<PAGE>
As filed with the Securities and Exchange Commission on March 8, 1995
Registration No. 33-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
Registration Statement Under The Securities Act of 1933
HEALTHSOUTH Corporation
(Exact Name of Registrant as Specified in its Charter)
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<S> <C> <C>
Delaware 8062 63-0860407
-------------------------------- ----------------------------- -------------------------------
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
Incorporation or Organization) Classification Code Number) Number)
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Two Perimeter Park South, Birmingham, Alabama 35243
(205) 967-7116
(Address, including Zip Code, and Telephone Number,
including Area Code, of Registrant's Principal Executive Offices)
RICHARD M. SCRUSHY
Chairman of the Board, President
and Chief Executive Officer
HEALTHSOUTH Corporation
Two Perimeter Park South
Birmingham, Alabama 35243
(205) 967-7116
(Name, Address, including Zip Code, and Telephone Number,
including Area Code, of Agent for Service)
Copies to:
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J. BROOKE JOHNSTON, JR., ESQ. BEALL D. J. VAUGHAN CURTIS, ESQ. NILS
GARY, JR., ESQ. Haskell Slaughter Young H. OKESON, ESQ. Alston & Bird
& Johnston, Professional Association WILLIAM W. HORTON, ESQ. Group Vice One Atlantic Center 1201 West
1200 AmSouth/Harbert Plaza 1901 Sixth President -- Legal Services HEALTHSOUTH Peachtree Street Atlanta,
Avenue North Birmingham, Alabama 35203 Corporation Two Perimeter Park South Georgia 30309-3424 (404)
(205) 251-1000 Birmingham, Alabama 35243 (205) 967-7116 881-7000
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Approximate date of commencement of proposed sale to the public: At the
effective time of the merger of Surgical Health Corporation with a wholly-owned
subsidiary of the Registrant, as described in the Prospectus-Joint Proxy
Statement included herein.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
<PAGE>
CALCULATION OF REGISTRATION FEE
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Proposed
Maximum Proposed Maximum Amount of
Title of Each Class of Amount to be Offering Price Aggregate Registration
Securities to be Registered ..... Registered Per Unit Offering Price(1) Fee
Common Stock, par value $.01 per 4,841,510
share............................ shares $ 13.21 $ 63,975,719 $ 22,060.60
</TABLE>
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(1) Computed in accordance with Rule 457(f)(2), solely for the purpose of
calculating the registration fee, based upon the book value of the SHC Shares
(as defined herein) at January 31, 1995, the latest practicable date prior to
the date of filing of this Registration Statement.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further Amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
HEALTHSOUTH Corporation
CROSS-REFERENCE SHEET
(Pursuant to Item 501(b) of Regulation S-K showing the Location in the
Prospectus-Joint Proxy
Statement of the responses to the Items of Part I of Form S-4)
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ITEM LOCATION IN PROSPECTUS-JOINT PROXY STATEMENT
- -------------------------------------------------------- ---------------------------------------------------------
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1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus ..................... Facing Page; Outside Front Cover Page of Prospectus-Joint
Proxy Statement
2. Inside Front and Outside Back Cover Pages of
Prospectus .. ...................................... Table of Contents; Available Information; Incorporation
of Certain Information by Reference
3. Risk Factors, Ratio of Earnings to Fixed Charges
and Other Information .............................. Summary of Prospectus-Joint Proxy Statement; The Special
Meetings
4. Terms of the Transaction ........................... Summary of Prospectus-Joint Proxy Statement; The
Special Meetings; The Merger; Description of Capital Stock of
HEALTHSOUTH; Operations and Management of HEALTHSOUTH after
the Merger; Comparison of Rights of SHC and HEALTHSOUTH
Stockholders
5. Pro Forma Financial Information .................... Pro Forma Condensed Financial Information
6. Material Contacts with the Company Being Acquired... Not Applicable
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters ..... Not Applicable
8. Interests of Named Experts and Counsel ............. Not Applicable
9. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities ..... Not Applicable
10. Information with Respect to S-3 Registrants ....... Incorporation of Certain Information by Reference; Pro Forma
Condensed Financial Information
11. Incorporation of Certain Information by Reference... Incorporation of Certain Information by Reference
12. Information with Respect to S-2 or S-3 Registrants.. Not Applicable
13. Incorporation of Certain Information by Reference... Not Applicable
14. Information with Respect to Registrants Other than
S-3 or S-2 Registrants.............................. Not Applicable
15. Information with Respect to S-3 Companies ......... Incorporation of Certain Information by Reference
16. Information with Respect to S-2 or S-3 Companies .. Not Applicable
17. Information with Respect to Companies Other than
S-3 or S-2 Companies ............................... Summary of Prospectus-Joint Proxy Statement; The Merger; Pro
Forma Condensed Financial Information; Selected Financial
Information of SHC; SHC Management's Discussion and Analysis
of Financial Condition and Results of Operations; Business of
SHC; Principal Stockholders of SHC; Consolidated Financial
Statements of SHC
18. Information if Proxies, Consents or Authorizations
are to be Solicited................................. Incorporation of Certain Information by Reference; Summary of
Prospectus-Joint Proxy Statement; The Special Meetings; The
Merger; Principal Stockholders of SHC
19. Information if Proxies, Consents or Authorizations
are not to be Solicited in an Exchange Offer ...... Not Applicable
</TABLE>
<PAGE>
[HEALTHSOUTH Logo]
March 14, 1995
Dear Stockholder:
I am pleased to enclose information relating to a Special Meeting of
Stockholders of HEALTHSOUTH Corporation to be held at the Company's offices at
Two Perimeter Park South, Birmingham, Alabama 35243, at 2:00 p.m., Central Time,
on April 13, 1995.
The purpose of the Special Meeting of Stockholders is to approve and adopt an
Amended and Restated Plan and Agreement of Merger, pursuant to which HEALTHSOUTH
will acquire Surgical Health Corporation, the nation's second largest
independent outpatient surgery center company. Surgical Health Corporation
operates 36 outpatient surgery centers in 11 states, and is in many of the same
markets as HEALTHSOUTH. HEALTHSOUTH believes that adding the outpatient surgical
component to our existing network will further enhance our position as a leading
provider of alternative-site healthcare services, and will make us more
competitive in the total healthcare market place. In addition, giving effect to
anticipated cost savings from the Merger, we expect that the transaction will be
accretive to earnings per share in 1995.
Surgical Health Corporation has excellent locations and a strong management
team. HEALTHSOUTH believes that the operations of Surgical Health Corporation
will be a valuable addition to HEALTHSOUTH's national network and will provide a
platform for future growth for HEALTHSOUTH. This acquisition is an important one
for HEALTHSOUTH and its stockholders, and HEALTHSOUTH's management encourages
your support for the Amended and Restated Plan and Agreement of Merger.
We urge you to consider carefully these important matters, which are
described in the attached Prospectus-Joint Proxy Statement. In order to ensure
that your vote is represented at the Special Meeting, please indicate your vote
on the Proxy form, date and sign it, and return it in the enclosed postage
pre-paid envelope. A prompt response will be appreciated. If you are able to
attend the Special Meeting, you may revoke your Proxy and vote in person if you
wish.
I look forward to seeing you at the Special Meeting.
Sincerely yours,
Richard M. Scrushy
Chairman of the Board, President
and Chief Executive Officer
Two Perimeter Park South o Birmingham, AL 35243 o (205) 967-7116
<PAGE>
[HEALTHSOUTH Logo]
HEALTHSOUTH Corporation
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
March 14, 1995
A Special Meeting of Stockholders of HEALTHSOUTH Corporation ("HEALTHSOUTH")
will be held at HEALTHSOUTH's executive offices, Two Perimeter Park South,
Birmingham, Alabama 35243, on Thursday, April 13, 1995, at 2:00 p.m., Central
Time, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the Amended and
Restated Plan and Agreement of Merger, dated as of January 22, 1995 (the "Plan")
among HEALTHSOUTH, ASC Atlanta Acquisition Company, Inc. (the "Subsidiary") and
Surgical Health Corporation ("SHC"), pursuant to which the Subsidiary will be
merged into SHC, with SHC being the surviving corporation (the "Merger"), and
each outstanding share of Common Stock, Series A Convertible Preferred Stock,
Series B Convertible Preferred Stock, and Series C Convertible Preferred Stock
of SHC will be cancelled and the holders of such shares will be entitled to
receive a specified fraction of a share of HEALTHSOUTH Common Stock for each
such share of SHC capital stock owned by them, as described in the accompanying
Prospectus-Joint Proxy Statement.
2. To transact such other business as may properly come before the Special
Meeting or any adjournment thereof.
Stockholders of record at the close of business on March 3, 1995, are
entitled to notice of, and to vote at, the Special Meeting or any adjournment
thereof.
Please complete, date and sign the accompanying Proxy and return it promptly
to HEALTHSOUTH. If you attend the Special Meeting, you may revoke your Proxy and
vote in person if you desire to do so, but attendance at the Special Meeting
does not itself serve to revoke your Proxy.
ANTHONY J. TANNER
Secretary
_______________________________________________________________________________
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY
PROMPTLY, WHETHER YOU PLAN TO ATTEND THE
SPECIAL MEETING OR NOT.
THE BOARD OF DIRECTORS OF HEALTHSOUTH
RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE APPROVAL AND
ADOPTION OF THE PLAN
_______________________________________________________________________________
<PAGE>
March 14, 1995
Dear Stockholder:
You are cordially invited to attend a special meeting of stockholders
("Special Meeting") of Surgical Health Corporation ("SHC") to be held at the
offices of Alston & Bird located on the 46th floor at 1201 West Peachtree Street
Atlanta, Georgia 30309 at 2:00 p.m., Eastern Time, on April 13, 1995.
At this important meeting, you will be asked to consider and vote upon the
approval of an Amended and Restated Plan and Agreement of Merger, dated as of
January 22, 1995, which provides for the merger of SHC with a wholly-owned
subsidiary of HEALTHSOUTH Corporation ("HEALTHSOUTH") with the result that SHC
will become a wholly-owned subsidiary of HEALTHSOUTH. If the proposed merger
(the "Merger") is consummated, each outstanding share of SHC Common Stock, SHC
Series A Preferred Stock, SHC Series B Preferred Stock and SHC Series C
Preferred Stock will be converted into and exchanged for the right to receive a
specified fraction of a share of HEALTHSOUTH Common Stock. The numerator of this
fraction will be $4.60 and the denominator will be the average daily closing
price per share of HEALTHSOUTH Common Stock for the 20 consecutive days on which
such shares are actually traded ending on the third day before the closing of
the Merger (the "Base Period Trading Price"); provided, however, that the Base
Period Trading Price will be deemed to equal (i) $37.00 in the event that the
Base Period Trading Price is greater than $37.00 or (ii) $33.00 in the event
that the Base Period Trading Price is less than $33.00. Cash will be paid in
lieu of fractional shares.
Approval of the merger agreement requires (i) the affirmative vote of a
majority of the votes entitled to be cast by the holders of record of SHC Common
Stock, SHC Series A Preferred Stock, SHC Series B Preferred Stock and SHC Series
C Preferred Stock, voting together as a single class, and (ii) the affirmative
vote of a majority of the votes entitled to be cast by the holders of record of
the SHC Series A Preferred Stock, SHC Series B Preferred Stock and SHC Series C
Preferred Stock, each voting as a separate class.
Enclosed are the (i) Notice of Special Meeting, (ii) Prospectus-Joint Proxy
Statement, and (iii) Proxy for the Special Meeting. The Prospectus-Joint Proxy
Statement describes in more detail the merger agreement and the proposed Merger,
including a description of the conditions to consummation of the Merger and the
effects of the Merger on the rights of SHC stockholders. It also describes
certain financial and other information pertaining to SHC and HEALTHSOUTH.
Please give this information your careful attention.
The merger agreement and consummation of the transactions contemplated
therein have been approved by the Board of Directors of SHC and the Board of
Directors recommends that you vote FOR approval and adoption of the merger
agreement and consummation of the transactions contemplated therein.
In order that your shares may be represented at the Special Meeting, you are
urged to promptly complete, sign, date and return the accompanying Proxy in the
enclosed postage pre-paid envelope, whether you plan to attend the Special
Meeting or not. In the event you attend the Special Meeting in person, you may,
if you wish, vote personally on all matters brought before the Special Meeting
even if you have previously returned your Proxy.
Sincerely yours,
Rock A. Morphis
Chairman of the Board,
President and
Chief Executive Officer
<PAGE>
SURGICAL HEALTH CORPORATION
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 13, 1995
To the Stockholders of Surgical Health Corporation:
Notice is hereby given that a Special Meeting of Stockholders of Surgical
Health Corporation, a Delaware corporation ("SHC"), will be held at the offices
of Alston & Bird located on the 46th floor at 1201 West Peachtree Street,
Atlanta, Georgia 30309 on April 13, 1995 at 2:00, Eastern Time, for
the following purposes:
1. To consider and vote upon a proposal to approve the Amended and Restated
Plan and Agreement of Merger, dated as of January 22, 1995 (the "Plan"),
providing for the merger of ASC Atlanta Acquisition Company, Inc., a Delaware
corporation (the "Subsidiary") wholly-owned by HEALTHSOUTH Corporation, a
Delaware corporation ("HEALTHSOUTH"), into SHC, and further providing that each
outstanding share of Common Stock, Series A Convertible Preferred Stock, Series
B Convertible Preferred Stock and Series C Convertible Preferred Stock of SHC
(collectively, the "SHC Shares") will be cancelled and the holders of such SHC
Shares will be entitled to receive a specified fraction of a share of
HEALTHSOUTH Common Stock for each such SHC Share, as described in the
accompanying Prospectus-Joint Proxy Statement; and
2. To consider and act upon such other matters as may properly come before
the Special Meeting, including any adjournments or postponements thereof.
The Board of Directors of SHC has fixed the close of business on February 28,
1995 as the record date for the determination of stockholders entitled to notice
of and to vote at the Special Meeting, and only stockholders of record at such
time will be entitled to notice of and to vote at the Special Meeting.
A form of Proxy and a Prospectus-Joint Proxy Statement containing more
detailed information with respect to the matters to be considered at the Special
Meeting accompany this notice.
You are cordially invited and urged to attend the Special Meeting in person.
Please complete, sign, date and promptly return the enclosed Proxy in the
enclosed self-addressed, postage pre-paid envelope. If you attend the Special
Meeting and desire to revoke your Proxy and vote in person, you may do so. In
any event, the Proxy may be revoked at any time before it is voted.
By Order of the Board of Directors,
H. Michael Finley
Secretary
March 14, 1995
<PAGE>
Prospectus-Joint Proxy Statement
JOINT PROXY STATEMENT
OF
HEALTHSOUTH
Corporation
for the Special Meeting of Stockholders
to be held on April 13, 1995
SURGICAL HEALTH
CORPORATION
for the Special Meeting of Stockholders
to be held on April 13, 1995
PROSPECTUS
OF
HEALTHSOUTH Corporation
This Prospectus relates to up to 4,841,510 shares of the Common Stock, par
value $.01 per share (the "HEALTHSOUTH Common Stock"), of HEALTHSOUTH
Corporation (together with its subsidiaries and controlled partnerships, as
applicable, "HEALTHSOUTH") issuable to the stockholders of Surgical Health
Corporation (together with its subsidiaries and controlled partnerships, as
applicable, "SHC") upon consummation of the Merger (as defined below). Such
number of shares represents the maximum number of shares that may be issued,
assuming that the Base Period Trading Price (as defined below) is equal to or
less than $33.00 and that all outstanding options and warrants to purchase
shares of SHC Common Stock (as defined below) that are exercisable prior to the
closing of the Merger are exercised prior to closing of the Merger. This
Prospectus also serves as the Proxy Statement of each of HEALTHSOUTH and SHC for
their respective special meetings of stockholders to be held on April 13, 1995,
and any adjournments and postponements thereof (the "Special Meetings"). See
"THE SPECIAL MEETINGS".
This Prospectus-Joint Proxy Statement describes the terms of a proposed
business combination between HEALTHSOUTH and SHC, pursuant to which HEALTHSOUTH
will acquire SHC by means of the merger (the "Merger") of ASC Atlanta
Acquisition Company, Inc., a wholly-owned subsidiary of HEALTHSOUTH (the
"Subsidiary"), with and into SHC, with SHC being the surviving corporation.
After the Merger, the combined operations of HEALTHSOUTH and SHC are expected to
be conducted with SHC as a wholly-owned subsidiary of HEALTHSOUTH and the
present subsidiaries of SHC continuing as subsidiaries of SHC and thus indirect
subsidiaries of HEALTHSOUTH. The Merger will be effective pursuant to the terms
and subject to the conditions of the Amended and Restated Plan and Agreement of
Merger, dated as of January 22, 1995, among HEALTHSOUTH, the Subsidiary and SHC
(the "Plan"). The Plan is attached to this Prospectus-Joint Proxy Statement as
Annex A and is incorporated herein by reference. HEALTHSOUTH and SHC are
hereinafter sometimes referred to as the "Companies" and individually as a
"Company".
Upon consummation of the Merger, except as described herein, each outstanding
share of Common Stock, par value $.0025 per share (the "SHC Common Stock"),
Series A Convertible Preferred Stock, par value $.01 per share (the "SHC Series
A Preferred Stock"), Series B Convertible Preferred Stock, par value $.01 per
share (the "SHC Series B Preferred Stock"), and Series C Convertible Preferred
Stock, par value $.01 per share (the "SHC Series C Preferred Stock" and,
together with the SHC Common Stock, the SHC Series A Preferred Stock and the SHC
Series B Preferred Stock, the "SHC Shares"), of SHC will be cancelled and the
<PAGE>
holders of such SHC Shares will be entitled to receive a fraction of a share of
HEALTHSOUTH Common Stock for each SHC Share so held. The number of shares of
HEALTHSOUTH Common Stock to be received by each such holder of SHC Shares will
be determined by multiplying the number of SHC Shares owned by such holder at
the effective time of the Merger by a fraction, the numerator of which is $4.60
and the denominator of which is the Base Period Trading Price (as such term is
defined herein); provided, however, that, for purposes of such calculation, the
Base Period Trading Price shall be deemed to equal (i) $37.00 in the event that
the Base Period Trading Price is greater than $37.00, or (ii) $33.00 in the
event that the Base Period Trading Price is less than $33.00. The term "Base
Period Trading Price" means the average daily closing price per share of
HEALTHSOUTH Common Stock for the 20 consecutive trading days on which such
shares are actually traded ending on the third trading day before the closing of
the Merger. SHC stockholders will receive cash (without interest) in lieu of
fractional shares. For a more complete description of the terms of the Merger,
see "THE MERGER".
This Prospectus-Joint Proxy Statement and the forms of Proxy are first being
mailed to stockholders of HEALTHSOUTH and SHC on or about March 14, 1995.
----------------------
THE SECURITIES TO BE ISSUED HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION (THE "SEC") OR BY ANY STATE
SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS-JOINT PROXY STATEMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
----------------------
The date of this Prospectus-Joint Proxy Statement is March 14, 1995.
<PAGE>
AVAILABLE INFORMATION
HEALTHSOUTH has filed a Registration Statement on Form S-4 under the
Securities Act of 1933, as amended (the "Securities Act"), with the Securities
and Exchange Commission (the "SEC") covering the shares of HEALTHSOUTH Common
Stock to be issued in connection with the Merger (the "Registration Statement").
As permitted by the rules and regulations of the SEC, this Prospectus-Joint
Proxy Statement omits certain information contained in the Registration
Statement. For further information pertaining to the securities offered hereby,
reference is made to the Registration Statement, including the exhibits filed as
a part thereof.
HEALTHSOUTH and SHC are subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file periodic reports, proxy statements (in the case of
HEALTHSOUTH) and other information with the SEC relating to their respective
businesses, financial statements and other matters. The Registration Statement,
as well as such reports, proxy statements (in the case of HEALTHSOUTH) and other
information, may be inspected at the public reference facilities maintained by
the SEC at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
and should be available for inspection and copying at the regional offices of
the SEC located at Seven World Trade Center, New York, New York and Suite 1400,
Citicorp Center, 500 West Madison Street, Chicago, Illinois. Copies of such
material can be obtained at prescribed rates by writing to the SEC, Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549. The
HEALTHSOUTH Common Stock is listed on the New York Stock Exchange (the "NYSE")
and the Registration Statement and other information with respect to HEALTHSOUTH
should be available for inspection at the library of the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
This Prospectus-Joint Proxy Statement incorporates documents by reference
with respect to HEALTHSOUTH which are not presented herein or delivered
herewith. Copies of such reports, proxy statements and other information filed
by HEALTHSOUTH, other than exhibits to such documents unless such exhibits are
specifically incorporated herein by reference, are available without charge,
upon written or oral request, from the Secretary of HEALTHSOUTH Corporation, Two
Perimeter Park South, Birmingham, Alabama 35243, telephone (205) 967-7116. To
ensure timely delivery of the documents, any request should be made by five days
prior to the Special Meetings.
There are hereby incorporated by reference into this Prospectus-Joint Proxy
Statement and made a part hereof the following documents filed by HEALTHSOUTH:
(a) HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1994;
(b) HEALTHSOUTH's Current Report on Form 8-K dated January 12, 1995 (relating
to the acquisition of ReLife, Inc.), as amended on the Form 8-K/A filed March 8,
1995 (to amend Item 7);
(c) HEALTHSOUTH's Proxy Statement, dated March 14, 1994, utilized for the
solicitation of proxies in connection with HEALTHSOUTH's 1994 Annual Meeting of
Stockholders held on April 14, 1994;
(d) HEALTHSOUTH's Proxy Statement, dated October 28, 1994, utilized for the
solicitation of proxies in connection with a Special Meeting of HEALTHSOUTH's
Stockholders held on December 6, 1994;
(e) HEALTHSOUTH's Registration Statement on Form S-4 (Registration No.
33-55929) declared effective by the SEC on November 10, 1994 (relating to the
acquisition of ReLife, Inc.);
(f) HEALTHSOUTH's Current Report on Form 8-K dated February 1, 1995 (relating
to the Merger);
(g) HEALTHSOUTH's Current Report on Form 8-K, dated February 14, 1995
(relating to the acquisition of ReLife, Inc.); and
<PAGE>
(h) HEALTHSOUTH's Current Report on Form 8-K dated February 21, 1995
(relating to the acquisition of certain rehabilitation facilities from NovaCare,
Inc.), as amended on the Form 8-K/A filed March 8, 1995 (to amend Item 5 and to
include Item 7).
All documents filed by HEALTHSOUTH pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus-Joint Proxy
Statement and prior to the Special Meetings shall be deemed to be incorporated
by reference into this Prospectus-Joint Proxy Statement and to be made a part
hereof from the date of the filing of such documents. Any statement contained in
a document incorporated by reference herein shall be deemed to be modified or
superseded for the purpose hereof to the extent that a statement contained
herein (or in any other subsequently filed document which also is incorporated
by reference herein) is modified or superseded by such statement. Any statement
so modified or superseded shall not be deemed to constitute a part hereof,
except as so modified or superseded.
All information contained in this Prospectus-Joint Proxy Statement or
incorporated herein by reference with respect to HEALTHSOUTH was supplied by
HEALTHSOUTH, and all information contained in this Prospectus-Joint Proxy
Statement with respect to SHC was supplied by SHC. Although neither HEALTHSOUTH
nor SHC has actual knowledge that would indicate that any statements or
information (including financial statements) relating to the other party
contained or, with respect to HEALTHSOUTH, incorporated by reference herein are
inaccurate or incomplete, neither HEALTHSOUTH nor SHC warrants the accuracy or
completeness of such statements or information as they relate to the other
party.
No person is authorized to give any information or to make any representation
not contained in this Prospectus-Joint Proxy Statement, and, if given or made,
such information or representation should not be relied upon as having been
authorized. Neither the delivery of this Prospectus-Joint Proxy Statement nor
any distribution of the securities to which this Prospectus-Joint Proxy
Statement relates shall, under any circumstances, create any implication that
there has been no change in the information concerning HEALTHSOUTH or SHC
contained in this Prospectus-Joint Proxy Statement since the date of such
information. This Prospectus-Joint Proxy Statement does not constitute an offer
to sell, or a solicitation of an offer to purchase, any securities other than
the securities to which it relates, or an offer to sell, or a solicitation of an
offer to purchase, the securities offered by this Prospectus-Joint Proxy
Statement in any jurisdiction in which such an offer or solicitation is not
lawful.
<PAGE>
TABLE OF CONTENTS
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Page
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AVAILABLE INFORMATION ....................................................... 3
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE ........................... 3
SUMMARY OF PROSPECTUS-JOINT PROXY STATEMENT.................................. 7
THE SPECIAL MEETINGS ........................................................ 20
General ..................................................................... 20
Dates, Places and Times ..................................................... 20
Record Dates; Quorums ....................................................... 20
Votes Required .............................................................. 21
Voting and Revocation of Proxies ............................................ 22
Solicitation of Proxies ..................................................... 23
THE MERGER................................................................... 23
Terms of the Merger ......................................................... 24
Background of the Merger .................................................... 26
Reasons for the Merger; Recommendations of the Boards of Directors ......... 27
Opinions of Financial Advisors .............................................. 33
Effective Time of the Merger ................................................ 33
Exchange of Certificates .................................................... 34
Conditions to the Merger .................................................... 35
Regulatory Approvals ........................................................ 36
Business Pending the Merger ................................................. 36
Waiver and Amendment ........................................................ 37
Termination ................................................................. 37
Third Party Bids............................................................. 38
Interests of Certain Persons in the Merger .................................. 39
Accounting Treatment ........................................................ 40
Certain Federal Income Tax Consequences ..................................... 41
Resale of HEALTHSOUTH Common Stock by Affiliates ............................ 42
Appraisal Rights ............................................................ 42
No Solicitation of Transactions.............................................. 43
Expenses..................................................................... 44
NYSE Listing................................................................. 44
PRO FORMA CONDENSED FINANCIAL INFORMATION ................................... 45
SELECTED FINANCIAL INFORMATION OF HEALTHSOUTH................................ 52
BUSINESS OF HEALTHSOUTH ..................................................... 54
General...................................................................... 54
Recent Developments ......................................................... 54
HEALTHSOUTH Strategy......................................................... 54
HEALTHSOUTH Patient Care Services Locations.................................. 56
HEALTHSOUTH Outpatient Rehabilitation Services............................... 59
HEALTHSOUTH Inpatient Services............................................... 59
HEALTHSOUTH Medical Centers ................................................. 59
SELECTED FINANCIAL INFORMATION OF SHC........................................ 60
SHC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS................................................................ 61
BUSINESS OF SHC ............................................................. 66
Outpatient Surgery Industry.................................................. 66
SHC Business Strategy........................................................ 66
Operation of SHC Surgery Centers............................................. 67
<PAGE>
Quality Assurance Controls................................................... 71
Marketing.................................................................... 71
Sources of Revenue........................................................... 71
Competition ................................................................. 71
Properties................................................................... 72
Government Healthcare Regulation............................................. 72
Employees.................................................................... 75
Legal Proceedings ........................................................... 75
PRINCIPAL STOCKHOLDERS OF SHC................................................ 76
DESCRIPTION OF CAPITAL STOCK OF HEALTHSOUTH ................................. 78
Common Stock ................................................................ 78
Fair Price Provision ........................................................ 78
Section 203 of the DGCL...................................................... 79
Preferred Stock ............................................................. 79
Transfer Agent............................................................... 79
COMPARISON OF RIGHTS OF SHC AND HEALTHSOUTH STOCKHOLDERS .................... 80
Classes and Series of Capital Stock.......................................... 80
Size and Election of the Board of Directors ................................. 80
Removal of Directors ........................................................ 81
Other Voting Rights.......................................................... 81
Dividends.................................................................... 81
Conversion and Dissolution................................................... 82
Fair Price Provision ........................................................ 83
Amendment or Repeal of the Certificate of Incorporation ..................... 83
Special Meetings of Stockholders............................................. 84
Liability of Directors....................................................... 84
Indemnification of Directors and Officers.................................... 85
OPERATIONS AND MANAGEMENT OF HEALTHSOUTH AFTER THE MERGER.................... 85
Operations .................................................................. 85
Management .................................................................. 85
EXPERTS ..................................................................... 85
LEGAL MATTERS................................................................ 86
ADDITIONAL INFORMATION....................................................... 86
Other Business............................................................... 86
Stockholder Proposals........................................................ 86
Index to Consolidated Financial Statements of SHC............................ F-1
ANNEXES:
A. Amended and Restated Plan and Agreement of Merger ........................ A-1
B. Opinion of Smith Barney Inc. ............................................. B-1
C. Opinion of Alex. Brown & Sons Incorporated................................ C-1
D. Appraisal Rights -- Section 262 of the General Corporation Law of the
State of Delaware......................................................... D-1
</TABLE>
<PAGE>
SUMMARY OF PROSPECTUS-JOINT PROXY STATEMENT
The following is a summary of certain information contained elsewhere in
this Prospectus-Joint Proxy Statement. Certain capitalized terms used in this
Summary are defined elsewhere in this Prospectus-Joint Proxy Statement.
Reference is made to, and this Summary is qualified in its entirety by, the more
detailed information contained in this Prospectus-Joint Proxy Statement, the
Annexes hereto and the documents incorporated by reference herein.
The Companies
HEALTHSOUTH. HEALTHSOUTH 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 conditions, such as
stroke, head injury, orthopaedic problems, neuromuscular disease and
sports-related injuries. HEALTHSOUTH's rehabilitative healthcare services
include physical therapy, sports medicine, work hardening, neurorehabilitation,
occupational therapy, respiratory therapy, speech-language pathology and
rehabilitation nursing. In addition to the rehabilitative healthcare services,
HEALTHSOUTH's medical center facilities also provide general and specialty
medical and surgical healthcare services.
At December 31, 1994, HEALTHSOUTH had 402 locations in 33 states, the
District of Columbia and Ontario, Canada, including 111 outpatient
rehabilitation centers with 127 associated satellite clinics, 66 inpatient
rehabilitation facilities with 39 associated satellite outpatient clinics, five
medical centers and 54 locations providing other patient care services.
See "BUSINESS OF HEALTHSOUTH".
At December 31, 1994, HEALTHSOUTH had consolidated assets of approximately
$1,552,334,000 and consolidated stockholders' equity of approximately
$426,134,000, and employed approximately 18,000 persons.
HEALTHSOUTH was incorporated under the laws of Delaware in 1984. The
principal executive offices of HEALTHSOUTH are located at Two Perimeter Park
South, Birmingham, Alabama 35243 and its telephone number is (205) 967-7116.
SHC. Surgical Health Corporation is the second largest independent operator
of freestanding outpatient surgery centers in the United States. SHC operates a
network of 36 freestanding surgery centers in eleven states, with an aggregate
of 155 operating and procedure rooms, and is currently developing an additional
three surgery centers in two states. SHC's surgery centers provide the
facilities and medical support staff necessary for physicians to perform
non-emergency surgical procedures that do not generally require overnight
hospitalization.
At December 31, 1994, SHC had consolidated assets of approximately
$184,002,000 and consolidated stockholders' equity of approximately $34,183,000,
and employed approximately 820 persons.
SHC was incorporated under the laws of Delaware in 1991. The principal
executive offices of SHC are located at 990 Hammond Drive, Suite 300, Atlanta,
Georgia 30328 and its telephone number is (404) 673-1954.
ASC Atlanta Acquisition Company, Inc. The Subsidiary is a direct,
wholly-owned subsidiary of HEALTHSOUTH and has not engaged in any business
activity unrelated to the Merger. The principal executive offices of the
Subsidiary are located at Two Perimeter Park South, Birmingham, Alabama 35243
and its telephone number is (205) 967-7116.
Recent Developments
HEALTHSOUTH. On December 29, 1994, HEALTHSOUTH completed the acquisition of
ReLife, Inc., an operator of 31 inpatient rehabilitation facilities, in a
transaction having an approximate value of $180,000,000 which was accounted for
as a pooling of interests. On February 3, 1995, HEALTHSOUTH entered into an
agreement to purchase the operations of the rehabilitation hospital division of
NovaCare, Inc., consisting of 11 rehabilitation hospitals, 12 other facilities
and two Certificates of Need. See "BUSINESS OF HEALTHSOUTH -- Recent
Developments".
<PAGE>
SHC. On January 20, 1995, SHC entered into a non-binding letter of intent to
acquire substantially all of the assets of an outpatient surgery center in
Washington, Missouri. The aggregate purchase price contemplated in the letter of
intent is $1,835,000. The parties are currently negotiating a definitive
purchase agreement and, if an agreement is signed, this acquisition could close
as soon as early April 1995.
The Special Meetings
HEALTHSOUTH. The Special Meeting of HEALTHSOUTH's stockholders to consider
and vote on the Plan (the "HEALTHSOUTH Special Meeting") will be held on April
13, 1995 at 2:00 p.m., Central Time, at the executive offices of HEALTHSOUTH at
Two Perimeter Park South, Birmingham, Alabama 35243. Only holders of record of
HEALTHSOUTH Common Stock at the close of business on March 3, 1995 (the
"HEALTHSOUTH Record Date"), will be entitled to notice of and to vote at the
HEALTHSOUTH Special Meeting. As of such date, there were outstanding and
entitled to vote 35,565,387 shares of HEALTHSOUTH Common Stock. Each issued and
outstanding share of HEALTHSOUTH Common Stock is entitled to one vote on each
matter to be presented at the HEALTHSOUTH Special Meeting.
SHC. The Special Meeting of SHC's stockholders to consider and vote on the
Plan (the "SHC Special Meeting") will be held on April 13, 1995, at 2:00 p.m.
Eastern Time at the offices of Alston & Bird, located on the 46th floor at 1201
West Peachtree Street, Atlanta, Georgia 30309. Only holders of record of SHC
Shares at the close of business on February 28, 1995 (the "SHC Record Date"),
will be entitled to notice of and to vote at the SHC Special Meeting. At such
date, there were outstanding and entitled to vote 21,951,901 shares of SHC
Common Stock, 1,911,902 shares of SHC Series A Preferred Stock, 3,961,413 shares
of SHC Series B Preferred Stock and 3,439,692 shares of SHC Series C Preferred
Stock. Each issued and outstanding SHC Share is entitled to one vote on each
matter to be presented at the SHC Special Meeting.
For additional information relating to the Special Meetings, see "THE SPECIAL
MEETINGS".
Votes Required
Approval and adoption of the Plan by the stockholders of HEALTHSOUTH requires
the affirmative vote of holders of a majority of the shares of HEALTHSOUTH
Common Stock present or represented and entitled to vote at the HEALTHSOUTH
Special Meeting. Accordingly, approval and adoption of the Plan at the
HEALTHSOUTH Special Meeting, provided that the votes cast at such meeting
represent at least 50% of the outstanding HEALTHSOUTH Common Stock, will require
the affirmative vote of the holders of shares of HEALTHSOUTH Common Stock
entitled to cast a minimum of 8,891,347 votes.
Approval and adoption of the Plan by the stockholders of SHC requires the
affirmative vote of a majority of the votes entitled to be cast by the holders
of record of (i) SHC Common Stock, SHC Series A Preferred Stock, SHC Series B
Preferred Stock and SHC Series C Preferred Stock, voting together as a single
class, and (ii) SHC Series A Preferred Stock, SHC Series B Preferred Stock and
SHC Series C Preferred Stock, each voting as a separate class. Accordingly,
approval and adoption of the Plan at the SHC Special Meeting will require the
affirmative vote of the holders of (i) 15,632,455 shares of SHC Common Stock,
SHC Series A Preferred Stock, SHC Series B Preferred Stock and SHC Series C
Preferred Stock, voting together as a single class, and (ii) 955,952 shares of
SHC Series A Preferred Stock, 1,980,707 shares of SHC Series B Preferred Stock
and 1,719,847 shares of SHC Series C Preferred Stock, each voting as a separate
class.
<PAGE>
As of the SHC Record Date, directors and executive officers of SHC and their
affiliates beneficially owned an aggregate of 7,712,907 shares of SHC Common
Stock (excluding shares issuable upon exercise of options and convertible
securities), 843,173 shares of SHC Series A Preferred Stock, 1,316,737 shares of
SHC Series B Preferred Stock and 1,206,584 shares of SHC Series C Preferred
Stock. Accordingly, of the 31,264,908 votes entitled to be cast with respect to
the Merger by the holders of SHC Shares, voting together as a single class, the
directors and executive officers of SHC and their affiliates beneficially own
SHC Shares entitled to cast 11,079,401, or approximately 35.4%, of such votes.
Further, of the 1,911,902, 3,961,413 and 3,439,692 votes entitled to be cast
with respect to the Merger by the holders of the SHC Series A Preferred Stock,
SHC Series B Preferred Stock and SHC Series C Preferred Stock, respectively,
voting separately as classes, the directors and executive officers of SHC and
their affiliates are entitled to cast 843,173, 1,316,737 and 1,206,584,
respectively, or approximately 44.1%, 33.2% and 35.1%, respectively, of such
votes. The directors and executive officers of SHC and their affiliates have
indicated their intentions to vote the SHC Shares beneficially owned by them for
the Plan.
As of the SHC Record Date, directors and executive officers of HEALTHSOUTH
and their affiliates (excluding Richard M. Scrushy and Charles W. Newhall III
and their affiliates because SHC Shares beneficially owned by them are included
in the amounts of SHC Shares owned by directors and executive officers of SHC
and their affiliates) beneficially owned an aggregate of 645,075 shares of SHC
Common Stock (excluding shares issuable upon the exercise of options and
convertible securities), 13,749 shares of SHC Series A Preferred Stock, 457,996
shares of SHC Series B Preferred Stock and 149,400 shares of SHC Series C
Preferred Stock. The directors and executive officers of HEALTHSOUTH and their
affiliates have indicated their intentions to vote the SHC Shares beneficially
owned by them for the Plan.
As of the HEALTHSOUTH Record Date, directors and executive officers of
HEALTHSOUTH and their affiliates beneficially owned an aggregate of 200,760
shares of HEALTHSOUTH Common Stock (excluding shares issuable upon exercise of
options and convertible securities) or approximately 0.56% of the shares of
HEALTHSOUTH Common Stock outstanding on such date. The directors and executive
officers of HEALTHSOUTH and their affiliates have indicated their intentions to
vote the shares of HEALTHSOUTH Common Stock beneficially owned by them for the
Plan.
As of the HEALTHSOUTH Record Date, directors and executive officers of SHC
and their affiliates beneficially owned an aggregate of - shares of HEALTHSOUTH
Common Stock (excluding shares which may be issuable upon exercise of options
and convertible securities) or approximately % of the shares of HEALTHSOUTH
Common Stock outstanding on such date. The directors and executive officers of
SHC and their affiliates have indicated their intentions to vote the shares of
HEALTHSOUTH Common Stock beneficially owned by them for the Plan.
See "THE SPECIAL MEETINGS -- Votes Required", "THE MERGER -- Conditions to
the Merger" and " -- Interests of Certain Persons in the Merger".
The Merger
Terms of the Merger. SHC will be acquired by HEALTHSOUTH pursuant to the
Plan, which provides that at the effective time of the Merger (the "Effective
Time"), the Subsidiary will merge with and into SHC with SHC being the surviving
corporation. The Restated Certificate of Incorporation of SHC, as amended and
existing at the Effective Time in form satisfactory to HEALTHSOUTH, and the
Bylaws of the Subsidiary in effect at the Effective Time, will govern the
surviving corporation until amended or repealed in accordance with applicable
law. At the Effective Time, each outstanding SHC Share (excluding shares held by
HEALTHSOUTH, SHC and any of their respective wholly-owned subsidiaries) will be
converted into the right to receive a fraction of a share of HEALTHSOUTH Common
Stock, with the number of shares of HEALTHSOUTH Common Stock to be received by
any holder of SHC Shares at the Effective Time to be determined by multiplying
<PAGE>
the number of SHC Shares owned by such SHC stockholder at the Effective Time by
a fraction (the "Exchange Ratio"), the numerator of which is $4.60 and the
denominator of which is the Base Period Trading Price (as defined below);
provided, however, that, for purposes of such calculation, the Base Period
Trading Price shall be deemed to equal (i) $37.00 in the event that the Base
Period Trading Price is greater than $37.00, or (ii) $33.00 in the event that
the Base Period Trading Price is less than $33.00.
The term "Base Period Trading Price" is defined in the Plan as the average of
the daily closing prices per share of HEALTHSOUTH Common Stock for the 20
consecutive trading days on which such shares are actually traded ending on the
third trading day before the closing of the Merger. The daily closing price per
share shall be the closing price for NYSE-Composite Transactions as reported in
The Wall Street Journal-Eastern Edition or, if not reported therein, any other
authoritative source. SHC stockholders will receive cash (without interest) in
lieu of fractional shares. See "THE MERGER" and "DESCRIPTION OF CAPITAL STOCK OF
HEALTHSOUTH".
The following table indicates the Exchange Ratio assuming various Base Period
Trading Prices, with the resulting "value" to be received for each SHC Share:
VALUE TO BE
BASE PERIOD RECEIVED FOR
TRADING PRICE EXCHANGE RATIO EACH SHC SHARE
(COL. 1 X COL.
(COL. 1) (COL. 2) 2)
- --------------- ---------------- ----------------
$30.00......... .1394 $4.18
31.00......... .1394 4.32
32.00......... .1394 4.46
33.00......... .1394 4.60
34.00......... .1353 4.60
35.00......... .1314 4.60
36.00......... .1278 4.60
37.00......... .1243 4.60
38.00......... .1243 4.72
39.00......... .1243 4.85
40.00......... .1243 4.97
In addition, at the Effective Time, all options and warrants to purchase
shares of SHC Common Stock which are outstanding at such time, whether or not
then exercisable, will become options or warrants, as the case may be, to
purchase HEALTHSOUTH Common Stock, and HEALTHSOUTH will assume each such option
and warrant (as adjusted to reflect the Exchange Ratio).
Recommendations of the Boards of Directors. The Board of Directors of each of
HEALTHSOUTH and SHC has approved the Plan and has recommended a vote FOR the
Plan. Each Board of Directors believes the Plan is fair to and in the best
interest of the stockholders of its Company. Neither Richard M. Scrushy nor
Charles W. Newhall III, who serve on both Boards of Directors, participated in
the voting by either Board of Directors on the Plan.
The Board of Directors of HEALTHSOUTH believes that the Merger is desirable
for the following reasons, among others: (i) SHC has facilities in desirable
locations, primarily in markets where HEALTHSOUTH has an existing presence, (ii)
SHC has a strong senior management team which is knowledgeable and experienced
in the industry, (iii) SHC's existing relationships with physicians and payors
will be enhanced by affiliation with HEALTHSOUTH's national network, (iv) the
Merger will further broaden the continuum of care that HEALTHSOUTH is able to
provide, and (v) the Merger is expected to be accretive to 1995 earnings per
share after anticipated cost savings.
The Board of Directors of SHC believes that the Plan is in the best interest
of the SHC stockholders based on a number of factors, including, without
limitation and without assigning relative weights thereto, the following
factors: (i) the value of the consideration to be received by SHC stockholders,
the fact that as HEALTHSOUTH stockholders the SHC stockholders would have more
liquidity, and the fact that the Merger is expected to be treated as a tax-free
reorganization; (ii) the opportunity for SHC stockholders to continue to share
in the potential for long-term gain in SHC through the ownership of HEALTHSOUTH
Common Stock after the Merger; (iii) the business reputation and capabilities of
HEALTHSOUTH and its management, HEALTHSOUTH's financial strength, prospects,
market position and strategic objectives, and the historical performance of
HEALTHSOUTH Common Stock; (iv) the opinion of Alex. Brown & Sons Incorporated,
who served as financial advisor to SHC in connection with the Merger, that, as
of the date of this Prospectus-Joint Proxy Statement, the consideration to be
received in the Merger is fair to the SHC stockholders from a financial point of
view; and (v) the perceived strengths of SHC and HEALTHSOUTH combined, the
belief that SHC and HEALTHSOUTH are strategically complementary, and the belief
that the combined Companies will be able to compete more effectively in the
changing healthcare marketplace and will be more attractive to managed care
companies and other payors.
<PAGE>
See "THE MERGER -- Recommendations of the Boards of Directors".
Opinions of Financial Advisors.
HEALTHSOUTH. Smith Barney Inc. ("Smith Barney") has acted as financial
advisor to HEALTHSOUTH in connection with the Merger and has delivered a written
opinion, dated January 22, 1995, to the Board of Directors of HEALTHSOUTH to the
effect that, as of the date of such opinion and based upon and subject to
certain matters stated therein, the Exchange Ratio was fair, from a financial
point of view, to HEALTHSOUTH. The full text of the written opinion of Smith
Barney, which sets forth the assumptions made, matters considered and
limitations on the review undertaken, is attached as Annex B to this
Prospectus-Joint Proxy Statement and should be read carefully in its entirety.
SHC. Alex. Brown & Sons Incorporated ("Alex. Brown"), which has served as
financial advisor to SHC in connection with the Merger, has rendered its opinion
to SHC's Board of Directors that, as of the date of this Prospectus-Joint Proxy
Statement, the consideration to be received by the holders of SHC Shares
pursuant to the Plan is fair from a financial point of view to such holders. A
copy of such opinion is attached as Annex C to this Prospectus-Joint Proxy
Statement and should be read in its entirety with respect to the assumptions
made, other matters considered and the limitations of the review undertaken.
See "THE MERGER -- Opinions of Financial Advisors".
Effective Time of the Merger. The Merger will become effective upon the
filing of a Certificate of Merger by the Subsidiary and SHC under the General
Corporation Law of the State of Delaware (the "DGCL"), or at such later time as
may be specified in such Certificate of Merger. The Plan requires that this
filing be made, subject to satisfaction of the conditions to the respective
obligations of each party to consummate the Merger, no later than two business
days after satisfaction of the various conditions to the Merger set forth in the
Plan, or at such other time as may be agreed by HEALTHSOUTH and SHC. See "THE
MERGER -- Effective Time of the Merger" and "-- Conditions to the Merger".
Exchange of Certificates. As soon as reasonably practicable after the
Effective Time, transmittal materials will be mailed to each holder of record of
SHC Shares for use in exchanging such holder's stock certificates for
certificates evidencing shares of HEALTHSOUTH Common Stock and for receiving
cash in lieu of fractional shares and any dividends or other distributions to
which such holder is entitled as a result of the Merger. Stockholders should not
send any stock certificates with their proxy cards. See "THE MERGER--Exchange of
Certificates".
Conditions to the Merger. The obligation of HEALTHSOUTH and the Subsidiary to
consummate the Merger is subject to, among others, the following conditions: (i)
SHC shall have performed all of its obligations as contemplated by the Plan at
or prior to the Effective Time; (ii) the representations and warranties of SHC
set forth in the Plan shall be true and correct in all material respects as of
the dates specified in the Plan; (iii) the licenses, certificates of need and
other regulatory approvals necessary for the operation of the SHC facilities
shall have been obtained or transferred, except where the failure to obtain such
licenses and transfers would not have a material adverse effect on the business
of SHC; and (iv) HEALTHSOUTH shall have received the opinion of its counsel that
the Merger constitutes a tax-free reorganization under the Internal Revenue Code
of 1986, as amended (the "Code").
<PAGE>
The obligation of SHC to consummate the Merger is subject to, among others,
the following conditions: (i) HEALTHSOUTH and the Subsidiary shall have
performed all of their obligations as contemplated by the Plan at or prior to
the Effective Time; (ii) the representations and warranties of HEALTHSOUTH and
the Subsidiary set forth in the Plan shall be true and correct in all material
respects as of the dates specified in the Plan, and (iii) SHC shall have
received the opinion of its counsel that the Merger constitutes a tax-free
reorganization under the Code.
The obligation of each of HEALTHSOUTH, the Subsidiary and SHC to consummate
the Merger is subject to certain additional conditions, including the following:
(i) no order, decree or injunction by a court of competent jurisdiction
preventing the consummation of the Merger or imposing any material limitation on
the ability of HEALTHSOUTH effectively to exercise full rights of ownership of
the SHC Shares or any material portion of the assets or business of SHC shall be
in effect; (ii) no statute, rule or regulation shall have been enacted by the
government of the United States or any state, municipality or other political
subdivision thereof that makes the consummation of the Merger or any other
transaction contemplated by the Plan illegal; (iii) the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act") shall have
expired or shall have been terminated; (iv) the Registration Statement shall
have been declared effective under the Securities Act and shall not be subject
to any stop order; (v) the Merger shall have been approved by the requisite vote
of the holders of the outstanding SHC Shares entitled to vote thereon and by the
requisite vote of the holders of the outstanding shares of HEALTHSOUTH Common
Stock entitled to vote thereon; (vi) the shares of HEALTHSOUTH Common Stock to
be issued in connection with the Merger shall have been approved for listing on
the NYSE upon official notice of issuance and shall have been issued pursuant to
an effective registration statement (subject to no stop order), or in
transactions qualified or exempt from registration, under applicable state
securities laws; and (vii) HEALTHSOUTH and SHC each shall have received a letter
from Ernst & Young LLP to the effect that the Merger will be accounted for as a
pooling of interests. See "THE MERGER--Conditions to the Merger".
Regulatory Approvals. The HSR Act provides that certain business mergers
(including the Merger) may not be consummated until certain information has been
furnished to the Department of Justice (the "DOJ") and the Federal Trade
Commission (the "FTC") and certain waiting period requirements have been
satisfied. On February 21, 1995, HEALTHSOUTH and SHC made their respective
filings with the DOJ and the FTC with respect to the Plan. Under the HSR Act,
the filings commenced a 30-day waiting period during which the Merger cannot be
consummated, which waiting period expires on March 23, 1995 unless extended by a
request for additional information. Notwithstanding the expiration of the HSR
Act waiting period, at any time before or after the Effective Time, the FTC, the
DOJ or others could take action under the antitrust laws, including seeking to
enjoin the consummation of the Merger or seeking the divestiture by HEALTHSOUTH
of all or any part of the stock or assets of SHC. There can be no assurance that
a challenge to the Merger on antitrust grounds will not be made or, if such a
challenge were made, that it would not be successful.
The operations of each Company are subject to a substantial body of federal,
state, local and accrediting body laws, rules and regulations relating to the
conduct, licensing and development of healthcare businesses and facilities. As a
result of the Merger, certain of the licenses for facilities operated by SHC
will be deemed to have been transferred, requiring the consents or approvals of
various state licensing and/or health planning agencies. In some instances, new
licenses will be required to be obtained. In addition, certain of the
arrangements between SHC and third-party payors may be deemed to have been
transferred, requiring the approval and consent of such payors. See "THE MERGER
- -- Regulatory Approvals".
<PAGE>
Business Pending the Merger. The Plan provides that, until the Effective
Time, except as provided in the Plan, HEALTHSOUTH and SHC will conduct their
respective businesses in the usual, regular and ordinary course in substantially
the same manner as previously conducted, and SHC will use its best efforts to
preserve intact its present business organizations and to preserve its
relationships with customers, suppliers and others having business dealings with
it. See "THE MERGER -- Business Pending the Merger".
Waiver and Amendment. The Plan provides that, at any time prior to the
Effective Time, HEALTHSOUTH and SHC may (i) extend the time for the performance
of any of the obligations or other acts of the other party contained in the
Plan; (ii) waive any inaccuracies in the representations and warranties of the
other party contained in the Plan or in any document delivered pursuant to the
Plan; and (iii) waive compliance with the agreements or conditions under the
Plan. In addition, the Plan may be amended at any time upon the written
agreement of HEALTHSOUTH and SHC without the approval of the stockholders of
either Company, except that after the Special Meetings no amendment may be made
which by law requires a further approval by the stockholders of either Company
without such further approval being obtained. See "THE MERGER -- Waiver and
Amendment".
Termination. The Plan may be terminated at any time prior to the Effective
Time, whether before or after approval of the Plan by the stockholders of SHC
and the stockholders of HEALTHSOUTH: (i) by mutual written consent of
HEALTHSOUTH, the Subsidiary and SHC; (ii) by either HEALTHSOUTH or SHC if there
is a material breach on the part of the other party of any representation,
warranty, covenant or other agreement set forth in the Plan which is not cured
as provided in the Plan; (iii) by either HEALTHSOUTH or SHC if any governmental
entity or court of competent jurisdiction shall have issued a final, permanent
order, enjoining or otherwise prohibiting the Merger and such order shall have
become non-appealable; (iv) by either HEALTHSOUTH or SHC if the Merger has not
been consummated on or before June 30, 1995 (or such later date as may be
determined under the Plan), unless such failure is due to the breach of the Plan
by the party seeking to terminate the Plan; (v) by either HEALTHSOUTH or SHC if
any required approval of the Plan by stockholders of SHC or stockholders of
HEALTHSOUTH has not been obtained by the required votes at a duly held meeting
of stockholders; (vi) by either HEALTHSOUTH or SHC if either party gives notice
of termination under the Plan due to the occurrence of certain material changes
which would have a material adverse effect on the notifying party; (vii) by
either HEALTHSOUTH or SHC if all of the mutual conditions to the obligations of
both parties to effect the Merger under the Plan have been satisfied and any
condition to the obligation of the terminating party to effect the Merger under
the Plan is not capable of being satisfied prior to June 30, 1995 (or such later
date as may be determined under the Plan); (viii) by SHC, if SHC's Board of
Directors shall have determined, in the exercise of its fiduciary duties under
applicable law, not to recommend the Merger to the stockholders of SHC or shall
have withdrawn such recommendation, or shall have approved, recommended or
endorsed any proposal to acquire SHC upon a merger, purchase of assets, purchase
of or tender offer for shares of SHC or similar transaction other than the
Merger, or shall have resolved to do any of the foregoing; (ix) by either
HEALTHSOUTH or SHC if such party has not received by March 1, 1995, a letter
from Ernst & Young LLP to the effect that the Merger will be accounted for as a
pooling of interests and (x) by HEALTHSOUTH, if the holders of more than 10% of
the SHC Shares have given proper written demand for appraisal of the value of
such shares as provided in Section 262 of the DGCL before the taking of a vote
on the Merger at any meeting of the stockholders of SHC called for that purpose.
<PAGE>
Third Party Bids. If the Plan is terminated by SHC pursuant to a
determination by SHC's Board of Directors, in the exercise of its fiduciary
duties under applicable law, not to recommend the Merger to the holders of SHC
Shares because such Board of Directors has approved, recommended or endorsed any
third-party Acquisition Transaction (as defined in the Plan), SHC must give
written notice to HEALTHSOUTH of the proposed Acquisition Transaction and each
of HEALTHSOUTH and such third party shall have the right to make a final and
best offer to acquire SHC. See "THE MERGER -- Third Party Bids".
Interests of Certain Persons in the Merger. In considering the
recommendations of the Boards of Directors of HEALTHSOUTH and SHC with respect
to the Plan and the transactions contemplated thereby, stockholders of both
Companies should be aware that certain members of the management of HEALTHSOUTH
and SHC and the Boards of Directors of such Companies have certain interests in
the Merger that are in addition to the interests of such stockholders generally.
Each of Richard M. Scrushy, Chairman of the Board, President and Chief
Executive Officer of HEALTHSOUTH, and Charles W. Newhall III is a director of
both HEALTHSOUTH and SHC. Neither of such persons cast votes in connection with
the approval of the Plan by the respective Boards of Directors of the Companies.
As of the SHC Record Date, directors and executive officers of HEALTHSOUTH
and their affiliates (excluding Richard M. Scrushy and Charles W. Newhall III
and their affiliates because SHC Shares beneficially owned by them are included
in the amounts of SHC Shares owned by directors and executive officers of SHC
and their affiliates) beneficially owned an aggregate of 645,075 shares of SHC
Common Stock (excluding shares issuable upon exercise of options and convertible
securities), 13,749 shares of SHC Series A Preferred Stock, 457,996 of SHC
Series B Preferred Stock and 149,400 shares of SHC Series C Preferred Stock, as
follows:
<TABLE>
<CAPTION>
SHC SHARES
BENEFICIALLY OWNED
-------------------------------------------
POSITION WITH SERIES A SERIES B SERIES C
NAME HEALTHSOUTH COMMON PREFERRED PREFERRED PREFERRED
- ----------------- ----------------------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
C. Sage
Givens(1)........ Director 210,700 -- 457,996 149,400
Larry R. House .. Director 434,375 -- -- --
Director and Executive
Vice President and
Chief Financial
Aaron Beam, Jr. . Officer -- 6,875 -- --
Director and Executive
Anthony J. Vice President and
Tanner........... Secretary -- 3,437 -- --
Michael D. Senior Vice President
Martin........... and Treasurer -- 3,437 -- --
<FN>
- -----------------
(1) These shares are owned of record by First Century Partnership III, of
which Ms. Givens is an affiliate.
</TABLE>
Such persons have indicated their intentions to vote all of such SHC Shares
for the Plan. Assuming a Base Period Trading Price of $33.00, such persons would
receive a total of 176,539 shares of HEALTHSOUTH Common Stock out of the total
of 4,358,328 shares of HEALTHSOUTH Common Stock to be issued to stockholders of
SHC in the Merger (excluding shares issuable to SHC stockholders upon exercise
of options or warrants).
As of the SHC Record Date, directors and executive officers of SHC and their
affiliates beneficially owned an aggregate of 7,712,907 shares of SHC Common
Stock (excluding shares issuable upon exercise of options and convertible
securities), 843,173 shares of SHC Series A Preferred Stock, 1,316,737 shares of
SHC Series B Preferred Stock and 1,206,584 shares of SHC Series C Preferred
Stock, as follows:
<PAGE>
<TABLE>
<CAPTION>
SHC SHARES
BENEFICIALLY OWNED
-------------------------------------------
POSITION WITH SERIES A SERIES B SERIES C
NAME SHC COMMON PREFERRED PREFERRED PREFERRED
- ----------------- ----------------------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
Rock A. Morphis........... Chairman of the Board,
President and Chief
Executive Officer 881,720 -- -- --
Charles W. Newhall
III(1).................... Director 1,648,133 567,845 1,030,490 775,185
John M. Nehra(2).......... Director 340,827 110,131 228,997 211,414
Ted H. McCourtney, Jr.
(3)....................... Director 720,210 275,328 286,247 422,828
Charles N. Martin,
Jr.(4).................... Director 2,833,288 -- -- --
Richard M. Scrushy........ Director 468,750 -- -- --
H. Carlton Stinson........ Director 881,720 -- -- --
J. Michael Ribaudo........ Director and Senior
Vice President--
Clinical Services 245,336 -- -- --
Sarah C. Garvin........... Senior Vice
President--Development 33,750 -- -- 8,571
<FN>
- -----------------
(1) Mr. Newhall is (i) a general partner of NEA Partners V, L.P., the general
partner of New Enterprise Associates V, L.P., (ii) a general partner of Catalyst
Ventures, Limited Partnership, and (iii) a general partner of NEA Silverado
Partners, the general partner of The Silverado Fund I, Limited Partnership. The
shares set forth opposite Mr. Newhall's name are owned of record by such
entities. Mr. Newhall shares voting and investment power with respect to such
shares and disclaims beneficial ownership of such shares.
(2) These shares are owned of record by Catalyst Ventures, of which Mr. Nehra
is a general partner. Mr. Nehra shares voting and investment power with respect
to such shares and disclaims beneficial ownership of such shares.
(3) These shares are held of record by Venrock Associates.
(4) These shares are owned by OrNda Investments, Inc., an indirect
wholly-owned subsidiary of OrNda HealthCorp. Mr. Martin is the Chairman and
Chief Executive Officer of OrNda HealthCorp. Mr. Martin disclaims beneficial
ownership of the shares held by OrNda Investments, Inc.
</TABLE>
Such persons have indicated their intentions to vote all of such SHC Shares
for the Plan. Assuming a Base Period Trading Price of $33.00, such persons would
receive a total of 1,668,725 shares of HEALTHSOUTH Common Stock out of the total
of 4,358,328 shares of HEALTHSOUTH Common Stock to be issued to stockholders of
SHC in the Merger (excluding shares issuable to SHC stockholders upon exercise
of options or warrants).
As of the HEALTHSOUTH Record Date, directors and executive officers of
HEALTHSOUTH and their affiliates beneficially owned an aggregate of 200,760
shares of HEALTHSOUTH Common Stock (excluding shares issuable upon exercise of
options and convertible securities) or approximately 0.56% of the shares of
HEALTHSOUTH Common Stock outstanding on such date. The directors and executive
officers of HEALTHSOUTH and their affiliates have indicated their intentions to
vote the shares of HEALTHSOUTH Common Stock beneficially owned by them for the
Plan.
As of the HEALTHSOUTH Record Date, directors and executive officers of SHC
and their affiliates beneficially owned an aggregate of shares of HEALTHSOUTH
Common Stock (excluding shares issuable upon exercise of options and convertible
securities), or approximately % of the shares of HEALTHSOUTH Common Stock
outstanding on such date. The directors and executive officers of SHC and their
affiliates have indicated their intentions to vote the shares of HEALTHSOUTH
Common Stock beneficially owned by them for the Plan.
See "THE MERGER -- Interests of Certain Persons in the Merger".
Accounting Treatment. It is intended that the Merger will be accounted for as
a pooling of interests. It is a condition to the consummation of the Merger that
each of HEALTHSOUTH and SHC receive a letter from Ernst & Young LLP to the
effect that the Merger will be accounted for as a pooling of interests. See "THE
MERGER -- Accounting Treatment" and "PRO FORMA CONDENSED FINANCIAL INFORMATION".
<PAGE>
Certain Federal Income Tax Consequences. The Merger is intended to qualify as
a reorganization within the meaning of the Code. If the Merger so qualifies, no
gain or loss will be recognized by holders of SHC Shares upon their receipt of
HEALTHSOUTH Common Stock in exchange for their SHC Shares, except with respect
to cash received in lieu of fractional shares. The obligation of SHC and
HEALTHSOUTH to consummate the Merger is conditioned upon their receipt of
opinions from their respective counsel to the effect that the Merger will
qualify as a reorganization within the meaning of Section 368(a) of the Code.
Each holder of SHC Shares and each holder of options or warrants to acquire SHC
Shares is urged to consult his or her personal tax and financial advisors
concerning the federal income tax consequences of the Merger, as well as any
state, local, foreign or other tax consequences of the Merger, based upon such
holder's own particular facts and circumstances. See "THE MERGER -- Certain
Federal Income Tax Consequences".
Resale Restrictions. All shares of HEALTHSOUTH Common Stock received by SHC
stockholders in the Merger will be freely transferable, except that shares of
HEALTHSOUTH Common Stock received by persons who are deemed to be "affiliates"
(as such term is defined under the Securities Act) of SHC at the time of the SHC
Special Meeting may be resold by them only in certain permitted circumstances.
See "THE MERGER -- Resale of HEALTHSOUTH Common Stock by Affiliates".
Appraisal Rights. Holders of SHC Shares have the right to dissent from the
Merger and, if the Merger is consummated, to receive payment of the fair value
of their SHC Shares (determined in accordance with Delaware law) upon compliance
with the provisions of Section 262 of the DGCL, a copy of which is attached to
this Prospectus-Joint Proxy Statement as Annex D. Holders of SHC Shares are
urged to read Section 262 carefully, including the provisions regarding actions
required to be taken by them prior to the taking of the vote on the Plan at the
SHC Special Meeting to preserve their rights to dissent and seek appraisal of
the fair value of their shares. Holders of HEALTHSOUTH Common Stock are not
entitled to appraisal rights under the DGCL.
See "THE MERGER -- Appraisal Rights".
NYSE Listing. A listing application will be filed with the NYSE to list the
shares of HEALTHSOUTH Common Stock to be issued to the SHC stockholders in the
Merger. Although no assurance can be given that the NYSE will accept such shares
of HEALTHSOUTH Common Stock for listing, HEALTHSOUTH and SHC anticipate that
these shares will qualify for listing. It is a condition to the obligation of
HEALTHSOUTH, the Subsidiary and SHC to consummate the Merger that such shares of
HEALTHSOUTH Common Stock be approved for listing on the NYSE upon official
notice of issuance at the Effective Time. See "THE MERGER -- NYSE Listing".
Market and Market Price
HEALTHSOUTH Common Stock is listed under the symbol HRC on the NYSE. Set
forth below are the closing prices per share of HEALTHSOUTH Common Stock on the
NYSE on (i) January 23, 1995, the last business day preceding public
announcement of the Merger, and (ii) March 3, 1995:
MARKET PRICE
PER SHARE OF
HEALTHSOUTH
DATE COMMON STOCK
- ---------------- ---------------
January 23, 1995 ............ $36.63
March 3, 1995 .............. $39.13
The following table sets forth certain information as to the high and low
reported sale prices per share of HEALTHSOUTH Common Stock for the calendar
years and quarters indicated. There is no public market for the SHC Shares. The
prices for HEALTHSOUTH Common Stock are as reported on the NYSE Composite
Transactions Tape. Neither HEALTHSOUTH nor SHC has ever paid dividends on its
capital stock, except for certain distributions to shareholders of S
corporations which were acquired by SHC in pooling-of-interests transactions,
and neither anticipates the payment of dividends in the near future.
<PAGE>
HEALTHSOUTH
COMMON STOCK
---------------
HIGH LOW
------ ------
1992
First Quarter........................ $37.13 $24.00
Second Quarter....................... 25.50 15.25
Third Quarter........................ 25.25 18.25
Fourth Quarter....................... 26.50 16.00
1993 ................................
First Quarter........................ $26.38 $14.25
Second Quarter....................... 18.63 13.00
Third Quarter........................ 16.75 12.13
Fourth Quarter....................... 25.63 15.25
1994 ................................
First Quarter........................ $32.25 $23.38
Second Quarter....................... 34.63 25.25
Third Quarter........................ 39.38 25.75
Fourth Quarter ...................... 38.63 32.25
1995
First Quarter (through March 3,
1995)................................ 40.63 36.13
As of the HEALTHSOUTH Record Date, there were approximately 1,281 record
holders of HEALTHSOUTH Common Stock. As of the SHC Record Date, there were
approximately 563 record holders of SHC Common Stock, approximately 23 record
holders of SHC Series A Preferred Stock, approximately 22 record holders of SHC
Series B Preferred Stock and approximately 21 record holders of SHC Series C
Preferred Stock.
Stockholders are advised to obtain current market quotations for HEALTHSOUTH
Common Stock. No assurance can be given as to the market price of HEALTHSOUTH
Common Stock at the Effective Time or at any other time.
Operations and Management of HEALTHSOUTH After the Merger
Pursuant to the Plan, following the Effective Time, SHC will be a
wholly-owned subsidiary of HEALTHSOUTH and all of SHC's subsidiaries will be
indirect subsidiaries of HEALTHSOUTH. HEALTHSOUTH will continue its operations
as prior to the Merger and will be managed by the same Board of Directors and
executive officers. See "OPERATIONS AND MANAGEMENT OF HEALTHSOUTH AFTER THE
MERGER".
COMPARATIVE PER SHARE INFORMATION
The following summary presents selected comparative per share information (i)
for HEALTHSOUTH on a historical basis in comparison with pro forma information
giving effect to the Merger on a pooling-of-interests basis, and (ii) SHC on a
historical basis in comparison with its pro forma equivalent information after
giving effect to the Merger, including the receipt of a fraction of a share of
HEALTHSOUTH Common Stock for each SHC Share in accordance with the Exchange
Ratio. The pro forma financial information should be read in conjunction with
the historical consolidated financial statements of HEALTHSOUTH and SHC and the
related notes thereto contained elsewhere herein or in documents incorporated
herein by reference, and in conjunction with the unaudited pro forma financial
information appearing elsewhere in this Prospectus-Joint Proxy Statement. See
"INCORPORATION OF CERTAIN INFORMATION BY REFERENCE", "PRO FORMA CONDENSED
FINANCIAL INFORMATION" and "CONSOLIDATED FINANCIAL STATEMENTS OF SHC".
Neither HEALTHSOUTH nor SHC has paid cash dividends since inception, except
for certain distributions to shareholders of S corporations which were acquired
by SHC in pooling-of-interests transactions. It is anticipated that HEALTHSOUTH
will retain all earnings for use in the expansion of the business and therefore
does not anticipate paying any cash dividends in the foreseeable future. The
payment of future dividends will be at the discretion of the Board of Directors
of HEALTHSOUTH and will depend, among other things, upon HEALTHSOUTH's earnings,
capital requirements, financial condition and debt covenants.
<PAGE>
The following information is not necessarily indicative of the combined
results of operations or combined financial position that would have resulted
had the Merger been consummated at the beginning of the periods indicated, nor
is it necessarily indicative of the combined results of operations in future
periods or future combined financial position.
YEAR ENDED DECEMBER 31,
------------------------------
1990 1991 1992 1993 1994
----- ----- ------ ----- -----
Net income per common and common
equivalent share:
HEALTHSOUTH
Historical (primary) (1)............... $.67 $.90 $1.01 $.39 $1.40
Historical (fully diluted) (1) (2) .... .59 .83 N/A N/A 1.39
Pro forma combined (primary) (1) ..... .70 .90 .95 .65(3) 1.20(4)
Pro forma combined (fully
diluted) (1) (2) ..................... .61 .83 N/A N/A 1.20(4)
SHC (5)
Historical............................. $.32 $.10 $ .02 $.11 $(.15)
Pro forma equivalent (primary) (6) .... .09 .11 .12 .08 .15
Pro forma equivalent (fully
diluted) (6).......................... .08 .10 N/A N/A .15
AT DECEMBER 31,
1994
----------------
Stockholders' equity per common and common
equivalent share:
HEALTHSOUTH - historical..................................... $11.23
HEALTHSOUTH - pro forma combined............................. 11.64
SHC - historical............................................. 1.57
SHC - pro forma equivalent (6)............................... 1.45
- --------------------
(1) Adjusted to reflect a three-for-two stock split effected in the form of a
50% stock dividend paid on December 31, 1991.
(2) Fully-diluted earnings per share for 1991 and 1992 reflect shares
reserved for issuance upon exercise of dilutive stock options and shares
reserved for issuance upon conversion of HEALTHSOUTH's 7 3/4 % Convertible
Subordinated Debentures Due 2014, all of which were converted into HEALTHSOUTH
Common Stock prior to June 3, 1991. Fully diluted earnings per share in 1994
reflect shares reserved for issuance upon exercise of dilutive stock options and
shares reserved for issuance upon conversion of HEALTHSOUTH's 5% Convertible
Subordinated Debentures due 2001.
(3) Gives effect to the acquisition of certain rehabilitation facilities from
National Medical Enterprises, Inc. (the "NME Selected Hospitals Acquisition") as
if the purchase had occurred on January 1, 1993. See "PRO FORMA CONDENSED
FINANCIAL INFORMATION".
(4) Gives effect to the acquisition of certain rehabilitation facilities from
NovaCare, Inc. (the "NovaCare Rehabilitation Hospitals Acquisition") as if the
purchase had occurred on January 1, 1994. See "PRO FORMA CONDENSED FINANCIAL
INFORMATION".
(5) Historical net income for 1990 to 1993 is adjusted to account for income
taxes on the S corporation earnings of two companies previously acquired by SHC
in pooling-of-interests transactions. See Note 10 of Notes to Consolidated
Financial Statements of SHC.
(6) SHC pro forma equivalent per share data have been calculated by
multiplying the pro forma HEALTHSOUTH amounts by an assumed Exchange Ratio of
.1243, which is the Exchange Ratio which would be in effect if the Base Period
Trading Price were equal to $39.13, the closing price of HEALTHSOUTH Common
Stock on March 3, 1995.
<PAGE>
HEALTHSOUTH and SHC
SELECTED PRO FORMA FINANCIAL INFORMATION
The following selected pro forma financial information for the combined
Companies gives effect to the Merger as a pooling of interests. All of the
following selected pro forma financial information should be read in conjunction
with the pro forma financial information, including the notes thereto, appearing
elsewhere in this Prospectus-Joint Proxy Statement. See "PRO FORMA CONDENSED
FINANCIAL INFORMATION". The pro forma financial information set forth in this
Prospectus-Joint Proxy Statement is not necessarily indicative of the results
that actually would have occurred had the Merger been consummated on the dates
indicated or that may be obtained in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1992 1993 (2) 1994 (3)
------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Income Statement Data(1):
Revenues ............................................ $ 501,046 $ 1,111,198 $ 1,387,374
Operating expenses:
Operating units ................................... 372,169 837,377 1,018,658
Corporate general and administrative .............. 16,878 34,329 50,115
Provision for doubtful accounts ..................... 13,254 24,452 25,008
Depreciation and amortization ....................... 29,834 65,070 97,251
Interest expense .................................... 12,623 54,668 87,348
Interest income ..................................... (5,415) (3,924) (4,308)
Merger expenses ..................................... 3,665 333 6.520
Loss on impairment of assets ........................ -- -- 10,500
Loss on abandonment of computer project ............. -- -- 4,500
NME Selected Hospitals Acquisition related expense .. -- 49,742 --
Gain on sale of partnership interest ................ -- (1,400) --
443,008 1,060,647 1,295,592
Income before income taxes and minority interests . 58,038 50,551 91,782
Provision for income taxes .......................... 18,864 18,629 34,566
39,174 31,922 57,216
Minority interests .................................. 4,245 6.846 6,847
Net income .......................................... $ 34,929 $ 25,076 $ 50,369
Weighted average common and common equivalent shares
outstanding ......................................... 36,957 38,624 42,099
Net income per common and common
equivalent share .................................... $ 0.95 $ .65 $ 1.20
Net income per common share--assuming full dilution (4) N/A N/A $ 1.20
</TABLE>
<PAGE>
DECEMBER 31,
----------------------------------
1992 1993 1994
---------- ---------- ---------
(IN THOUSANDS)
Balance Sheet Data(1):
Cash and marketable
securities.................... $111,524 $ 89,999 $ 89,248
Working capital............... 204,065 211,062 261,158
Total assets.................. 795,367 1,444,418 1,993,454
Long-term debt (5)............ 338,000 888,180 1,269,116
Stockholders' equity.......... 361,512 388,535 489,920
- ---------------
(1) Reflects combination of HEALTHSOUTH and ReLife for all periods presented,
as HEALTHSOUTH acquired ReLife in December 1994 in a transaction accounted for
as a pooling of interests.
(2) Gives effect to the NME Selected Hospitals Acquisition as if the purchase
had occurred on January 1, 1993. See "PRO FORMA CONDENSED FINANCIAL
INFORMATION".
(3) Gives effect to the NovaCare Rehabilitation Hospitals Acquisition as if
the purchase had occurred on January 1, 1994. See "PRO FORMA CONDENSED FINANCIAL
INFORMATION".
(4) Fully-diluted earnings per share in 1994 reflects shares reserved for
issuance upon conversion of HEALTHSOUTH's 5% Convertible Subordinated Debentures
Due 2001.
(5) Includes current portion of long-term debt.
<PAGE>
THE SPECIAL MEETINGS
General
This Prospectus-Joint Proxy Statement is being furnished to holders of
HEALTHSOUTH Common Stock in connection with the solicitation of proxies by the
Board of Directors of HEALTHSOUTH for use at the HEALTHSOUTH Special Meeting to
consider and vote upon the approval of the Plan and to transact such other
business as may properly come before the HEALTHSOUTH Special Meeting or any
adjournments or postponements thereof.
This Prospectus-Joint Proxy Statement is also being furnished to holders of
SHC Shares in connection with the solicitation of proxies by the Board of
Directors of SHC for use at the SHC Special Meeting to consider and vote upon
the approval of the Plan and to transact such other business as may properly
come before the SHC Special Meeting or any adjournments or postponements
thereof.
Each copy of this Prospectus-Joint Proxy Statement mailed to holders of
HEALTHSOUTH Common Stock is accompanied by a form of Proxy for use at the
HEALTHSOUTH Special Meeting, and each copy of this Prospectus-Joint Proxy
Statement mailed to holders of SHC Shares is accompanied by a form of Proxy to
be used at the SHC Special Meeting.
This Prospectus-Joint Proxy Statement is also furnished to holders of SHC
Shares as a Prospectus in connection with the issuance to them of the shares of
HEALTHSOUTH Common Stock upon consummation of the Merger.
Dates, Places and Times
The HEALTHSOUTH Special Meeting will be held at the executive offices of
HEALTHSOUTH at Two Perimeter Park South, HEALTHSOUTH Corporation, Birmingham,
Alabama 35243 on April 13, 1995 at 2:00 p.m., Central Time.
The SHC Special Meeting will be held at the offices of Alston & Bird located
on the 46th floor at 1201 West Peachtree Street, Atlanta, Georgia 30309, at 2:00
p.m., Eastern Time.
Record Dates; Quorums
The Board of Directors of HEALTHSOUTH has fixed the close of business on
March 3, 1995 as the HEALTHSOUTH Record Date for the determination of the
holders of HEALTHSOUTH Common Stock entitled to receive notice of and to vote at
the HEALTHSOUTH Special Meeting. The presence, in person or by Proxy, of the
holders of shares of HEALTHSOUTH Common Stock entitled to cast a majority of the
votes entitled to be cast at the HEALTHSOUTH Special Meeting will constitute a
quorum at the HEALTHSOUTH Special Meeting.
The Board of Directors of SHC has fixed the close of business on February 28,
1995, as the SHC Record Date for the determination of holders of SHC Shares
entitled to receive notice of and to vote at the SHC Special Meeting. The
presence, in person or by Proxy, of the holders of SHC Shares entitled to cast a
majority of the votes entitled to be cast at the SHC Special Meeting will
constitute a quorum at the SHC Special Meeting.
Votes Required
As of the HEALTHSOUTH Record Date, there were outstanding and entitled to
vote 35,565,387 shares of HEALTHSOUTH Common Stock. Each share of HEALTHSOUTH
Common Stock is entitled to one vote on each matter that comes before the
HEALTHSOUTH Special Meeting.
The affirmative vote of the holders of shares of HEALTHSOUTH Common Stock
representing a majority of the votes cast at the HEALTHSOUTH Special Meeting is
required to approve and adopt the Plan, provided that the total votes cast at
the HEALTHSOUTH Special Meeting represent at least 50% of the outstanding shares
of HEALTHSOUTH Common Stock. Accordingly, the Plan will require the affirmative
vote of the holders of shares of HEALTHSOUTH Common Stock entitled to cast a
minimum of 8,891,347 votes.
<PAGE>
As of the SHC Record Date, there were outstanding and entitled to vote
21,951,901 shares of SHC Common Stock, 1,911,902 shares of SHC Series A
Preferred Stock, 3,961,413 shares of SHC Series B Preferred Stock and 3,439,692
shares of Series SHC Series C Preferred Stock. Each of such SHC Shares is
entitled to one vote on each matter that comes before the SHC Special Meeting.
Approval and adoption of the Plan will require the affirmative vote of a
majority of the votes entitled to be cast by the holders of record of (i) SHC
Common Stock, SHC Series A Preferred Stock, SHC Series B Preferred Stock and SHC
Series C Preferred Stock, voting together as a single class, and (ii) SHC Series
A Preferred Stock, SHC Series B Preferred Stock and SHC Series C Preferred
Stock, each voting as a separate class. Accordingly, approval and adoption of
the Plan will require the affirmative vote of the holders of (i) 15,632,455
shares of SHC Common Stock, SHC Series A Preferred Stock, SHC Series B Preferred
Stock and SHC Series C Preferred Stock, voting together as a single class, and
(ii) 955,952 shares of SHC Series A Preferred Stock, 1,980,707 shares of SHC
Series B Preferred Stock and 1,719,847 shares of SHC Series C Preferred Stock,
each voting as a separate class.
As of the SHC Record Date, directors and executive officers of SHC and their
affiliates beneficially owned an aggregate of 7,712,907 shares of SHC Common
Stock (excluding shares issuable upon exercise of options and convertible
securities), 843,173 shares of SHC Series A Preferred Stock, 1,316,737 shares of
SHC Series B Preferred Stock and 1,206,584 shares of SHC Series C Preferred
Stock. Each issued and outstanding SHC Share is entitled to one vote on each
matter to be presented at the SHC Special Meeting. Accordingly, of the
31,264,908 votes entitled to be cast with respect to the Merger by the holders
of SHC Shares, voting together as a single class, the directors and executive
officers of SHC and their affiliates beneficially own SHC Shares entitled to
cast 11,079,401, or approximately 35.4%, of such votes. Further, of the
1,911,902, 3,961,413 and 3,439,692 votes entitled to be cast with respect to the
Merger by the holders of SHC Series A Preferred Stock, SHC Series B Preferred
Stock and SHC Series C Preferred Stock, respectively, voting separately as
classes, the directors and executive officers of SHC and their affiliates are
entitled to cast 843,173, 1,316,737 and 1,206,584 votes, respectively, or
approximately 44.1%, 33.2% and 35.1%, respectively, of such votes. The directors
and executive officers of SHC and their affiliates have indicated their
intentions to vote the SHC Shares beneficially owned by them for the Plan.
As of the SHC Record Date, directors and executive officers of HEALTHSOUTH
and their affiliates (excluding Richard M. Scrushy and Charles W. Newhall III
and their affiliates because SHC Shares beneficially owned by them are included
in the amounts of SHC Shares owned by directors and executive officers of SHC
and their affiliates) beneficially owned an aggregate of 645,075 shares of SHC
Common Stock (excluding shares issuable upon the exercise of options and
convertible securities), 13,749 shares of SHC Series A Preferred Stock, 457,996
shares of SHC Series B Preferred Stock and 149,400 shares of SHC Series C
Preferred Stock. The directors and executive officers of HEALTHSOUTH and their
affiliates have indicated their intentions to vote the SHC Shares beneficially
owned by them for the Plan.
As of the HEALTHSOUTH Record Date, directors and executive officers of
HEALTHSOUTH and their affiliates beneficially owned an aggregate of 200,760
shares of HEALTHSOUTH Common Stock (excluding shares issuable upon exercise of
options and convertible securities), or approximately 0.56% of the shares of
HEALTHSOUTH Common Stock outstanding on such date. The directors and executive
officers of HEALTHSOUTH and their affiliates have indicated their intentions to
vote the shares of HEALTHSOUTH Common Stock beneficially owned by them for the
Plan.
As of the HEALTHSOUTH Record Date, directors and executive officers of SHC
and their affiliates beneficially owned an aggregate of - shares of HEALTHSOUTH
Common Stock (excluding shares issuable upon exercise of options and convertible
securities) or approximately % of the shares of HEALTHSOUTH Common Stock
outstanding on such date. The directors and executive officers of SHC and their
affiliates have indicated their intentions to vote the shares of HEALTHSOUTH
Common Stock beneficially owned by them for the Plan.
<PAGE>
Voting and Revocation of Proxies
Shares of HEALTHSOUTH Common Stock and the SHC Shares represented by a Proxy
properly signed and received at or prior to the appropriate Special Meeting,
unless subsequently revoked, will be voted in accordance with the instructions
thereon. If a Proxy is properly executed and returned without indicating any
voting instructions, shares of HEALTHSOUTH Common Stock represented by the Proxy
will be voted for approval and adoption of the Plan and SHC Shares represented
by the Proxy will be voted for approval and adoption of the Plan. Any Proxy
given pursuant to the solicitation may be revoked by the person giving it at any
time before the Proxy is voted by the filing of an instrument revoking it or of
a duly executed Proxy bearing a later date with the Secretary of HEALTHSOUTH,
for HEALTHSOUTH stockholders, or with the Secretary of SHC, for SHC
stockholders, prior to or at the appropriate Special Meeting, or by voting in
person at the appropriate Special Meeting. Attendance at a Special Meeting will
not in and of itself constitute a revocation of a Proxy. Only votes cast for
approval of the Plan or other matters constitute affirmative votes. Abstentions
and broker non-votes will, therefore, have the same effect as votes against
approval of the Plan with respect to the SHC Special Meeting. So long as votes
representing at least 50% of all issued and outstanding shares of HEALTHSOUTH
Common Stock are cast, abstentions and broker non-votes will not affect the vote
on the Plan at the HEALTHSOUTH Special Meeting.
The Boards of Directors of HEALTHSOUTH and SHC are not aware of any business
to be acted upon at the Special Meetings of their respective stockholders other
than as described herein. If, however, other matters are properly brought before
either Special Meeting, or any adjournments or postponements thereof, the
persons appointed as proxies will have discretion to vote or act thereon
according to their best judgment and subject to applicable rules of the SEC or
Delaware law.
Solicitation of Proxies
In addition to solicitation by mail, directors, officers and employees of
HEALTHSOUTH and SHC, who will not be specifically compensated for such services,
may solicit proxies from the stockholders of HEALTHSOUTH and SHC, respectively,
personally or by telephone or telegram or other forms of communication.
Brokerage houses, nominees, fiduciaries and other custodians will be requested
to forward soliciting materials to beneficial owners and will be reimbursed for
their reasonable expenses incurred in doing so.
HEALTHSOUTH has retained Chemical Bank to assist in the solicitation of
proxies from its stockholders. The fees to be paid to Chemical for such services
by HEALTHSOUTH are not expected to exceed approximately $5,000, plus reasonable
out-of-pocket costs and expenses. Except as otherwise provided in the Plan, each
of HEALTHSOUTH and SHC will bear its own expenses in connection with the
solicitation of proxies for its Special Meeting, except that HEALTHSOUTH and SHC
each will pay one-half of the expenses incurred in printing this
Prospectus-Joint Proxy Statement, the forms of Proxies and other proxy
materials. See "THE MERGER -- Expenses".
STOCKHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY CARDS. THE
PROCEDURE FOR THE EXCHANGE OF SHARES AFTER THE MERGER IS CONSUMMATED IS SET
FORTH ELSEWHERE IN THIS PROSPECTUS-JOINT PROXY STATEMENT. SEE "THE MERGER --
Exchange of Certificates".
<PAGE>
THE MERGER
The description of the Merger contained in this Prospectus-Joint Proxy
Statement summarizes the principal provisions of the Plan; it is not
complete and is qualified in its entirety by reference to the Plan, the
full text of which is attached hereto as Annex A. All stockholders are
urged to read Annex A in its entirety.
Terms of the Merger
The acquisition of SHC by HEALTHSOUTH will be effected by means of the merger
of the Subsidiary with and into SHC, with SHC being the surviving corporation.
The Sixth Restated Certificate of Incorporation of SHC (the "SHC Certificate")
shall be amended and restated, effective at the Effective Time, in a manner
satisfactory to HEALTHSOUTH, and will govern the surviving corporation until
amended in accordance with applicable law. The Bylaws of the Subsidiary as in
effect at the Effective Time will govern the surviving corporation until amended
or repealed in accordance with applicable law. At the Effective Time, SHC shall
continue as the surviving corporation under the name "Surgical Health
Corporation".
At the Effective Time, each outstanding SHC Share not owned directly or
indirectly by HEALTHSOUTH or SHC will be converted into the right to receive a
fraction of a share of HEALTHSOUTH Common Stock, with the number of shares of
HEALTHSOUTH Common Stock to be received by any holder of SHC Shares at the
Effective Time to be determined by multiplying the number of SHC Shares owned by
such holder at the Effective Time by a fraction (the "Exchange Ratio"), the
numerator of which is $4.60 and the denominator of which is the Base Period
Trading Price; provided, however, that, for purposes of such calculation, the
Base Period Trading Price shall be deemed to equal (i) $37.00 in the event that
the Base Period Trading Price is greater than $37.00, or (ii) $33.00 in the
event that the Base Period Trading Price is less than $33.00.
The term "Base Period Trading Price" means the average of the daily closing
prices per share of HEALTHSOUTH Common Stock for the 20 consecutive trading days
on which such shares are actually traded ending on the third trading day before
the closing of the Merger. The daily closing price per share shall be the
closing price for NYSE-Composite Transactions as reported in The Wall Street
Journal-Eastern Edition or, if not reported therein, any other authoritative
source.
The following table indicates the Exchange Ratio assuming various Base Period
Trading Prices, with the resulting "value" to be received for each SHC Share:
VALUE TO BE
BASE PERIOD RECEIVED FOR
TRADING PRICE EXCHANGE RATIO EACH SHC SHARE
(COL. 1) (COL. 2) (COL. 1 X COL. 2)
- --------------- ---------------- ----------------
$30.00......... .1394 $4.18
31.00......... .1394 4.32
32.00......... .1394 4.46
33.00......... .1394 4.60
34.00......... .1353 4.60
35.00......... .1314 4.60
36.00......... .1278 4.60
37.00......... .1243 4.60
38.00......... .1243 4.72
39.00......... .1243 4.85
40.00......... .1243 4.97
As of the Effective Time, all SHC Shares shall no longer be outstanding,
shall automatically be cancelled and retired and shall cease to exist, and each
holder of a certificate representing such shares shall cease to have any rights
with respect thereto, except the right to receive a fraction of a share of
HEALTHSOUTH Common Stock, cash (without interest) in lieu of fractional shares
and any dividends or other distributions to which such holder is entitled as a
result of the Merger. Each SHC Share that is owned by SHC or any subsidiary of
SHC shall automatically be cancelled and retired and shall cease to exist, and
none of the HEALTHSOUTH Common Stock, fractional shares, cash or other
consideration shall be delivered in exchange therefor. As provided in the Plan,
the Merger will not be treated as a liquidation, dissolution or winding up of
SHC under the liquidation provisions of the SHC Certificate.
<PAGE>
Notwithstanding the foregoing, SHC Shares outstanding immediately prior to
the Effective Time held by a stockholder who is entitled to demand, and who
properly demands, appraisal for such shares in accordance with Section 262 of
the DGCL shall not be converted into a right to receive a fraction of a share of
HEALTHSOUTH Common Stock, as set forth hereinabove, unless such stockholder
fails to perfect or otherwise loses his right to appraisal, if any. If, after
the Effective Time, such stockholder fails to perfect or loses any such right to
appraisal, such SHC Shares shall be treated as if they had been converted as of
the Effective Time into the right to receive a fraction of a share of
HEALTHSOUTH Common Stock, cash in lieu of fractional shares of HEALTHSOUTH
Common Stock and any dividends or distributions to which such holder is entitled
as a result of the Merger, as set forth hereinabove. Shares of HEALTHSOUTH
Common Stock are not entitled to appraisal rights under the DGCL. See "--
Appraisal Rights".
The Plan provides that, at the Effective Time, all outstanding options and
warrants to purchase SHC Common Stock will be converted into options and
warrants to purchase a number of shares of HEALTHSOUTH Common Stock determined
in accordance with the Exchange Ratio upon terms identical to those governing
the presently existing options and warrants, and HEALTHSOUTH will assume all of
such options and warrants.
Based upon the number of shares of HEALTHSOUTH Common Stock outstanding and
reserved for issuance upon exercise of options and convertible securities as of
the HEALTHSOUTH Record Date, the stockholders of SHC will receive approximately
10.3% of the outstanding shares of HEALTHSOUTH Common Stock anticipated to be
outstanding immediately after the Effective Time at the maximum Exchange Ratio.
Background of the Merger
In late May 1994, William B. Luttrell, the then-President and Chief Executive
Officer of SHC, was contacted by Richard M. Scrushy, Chairman of the Board,
President and Chief Executive Officer of HEALTHSOUTH, regarding a possible
business combination in which SHC would be acquired by HEALTHSOUTH. Alex. Brown
was retained by SHC to act as its financial advisor. In addition, and on the
advice of legal counsel to SHC, Messrs. Scrushy and Charles W. Newhall III,
directors of SHC, were excluded from all meetings and negotiations regarding a
possible business combination because they are affiliates of HEALTHSOUTH. In
addition, John M. Nehra, who is also a director of SHC, was excluded because he
is a business partner of Mr. Newhall. Negotiations, including the negotiation of
a merger agreement, continued from late May into early June 1994. On June 6,
1994, HEALTHSOUTH decided not to proceed with a transaction with SHC and all
discussions and negotiations ceased.
On November 22, 1994, Rock A. Morphis, Chairman of the Board, President and
Chief Executive Officer of SHC, was contacted by the chief financial officer of
a publicly held healthcare company (the"Other Bidder") who expressed an interest
in a possible business combination with SHC. Thereafter, on December 5, 1994,
Mr. Morphis met with representatives of the Other Bidder, including the Chairman
of the Board of the Other Bidder, and provided an overview of SHC's business
operations. On December 10, 1994, Mr. Morphis and H. Michael Finley, Chief
Financial Officer of SHC, met again with representatives of the Other Bidder,
including its Chairman of the Board. At the December 10 meeting, accounting and
general business issues that would be involved in a business combination were
discussed. Following the December 10 meeting, the Chairman of the Board of the
Other Bidder requested an opportunity to address the SHC Board of Directors.
At SHC's regularly scheduled Board of Directors meeting on December 20, 1994,
Mr. Morphis reported to the Board on his discussions with the Other Bidder and
was authorized to schedule a special meeting of the SHC Board for the purpose of
meeting with representatives of the Other Bidder. A special meeting of the SHC
Board of Directors was scheduled for January 10, 1995.
<PAGE>
On January 3, 1995, Mr. Morphis and Mr. Scrushy had a telephone conversation
in which they discussed the December 20, 1994 SHC Board meeting and the upcoming
special meeting of the SHC Board scheduled for January 10, 1995. In this
telephone conversation, Mr. Scrushy did not indicate any interest on the part of
HEALTHSOUTH in acquiring SHC.
A special meeting of the SHC Board of Directors was held on January 10, 1995.
All members of the SHC Board of Directors were present at the special meeting as
well as representatives of Alex. Brown, the financial advisor to SHC,
representatives of the Other Bidder and a representative of the Other Bidder's
financial advisor. At the meeting, the representatives of the Other Bidder made
a general presentation about their company and the benefits of a business
combination between the Other Bidder and SHC.
Prior to conclusion of the January 10, 1995 SHC Board meeting, Mr. Scrushy
left the meeting, but left a note with Mr. Morphis indicating that if the SHC
Board of Directors decided to entertain an acquisition proposal from the Other
Bidder, then HEALTHSOUTH would also like to consider a business combination with
SHC.
Also at the January 10, 1995 SHC Board meeting, and after representatives of
the Other Bidder had left the meeting, the SHC Board of Directors concluded that
they would continue discussions about a possible business combination with the
Other Bidder and appointed a Special Committee composed of Messrs. Morphis,
Charles N. Martin, Jr. and Ted H. McCourtney, Jr. to analyze and negotiate any
proposals to acquire SHC and make any recommendations they may have to the full
Board of Directors. Also, because of the expressed interest of HEALTHSOUTH, and
as had been done during the earlier discussions with HEALTHSOUTH in May and June
1994, it was determined that Messrs. Scrushy, Newhall and Nehra should be
excluded from all discussions, negotiations and meetings regarding any business
combination. None of them subsequently participated in any such discussions,
negotiations or meetings.
On January 13, 1995, Mr. Morphis and the Chairman of the Board of the Other
Bidder had a telephone conversation in which they began negotiating certain
financial terms of a proposed business combination that would be accounted for
as a pooling of interests. No agreement was reached and no firm proposal was
made by the Other Bidder in this conversation.
On January 16, 1995, Mr. Scrushy telephoned Mr. Morphis and expressed a
serious interest in pursuing a merger transaction between HEALTHSOUTH and SHC
that would be accounted for as a pooling of interests. Following that telephone
conversation, Mr. Morphis received a letter by facsimile from Mr. Scrushy in
which Mr. Scrushy, on behalf of HEALTHSOUTH, made a proposal to acquire SHC in a
merger transaction in which holders of SHC Shares would receive $4.40 of
HEALTHSOUTH Common Stock for each SHC Share outstanding. SHC did not immediately
respond to this letter and no further negotiations took place at this time.
On January 16, 1995, Alston & Bird, legal counsel to SHC, delivered a form of
merger agreement to the Other Bidder and its legal counsel containing terms and
conditions acceptable to SHC assuming the parties could agree on the financial
terms of a business combination. Arrangements were also made for the Other
Bidder's legal counsel to come to Atlanta, Georgia on January 17, 1995 to
conduct legal due diligence.
A draft merger agreement was negotiated between counsel for HEALTHSOUTH and
counsel for SHC during the week of January 16, 1995. In addition, during that
week representatives of Alex. Brown had a number of discussions with
representatives of HEALTHSOUTH regarding the structure of HEALTHSOUTH's proposal
to acquire SHC.
On January 18, 1995, business representatives of the Other Bidder, including
the Chairman of the Board, and a representative of the Other Bidder's financial
advisor, began two days of meetings with representatives of SHC, including Mr.
Morphis, and representatives of Alex. Brown. During these meetings, the Chairman
of the Board of the Other Bidder indicated that he had scheduled a meeting of
the Board of Directors of the Other Bidder for Saturday, January 21, 1995, to
discuss the acquisition of SHC and that, subject to his Board's approval, he
would make a firm offer to SHC following that Board meeting. As a result, Mr.
Morphis called a meeting of the Special Committee of the SHC Board of Directors
for January 21, 1995. At the request of Michael D. Martin, Senior Vice President
and Treasurer of HEALTHSOUTH, Mr. Morphis agreed that representatives of
HEALTHSOUTH would be allowed an opportunity to address the SHC Special Committee
on January 21, 1995.
<PAGE>
On January 21, 1995, a meeting of the Special Committee of the SHC Board of
Directors was held. Messrs. Morphis, Martin and McCourtney of the Special
Committee were present, as well as representatives from Alex. Brown and Alston &
Bird. Messrs. Martin and William W. Horton, Group Vice President -Legal Services
of HEALTHSOUTH, and representatives from Smith Barney, HEALTHSOUTH's financial
advisor, were invited to join the meeting of the Special Committee. Mr. Martin
of HEALTHSOUTH provided an overview of the business of HEALTHSOUTH and
reiterated that HEALTHSOUTH believed that $4.40 of HEALTHSOUTH Common Stock per
SHC Share was a fair price. Following the presentation by Mr. Martin and
representatives of Smith Barney, they were excused.
Shortly after the presentation by Mr. Martin, Mr. Morphis received a
telephone call from the Chairman of the Board of the Other Bidder. In this
telephone call, the Chairman of the Board of the Other Bidder outlined the terms
of an offer to acquire SHC in a stock-for-stock merger transaction that would be
accounted for as a pooling of interests.
Following this telephone call, the Special Committee, with representatives of
Alex. Brown and Alston & Bird present, reconvened to consider the offers by
HEALTHSOUTH and the Other Bidder. Following a discussion of the two offers,
including an analysis by Alex. Brown of the securities offered by each of the
bidders, the Special Committee concluded that it should negotiate a higher price
with HEALTHSOUTH. As a result of negotiations which ensued, HEALTHSOUTH raised
its offer from $4.40 to $4.60 of HEALTHSOUTH Common Stock per SHC Share. After
additional discussion, the SHC Special Committee concluded that the revised
offer by HEALTHSOUTH was the most favorable to SHC and its stockholders and
unanimously agreed to recommend a transaction with HEALTHSOUTH to the full SHC
Board of Directors.
At 9:00 p.m., Atlanta time, on January 22, 1995, a special meeting of the SHC
Board of Directors was held telephonically. All members of the SHC Board, except
Messrs. Scrushy, Newhall and Nehra, were present, along with representatives of
Alex. Brown and Alston & Bird. On behalf of the Special Committee, Mr. Morphis
delivered a detailed summary of the negotiations with HEALTHSOUTH and the Other
Bidder and described the advantages and disadvantages of the respective offers.
Each director had been delivered written materials prepared by Alex. Brown which
analyzed certain financial elements of the proposed offers. In addition, Alex.
Brown delivered orally its opinion that the proposed consideration offered by
HEALTHSOUTH was fair from a financial point of view to the holders of the SHC
Shares. A representative of Alston & Bird also summarized certain legal issues
relevant to the proposed offers. After a discussion of the proposed offers and
after receiving the recommendation of the Special Committee, the members of the
Board present unanimously approved the transaction with HEALTHSOUTH and
authorized Mr. Morphis, as Chairman of the Board, to execute and deliver the
Plan.
Reasons for the Merger; Recommendations of the Boards of Directors
On January 23, 1995, the HEALTHSOUTH Board of Directors ratified its prior
approval of the Plan and the Merger. Messrs. Scrushy and Newhall did not
participate in the vote with respect to such approval or ratification. The
HEALTHSOUTH Board of Directors believes that the Merger is desirable for the
following reasons, among others: (i) SHC has facilities in desirable locations,
primarily in markets where HEALTHSOUTH has an existing presence, (ii) SHC has a
strong senior management team which is knowledgeable and experienced in the
industry, (iii) SHC's existing relationships with physicians and payors will be
enhanced by affiliation with HEALTHSOUTH's national network, (iv) the Merger
will further broaden the continuum of care that HEALTHSOUTH is able to provide,
and (v) the Merger is expected to be accretive to 1995 earnings per share after
anticipated cost savings. For the foregoing reasons, among others, the Board of
Directors of HEALTHSOUTH recommends that the stockholders of HEALTHSOUTH vote
FOR the approval and adoption of the Plan.
<PAGE>
By the unanimous vote of the members of the Board of Directors of SHC present
at a special telephonic meeting held on January 22, 1995, the SHC Board of
Directors determined that the proposed Merger, and the terms and conditions of
the Plan, were in the best interests of SHC and its stockholders. The Plan and
the Merger were adopted and approved unanimously by all directors present at the
meeting, who also unanimously resolved to recommend that the stockholders of SHC
vote FOR approval and adoption of the Plan. See "-- Background of the Merger".
In reaching its conclusion to enter into the Plan and to recommend that the
stockholders of SHC vote for the approval and adoption of the Plan, the Board of
Directors of SHC considered a number of factors, including, without limitation
and without assigning relative weights thereto, the following:
(i) The terms and conditions of the proposed Merger, including the value of
the consideration to be received by the stockholders of SHC, the fact that as
HEALTHSOUTH stockholders the SHC stockholders would have more liquidity, and the
fact that the Merger is expected to be treated as a tax-free reorganization.
(ii) The opportunity for holders of SHC Shares to continue to share in the
potential for long-term gains in SHC through the ownership of HEALTHSOUTH Common
Stock following the Merger.
(iii) The business reputation and capabilities of HEALTHSOUTH and its
management, HEALTHSOUTH's financial strength, prospects, market position and
strategic objectives, and the historical performance of HEALTHSOUTH Common
Stock.
(iv) The presentations of Alex. Brown delivered to the Special Committee of
the Board of Directors of SHC at its meeting held on January 21, 1995 and to the
Board of Directors of SHC at its meeting held on January 22, 1995, including the
opinion of Alex. Brown delivered on January 22, 1995 that the consideration to
be received in the Merger was fair to the holders of SHC Shares from a financial
point of view. Alex. Brown has since delivered an updated written opinion, dated
as of the date of this Prospectus-Joint Proxy Statement, to the effect that, as
of the date of this Prospectus-Joint Proxy Statement, the proposed consideration
to be received by the holders of SHC Shares pursuant to the Merger is fair to
such holders from a financial point of view. See "--Opinions of Financial
Advisors".
(v) The perceived strengths of SHC and HEALTHSOUTH combined, the belief that
SHC and HEALTHSOUTH are strategically complementary and that the combined
Companies will be able to compete more effectively in the changing healthcare
marketplace and will be more attractive to managed care companies and other
payors, and the belief that SHC could be integrated into HEALTHSOUTH without
significantly disrupting or adversely affecting the business of HEALTHSOUTH or
SHC.
Opinions of Financial Advisors
HEALTHSOUTH.
Smith Barney was retained by HEALTHSOUTH to act as its financial advisor in
connection with the Merger. In connection with such engagement, HEALTHSOUTH
requested that Smith Barney evaluate the fairness, from a financial point of
view, to HEALTHSOUTH of the consideration to be paid by HEALTHSOUTH in the
Merger. Smith Barney has delivered a written opinion, dated January 22, 1995, to
the Board of Directors of HEALTHSOUTH to the effect that, as of such date and
based upon and subject to certain matters stated in such opinion, the Exchange
Ratio was fair, from a financial point of view, to HEALTHSOUTH.
In arriving at its opinion, Smith Barney reviewed the Plan and held
discussions with certain senior officers, directors and other representatives
and advisors of HEALTHSOUTH and certain senior officers and other
representatives and advisors of SHC concerning the businesses, operations and
prospects of HEALTHSOUTH and SHC. Smith Barney examined certain publicly
available business and financial information relating to HEALTHSOUTH and SHC as
well as certain financial forecasts and other data for HEALTHSOUTH and SHC which
were provided to Smith Barney by the respective managements of HEALTHSOUTH and
SHC, including information relating to certain strategic implications and
operational benefits anticipated from the Merger. Smith Barney reviewed the
financial terms of the Merger as set forth in the Plan in relation to, among
other things: current and historical market prices and trading volumes of the
HEALTHSOUTH Common Stock; the historical and projected earnings of HEALTHSOUTH
and SHC; and the capitalization and financial condition of HEALTHSOUTH and SHC.
Smith Barney considered, to the extent publicly available, the financial terms
of a similar transaction recently effected which Smith Barney considered
comparable to the Merger and analyzed certain financial, stock market and other
publicly available information relating to the businesses of other companies
whose businesses Smith Barney considered comparable to those of HEALTHSOUTH and
SHC. Smith Barney also evaluated the potential pro forma financial impact of the
Merger on HEALTHSOUTH. In addition to the foregoing, Smith Barney conducted such
other analyses and examinations and considered such other financial, economic
and market criteria as Smith Barney deemed necessary to arrive at its opinion.
Smith Barney noted that its opinion was necessarily based upon information
available, and financial, stock market and other conditions and circumstances
existing and disclosed, to Smith Barney as of the date of its opinion.
<PAGE>
In rendering its opinion, Smith Barney assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information publicly available or furnished to or otherwise reviewed
by or discussed with Smith Barney. With respect to financial forecasts and other
information provided to or otherwise reviewed by or discussed with Smith Barney,
the managements of HEALTHSOUTH and SHC advised Smith Barney that such forecasts
and other information were reasonably prepared on bases reflecting the best
currently available estimates and judgments of the respective managements of
HEALTHSOUTH and SHC as to the future financial performance of HEALTHSOUTH and
SHC and the strategic implications and operational benefits anticipated from the
Merger. Smith Barney assumed, with the consent of the Board of Directors of
HEALTHSOUTH, that the Merger will be treated as a pooling of interests in
accordance with generally accepted accounting principles and as a tax-free
reorganization for federal income tax purposes. Smith Barney's opinion relates
to the relative values of HEALTHSOUTH and SHC. Smith Barney did not express any
opinion as to what the value of the HEALTHSOUTH Common Stock actually will be
when issued to SHC stockholders pursuant to the Merger or the price at which the
HEALTHSOUTH Common Stock will trade subsequent to the Merger. In addition, Smith
Barney did not make or obtain an independent evaluation or appraisal of the
assets or liabilities (contingent or otherwise) of HEALTHSOUTH or SHC nor did
Smith Barney make any physical inspection of the properties or assets of
HEALTHSOUTH or SHC. Smith Barney was not asked to consider, and its opinion does
not address, the relative merits of the Merger as compared to any alternative
business strategies that might exist for HEALTHSOUTH or the effect of any other
transaction in which HEALTHSOUTH might engage. In addition, although Smith
Barney evaluated the Exchange Ratio from a financial point of view, Smith Barney
was not asked to and did not recommend the specific consideration payable in the
Merger. No other limitations were imposed by HEALTHSOUTH on Smith Barney with
respect to the investigations made or procedures followed by Smith Barney in
rendering its opinion.
The full text of the written opinion of Smith Barney dated January 22, 1995,
which sets forth the assumptions made, matters considered and limitations on the
review undertaken, is attached hereto as Annex B and is incorporated herein by
reference. HEALTHSOUTH stockholders are urged to read this opinion carefully in
its entirety. Smith Barney's opinion is directed only to the fairness of the
Exchange Ratio from a financial point of view and has been provided solely for
the use of the Board of Directors of HEALTHSOUTH in its evaluation of the
Merger, does not address any other aspect of the Merger or related transactions
and does not constitute a recommendation to any HEALTHSOUTH stockholder as to
how such stockholder should vote at the Special Meeting. The summary of the
opinion of Smith Barney set forth in this Prospectus-Joint Proxy Statement is
qualified in its entirety by reference to the full text of such opinion.
In preparing its opinion to the Board of Directors of HEALTHSOUTH, Smith
Barney performed a variety of financial and comparative analyses, including
those described below. The summary of such analyses does not purport to be a
complete description of the analyses underlying Smith Barney's opinion. The
preparation of a fairness opinion is a complex analytic process involving
various determinations as to the most appropriate and relevant methods of
financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. In arriving at its opinion, Smith Barney did not attribute
any particular weight to any analysis or factor considered by it, but rather
made qualitative judgments as to the significance and relevance of each analysis
and factor. Accordingly, Smith Barney believes that its analyses must be
considered as a whole and that selecting portions of its anaylsis and factors,
without considering all analyses and factors, could create a misleading or
incomplete view of the processes underlying such analyses and its opinion. In
its analyses, Smith Barney made numerous assumptions with respect to
HEALTHSOUTH, SHC, industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
HEALTHSOUTH and SHC. The estimates contained in such analyses are not
necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than those suggested
by such analyses. In addition, analyses relating to the value of businesses or
securities do not purport to be appraisals or to reflect the prices at which
businesses or securities actually may be sold. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty.
<PAGE>
Comparable Company Analysis. Using publicly available information, Smith
Barney analyzed, among other things, the market values and trading multiples of
Surgical Care Affiliates ("SCA"), the only publicly-traded surgical care company
which Smith Barney deemed reasonably comparable to SHC, and compared such
multiples against the multiples for SHC implied by the Exchange Ratio. Smith
Barney compared market values as multiples of, among other things, estimated net
income, and adjusted market values (equity market value, plus total debt, less
cash) as multiples of, among other things, historical and projected earnings
before interest, taxes, depreciation and amortization ("EBITDA"). The multiples
of estimated calendar 1994, 1995 and 1996 net income and latest 12 months EBITDA
of SCA were 21.1x, 18.0x, 14.9x and 8.7x, respectively. The Exchange Ratio,
based on a closing sale price for HEALTHSOUTH Common Stock on January 19, 1995
of $36.88, equated to implied multiples of estimated calendar 1994, 1995 and
1996 net income for SHC of 49.2x, 23.8x and 14.6x, respectively, and implied
multiples of estimated calendar 1994, 1995 and 1996 EBITDA for SHC of 10.7x,
6.8x and 5.5x, respectively (assuming no cost savings anticipated from the
Merger were achieved) and 7.9x, 5.5x and 4.6x, respectively (assuming all such
costs savings were achieved).
Using publicly available information, Smith Barney analyzed similar market
values and trading multiples of HEALTHSOUTH and the following selected companies
in the rehabilitation industry: Advantage Health Corp.; Continental Medical
Systems, Inc.; NovaCare, Inc.; Pacific Rehabilitation & Sports Medicine, Inc.;
Rehabcare Corporation; Rehability Corporation; and U.S. Physical Therapy, Inc.
(the "Comparable Rehabilitation Companies" and, together with SCA, the
"Comparable Companies"). Smith Barney also compared the debt to capitalization
ratios, profit margins, historical revenue growth and projected calendar year
earnings per share ("EPS") growth of the Comparable Rehabilitation Companies
with those of HEALTHSOUTH. The mean and median multiples of estimated calendar
year 1994, 1995 and 1996 net income and latest 12 months EBITDA for the
Comparable Rehabilitation Companies were as follows: (i) estimated calendar year
1994 net income mean and median: 13.4x and 12.1x, respectively; (ii) estimated
calendar year 1995 net income mean and median: 10.8x and 9.8x, respectively;
(iii) estimated calendar year 1996 net income mean and median: 9.1x and 8.2x,
respectively; and (iv) latest 12 months EBITDA mean and median: 7.7x and 7.4x,
respectively. The multiples of estimated calendar year 1994, 1995 and 1996 net
income and latest 12 months EBITDA of HEALTHSOUTH were 22.1x, 17.3x, 14.5x and
10.6x, respectively.
Net income and EPS projections for the Comparable Companies were analyzed
based on the consensus estimates of selected investment banking firms, and
earnings projections for HEALTHSOUTH and SHC were analyzed based on internal
estimates of the managements of HEALTHSOUTH and SHC. All multiples were based on
closing stock prices as of January 19, 1995.
Comparable Merger and Acquisition Transaction Analysis. Using publicly
available information, Smith Barney analyzed the purchase price and implied
transaction multiples paid by Columbia/HCA Healthcare Corporation in connection
with its acquisition of Medical Care America, Inc., the only transaction
recently effected which Smith Barney deemed reasonably comparable to the Merger
(the "Comparable Transaction"). Smith Barney compared the purchase price in such
transaction as a multiple of, among other things, latest 12 months and projected
net income, and transaction value as a multiple of, among other things, latest
12 months revenues and EBITDA, and then compared these multiples to similar
multiples for SHC implied by the Exchange Ratio described above under "--Com
parable Company Analysis". All multiples for the Comparable Transaction were
based on information available at the time of announcement of the transaction
(May 23, 1994). The multiples of latest 12 months and projected net income and
latest 12 months revenue and EBITDA for the Comparable Transaction were 17.4x,
17.4x, 2.8x and 6.9x, respectively.
<PAGE>
No company, transaction or business used in the comparable company and
comparable merger and acquisition transaction analyses as a comparison is
identical to HEALTHSOUTH, SHC or the Merger. Accordingly, an analysis of the
results of the foregoing is not entirely mathematical; rather, it involves
complex considerations and judgments concerning differences in financial and
operating characteristics and other factors that could affect the acquisition or
public trading value of the Comparable Companies or the business segment or
company to which they are being compared.
Discounted Cash Flow Analysis. Smith Barney performed a discounted cash flow
analysis of the projected free cash flow of SHC for the fiscal years ended
December 31, 1995 through 1998, assuming among other things, discount rates of
10%, 12.5% and 15%, and terminal multiples of EBITDA of 7.0x to 9.0x. Utilizing
these assumptions, Smith Barney arrived at an equity valuation reference range
for SHC of approximately $156 million, or approximately $4.64 to $8.40 per
share.
Pro Forma Merger Analysis. Smith Barney analyzed certain pro forma effects
resulting from the Merger, including, among other things, the impact of the
Merger on the projected EPS of HEALTHSOUTH for the fiscal years ended 1995
through 1997. Based on the consensus EPS estimates of selected investment
banking firms, the results of the pro forma merger analysis suggest that the
Merger would be accretive to HEALTHSOUTH EPS in each of the years analyzed
assuming all cost savings anticipated from the Merger were achieved, and only
slightly dilutive in fiscal year 1995 assuming no such cost savings were
achieved. The actual results achieved by the combined company may vary from
projected results and the variations may be material.
Other Factors and Comparative Analyses. In rendering its opinion, Smith
Barney considered certain other factors and conducted certain other comparative
analyses, including, among other things, a review of (i) HEALTHSOUTH and SHC
historical and projected financial results; (ii) the history of trading prices
for the HEALTHSOUTH Common Stock and the relationship between movements of such
common stock, movements of the common stock of comparable companies and
movements in the Standard & Poor's 500 Index; (iii) the relative contributions
of HEALTHSOUTH and SHC to selected pro forma financial data of the combined
company; and (iv) the pro forma ownership of the combined company.
Pursuant to the terms of Smith Barney's engagement, HEALTHSOUTH has agreed to
pay Smith Barney for its services in connection with the Merger an aggregate
financial advisory fee of $1,000,000. HEALTHSOUTH also has agreed to reimburse
Smith Barney for travel and other out-of-pocket expenses incurred by Smith
Barney in performing its services, including the fees and expenses of its legal
counsel, and to indemnify Smith Barney and related persons against certain
liabilities, including liabilities under the federal securities laws, arising
out of Smith Barney's engagement.
Smith Barney has advised HEALTHSOUTH that, in the ordinary course of
business, it may actively trade the equity and debt securities of HEALTHSOUTH
and the debt securities of SHC for its own account or for the account of its
customers and, accordingly, may at any time hold a long or short position in
such securities. Smith Barney has in the past provided financial advisory and
investment banking services to HEALTHSOUTH and SHC unrelated to the Merger, and
has received compensation for the rendering of such services.
Smith Barney is a nationally recognized investment banking firm and was
selected by HEALTHSOUTH based on Smith Barney's experience. Smith Barney
regularly engages in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
bids, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes.
<PAGE>
SHC.
Alex. Brown has delivered to the SHC Board of Directors its written opinion
that, as of January 22, 1995, and as of the date of this Propectus-Joint Proxy
Statement, the consideration to be received by the stockholders of SHC pursuant
to the Plan was fair from a financial point of view to such stockholders. No
limitations were imposed by the Board of Directors of SHC upon Alex. Brown with
respect to the investigations made or procedures followed by it in rendering its
opinion.
The full text of the opinion of Alex. Brown dated as of the date of this
Proxpectus-Joint Proxy Statement, which sets forth the assumptions made, matters
considered and limitations on the review undertaken, is attached as Annex C to
this Prospectus-Joint Proxy Statement. SHC stockholders are urged to read this
opinion in its entirety. Alex. Brown's opinion is directed only to the fairness
of the consideration to be received by the stockholders of SHC and does not
constitute a recommendation to any SHC stockholder as to how such stockholder
should vote at the SHC Special Meeting. The summary of the opinion of Alex.
Brown in this Prospectus-Joint Proxy Statement is qualified in its entirety by
reference to the full text of such opinion.
In connection with its opinion, Alex. Brown reviewed the Plan and certain
publicly available financial information concerning SHC and HEALTHSOUTH. Alex.
Brown also reviewed certain internal financial analyses and other information,
including financial projections, furnished to it by SHC and HEALTHSOUTH and held
discussions with members of the senior management of SHC and HEALTHSOUTH
regarding the business and prospects of their respective companies and the joint
prospects of a combined company. In addition, Alex. Brown (i) reviewed certain
reported price and trading activity for the Common Stock of HEALTHSOUTH, (ii)
compared certain financial and stock market information for HEALTHSOUTH and
certain financial information for SHC with similar information for certain other
companies whose securities are publicly traded, (iii) reviewed the financial
terms of certain recent business combinations which it deemed comparable in
whole or in part and (iv) performed such other studies and analyses and
considered such other factors as it deemed appropriate.
As described in the opinion, Alex. Brown assumed, without independent
verification, the accuracy and completeness of the information that it reviewed
and relied upon for purposes of rendering its opinion. With respect to the
financial projections furnished to it, Alex. Brown assumed that they had been
reasonably prepared on bases reflecting the best currently available estimates
and judgements of the respective senior managements of SHC and HEALTHSOUTH as to
the likely future financial performance of their respective companies. In
addition, Alex. Brown did not make an independent valuation or appraisal of the
assets of SHC or HEALTHSOUTH, nor was it furnished with any such valuation or
appraisal. Alex. Brown's opinion stated that such opinion was based on market,
economic and other conditions as they existed and could be evaluated as of the
date of the opinion.
The following is a summary of the report presented by Alex. Brown to the SHC
Board of Directors on January 22, 1995 (the "Alex. Brown Report") in connection
with its January 22, 1995 opinion:
HEALTHSOUTH Stock Trading History. Alex. Brown reviewed the historical
trading volume and market prices for the Common Stock of HEALTHSOUTH. The
analysis revealed that the 20-day trading average closing stock price of
HEALTHSOUTH's Common Stock for the period ending January 20, 1995 was $36.31.
Alex. Brown noted that the proposed collar of $33.00 and $37.00, was 9.1% below
and 1.9% above the 20-day trading average.
Comparison of HEALTHSOUTH with Selected Publicly Traded Companies. Alex.
Brown compared certain financial information for HEALTHSOUTH with corresponding
data and ratios for the following group of four publicly traded alternate-site
healthcare companies: AdvantageHEALTH Corporation, Integrated Health Services,
Inc., Mariner Health Group, Inc. and Vencor, Inc. Such financial information
included market valuation, adjusted market value (market value adjusted by
adding debt and subtracting cash and marketable securities), profitability,
growth rates and implied multiples of revenues, operating income (after
deducting minority interest), net income, tangible book value and estimated
future earnings per share. This analysis showed that on January 20, 1995, the
average ratio of stock price to projected calendar 1995 earnings per share for
the four companies listed above was 19.2x while the ratio of stock price to
projected calendar 1995 earnings per share for HEALTHSOUTH was 17.4x. Alex.
Brown also compared the historical stock price performance of the four companies
listed above and the S&P 500 to the historical stock price performance of
HEALTHSOUTH.
<PAGE>
Comparison of SHC with Selected Publicly Traded Companies. Alex. Brown
compared certain financial information for SHC with corresponding data and
ratios for the following group of seven publicly traded alternate-site
healthcare companies: HEALTHSOUTH Corporation, Homedco Group, Inc., Lincare
Holdings, Inc., Quantum Health Resources, Inc., Surgical Care Affiliates, Inc.,
Vencor, Inc. and Vivra Incorporated. Such financial information included market
valuation, adjusted market value (market value adjusted by adding debt and
subtracting cash and marketable securities), profitability, growth rates and
implied multiples of revenues, operating income (after deducting minority
interest), net income, tangible book value and estimated future earnings per
share. This analysis showed that on January 20, 1995, the average ratio of stock
price to projected calendar 1995 earnings per share for the seven companies
listed above was 16.8x while the ratio of the offer price of $4.60 to the
projected calendar 1995 earnings per share for SHC was 24.2x.
Contribution Analysis. Alex. Brown analyzed the contribution of SHC and
HEALTHSOUTH to the pro forma income statement and balance sheet of the combined
company and compared such contribution to the pro forma ownership of HEALTHSOUTH
by the SHC stockholders. The analysis was performed on the basis of the
financial information for HEALTHSOUTH as of December 31, 1994 (as projected by
HEALTHSOUTH's management including the results of ReLife, Inc.) and SHC as of
September 30, 1994 and for the twelve months then ended. This analysis showed
that SHC would have contributed 8.1% of the net revenue, 6.7% of earnings before
interest and taxes less minority interest and 2.8% of the net income of the
combined company. Based on HEALTHSOUTH's closing stock price of $36.625 on
January 20, 1995, SHC shareholders would own approximately 9.2% of the combined
company.
Pro Forma Merger Analysis. Alex. Brown analyzed certain pro forma effects on
HEALTHSOUTH resulting from the Merger. This analysis, based on the respective
managements' projections, showed modest accretion to 1995 earnings per share,
assuming the combined company would be able to achieve the projected operating
synergies.
Analysis of Selected Healthcare Merger and Acquisition Transactions. Alex.
Brown analyzed, based on selected mergers and acquisitions in the ambulatory
surgery center market and in the alternate-site market generally, the financial
multiples of equity purchase price to last twelve months net income and to
forward twelve months net income and of adjusted purchase price (equity purchase
price adjusted by adding debt and subtracting cash and marketable securities) to
last twelve months net revenue, to earnings before depreciation, amortization,
interest and taxes less minority interest and to earnings before interest and
taxes less minority interest. Alex. Brown calculated the implied equity value
per share for SHC by applying SHC's actual and forecasted financial results to
the mean multiple for each of the measures derived from this analysis. For the
three transactions in the ambulatory surgery center market, the implied equity
value per share ranged from $1.65 to $3.83. For the nineteen transactions in the
alternate-site market, the implied equity value per share ranged from $2.30 to
$7.85.
Discounted Cash Flow Analysis. Using a discounted cash flow analysis, Alex.
Brown estimated the present value of the future cash flows that SHC could
produce over a five-year period from 1995 through 1999, under various
assumptions, if SHC performs in accordance with management's forecasts. Alex.
Brown estimated the terminal values of SHC at the end of the five-year period
based on multiples of SHC's projected 1999 earnings before depreciation,
amortization, interest and taxes less minority interest and discounted them to
present value using different discount rates selected based upon the
consideration of a number of factors, including cost of capital, required rates
of return to investors and risks attributable to the uncertainty of achieving
the projected cash flows. The foregoing analysis resulted in a present value
range of $4.37 to $5.99 per share for SHC.
The summary set forth above does not purport to be a complete description of
the presentation by Alex. Brown of the Alex. Brown Report to the SHC Board of
Directors or the analyses performed and factors considered by Alex. Brown in
connection with its opinion dated January 22, 1995. Alex. Brown believes that
its analyses and the summary set forth above must be considered as a whole and
that selecting portions of its analyses, without considering all analyses, or
selecting portions of the above summary, without considering all factors and
analyses, could create an incomplete view of the process underlying the analyses
set forth in the opinion and the Alex. Brown Report. In performing its analyses,
Alex. Brown made numerous assumptions with respect to industry performance,
general business, economic, market and financial conditions and other matters,
many of which are beyond the control of SHC or HEALTHSOUTH. The analyses
performed by Alex. Brown are not necessarily indicative of actual values or
future results, which may be significantly more or less favorable than suggested
by such analyses.
<PAGE>
Alex. Brown is a nationally recognized investment banking firm and, as a
customary part of its investment banking business, is engaged in the valuation
of businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, private placements and valuations for corporate and
other purposes. The Board of Directors of SHC selected Alex. Brown to serve as
its financial advisor because of Alex. Brown's reputation and healthcare
expertise as well as its familiarity with SHC, HEALTHSOUTH and their respective
businesses. Alex. Brown has served as financial advisor and has provided
financial advisory services to SHC and has also provided financing services to
HEALTHSOUTH and received customary fees for such services. Alex. Brown regularly
publishes research reports regarding the healthcare industry and the businesses
and securities of publicly traded companies in that industry. In the ordinary
course of its business, Alex. Brown trades the securities of SHC and HEALTHSOUTH
and, in the course of its trading activities, Alex. Brown may, from time to
time, hold a long or short position in, and buy or sell securities of, SHC or
HEALTHSOUTH.
Pursuant to the terms of an engagement letter dated May 27, 1994, SHC has
paid Alex. Brown a fee of $50,000 and has agreed to pay Alex. Brown a fee of
$500,000 for rendering its opinion. SHC has also agreed to pay Alex. Brown a
transaction fee of $1,800,000 upon consummation of the Merger against which the
$500,000 fee will be credited. In addition, SHC has agreed to reimburse Alex.
Brown for its reasonable out-of-pocket expenses, including fees and
disbursements of counsel, and to indemnify Alex. Brown and certain related
persons against certain liabilities, including certain liabilities under the
federal securities laws, relating to, or arising out of, its engagement.
Effective Time of the Merger
The Merger will become effective upon the filing of a Certificate of Merger
by the Subsidiary and SHC under the DGCL, or at such later time as may be
specified in such Certificate of Merger. The Plan requires that this filing be
made, subject to satisfaction of the separate conditions to the obligations of
each party to consummate the Merger, no later than two business days after
satisfaction of the various conditions to the Merger set forth in the Plan, or
at such other time as may be agreed by HEALTHSOUTH and SHC. It is presently
anticipated that such filing will be made as soon as reasonably possible after
the Special Meetings on April 13, 1995 and after all regulatory approvals have
been obtained, and that the Effective Time will occur upon such filing. However,
there can be no assurance as to whether or when the Merger will occur. See
"--Conditions to the Merger" and "--Regulatory Approvals".
Exchange of Certificates
From and after the Effective Time, each holder of a stock certificate, which
immediately prior to the Effective Time represented outstanding SHC Shares, will
be entitled to receive in exchange therefor, upon surrender thereof to the
Exchange Agent (as defined in the Plan), a certificate or certificates
representing the number of whole shares of HEALTHSOUTH Common Stock into which
such holder's SHC Shares have been converted, cash in lieu of fractional shares
and any dividends or other distributions to which such holder is entitled as a
result of the Merger.
As soon as reasonably practicable after the Effective Time, HEALTHSOUTH will
deliver through the Exchange Agent to each holder of record of SHC Shares at the
Effective Time transmittal materials for use in exchanging the stock
certificates that formerly represented such SHC Shares for certificates for the
shares of HEALTHSOUTH Common Stock into which such SHC Shares have been
converted.
<PAGE>
After the Effective Time, there will be no transfers on the stock transfer books
of SHC Shares which were issued and outstanding immediately prior to the
Effective Time and converted in the Merger. Outstanding shares of HEALTHSOUTH
Common Stock at the Effective Time will remain outstanding.
No fractional shares of HEALTHSOUTH Common Stock and no certificates or scrip
therefor, or other evidence of ownership thereof, will be issued in the Merger;
instead, HEALTHSOUTH will pay to each holder of SHC Shares who would otherwise
be entitled to a fractional share an amount in cash determined by multiplying
such holder's fractional interest by the Base Period Trading Price. See "--Terms
of the Merger".
The certificates representing shares of HEALTHSOUTH Common Stock, the
fractional share payment (if any) which any holder of SHC Shares is entitled to
receive, and any dividends or other distributions paid on such HEALTHSOUTH
Common Stock prior to the delivery to HEALTHSOUTH of such stockholder's
certificates representing SHC Shares, will not be delivered to such stockholder
until the certificates representing such SHC Shares are delivered to HEALTHSOUTH
through the Exchange Agent. No interest will be paid on dividends or other
distributions or on any fractional share payment which the holder of such shares
shall be entitled to receive upon such delivery.
At the Effective Time, holders of SHC Shares immediately prior to the
Effective Time will cease to be, and shall have no rights as, stockholders of
SHC, other than the right to receive shares of HEALTHSOUTH Common Stock into
which such shares have been converted and any fractional share payment and any
dividends or other distributions to which they may be entitled under the Plan
or, the right to receive payment for their SHC Shares pursuant to the effective
exercise of appraisal rights under the DGCL. See "-- Appraisal Rights". Holders
of SHC Shares will be treated as stockholders of record of HEALTHSOUTH for
purposes of voting at any annual or special meeting of stockholders of
HEALTHSOUTH after the Effective Time, both before and after such time as they
exchange their certificates for SHC Shares for certificates of HEALTHSOUTH
Common Stock as provided in the Plan.
Neither HEALTHSOUTH nor SHC will be liable to any holder of SHC Shares for
any shares of HEALTHSOUTH Common Stock (or dividends or other distributions with
respect thereto) or cash in lieu of fractional shares delivered to a public
official pursuant to any applicable abandoned property, escheat or similar law.
Conditions to the Merger
The obligation of HEALTHSOUTH and the Subsidiary to consummate the Merger is
subject to, among others, the following conditions: (i) SHC shall have performed
all of its obligations as contemplated by the Plan at or prior to the Effective
Time; (ii) the representations and warranties of SHC set forth in the Plan shall
be true and correct as of the dates specified in the Plan; (iii) the licenses,
certificates of need and other regulatory approvals necessary for the operation
of the SHC facilities shall have been obtained or transferred, except where the
failure to obtain such licenses and transfers would not have a material adverse
effect on the business of SHC; and (iv) HEALTHSOUTH shall have received the
opinion of its counsel that the Merger constitutes a tax-free reorganization
under the Code.
The obligation of SHC to consummate the Merger is subject to, among others,
the following conditions: (i) HEALTHSOUTH and the Subsidiary shall have
performed all of their obligations as contemplated by the Plan at or prior to
the Effective Time; (ii) the representations and warranties of HEALTHSOUTH and
the Subsidiary set forth in the Plan shall be true and correct as of the dates
specified in the Plan; and (iii) SHC shall have received the opinion of its
counsel that the Merger constitutes a tax-free reorganization under the Code.
The obligation of each of HEALTHSOUTH, the Subsidiary and SHC to consummate
the Merger is subject to certain additional conditions, including the following:
(i) no order, decree or injunction by a court of competent jurisdiction
preventing the consummation of the Merger or imposing any material limitation on
the ability of HEALTHSOUTH effectively to exercise full rights of ownership of
the SHC Shares or any material portion of the assets or business of SHC shall be
in effect; (ii) no statute, rule or regulation shall have been enacted by the
government of the United States or any state, municipality or other political
subdivision thereof that makes the consummation of the Merger or any other
transaction contemplated by the Plan illegal; (iii) the waiting period under the
HSR Act shall have expired or shall have been terminated; (iv) the Registration
Statement shall have been declared effective under the Securities Act and shall
not be subject to any stop order; (v) the Merger shall have been approved by the
requisite votes of the holders of the outstanding SHC Shares entitled to vote
thereon and by the requisite votes of the holders of outstanding shares of
HEALTHSOUTH Common Stock entitled to vote thereon; (vi) the shares of
HEALTHSOUTH Common Stock to be issued in connection with the Merger shall have
been approved for listing on the NYSE upon official notice of issuance and shall
have been issued pursuant to an effective registration statement (subject to no
stop order), or in transactions qualified or exempt from registration, under
applicable securities laws of such states of the United States as may be
required; and (vii) HEALTHSOUTH and SHC each shall have received a letter from
Ernst & Young LLP to the effect that the Merger will be accounted for as a
pooling of interests.
<PAGE>
Regulatory Approvals
The HSR Act prohibits consummation of the Merger until certain information
has been furnished to the Antitrust Division of the DOJ and the FTC and certain
waiting period requirements have been satisfied. On February 21, 1995,
HEALTHSOUTH and SHC made their respective filings with the DOJ and the FTC with
respect to the Plan. Under the HSR Act, the filings commenced a 30-day waiting
period during which the Merger cannot be consummated, which waiting period
expires on March 23, 1995 unless extended by a request for additional
information. Notwithstanding the termination of the HSR Act waiting period, at
any time before or after the Effective Time, the FTC, the DOJ or others could
take action under the antitrust laws, including seeking to enjoin the
consummation of the Merger or seeking the divestiture by HEALTHSOUTH of all or
any part of the stock or assets of SHC. There can be no assurance that a
challenge to the Merger on antitrust grounds will not be made or, if such a
challenge were made, that it would not be successful.
As conditions precedent to the consummation of the Merger, the Plan requires,
among other things: (i) that the HSR Act waiting period has expired or been
terminated, and (ii) that all other governmental approvals required for the
consummation of the Merger have been obtained, except where the failure to
obtain such approvals would not have a material adverse effect on the business
of SHC.
HEALTHSOUTH and SHC believe that the Merger does not violate the antitrust
laws and intend to resist vigorously any assertion to the contrary by the FTC,
the DOJ or others. Any such resistance could delay consummation of the Merger,
perhaps for a considerable period. Prior to the Merger, the FTC or the DOJ could
seek to enjoin the consummation of the Merger under the federal antitrust laws
or require that HEALTHSOUTH or SHC divest certain assets to avoid such a
proceeding. The FTC or DOJ could also, following the Merger, take action under
the federal antitrust laws to rescind the Merger, to require divestiture of
assets of either HEALTHSOUTH or SHC, or to obtain other relief.
Certain other persons, such as states' attorneys general and private parties,
could challenge the Merger as violative of the antitrust laws and seek to enjoin
the consummation of the Merger and, in the case of private persons, also to
obtain treble damages. There can be no assurance that a challenge to the Merger
on antitrust grounds will not be made or, if such a challenge is made, that it
would not be successful. Neither HEALTHSOUTH nor SHC intends to seek any further
stockholder approval or authorization of the Plan as a result of any action that
it may take to resist or resolve any FTC, DOJ or other objections, unless
required to do so by applicable law.
The operations of each Company are subject to a substantial body of federal,
state, local and accrediting body laws, rules and regulations relating to the
conduct, licensing and development of healthcare businesses and facilities. As a
result of the Merger, many of the arrangements between SHC and third-party
payors may be deemed to have been transferred, requiring the approval and
consent of such payors. In addition, a number of the facilities operated by SHC
may be deemed to have been transferred, requiring the consents or approvals of
various state licensing and/or health regulatory agencies. In some instances,
new licenses will be required to be obtained. It is anticipated that, prior to
the time this Prospectus-Joint Proxy Statement is mailed to the stockholders of
SHC and HEALTHSOUTH, all filings required to be made prior to such date to
obtain the consents and approvals required from federal and state healthcare
regulatory bodies and agencies will have been made. However, certain of such
filings cannot be made under the applicable laws, rules and regulations until
after the Effective Time. Although no assurances to this effect can be given, it
is anticipated that the Companies will be able to obtain any required consent or
approval.
<PAGE>
Business Pending the Merger
The Plan provides that, during the period from the date of the Plan to the
Effective Time, except as provided in the Plan, HEALTHSOUTH and SHC will conduct
their respective businesses in the usual, regular and ordinary course in
substantially the same manner as previously conducted, and SHC will use its best
efforts to preserve intact its present business organizations and to preserve
its relationships with customers, suppliers and others having business dealings
with it.
Under the Plan, SHC may not (other than as required pursuant to or
contemplated by the terms of the Plan and related documents), without first
obtaining the written consent of HEALTHSOUTH, (i) encumber any asset or enter
into any transaction or make any contract or commitment relating to its
properties, assets and business, other than in the ordinary course of business
or as otherwise disclosed in the Plan; (ii) enter into any employment contract
which is not terminable upon notice of 30 days or less, at will and without
penalty to it, except as provided in the Plan; (iii) except in connection with
the ongoing construction or development of new surgery centers as disclosed to
HEALTHSOUTH, enter into any contract or agreement which cannot be performed
within three months or which involves the expenditure of over $100,000; (iv)
issue or sell, or agree to issue or sell, any shares of its capital stock or
other securities of SHC, except upon exercise of currently outstanding stock
options or warrants; (v) except for contributions to the Outpatient/Midwest
Retirement Plan, make any payment or distribution to the trustee under any
bonus, pension, profit sharing or retirement plan or incur any obligation to
make any such payment or contribution which is not in accordance with SHC's
usual past practice, or make any payment or contributions or incur any
obligation pursuant to or in respect of any other plan or contract or
arrangement providing for bonuses, executive incentive compensation, pensions,
deferred compensation, retirement payments, profit sharing or the like,
establish or enter into any such plan, contract or arrangement, or terminate any
plan; (vi) extend credit to anyone, except in the ordinary course of business
consistent with prior practices; (vii) guarantee the obligation of any person,
firm or corporation, except in the ordinary course of business consistent with
prior practices; (viii) amend its Certificate of Incorporation or Bylaws; (ix)
discharge or satisfy any material lien or encumbrance or pay or satisfy any
material obligation or liability (absolute, accrued, contingent or otherwise)
other than liabilities shown or reflected on the consolidated balance sheet of
SHC as of September 30, 1994 (the "SHC Balance Sheet"), or liabilities incurred
since said date in the ordinary course of business; (x) increase or establish
any reserve for taxes or any other liability on its books or otherwise provide
therefor which would have a material adverse effect on SHC, except as may be
required due to income or operations of SHC since the date of the SHC Balance
Sheet; (xi) mortgage, pledge or subject to any lien, charge or other encumbrance
any of the assets, tangible or intangible, which assets are material to the
consolidated business or financial condition of SHC; (xii) sell or transfer any
of the assets material to the consolidated business of SHC, cancel any material
debts or claims or waive any material rights, except in the ordinary course of
business; (xiii) grant any general or uniform increase in the rates of pay of
employees or any material increase in salary payable or to become payable by SHC
to any officer or employee, consultant or agent (other than normal merit
increases) or, by means of any bonus or pension plan, contract or other
commitment, increase in a material respect the compensation of any officer,
employee, consultant or agent; (xiv) except for the Plan and the other
agreements executed and delivered pursuant to the Plan, enter into any material
transaction other than in the ordinary course of business or permitted under the
Plan; and (xv) issue any stock, bonds or other securities, other than stock
issued pursuant to options or warrants that are disclosed in the Plan.
Waiver and Amendment
The Plan provides that, at any time prior to the Effective Time, HEALTHSOUTH
and SHC may (i) extend the time for the performance of any of the obligations or
other acts of the other party contained in the Plan; (ii) waive any inaccuracies
in the representations and warranties of the other party contained in the Plan
or in any document delivered pursuant to the Plan; and (iii) waive compli ance
with the agreements or conditions under the Plan. In addition, the Plan may be
amended at any time upon the written agreement of HEALTHSOUTH and SHC without
the approval of stockholders of either Company, except that after the Special
Meetings no amendment may be made which by law requires a further approval by
the stockholders of either Company without such further approval being obtained.
<PAGE>
Termination
The Plan may be terminated at any time prior to the Effective Time, whether
before or after approval of the Plan by the stockholders of SHC and the
stockholders of HEALTHSOUTH: (i) by mutual written consent of HEALTHSOUTH, the
Subsidiary and SHC; (ii) by either HEALTHSOUTH or SHC if there is a material
breach on the part of the other party of any representation, warranty, covenant
or other agreement set forth in the Plan which is not cured as provided in the
Plan; (iii) by either HEALTHSOUTH or SHC if any governmental entity or court of
competent jurisdiction shall have issued a final, permanent order, enjoining or
otherwise prohibiting the Merger and such order shall have become
non-appealable; (iv) by either HEALTHSOUTH or SHC if the Merger has not been
consummated on or before June 30, 1995 (or such later date as may be determined
under the Plan), unless the failure to consummate the Merger by such time is due
to the breach of the Plan by the party seeking to terminate the Plan; (v) by
either HEALTHSOUTH or SHC if any required approval of the Plan by stockholders
of SHC or stockholders of HEALTHSOUTH has not been obtained by the required
votes at a duly held meeting of stockholders; (vi) by either HEALTHSOUTH or SHC
if either party gives notice of termination under the Plan due to the occurrence
of a material change in or a material addition to an Exhibit to the Plan which
would have a material adverse effect on the notifying party; (vii) by either
HEALTHSOUTH or SHC if all of the mutual conditions to the obligations of both
parties to effect the Merger under the Plan have been satisfied and any
condition to the obligation of such party to effect the Merger under the Plan is
not capable of being satisfied prior to June 30, 1995 (or such later date as may
be determined under the Plan); (viii) by SHC, if SHC's Board of Directors shall
have determined, in the exercise of its fiduciary duties under applicable law,
not to recommend the Merger to the stockholders of SHC or shall have withdrawn
such recommendation, or shall have approved, recommended or endorsed any
proposal to acquire SHC upon a merger, purchase of assets, purchase of or tender
offer for shares of SHC or similar transaction other than the Merger, or shall
have resolved to do any of the foregoing; (ix) by either HEALTHSOUTH or SHC if
such party has not received by March 1, 1995, a letter from Ernst & Young LLP to
the effect that the Merger will be accounted for as a pooling of interests and
(x) by HEALTHSOUTH, if the holders of more than 10% of the SHC Shares have given
proper written demand for appraisal of the value of such shares as provided in
Section 262 of the DGCL before the taking of a vote on the Merger at any meeting
of the stockholders of SHC called for that purpose.
Third Party Bids
If the Plan is terminated by SHC because its Board of Directors has (i)
determined, in the exercise of its fiduciary duties under applicable law, not to
recommend the Merger to the holders of SHC Shares or shall have withdrawn such
recommendation, or (ii) approved, recommended or endorsed any Acquisition
Transaction (as defined in the Plan) with a Third Party (as defined in the Plan)
and, within six months after the effective date of such termination, SHC enters
into an agreement with a Third Party with respect to an Acquisition Transaction,
SHC shall immediately notify HEALTHSOUTH in writing that an agreement has been
entered into with respect to an Acquisition Transaction. Each of HEALTHSOUTH and
the Third Party shall then have not less than 48 hours (the exact deadline to be
set by SHC) from the time of receipt of written notice by SHC to submit a final
and best offer (a "Final Offer") for a business combination with SHC, together
with a fully-executed definitive agreement, acceptable to SHC, reflecting the
terms of such Final Offer. Not later than 48 hours after receipt of any Final
Offer from HEALTHSOUTH and the Third Party (but in no event sooner than the
expiration of the deadline set by SHC unless HEALTHSOUTH has expressly declined
to submit a Final Offer), SHC shall notify the party submitting the most
favorable Final Offer (as determined by SHC's Board of Directors after
consulting with its legal counsel and financial advisors) and, subject to the
approval of SHC's Board of Directors, SHC shall enter into a definitive
agreement with the party which submitted the most favorable Final Offer.
HEALTHSOUTH has agreed that any such determination of the most favorable Final
Offer by SHC's Board of Directors shall be final and binding, and HEALTHSOUTH
has agreed not to dispute any such determination in any forum or jurisdiction;
provided, however, that the foregoing covenant of HEALTHSOUTH not to sue is
expressly conditioned upon SHC's obtaining a like covenant not to sue from the
Third Party prior to SHC's determination of the most favorable Final Offer.
<PAGE>
Interests of Certain Persons in the Merger
Interests of Certain Persons in the Merger. In considering the
recommendations of the Boards of Directors of HEALTHSOUTH and SHC with respect
to the Plan and the transactions contemplated thereby, stockholders of both
Companies should be aware that certain members of the management of HEALTHSOUTH
and SHC and the Boards of Directors of such Companies have certain interests in
the Merger that are in addition to the interests of such stockholders generally.
Each of Richard M. Scrushy, Chairman of the Board, President and Chief
Executive Officer of HEALTHSOUTH, and Charles W. Newhall III is a director of
both HEALTHSOUTH and SHC. Neither of such persons cast votes in connection with
the approval of the Plan by the respective Boards of Directors of the Companies
and neither Mr. Scrushy nor Mr. Newhall participated in any negotiations or
discussions by the SHC Board of Directors.
As of the SHC Record Date, directors and executive officers of HEALTHSOUTH
and their affiliates (excluding Richard M. Scrushy and Charles W. Newhall III
and their affiliates because SHC Shares beneficially owned by them are included
in the amounts of SHC Shares owned by directors and executive officers of SHC
and their affiliates) beneficially owned an aggregate of 645,075 shares of SHC
Common Stock (excluding shares issuable upon exercise of options and convertible
securities), 13,749 shares of SHC Series A Preferred Stock, 457,996 shares of
SHC Series B Preferred Stock and 149,400 shares of SHC Series C Preferred Stock,
as follows:
<TABLE>
<CAPTION>
SHC SHARES
BENEFICIALLY OWNED
--------------------------------------------
POSITION WITH SERIES A SERIES B SERIES C
NAME HEALTHSOUTH COMMON PREFERRED PREFERRED PREFERRED
------------------ ------------------------ ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
C. Sage Givens(1) ......... Director 210,700 -- 457,996 49,400
Larry R. House ............ Director 434,375 -- -- --
Aaron Beam, Jr ............ Director and Executive -- 6,875 -- --
Vice President and Chief
Financial Officer
Anthony J. Tanner ......... Director and Executive -- 3,437 -- --
Vice President and
Secretary
Michael D. Martin .......... Senior Vice President and -- 3,437 -- --
Treasurer
<FN>
- ---------------
(1) These shares are owned of record by First Century Partnership III, of
which Ms. Givens is an affiliate.
</TABLE>
Such persons have indicated their intentions to vote all of such SHC Shares
for the Plan. Assuming a Base Period Trading Price of $33.00, such persons would
receive a total of 176,539 shares of HEALTHSOUTH Common Stock out of the total
of 4,358,328 shares of HEALTHSOUTH Common Stock to be issued to stockholders of
SHC in the Merger (excluding shares issuable to SHC stockholders upon exercise
of options or warrants).
<PAGE>
As of the SHC Record Date, directors and executive officers of SHC and their
affiliates beneficially owned an aggregate of 7,712,907 shares of SHC Common
Stock (excluding shares issuable upon exercise of options and convertible
securities), 843,173 shares of SHC Series A Preferred Stock, 1,316,737 shares of
SHC Series B Preferred Stock and 1,206,584 shares of SHC Series C Preferred
Stock, as follows:
<TABLE>
<CAPTION>
SHC SHARES
BENEFICIALLY OWNED
--------------------------------------------
POSITION WITH SERIES A SERIES B SERIES C
NAME SHC COMMON PREFERRED PREFERRED PREFERRED
------------------ ------------------------ ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Rock A. Morphis ................ Chairman of the Board, 881,720 -- -- --
President and Chief
Executive Officer
Charles W. Newhall, ............ 1,648,133 567,845 1,030,490 775,185
III(1) ......................... Director
John M. Nehra(2) ............... Director 340,827 110,131 228,997 211,414
Ted H. McCourtney, Jr.(3) ...... Director 720,210 275,328 286,247 422,828
Charles N. Martin, Jr.(4) ...... Director 2,833,288 -- -- --
Richard M. Scrushy ............. Director 468,750 -- -- --
H. Carlton Stinson ............. Director 881,720 -- -- --
J. Michael Ribaudo ............. Director and Senior Vice 245,336 -- -- --
President--Clinical
Services
Sarah C. Garvin ................ Senior Vice 33,750 -- -- 8,571
President--Development
<FN>
- --------------------
(1) Mr. Newhall is (i) a general partner of NEA Partners V, L.P., the general
partner of New Enterprise Associates V, L.P., (ii) a general partner of Catalyst
Ventures, Limited Partnership, and (iii) a general partner of NEA Silverado
Partners, the general partner of The Silverado Fund I, Limited Partnership. The
shares set forth opposite Mr. Newhall's name are owned of record by such
entities. Mr. Newhall shares voting and investment power with respect to such
shares and disclaims beneficial ownership of such shares.
(2) These shares are owned of record by Catalyst Ventures, of which Mr. Nehra
is a general partner. Mr. Nehra shares voting and investment power with respect
to such shares and disclaims beneficial ownership of such shares.
(3) These shares are held of record by Venrock Associates.
(4) These shares are owned by OrNda Investments, Inc., an indirect
wholly-owned subsidiary of OrNda HealthCorp. Mr. Martin is the Chairman and
Chief Executive Officer of OrNda HealthCorp. Mr. Martin disclaims beneficial
ownership of the shares held by OrNda Investments, Inc.
</TABLE>
Such persons have indicated their intentions to vote all of such SHC Shares
for the Plan. Assuming a Base Period Trading Price of $33.00, such persons would
receive a total of 1,668,725 shares of HEALTHSOUTH Common Stock out of the total
of 4,358,328 shares of HEALTHSOUTH Common Stock to be issued to stockholders of
SHC in the Merger (excluding shares issuable to SHC stockholders upon exercise
of options or warrants).
As of the HEALTHSOUTH Record Date, directors and executive officers of
HEALTHSOUTH and their affiliates beneficially owned an aggregate of 200,760
shares of HEALTHSOUTH Common Stock (excluding shares issuable upon exercise of
options and convertible securities) or approximately 0.56% of the shares of
HEALTHSOUTH Common Stock outstanding on such date. The directors and executive
officers of HEALTHSOUTH and their affiliates have indicated their intentions to
vote the shares of HEALTHSOUTH Common Stock beneficially owned by them for the
Plan.
As of the HEALTHSOUTH Record Date, directors and executive officers of SHC
and their affiliates beneficially owned an aggregate of shares of HEALTHSOUTH
Common Stock (excluding shares issuable upon exercise of options and convertible
securities), or approximately ___% of the shares of HEALTHSOUTH Common Stock
outstanding on such date. The directors and executive officers of SHC and their
affiliates have indicated their intentions to vote the shares of HEALTHSOUTH
Common Stock beneficially owned by them for the Plan.
See "THE MERGER -- Interests of Certain Persons in the Merger".
Accounting Treatment
Consummation of the Merger is conditioned upon the receipt by HEALTHSOUTH and
SHC of an opinion from Ernst & Young LLP, HEALTHSOUTH's and SHC's independent
auditors, to the effect that the Merger will qualify for pooling-of-interests
accounting treatment if consummated in accordance with the Plan. HEALTHSOUTH and
SHC have agreed not to take any action intentionally that would disqualify
treatment of the Merger as a pooling of interests for accounting purposes.
<PAGE>
Under the pooling-of-interests method of accounting, the historical basis of
the assets and liabilities of HEALTHSOUTH and SHC will be combined at the
Effective Time and carried forward at their previously recorded amounts, the
stockholders' equity accounts of HEALTHSOUTH and SHC will be combined on
HEALTHSOUTH's consolidated balance sheet and no goodwill or other intangible
assets will be created. Financial statements of HEALTHSOUTH issued after the
Merger will be restated retroactively to reflect the consolidated operations of
HEALTHSOUTH and SHC as if the Merger had taken place prior to the periods
covered by such financial statements.
The unaudited pro forma financial information contained in this
Prospectus-Joint Proxy Statement has been prepared using the
pooling-of-interests accounting method to account for the Merger. See "PRO FORMA
CONDENSED FINANCIAL INFORMATION".
Certain Federal Income Tax Consequences
The following discussion of certain federal income tax
consequences of the Merger is included for general
information only. This summary is not a complete description
of all the consequences of the Merger and, in particular, may
not address federal income tax considerations that may affect
the treatment of a stockholder who acquired SHC Shares that
are converted into HEALTHSOUTH Common Stock in the Merger,
pursuant to the exercise of an option or warrant. Each
stockholder's individual circumstances may affect the tax
consequences of the Merger to him or her. In addition, no
information is provided herein with respect to the tax
consequences of the Merger under applicable foreign, state or
local laws. Accordingly, each SHC stockholder and option or
warrant holder is advised to consult his or her own tax
advisor as to the specific tax consequences of the Merger to
him or her.
Neither HEALTHSOUTH nor SHC has requested or will receive an advance ruling
from the Internal Revenue Service (the "Service") as to the federal income tax
consequences of the Merger. The respective obligations of SHC and HEALTHSOUTH to
consummate the Merger are conditioned upon receipt of certain legal opinions
relating to the federal income tax consequences of the Merger, in form and
substance satisfactory to SHC and HEALTHSOUTH and their respective counsel. The
opinions of such counsel are based upon the facts that are described herein, and
upon certain customary representations made by the management of SHC and by the
management of HEALTHSOUTH. Such opinions are also based upon the Code,
regulations currently in effect thereunder, current administrative rulings and
practice by the Service, and judicial authority, all of which are subject to
change. Any such change could affect the continuing validity of such opinions
and this discussion. In addition, an opinion of counsel is not binding upon the
Service, and there can be no assurance, and none is hereby given, that the
Service will not take a position which is contrary to one or more positions
reflected in the opinions of such counsel, or that such opinions will be upheld
by the courts if challenged by the Service. Furthermore, HEALTHSOUTH and SHC
have agreed in the Plan not to take any action which would disqualify the Merger
as a reorganization which is tax-free to the stockholders of SHC pursuant to
Section 368(a) of the Code. Each holder of SHC Shares is urged to consult such
holder's personal tax and financial advisors as to the specific federal income
tax consequences to such holder, based on such holder's own particular status
and circumstances, and also as to any state, local, foreign or other tax
consequences arising out of the Merger.
It is a condition to the obligation of HEALTHSOUTH to proceed with the Merger
that HEALTHSOUTH shall have received an opinion from Haskell Slaughter Young &
Johnston, Professional Association, its counsel, and it is a condition to the
obligation of SHC to proceed with the Merger that SHC shall have received an
opinion from Alston & Bird, its counsel, concerning certain of the federal
income tax consequences of the Merger, substantially to the effect that:
(i) The Merger will constitute a reorganization within the meaning of
Section 368(a)(1)(A) of the Code, and HEALTHSOUTH, the Subsidiary and SHC
will each be a party to the reorganization within the meaning of Section
368(b) of the Code;
(ii) No gain or loss will be recognized by HEALTHSOUTH, SHC or Subsidiary
as a result of the Merger;
<PAGE>
(iii) No gain or loss will be recognized by an SHC stockholder who
receives solely shares of HEALTHSOUTH Common Stock in exchange for SHC
Shares;
(iv) The receipt of cash in lieu of fractional shares of HEALTHSOUTH
Common Stock will be treated as if the fractional shares were distributed as
part of the exchange and then were redeemed by HEALTHSOUTH. These payments
will be treated as having been received as distributions in full payment in
exchange for the stock deemed as provided in Section 302(a) of the Code;
(v) The tax basis of the shares of HEALTHSOUTH Common Stock received by an
SHC stockholder will be equal to the tax bases of the SHC Shares exchanged
therefor, excluding any basis allocable to a fractional share of HEALTHSOUTH
Common Stock for which cash is received. In every case in which an SHC
stockholder owns stock of more than one class, the basis of the stock of each
such class held before the Merger by such SHC stockholder shall be allocated
among the shares of HEALTHSOUTH Common Stock received by such SHC stockholder
pursuant to the Merger;
(vi) The holding period of the shares of HEALTHSOUTH Common Stock received
by an SHC stockholder will include the holding period or periods of the SHC
Shares exchanged therefor, provided that the SHC Shares are held as a capital
asset within the meaning of Section 1221 of the Code at the Effective Time.
The foregoing discussion is intended only as a summary of certain federal
income tax consequences of the Merger and does not purport to be a complete
analysis or listing of all potential tax effects relevant to a decision whether
to vote in favor of approval and adoption of the Plan and the Merger. The
discussion does not address the tax consequences that may be relevant to a
particular SHC stockholder subject to special treatment under certain federal
income tax laws, such as dealers in securities, banks, insurance companies,
tax-exempt organizations, non-United States persons and stockholders who
acquired SHC Shares as compensation, nor any consequences arising under the laws
of any state, locality or foreign jurisdiction. Holders of SHC Shares are urged
to consult their own tax advisors concerning the federal, state, local and
foreign tax consequences of the Merger to them.
Resale of HEALTHSOUTH Common Stock by Affiliates
HEALTHSOUTH Common Stock to be issued to stockholders of SHC in connection
with the Merger has been registered under the Securities Act. HEALTHSOUTH Common
Stock received by the stockholders of SHC upon consummation of the Merger will
be freely transferable under the Securities Act, except for shares issued to any
person who may be deemed an "Affiliate" (as defined below) of SHC or HEALTHSOUTH
within the meaning of Rule 145 under the Securities Act. "Affiliates" are
generally defined as persons who control, are controlled by, or are under common
control with SHC or HEALTHSOUTH at the time of the Special Meetings (generally,
directors, certain executive officers and major stockholders). Affiliates of SHC
or HEALTHSOUTH may not sell their shares of HEALTHSOUTH Common Stock acquired in
connection with the Merger, except pursuant to an effective registration
statement under the Securities Act covering such shares or in compliance with
Rule 145 or another applicable exemption from the registration requirements of
the Securities Act. In general, under Rule 145, for two years following the
Effective Time, an Affiliate (together with certain related persons) would be
entitled to sell shares of HEALTHSOUTH Common Stock acquired in connection with
the Merger only through unsolicited "broker transactions" or in transactions
directly with a "market maker," as such terms are defined in Rule 144 under the
Securities Act. Additionally, the number of shares to be sold by an Affiliate
(together with certain related persons and certain persons acting in concert)
during such two-year period within any three-month period for purposes of Rule
145 may not exceed the greater of 1% of the outstanding shares of HEALTHSOUTH
Common Stock or the average weekly trading volume of such stock during the four
calendar weeks preceding such sale. Rule 145 would remain available to
Affiliates only if HEALTHSOUTH remained current with its information filings
with the SEC under the Exchange Act. Two years after the Effective Time, an
Affiliate would be able to sell such HEALTHSOUTH Common Stock without such
manner of sale or volume limitations, provided that HEALTHSOUTH were current
with its Exchange Act information filings and such Affiliate were not then an
Affiliate of HEALTHSOUTH. Three years after the Effective Time, an Affiliate
would be able to sell such shares of HEALTHSOUTH Common Stock without any
restrictions so long as such Affiliate had not been an Affiliate of HEALTHSOUTH
for at least three months prior thereto.
<PAGE>
SHC has agreed to use its reasonable, good faith efforts to cause each holder
of SHC Shares deemed to be an Affiliate of SHC to enter into an agreement
providing that such Affiliate will not sell, pledge, transfer or otherwise
dispose of shares of HEALTHSOUTH Common Stock to be received by such person in
the Merger, (i) except in compliance with the applicable provisions of the
Securities Act and the rules and regulations thereunder and (ii) until after
such time as results covering at least thirty days of post-Merger combined
operations of HEALTHSOUTH and SHC have been published.
Appraisal Rights
Under the DGCL, holders of SHC Shares will be entitled to dissenters' rights
of appraisal in connection with the Merger. Holders of HEALTHSOUTH Common Stock
will not be entitled to dissenters' rights under the DGCL.
Any holder of SHC Shares may dissent from the Merger and receive in cash the
"fair value" as of the Effective Time of the SHC Shares held by such stockholder
pursuant to Section 262 of the DGCL, a copy of which is attached hereto as Annex
D. Such "fair value" is exclusive of any value resulting from the effectuation
of the Merger but is inclusive of a fair rate of return thereon.
If a holder of SHC Shares wishes to dissent from the Merger, such stockholder
must file with SHC, prior to or at the SHC Special Meeting and prior to the
taking of the vote with respect to the Plan and the Merger, a written demand for
appraisal of such stockholder's SHC Shares, and must not vote in favor of the
Merger. Such written demand must be filed either by mail or in person with SHC
at its offices located at 990 Hammond Drive, Atlanta, Georgia 30328, Attention:
Secretary. A failure to vote against the Plan and Merger does not constitute a
waiver of appraisal rights, nor does a vote against, or abstention with respect
to voting on, the Plan and the Merger, in person or by proxy, constitute such a
demand. Only a holder of record of SHC Shares is entitled to assert appraisal
rights for the SHC Shares registered in such holder's name. Such appraisal
rights may be asserted with respect to all or less than all of the SHC Shares
held of record by such holder. If the SHC Shares are owned of record by more
than one person, such as a joint tenancy or a tenancy in common, the written
demand should be executed by or for all joint holders. An authorized agent may
execute the demand for appraisal for a holder of record, but the agent must
identify the record holder or holders and disclose the fact that, in executing
such demand, the agent is acting as an agent of the record holder.
A record holder who holds SHC Shares as a nominee for the beneficial owner
may exercise appraisal rights with respect to the SHC Shares held for one or
more beneficial owners while not exercising such rights for the other beneficial
owners, and in such case, the written demand should set forth the number of SHC
Shares covered by it. If there are no number of SHC Shares expressly mentioned
in the written demand, the demand will be presumed to cover all SHC Shares held
in the name of the record holder.
Within ten days after the Effective Time, SHC shall notify each stockholder
who has complied with the provisions of Section 262 of the DGCL, and who has not
voted in favor of or consented to the Merger, of the date that the Merger became
effective. If the dissenting stockholder and SHC are unable to reach agreement
as to the "fair value" of the SHC Shares within 120 days after the Effective
Time of the Merger, SHC or the dissenting stockholder may file a petition in the
Delaware Court of Chancery demanding a determination of the value of the SHC
Shares. Notwithstanding the foregoing, at any time within sixty days of the
Effective Time, a stockholder shall have the right to withdraw his or her demand
for appraisal and to accept the terms offered in the Plan with respect to the
Merger. Within 120 days after the Effective Time, any stockholder of SHC who has
complied with the requirement for exercise of appraisal rights is entitled, upon
written request to SHC, to receive from SHC a statement setting forth the
aggregate number of SHC Shares not voted in favor of the Merger and with respect
to which demands for appraisal have been made and the aggregate number of
holders of dissenting SHC Shares. Such statement must be mailed within ten days
after the written request therefor has been received by SHC. After determining
the stockholders entitled to an appraisal, the Court of Chancery will appraise
the shares, determining their "fair value", exclusive of any element of value
arising from the effectuation or expectation of the Merger, together with a fair
rate of interest, if any, to be paid on the amount determined to be the "fair
value". In determining "fair value", the Court of Chancery will take into
account all relevant factors.
<PAGE>
The cost of the proceedings may be determined by the Court of Chancery and
taxed to the parties as the Court deems equitable under the circumstances.
From and after the Effective Time, no SHC stockholder who has demanded his
appraisal rights shall be entitled to vote his SHC Shares (or the shares of
HEALTHSOUTH Common Stock which such shares represent the right to receive in the
Merger) for any purpose or to receive payment of dividends or other
distributions on the SHC Shares (or on the shares of HEALTHSOUTH Common Stock
which such shares represent the right to receive in the Merger). If no petition
for an appraisal is filed within the time provided by Section 262 or if an SHC
stockholder delivers to SHC a written withdrawal of his demand for an appraisal
and acceptance of the Merger, either within 60 days after the Effective Time or
thereafter with the written approval of SHC, then the right of such stockholder
to an appraisal will cease.
Dissenting stockholders are urged to consult their legal counsel for specific
advice regarding the interpretation of the DGCL with respect to dissenters'
rights.
Any communication by stockholders necessary under the foregoing shall be
mailed or hand delivered to SHC at the address specified in the second paragraph
of this section.
Any stockholder receiving cash as a result of the exercise of dissenters'
rights will be deemed, in effect, to have sold his shares, with the tax
consequences applicable to a sale. See "-- Certain Federal Income Tax
Consequences".
THE SUMMARY SET FORTH ABOVE DOES NOT PURPORT TO BE A COMPLETE STATEMENT OF
THE PROVISIONS OF THE DGCL RELATING TO THE RIGHTS OF DISSENTING STOCKHOLDERS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE APPLICABLE SECTION OF THE DGCL
WHICH IS INCLUDED AS ANNEX D TO THIS PROSPECTUS-JOINT PROXY STATEMENT. ANY
STOCKHOLDER INTENDING TO EXERCISE DISSENTERS' RIGHTS IS URGED TO REVIEW
CAREFULLY ANNEX D SO AS TO BE IN STRICT COMPLIANCE WITH THE PROVISIONS OF THE
DGCL.
No Solicitation of Transactions
Under the Plan, SHC may furnish information concerning SHC to other
corporations, partnerships, persons or other entities or groups, and may
participate in discussions and negotiate with such entities concerning any
proposal to acquire SHC upon a merger, purchase of assets, purchase of or tender
offer for SHC Shares or similar transaction (an "Acquisition Transaction"), in
response to unsolicited requests therefor, if (i) the Board of Directors of SHC
determines in its good faith judgment in the exercise of its fiduciary duties
that such action is appropriate in furtherance of the best interest of its
stockholders and (ii) the other party involved enters into a confidentiality
agreement with SHC substantially similar to the provisions respecting
confidentiality applicable to SHC and HEALTHSOUTH. Except as described in the
preceding sentence, SHC has agreed that it will not, and will direct each
officer, director, employee, representative and agent of SHC not to, directly or
indirectly, encourage, solicit, participate in or initiate discussions or
negotiations with or provide any information to any corporation, partnership,
person or other entity or group (other than HEALTHSOUTH or an affiliate,
associate or agent of HEALTHSOUTH) concerning any merger, sale of assets, sale
of or tender offer for SHC Shares or similar transactions involving SHC. SHC has
further agreed that it will notify HEALTHSOUTH if it enters into a confidenti
ality agreement with any third party in response to any unsolicited request for
information and access in connection with a possible Acquisition Transaction,
including providing HEALTHSOUTH with the identity of the third party and the
proposed terms of such Acquisition Transaction.
Expenses
The Plan provides that all costs and expenses incurred in connection with the
Plan and the transactions contemplated thereby shall be paid by the party
incurring such expense, except that expenses of printing and mailing this
Prospectus-Joint Proxy Statement shall be shared equally by HEALTHSOUTH and SHC.
NYSE Listing
A listing application will be filed with the NYSE to list the shares of
HEALTHSOUTH Common Stock to be issued to SHC stockholders in connection with the
Merger. Although no assurance can be given that the shares of HEALTHSOUTH Common
Stock so issued will be accepted for listing, HEALTHSOUTH and SHC anticipate
that these shares will qualify for listing on the NYSE upon official notice of
issuance thereof. It is a condition to the Merger that such shares of
HEALTHSOUTH Common Stock be approved for listing on the NYSE upon official
notice of issuance at the Effective Time.
<PAGE>
PRO FORMA CONDENSED FINANCIAL INFORMATION
The following pro forma condensed financial information and explanatory notes
are presented to reflect the proposed Merger on the historical financial
statements of HEALTHSOUTH and SHC. The Merger is reflected in the pro forma
condensed financial information as a pooling of interests. The HEALTHSOUTH
historical amounts reflect the combination of HEALTHSOUTH and ReLife for all
periods presented, as HEALTHSOUTH acquired ReLife in December 1994 in a
transaction accounted for as a pooling of interests.
In addition, the pro forma condensed financial information reflects the
impact of the "NME Selected Hospitals Acquisition" on the results of operations
for the year ended December 31, 1993. The NME Selected Hospitals Acquisition was
completed on December 31, 1993 and accounted for as a purchase; therefore, the
impact of the acquisition on HEALTHSOUTH's financial position is already
reflected in its historical December 31, 1994 balance sheet and income
statement.
Finally, the pro forma condensed financial information reflects the impact of
the pending acquisition from NovaCare, Inc. ("NovaCare") by HEALTHSOUTH of 11
rehabilitation hospitals, 12 other facilities and two Certificates of Need (the
"NovaCare Rehabilitation Hospitals Acquisition") on the results of operations
and financial position for the year ended December 31, 1994. Prior to the
NovaCare Rehabilitation Hospitals Acquisition, which is currently expected to be
consummated in the second quarter of 1995, these facilities are operated by a
wholly-owned subsidiary of NovaCare, Rehab Systems Company ("RSC").
The pro forma condensed balance sheet assumes that the Merger was consummated
on December 31, 1994, and the pro forma condensed income statements assume that
the SHC Merger was consummated at the beginning of each period presented. The
assumptions are described in the accompanying Notes to Pro Forma Condensed
Financial Information.
The pro forma information should be read in conjunction with the historical
financial statements of HEALTHSOUTH, SHC and RSC and the related notes thereto
included in documents incorporated herein by reference. See "INCORPORATION OF
CERTAIN INFORMATION BY REFERENCE". The pro forma financial information is
presented for informational purposes only and is not necessarily indicative of
the results of operations or combined financial position that would have
resulted had the Merger and other acquisitions described above been consummated
at the dates indicated, nor is it necessarily indicative of the results of
operations of future periods or future combined financial position.
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Pro Forma Condensed Combined Balance Sheet (Unaudited)
December 31, 1994
<TABLE>
<CAPTION>
ACQUISITION
---------------------------------------
HEALTH- PRO FORMA PRO FORMA PRO FORMA PRO FORMA
SOUTH SHC ADJUSTMENTS COMBINED NOVACARE ADJUSTMENTS COMBINED
------------ ---------- -------------- ------------- ----------- -------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents ....... $ 65,949 $ 2,786 -- $ 68,735 $ 8,858 $ (4,973) (1) $ 72,620
Other marketable securities ..... 16,628 -- -- 16,628 --
16,628
Accounts receivable ............. 222,720 19,939 -- 242,659 42,608 (259) 285,008
Inventories, prepaid expenses and
other current assets ............ 90,663 6,517 -- 97,180 5,515 (42) 102,653
Total current assets ............ 395,960 29,242 -- 425,202 56,981 (5,274) 476,909
Other assets .................... 41,932 1,142 -- 43,074 49,844 (40,637) 52,281
Property, plant and equipment,
net ............................. 789,538 67,834 -- 857,372 38,724 120,000 1,014,377
(1,719)
Intangible assets, net........... 324,904 85,784 -- 410,688 62,447 (22,006) 449,887
Total assets ................... $ 1,552,334 $ 184,002 $ -- $ 1,736,336 $ 207,996 $ 49,122 $1,993,454
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Current liabilities: ..............
Accounts payable ..................$ 83,180 $ 3,973 $ -- $ 87,153 $ 20,347 $ (454)(1) $ 107,046
Salaries and wages payable......... 32,672 1,430 -- 34,102 -- -- 34,102
Accrued interest payable and other
liabilities........................ 46,714 9,208 -- 55,922 672 (275)(1) 56,319
Current portion of long-term debt . 14,713 1,985 -- 16,698 1,732 (146)(1) 18,284
Total current liabilities.......... 177,279 16,596 -- 193,875 22,751 (875) 215,751
Long-term debt..................... 930,061 87,635 -- 1,017,696 56,756 215,000 (2) 1,250,832
(38,620)(1)
Deferred income taxes.............. 7,882 713 -- 8,595 -- -- 8,595
Other long-term liabilities........ 5,655 2,743 -- 8,398 -- -- 8,398
Payable to affiliates.............. -- -- -- -- 92,377 (92,377)(1) --
Deferred revenue................... 7,526 -- -- 7,526 736 -- 8,262
Minority interests................. (2,203) 12,529 -- 10,326 1,370 -- 11,696
Redeemable common stock and
warrants........................... -- 3,034 (3,034) -- -- -- --
Redeemable convertible preferred
stock.............................. -- 26,569 (26,569) -- -- -- --
Stockholders' equity: .............
Preferred stock, $.10 par.......... -- -- -- -- -- --
Common stock, $.01 par............. 342 54 (15) 381 -- -- 381
Additional paid-in capital......... 306,565 33,392 29,618 369,575 34,006 (117,006)(2) 369,575
83,000 (1)
Retained earnings.................. 137,027 737 -- 137,764 -- -- 137,764
Treasury stock..................... (323) -- -- (323) -- (323)
Receivable from Employee Stock
Ownership Plan..................... (17,477) -- -- (17,477) -- -- (17,477)
Total stockholders' equity......... 426,134 34,183 29,603 489,920 34,006 (34,006) 489,920
Total liabilities and
stockholders' equity...............$1,552,334 $ 184,002 $ -- $1,736,336 $ 207,996 $ 49,122 $ 1,993,454
</TABLE>
See accompanying notes.
<PAGE>
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Pro Forma Condensed Combined Income Statement (Unaudited)
Year Ended December 31, 1994
<TABLE>
<CAPTION>
ACQUISITION
----------------------------------------
HEALTH- PRO FORMA PRO FORMA PRO FORMA PRO FORMA
SOUTH SHC ADJUSTMENTS COMBINED NOVACARE ADJUSTMENTS COMBINED
------------ ---------- -------------- ------------ ----------- -------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues ...................... $1,127,441 $ 108,749 -- $1,236,190 $ 142,548 $ 8,636 (7) $1,387,374
Operating expenses:
Operating units ............... 835,888 70,824 -- 906,712 128,233 (16,287)(3) 1,018,658
Corporate general and
administrative................. 37,139 8,756 -- 45,895 -- 4,220 (4) 50,115
Provision for doubtful
accounts....................... 20,583 3,156 -- 23,739 1,269 -- 25,008
Depreciation and amortization 75,588 11,090 -- 86,678 7,041 5,450 (5) 97,251
(1,918)(1)
Interest expense............... 57,255 8,031 -- 65,286 11,096 10,966 (6) 87,348
Interest income ............... (4,224) (84) -- (4,308) -- -- (4,308)
Merger expenses ............... 2,949 3,571 -- 6,520 -- -- 6,520
Loss on impairment of assets .. 10,500 -- -- 10,500 -- -- 10,500
Loss on abandonment of
computer project............... 4,500 -- -- 4,500 -- -- 4,500
1,040,178 105,344 -- 1,145,522 147,639 2,431 1,295,592
Income before income taxes and
minority interests ............ 87,263 3,405 -- 90,668 (5,091) 6,205 91,782
Provision for income taxes .... 33,835 470 -- 34,305 (1,084) 1,345 (8) 34,566
53,428 2,935 -- 56,363 (4,007) 4,860 57,216
Minority interests............. 203 6,199 -- 6,402 445 -- 6,847
Net income (loss).............. $ 53,225 $(3,264) $ -- $ 49,961 $ (4,452) $ 4,860 $ 50,369
Weighted average common and
common equivalent shares
outstanding ................... 37,938 21,814 (17,653) 42,099 N/A N/A 42,099
Net income (loss) per common
and common equivalent share .. $ 1.40 $ (0.15) N/A $ 1.19 N/A N/A $ 1.20
Net income per common share
assuming full dilution......... $ 1.39 N/A N/A $ 1.19 N/A N/A $ 1.20
</TABLE>
See accompanying notes.
<PAGE>
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Pro Forma Condensed Combined Income Statement (Unaudited)
Year Ended December 31, 1993
<TABLE>
<CAPTION>
ACQUISITION
---------------------------------------
HEALTH- PRO FORMA PRO FORMA PRO FORMA PRO FORMA
SOUTH SHC ADJUSTMENTS COMBINED NME ADJUSTMENTS COMBINED
---------- --------- -------------- ------------ ---------- -------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues....................... $ 575,346 $ 80,983 $ -- $ 656,329 $ 461,148 $ (6,279) $ 1,111,198
Operating expenses: ...........
Operating units................ 418,981 52,797 -- 471,778 410,609 (45,010) 837,377
Corporate general and
administrative................. 20,018 4,311 -- 24,329 0 10,000 34,329
Provision for doubtful
accounts....................... 13,875 2,306 -- 16,181 8,271 -- 24,452
Depreciation and amortization . 39,376 6,848 -- 46,224 15,922 2,924 65,070
Interest expense............... 14,261 4,234 -- 18,495 7,129 29,044 54,668
Interest income................ (3,698) (226) -- (3,924) 0 -- (3,924)
Merger expenses................ -- 333 -- 333 -- -- 333
NME Selected Hospitals
Acquisition related expense ... 49,742 -- -- 49,742 -- -- 49,742
Gain on sale of partnership
interest....................... -- (1,400) -- (1,400) -- (1,400)
552,555 69,203 -- 621,758 441,931 (3,042) 1,060,647
Income before income taxes and
minority interests............. 22,791 11,780 -- 34,571 19,217 (3,237) 50,551
Provision for income taxes .... 9,009 2,921 -- 11,930 7,897 (1,198) 18,629
13,782 8,859 -- 22,641 11,320 (2,039) 31,922
Minority interests............. 190 5,254 -- 5,444 1,402 -- 6,846
Net income .................... $ 13,592 $ 3,605 $ -- $ 17,197 $ 9,918 $ (2,039) $ 25,076
Weighted average common and
common equivalent shares
outstanding.................... 34,717 31,428 (27,521) 38,624 N/A N/A 38,624
Net income per common and
common equivalent share........ $ 0.39 $ 0.11 N/A $ 0.45 N/A N/A $ 0.65
</TABLE>
See accompanying notes.
<PAGE>
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Pro Forma Condensed Combined Income Statement (Unaudited)
Year Ended December 31, 1992
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HEALTHSOUTH SHC ADJUSTMENTS COMBINED
------------- --------- -------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues..................................... $ 464,288 $ 36,758 $ -- $ 501,046
Operating expenses: .........................
Operating units.............................. 347,073 25,096 -- 372,169
Corporate general and administrative ........ 14,418 2,460 -- 16,878
Provision for doubtful accounts.............. 11,842 1,412 -- 13,254
Depreciation and amortization ............... 26,737 3,097 -- 29,834
Interest expense............................. 11,295 1,328 -- 12,623
Interest income.............................. (5,121) (294) -- (5,415)
Terminated merger expenses................... 3,665 -- -- 3,665
409,909 33,099 -- 443,008
Income before income taxes and minority
interests.................................... 54,379 3,659 -- 58,038
Provision for income taxes................... 18,383 481 18,864
35,996 3,178 -- 39,174
Minority interests........................... 1,402 2,843 4,245
Net income................................... $ 34,594 $ 335 $ -- $ 34,929
Weighted average common and common
equivalent shares outstanding................ 34,418 20,425 (17,886) 36,957
Net income per common and common equivalent
share........................................ $ 1.01 $ 0.02 N/A $ 0.95
</TABLE>
See accompanying notes.
<PAGE>
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Pro Forma Condensed Financial Information
A. The SHC Merger
The proposed SHC Merger is intended to be accounted for as a pooling of
interests. The pro forma condensed income statements assume that the SHC Merger
was consummated at the beginning of each period presented. The pro forma
condensed balance sheet assumes that the SHC Merger was consummated on December
31, 1994.
The pro forma condensed financial information contains no adjustments to
conform the accounting policies of the two companies because any such
adjustments have been determined to be immaterial by the management of
HEALTHSOUTH.
The pro forma condensed financial information does not reflect non-recurring
costs resulting directly from the Merger. The management of HEALTHSOUTH
estimates that these costs will approximate $4,000,000 and will be charged to
operations in the quarter the Merger is consummated. The amount includes costs
to merge the two companies and professional fees.
Pro forma share amounts are based on historical share amounts, converting
each outstanding share of SHC Common Stock and redeemable preferred stock into
.1243 shares of HEALTHSOUTH Common Stock. The conversion ratio is based upon the
closing price of HEALTHSOUTH's Common Stock of $39.13 per share on March 3,
1995.
B. The NovaCare Rehabilitation Hospitals Acquisition
In February 1995 HEALTHSOUTH entered into a definitive agreement to purchase
the rehabilitation hospitals division of NovaCare, Inc. ("NovaCare"), consisting
of 11 rehabilitation hospitals, 12 other facilities, and certificates of need to
build two additional facilities (the "NovaCare Rehabilitation Hospitals
Acquisition"). The purchase price will be approximately $215,000,000 in cash and
the assumption of approximately $20,000,000 in long-term debt. The transaction
will be accounted for as a purchase and is expected to be completed in the
second quarter of 1995. HEALTHSOUTH intends to finance the cost of the NovaCare
Rehabilitation Hospitals Acquisition through additional borrowings under its
existing credit facilities, as amended.
The accompanying pro forma balance sheet assumes that the NovaCare
Rehabilitation Hospitals Acquisition was consummated on December 31, 1994 and
the accompanying pro forma income statement for the year ending December 31,
1994 assumes that the transaction was consummated at the beginning of the
period.
The following pro forma adjustments are necessary for the NovaCare
Rehabilitation Hospitals Acquisition:
1. To eliminate assets (including associated depreciation expense) and
liabilities of Rehab Systems Company (a wholly owned subsidiary of NovaCare,
Inc.) which are excluded from the NovaCare Rehabilitation Hospitals Acquisition.
2. To allocate the excess of the $215,000,000 cash purchase price over the
net tangible asset value of the acquired NovaCare facilities, which is
approximately $159,199,000. Of this excess, $120,000,000 has been allocated to
leasehold value and the remaining $39,199,000 has been allocated to goodwill.
This allocation serves to decrease historical goodwill of the NovaCare
facilities by $22,006,000. This adjustment also reflects the increase in
long-term debt necessary to finance the transaction.
3. To eliminate intercompany management and royalty fees and divisional
overhead of the acquired NovaCare facilities. These fees and expenses total
$16,287,000 and are included in operating unit expenses in the accompanying
income statement.
4. To adjust corporate general and administrative expenses for estimated
additions necessary to assimilate and operate the acquired facilities.
<PAGE>
5. To adjust depreciation and amortization expense to reflect the allocation
of the excess purchase price over the net tangible asset value described in Item
1 above as follows (in thousands):
<TABLE>
<CAPTION>
PURCHASE PRICE
ALLOCATION USEFUL ANNUAL
ADJUSTMENT LIFE AMORTIZATION
---------------- ----------- --------------
<S> <C> <C> <C>
Leasehold
value.......... $120,000 20 years $ 6,000
Goodwill....... (22,006) 40 years (550)
$ 5,450
</TABLE>
6.To increase interest expense by $20,425,000 to reflect pro forma
borrowings described in Item 1 above as if they were outstanding for the
entire year, and to decrease interest expense by $9,459,000, which
represents interest on NovaCare debt not assumed by HEALTHSOUTH.
7.To adjust estimated Medicare reimbursement for the increases in
reimburseable expenses described in Item 4, 5 and 6 above.
8.To adjust the NovaCare provision for income taxes to an effective rate of
39% (net of minority interests).
C. The NME Selected Hospitals Acquisition:
Effective December 31, 1993, HEALTHSOUTH completed the acquisition from
National Medical Enterprises, Inc. ("NME") of 28 inpatient rehabilitation
facilities and 45 outpatient rehabilitation facilities (the "NME Selected
Hospitals Acquisition"). The total consideration paid was approximately
$394,588,000, consisting of $361,164,000 in cash, the assumption of $17,111,000
in long-term debt obligations, and the assumption of $16,313,000 in current
liabilities.
The HEALTHSOUTH historical December 31, 1994 balance sheet included in the
accompanying pro forma condensed balance sheet as of December 31, 1994 already
reflects the effects of the NME Selected Hospitals Acquisition. The accompanying
pro forma condensed income statement for the year ended December 31, 1993
presents the acquisition as if it had occurred as of the beginning of the
respective period.
The transaction has been accounted for using the purchase method of
accounting. The purchase price has been allocated to the tangible and
identifiable intangible assets acquired and liabilities assumed based upon their
respective fair values. Accordingly, depreciation and amortization has been
adjusted to reflect the purchase price allocation.
The pro forma presentation assumes HEALTHSOUTH will finance the total
purchase price through a combination of subordinated and convertible debt, as
well as additional borrowings under their existing line of credit. Accordingly,
interest expense has been adjusted to reflect HEALTHSOUTH's pro forma
capitalization as if the debt were outstanding during all of the fiscal year
ended December 31, 1993.
The pro forma presentation also adjusts corporate general and administrative
fees for estimated additions necessary to assimilate and operate the acquired
facilities, eliminates intercompany management fees and corporate overhead paid
to NME, adjusts estimated Medicare reimbursement for effects of the other pro
forma adjustments, and adjusts the combined incremental income tax rate to 37%.
For a more detailed discussion of the NME Selected Hospitals Acquisition pro
forma adjustments, reference is made to HEALTHSOUTH's Current Report on Form
8-K, as amended, dated June 22, 1994.
<PAGE>
SELECTED FINANCIAL INFORMATION OF HEALTHSOUTH
HEALTHSOUTH Rehabilitation Corporation and Subsidiaries
The following table sets forth certain selected consolidated financial
information for HEALTHSOUTH. The amounts give effect to the combination of
HEALTHSOUTH and ReLife for all periods presented, as HEALTHSOUTH acquired ReLife
in December 1994 in a transaction accounted for as a pooling of interests. The
selected financial information is derived from and should be read in conjunction
with the consolidated financial statements of HEALTHSOUTH and the related notes
thereto in documents incorporated herein by reference. See "INCORPORATION OF
CERTAIN INFORMATION BY REFERENCE".
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1990 1991 1992 1993 1994
---------- ---------- ---------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues ................................. $ 198,087 $ 267,346 $ 464,288 $ 575,346 $ 1,127,441
Operating expenses: Operating units ...... 144,358 191,208 347,073 418,981 835,888
Corporate general and administrative ..... 7,025 10,631 14,418 20,018 37,139
Provision for doubtful accounts .......... 5,441 6,030 11,842 13,875 20,583
Depreciation and amortization ............ 11,388 15,115 26,737 39,376 75,588
Interest expense ......................... 11,857 10,412 11,295 14,261 57,255
Interest income .......................... (4,136) (5,804) (5,121) (3,698) (4,224)
ReLife merger expense (1) ................ -- -- -- -- 2,949
Loss on impairment of assets (2) ......... -- -- -- -- 10,500
Loss on abandonment of computer project
(2) ...................................... -- -- -- -- 4,500
NME Selected Hospitals Acquisition related
expense (3) .............................. -- -- -- 49,742 --
Terminated merger expense (4) ............ -- -- 3,665 -- --
175,933 227,592 409,909 552,555 1,040,178
Income before income taxes and minority
interests ................................ 22,154 39,754 54,379 22,791 87,263
Provision for income taxes ............... 7,638 13,284 18,383 9,009 33,835
Income before minority interests ......... 14,516 26,470 35,996 13,782 53,428
Minority interests ....................... 929 1,272 1,402 190 203
Net income ............................... $ 13,587 $ 25,198 $ 34,594 $ 13,592 $ 53,225
Weighted average common and common
equivalent shares outstanding (5) (6) .... 20,325 28,074 34,418 34,717 37,938
Net income per common and common
equivalent share (5) ..................... $ 0.67 $ 0.90 $ 1.01 $ 0.39 $ 1.40
Net income per common share--assuming full
dilution (5) (6) ......................... $ 0.59 $ 0.83 N/A N/A $ 1.39
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
1990 1991 1992 1993 1994
--------- ---------- ---------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and marketable
securities.................... $ 74,480 $125,252 $104,381 $ 77,299 $ 82,577
Working capital............... 114,513 183,023 195,016 198,352 218,681
Total assets.................. 316,594 491,004 701,210 1,281,522 1,552,334
Long-term debt (7)............ 156,560 170,175 306,082 818,349 944,774
Stockholders' equity.......... 128,898 288,434 340,466 352,396 426,134
<FN>
- --------------------
(1) Expense related to the ReLife merger.
(2) Expense related to impairment of long-term assets.
(3) Expense related to the NME Selected Hospitals Acquisition.
(4) Expense related to the termination of a proposed merger in the first
quarter of 1992.
(5) Adjusted to reflect a three-for-two stock split affected in the form of a
50% stock dividend paid on December 31, 1991.
(6) Fully-diluted earnings per share in 1990 and 1991 reflect shares reserved
for issuance upon exercise of dilutive stock options and shares reserved
for issuance upon conversion of HEALTHSOUTH's 7 3/4 % Convertible
Subordinated Debentures Due 2014, all of which were converted into Common
Stock prior to June 3, 1991. Fully diluted earnings per share in 1994
reflect shares reserved for issuance upon exercise of dilutive stock
options and shares reserved for issuance upon exercise of dilutive stock
options and shares reserved for issuance upon conversion of HEALTHSOUTH's
5% Convertible Subordinated Debentures due 2001.
(7) Includes current portion of long-term debt.
</TABLE>
<PAGE>
BUSINESS OF HEALTHSOUTH
General
HEALTHSOUTH 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.
At December 31, 1994, HEALTHSOUTH had 402 locations in 33 states, the
District of Columbia and Ontario, Canada, including 111 outpatient
rehabilitation centers and 127 associated satellite clinics, 66 inpatient
rehabilitation facilities with 39 associated satellite outpatient clinics, five
medical centers and 54 locations providing other patient care services. See
"OPERATIONS AND MANAGEMENT OF HEALTHSOUTH AFTER THE MERGER".
Recent Developments
Acquisition of ReLife, Inc. Effective December 29, 1994, HEALTHSOUTH and its
wholly-owned subsidiary, RRS Acquisitions Company, Inc., a Delaware corporation
("RRS"), completed the acquisition of ReLife, Inc., a Delaware corporation
("ReLife"), through a merger of RRS into ReLife. ReLife is the surviving
corporation in the merger, and is wholly owned by HEALTHSOUTH. ReLife
stockholders received .7053 shares of HEALTHSOUTH Common Stock for each share of
the Common Stock of ReLife held by them. A total of 5,512,645 shares of
HEALTHSOUTH Common Stock were issued in the transaction. The exchange ratio
represents a value of $24.00 per share to ReLife's stockholders, resulting in an
approximate value of the transaction of $180,000,000.
ReLife provides a comprehensive system of rehabilitation services for
disabled and injured individuals. As of December 31, 1994, ReLife operated 31
inpatient facilities with an aggregate of 1,102 licensed beds, including nine
free-standing rehabilitation hospitals, nine acute rehabilitation units, five
sub-acute rehabilitation units, seven transitional living units and one
residential facility and provided outpatient rehabilitation services at twelve
outpatient centers. ReLife also provides other services and programs, including
contract staffing of rehabilitation therapists and specialized programs for
spinal cord injury, brain injury and industrial rehabilitation.
NovaCare Rehabilitation Hospitals Acquisition. On February 3, 1995,
HEALTHSOUTH entered into a definitive agreement to purchase the operations of
the rehabilitation hospital division of NovaCare, Inc., consisting of 11
rehabilitation hospitals in seven states, 12 other facilities and two
Certificates of Need. This transaction will be a cash purchase and involves the
payment of $215,000,000 in cash and the assumption of $20,000,000 in liabilities
for a total consideration of $235,000,000. The acquisition is to be funded by an
increase in HEALTHSOUTH's existing bank credit facilities. The transaction is
subject to certain regulatory and governmental reviews, including clearance
under the HSR Act and is expected to be completed early in the second quarter of
1995. Upon completion of the acquisition, HEALTHSOUTH will have approximately
425 locations, of which 77 will be inpatient rehabilitation facilities
representing 4,685 beds.
HEALTHSOUTH Strategy
HEALTHSOUTH's principal objective is to be the provider of choice for
patients, physicians and payors alike for inpatient and outpatient
rehabilitative healthcare services throughout the United States. HEALTHSOUTH's
growth strategy continues to be based upon three primary elements: (i) the
expansion of HEALTHSOUTH's national network, (ii) successful marketing to
payors, managed care providers and other constituencies, and (iii) the provision
of high-quality, cost-effective rehabilitative healthcare services.
<PAGE>
* Expansion of National Network. As the largest provider of rehabilitative
healthcare services in the United States, HEALTHSOUTH is able to realize
economies of scale and compete successfully for national contracts with large
payors and employers while retaining the flexibility to respond to particular
needs of local markets. The benefits of the national network include the
opportunity to offer large national and regional employers and payors the
convenience of dealing with a single provider, to utilize greater buying
power through centralized purchasing, and to more effectively recruit and
retain clinicians. These national benefits are realized without sacrificing
local market responsiveness. HEALTHSOUTH's objective is to provide those
rehabilitative healthcare services needed within each local market by
tailoring its services and facilities to that market's needs, thus bringing
the benefits of nationally recognized expertise and competency into the local
setting.
* Marketing to Payors, Managed Care Providers and Others. HEALTHSOUTH's
marketing focus has been and will continue to be directed at the development
and implementation of contractual relationships with major insurance
companies, managed care networks (HMOs and PPOs), large regional and national
employer groups, and provider alliances and networks. HEALTHSOUTH's
documented outcomes and experience with several hundred thousand patients in
delivering quality comprehensive rehabilitative care at reasonable prices
enables it to enter into contracts to provide its services at pre-determined
prices wherever required in the markets HEALTHSOUTH services. This enables
payors, employers and others to provide their employees and other
beneficiaries with quality care at prices which are reasonable in relation to
the outcome desired, thus encouraging increased utilization of HEALTHSOUTH's
facilities. In addition, by continuing its development of relationships with
tertiary-care hospitals and primary physician groups, HEALTHSOUTH encourages
the integration of primary care with rehabilitative care.
* High-Quality, Cost-Effective Services. HEALTHSOUTH believes that
rehabilitative healthcare services will assume increasing importance in the
healthcare environment as payors continue to seek to reduce overall costs by
shifting patients to more cost-effective treatment settings. HEALTHSOUTH has
developed standardized clinical protocols for the treatment of its patients.
This results in "best practices" techniques being utilized at all of
HEALTHSOUTH's facilities, allowing the consistent achievement of
demonstrable, cost-effective clinical outcomes. HEALTHSOUTH's reputation for
its clinical programs is enhanced through its relationships with major
universities throughout the nation, such as Vanderbilt University, and its
support of clinical research in its facilities.
As a result of the acquisition of 28 rehabilitation hospitals and 45
outpatient rehabilitation locations from National Medical Enterprises, Inc. (the
"NME Selected Hospitals Acquisition"), HEALTHSOUTH believes it complemented its
existing facilities and enhanced its market position. HEALTHSOUTH believes that
the geographic dispersion of the 338 locations operated by it at December 31,
1994 makes HEALTHSOUTH a more attractive provider for managed care networks,
major insurance companies, regional and national employers and regional provider
alliances. In addition, since the acquired NME facilities had very limited
contractual relationships with insurance companies, managed care providers,
employers or others, HEALTHSOUTH intends to expand its existing payor
relationships to include the former NME facilities. HEALTHSOUTH has begun the
integration of the former NME facilities with its existing network, implementing
centralized management and financial controls, utilization of HEALTHSOUTH's
clinical programs and protocols and provision of marketing and sales efforts to
increase the utilization of these facilities.
<PAGE>
HEALTHSOUTH Patient Care Services Locations
At December 31, 1994, HEALTHSOUTH operated inpatient and outpatient
rehabilitation facilities and medical centers in the following locations:
<TABLE>
<CAPTION>
INPATIENT MEDICAL
REHABILITATION CENTER TOTAL
OUTPATIENT LOCATIONS LOCATIONS LOCATIONS
STATE MARKET(1) LOCATIONS(2) (BEDS) (3) (4) (BEDS) (4) (BEDS) (4)
- --------------- ------------------ ------------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Alabama Birmingham 9 5 (205) 1 (219) 15 (424)
Florence 2 2
Huntsville 3 1 (50) 4 (50)
Mobile 2 2
Montgomery 1 1 (80) 2 (80)
Dothan 1 (34) 1 (34)
Muscle Shoals 1 1
Arizona Tucson 2 2
Phoenix 3 3
Scottsdale 3 3
Arkansas Little Rock 2 2
Ft. Smith 1 (80) 1 (80)
California San Francisco 2 2
Fresno 2 2
San Carlos 1 1
Marina Del Ray 1 1
Woodland Hills 1 1
Redding 1 1
Huntington Beach 2 2
San Diego 2 2
Santa Rosa 2 2
Van Nuys 1 1
Colorado Denver 9 9
Ft. Collins 2 2
Colorado Springs 1 1
Washington DC Washington 1 1
Florida Ocala 2 2
Jacksonville 4 4
Merritt Island 3 3
Boca Raton 2 2
Port St. Lucie 3 3
Lake Worth 1 1
Melbourne 1 1 (80) 2 (80)
Ocoee 2 2
Orlando 5 5
Palm Bay 2 2
Ft. Lauderdale 3 1 (108) 4 (108)
West Palm 2 2
Tampa 4 4
Miami 4 1 (165) 2 (397) 7 (562)
Largo 1 (40) 1 (40)
Tarpon Springs 1 1
Sarasota 2 1 (60) 3 (60)
Tallahassee 1 (70) 1 (70)
Vero Beach 1 (70) 1 (70)
Panama City 2 2
Georgia Atlanta 6 1 (14) 7 (14)
Columbus 1 1
Macon 1 1 (75) 2 (75)
Illinois Chicago 4 4
Columbia 2 2
Carbondale 1 1
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INPATIENT MEDICAL
REHABILITATION CENTER TOTAL
OUTPATIENT LOCATIONS LOCATIONS LOCATIONS
STATE MARKET(1) LOCATIONS(2) (BEDS) (3) (4) (BEDS) (4) (BEDS) (4)
- --------------- ------------------ ------------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Iowa Des Moines 1 1
Kansas Leawood 1 1
Kentucky Louisville 2 2
Edgewood 1 (40) 1 (40)
Louisiana Metairie 2 2
Baton Rouge 1 1 (43) 2 (43)
Maryland Baltimore 10 10
Chevy Chase 1 1
Rockville 1 1
Michigan Detroit 1 1
Mississippi Jackson 2 2
Meridian 1 1
Missouri St. Louis 11 1 (26) 12 (26)
Columbia 3 3
Kansas City 1 2 (21) 3 (21)
Cape Girardeau 3 3
Lake Ozark 1 1
Nebraska Omaha 1 1
Nevada Las Vegas 2 2
New Hampshire Bedford 3 3
Manchester 1 1
Concord 1 (100) 1 (100)
New Jersey East Brunswick 1 1
Manahawkin 1 1
Tinton Falls 1 1
Bridgewater 1 1
Newton 1 1
Linden 2 2
Paramus 2 2
Edison 2 2
Madison 1 1
Washington 1 1
North Bergen 1 1
Upper Saddle
River 2 2
Toms River 1 1 (155) 2 (155)
New Mexico Albuquerque 5 1 (60) 6 (60)
New York Syracuse 2 2
North
Carolina Charlotte 1 1
Statesville 1 1
Asheville 1 1
Kinston 1 (17) 1 (17)
Ohio Lorain 4 4
Troy 2 (26) 2 (26)
Ashtabula 1 1
Oklahoma Oklahoma City 3 1 (111) 4 (111)
Weatherford 1 1
Tulsa 1 1
Ontario,
Canada Etabicoke 1 1
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INPATIENT MEDICAL
REHABILITATION CENTER TOTAL
OUTPATIENT LOCATIONS LOCATIONS LOCATIONS
STATE MARKET(1) LOCATIONS(2) (BEDS) (3) (4) (BEDS) (4) (BEDS) (4)
- --------------- ------------------ ------------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Pennsylvania Harrisburg 3 3
Pittsburgh 6 1 (89) 7 (89)
Pottstown 1 1
Altoona 2 1 (66) 3 (66)
Erie 1 2 (207) 3 (207)
Mechanicsburg 3 2 (201) 5 (201)
Pleasant Gap 4 1 (88) 5 (88)
York 3 1 (88) 4 (88)
South
Carolina Columbia 2 1 (89) 3 (89)
Florence 1 1 (88) 2 (88)
Charleston 1 (36) 1 (36)
Lancaster 2 (54) 2 (54)
Tennessee Kingsport 1 (50) 1 (50)
Knoxville 2 2
Chattanooga 2 1 (80) 3 (80)
Nashville 2 4 (164) 6 (164)
Memphis 5 1 (80) 6 (80)
Martin 1 (40) 1 (40)
Texas Dallas 3 3 (173) 1 (96) 7 (269)
Ft. Worth 2 1 (60) 3 (60)
Texarkana 1 1 (60) 2 (60)
Austin 4 1 (80) 5 (80)
San Antonio 7 3 (127) 10 (127)
Waco 1 1
Midland 1 (60) 1 (60)
Houston 8 2 (186) 10 (186)
Arlington 2 2
Utah Sandy 1 1 (86) 2 (86)
Virginia Richmond 2 1 (36) 1 (200) 4 (236)
Virginia Beach 3 3
Roanoke 1 1
Arlington 1 1
Alexandria 1 1
Warrenton 1 1
West Virginia Huntington 1 (40) 1 (40)
Wisconsin Green Bay 1 1
TOTAL 277 66 (4,058) 5 (912) 348 (4,970)
<FN>
- ---------
(1) "Markets" are determined by reference to base facility locations.
Satellite facilities may be located in different geographic markets, but are
included with the base facility location in the table.
(2) Includes base outpatient centers and their satellite centers, as well as
outpatient satellites of inpatient rehabilitation facilities.
(3) Includes rehabilitation hospitals, subacute, skilled nursing and
transitional living facilities and hospital-based units.
(4) "Beds" refers to the number of beds for which a license or Certificate of
Need has been issued, which may vary materially from beds available for use.
</TABLE>
At December 31, 1994, the Company provided other patient care services
(including physician services, diagnostic services, home health services and
impairment evaluation services) at 54 additional locations.
<PAGE>
HEALTHSOUTH Outpatient Rehabilitation Services
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, 1994, HEALTHSOUTH provided outpatient rehabilitative
healthcare services through 111 outpatient centers and their 127 associated
satellite clinics as well as through the 39 satellite outpatient clinics
associated with its inpatient facilities.
HEALTHSOUTH Inpatient Services
HEALTHSOUTH now operates 66 inpatient rehabilitation facilities with 4,058
beds, representing the largest group of affiliated proprietary inpatient
rehabilitation facilities in the United States. HEALTHSOUTH's inpatient
rehabilitation facilities provide high-quality comprehensive services to
patients who require intensive institutional rehabilitation care. These
inpatient facilities also provide outpatient rehabilitation services through 39
associated satellite clinics.
HEALTHSOUTH Medical Centers
HEALTHSOUTH operates five medical centers with 912 licensed beds in four
distinct markets. These facilities provide general and specialty medical and
surgical healthcare services, emphasizing orthopaedics, sports medicine and
rehabilitation.
<PAGE>
SELECTED FINANCIAL INFORMATION OF SHC
Surgical Health Corporation and Subsidiaries
The selected consolidated financial data presented below as of and for the
years ended December 31, 1991, 1992, 1993 and 1994 have been derived from the
audited consolidated financial statements of SHC. The selected consolidated
statement of operations data presented below for the year ended December 31,
1990 have been derived from the audited consolidated financial statements of
SHC. The selected consolidated balance sheet data presented below as of December
31, 1990 have been derived from the unaudited consolidated financial statements
of SHC. Data for 1990 reflect solely the operations of Ballas Outpatient
Management, Inc. ("Ballas") and Midwest Anesthesia, Inc. ("MWA"), and data for
1991 reflect principally the operations of Ballas and MWA, which were acquired
by SHC in February 1993 in transactions accounted for as poolings of interests.
The selected consolidated financial data set forth below should be read in
conjunction with the Consolidated Financial Statements of SHC, the Notes thereto
and "SHC Management's Discussion and Analysis of Financial Condition and Results
of Operations" included elsewhere in this Prospectus-Joint Proxy Statement.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1990 1991 1992 1993 1994
------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues.......................................... $ 9,303 $ 10,309 $ 36,561 $ 80,883 $ 108.258
Operating costs....................................... 7,779 9,204 29,606 61,951 84,548
Operating income...................................... 1,524 1,105 6,955 18,932 23,710
General, administrative and development expenses ..... -- 270 2,460 4,311 8,756
Interest expense...................................... 201 95 1,328 4,234 8.031
Merger costs.......................................... -- -- -- 333 3,571
Gain on sale of partnership interest.................. -- -- -- (1,400) --
Interest and other income............................. (30) (31) (491) (326) (575)
Income before minority interest, income taxes and
extraordinary item................................. 1,353 771 3,658 11,780 3,927
Minority interest in net earnings of partnerships .... -- -- (2,843) (5,254) (6,199)
Income (loss) before income taxes and extraordinary
item............................................... 1,353 771 815 6,526 (2,272)
Income taxes ......................................... -- -- 628 2,617 470
Income (loss) before extraordinary item............... 1,353 771 187 3,909 (2,742)
Extraordinary loss from early extinguishment of debt,
net of income tax benefit of $226,000............... -- -- -- -- 201
Net income (loss)..................................... 1,353 771 187 3,909 (2,943)
Warrant accretion..................................... -- -- -- -- 321
Net income (loss) attributable to common shares ...... $ 1,353 $ 771 $ 187 $ 3,909$ (3,264)
Pro forma net income (1).............................. $ 838 473 $ 335 $ 3,605 N/A
Income (loss) attributable to common shares before
extraordinary loss per share(pro forma for 1990
to 1993)............................................ $ .32 $ .10 $ .02 $ .11$ (.14)
Extraordinary loss per share.......................... -- -- -- -- (.01)
Net income (loss) per share (pro forma for 1990 to
1993) (1)........................................... $ .32 $ .10 $ .02 $ .11$ (.15)
Weighted average common and common equivalent shares . 2,606 4,718 20,425 31,428 21,814
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1990 1991 1992 1993 1994
--------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital......................................... $ 248 $ 1,706 $ 9,049 $ 12,711 $ 12,645
Total assets............................................ 4,789 12,793 94,157 162,896 184,002
Long-term debt and capital lease obligations (including
current portion)........................................ 1,025 1,100 31,918 69,831 89,620
Redeemable convertible preferred
stock, and warrants(2).................................. -- 7,858 24,732 29,763 29,603
Shareholders' equity.................................... 3,111 2,805 21,046 36,140 34,183
<FN>
- --------------
(1) Pro forma net income is adjusted to account for income taxes on the S
corporation earnings of Ballas and MWA. See Note 10 of Notes to Consolidated
Financial Statements of SHC.
(2) See Notes 5 and 6 of Notes to Consolidated Financial Statements of SHC .
</TABLE>
<PAGE>
SHC Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
SHC was incorporated in April 1991. Since its inception, SHC has grown
significantly through the acquisition and development of surgery centers. In
February 1993, SHC acquired Ballas Outpatient Management, Inc. ("Ballas"), which
owned Outpatient Surgery Center in St. Louis, Missouri, and Midwest Anesthesia,
Inc. ("MWA") in pooling-of-interests transactions. In January 1994, SHC acquired
all the outstanding common stock of Heritage Surgical Corporation, an operator
of ten outpatient surgery centers, in a pooling-of-interests transaction (the
"Heritage Merger"). Unless otherwise indicated or required by the context, all
historical financial and operating information contained in this
Prospectus-Joint Proxy Statement has been restated to reflect these
pooling-of-interests transactions. The following table summarizes SHC's center
growth:
1992 1993 1994
------ ------ ------
Surgery centers in operation:
Centers at beginning of
period...................... 1 20 28
Centers acquired.............. 14 6 0
Centers developed............. 5 2 8
------ ------ ------
Centers at end of period ..... 20 28 36
====== ====== ======
SHC's operations are principally conducted through limited partnerships which
operate outpatient surgery centers, although most centers are operated by wholly
owned subsidiaries of SHC. For centers operated by limited partnerships, SHC
typically holds between 51% and 90% of the limited partnership interests and an
SHC subsidiary serves as managing general partner. In addition to its equity
investment, in a number of cases SHC serves as the limited partnership's
principal lender as described below. Although the general partner of the limited
partnership is potentially liable for all obligations of the limited
partnership, SHC believes it has limited the risks associated with this
structure by utilizing corporate general partners that are wholly-owned
subsidiaries of SHC. As a result of this holding company structure, SHC relies
principally on cash distributions, management fees and interest payments on
loans to generate the funds necessary to meet its obligations. The ability of
SHC's subsidiaries to make such distributions to SHC depends on the
profitability of the respective surgery centers they operate.
SHC's business strategy involves clustering surgery centers in selected
geographic markets. As a result, a majority of SHC's centers are concentrated in
eight cluster markets, and a substantial amount of SHC's net revenues are
derived from these centers. In particular, SHC's surgery centers in two of these
markets, St. Louis and Southern Florida, accounted for a substantial portion of
SHC's net revenues in 1994. A material adverse change in SHC's operations in
either of these markets could result in a material adverse effect on SHC's
financial position and results of operations.
Fees charged by SHC for surgical procedures vary with the type of procedure
performed. As a result, SHC's revenues and profitability are affected by the
types of cases performed at SHC's surgery centers. In general, higher acuity
cases, such as anterior cruciate ligament reconstructions and lumbar
diskectomies, generate higher net revenue per case than lower acuity cases, such
as removals of cataracts and gastroenterological endoscopy. SHC seeks to
increase its net revenue per case by managing its case mix to promote higher
acuity cases through such measures as maintaining high levels of technical
capability at its surgery centers, focusing its physician and payor marketing
efforts and adding extended recovery facilities where permitted.
For purposes of the following discussion of SHC's results of operations,
newly acquired or developed centers become comparable centers for purposes of
calculating same center growth rates, starting with the first full month
following the first 12 full months of operation of such centers by SHC.
<PAGE>
Results of Operations
1994 vs. 1993
SHC's net revenues for 1994 were $108.3 million compared to $80.9 million for
1993, an increase of $27.4 million or 33.9%. Of this increase, $16.7 million
resulted from acquisitions completed and centers opened in 1994 as well as the
full-year contribution of acquisitions completed and centers opened in 1993. The
remainder of the increase was primarily due to same center growth.
Surgical cases for 1994 were approximately 84,600 compared to approximately
62,900 for 1993, an increase of 21,700 or 34.5%. Of this increase, approximately
14,200 surgical cases resulted from acquisitions completed and centers opened in
1994 as well as the full-year contribution of acquisitions completed and centers
opened in 1993.
On a same center basis, SHC's net revenues rose 6.0%, reflecting increased
surgical case volume, changes in case mix which resulted in higher net revenue
per case and to a lesser extent price increases. On a same center basis, SHC's
surgical case volume increased 5.0% for 1994, resulting principally from the
growth in surgical cases experienced at centers acquired in 1992. Overall, net
revenue per case decreased to $1,280 for 1994 from $1,286 for 1993.
Operating costs increased from $62.0 million for 1993 to $84.5 million for
1994, an increase of $22.5 million or 36.3%, primarily as a result of new
centers opened in 1994. As a percentage of net revenues, operating costs
increased from 76.6% to 78.0% in 1993 and 1994, respectively. On a per surgical
case basis, operating costs remained essentially the same at $986 in 1993 and
$999 in 1994.
General, administrative and development expenses increased from approximately
$4.3 million for 1993 to $8.8 million for 1994. As a percentage of net revenues,
general, administrative and development expenses increased from 5.3% to 8.1%.
This increase resulted primarily from an increase in the number of corporate
personnel corresponding to the expanded business of SHC. Also, expenses
totalling $1.3 million were recorded in 1994 related to severance agreements
with SHC's former Chief Executive Officer and several other senior officers.
Deferred costs with respect to abandoned development projects of approximately
$0.5 million were also written off in 1994.
Interest expense increased from approximately $4.2 million in 1993 to $8.0
million in 1994, reflecting primarily the increased level of outstanding
borrowings incurred to finance SHC's acquisitions and development projects. The
issuance of the Senior Subordinated Notes in June 1994 caused SHC's overall
effective borrowing rate to increase as the rates on the Senior Subordinated
Notes were higher than the rates of the debt repaid. See Note 5 of Notes to
Consolidated Financial Statements of SHC.
Merger costs in 1993 of approximately $0.3 million represent costs
(principally legal and accounting fees) incurred in connection with the
consummation of the merger with Ballas and MWA. Merger costs in 1994 of
approximately $3.6 million represent costs (principally advisory, legal and
accounting fees) incurred in connection with the Heritage Merger. See Notes 2
and 15 of Notes to Consolidated Financial Statements of SHC.
Gain on sale of partnership interest in 1993 represents a $1.4 million gain
realized upon the sale of SHC's 51.0% partnership interest in Coastal
Lithotripsy Associates, L.P. and an associated management services contract. See
Note 16 of Notes to Consolidated Financial Statements of SHC.
Interest and other income increased from approximately $0.3 million in 1993
to approximately $0.6 million in 1994. This increase is primarily due to rental
income from a medical office building.
In 1994, income tax expense of $0.5 million was recorded due to certain
non-deductible merger costs and amortization of non-deductible intangible
assets. The non-deductible merger costs will not affect SHC's tax provision in
periods subsequent to 1994.
1993 vs. 1992
SHC's net revenues for 1993 were $80.9 million compared to $36.6 million for
1992, an increase of $44.3 million or 121.0%. Of this increase, $37.7 million
resulted from acquisitions completed and centers opened in 1993 as well as the
full-year contribution of acquisitions completed and centers opened in 1992. The
remainder of the increase was primarily due to same center growth.
<PAGE>
Surgical cases for 1993 were approximately 62,900 compared to approximately
27,600 for 1992, an increase of 35,300 or 128.0%. Of this increase approximately
32,000 resulted from acquisitions completed and centers opened in 1993 as well
as the full-year contribution of acquisitions completed and centers opened in
1992.
On a same center basis, SHC's net revenue rose 20.0%, reflecting increased
surgical case volume, changes in case mix which resulted in higher net revenue
per case and to a lesser extent price increases. On a same center basis, SHC's
surgical case volume increased 13.0% for 1993, resulting principally from the
growth in surgical cases experienced at five development centers opened in 1992.
SHC's net revenue per case decreased to $1,286 for 1993 from $1,326 for 1992,
due primarily to the lower net revenue per case of the six centers acquired in
1993. These six centers generally have more lower acuity cases than SHC's other
centers.
Operating costs increased from $29.6 million for 1992 to $62.0 million for
1993, an increase of 109.0%. As a percentage of net revenues, operating costs
decreased from 81.0% to 76.6%. On a per surgical case basis, operating costs
decreased from $1,073 in 1992 to $986 in 1993, a decrease of 8.2%. These
decreases resulted principally from the center's fixed costs component (such as
administrative salaries, rent and certain miscellaneous operating costs)
increasing at a lesser rate than the rate of increase in net revenues.
General, administrative and development expenses increased from approximately
$2.5 million for 1992 to $4.3 million for 1993. This increase resulted primarily
from an increase in the number of corporate personnel corresponding to the
expanded business of SHC. As a percentage of net revenues, general,
administrative and development expenses decreased from 6.7% to 5.3% as revenues
increased at a faster rate than corporate overhead.
Interest expense increased from approximately $1.3 million in 1992 to $4.2
million in 1993, reflecting primarily the increased level of outstanding
borrowings incurred in late 1992 and in 1993 to finance SHC's acquisitions and
development projects.
Merger costs in 1993 of approximately $0.3 million represent costs
(principally legal and accounting fees) incurred in connection with the
consummation of the merger with Ballas and MWA. See Notes 1 and 2 of Notes to
Consolidated Financial Statements of SHC.
Interest and other income decreased from approximately $0.5 million in 1992
to approximately $0.3 million in 1993. This decrease reflects a reduction in the
amount of cash available for overnight investments from 1992 amounts, as the
proceeds of SHC's preferred stock offerings were deployed.
Liquidity and Capital Resources
At December 31, 1993 and 1994, SHC had working capital of approximately $12.7
million and $12.6 million, respectively, and cash and cash equivalents of
approximately $12.7 million and $2.8 million, respectively. SHC intends to
finance its working capital needs, as well as, purchases of additional property
and equipment for the operation of its existing centers, from cash generated by
operations and from its revolving credit facility.
Net cash provided by operating activities was $4.6 million, $13.2 million and
$14.1 million for the years ended December 31, 1992, 1993 and 1994,
respectively. SHC's principal sources of cash from operating activities have
been from its operating results and increases in current liabilities, offset
principally by increases in accounts receivable resulting from increased levels
of business. Net cash used in investing activities was $33.0 million, $45.3
million and $36.8 million for the years ended December 31, 1992, 1993 and 1994,
respectively. SHC's principal uses of cash in investing activities have related
to acquisitions, which resulted in cash uses of $21.5 million, $25.7 million and
$3.8 million in the years ended December 31, 1992, 1993 and 1994, respectively,
as well as additions to property and equipment of $8.1 million, $17.7 million
and $37.2 million in the years ended December 31, 1992, 1993 and 1994,
respectively. Additionally, during 1994 SHC entered into sale lease-back
transactions of certain of its facilities which resulted in proceeds to SHC of
approximately $9.4 million. Net cash provided by financing activities was $33.8
million, $37.7 million and $12.8 million for the years ended December 31, 1992,
1993 and 1994, respectively. The principal sources of net cash provided by
financing activities were the proceeds from redeemable convertible preferred
stock offerings of $23.1 million in 1992 and $12.1 million in 1993, as well as
the proceeds from long-term debt borrowings of $11.3 million in 1992, $40.5
million in 1993 and $105.2 million in 1994. As a result, cash and cash
equivalents increased (decreased) $5.2 million, $5.6 million and ($9.9) million
in the three years ended December 31, 1992, 1993 and 1994, respectively.
<PAGE>
SHC's strategy is to continue to expand its operations both through
development of centers and acquisitions. SHC is constructing three new
outpatient surgery centers. SHC expects that the aggregate capital requirement,
including construction costs and equipment and start-up costs, for these three
centers and the medical office building will be approximately $9.3 million. SHC
intends to finance this capital requirement through its available cash,
borrowings from its lenders, and, to a lesser extent, landlord buildout
allowances.
SHC intends to develop and acquire additional surgery centers each year. The
development of a typical freestanding surgery center generally requires
approximately $100,000 to $150,000 for development and start-up costs and
approximately $2.5 million to $3.5 million for construction costs, equipment and
working capital. Based upon SHC's historical performance, a development center
typically achieves break-even between its second and twelfth months of
operation. However, the period of time for a developed center to break-even is
dependent on many factors which can vary significantly from center to center
and, therefore, SHC's past experience may not be indicative of the performance
of future developed centers.
SHC is obligated to make certain earnout payments with respect to two
previously completed acquisitions which amounts, if any, become due and payable
from 1995 to 1997. SHC anticipates using its available cash and borrowings from
its lenders to finance these earnout obligations when due. The amount of such
obligations is based on future earnings of such acquired businesses and, based
on SHC's current estimates, will approximate $1.3 million in the aggregate for
1995.
Effective June 28, 1994, SHC entered into an Amended and Restated Loan and
Security Agreement (the "Amended Agreement") with its primary lenders. The
Amended Agreement provides for a revolving credit facility of up to $50.0
million which expires on December 31, 1999. Borrowings outstanding under the
Amended Agreement bear interest, at SHC's option, at the bank's prime rate plus
1/4 % or LIBOR plus 2 1/4 %. As of March 1, 1995, SHC had approximately $33.0
million available for future borrowings. In connection with the Amended
Agreement, SHC issued warrants to purchase 596,679 shares of common stock or a
similar number of shares of non-voting common stock at an exercise price of $.01
per share. The warrant agreement requires SHC to repurchase the warrants or
warrant shares, at the option of the holder, at any time from February 2000 to
February 2003 at a purchase price based on a multiple of operating cash flows.
SHC recorded these warrants as loan origination costs in the amount of $1.9
million, based on their estimated fair value at the time of issuance.
The Amended Agreement contains numerous affirmative and negative covenants
with which SHC must comply and includes restrictions on the payment of
dividends, the incurrence of debt, sale of assets, changes in corporate or
partnership structure, and the making of loans, investments, and acquisitions.
The Amended Agreement also contains certain financial covenants which require
SHC to maintain certain financial ratios and targets. The obligations of SHC
under the Amended Agreement are secured by substantially all of the assets of
SHC, including all accounts receivable, supplies and equipment and all
subsidiary capital stock and partnership interests.
The proceeds of borrowings under the Amended Agreement are re-lent by SHC to
limited partnerships which operate centers in which an SHC-owned subsidiary
serves as general partner and to wholly owned subsidiaries of SHC which operate
centers. The amount of borrowings that may be re-lent may not exceed the lesser
of 55% of the acquisition or construction costs of the center or $5.0 million
and are secured by substantially all of the assets of the center, including all
accounts receivable, supplies, and equipment.
On June 29, 1994, SHC issued $75 million of 11.5% Senior Subordinated Notes
due July 15, 2004 (the "Notes"). Utilizing the net proceeds from the Notes plus
its available cash, SHC repaid at various dates in June and July of 1994 all of
its exiting long-term debt (with the exception of outstanding capital lease
obligations). The aggregate principal balance of such indebtedness was
approximately $74.5 million. In connection with this repayment, SHC recognized
an extraordinary loss of approximately $0.4 million (before deduction for
related income tax benefits of $0.2 million) resulting from the write-off of the
unamortized balance of deferred loan fees.
<PAGE>
The Indenture under which the Notes were issued contains certain limitations
on SHC's ability to, among other things, incur additional indebtedness
(excluding borrowings under the Amended Agreement), repurchase outstanding
capital stock, declare dividends on capital stock and make certain investments.
On June 29, 1994, SHC completed the sale of the real estate and associated
improvements relative to two of its outpatient surgery centers. The aggregate
proceeds were approximately $2.0 million. SHC also entered into agreements to
lease the two facilities for initial lease terms of 13 to 15 years. The
aggregate annual lease payments with respect to these two properties are
approximately $0.4 million.
Additionally, in July 1994, a majority-owned partnership sold an uncompleted
medical office building for aggregate proceeds of $7.4 million. SHC also entered
into an agreement to lease this medical office building for an initial lease
term of 15 years. The aggregate annual lease payments with respect to this
building are approximately $0.8 million. SHC also agreed to complete
construction of the facility including the related tenant improvements.
SHC deferred an insignificant gain resulting from the sale of these three
facilities. SHC is accounting for each of the new leases as operating leases.
<PAGE>
BUSINESS OF SHC
SHC is the second largest independent operator of freestanding outpatient
surgery centers in the United States. SHC operates a network of 36 freestanding
surgery centers in eleven states, with an aggregate of 155 operating and
procedures rooms, and is developing an additional three surgery centers in two
states. SHC's surgery centers provide the facilities and medical support staff
necessary for physicians to perform non-emergency surgical procedures that do
not generally require overnight hospitalization.
Outpatient Surgery Industry
Outpatient surgery is a cost-effective alternative to traditional
hospital-based inpatient surgery. Industry sources indicate that outpatient
surgical procedures in 1992 represented approximately 62% of all surgical
procedures in the United States, compared to approximately 23% in 1982. SHC
believes that the following factors have contributed to the growth of outpatient
surgery:
* Cost Savings. Outpatient surgery is generally less expensive than inpatient
surgery at a hospital. In addition, SHC believes that outpatient surgery
performed at a freestanding outpatient surgery center is generally less
expensive than hospital-based outpatient surgery. SHC believes that the
emphasis on reduced healthcare costs by employers, state and federal
governments, insurers and other third-party payors will favor those providers
which offer lower-cost alternatives to the traditional hospital setting.
* Managed Care. SHC believes that enrollment in managed care organizations will
continue to increase and that managed care organizations will seek low-cost
alternatives when providing healthcare services to their enrollees. SHC
believes that outpatient surgery center companies with facilities clustered
in multiple markets are attractive to managed care companies and other payors
because they have the resources necessary to offer high quality healthcare
services at competitive prices, provide managed care enrollees with
flexibility in available locations and generally possess greater information
resources than single-site companies and therefore are able to provide more
reliable data about surgery outcomes.
* Physician and Patient Preference. SHC believes that many physicians prefer
the efficiencies of freestanding outpatient surgery centers. SHC believes
that freestanding outpatient surgery centers provide physicians with greater
scheduling flexibility, which can allow a physician to perform more surgeries
in a defined period of time. In contrast, hospitals generally serve a broader
group of physicians, including those involved with major life-threatening or
emergency procedures which must be given priority over scheduled
non-emergency procedures. Additionally, many physicians and their patients
prefer the simplified admissions and discharge procedures and the less
institutional atmosphere of freestanding outpatient surgery centers.
* New Technology. The use of new technology, as well as advances in anesthesia,
have significantly increased the types of surgical procedures that can be
performed in outpatient surgery centers. Lasers, enhanced endoscopic
techniques and fiber optics have reduced the trauma and recovery time of many
surgical procedures. Improved anesthesia has shortened recovery time by
minimizing post-operative side effects such as nausea and drowsiness, thereby
avoiding, in some cases, overnight hospitalization.
* Extended Recovery Facilities. In recent years, some states have begun
permitting the use of extended-stay recovery care beds by outpatient surgery
centers. While states typically restrict the time period a patient may remain
in an outpatient surgery center after surgery, a number of states, including
five states in which SHC operates, allow extended recovery stays. This
extended recovery capability increases the variety of procedures that can be
performed in outpatient surgery centers.
SHC Business Strategy
SHC's objective is to be a leading provider of cost-effective healthcare
services through the operation of outpatient surgery centers. SHC's strategy has
the following key components:
* cluster centers in selected geographic markets to create significant local
market presence, attract managed care contracts and promote effective center
management;
<PAGE>
* emphasize quality, convenience and service in marketing to physician groups,
payors and patients;
* focus on adding extended recovery facilities where permitted;
* create physician/facility alliances for enhanced marketing to managed care
organizations, employers and other payors, thereby increasing patient flow to
surgery centers; and
* explore hospital joint ventures in selected markets served by SHC.
Center Concentration and Market Presence. A major part of SHC's strategy is
to create a significant presence in selected local geographic markets. SHC
believes that local market concentration allows it to leverage management
resources, attract large contract payors, including managed care organizations,
implement effective sales and marketing programs at lower marginal costs and
provide physicians and patients with increased accessibility to its outpatient
surgery centers. SHC generally establishes a position in a target market through
the development of a start-up surgery center or the acquisition of an existing
surgery center, then "densifies" the market through the development of
additional new centers, additional complementary acquisitions and the expansion
of existing centers.
Quality and Service. SHC is committed to providing high-quality, convenient
outpatient surgical care. This commitment involves providing physicians with
state-of-the-art technology and extensive training for the center's staff, which
helps reduce staff turnover. SHC also believes that it is responsive to the
technical requirements of physicians who practice at SHC's surgery centers. In
addition, SHC's staff professionals monitor the progress of patients after
completion of their care at the center. SHC believes that all of these factors
contribute to SHC's reputation as a high-quality provider of surgical care and
enhance SHC's ability to market successfully to local physicians and payors.
Extended Recovery Facilities. Extended recovery facilities provide the
capability for post-operative recovery care by a center's medical staff beyond
customary business hours. By offering extended recovery care, a surgery center
is able to accommodate a wider variety of surgical procedures, including higher
acuity cases that generally provide higher reimbursement and higher net revenue
per case. At present, seventeen of SHC's centers offer extended recovery care
facilities and one of SHC's centers currently under development is anticipated
to have extended recovery capabilities. Some of SHC's recovery beds can
accommodate unlimited recovery stays, while others are limited to recovery stays
of no more than 23 hours. SHC intends to utilize extended recovery facilities in
states that permit such facilities in outpatient surgery centers.
Physician/Facility Alliances. SHC's strategy also involves the creation of
physician/facility alliances, including alliances with both surgical specialists
and primary care physicians. SHC believes that creating these alliances will
make it more attractive to managed care companies and, ultimately, increase
patient flow through its surgery centers. SHC is forming such alliances by
developing Independent Practice Associations ("IPAs") and Management Service
Organizations ("MSOs") in connection with certain of its surgery centers. Such
IPAs are associations of physicians practicing in a given market, most of whom
use SHC's surgery centers. The primary business activity of each such IPA is to
promote itself, its physicians and the facilities at which they operate
(including SHC's surgery centers) to purchasers of healthcare services, with the
objective of entering into contracts with such purchasers. MSOs provide
administrative services to physicians, such as billing and collection services,
and serve as a conduit for negotiating managed care contracts. Currently, SHC
has developed and is managing an MSO in Orlando, Florida and is processing
claims for certain physician panels in Atlanta, Georgia.
Joint Ventures with Hospitals. SHC is exploring hospital joint ventures in
selected markets served by SHC. SHC believes that such joint ventures would
increase patient flow through, among other things, joint marketing with
hospitals, access to the hospitals' managed care contracts and participation in
a broader network of healthcare providers in a given market. SHC is currently
discussing possible joint ventures with certain hospitals. There can be no
assurance that SHC will enter into any such joint ventures or that any such
joint ventures, if entered into, will be profitable.
Operation of SHC Surgery Centers
SHC's freestanding surgery centers provide the facilities and medical support
staff necessary for physicians to perform non-emergency surgical procedures that
do not generally require overnight hospitalization. SHC's typical surgery center
is a freestanding facility with two to six fully equipped operating and
procedure rooms and ancillary areas for reception, preparation, recovery and
administration. Each of SHC's centers is available for use only by licensed
physicians, oral surgeons and podiatrists. SHC's surgery centers do not perform
surgery on an emergency basis.
<PAGE>
The types of procedures typically performed at SHC's surgery centers, within
various specialties, include:
<TABLE>
<CAPTION>
SPECIALTY DESCRIPTION OF TYPICAL PROCEDURES
- ------------------------ ---------------------------------------------------------------
<S> <C>
Orthopedic surgery...... Arthroscopy, hand surgery, fracture repair and ligament
and tendon repair
Gynecology.............. Laparoscopy, tubal ligation and dilitation and curettage
Hernia repair, biopsy and removal of lesions of the female
General surgery ........ breast and pilonidal cysts
Removal of tonsils and adenoids and insertion of ear drainage
Ear, nose and throat ... tubes
Podiatry................ Foot and ankle surgery
Neurosurgery............ Hand surgery and nerve repair
Ophthalmology........... Removal of cataracts and lens implantation
Oral surgery............ Wisdom teeth extraction and dental restoration
Plastic surgery......... Face lifts, hand surgery and rhinoplasty
Urology................. Vasectomy, circumcision and lithotripsy
Gastroenterology........ Cystoscopy and endoscopy
Anesthesiology.......... Pain management
</TABLE>
Outpatient surgery centers, unlike hospitals, have not historically provided
overnight accommodations, food services or other similar ancillary services.
Over the past several years, states have increasingly permitted the use of
extended-stay recovery facilities by outpatient surgery centers. As a result,
many outpatient surgery centers are adding extended recovery care capabilities
where permitted. Seventeen of SHC's centers currently provide for extended
recovery stays. In addition, SHC intends to seek hospital licensure for one
center currently under development in Texas, which would permit unlimited
recovery care stays at this center. SHC's ability to develop such recovery care
facilities is dependent on state regulatory environments where SHC operates.
Patients generally arrive at the center approximately one hour before
scheduled surgery to allow time for admission and review of medical history. A
local or general anesthetic is administered and the surgery is performed. After
completion of surgery, patients typically spend up to three hours in the
recovery area before being released by the center's anesthesiologist.
SHC's surgery centers generally employ a staff of between 20 and 35
employees, depending on the volume of cases. The staff includes a center
administrator, a business manager, registered nurses, operating room technicians
and clerical workers. The center administrator is responsible for general
oversight of the center's operations, including liaison with physicians and
coordination of marketing efforts, and reports to a regional vice president. The
business manager is responsible for the center's financial records and patient
billing and collections. The center's business manager reports to the center
administrator. In addition, each center has a medical director who supervises
and is responsible for the quality of medical care provided at the center. The
medical director, who is generally a practicing surgeon or anesthesiologist,
reports directly to the center's medical advisory committee. See "-- Quality
Assurance Controls".
SHC's outpatient surgery centers are typically owned by limited partnerships
in which a subsidiary of SHC owns a general partnership interest. SHC is
presently offering limited partnership interests in several centers and may from
time to time offer additional limited partnership interests in other centers.
Any sale of additional limited partnership interests will reduce SHC's ownership
interests in such centers.
<PAGE>
SHC has concentrated most of its facilities in the following eight cluster
markets: Atlanta, Chicago, Houston, Oklahoma City, Orlando, St. Louis, San Diego
and Southern Florida. The following table sets forth certain information with
respect to the centers operating or under development in each of SHC's cluster
markets.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
OPERATING/ EXTENDED
PERCENTAGE ORIGINALLY OPENED PROCEDURE RECOVERY
MARKET/CENTER OWNERSHIP(2) FOR OPERATIONS ROOMS BEDS
- -------------------------------------------- ------------ -------------------- ------------ -----------
<S> <C> <C> <C> <C>
Atlanta:
Perimeter Center for Outpatient Surgery .... 85 % 1992 3 2
Gwinnett Center for Outpatient Surgery ..... 80 1986 4 6
Northlake Center for Outpatient Surgery .... 100 (3) 1993 2 1
Chicago:
North Shore Outpatient Surgicenter ........ 77.5 1989 4 --
Hawthorn Place Surgical Center.............. 77 1981 3 --
Houston:
Gulf Coast Lithotripsy...................... 51 1992 2 --
The Surgery Center of the Woodlands ........ 50 1993 5 3
HSC Surgical Associates of Houston(1) ...... 55 1994 10 5
HSC Surgical Associates of Southwest
Houston................................... 73 1994 6 3
Oklahoma City:
Oklahoma Ambulatory Surgery Center.......... 90 1977 2 --
Surgery Center of Oklahoma.................. 88 1992 4 --
Orlando:
Indian River Surgery Center................. 51 1991 6 --
Orlando Center for Outpatient Surgery ...... 66 1992 3 --
Oakwater Outpatient Surgery Center.......... 70 1992 2 --
Central Florida Outpatient Surgery Center .. 70 1990 1 --
St. Louis:
Outpatient Surgery Center................... 100 1985 17 18
West County Surgery Center.................. 78 1988 6 --
South County Outpatient Surgery Center ..... 52.5 1994 4 8
North County Surgery Center................. 77 1994 2 --
San Diego:
UTC Surgicenter............................. 50 1989 3 --
The Center for Surgery of Encinitas ........ 50 1985 4 2
South Bay Ambulatory Surgery Center ........ 50 1985 4 2
Southern Florida:
Melbourne Surgery Center.................... 86 Second Quarter 1995* 4 --
HSC Surgical Associates of Ft. Pierce ...... 87 Third Quarter 1995* 4 --
Collier Outpatient Surgery Center........... 89 1991 4 --
North Dade Center for Outpatient Surgery ... 51 1992 3 --
Ambulatory Surgery Center of Bradenton ..... 92 1984 4 --
Boca Raton Outpatient Surgery & Laser
Center...................................... 60 1992 9 --
Palms Wellington Surgical Center............ 51 1992 2 --
<FN>
- ------------------
* Estimated.
(1) This center is licensed as a hospital under state law.
(2) Percentage ownership shown at December 31, 1994.
(3) Subscriptions for limited partnership interests have not yet been
accepted by SHC.
</TABLE>
<PAGE>
SHC also has centers located in other markets. These centers are primarily
located in states which allow surgery centers to offer extended recovery beds.
While SHC does not currently have additional acquisition or development targets
in these markets, SHC may implement its clustering strategy in any of these
markets, may enter into joint ventures with hospitals and may enter into
physician alliances in these markets in order to increase its local market
presence and patient flow. The following table sets forth certain information
regarding the centers operating or under development in markets other than the
current cluster markets:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
OPERATING/ EXTENDED
PERCENTAGE ORIGINALLY OPENED PROCEDURE RECOVERY
MARKET/CENTER OWNERSHIP(2) FOR OPERATIONS ROOMS BEDS
- ----------------------------------------- ------------ -------------------- ------------ -----------
<S> <C> <C> <C> <C>
Tennessee:
Clarksville Surgery Center............... 63% 1994 4 3
Chattanooga Center for Outpatient
Surgery................................ 83 1994 2 2
Texas:
Surgicenter of San Antonio............... 78 1980 5 2
Amarillo Surgery Center(1)............... 77 1994 4 4
HSC Surgical Associates of Beaumont ..... 70 1994 6 3
Austin Center for Outpatient Surgery(1) . 80 Second Quarter 1995* 5 8
California: .............................
Newport Beach Surgery Center............. 52 1993 5 2
Arizona: ................................
Phoenix Center for Outpatient Surgery ... 75 1986 4 2
Maryland: ...............................
Chesapeake Lithotripsy (Baltimore) ...... 51 1992 2 --
Ohio:
Tri-State Endoscopy Center (Cincinnati) . 60 1990 4 --
<FN>
- -----------------
* Estimated.
(1) Centers licensed or expected to be licensed as hospitals under state law.
(2) Percentage ownership shown at December 31, 1994.
</TABLE>
On January 20, 1995, SHC entered into a non-binding letter of intent to
acquire substantially all of the assets of an outpatient surgery center in
Washington, Missouri. The aggregate purchase price contemplated in the letter of
intent is $1,835,000. The parties are currently negotiating a definitive
purchase agreement and, if an agreement is signed, this acquisition could close
as soon as early April 1995.
SHC provides each of its outpatient surgery centers with a full range of
financial, marketing and operating services from SHC's corporate headquarters.
SHC provides standardized data processing systems to its centers both for
internal operational control and for the orderly conduct of business office
functions. This includes a financial reporting and accounting package, a billing
and accounts receivable system, inventory and accounts payable systems and a
patient record-keeping system. Corporate management also supports local
marketing activities, including the analysis of market conditions and patient
utilization patterns and the development of prices and services which are
competitive with those offered by other local healthcare providers. SHC, where
appropriate, executes master agreements for purchasing equipment and supplies to
provide to each center the economies of scale available through volume
purchases. In addition, SHC provides support for Medicare certification, local
regulatory licensure and accreditation efforts.
SHC is organized into six operating regions. Each region is supervised and
managed by a regional vice president who is located within the particular
geographic region. SHC believes that its regional operating structure
facilitates both the development and acquisition of additional centers to
densify SHC's presence in local markets and the successful integration of
acquired and newly developed centers. The regional management structure also
enables the regional vice presidents to have a significant impact on the
operation of each center and to maximize the leverage created by the clustered
centers, especially in establishing relationships with employers, managed care
organizations and in marketing to physicians, payors and patients.
Two of SHC's surgery centers are mobile lithotripsy units which operate
primarily in the states of Texas, Maryland and Delaware, and three of SHC's
centers are single-specialty endoscopy centers. The lithotripsy units operate on
a regular route, providing services to local hospitals and freestanding
outpatient surgery centers. Procedures are performed by physicians with
technical assistance provided by an SHC employee.
<PAGE>
Quality Assurance Controls
SHC's outpatient surgery centers implement quality control procedures to
evaluate the level of care provided at the centers. Each center has a medical
advisory committee of three to ten physicians which reviews the professional
credentials of physicians applying for medical staff privileges at the center.
The center administrator interviews each physician on a regular basis regarding
the procedures performed and the quality of the logistical, medical and
technological support provided to the physician. In addition, the patient is
contacted by a center nurse on the day following discharge to check on the
patient's condition and to survey the patient as to the quality of care
provided. SHC believes that this direct, systematic feedback from both physician
and patient is an effective means to monitor the level of care at each center.
Marketing
SHC markets services offered by its surgery centers directly to payors
(including HMOs, PPOs, other managed care organizations, employers and other
payor groups) as well as to physicians and other healthcare providers.
Sources of Revenue
SHC's principal source of revenue is a facility fee charged by its surgery
centers for surgical procedures performed at the centers. Facility fees range
between $300 and $5,000 per case. Facility fees generally do not include the
charges of the patient's surgeon, anesthesiologist or other attending
physicians, which are billed directly by such physicians. The fee varies
depending on the procedure, but usually includes all charges for operating room
usage, special equipment usage, supplies, recovery room usage and medications.
For those centers providing extended recovery care, an additional fee is
typically charged for an overnight stay. This fee generally includes a flat fee
per day of post-operative care and may include itemized amounts for medications
and other supplies. SHC seeks to minimize bad debts by verifying insurance
coverage before admission and through advance collection from the patient, when
permissible.
SHC receives payments for services rendered to patients from private
insurers, the patients directly and governmental payors under Medicare and
Medicaid. In certain instances, SHC has agreed with health maintenance
organizations and similar patient referral sources to provide services at
discounted prices. SHC charges for services rendered on a fee-for-service basis
although it is considering, and may in the future enter into, capitation
agreements with patient referral sources. The sources and amounts of SHC's
revenues derived from its surgery centers are determined by a number of factors,
including the number of patient procedures performed, the mix of patient
procedures and the rates of reimbursement among payor categories (private,
Medicare and Medicaid). Generally, private pay patients are the most profitable
and Medicaid patients are the least profitable. Changes in the mix of SHC's
patients among private pay, Medicare and Medicaid categories can significantly
affect the profitability of SHC's operations.
Government reimbursement programs are subject to statutory and regulatory
changes, retroactive rate adjustments, administrative rulings and government
funding restrictions, all of which may materially increase or decrease the rate
of program payments to SHC's surgery centers. There can be no assurance that
payments under governmental programs will remain at levels comparable to present
levels or will, in the future, be sufficient to cover the costs allocable to
patients participating in such programs. In addition, there can be no assurance
that facilities operated by SHC now or in the future will initially meet or
continue to meet the requirements for participation in such programs. In
addition, SHC could be adversely affected by the continuing efforts of
governmental and private third-party payors to control the amount of
reimbursement for healthcare services. See "-- Government Healthcare
Regulation".
Competition
SHC competes principally with hospitals and other operators of freestanding
surgery centers in attracting physicians and patients to its outpatient surgery
centers, in developing new centers and in acquiring existing centers. In
competing for physicians and patients, important competitive factors are
convenience, cost, quality of service, physician loyalty and reputation.
Hospitals have many competitive advantages in attracting physicians and
patients, including established standing in the community, his torical physician
loyalty and convenience for physicians making rounds or performing inpatient
surgery in the hospital. SHC believes that its regional cluster strategy offers
a competitive advantage over hospitals and single-site operators of surgery
centers, both in contracting with managed care organizations and in encouraging
physician and patient utilization of SHC's centers.
<PAGE>
Properties
SHC's surgery centers range from 1,000 to 28,800 square feet, with the
typical surgery center occupying approximately 12,000 square feet. SHC's
partnerships typically lease their facilities pursuant to long-term lease
agreements, most of which contain options to extend the lease period for up to
ten additional years.
SHC's principal executive offices are located at 900 Hammond Drive, Suite
300, Atlanta, Georgia. SHC leases this property, and the current lease expires
in March 1999.
Government Healthcare Regulation
Regulatory Environment
SHC and its centers, practitioners and services are subject to numerous
regulatory, accreditation and certification requirements, including requirements
related to licensure, certificate of need, reimbursement from insurance
companies and other private third-party payors, Medicare and Medicaid
participation and reimbursement and utilization and quality review
organizations. The grant and renewal of these licenses, certifications and
accreditations are based upon governmental and private regulatory agency
inspections, surveys, audits, investigations or other reviews, including
self-reporting requirements. All of SHC's multi-specialty centers in operation
are currently licensed as ambulatory surgery centers, except for two centers in
Texas which are currently licensed as hospitals. SHC is developing one center in
Texas for which it intends to seek hospital licensure.
An adverse review or determination by any regulatory authority could result
in denial of a center's plan of development or proposed expansion of facilities
or services, loss or restriction of licensure by a center or one of its
practitioners or loss of center certification or accreditation. A regulatory
authority could also reduce, delay or terminate reimbursement to a center or its
practitioners or require repayment of reimbursement received. The loss, denial
or restriction of any such licensure, accreditation, certification (including
certificates of need or exemption therefrom), or reimbursement through changes
in the regulatory requirements, an enforcement action, or otherwise, could have
a material adverse effect on SHC.
SHC is currently involved in litigation involving the certificate of need
requirements of one of its surgery centers. See " -- Legal Proceedings".
Federal Regulation of Physician Investments and Referrals
All of SHC's surgery centers (other than certain newly acquired or developed
centers, for which certification is being sought) are certified under the
federal government's Medicare program and the respective state Medicaid
programs. Failure to comply with such programs' standards of operation may
result in loss of program reimbursement or other governmental sanction. Under
the Medicare and Medicaid programs, the federal and state governments enforce a
federal statute (the "Fraud and Abuse Statute") that prohibits the offer,
payment, solicitation or receipt of any remuneration, directly or indirectly,
overtly or covertly, in cash or in kind to induce or in exchange for (i) the
referral of patients covered by the programs, or (ii) the leasing, purchasing,
ordering or arranging for or recommending the lease, purchase, or order of any
item, good, facility or service covered by the programs. The Fraud and Abuse
Statute is sometimes referred to as the "anti-kickback" statute.
The Fraud and Abuse Statute provides for penalties to be assessed against
individuals or providers who violate the Fraud and Abuse Statute, including
fines of up to $25,000 per violation, imprisonment for up to five years, or
both. Additionally, the Secretary of the Department of Health and Human Services
("DHHS") has the authority to exclude any person who commits any of the
prohibited acts from participation in the programs. If applied to SHC or any of
its centers or practitioners, such exclusion could result in a significant loss
of reimbursement.
<PAGE>
The federal courts have held that an arrangement violates the Fraud and Abuse
Statute if one purpose of a transaction which results in the payment of
remuneration (including the distribution of profits) is to induce the referral
of patients covered by the Medicare and Medicaid programs, even if another
purpose of the payment is to compensate an individual for professional services.
A DHHS appeals board has interpreted the Fraud and Abuse Statute not to require
an actual agreement or contract to refer patients, but merely an intention to
influence the reason or judgment of another so as to cause the other person to
refer Medicare or Medicaid business that he or she would not otherwise refer.
This administrative ruling has been upheld by a federal court.
In an attempt to clarify which arrangements are exempt from program
exclusion, civil sanctions or criminal prosecution under the Fraud and Abuse
Statute, DHHS published in 1991 a set of "safe harbor" regulations outlining
practices that are deemed not to violate the Fraud and Abuse Statute. Although
compliance with one of the safe harbors assures participants in a transaction
that the transaction does not violate the Fraud and Abuse Statute, failure of a
transaction or arrangement to fit within a safe harbor provision does not
necessarily mean that the transaction or arrangement violates the Fraud and
Abuse Statute. Most of SHC's surgery centers are owned by limited partnerships
which include, as limited partners, physicians who perform surgical procedures
at such center. SHC has determined that these arrangements do not fit within any
of the safe harbors applicable to investments in healthcare providers by
physicians who are in a position to make or influence referrals. DHHS has issued
for public comment additional proposed safe harbors, one of which specifically
addresses surgeon ownership interests in ambulatory surgery centers. As
proposed, the ambulatory surgery center safe harbor would protect payments made
to surgeons as a return on an investment interest in a surgery center if, among
other conditions, all the investors are surgeons who are in a position to refer
patients directly to the center and perform surgery on such referred patients.
Since a subsidiary of SHC is an investor in each limited partnership which owns
a surgery center, SHC's arrangements with physician investors do not fit within
the safe harbor for ambulatory surgery centers as currently proposed.
SHC is unable at this time to predict whether the proposed ambulatory surgery
safe harbor will become final, and if so, whether the language and requirements
will remain as currently proposed or whether changes will be made prior to
becoming final. There can be no assurance that SHC will ever meet the criteria
under this new safe harbor as proposed or as may be adopted in final form. SHC
believes that its arrangements with physicians should not fall within the
activities prohibited by the Fraud and Abuse Statute. However, no assurances can
be given that regulatory authorities might not assert a contrary position or
that new laws, or the interpretation of existing laws, might not adversely
affect relationships established by SHC with physicians or other healthcare
providers or result in the imposition of penalties on SHC or its facilities. SHC
has the right under its limited partnership agreements to take necessary steps,
including, as to certain centers, the redemption of limited partnership units,
to comply with existing federal and state law relating to the safe harbors or
the underlying Fraud and Abuse Statute.
SHC's centers and their physicians, dentists, and podiatrists are also
subject to the Ethics in Patient Referrals Act of 1989, or the "Stark Law". As
originally enacted, the Stark Law restricted physician investments in, and
referrals to, clinical laboratory services provided after January 1, 1992 to
Medicare patients. With the passage of the Budget Reconciliation Act of 1993,
the list of restricted services was expanded effective January 1, 1995. Unless
excepted, a physician, dentist or podiatrist may not make a referral of a
Medicaid or Medicare patient to any provider with whom he or she has a financial
relationship (either investment and/or compensation) for such restricted
services, and any provider who accepts such a referral may not bill for the
service provided pursuant to the referral. Among other sanctions, a civil
monetary penalty of up to $15,000 may be levied for each service provided
pursuant to a prohibited referral upon the provider rendering the service and
the person making the prohibited referral. Such persons or entities are also
subject to exclusion from Medicare and Medicaid. Any entity or person
participating in a circumvention scheme to avoid the referral prohibitions is
liable for civil monetary penalties of up to $100,000.
<PAGE>
Unlike the Fraud and Abuse Statute in which activity may fall outside a safe
harbor and still not violate the law, a referral under the Stark Law that does
not fall within an exception is strictly prohibited. Ambulatory surgery is not
included in the list of restricted services, and SHC does not believe that
ambulatory surgery is subject to the Stark restrictions. However, lithotripsy
facilities operated by SHC frequently operate on hospital campuses, and it is
possible to conclude that such services are "inpatient and outpatient hospital
services" -- a category of proscribed services within the meaning of the Stark
Law. Similarly, physicians frequently perform endoscopic procedures in the
procedure rooms of centers operated by SHC, and it is similarly possible to
construe such services to be "other diagnostic procedures," which is also a
category of proscribed services under the Stark Law. If the Stark Law were found
to apply to such services, SHC intends to take steps necessary to cause the
operation of its facilities to comply with the law. Similarly, most facilities
operated by SHC provide laboratory services incidental to the performance of
surgical procedures. As with endoscopic and lithotripsy services, it is possible
to conclude that these services are precluded by the Stark Law. Should such a
determination be confirmed, SHC intends to take steps necessary to cause the
operation of its facilities to comply with all applicable laws and regulations.
State Anti-Referral Laws
In addition to the investment interest and patient referral prohibitions of
the federal laws described above, certain states in which SHC operates have
enacted similar legislation. Some states have determined that certain patient
referrals by a healthcare provider to an entity in which the provider has a
financial interest may present a potential conflict of interest for the
healthcare provider. SHC believes its centers' operations are consistent with
applicable statutes of the states in which they operate because either the state
statute (i) excludes from the definition of referral the recommendation by a
healthcare provider that a patient utilize the types of services provided at the
center, (ii) exempts healthcare provider-investors who directly provide services
within the entity and are personally involved in the rendering of care to the
referred patient, or (iii) does not encompass the provider specialty or services
rendered at the center.
SHC's business strategy involves the creation of clusters of surgery centers
in selected geographic markets. See "--SHC Business Strategy". As a result, a
majority of SHC centers are concentrated in the following eight cluster markets:
Atlanta, Chicago, Houston, Oklahoma City, Orlando, St. Louis, San Diego, and
Southern Florida. See "--Operation of SHC Surgery Centers". A substantial amount
of SHC's net revenues are derived from the surgery centers located in SHC
cluster markets. In particular, SHC's surgery centers in two of these markets,
St. Louis and Southern Florida, accounted for approximately 33.6% of SHC's net
revenues in 1994. Legislation prohibiting the referral or treatment of patients
to or at centers by healthcare providers with an investment interest in the
centers in any state in which SHC has a cluster market, particularly Missouri or
Florida, or other legislation enacted in those states, may have a material
adverse effect on the profitability of SHC's centers in that market, which in
turn could result in a material adverse effect on SHC's financial position and
results of operations as a whole.
Licensure
Persons engaged in the professional practice of medicine, podiatry or
dentistry must be state licensed. SHC believes its centers are in conformity
with applicable state regulations with respect to the practice of medicine,
podiatry and dentistry and the division of professional fees. Neither SHC nor
its centers have the right to control the medical decisions of the physicians,
podiatrists, or dentists utilizing the facility. Their responsibilities are
limited to supplying non-physician, non-podiatrist and non-dentist personnel,
space, supplies, equipment and providing management services to a facility.
Practitioners treat patients on their own, and collections of professional fees
are generally made by the treating practitioners, who retain all professional
fees for their services. The fee splitting prohibitions imposed on practitioners
by their professional boards usually only apply to fees received for
professional services rendered. There can be no assurance, however, that
regulatory authorities would not assert that SHC's operations violate
fee-splitting prohibitions. In the event an entity is found to be engaging in
fee splitting or in the practice of medicine, podiatry or dentistry in violation
of applicable state laws, a center could be enjoined from operating or fined. In
such event, a center would be forced to change its plan of operations, or it
could be forced to cease doing business.
Extended Recovery
SHC also licenses many of its extended recovery beds in accordance with state
law. Licensure of extended recovery beds enables the centers to receive Medicare
and Medicaid benefits for the extended recovery period. At two locations,
Outpatient Surgery Center and South County Outpatient Surgery Center, both in
St. Louis, Missouri, SHC utilizes or will utilize unlicensed extended recovery
beds. SHC receives payments from private third-party payors for the use of these
beds, but Medicare and Medicaid benefits cannot be received for their use. The
extended recovery facility used by Outpatient Surgery Center is owned by a
third-party, Surgical Care Foundation ("SCF"), and Outpatient Surgery Center has
a contractual arrangement with SCF for the use of the extended recovery beds.
<PAGE>
Infectious Waste
As generators of infectious waste, SHC's centers are required to satisfy all
federal, state and local waste disposal requirements. If any regulatory agency
finds a center to be in violation of waste laws, penalties and fines may be
imposed for each day of violation, and the affected center could be forced to
cease operations. SHC believes its centers dispose of such waste properly.
Employees
On January 31, 1995, SHC had approximately 821 full-time-equivalent
employees, of which 18 are corporate personnel. The remaining full-time
employees, most of whom are nurses and office personnel, work at the centers.
None of SHC's employees is covered by a collective bargaining agreement. SHC
considers relations with its employees to be good.
Legal Proceedings
SHC is a party in two related state court proceedings commenced in November
1992 and January 1993, respectively, in the Superior Court of Fulton County,
Georgia, styled HCA Health Services of Georgia, Inc., d/b/a Northlake Regional
Medical Center v. State Health Planning Agency, Northlake/Tucker Ambulatory
Surgery Center, Inc. d/b/a Surgicare and Surgical Health Corporation, and HCA
Health Services of Georgia, Inc., d/b/a Northlake Regional Medical Center v.
Dottie Roach as Executive Director of the State Health Planning Agency and the
State Health Planning Agency, challenging the determination by the Georgia State
Health Planning Agency ("SHPA") that no Certificate of Need ("CON") was required
for the relocation of SHC's Northlake Center for Outpatient Surgery in Atlanta,
Georgia (the "Northlake Center"). The lower court decided that no CON was
required and the decision was appealed to the Georgia Supreme Court. In February
1994, the Supreme Court reversed the lower court's decision and ruled that SHPA
did not have authority by statute or regulation to permit relocation of the
center within a three-mile radius of its original location without a CON. In
addition, the Supreme Court ruled that the lower court had erred by not
considering evidence about whether the center had been properly grandfathered
under existing statutes from application of the CON requirements prior to its
being acquired by SHC in 1992. The center has been in operation since 1974.
With respect to SHPA's authority to permit relocation of the center within a
three-mile radius of its original location, SHPA has since adopted regulations
which permit such a relocation and which contain a grandfather provision that
applies to the Northlake Center as well as to other similarly situated
facilities in Georgia. With respect to the issue of whether the Northlake Center
was properly grandfathered from the CON requirements under existing statutes,
that issue was remanded by the Supreme Court to the lower court. In October
1994, the lower court ruled that the Northlake Center had been properly
grandfathered from the CON requirements under existing statutes and that the new
SHPA regulations did dispose of the relocation issue. The court also declared
the relocation regulations valid, dismissing a declaratory judgment action
against the regulations also filed by the plaintiff in the above described
proceedings. These rulings were appealed again to the Georgia Supreme Court and
were argued there in January 1995. To date, no decision on such appeal has been
rendered by the Georgia Supreme Court.
If the relocation regulations as adopted are held to be invalid, or if SHC
does not finally prevail on the issue of whether the Northlake Center was
properly grandfathered from the CON requirements under existing statutes, SHC
may be required to discontinue operation of the Northlake Center. SHC intends to
apply for a CON in such event.
From time to time, SHC is party to certain claims, suits and complaints which
arise in the ordinary course of business. Currently, there are no claims, suits
or complaints which, in the opinion of SHC, would have a material adverse effect
on SHC's financial position or results of operations.
<PAGE>
PRINCIPAL STOCKHOLDERS OF SHC
The following table sets forth certain information with respect to the
beneficial ownership of capital stock of SHC as of February 28, 1995, by (i)
each person who is known by SHC to beneficially own more than five percent of
any class of outstanding capital stock of SHC, (ii) certain executive officers
of SHC, (iii) each director of SHC and (iv) all of SHC's executive officers and
directors as a group.
<TABLE>
<CAPTION>
SHC SERIES A SHC SERIES B SHC SERIES C
SHC COMMON STOCK PREFERRED STOCK(3) PREFERRED STOCK(3) PREFERRED STOCK(3)
-------------------------- --------------------- --------------------- ---------------------
NUMBER OF PERCENT NUMBER OF PERCENT NUMBER OF PERCENT NUMBER OF PERCENT
NAME SHARES(1) OWNED(2) SHARES(1) OWNED(2) SHARES(1) OWNED(2) SHARES(1) OWNED(2)
- -------------------------- ---------------- --------- ----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
New Enterprise Associates
V, Limited
Partnership............... 3,113,096 (4) 10.0% 440,526 23.0% 801,493 20.2% 563,771 16.4%
OrNda Investments, Inc. . 2,833,288 (5) 9.1 -- -- -- -- -- --
Venrock Associates........ 1,704,613 (4) 5.5 275,328 14.4 286,247 7.2 422,828 12.3
Sprout Capital VI, L.P. .. 1,612,133 (4) 5.2 212,961 11.1 442,813 11.2 298,798 8.7
William Blair Venture
Partners III.............. 1,558,929 (4) 5.0 220,262 11.5 343,496 8.7 366,452 10.7
CW R&D II (Financial)
Fund, L.P................. 947,976 (4) 3.0 220,262 11.5 57,250 1.4 174,769 5.1
Catalyst Ventures,
Limited Partnership....... 924,531 (6) 3.0 110,131 5.8 228,997 5.8 211,414 6.1
Landmark Venture
Capital Partners, L.P. ... 610,417 (4) 2.0 110,131 5.8 114,498 2.9 98,660 2.9
HancockVenture
Partners II, L.P.......... 818,096 (4) 2.6 -- -- 457,996 11.6 149,400 4.3
First Century Partnership
III....................... 818,096 (4) 2.6 -- -- 457,996 11.6 149,400 4.3
Morganthaler Venture
Partners III.............. 642,857 (4) 2.1 -- -- 343,496 8.7 140,943 4.1
Frontenac Venture V
Limited Partnership....... 357,143 (4) 1.1 -- -- 68,698 1.7 253,697 7.4
Frontenac VI Limited
Partnership............... 314,286 (4) 1.0 -- -- -- -- 310,074 9.0
New Venture Partners III,
L.P....................... 185,714 (4) * -- -- -- -- 183,225 5.3
Rock A. Morphis........... 881,720 2.8 -- -- -- -- -- --
William B. Luttrell....... 854,375 (7) 2.7 -- -- -- -- -- --
George G. Schneider....... 300,000 (8) 1.0 -- -- -- -- -- --
Gary W. Rasmussen......... 80,000 * -- -- -- -- -- --
Sarah C. Garvin........... 272,321 (9) * -- -- -- -- 8,571 *
H. Michael Finley......... 100,000(10) * -- -- -- -- -- --
J. Michael Ribaudo, M.D. . 415,336(11) 1.3 -- -- -- -- -- --
Ted H. McCourtney, Jr. ... 1,704,613(12) 5.5 275,328 14.4 286,247 7.2 422,828 12.3
Charles N. Martin, Jr. ... 2,833,288 (5) 9.1 -- -- -- -- -- --
John M. Nehra............. 924,531(13) 3.0 110,131 5.8 228,997 5.8 211,414 6.1
Charles W. Newhall III ... 4,054,815(14) 13.0 567,845 29.7 1,030,490 26.0 775,185 22.5
Richard M. Scrushy........ 478,750(15) 1.5 -- -- -- -- -- --
H. Carlton Stinson........ 881,720 2.8 -- -- -- -- -- --
All directors and
executive officers as a
group (11 persons)........ 11,944,001(16) 37.2 843,173 44.1 1,316,737 33.2 1,206,584 35.0
<FN>
- ----------------
* Less than one percent.
(1) The named stockholders have sole voting and investment power with respect
to all shares shown as being beneficially owned by them, except as otherwise
indicated.
(2) Percentage calculated by adding only individual stockholder's options or
warrants to total outstanding shares.
(3) The shares of SHC Series A Preferred Stock, SHC Series B Preferred Stock
and SHC Series C Preferred Stock are convertible into SHC Common Stock on a
one-for-one basis.
<PAGE>
(4) Includes shares of SHC Common Stock issuable upon conversion of shares of
SHC Series A Preferred Stock, SHC Series B Preferred Stock and SHC Series C
Preferred Stock.
(5) These shares are owned by OrNda Investments, Inc., an indirect
wholly-owned subsidiary of OrNda HealthCorp. Mr. Martin is the Chairman and
Chief Executive Officer of OrNda HealthCorp. Mr. Martin disclaims beneficial
ownership of the shares held by OrNda Investments, Inc.
(6) Includes shares of SHC Common Stock issuable upon conversion of shares of
SHC Series A Preferred Stock, SHC Series B Preferred Stock and SHC Series C
Preferred Stock, and 33,162 shares of SHC Common Stock issuable upon the
exercise of warrants.
(7) Includes 420,000 shares of SHC Common Stock issuable upon the exercise of
options. Also includes 64,132 shares of SHC Common Stock held by Mr.
Luttrell's wife, as Trustee, as to which shares Mr. Luttrell may be deemed to
share voting and investment power.
(8) Includes 300,000 shares of SHC Common Stock issuable upon the exercise of
options, all of which will vest upon consummation of the Merger.
(9) Includes shares of SHC Common Stock issuable upon conversion of shares of
SHC Series C Preferred Stock and 230,000 shares of SHC Common Stock issuable
upon the exercise of options, 90,000 of which will vest upon consummation of
the Merger.
(10) Includes 100,000 shares of SHC Common Stock issuable upon the exercise
of options, all of which will vest upon consummation of the Merger.
(11) Includes 170,000 shares of SHC Common Stock issuable upon the exercise
of options.
(12) These shares are held of record by Venrock Associates. Mr. McCourtney is
a general partner of Venrock Associates and, as such, shares voting and
investment power with respect to such shares. Includes shares of SHC Common
Stock issuable upon conversion of shares of SHC Series A Preferred Stock, SHC
Series B Preferred Stock and SHC Series C Preferred Stock.
(13) These shares are owned of record by Catalyst Ventures, of which Mr.
Nehra is a general partner. Mr. Nehra shares voting and investment power with
respect to such shares and disclaims beneficial ownership of such shares.
Includes 33,162 shares of SHC Common Stock issuable upon the exercise of
warrants.
(14) Mr. Newhall is (i) a general partner of NEA Partners V, L.P., the
general partner of New Enterprise Associates V, L.P., (ii) a general partner
of Catalyst Ventures, Limited Partnership, and (iii) a general partner of NEA
Silverado Partners, the general partner of The Silverado Fund I, Limited
Partnership. The shares set forth opposite Mr. Newhall's name are owned of
record by such entities. Mr. Newhall shares voting and investment power with
respect to such shares and disclaims beneficial ownership of such shares.
Includes 33,162 shares of SHC Common Stock issuable upon the exercise of
warrants.
(15) Includes 10,000 shares of SHC Common Stock issuable upon the exercise of
options.
(16) Includes shares of SHC Common Stock issuable upon the exercise of
options, as well as shares of SHC Common Stock issuable upon conversion of
shares of SHC Series A Preferred Stock, SHC Series B Preferred Stock and SHC
Series C Preferred Stock. Does not include SHC Shares held by William B.
Luttrell or Gary W. Rasmussen because such persons were no longer serving as
either directors or executive officers of SHC as of February 28, 1995.
</TABLE>
-----------------------
The addresses of those persons who are known to SHC to be the beneficial
owners of 5% or more of any class of outstanding capital stock of SHC are as
follows: Venrock Associates, 30 Rockefeller Plaza, Room 5508, New York, New York
10005; New Enterprises Associates, 1119 St. Paul Street, Baltimore, Maryland
21202; Landmark Venture Capital Partners, Limited Partnership 1119 St. Paul
Street, Baltimore, Maryland 21202; Catalyst Ventures, Limited Partnership, 1119
St. Paul Street, Baltimore, Maryland 21202; William Blair Venture Partners III,
222 West Adams Street, Chicago, Illinois 60606; OrNda Investments, Inc. 1409 E.
Lake Mead Boulevard, N. Las Vegas, Nevada 89030; Sprout Capital VI, L.P., 140
Broadway, 42nd Floor, New York, New York 10005; CW R&D II (Financial) Fund,
L.P., 1041 Third Avenue, Second Floor, New York, New York 10021; Hancock Venture
Partners III, L.P., One Financial Center, 44th Floor, Boston, Massachusetts
02111; First Century Partnership III, 111 Bayhill Drive, Suite 380, San Bruno,
California 94066; New Venture Partners III, L.P., 1119 St. Paul Street,
Baltimore, Maryland 21202; Morganthaler Venture Partners III, 2730 Sand Hill
Road, Suite 280, Menlo Park, California 94025; and Frontenac Venture V Limited
Partnership and Frontenac VI Limited Partnership, 135 South LaSalle Street,
Suite 3800, Chicago, Illinois 60603.
<PAGE>
DESCRIPTION OF CAPITAL STOCK OF HEALTHSOUTH
HEALTHSOUTH is authorized by its Restated Certificate of Incorporation to
issue up to 101,500,000 shares of capital stock, of which 100,000,000 shares are
designated Common Stock, par value $.01 per share, and 1,500,000 shares are
designated Preferred Stock, par value $.10 per share.
Common Stock
As of March 3, 1995, there were 35,565,387 shares of HEALTHSOUTH Common Stock
outstanding. In addition, there were outstanding options under HEALTHSOUTH's
stock option plans to purchase an additional 6,021,937 shares of HEALTHSOUTH
Common Stock. An additional 550,204 shares of HEALTHSOUTH Common Stock were
reserved for future option grants under such plans. Additionally, 3,056,478
shares are currently reserved for issuance upon conversion of HEALTHSOUTH's
outstanding $115,000,000 principal amount of 5% Convertible Subordinated
Debentures due 2001 (the "Debentures").
Holders of HEALTHSOUTH Common Stock are entitled to participate equally in
dividends when and as declared by the Board of Directors out of funds legally
available therefor and, in the event of liquidation or distribution of assets of
HEALTHSOUTH, are entitled to share ratably in such assets remaining after
payment of liabilities. Stockholders are entitled to one vote per share. Holders
of HEALTHSOUTH Common Stock have no conversion, preemptive or other subscription
rights, and there are no redemption or sinking fund provisions with respect to
such stock. The outstanding shares of HEALTHSOUTH Common Stock are fully paid
and nonassessable.
Fair Price Provision
HEALTHSOUTH's Restated Certificate of Incorporation contains certain
provisions requiring supermajority stockholder approval to effect specified
extraordinary corporate transactions unless certain conditions are met. The
Restated Certificate of Incorporation requires the affirmative vote of 66 2/3 %
of all shares of HEALTHSOUTH entitled to vote in the election of Directors to
approve a "business combination" with any "other entity" that is the beneficial
owner, directly or indirectly, of more than 20% of the outstanding shares of
HEALTHSOUTH entitled to vote in the election of Directors. For purposes of this
restriction, a "business combination" includes: (a) the sale, exchange, lease,
transfer or other disposition by HEALTHSOUTH of all, or substantially all, of
its assets or business; (b) any merger or consolidation of HEALTHSOUTH; and (c)
certain sales of HEALTHSOUTH's Common Stock in exchange of cash, assets,
securities or any combination thereof. An "other entity" is defined to include,
generally, any corporation, person or entity, and any affiliate or associate of
such corporation, person or entity.
The foregoing supermajority vote shall not be required where, in the business
combination, (i) HEALTHSOUTH's stockholders receive consideration per share not
less than the highest per share price paid by the other entity in acquiring any
of its holdings of HEALTHSOUTH's Common Stock (subject to certain adjustments
upward) and (ii) certain other requirements, designed to prevent the other
entity from receiving disproportionate gains in connection with the business
combination, are satisfied.
The provisions of HEALTHSOUTH's Restated Certificate of Incorporation
described in the preceding paragraphs, and its Bylaws, may be amended or
repealed only by the affirmative vote of 66 2/3 % of the shares entitled to vote
thereon.
The effect of the foregoing provisions is to make it more difficult for a
person, entity or group to effect a change in control of HEALTHSOUTH through the
acquisition of a large block of HEALTHSOUTH's voting stock, or to effect a
merger or other acquisition that is not approved by a majority of HEALTHSOUTH's
Directors serving in office prior to the acquisition by the other entity of 5%
or more of HEALTHSOUTH's stock. In addition, holders of the Debentures have the
right to require HEALTHSOUTH to redeem the Debentures at 100% of the principal
amount thereof, plus accrued interest, upon the occurrence of certain events
involving a sale or merger of HEALTHSOUTH, unless holders of HEALTHSOUTH's
Common Stock shall receive an amount per share at least equal to the conversion
price of the Debentures in effect on the date such sale or merger is
consummated. Such holders' redemption option may impede certain forms of
takeovers if the potential acquiror is unable to finance the redemption of the
Debentures.
<PAGE>
Section 203 of the DGCL
HEALTHSOUTH is subject to the provisions of Section 203 of the DGCL. That
section provides, with certain exceptions, that a Delaware corporation may not
engage in any of a broad range of business combinations with a person or
affiliate or associate of such person who is an "interested stockholder" for a
period of three years from the date that such person became an interested
stockholder unless: (i) the transaction resulting in a person's becoming an
interested stockholder, or the business combination, is approved by the board of
directors of the corporation before the person becomes an interested
stockholder, (ii) the interested stockholder acquires 85% or more of the
outstanding voting stock of the corporation in the same transaction that makes
it an interested stockholder (excluding shares held by directors, officers and
certain employee stock ownership plans); or (iii) on or after the date the
person becomes an interested stockholder, the business combination is approved
by the corporation's board of directors and by the holders of at least 66 2/3 %
of the corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. An "interested
stockholder" is defined to include any person, and the affiliates and associates
of such person that (i) is the owner of 15% or more of the outstanding voting
stock of the corporation or (ii) is an affiliate or associate of the corporation
and was the owner of 15% or more of the outstanding voting stock of the
corporation at any time within the three-year period immediately prior to the
date on which it is sought to be determined whether such person is an interested
stockholder. It is anticipated that the provisions of Section 203 of the DGCL
may encourage companies or others interested in acquiring HEALTHSOUTH to
negotiate in advance with the HEALTHSOUTH Board of Directors, since the
stockholder approval requirement would be avoided if a majority of the directors
then in office approve either the business combination or the transaction which
results in the acquiror's becoming an interested stockholder.
Preferred Stock
HEALTHSOUTH's Restated Certificate of Incorporation authorizes the issuance
of up to 1,500,000 shares of Preferred Stock, par value $.10 per share (the
"HEALTHSOUTH Preferred Stock"). The Board of Directors has the authority to
issue the HEALTHSOUTH Preferred Stock in one or more series and to fix the
rights, preferences, privileges and restrictions, including the dividend rights,
dividend rate, conversion rights, voting rights, terms of redemption, redemption
price or prices, liquidation preferences and the number of shares constituting
any series or the designations of such series, without any further vote or
action by the stockholders. Issuance of shares of HEALTHSOUTH Preferred Stock,
while providing flexibility in connection with possible acquisition and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from acquiring, a
majority of the outstanding voting stock of HEALTHSOUTH. Any such issuance could
also adversely affect the voting power of the holders of the HEALTHSOUTH Common
Stock. The Board of Directors of HEALTHSOUTH has no present intention of issuing
any shares of HEALTHSOUTH Preferred Stock.
Transfer Agent
The transfer agent and registrar for the HEALTHSOUTH Common Stock is Chemical
Bank, New York, New York.
<PAGE>
COMPARISON OF RIGHTS
OF SHC AND HEALTHSOUTH STOCKHOLDERS
Both SHC and HEALTHSOUTH are incorporated in Delaware. Holders of the capital
stock of SHC will continue to have their rights and obligations as stockholders
of HEALTHSOUTH after the Merger governed by Delaware law. Set forth below is a
summary comparison of the rights of a HEALTHSOUTH stockholder under
HEALTHSOUTH's Restated Certificate of Incorporation (the "HEALTHSOUTH
Certificate") and HEALTHSOUTH's Bylaws (the "HEALTHSOUTH Bylaws"), on the one
hand, and the rights of an SHC stockholder under the SHC Certificate and SHC's
Second Amended and Restated Bylaws (the "SHC Bylaws"), on the other hand. The
information set forth below is qualified in its entirety by reference to the
HEALTHSOUTH Certificate, the HEALTHSOUTH Bylaws, the SHC Certificate and the SHC
Bylaws.
Classes and Series of Capital Stock
SHC. The authorized capital stock of SHC consists of a total of 85,722,053
shares of capital stock. Of the total shares authorized, 60,000,000 shares have
been authorized as SHC Common Stock, 700,000 shares have been authorized as SHC
Non-Voting Common Stock and 25,022,053 shares have been authorized as SHC
Preferred Stock. An aggregate of 15,022,053 shares of the SHC Preferred Stock
has been divided into three series, the SHC Series A Preferred Stock, the SHC
Series B Preferred Stock and the SHC Series C Preferred Stock, consisting of
5,450,624 authorized shares, 6,000,000 authorized shares and 3,571,429
authorized shares, respectively. The remaining 10,000,000 authorized shares of
SHC Preferred Stock are undesignated. As of February 28, 1995, there were
21,951,901 shares of SHC Common Stock outstanding, no shares of SHC Non-Voting
Common Stock outstanding, 1,911,902 shares of SHC Series A Preferred Stock
outstanding, 3,961,413 shares of SHC Series B Preferred Stock outstanding, and
3,439,692 shares of SHC Series C Preferred Stock outstanding.
HEALTHSOUTH. HEALTHSOUTH is authorized by the HEALTHSOUTH Certificate to
issue up to 101,500,000 shares of capital stock, of which 100,000,000 shares are
designated Common Stock, par value $.01 per share, and 1,500,000 shares are
designated Preferred Stock, par value $.10 per share. As of March 3, 1995, there
were 35,565,387 shares of HEALTHSOUTH Common Stock outstanding. In addition,
there were outstanding options under HEALTHSOUTH stock option plans to purchase
an additional 6,021,937 shares of HEALTHSOUTH Common Stock. An additional
365,204 shares of HEALTHSOUTH Common Stock were reserved for future option
grants under such plans. Furthermore, 3,056,478 shares are currently reserved
for issuance upon conversion of HEALTHSOUTH's outstanding $115,000,000 principal
amount of 5% Convertible Subordinated Debentures due 2001. The Board of
Directors of HEALTHSOUTH has the authority to issue the HEALTHSOUTH Preferred
Stock in one or more series and to fix the rights, preferences, privileges and
restrictions for each such series, without any further vote or action by the
stockholders. As of January 21, 1995, there were no shares of HEALTHSOUTH
Preferred Stock issued and outstanding, and the Board of Directors of
HEALTHSOUTH has no present intention of issuing shares of HEALTHSOUTH Preferred
Stock.
Size and Election of the Board of Directors
SHC. The SHC Bylaws provide that the number of directors of SHC shall be one
or more, with the precise number to be fixed or changed from time to time by
resolution adopted by affirmative vote of (i) at least two-thirds of the total
number of directors then in office, or (ii) holders of at least two-thirds of
the total number of issued and outstanding SHC Shares entitled to vote in the
election of directors.
Directors are divided into three classes, with each class consisting, as
nearly as possible, of one-third of the total number of directors constituting
the entire board. The term of office of one of the classes expires every year,
so that each director's term is for a period of three years. At each succeeding
annual meeting of stockholders, successors to the directors whose term expires
at that annual meeting are elected or re-elected for a three year term.
Directors are elected by the affirmative vote of the holders of a majority of
the total number of issued and outstanding SHC Shares represented at the annual
meeting of stockholders and entitled to vote in the election of directors.
Vacancies occurring on the Board of Directors, however occurring, whether by
increase in the number of directors, resignation, retirement, disqualification,
removal from office, death or otherwise, may be filled, until the next election
of directors, by the affirmative vote of at least two-thirds of the total number
of directors then remaining in office, though they constitute less than a quorum
of the Board of Directors.
<PAGE>
HEALTHSOUTH. The HEALTHSOUTH Bylaws provide that the HEALTHSOUTH Board of
Directors shall consist of at least one director and that the size of the
HEALTHSOUTH Board of Directors may be fixed by the directors then in office.
Directors of HEALTHSOUTH are elected by a plurality of votes cast and the annual
meeting of stockholders. Vacancies in the Board of Directors and newly created
directorships resulting from any increase in the authorized number of directors
are filled by a majority of directors then in office.
Removal of Directors
SHC. The SHC Bylaws provide that the entire Board of Directors or any
individual director may be removed from office only for cause by the affirmative
vote of the holders of at least two-thirds of the total issued and outstanding
SHC Shares entitled to vote in the election of directors at any stockholders'
meeting at which notice of such purpose has been given.
HEALTHSOUTH. The HEALTHSOUTH Bylaws provide that a director may be removed
with or without cause by the vote of the holders of a majority of the shares of
capital stock entitled to vote thereon.
Other Voting Rights
The SHC Bylaws provide that, unless otherwise required by law, the SHC
Certificate or the SHC Bylaws, any question brought before any meeting of
stockholders shall be decided by a majority of the votes entitled to be cast by
the holders of SHC Shares represented and entitled to vote at such meeting. The
SHC Certificate provides that, among other things, no liquidation, dissolution
or winding up of SHC, or consolidation or merger of SHC with any other entity,
may be effected without the approval of at least a majority of the then
outstanding shares of SHC Series A Preferred Stock, SHC Series B Preferred Stock
and SHC Series C Preferred Stock, given in writing or by vote at a meeting,
consenting or voting as a separate series. The SHC Certificate contains similar
provisions requiring majority or, in certain cases, supermajority of 70%,
approval from certain classes of the SHC Preferred Stock with respect to actions
adverse to the rights of holders of certain classes of the SHC Preferred Stock
or with respect to proposed redemptions of classes of the SHC Preferred Stock.
HEALTHSOUTH. The HEALTHSOUTH Common Stock is not divided into classes, and
HEALTHSOUTH has no other classes or series of capital stock issued or
outstanding other than the HEALTHSOUTH Common Stock. Each HEALTHSOUTH
stockholder holding shares of HEALTHSOUTH Common Stock entitled to be voted on
any matter, including the election of directors, shall have one vote on each
such matter submitted to vote at a meeting of stockholders for each such share
of HEALTHSOUTH Common Stock held by such stockholder as of the record date for
such meeting. Except as specifically provided otherwise by law or by the
HEALTHSOUTH Certificate or the HEALTHSOUTH Bylaws, the vote of the holders of a
majority of the shares of capital stock present or represented and entitled to
vote is required for the approval of any matter at a meeting of HEALTHSOUTH
stockholders.
Dividends
SHC. The holders of SHC Preferred Stock are entitled to receive dividends,
out of funds legally available therefor, when and if declared by the Board of
Directors. No dividends may be paid with respect to the SHC Series A Preferred
Stock unless proportionate dividends (based on the original purchase prices of
the series of SHC Preferred Stock, as defined in the SHC Certificate) have first
been paid with respect to the SHC Series B Preferred Stock and the SHC Series C
Preferred Stock. The SHC Certificate generally requires the approval of at least
a majority of the then outstanding shares of SHC Preferred Stock to authorize
the payment of any dividends on any SHC Shares other than the SHC Preferred
Stock. No dividends shall be paid on the SHC Common Stock unless SHC is current
in certain payments to holders of the SHC Preferred Stock. Dividends and other
distributions, payable in cash or other property, are to be paid on the SHC
Non-Voting Common Stock on a parity with such dividends and other distributions
paid on the SHC Common Stock, as and when declared by the Board of Directors of
SHC, as though the SHC Common Stock and the SHC Non-Voting Common Stock were one
and the same class, taking into account the number of shares of SHC Common Stock
into which one share of SHC Non-Voting Common Stock can be converted on the date
of payment of such dividend or other distribution.
<PAGE>
HEALTHSOUTH. The HEALTHSOUTH Certificate contains no provisions similar to
the dividend provisions of the SHC Certificate set forth above.
Conversion and Dissolution
SHC. Generally, the holders of shares of SHC Preferred Stock may, at any
time, elect to convert such SHC Preferred Stock into shares of SHC Common Stock
on a one-for-one basis subject to adjustment upon the occurrence of certain
specified events, which may include the issuance of additional shares of SHC
Common Stock, the issuance of rights or options, the issuance of convertible
securities, changes in option price or conversion rate, payment of stock
dividends and other events. Upon any liquidation of SHC, the holders of the
shares of SHC Series B Preferred Stock and the holders of the shares of SHC
Series C Preferred Stock are entitled, before any distribution or payment is
made upon any stock ranking in liquidation junior thereto, to be paid the
following amounts; (i) holders of SHC Series B Preferred Stock shall be entitled
to be paid an amount equal to the greater of (a) $3.00 per share plus, in the
case of each such share, an amount equal to the excess, if any, of (x) $.30 per
share times the number of full years and parts thereof that such share has been
outstanding, over (y) all cash dividends paid in the case of such share, or (b)
such amount per share as would have been payable had each such share been
converted to Common Stock immediately prior to liquidation; (ii) holders of SHC
Series C Preferred Stock shall be entitled to be paid an amount equal to the
greater of (a) $3.50 per share plus, in the case of each such share, an amount
equal to the excess, if any, of (x) $.35 per share times the number of full
years and parts thereof that such share has been outstanding, over (y) all cash
dividends paid in the case of such share, or (b) such amount per share as would
have been payable had each share been converted to SHC Common Stock immediately
prior to liquidation. If upon liquidation, the assets to be distributed among
the holders of SHC Series B Preferred Stock and the holders of SHC Series C
Preferred Stock are insufficient to permit payment to such holders, then such
holders shall share ratably in such assets. Upon any such liquidation, after the
holders of SHC Series B Preferred Stock and the holders of SHC Series C
Preferred Stock have been paid in full the amounts to which they are entitled,
the holders of SHC Series A Preferred Stock shall be entitled, before any
distribution or payment is made upon any stock ranking junior thereto on
liquidation, to be paid an amount equal to the greater of (a) 1.4545454 per
share plus, in the case of each such share, an amount equal to the excess, if
any, of (x) $.14545454 per share times the full years and parts thereof that
such share has been outstanding over (y) all cash dividends in the case of such
share, or (b) such amount per share as would have been payable had each such
share been converted to SHC Common Stock immediately prior to liquidation. If,
upon such liquidation, the assets to be distributed among the holders of SHC
Series A Preferred Stock shall be insufficient to permit payable to such holders
of the amount distributable as set forth above, then such holders shall share
ratably in such assets.
Each share of SHC Non-Voting Common Stock is convertible at any time at the
option of the holder into one fully paid and nonassessable share of SHC Common
Stock, subject to certain restrictions with respect to the amount of SHC Common
Stock to be owned upon such conversion. The holders of SHC Non-Voting Common
Stock share ratably with the holders of SHC Common Stock upon the dissolution of
SHC. No shares of SHC Non-Voting Common Stock are currently outstanding.
HEALTHSOUTH. The HEALTHSOUTH Common Stock has no conversion features. The
HEALTHSOUTH Certificate authorizes 1,500,000 shares of Preferred Stock, par
value $.10 per share, and provides that such shares of HEALTHSOUTH Preferred
Stock may have such voting powers, preferences and other special rights
(including, without limitation, the right to convert the shares of such
HEALTHSOUTH Preferred Stock into shares of HEALTHSOUTH Common Stock) as shall be
stated in the HEALTHSOUTH Certificate or resolutions providing for the issuance
of HEALTHSOUTH Preferred Stock. If the Board of Directors were to designate such
a series of HEALTHSOUTH Preferred Stock, such HEALTHSOUTH Preferred Stock could
be entitled to preferential payments in the event of dissolution of HEALTHSOUTH.
<PAGE>
Fair Price Provision
SHC. The SHC Certificate does not have a "fair price" provision.
HEALTHSOUTH. The HEALTHSOUTH Certificate provides that the vote of the
holders of 66-2/3 percent of all shares of HEALTHSOUTH entitled to vote in the
election of directors is required for the approval and adoption of a business
combination (as defined in the HEALTHSOUTH Certificate) with any entity (as
defined in the HEALTHSOUTH Certificate) if, on the record date for the
determination of stockholders entitled to vote thereon, the other entity is the
beneficial owner, directly or indirectly, of more than 20 percent of the
outstanding shares of HEALTHSOUTH entitled to vote in the election of directors.
The voting requirements of the "fair price" provision are not applicable to a
business combination involving a holder of 20 percent or more of HEALTHSOUTH's
voting stock in the business combination, if: (i) HEALTHSOUTH's stockholders
receive consideration per share not less than the highest per share price paid
by the other entity in acquiring any of its holdings of the HEALTHSOUTH Common
Stock (subject to certain upward adjustments); and (ii) certain other
requirements, designed to prevent the other entity from receiving
disproportionate gains in connection with the business combination, are
satisfied. See "DESCRIPTION OF CAPITAL STOCK OF HEALTHSOUTH -- Fair Price
Provision".
Amendment or Repeal of the Certificate of Incorporation
Under Delaware law, unless its certificate of incorporation or by-laws
otherwise provide, amendments of a corporation's certificate of incorporation
generally require the approval of the holders of a majority of the outstanding
stock entitled to vote thereon, and if such amendment would increase or decrease
the number of authorized shares of any class or series or the par value of such
shares or would adversely affect the shares of such class or series, the
approval of a majority of the outstanding stock of such class or series.
SHC. The SHC Certificate requires the approval of a majority of the then
outstanding shares of SHC Series A Preferred Stock, SHC Series B Preferred Stock
and SHC Series C Preferred Stock, consenting or voting as separate series, in
order for SHC to consent to any liquidation, dissolution, winding up,
consolidation or merger with or into any other entity, or the sale or transfer
of all or substantially all of SHC's assets. If the amendment, alteration or
repeal of SHC's Certificate or Bylaws would adversely affect the rights of the
holders of SHC Preferred Stock, it is necessary that at least a majority of the
then outstanding shares of SHC Series A Preferred Stock or at least 70% of the
then outstanding shares of SHC Series B Preferred Stock or SHC Series C
Preferred Stock (whichever such series would be adversely affected by such
action) give its affirmative vote for the proposed action. With respect to the
purchasing, or setting aside of any sums for the purchase of, or payment of any
dividend or making any distribution on, any SHC Shares other than the SHC
Preferred Stock (except for certain actions specified in SHC's Certificate), it
is necessary to obtain the approval of at least a majority of the then
outstanding shares of SHC Preferred Stock. A redemption or other acquisition of
any shares of SHC Series A Preferred Stock, SHC Series B Preferred Stock or SHC
Series C Preferred Stock (other than pursuant to optional redemption or pursuant
to a purchase offer made pro rata to all holders of the shares of SHC Preferred
Stock) requires the affirmative vote of at least a majority of the then
outstanding shares of SHC Series A Preferred Stock, at least 70% of the then
outstanding shares of SHC Series B Preferred Stock and at least 70% of the then
outstanding shares of SHC Series C Preferred Stock, in each case consenting or
voting separately as a series.
No provisions of the terms of the SHC Preferred Stock contained in the SHC
Certificate may be amended, altered or changed so as to affect adversely the
holders of any series of SHC Preferred Stock without the written consent or
affirmative vote of the holders of (i) in the case of the SHC Series A Preferred
Stock, at least a majority of the then outstanding shares of such series, (ii)
in the case of the SHC Series B Preferred Stock, at least 70% of the then
outstanding shares of such series, or (iii) in the case of the SHC Series C
Preferred Stock, at least 70% of the then outstanding shares of such series.
<PAGE>
The SHC Certificate's provisions governing the classification of the Board of
Directors may not be altered, amended or repealed in any respect unless such
action is approved by the affirmative of the holders of at least two-thirds of
the total number of issued and outstanding SHC Shares entitled to vote in the
election of directors.
The SHC Certificate reserves the right to amend, alter, change or repeal any
provision contained therein in the manner prescribed by law. The SHC Bylaw
provisions governing the number and election of directors, classification of
directors, resignation, and removal of directors, and vacancies on the Board of
Directors may not be altered, amended or repealed in any respect unless such
action is approved by the affirmative vote of at least two-thirds of the total
number of issued and outstanding SHC shares stock entitled to vote in the
election of directors. The SHC Certificate states that the Board of Directors
may adopt, alter, amend or repeal the Bylaws of SHC.
HEALTHSOUTH. The HEALTHSOUTH Certificate requires approval by holders of at
least 66-2/3 percent of the outstanding shares entitled to vote thereon to
repeal or amend Article SIXTH of the HEALTHSOUTH Certificate (regarding the
calling of special meetings by the stockholders), Article SEVENTH of the
HEALTHSOUTH Certificate (regarding the "fair price" provision) and Article
EIGHTH of the HEALTHSOUTH Certificate (regarding the amendment of the
HEALTHSOUTH Certificate). The HEALTHSOUTH Certificate also provides that a
majority of the HEALTHSOUTH Board of Directors may make, alter or repeal the
HEALTHSOUTH Bylaws.
Special Meetings of Stockholders
SHC. The SHC Bylaws provide that special meetings of stockholders, unless
otherwise prescribed by law or by the SHC Certificate, may be called only by the
President or at the request of a majority of the Board of Directors,
HEALTHSOUTH. The HEALTHSOUTH Bylaws provide that a special meeting of the
HEALTHSOUTH stockholders may be called by a majority of the board of directors
or by the holders of at least 20 percent of the outstanding shares of capital
stock of HEALTHSOUTH entitled to vote in the election of directors.
Liability of Directors
The DGCL permits a corporation to include a provision in its certificate of
incorporation eliminating or limiting the personal liability of a director or
officer to the corporation or its stockholders for damages for breach of the
director's fiduciary duty, subject to certain limitations. Each of the
HEALTHSOUTH Certificate and the SHC Certificate includes such a provision, as
set forth below, to the maximum effect permitted by law.
Each of the HEALTHSOUTH Certificate and the SHC Certificate provides that a
director will not be personally liable to the corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL, which concerns unlawful payments of dividends, stock
purchases or redemptions or (iv) for any transaction from which the director
derived an improper personal benefit.
While these provisions provide directors with protection from awards of
monetary damages for breaches of their duty of care, they do not eliminate such
duty. Accordingly, these provisions will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's
breach of his or her duty of care. The provisions described above apply to an
officer of the corporation only if he or she is a director of the corporation
and is acting in his or her capacity as director, and do not apply to officers
of the corporation who are not directors.
<PAGE>
Indemnification of Directors and Officers
The DGCL permits a corporation to indemnify officers, directors, employees
and agents for actions taken in good faith and in a manner they reasonably
believed to be in, or not opposed to, the best interests of the corporation, and
with respect to any criminal action, which they had no reasonable cause to
believe was unlawful. The DGCL provides that a corporation may advance expenses
of defense (upon receipt of a written undertaking to reimburse the corporation
if indemnification is not appropriate) and must reimburse a successful defendant
for expenses, including attorneys' fees, actually and reasonably incurred, and
permits a corporation to purchase and maintain liability insurance for its
directors and officers. The DGCL provides that indemnification may not be made
for any claim, issue or matter as to which a person has been adjudged by a court
of competent jurisdiction, after exhaustion of all appeals therefrom, to be
liable to the corporation, unless and only to the extent a court determines that
the person is entitled to indemnity for such expenses as the court deems proper.
The HEALTHSOUTH Bylaws provide that each person who is involved in any actual
or threatened action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he or she is or was
a director, officer, employee or agent of HEALTHSOUTH, or is or was serving at
the request of HEALTHSOUTH as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to an employee benefit plan, will be indemnified
by HEALTHSOUTH to the full extent permitted by the DGCL, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits HEALTHSOUTH to provide broader
indemnification rights than said law permitted prior to such amendment) or by
other applicable laws then in effect.
The Plan provides that all rights to indemnification for acts or omissions
occurring prior to the Effective Time of the Merger now existing in favor of the
current or former directors or officers of SHC and its subsidiaries as provided
in their respective certificates or articles of incorporation or bylaws shall
survive the Merger and shall continue in full force and effect in accordance
with their terms.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling HEALTHSOUTH
pursuant to the foregoing provisions, HEALTHSOUTH has been informed that in the
opinion of the SEC such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.
OPERATIONS AND MANAGEMENT
OF HEALTHSOUTH AFTER THE MERGER
Operations
After the consummation of the Merger, SHC will be a wholly-owned subsidiary
of HEALTHSOUTH and all of SHC subsidiaries will be indirect wholly-owned
subsidiaries of HEALTHSOUTH. SHC will operate under the name Surgical Health
Corporation. HEALTHSOUTH will continue to engage in the business of providing
rehabilitative healthcare services as prior to the Merger, working with the
management of SHC to operate and continue to expand SHC's business. See the
information set forth herein and in the documents incorporated herein by
reference as set forth under "INCORPORATION OF CERTAIN INFORMATION BY
REFERENCE", "BUSINESS OF HEALTHSOUTH" and "BUSINESS OF SHC".
Management
After the consummation of the Merger, HEALTHSOUTH will be managed by the same
Board of Directors and executive officers as existed prior to the Merger. See
"INCORPORATION OF CERTAIN INFORMATION BY REFERENCE".
EXPERTS
The consolidated financial statements of HEALTHSOUTH appearing in
HEALTHSOUTH's Annual Report (Form 10-K) for the year ended December 31, 1994,
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon included therein and incorporated herein by reference. Such
consolidated financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
<PAGE>
The consolidated financial statements of SHC at December 31, 1993 and 1994
and for each of the three years in the period ended December 31, 1994 appearing
in this Prospectus-Joint Proxy Statement and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein which, as to the years 1992 and 1993
are based in part on the report of Arthur Andersen LLP, independent auditors.
The financial statements referred to above are included in reliance upon such
reports given upon the authority of such firms as experts in accounting and
auditing.
The consolidated financial statements of Rehab Systems Company for the fiscal
year ended June 30, 1994 incorporated in this Prospectus-Joint Proxy Statement
by reference to the Current Report on Form 8-K/A, Amendment No.1, of HEALTHSOUTH
dated March 8, 1995, have been so incorporated in reliance on the report (which
contains an explanatory paragraph describing significant transactions with
affiliated companies) of Price Waterhouse LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
The Boards of Directors of each of HEALTHSOUTH and SHC have appointed Ernst &
Young LLP, certified public accountants, as independent auditors for their
respective companies for 1995. Representatives of Ernst & Young LLP are expected
to be present at each of the Special Meetings. These representatives will have
an opportunity to make statements if they so desire and will be available to
respond to appropriate questions.
LEGAL MATTERS
The validity of the shares of HEALTHSOUTH Common Stock to be issued to the
stockholders of SHC pursuant to the Merger will be passed upon by Haskell
Slaughter Young & Johnston, Professional Association. As of the date of this
Prospectus-Joint Proxy Statement, attorneys in that firm owned a total of 7,300
shares of HEALTHSOUTH Common Stock, and held currently-exercisable options to
acquire an additional 7,500 shares of HEALTHSOUTH Common Stock.
ADDITIONAL INFORMATION
Other Business
The respective Boards of Directors of each of HEALTHSOUTH and SHC do not know
of any matter to be brought before their respective Special Meeting other than
described in the Notice of Special Meeting accompanying this Prospectus-Joint
Proxy Statement mailed to the stockholders of such company. If any other matter
comes before such Special Meeting, it is the intention of the persons named in
the accompanying proxy to vote the proxy in accordance with their best judgment
with respect to such other matter.
Stockholder Proposals
HEALTHSOUTH's 1995 Annual Meeting of Stockholders is scheduled to be held on
June 6, 1995. In order for materials with respect to any proposals by
stockholders to have been considered for inclusion in the Proxy Statement of
HEALTHSOUTH for that meeting, such proposals would, under the rules of the SEC,
have had to have been received by HEALTHSOUTH by December 17, 1994. No such
proposals for inclusion in HEALTHSOUTH's proxy materials for its 1995 Annual
Meeting of Stockholders have been received by HEALTHSOUTH. The SHC Shares are
not registered under the Exchange Act and, therefore, SHC is not subject to the
SEC's proxy rules.
<PAGE>
Index to Consolidated Financial Statements of SHC
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Surgical Health Corporation .............................................................
Reports of Independent Auditors.......................................................... F-2
Consolidated Balance Sheets as of December 31, 1993 and 1994............................. F-4
Consolidated Statements of Operations for the years ended December 31, 1992, 1993 and
1994................................................................................... F-5
Consolidated Statements of Redeemable Convertible Preferred Stock and Common Stock and
Other Shareholders' Equity for the years ended December 31, 1992, 1993 and 1994 ......... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1992, 1993 and
1994................................................................................... F-7
Notes to Consolidated Financial Statements .............................................. F-8
</TABLE>
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Surgical Health Corporation
We have audited the accompanying consolidated balance sheets of Surgical Health
Corporation and subsidiaries as of December 31, 1993 and 1994, and the related
consolidated statements of operations redeemable convertible preferred stock and
common stock and other shareholders|Al equity and cash flows for each of the
three years in the period ended December 31, 1994. These financial statements
are the responsibility of the Company|Als management. Our responsibility is to
express an opinion on these financial statements based on our audits. We did not
audit the 1992 and 1993 consolidated financial statements of Heritage Surgical
Corporation, a wholly-owned subsidiary, which statements reflect total assets
constituting 53% in 1992 and 42% in 1993, total revenues constituting 44% in
1992 and 46% in 1993 and total net income constituting 57% in 1992 and 54% in
1993, of the related consolidated totals. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to data included for Heritage Surgical Corporation, is based solely on
the report of the other auditors.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referredto above present fairly, in all material respects,
the consolidated financial position of Surgical Health Corporation and
subsidiaries at December 31, 1993 and 1994, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Atlanta, Georgia
March 1, 1995
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Heritage Surgical Corporation:
We have audited the accompanying consolidated balance sheets of Heritage
Surgical Corporation (a Tennessee corporation) as of December 31, 1992 and 1993,
and the related consolidated statements of income, shareholders' equity and cash
flows for the years then ended (not presented separately herein). These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements (not presented separately
herein) referred to above present fairly, in all material respects, the
financial position of Heritage Surgical Corporation as of December 31, 1992 and
1993, and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
As discussed in the notes to the consolidated financial statements, the Company
adopted SFAS 109 on January 1, 1993, and did not restate prior periods.
Implementation of SFAS 109 required conversion to the liability method of
accounting for deferred income taxes. As a result of the implementation of the
standard, the classification of certain items on the balance sheet changed with
no material effect on the Company's financial condition.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
March 11, 1994
<PAGE>
SURGICAL HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1993 1994
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 12,699,961 $ 2,786,123
Accounts receivable, net of allowance for bad debts of $2,064,000 in 1993
and $2,568,000 in 1994..................................................... 14,175,377 19,939,089
Other receivables............................................................ 542,309 854,006
Supplies..................................................................... 2,938,599 3,888,752
Prepaid expenses and other................................................... 2,317,728 1,174,454
Income taxes refundable...................................................... -- 599,169
Total current assets....................................................... 32,673,974 29,241,593
Property and equipment:
Land and land improvements................................................... 4,034,911 3,261,308
Buildings.................................................................... 3,058,319 14,752,210
Leaseholds and leasehold improvements........................................ 9,608,439 15,058,251
Equipment, furniture and fixtures............................................ 30,775,496 47,892,201
Construction in progress..................................................... 8,110,991 2,334,801
55,588,156 83,298,771
Less accumulated depreciation and amortization............................... (8,574,744) (15,464,348)
47,013,412 67,834,423
Other assets:
Intangible assets............................................................ 73,769,563 75,988,135
Deferred costs............................................................... 7,406,067 9,795,828
Deposits and other........................................................... 1,564,338 1,142,476
Investments in unconsolidated entities....................................... 468,742 -
83,208,710 86,926,439
Total assets............................................................... $ 162,896,096 $ 184,002,455
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................. $ 4,694,700 $ 3,973,548
Accrued expenses............................................................. 3,431,204 9,207,661
Accrued compensation......................................................... 1,352,156 1,430,569
Income taxes payable......................................................... 326,083 --
Current portion of long-term debt and capital lease obligations ............. 10,158,598 1,984,712
Total current liabilities.................................................. 19,962,741 16,596,490
Long-term debt and capital lease obligations, less current portion ............ 59,672,637 87,635,174
Other long-term liabilities.................................................... 2,827,109 2,743,273
Deferred income taxes.......................................................... 1,205,892 712,827
Minority interests............................................................. 13,324,759 12,528,466
Commitments and contingencies
Redeemable common stock and warrants........................................... 2,713,407 3,034,339
Redeemable convertible preferred stock in series, $.01 par value:
Authorized shares--15,022,053 .............................................
Issued and outstanding shares--9,523,400 in 1993 and 9,313,007 in 1994;
liquidation value of $30,032,000 in 1993 and $32,144,000 in 1994 ........ 95,234 93,130
Additional paid-in capital on redeemable convertible preferred stock ...... 26,954,050 26,475,558
Shareholders' equity:
Preferred stock, $.01 par value: ............................................
Authorized shares--10,000,000 .............................................
Issued and outstanding shares--none in 1993 and 1994....................... -- --
Non-voting common stock, $.0025 par value: ..................................
Authorized shares--700,000 ................................................
Issued and outstanding shares--none in 1993 and 1994....................... -- --
Common stock. $.0025 par value: .............................................
Authorized shares-- 60,000,000 ............................................
Issued and outstanding shares--21,373,680 in 1993 and 21,680,917 in 1994 .. 53,434 54,202
Additional paid-in capital on common stock................................. 32,085,944 33,391,713
Retained earnings.......................................................... 4,000,889 737,283
Total shareholders' equity............................................... 36,140,267 34,183,198
Total liabilities and shareholders|Al equity.............................. .$ 162,896,096 $ 184,002,455
</TABLE>
See accompanying notes.
<PAGE>
SURGICAL HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1992 1993 1994
------ ------ ------
<S> <C> <C> <C>
Net revenues...................................... $ 36,561,415 $ 80,882,690 $ 108,257,719
Operating costs................................... 29,605,875 61,950,476 84,547,790
Operating income.................................. 6,955,540 18,932,214 23,709,929
General, administrative and development expenses . 2,460,340 4,311,128 8,756,375
Interest expense.................................. 1,327,987 4,233,979 8,030,938
Merger costs...................................... -- 332,523 3,570,961
Gain on sale of partnership interest.............. -- (1,400,137) --
Interest and other income......................... (491,119) (325,718) (575,262)
Income before minority interests, income taxes
and extraordinary item ......................... 3,658,332 11,780,439 3,926,917
Minority interests in net earnings of
partnerships.................................... (2,842,677) (5,254,400) (6,198,714)
Income (loss) before income taxes and
extraordinary item.............................. 815,655 6,526,039 (2,271,797)
Income taxes...................................... 628,075 2,616,693 469,755
Income (loss) before extraordinary item........... 187,580 3,909,346 (2,741,552)
Extraordinary loss from early extinguishment of
debt, net of income tax benefit of $226,000..... -- -- 201,122
Net income (loss)................................. 187,580 3,909,346 (2,942,674)
Warrant accretion................................. -- -- 320,932
Net income (loss) attributable to common shares .. $ 187,580 $ 3,909,346 $ (3,263,606)
Pro forma net income data:
Net income as reported ........................... $ 187,580 $ 3,909,346
Pro forma income taxes (benefit).................. (147,400) 304,000
Pro forma net income ............................. $ 334,980 $ 3,605,346
before extraordinary item per common share
(pro forma for 1992 and 1993) ................. $ .02 $ .11 $ (.14)
Extraordinary loss per common share............... -- -- (.01)
Net income (loss) attributable to common shares
per common share (pro forma for 1992 and 1993) .. $ .02 $ .11 $ (.15)
Weighted average common and common equivalent
shares outstanding................................ 20,424,825 31,428,040 21,814,316
</TABLE>
See accompanying notes.
<PAGE>
SURGICAL HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
THIS TABLE SPLITS ONTO NEXT PAGE
REDEEMABLE CONVERTIBLE PREFERRED STOCK
---------------------------------------------------------------
ADDITIONAL
SERIES A SERIES B SERIES C PAID-IN
CONVERTIBLE CONVERTIBLE CONVERTIBLE CAPITAL ON PREFERRED
PREFERRED PREFERRED PREFERRED PREFERRED STOCK COMMON
STOCK STOCK STOCK STOCK SUBSCRIBED STOCK
---------- ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1991...................... $ 11,908 $ - $ - $1,653,933 $6,191,897 $ 20,786
Issuance of 4,259,840 shares of series A
convertible preferred stock previously
subscribed........................................ 42,598 - - 6,149,299 (6,191,897) -
Issuance of 5,653,263 shares of series B
convertible preferred stock, less offering costs
of $85,388........................................ - 56,533 - 16,817,868 - -
Issuance of 2,834,478 shares of common stock ..... - - - - - 7,086
Issuance of 4,487,919 shares of common stock in
connection with acquisitions...................... - - - - - 11,220
Issuance of 20,000 shares of common stock upon
exercise of stock options.......................... - - - - - 50
Common stock subscribed............................. - - - - - -
Net income.......................................... - - - - - -
Dividends paid...................................... - - - - - -
Balance at December 31, 1992.......................... 54,506 56,533 - 24,621,100 - 39,142
Issuance of 470,208 shares of common stock in
connection with Ballas and MWA acquisitions ...... - - - - - 1,175
Conversion of 3,427,885 shares of series A
convertible preferred stock and
1,638,317 shares of series B convertible
preferred stock into 5,066,202 shares of
common stock.................................... (34,279) (16,383) - (9,779,387) - 12,666
Issuance of 123,000 shares of common stock ........ - - - - - 308
Issuance of 5,437 shares of common stock in
connection with acquisitions..................... - - - - - 13
Issuance of stock purchase warrant................. - - - - - -
Issuance of 52,000 shares of common stock upon
exercise of stock options........................ - - - - - 130
Issuance of 3,485,715 shares of series C
convertible preferred stock, less offering costs
of $52,808....................................... - - 34,857 12,112,337 - -
Net income......................................... - - - - - -
Dividends paid....................................... - - - - - -
Balance at December 31, 1993......................... 20,227 40,150 34,857 26,954,050 - 53,434
Accretion of redeemable warrants..................... - - - - - -
Conversion of 110,837 shares of series A convertible
preferred stock, 53,533 shares of series B
convertible preferred stock and 46,023 of
series C convertible preferred stock into
210,393 shares of common stock..................... (1,109) (535) (460) (478,492) - 526
Issuance of 54,320 shares of common stock upon
exercise of stock options............................ - - - - - 136
Stock option compensation............................ - - - - - -
Issuance of 42,524 shares of common stock upon
exercise of stock warrants........................... - - - - - 106
Net loss............................................. - - - - - -
Balance at December 31, 1994......................... $ 19,118 $ 39,615 $ 34,397 $26,475,558 $ - $ 54,202
</TABLE>
See accompanying notes.
<PAGE>
SURGICAL HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY
(CONTINUED...SPLIT TABLE)
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY
-------------------------------------
ADDITIONAL
PAID-IN
CAPITAL ON COMMON
COMMON STOCK RETAINED
STOCK SUBSCRIBED EARNINGS
---------- ---------- --------
<S> <C> <C> <C>
Balance at December 31, 1991.......................... $1,094,974 $ - $ 1,688,961
Issuance of 4,259,840 shares of series A
convertible preferred stock previously
subscribed........................................ - - -
Issuance of 5,653,263 shares of series B
convertible preferred stock, less offering costs
of $85,388........................................ - - -
Issuance of 2,834,478 shares of common stock ..... 4,220,523 - -
Issuance of 4,487,919 shares of common stock in
connection with acquisitions...................... 14,718,833 - -
Issuance of 20,000 shares of common stock upon
exercise of stock options.......................... 7,950 - -
Common stock subscribed............................. - 213,000 -
Net income.......................................... - - 187,580
Dividends paid...................................... - - (1,124,998)
Balance at December 31, 1992.......................... 20,042,280 213,000 751,543
Issuance of 470,208 shares of common stock in
connection with Ballas and MWA acquisitions ...... 1,498,764 - -
Conversion of 3,427,885 shares of series A
convertible preferred stock and
1,638,317 shares of series B convertible
preferred stock into 5,066,202 shares of
common stock.................................... 9,817,383 - -
Issuance of 123,000 shares of common stock ........ 544,152 (213,000) -
Issuance of 5,437 shares of common stock in
connection with acquisitions..................... 18,487 - -
Issuance of stock purchase warrant................. 144,208 - -
Issuance of 52,000 shares of common stock upon
exercise of stock options........................ 20,670 - -
Issuance of 3,485,715 shares of series C
convertible preferred stock, less offering costs
of $52,808....................................... - - -
Net income......................................... - - 3,909,346
Dividends paid....................................... - - (660,000)
Balance at December 31, 1993......................... 32,085,944 - 4,000,889
Accretion of redeemable warrants..................... - - (320,932)
Conversion of 110,837 shares of series A convertible
preferred stock, 53,533 shares of series B
convertible preferred stock and 46,023 of
series C convertible preferred stock into
210,393 shares of common stock..................... 480,070 - -
Issuance of 54,320 shares of common stock upon
exercise of stock options............................ 20,638 - -
Stock option compensation............................ 804,685 - -
Issuance of 42,524 shares of common stock upon
exercise of stock warrants........................... 376 - -
Net loss............................................. - - (2,942,674)
Balance at December 31, 1994......................... $33,391,713 $ - $ 737,283
</TABLE>
See accompanying notes.
<PAGE>
SURGICAL HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1992 1993 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
Operating activities
Net income (loss) ............................................ $ 187,580 $ 3,909,346 $ (2,942,674)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization .............................. 3,097,202 6,848,027 11,089,967
Amortization of loan origination costs ..................... -- 337,950 638,042
Minority interests in earnings of partnerships ............. 2,842,677 5,254,400 6,198,714
Loss on early extinguishment of debt ....................... -- -- 427,122
Stock option compensation .................................. -- -- 804,685
Gain on sale of partnership interests ...................... -- (1,400,137) --
Deferred income taxes ...................................... 94,573 868,612 (341,801)
Changes in operating assets and liabilities (net of
acquired operating assets and liabilities):
Accounts receivable .................................. (4,195,775) (2,801,468) (5,763,712)
Other receivables .................................... 62,997 (193,752) (184,517)
Supplies ............................................. (689,018) (573,315) (950,153)
Prepaid expenses and other ........................... (78,637) (1,647,978) 1,143,274
Income taxes refundable .............................. -- -- (599,169)
Accounts payable ..................................... 2,119,570 270,148 (721,152)
Accrued expenses and compensation .................... 519,717 2,269,790 5,771,034
Income taxes payable ................................. 498,802 32,738 (477,347)
Net cash provided by operating activities ...................... 4,459,688 13,174,361 14,092,313
Investing activities
Payments for purchase of majority interests in surgery
centers, net of cash acquired .............................. (21,525,462) (25,706,471) (3,831,868)
Purchase of property and equipment ........................... (8,075,378) (17,652,446) (37,210,354)
Purchase of medical assets ................................... (1,764,644) (408,116) --
Proceeds from sale of property and equipment ................. -- -- 9,291,939
Proceeds from sale of partnership interest ................... -- 3,163,225 423,085
Increase in other assets ..................................... (1,642,052) (4,735,835) (5,493,853)
Net cash used in investing activities ........................ (33,007,536) (45,339,643) (36,821,051)
Financing activities
Proceeds from issuance of redeemable convertible
preferred stock ............................................ 23,066,298 12,147,194 --
Proceeds from issuance of common stock ....................... 4,448,606 1,852,198 21,256
Contributions from limited partners .......................... 1,915,000 2,698,712 1,784,250
Distributions to limited partners ............................ (1,914,743) (4,356,045) (8,779,257)
Proceeds from issuance of long-term debt ..................... 11,275,925 40,547,822 105,179,305
Payments on long-term debt and capital lease
obligations ................................................ (3,908,400) (14,507,525) (85,390,654)
Dividends paid ............................................... (1,124,998) (660,000) --
Net cash provided by financing activities .................... 33,757,688 37,722,356 12,814,900
Net increase (decrease) in cash and cash equivalents ......... 5,209,840 5,557,074 (9,913,838)
Cash and cash equivalents at beginning of year ............... 1,933,047 7,142,887 12,699,961
Cash and cash equivalents at end of year ..................... $ 7,142,887 $ 12,699,961 $ 2,786,123
</TABLE>
See accompanying notes.
<PAGE>
SURGICAL HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Description of Business
Surgical Health Corporation (the "Company") was incorporated on April 24,
1991 to develop, acquire and manage outpatient surgery centers. The Company
merged with Ballas Outpatient Management, Inc. ("Ballas") and Midwest
Anesthesia, Inc. ("MWA") on February 11, 1993 in a transaction accounted for as
a pooling of interests. Ballas (formerly Outpatient Surgery Center, Inc.) was
incorporated in December 1984 and MWA was incorporated in July 1985. On January
18, 1994, the Company merged with Heritage Surgical Corporation ("Heritage") in
a transaction accounted for as a pooling of interests. Heritage was incorporated
in November 1991. All financial data for periods prior to the mergers have been
restated to include the accounts and results of operations of the merged
companies. See "Basis of Presentation" below.
As of December 31, 1994, the Company, through its wholly-owned subsidiaries,
owned and managed 36 outpatient surgery centers.
Basis of Presentation
On February 11, 1993, the Company acquired all the outstanding stock of
Ballas, an outpatient surgery center in St. Louis, Missouri, in exchange for
1,882,336 shares of the Company's common stock and also acquired all the
outstanding stock of MWA, a provider of anesthesia services to patients of
Ballas, in exchange for 823,500 shares of the Company's common stock. On January
18, 1994, the Company acquired all the outstanding common stock of Heritage, an
operator of eleven outpatient surgery centers, in exchange for 12,079,186 shares
of the Company's common stock. The Company agreed to allow the holders of
Heritage common stock options and stock purchase warrants to convert such
options and warrants into shares of the Company's common stock upon exercise of
the related option and warrant by the holder in accordance with its original
terms. Common stock in the aggregate number of 1,464,960 shares would be issued
if all such options and warrants were exercised.
These acquisitions have been accounted for as poolings of interests; and
accordingly, all financial data for periods prior to the acquisitions have been
restated to include the results of the merged companies.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. Certain of the Company's wholly-owned
subsidiaries are general partners in limited partnerships which own and operate
outpatient surgery centers. In each instance where the subsidiary owns at least
a 50% interest in the partnership and also controls the operations of the
partnership, the accounts and operations of such partnerships are included in
the consolidated financial statements. Where the subsidiary owns less than a 50%
interest in the partnership, the Company's investment in such partnership is
accounted for using the equity method. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Supplies
Supplies include medical supplies and drugs and are stated at the lower of
cost (first-in, first-out method) or market.
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Significant Accounting Policies--Continued
Property and Equipment
Property and equipment purchased directly is stated at cost; property and
equipment obtained through a purchase business combination is stated at
estimated fair value as of the date of acquisition. Property and equipment under
capital leases is recorded at the lower of the present value of the future
minimum lease payments or the fair value of the related equipment.
Depreciation (which includes the amortization of assets under capital leases)
is computed using the straight line method over the related asset's estimated
useful life (or the term of the related lease, if less), ranging from seven to
thirty years.
Intangible Assets
Intangible assets principally represent the amount by which the cost of
acquired net assets exceeds their related fair value (goodwill). This amount is
being amortized on a straight-line basis over a forty-year period. Medical
licenses represent the value of Certificates of Need obtained in connection with
certain acquisitions and are being amortized on a straight-line basis over a
forty-year period. Management contracts represent the amount assigned to acquire
management service contracts and are amortized over the contractual term of the
related agreement. The carrying value of goodwill will be evaluated if the facts
and circumstances suggest that it has been impaired. If this evaluation
indicates that goodwill will not be recoverable, as determined based on the
undiscounted cash flows of the entity acquired over the remaining amortization
period, the Company's carrying value of goodwill will be reduced by the
estimated short fall of cash flows.
Deferred Costs
Organization costs incurred in connection with the formation of partnerships
are deferred and amortized over a five-year period commencing when the center
opens. Deferred costs also include pre-opening costs incurred in preparing a
constructed facility for operations which are deferred and amortized over a
twelve-month period from the date of opening. Costs incurred with respect to
pending acquisitions or development projects (direct out-of-pocket costs as well
as deposits or option payments) are deferred until completed or abandoned. The
costs associated with completed projects are capitalized and costs associated
with abandoned projects are expensed. During the fourth quarter of 1994, the
Company reevaluated its continuing involvement in certain development projects.
As a result of this analysis, the Company made a determination to abandon
certain projects and charged approximately $503,000 of related deferred costs to
expense in 1994.
The costs incurred in connection with the negotiating and closing of
financing agreements, principally the fair market value of stock purchase
warrants and legal fees, are capitalized and amortized over the term of the
related agreement.
At December 31, 1993 and 1994, accumulated amortization of deferred costs was
approximately $1,560,000 and $4,165,000, respectively.
Net Revenues
Net revenues are reported at the estimated net realizable amount from
patients, third-party payors and others. Such revenues are recognized as the
related services are performed. Contractual adjustments resulting from
agreements with various organizations to provide services for amounts which
differ from standard charges are recorded as deductions from revenues. Amounts
which are determined to be uncollectible are charged to operating expenses.
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Significant Accounting Policies--Continued
Concentration of Credit Risk
The Company's principal financial instrument subject to potential
concentration of credit risk is trade accounts receivable. The concentration of
credit risk with respect to trade accounts receivable is limited due to the
large number of payors and their dispersion across many different insurance
companies, individuals and geographic locations.
Minority Interests
Minority interests represent the equity interests of the minority investors
in the Company's majority-owned partnerships. The amount of the minority
interests is adjusted for the minority investors' share of the partnerships'
income or loss and is decreased by distributions paid to minority investors.
Minority interests in net earnings of partnerships reflect the minority
investors respective share of the income or loss of the related partnership.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes".
Net Income (Loss) Per Common Share
Net income (loss) per common share is based upon the weighted average number
of common and common equivalent shares outstanding. Common equivalent shares,
when dilutive, include the effects of outstanding stock options and warrants as
well as the assumed conversion of outstanding redeemable convertible preferred
stock. In addition, pro forma net income per common share for 1992 and 1993
reflects a pro forma tax provision relating to certain acquisitions of S
corporations accounted for as poolings of interests. In 1994, the net loss
attributable to common shares includes accretion for the increase in redemption
value of redeemable warrants.
2. Mergers
Net revenues and net income (loss) for the merged companies (as described in
Note 1, "Description of Business" and "Basis of Presentation") for 1992, 1993
and 1994 follows (in thousands):
NET NET INCOME
REVENUES (LOSS)
---------- ------------
Year ended December 31, 1992
The Company................. $ 6,341 $ (852)
Heritage.................... 16,057 765
Ballas and MWA.............. 14,283 271
Conforming adjustments ..... (120) 4
Combined.................... $ 36,561$ 188
Year ended December 31, 1993
The Company................. $ 41,318 $ 1,819
Heritage.................... 37,527 2,107
Ballas and MWA.............. 2,038 (17)
Combined.................... $ 80,883 $ 3,909
Year ended December 31, 1994
The Company................. $ 106,281 $ (3,014)
Heritage.................... 1,977 71
Combined.................... $ 108,258 $ (2,943)
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Mergers--Continued
Conforming adjustments relate principally to amounts necessary to conform the
depreciation policies used by Ballas and MWA.
3. Acquisitions
In February 1992, the Company, through a majority-owned limited partnership,
acquired certain medical equipment and a license to operate an outpatient
surgery center from Multi-Care Surgery Center, Inc. ("Multi-Care"), a provider
of ambulatory healthcare services in Atlanta, Georgia, for cash consideration of
approximately $1,810,000 and a 10% note payable for $400,000. In connection with
the Multi-Care asset purchase, the Company entered into a consulting agreement
with an individual related to Multi-Care under the terms of which the Company
agreed to make annual payments of $100,000 for five years and to issue warrants
to this individual to purchase 25,000 shares of the Company's common stock at a
price per share equal to any future initial public offering price per share of
the Company's common stock. The warrants expire at a date three years subsequent
to an initial public offering.
In April 1992, the Company, through a wholly-owned subsidiary, acquired a 51%
interest in Indian River Surgery Center, an outpatient surgery center located in
Vero Beach, Florida, for cash consideration of $207,000 and the issuance of
555,484 shares of the Company's common stock. The common stock was recorded at
its estimated fair value of $630,000.
Interests in three outpatient surgery centers were acquired in April 1992 for
$546,437 in cash consideration and the issuance of 1,099,147 shares of the
Company|Als common stock. The common stock was recorded at its estimated fair
value of $1,246,594. The Company acquired a 41% interest in Gulf Coast
Lithotripsy Associates, L.P., located in Houston, Texas, a 28% interest in
Coastal Lithotripsy Associates, L.P., located in Atlanta, Georgia and a 31%
interest in Chesapeake Lithotripsy Associates, L.P., located in Baltimore,
Maryland.
In June 1992, the Company, through a wholly-owned subsidiary, acquired all of
the outstanding common stock of Surgicenter of San Antonio, Inc., an outpatient
surgery center in San Antonio, Texas, for cash consideration of approximately
$3,400,000 and a 9% note payable for $200,000.
In August 1992, the Company, through a majority-owned limited partnership,
acquired all the outstanding common stock of Collier Surgi-Center, Inc., an
outpatient surgery center in Naples, Florida, for cash consideration of
approximately $1,082,000 and the issuance of a 10% interest in the partnership.
Additionally, an earnout payment of $237,000 was paid in 1994 and was recorded
as additional purchase price.
In September 1992, the Company, through a majority-owned limited partnership,
acquired all the assets of Surgical Partners Joint Venture, an outpatient
surgery center in Evanston, Illinois, for cash consideration of approximately
$3,900,000, an 8% note payable for $1,665,000 and the issuance of a 21% interest
in the partnership. Additionally, an earnout payment of $404,000 was paid in
1993 and was recorded as additional purchase price.
In September 1992, the Company, through a majority-owned limited partnership,
acquired all assets of North Dade Specialists, Inc., a development stage
outpatient surgery center in North Miami Beach, Florida, for cash consideration
of approximately $350,000 and the issuance of a 49% interest in the partnership.
In September 1992, the Company, through a majority-owned limited partnership,
acquired substantially all the assets of the Center for Outpatient Surgery,
Inc., an outpatient surgery center in Phoenix, Arizona, for cash consideration
of approximately $2,220,000 and a 9% note payable for $2,110,000.
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Acquisitions--Continued
In September 1992, the Company acquired, in a single transaction, partnership
interests in three operating outpatient surgery centers. The facilities acquired
were South Bay Ambulatory Surgery Center, a 50% partnership interest, UTC
Surgicenter, a 50% partnership interest and Center for Surgery of Encinitas, a
50% partnership interest, all of which are located in San Diego, California. In
addition to the three operating centers, the Company acquired partnership
interests in two outpatient surgery centers under development, Newport Beach
Surgery Center (a 50% partnership interest), located in Newport Beach,
California, and The Surgery Center of The Woodlands (a 30% partnership
interest), located in The Woodlands, Texas. The Company issued 2,833,288 shares
of common stock as consideration, which was recorded at its estimated fair value
of $12,853,459.
In October 1992, the Company, through a wholly-owned subsidiary, acquired a
60% partnership interest in Boca Raton Outpatient Surgery and Laser Center, an
outpatient surgery center located in Boca Raton, Florida, for cash consideration
of $5,000,000. Additionally, earnout payments, based upon a multiple of the
partnership|Als net income for the twelve-month periods ending February 28,
1993, l994, 1995 and 1996 are due and payable by April 30 of each year. The
Company paid $1,500,000 and $2,714,000 in 1993 and 1994, respectively. These
amounts were recorded as additional purchase price.
In October 1992, the Company, through a majority-owned limited partnership,
acquired substantially all the assets of Surgery Center, Inc., an outpatient
surgery center located in Bradenton, Florida for cash consideration of
approximately $750,000.
In October 1992, the Company, through a majority-owned limited partnership,
acquired substantially all the assets of Gwinnett Ambulatory Surgical Unit,
L.P., an outpatient surgery center in Snellville, Georgia, for cash
consideration of approximately $3,300,000 and the issuance of a 20% interest in
the partnership. Additionally, an earnout payment of $759,000 was paid in 1993
and was recorded as additional purchase price.
In December 1992, the Company, through a majority-owned limited partnership,
acquired all the assets of Palms Wellington Surgical Partners Limited, a
development stage outpatient surgery center in Royal Palm Beach, Florida, for
cash consideration of approximately $285,000, a 12% note payable for $415,000
and the issuance of a 49% interest in the partnership. Additionally, an earnout
payment based upon a multiple of the partnership's calendar year 1995 net
income, to the extent such amount exceeds a base amount, is due in April 1996.
In December 1992, the Company, through a majority-owned limited partnership,
acquired all the assets of Oklahoma Ambulatory Surgery Center, Inc., an
outpatient surgery center in Midwest City, Oklahoma, for cash consideration of
approximately $100,000, a 10% note payable of $1,400,000 and the issuance of a
10% interest in the partnership. Additionally, an earnout payment of $530,000
was paid in March 1993 and was recorded as additional purchase price.
In January 1993, the Company acquired all the outstanding common stock of
Heritage Medical Services of Maryland, Inc.; Heritage Medical Services of Texas,
Inc. and Heritage Medical Services of Georgia, Inc. The sole asset of these
three companies was a general partnership interest in the three outpatient
surgery centers in which the Company originally acquired a partnership interest
in April 1992. As a result, the Company increased its ownership interest in each
of these three partnerships to 51%. The common stock was purchased with
subordinated promissory notes in the principal amount of $3,546,621. Certain of
the Company's shareholders (including several who are also officers and/or
directors) were the principal shareholders of these three companies.
Additionally, the Company purchased the management service contracts for these
three partnerships from Heritage Group, Inc., a company owned by certain
shareholders of the Company for subordinated promissory notes in the principal
amount of $1,316,817.
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Acquisitions--Continued
In March 1993, the Company, through a majority-owned limited partnership,
acquired substantially all the assets of Podiatry Associates of Oklahoma, Inc.,
an outpatient surgery center in Oklahoma City, Oklahoma, for cash consideration
of approximately $7,320,000 and the issuance of an 11% interest in the
partnership.
In April 1993, the Company, through a majority-owned limited partnership,
acquired certain medical equipment and a license to operate an outpatient
surgery center in Tucker, Georgia from Northlake Tucker Ambulatory Surgery
Center, Inc. for cash consideration of approximately $350,000.
In July 1993, the Company, through two majority-owned limited partnerships,
acquired substantially all the assets of Central Florida Surgical Centers, Inc.
("Central Florida") and Oakwater Surgical Center, Inc. ("Oakwater"). Central
Florida and Oakwater each owned and operated an outpatient surgery center in
Orlando, Florida and were majority-controlled by the same shareholders. The
purchase price consisted of approximately $8,640,000 in cash and issuance of a
30% interest in each of the newly formed limited partnerships.
In August 1993, the Company, through a wholly-owned subsidiary, acquired all
of the common stock of Tesson Ferry Medical Management, Inc. and South County
Outpatient Management, Inc. for consideration of approximately $225,000. The
sole asset of these two companies were general partner interests in two newly
formed limited partnerships. The Company, through these two partnerships,
constructed a medical office building and outpatient surgery center in St.
Louis, Missouri. Additionally, the Company acquired the rights to the related
management service contracts for the two partnerships from a company which is
majority-owned by one of the Company's officers and directors for $200,000.
In September 1993, the Company, through a wholly-owned subsidiary, purchased
a 60% interest in an outpatient surgery center in Cincinnati, Ohio for a total
purchase price of approximately $3,323,000. The purchase price consisted of
$1,594,000 in cash, notes payable of approximately $775,000 and the issuance of
219,752 shares of the Company's common stock which was recorded at its estimated
fair value of approximately $810,000. In addition, the Company granted to an
individual warrants for the purchase of 42,525 shares of common stock at an
exercise price of $.01 per share for payment of brokerage fees on this
transaction. The warrant was recorded at its estimated fair value of
approximately $144,000.
In September 1993, the Company purchased an additional 20% interest in The
Surgery Center of The Woodlands for a purchase price of $300,000 in cash. This
purchase increased the Company|Als ownership interest to 50%.
In November 1993, the Company, through a majority-owned limited partnership,
purchased substantially all the assets of Surgery Center Associates, Inc., an
outpatient surgery center located in St. Louis, Missouri for cash consideration
of $4,154,000. Additionally, the Company granted to the seller a warrant to
purchase 25,000 shares of the Company|Als common stock at a price per share
equal to any future initial public offering price per share. This warrant
expires three years subsequent to an initial public offering.
In December 1993, the Company, through a majority-owned limited partnership,
purchased all the assets of Hawthorn Place Joint Venture, an outpatient surgery
center located in Libertyville, Illinois for consideration of $3,000,000.
Additionally, an earnout payment of $1,118,000 was paid in 1994 and was recorded
as additional purchase price.
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Acquisitions--Continued
In March 1994, the Company, through a wholly-owned subsidiary, acquired all
the outstanding capital stock of Tesson Ferry Anesthesia, Inc. ("TFA") from an
individual who is also an officer and director of the Company. The purchase
price for the stock is to be paid based upon a multiple of TFA|Als adjusted net
income for the first three twelve-month periods following the start of business
operations by TFA. TFA was formed to provide anesthesia services to patients of
an outpatient surgery center acquired by the Company in the development stage in
August 1993. Up to 30% of the capital stock of TFA may be issued by the Company
to anesthesiologists providing services at such center. TFA commenced operations
in May 1994.
In April 1994, the Company issued 8% subordinated promissory notes in the
aggregate principal amount of $245,000 in connection with finalizing the earnout
provision of the purchase of the common stock of Heritage Medical Services of
Maryland, Inc. Certain of the Company|Als shareholders (including several who
are officers or directors) were the principal shareholders of this company.
Each of the above acquisitions was accounted for as a purchase transaction
and accordingly the various assets acquired have been recorded at their
respective fair value as of the date of acquisition. The Company records amounts
paid, if any, under the earnout provisions described above as additional
purchase consideration in the period the amount is determinable. The excess of
the total acquisition costs (consisting of the related purchase price, assumed
liabilities and associated acquisition costs) over the fair value of the net
assets acquired was approximately $33,640,000 in 1993 and $3,832,000 in 1994.
The results of operations of the acquired businesses have been included in the
consolidated statement of income since their respective purchase dates.
The following unaudited pro forma summary of consolidated results of
operations has been prepared as if each of the above acquisitions had been
acquired on the later of January 1, 1992 or the respective acquired entities'
start of business.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1992 1993
-------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Net revenues.......................... $66,227 $88,990
Net income............................ 2,019 4,128
Net income per common share........... .08 .13
</TABLE>
These pro forma results do not purport to be indicative of the results that
would have actually been obtained if the respective businesses had been acquired
as of January 1, 1992 or of results which may occur in the future.
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Intangible Assets
Intangible assets consist of the following amounts:
DECEMBER 31,
1993 1994
--------- ---------
Excess of cost over net assets
acquired ................................. $69,273,072 $ 73,624,971
Medical licenses ......................... 4,924,315 4,975,260
Management contracts ..................... 1,217,277 1,417,277
Other .................................... 238,920 238,920
75,653,584 80,256,428
Accumulated amortization ................. (1,884,021) (4,268,293)
$73,769,563 $ 75,988,135
5. Long-Term Debt and Capital Lease Obligations
At December 31, 1993 and 1994, long-term debt and capital lease obligations
consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1993 1994
----------- ------------
<S> <C> <C>
Senior subordinated notes, interest at 11.5%, due July 15,
2004.......................................................... $ -- $ 75,000,000
Revolving credit facility..................................... 31,617,260 9,000,000
Various notes repaid in 1994.................................. 30,798,641 --
Capital lease obligations..................................... 7,268,993 5,484,251
Other......................................................... 146,341 135,635
69,831,235 89,619,886
Current portion............................................... (10,158,598) (1,984,712)
$ 59,672,637 $ 87,635,174
</TABLE>
In June 1994, the Company issued $75 million of 11.5% Senior Subordinated
Notes due July 15, 1999 (the "Notes"). The Notes may not be redeemed by the
Company prior to July 15, 1999, except that prior to July 15, 1997, the Company
may redeem up to $18.75 million in aggregate principal amount of the notes at
110% of the principal amount plus accrued interest with the proceeds of an
initial public offering of common stock. The terms of the Notes provide for
limitations on the Company's ability to incur additional indebtedness (excluding
borrowings under the senior credit facility); to repurchase outstanding capital
stock; to declare any dividends on capital stock; to make certain investments or
to merge the Company.
The proceeds of these Notes were used to repay all of the Company's
outstanding long-term debt with the exception of its capital lease obligations.
The aggregate principal balance of such indebtedness was approximately
$74,544,000. In connection with this repayment, the Company recognized an
extraordinary loss resulting from the write-off of the unamortized balance of
deferred loan fees in the amount of $427,122 (before deduction of related income
tax benefit of $226,000).
In June 1994, the Company amended and restated its existing Loan and Security
Agreement (the "Amended Agreement") with its primary lender. The Amended
Agreement provides for a revolving credit facility of up to $50 million which
expires on December 31, 1999. Borrowings outstanding under the Amended Agreement
bear interest, at the Company|Als option, at either the bank's prime rate (8.5%
at December 31, 1994) plus 1/4% or LIBOR (5.9% at December 31, 1994) plus 2 1/4
%. Commitment fees of 1/2 % are payable quarterly on the unused portion. As of
December 31, 1994, the Company had approximately $41,000,000 available under
this Amended Agreement for future borrowings.
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Long-Term Debt and Capital Lease Obligations--Continued
In connection with the revolving credit facility, the Company issued to the
bank a stock purchase warrant to purchase 596,679 shares of its common stock or
a similar number of shares of non-voting common stock at an exercise price of
$.01 per share. The warrant expires in February 2003 and may be exercised at any
time at the option of the warrant holder. Under the terms of the warrant
agreement, the warrant holder has certain registration rights and antidilution
protection from future equity securities issued at below fair market value, and
can restrict the payment of dividends to any class of capital stock. The warrant
agreement also requires the Company to repurchase the warrant, at the option of
the warrant holder, at any time during the period February 2000 to February
2003. The purchase price is to be based upon a multiple of the Company|Als then
operating cash flows, as defined in the warrant agreement. This put right
expires upon the successful completion of an initial public offering of the
Company's common stock in which the proceeds to the Company and any selling
stockholders are not less than $12,000,000.
The Company recorded the warrants issued at their estimated fair value of
$1,903,406 and has included the amount in loan origination costs and treated the
item as a non-cash financing transaction for purposes of the Statement of Cash
Flows. The loan origination costs are being amortized over the term of the
Amended Agreement. The excess of the redemption value over the carrying value
has been accreted by periodic charges to common stock additional paid-in-capital
over the life of the issue.
The Amended Agreement contains numerous restrictive covenants, which limit,
among other things, future borrowings; payment of dividends on any class of the
Company|Als capital stock; distributions by the Company|Als majority-owned
partnerships; loans to subsidiaries, affiliates or third parties and certain
investments. The Amended Agreement also requires the maintenance of specified
levels of cash flows, interest coverage and net worth.
Through March 1, 1995, the Company had borrowed an additional $8,300,000
under the Amended Agreement.
Borrowings under the Amended Agreement are secured by all the assets of the
majority-owned partnerships to which such borrowings are advanced as well as a
pledge of the related partnership interest and stock of the Company|Als
wholly-owned subsidiaries which serve as the partnerships|Al general partner.
Substantially all the assets of the Company and the Company's majority-owned
partnerships are pledged to secure the Company|Als indebtedness.
The Company leases certain medical equipment under long-term lease
arrangements which have been recorded as capital leases. During 1993 and 1994,
the Company entered into capital lease obligations in the original principal
amounts of approximately $3,100,000 and $200,000, respectively. The aggregate
future minimum payments of these capital lease obligations as of December 31,
1994 are as follows:
1995............................. $ 2,492,827
1996............................. 2,324,502
1997............................. 1,183,595
1998............................. 346,514
1999............................. 20,967
Thereafter....................... 45,558
6,413,963
Less amount representing
interest....................... (929,712)
$ 5,484,251
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Long-Term Debt and Capital Lease Obligations--Continued
Assets recorded under capital leases consist of the following:
DECEMBER 31,
-----------------------
1993 1994
---- -----
Equipment, furniture and
fixtures......................... $ 9,682,023 $ 9,877,810
Accumulated amortization......... (2,654,841) (4,548,462)
$ 7,027,182 $ 5,329,348
The Company paid interest on its long-term debt and capital lease obligations
during 1992, 1993, and 1994 of approximately $1,275,000, $3,897,000 and
$3,110,000 (including interest of $42,000 in 1992, $280,000 in 1993 and $635,000
in 1994 capitalized in connection with construction projects), respectively. The
carrying amount of long-term debt and capital lease obligations approximates
fair value.
6. Redeemable Convertible Preferred Stock
At December 31, 1994, the Company had authorized 5,450,624; 6,000,000; and
3,571,429 shares of series A, series B and series C redeemable convertible
preferred stock, respectively. The following is a summary of the issued and
outstanding shares and liquidation value by series as of December 31, 1993 and
1994:
<TABLE>
<CAPTION>
1993 1994
------------------------------- -----------------------------
ISSUED AND LIQUIDATION ISSUED AND LIQUIDATION
OUTSTANDING SHARES VALUES OUTSTANDING SHARES VALUES
------------------ ------------ ----------------- -----------
<S> <C> <C> <C> <C>
Series A ........ 2,022,739 $ 3,502,000 1,911,902 $ 3,586,000
Series B ........ 4,014,946 13,775,000 3,961,413 14,773,000
Series C ........ 3,485,715 12,755,000 3,439,692 13,785,000
Total ........... 9,523,400 $ 30,032,000 9,313,007 $ 32,144,000
</TABLE>
The holders of the series A, series B, and series C convertible preferred
stock (collectively, the "preferred stock"), are entitled to receive dividends,
if declared by the Board of Directors and affirmed by a majority of the
directors elected by the holders of the preferred stock. No dividends will be
paid to holders of series A convertible preferred stock until dividends have
first been paid to holders of series B and series C convertible preferred stock.
The holders of the preferred stock have the right to require the Company to
redeem all of the outstanding preferred stock on or after July 1, 1997 (the
"redemption date") following a majority vote by the holders of preferred stock
and the consent of the Company|Als lender under the Amended Agreement (see Note
5). However, the preferred stock may not be redeemed as long as the Company has
outstanding debt on the revolving credit agreement or the senior subordinated
notes. In the event the preferred stock is redeemed, the redemption price of
approximately $26,567,000 is equal to the original issue price plus any declared
but unpaid dividends at December 31, 1994. The Company has no funding
requirements prior to the redemption date.
Each share of preferred stock is also convertible into one share of common
stock at the option of the holder at any time prior to July 1, 1997. If not
redeemed prior to July 1, 1997, the conversion ratio shall reduce to 90% of the
immediately preceding conversion ratio, and for each 90 day period thereafter
until redeemed, the conversion ratio would reduce to 90% of the immediately
preceding adjusted conversion ratio. The conversion ratio will be adjusted for
dilution in the event of future issuances of capital stock for a per share
consideration less than that paid by the preferred shareholders, except for
issuance of up to an aggregate of 3,725,000 shares to employees or to principal
owners of facilities which may be acquired. The preferred shareholders waived
this right with respect to the stock purchase warrants issued to the bank (see
Note 5) and also with respect to the shares, options and warrants issued in the
Heritage acquisition (see Note 1).
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Redeemable Convertible Preferred Stock--Continued
In the event of any liquidation, dissolution, or winding up of the business,
the holders of the preferred stock would be entitled to receive a liquidation
payment, prior to any distribution to common shareholders. The liquidation
payment would be equal to the greater of either (i) $1.45 per share for series
A, $3 per share for series B and $3.50 per share for series C, plus an amount
equal to a dividend of 10% per annum less cash dividends paid, or (ii) an amount
per share that would have been payable had each share been converted to common
stock immediately prior to liquidation. For the purposes of the liquidation
payment, the rights of holders of series A are considered junior to the rights
of holders of series B and series C. In the accompanying balance sheet, the
liquidation values of the preferred stock have been calculated as $1.45 per
share for series A, $3 per share for series B and $3.50 per share for series C,
plus an amount equal to a dividend of 10% per annum. No dividends have been
paid. The preferred stock has restrictive rights which require approval by the
preferred shareholders, as defined in the amended certificate of incorporation,
to enact any subsequent changes in capital structure, any consent to
liquidation, an amendment to the certificate of incorporation or bylaws, and any
distribution of shares of the Company|Als capital stock, or a redemption of the
preferred stock. No dividends on preferred stock were declared in 1992, 1993 or
1994.
On February 10, 1993, the holders of 3,427,885 shares of series A convertible
preferred stock and 1,638,317 shares of series B convertible preferred stock
converted such shares into 5,066,202 shares of common stock. As a result,
approximately $9,830,000 was transferred from preferred stock to common stock.
Assuming this conversion had occurred effective with the respective date of
issuance of the converted preferred shares, the net income per common share for
the years ended December 31, 1992 and 1993 would not have been materially
different.
On January 18, 1994, the holders of 110,837 shares of series A convertible
preferred stock, 53,533 shares of series B convertible preferred stock and
46,023 shares of series C convertible preferred stock converted such shares into
210,393 shares of common stock. As a result, approximately $480,000 was
transferred from preferred stock to common stock.
7. Shareholders' Equity
The Company's Certificate of Incorporation authorizes the issuance of up to
700,000 shares of non-voting common stock. Shares of nonvoting common stock, if
issued, would be convertible at the option of the holder on a one for one basis
into common stock. Such shares would also have certain antidilution provisions
but would have no preferences to those of the common shareholders in dividends
or in the event of liquidation.
In June 1993, the Company amended its Certificate of Incorporation to
increase the number of authorized shares of common stock to 30,000,000 shares.
Additionally, in January 1994, the Company amended its Certificate of
Incorporation to increase the number of authorized shares of common stock to
60,000,000 shares and also to increase the authorized number of preferred shares
to 25,022,053 shares of which 10,000,000 shares are undesignated.
At December 31, 1994, the Company had reserved 20,723,009 shares of common
stock for possible future issuance in the event the outstanding shares of series
A, series B, and series C convertible preferred stock are converted and the
outstanding stock options and stock purchase warrants are exercised.
As of December 31, 1994, the Company had stock option plans which provide for
the issuance of up to 4,883,360 shares of common stock to key employees,
directors and consultants of the Company. Under these plans, the Company may
issue incentive or nonqualified options and all options granted expire ten years
from the date of grant. Options granted under the plans generally vest 20% per
year.
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Shareholder's Equity--Continued
In connection with the termination of an officer of the Company during the
fourth quarter of 1994, the Company agreed to accelerate the vesting of certain
options and to extend the exercise period of vested options from 90 days to 3
years. These changes in option terms resulted in a compensation charge of
$804,685 during the fourth quarter.
A summary of transactions during 1992, 1993 and 1994 under these option plans
follows:
NUMBER OF OPTION PRICE
SHARES PER SHARE
------------- --------------
1992
Granted............................. 2,595,033 $.40-4.54
Exercised........................... (20,000) .40
Outstanding at December 31, 1992.... 2,575,033 .40-4.54
1993
Granted............................. 1,535,327 2.27-3.50
Exercised........................... (52,000) .40
Canceled............................ (48,000) .40
Outstanding at December 31, 1993.... 4,010,360 .40-4.54
1994
Granted............................. 1,079,551 3.67
Exercised........................... (54,320) .40
Canceled............................ (1,287,686) .40-3.67
Outstanding at December 31, 1994.... 3,747,905 .40-4.54
At December 31, 1994, options covering 1,931,979 shares of common stock were
exercisable.
In 1993, the Board of Directors of the Company authorized the Company to
issue warrants for the purchase of the Company's common stock. The warrants
generally expire five years from the date of issuance. Warrants to purchase
251,292 shares of common stock at prices ranging from $.57 to $4.54 per share
are outstanding and exercisable at December 31, 1994.
In 1993, in connection with the formation of a new majority-owned
partnership, the Company issued a warrant to purchase 12,785 shares of common
stock to the partnerships. This warrant expires in February 1998 and has an
exercise price of $4.54 per share.
In conjunction with a $1,000,000 note payable paid in 1994, the Company
granted to an investor a warrant to purchase 33,162 shares of common stock at
$3.50 per share. This warrant expires in December 1997.
In 1993, the Company granted in connection with an acquisition and the
related issuance of 219,752 shares of common stock the right for the holder, at
its sole option, to require the Company to repurchase such shares at $3.69 per
share in September 1996. These shares are classified as redeemable common stock
in the consolidated balance sheet.
Dividends paid by Ballas and MWA to their pre-merger shareholders aggregated
$1,124,998 and $660,000 in 1992 and 1993, respectively.
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Operating Leases
The Company leases space for its corporate office as well as its outpatient
surgery centers under the terms of operating lease agreements that expire at
various dates through 2009. Certain of these leases contain renewal options for
additional periods of five to fifteen years at the then fair market rental
rates. These leases generally provide for the payment of minimum annual rents
(increasing at various rates over the lease term) in addition to insurance,
operating costs and property taxes. Rent expense approximated $1,875,000 in
1992, $5,956,000 in 1993 and $7,527,000 in 1994.
At December 31, 1994, the future minimum lease payments under non-cancelable
operating leases were as follows:
1995........... $ 7,486,200
1996........... 7,452,774
1997........... 7,259,343
1998........... 7,108,871
1999........... 6,820,077
Thereafter..... 32,660,114
$ 68,787,379
9. Income Taxes
Prior to the merger with the Company, Ballas and MWA were S corporations
under the Internal Revenue Code and consequently their earnings were not subject
to federal or state income taxes. The shareholders of Ballas and MWA included
their respective share of the acquired companies' earnings or losses in their
individual income tax returns. Their portion of the Company's income during 1992
and for the period January 1, 1993 to February 11, 1993 was not included in the
Company's income tax provision (see Note 10).
The provision for income taxes includes the following components:
YEARS ENDED DECEMBER 31,
1992 1993 1994
------ ------ ------
Current:
Federal .................... $ 397,196 $1,334,256 $ 392,584
State ...................... 136,306 413,825 192,972
Deferred ..................... 94,573 868,612 (341,801)
$ 628,075 $2,616,693 $ 243,755
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Income Taxes--Continued
A reconciliation of the provision for income taxes to the federal statutory
rate of 34% is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1992 1993 1994
-------- ------ --------
<S> <C> <C> <C>
Statutory federal income tax expense (benefit) ......... $ 277,300 $ 2,219,200 $ (917,600)
State income taxes, net of federal benefit ............. 102,700 365,700 127,400
Tax effect of S corporation (income) loss .............. (93,500) 5,700 --
Non-deductible merger costs ............................ -- 58,200 617,700
Increase (decrease) in valuation allowance for
deferred tax assets .................................. 224,900 (318,600) --
Non-deductible amortization of intangible
assets ................................................. 106,100 229,400 397,400
Other .................................................. 10,575 57,093 18,855
Income tax expense ..................................... $ 628,075 $ 2,616,693 $ 243,755
</TABLE>
A deferred tax asset is required to be recognized for the tax benefit of
deductible temporary differences and net operating loss carryforwards. A
valuation allowance is recognized if it is more likely than not that some or all
of the deferred tax asset will not be realized. A valuation allowance of
$318,600 at December 31, 1992 was established for the net deferred tax assets of
the Company. During 1993, the valuation allowance was reduced as it became more
likely than not that the deferred tax assets would be realized. The valuation
allowance was not changed for 1994. During 1994, the Company utilized net
operating loss carryforwards of $123,000.
Deferred income taxes reflect the tax effects of differences between the
carrying amounts of assets and liabilities for financial reporting and income
tax purposes. The significant components of the Company's deferred tax assets
and liabilities at December 31, 1993 and 1994 are as follows:
DECEMBER 31,
1993 1994
------ ------
Deferred tax assets:
Net operating loss
carryforwards................. $ 88,900 $ 42,200
Accrued liabilities............. 103,400 709,500
Asset valuation allowances ..... 503,300 761,300
Alternative minimum tax......... -- 424,000
Other........................... 23,378 10,087
Total......................... 718,978 1,947,087
Deferred tax liabilities:
Depreciation and amortization .. 1,669,700 2,275,200
Cash basis reporting............ 156,100 104,000
Other........................... 99,070 280,714
Total......................... 1,924,870 2,659,914
Net deferred tax balance........ $ 1,205,892 $ 712,827
At December 31, 1994, the Company and its subsidiaries had available net
operating loss carryforwards of approximately $111,000. These net operating loss
carryforwards expire beginning in 2001 through 2007. Because of changes in
ownership of the Company, the utilization of these losses in the future may be
limited.
The Company made federal and state income tax payments of approximately
$1,818,000 in 1993 and $1,100,000 in 1994. No federal and state income tax
payments were made in 1992.
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Pro Forma Income Taxes
As described in Note 9, Ballas and MWA were previously taxed as S
corporations. Effective with the completion of the merger in February 1993, the
acquired companies became subject to federal and state income taxes.
The following pro forma information reflects the historical provision for
income taxes adjusted for the increase or decrease in income taxes that would
have resulted if Ballas and MWA had been subject to federal and state income
taxes and had been consolidated subsidiaries for 1992 and 1993.
YEARS ENDED DECEMBER 31,
` 1992 1993
-------- --------
Pro forma income taxes:
Current:
Federal................. $ 301,196 $ 1,739,856
State................... 144,406 414,225
Deferred................ 35,073 766,612
$ 480,675 $ 2,920,693
The pro forma provision for income taxes differs from the amount computed by
applying the federal statutory rate of 34% to income before income taxes as
follows:
YEARS ENDED DECEMBER 31,
------------------------
1992 1993
------- --------
Statutory federal income tax expense............ $ 277,300 $ 2,219,200
State income taxes, net of federal benefit ..... 108,000 365,700
Non-deductible amortization of intangible
assets..................................... 106,100 229,400
Ballas and MWA non-deductible merger costs ..... -- 101,200
Other........................................... (10,725) 5,193
$ 480,675 $ 2,920,693
11. Commitments and Contingencies
As of December 31, 1994, the Company is constructing three outpatient surgery
centers and is expanding an existing facility. The Company estimates that it
will cost approximately $9.3 million to complete these projects.
Additionally, since December 31, 1994, the Company has signed long-term lease
agreements in connection with the development of two outpatient surgery centers.
These leases require payments of $49,500 per month over their term.
The Company's majority-owned partnerships carry malpractice and general
liability insurance on a claims-made basis. Should these claims-made policies
not be renewed or replaced with equivalent insurance, claims based on
occurrences during the term of the respective policies, but asserted
subsequently, would be uninsured. To date, the partnerships have obtained
equivalent insurance at the expiration of the current coverage periods.
At December 31, 1994, the Company's majority-owned partnerships have several
malpractice claims outstanding which have arisen in the normal course of
business. In addition, it is possible that certain incidents may have occurred
which have not been reported as of this date. The Company has policies and
procedures in place to track and monitor incidents of significance. Based on the
Company's knowledge of the facts to date, consultation with its legal advisors
and extent of existing insurance coverages, management believes the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position or the results of operations.
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Other Receivables
The Company had made advances of approximately $784,000 to Surgical Care
Foundation ("SCF"), a not for profit entity which provides recovery bed service
to one of the Company's surgery centers. Of these advances, $275,000 had been
made through a company in which an officer and director of the Company is the
majority shareholder. During the fourth quarter of 1994, the Company concluded
the advances to SCF are not collectible and fully reserved for the advances.
The Company entered into an agreement to provide advances to an
anesthesiologist who provides services at one of its facilities. During the
fourth quarter of 1994, the Company established a reserve of $216,000 for
advances that may not be collectible.
In connection with the development of a surgery facility, the Company
received approximately $100,000 of subscription receivables from the limited
partners and advanced approximately $338,000 to an entity which is owned by
certain of the limited partners. During the fourth quarter of 1994, the Company
concluded these receivables are not collectible and fully reserved for the
receivables.
13. Related Party Transactions
In connection with the development of a medical office building and an
outpatient surgery center in St. Louis, Missouri, the Company paid development
fees of $300,000 to a Company in which an officer and director of the Company is
a majority shareholder.
The Company leases one of its outpatient surgery centers from a limited
partnership whose general partner is wholly-owned by an officer and director of
the Company. Rent expense under this lease was approximately $494,000, $592,000,
and $954,000 in 1992, 1993, and 1994, respectively.
During 1992, certain partnerships paid a management fee to a Company whose
majority shareholders are also shareholders of the Company. The related expense
of approximately $300,000 is included in operating costs in the consolidated
statement of income for the year ended December 31, 1992. The Company paid this
company certain fees in connection with the development, organization and
syndication of certain of the Company's outpatient surgery centers. These fees
aggregated $325,000 and $505,000 in 1992 and 1993, respectively.
The Company had a net receivable of $143,119 at December 31, 1993 due from a
corporation which is also a shareholder of the Company. The net payable and net
receivable were included in payables to affiliates and other receivables and
arose in connection with the acquisition of several outpatient surgery centers
previously owned by this corporation.
At December 31, 1994, the Company had a net receivable of $103,000 from a
company in which an officer and director of the Company is a shareholder.
14. Defined Contribution Plans
Effective April 1, 1994, the Company amended the 401(k) Profit-sharing Plan
of Heritage Surgical Corporation (the "401(k) plan") established January 1,
1993. The amended 401(k) plan allows participation of all eligible Company
employees at its centers and the corporate office. Employer contributions are
made at the discretion of the Company. The Company made no contributions in 1993
and 1994.
A defined contribution profit sharing plan co-sponsered by two wholly-owned
subsidiaries of the Company with certain other companies was terminated in 1993.
Profit sharing contributions charged to operations were approximately $175,000
in 1992 and $210,000 in 1993.
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Merger Costs
In connection with the February 1993 merger between the Company, Ballas and
MWA, the Company incurred legal, accounting and other out-of-pocket costs of
$332,532. These costs were expensed in 1993.
In connection with the January 1994 merger between the Company and Heritage,
the Company incurred advisory fees, legal and accounting costs and other direct
costs of $3,570,961 for investigating, negotiating, and closing this
transaction. These costs were expensed in 1994.
16. Gain on Sale of Partnership Interest
In May 1993, the Company sold its 51% partnership interest in Coastal
Lithotripsy Associates, L.P. and the associated management services contract for
net proceeds of approximately $3,163,000. The Company recognized a gain of
$1,400,137 from this sale.
For the four months ended April 30, 1993, this partnership had net revenues
of $642,000 and the Company's interest in its net income was $109,000.
17. Sale of Real Estate
On June 29, 1994, the Company completed the sale of the real estate and
associated improvements relative to two of its outpatient surgery centers. The
aggregate proceeds were approximately $2 million. The Company also entered into
agreements to lease the two facilities for initial lease terms of 13 to 15
years. The aggregate annual lease payments with respect to these two properties
are approximately $370,000.
Additionally, in July 1994, a majority-owned partnership sold an uncompleted
medical office building for aggregate proceeds of $7.4 million. The Company also
entered into an agreement to lease this medical office building for an initial
lease term of 15 years. The aggregate annual lease payments with respect to this
building are approximately $830,000. The Company also agreed to complete
construction of the facility including the related tenant improvements.
The Company deferred an insignificant gain resulting from the sale of these
three facilities. The Company is accounting for each of the new leases as an
operating lease.
18. Fair Value of Financial Instruments
The following methods were used by the Company in estimating its fair value
disclosures for financial instruments.
Cash and Cash Equivalents
The carrying amount reported in the consolidated balance sheet for cash and
cash equivalents approximate its fair value.
Long-Term Debt
The fair values of the Company|Als long-term debt are estimated using quoted
market prices and discounted cash flow analyses, based on the Company|Als
current incremental borrowing rates for similar types of borrowing arrangements.
The carrying amounts and fair values of the Company's financial instruments
are as follows:
DECEMBER 31, 1994
----------------------------
CARRYING
AMOUNT FAIR VALUE
--------------- ------------
Cash and cash equivalents................. $ 2,786,123 $ 2,786,123
Long-term debt (including current
portion)................................ 89,619,886 88,617,613
The carrying amounts of cash and long-term debt approximated fair value at
December 31, 1993.
<PAGE>
SURGICAL HEALTH CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. Subsequent Event
In January 1995, the Company entered into a merger agreement with HealthSouth
Corporation under which all of the Company|Als outstanding shares of common
stock and redeemable convertible preferred stock would be exchanged for common
stock of HealthSouth Corporation. The Company must obtain the approval of the
holders of a majority of the aggregate principal amount of the outstanding
Senior Subordinated Notes and the consent of the Lender under the Amended
Agreement prior to consummation of the merger. In addition, should this merger
be consummated, the Company would be required to offer to purchase all
outstanding Senior Subordinated Notes at a purchase price equal to 101% of the
aggregate principal amount of the notes, plus accrued and unpaid interest.
On January 20, 1995, the Company entered into a non-binding letter of intent
to acquire substantially all of the assets of an outpatient surgery center in
Washington, Missouri. The aggregate purchase price contemplated in the letter of
intent is $1,835,000. The parties are currently negotiating a definitive
purchase agreement.
<PAGE>
ANNEX A
AMENDED AND RESTATED PLAN AND AGREEMENT OF MERGER
AMENDED AND RESTATED PLAN AND AGREEMENT OF MERGER (the "Plan of Merger"),
made and entered into as of the 22nd day of January, 1995, by and among
HEALTHSOUTH Corporation, a Delaware corporation ("HEALTHSOUTH"), ASC ATLANTA
ACQUISITION COMPANY, INC., a Delaware corporation (the "Subsidiary"), and
SURGICAL HEALTH CORPORATION, a Delaware corporation ("SHC") (the Subsidiary and
SHC being sometimes collectively referred to herein as the "Constituent
Corporations").
W I T N E S S E T H:
WHEREAS, the Board of Directors of each of HEALTHSOUTH and SHC has determined
that a business combination between HEALTHSOUTH and SHC is in the best interests
of their respective companies and stockholders and presents as opportunity for
their respective companies to achieve long-term strategic and financial
benefits;
WHEREAS, on January 22, 1995, HEALTHSOUTH, the Subsidiary and SHC executed
and delivered a Plan and Agreement of Merger, which their duly authorized
officers have determined to amend and restate in its entirety as provided herein
to be effective for all purposes as of and from and after January 22, 1995;
WHEREAS, the respective Boards of Directors of HEALTHSOUTH, the Subsidiary
and SHC have approved the merger of the Subsidiary with and into SHC (the
"Merger"), upon the terms and conditions set forth in this Plan of Merger,
whereby (i) each share of Common Stock, par value $.0025 per share, of SHC (the
"SHC Common Stock"), not owned directly or indirectly by SHC, except Dissenting
Shares (as hereinafter defined), (ii) each share of Series A Convertible
Preferred Stock, par value $.01 per share, of SHC (the "Series A Preferred
Stock"), not owned directly or indirectly by SHC, except Dissenting Shares,
(iii) each share of Series B Convertible Preferred Stock, par value $.01 per
share, of SHC (the "Series B Preferred Stock"), not owned directly or indirectly
by SHC, except Dissenting Shares, and (iv) each share of Series C Convertible
Preferred Stock, par value $.01 per share, of SHC (the "Series C Preferred
Stock"), not owned directly or indirectly by SHC, except Dissenting Shares, will
be converted into the right to receive the Merger Consideration (as hereinafter
defined) (the Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock may be hereinafter collectively referred to as the "Preferred
Stock", and, together with the SHC Common Stock, may be hereinafter collectively
referred to as the "SHC Shares");
WHEREAS, each of HEALTHSOUTH, the Subsidiary and SHC desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger;
WHEREAS, for federal income tax purposes, it is intended that the Merger (as
defined herein) shall qualify as a reorganization under the provisions of
Section 368 of the Internal Revenue Code of 1986, as amended; and
WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a "pooling of interests".
NOW, THEREFORE, in consideration of the premises, and the mutual covenants
and agreements contained herein, the parties hereto do hereby agree as follows:
Section 1. The Merger.
1.1 The Merger. Upon the terms and conditions set forth in this Plan of
Merger, and in accordance with the Delaware General Corporation Law (the
"DGCL"), the Subsidiary shall be merged with and into SHC at the Effective Time
of the Merger (as defined in Section 1.3). Following the Effective Time of the
Merger, the separate corporate existence of the Subsidiary shall cease and SHC
shall continue as the surviving corporation (the "Surviving Corporation") under
the name "Surgical Health Corporation" and shall succeed to and assume all the
rights and obligations of the Subsidiary and SHC in accordance with the DGCL.
<PAGE>
1.2 The Closing. The closing of the Merger (the "Closing") will take place at
10:00 a.m. Central Time on a date to be specified by the parties (the "Closing
Date"), which (subject to satisfaction or waiver of the conditions set forth in
Sections 9.2 and 9.3) shall be no later than the second business day after
satisfaction of the conditions set forth in Section 9.1 (other than Section
9.1(a)), at the offices of Haskell Slaughter Young & Johnston, Professional
Association, Birmingham, Alabama, unless another date or place is agreed to in
writing by the parties hereto.
1.3 Effective Time. Subject to the provisions of this Plan of Merger, the
parties shall file a certificate of merger (the "Certificate of Merger")
executed in accordance with the relevant provisions of the DGCL and shall make
all other filings or recordings required under the DGCL as soon as practicable
on or after the Closing Date. The Merger shall become effective at such time as
the Certificate of Merger is duly filed with the Delaware Secretary of State, or
at such other time as Subsidiary and SHC shall agree should be specified in the
Certificate of Merger (the "Effective Time").
1.4 Effect of the Merger. The Merger shall have the effects set forth in
Section 259 of the DGCL.
Section 2. Effect of the Merger on the Capital Stock of the Constituent
Corporations; Exchange of Certificates.
2.1 Effect on Capital Stock. As of the Effective Time of the Merger, by
virtue of the Merger and without any action on the part of any holder of SHC
Shares or any shares of capital stock of the Subsidiary:
(a) Subsidiary Common Stock. Each share of capital stock of the Subsidiary
issued and outstanding immediately prior to the Effective Time of the Merger
shall be converted into one fully paid and nonassessable share of SHC Common
Stock.
(b) Cancellation of Treasury Stock. Each share of SHC Common Stock that is
owned by SHC or by any subsidiary of SHC shall automatically be canceled and
retired and shall cease to exist, and none of the Common Stock, par value $.01
per share, of HEALTHSOUTH ("HEALTHSOUTH Common Stock"), cash or other
consideration shall be delivered in exchange therefor.
(c) Conversion of SHC Shares. Subject to Section 2.2(e), each issued and
outstanding SHC Share (other than shares to be canceled in accordance with
Section 2.1(b) and Dissenting Shares) shall be converted into the right to
receive that fraction of a share of HEALTHSOUTH Common Stock obtained by
dividing $4.60 by the Base Period Trading Price (as may be adjusted as provided
below) (the "Merger Consideration"); provided, however, that for purposes of
such calculation, the Base Period Trading Price shall be deemed to equal (i)
$37.00 in the event that the Base Period Trading Price is greater than $37.00,
or (ii) $33.00 in the event the Base Period Trading Price is less than $33.00
(collectively, $37.00 and $33.00 are referred to herein as the "Base Period
Trading Price Limitations"). For purposes of this Plan of Merger, the term "Base
Period Trading Price" shall mean the average daily closing prices for the shares
of HEALTHSOUTH Common Stock for the 20 consecutive trading days on which such
shares are actually traded (as reported on the New York Stock Exchange Composite
Transaction Tape as reported in The Wall Street Journal, Eastern Edition, or if
not reported thereby, any other authoritative source) ending at the close of
trading on the third trading day immediately preceding the Closing Date. As of
the Effective Time of the Merger, all such SHC Shares shall no longer be
outstanding and shall automatically be canceled and retired and shall cease to
exist, and each holder of a certificate representing any SHC Shares shall cease
to have any rights with respect thereto, except the right to receive the Merger
Consideration and any cash in lieu of fractional shares of HEALTHSOUTH Common
Stock to be issued or paid in consideration therefor upon surrender of such
certificate in accordance with Section 2.2, without interest.
(d) Dissenting Shares. Notwithstanding anything in this Plan of Merger to the
contrary, SHC Shares outstanding immediately prior to the Effective Time of the
Merger held by a holder (if any) who is entitled to demand, and who properly
demands, appraisal for such shares in accordance with Section 262 of the DGCL
("Dissenting Shares") shall not be converted into a right to receive the Merger
Consideration and any cash in lieu of fractional shares of HEALTHSOUTH Common
Stock unless such holder fails to perfect or otherwise loses such holder's right
to appraisal, if any. If, after the Effective Time of the Merger, such holder
fails to perfect or loses any such right to appraisal, such shares shall be
treated as if they had been converted as of the Effective Time of the Merger
into the right to receive the Merger Consideration pursuant to Section 2.1(c)
and the cash in lieu of fractional shares of HEALTHSOUTH Common Stock specified
in Section 2.2.
<PAGE>
(e) Stock Options and Warrants. At the Effective Time, all rights with
respect to SHC Common Stock pursuant to any SHC stock options or SHC warrants
which are outstanding at the Effective Time, whether or not then exercisable,
shall be converted into and become rights with respect to HEALTHSOUTH Common
Stock and HEALTHSOUTH shall assume each SHC stock option or SHC warrant, in
accordance with the terms of the stock option plan under which it was issued and
the stock option agreement or warrant agreement, as the case may be, by which it
is evidenced. It is intended that the foregoing provisions shall be undertaken
in a manner that will not constitute a "modification" as defined in Section 425
of the Code, as to any stock option which is an "incentive stock option."
(f) Anti-Dilution Provisions. In the event that HEALTHSOUTH changes the
number of shares of HEALTHSOUTH Common Stock issued and outstanding prior to the
Effective Time as a result of a stock split, stock dividend, or similar
recapitalization with respect to such stock and the record date thereof (in the
case of a stock dividend) or the effective date thereof (in the case of a stock
split or similar recapitalization for which a record date is not established)
shall be prior to the Effective Time, (i) the Base Period Trading Price
Limitations shall be adjusted to appropriately adjust the ratio pursuant to
which SHC Shares will be converted into shares of HEALTHSOUTH Common Stock
pursuant to this Section 2.1, and (ii) if necessary, the anticipated Effective
Time shall be postponed for an appropriate period of time agreed upon by the
parties in order for the Base Period Trading Price to reflect the market effect
of such stock split, stock dividend, or similar recapitalization.
2.2 Exchange of Certificates. (a) Exchange Agent. Prior to the Effective Time
of the Merger, HEALTHSOUTH shall enter into an agreement with such bank or trust
company as may be designated by HEALTHSOUTH (the "Exchange Agent") which
provides that HEALTHSOUTH shall deposit with the Exchange Agent as of the
Effective Time of the Merger, for the benefit of the holders of SHC Shares, for
exchange in accordance with this Section 2, through the Exchange Agent,
certificates representing the shares of HEALTHSOUTH Common Stock (such shares of
HEALTHSOUTH Common Stock, together with any dividends or distributions with
respect thereto with a record date after the Effective Time of the Merger, being
hereinafter referred to as the "Exchange Fund") issuable pursuant to Section 2.1
in exchange for outstanding SHC Shares.
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time of the Merger, the Exchange Agent shall mail to each holder of
record of a certificate or certificates which immediately prior to the Effective
Time of the Merger represented outstanding SHC Shares (the "Certificates") whose
shares were converted into the right to receive the Merger Consideration
pursuant to Section 2.1, (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon delivery of the Certificates to the Exchange Agent and shall be
in such form and have such other provisions as HEALTHSOUTH may reasonably
specify) and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for certificates representing shares of HEALTHSOUTH
Common Stock. Upon surrender of a Certificate for cancellation to the Exchange
Agent or to such other agent or agents as may be appointed by HEALTHSOUTH,
together with such letter of transmittal, duly executed, and such other
documents as may reasonably be required by the Exchange Agent, the holder of
such Certificate shall be entitled to receive in exchange therefor a certificate
representing that number of whole shares of HEALTHSOUTH Common Stock which such
holder has the right to receive pursuant to the provisions of this Section 2,
and the Certificate so surrendered shall forthwith be canceled. In the event of
a transfer of ownership of SHC Shares which is not registered in the transfer
records of SHC, a certificate representing the proper number of shares of
HEALTHSOUTH Common Stock may be issued to a person other than the person in
whose name the Certificate so surrendered is registered, if such Certificate
shall be properly endorsed or otherwise be in proper form for transfer and the
person requesting such payment shall pay any transfer or other taxes required by
reason of the issuance of shares of HEALTHSOUTH Common Stock to a person other
than the registered holder of such Certificate or establish to the satisfaction
of HEALTHSOUTH that such tax has been paid or is not applicable. Until
surrendered as contemplated by this Section 2.2, each Certificate shall be
deemed at any time after the Effective Time of the Merger to represent only the
right to receive upon such surrender the certificate representing shares of
HEALTHSOUTH Common Stock and cash in lieu of any fractional shares of
HEALTHSOUTH Common Stock as contemplated by this Section 2.2. No interest will
be paid or will accrue on any cash payable in lieu of any fractional shares of
HEALTHSOUTH Common Stock. To the extent permitted by law, former stockholders of
record of SHC shall be entitled to vote after the Effective Time of the Merger
at any meeting of HEALTHSOUTH stockholders the number of whole shares of
HEALTHSOUTH Common Stock into which their respective SHC Shares are converted,
regardless of whether such holders have exchanged their Certificates for
certificates representing HEALTHSOUTH Common Stock in accordance with this
Section 2.2.
<PAGE>
(c) Distributions with Respect to Unexchanged Shares. No dividends or other
distributions with respect to HEALTHSOUTH Common Stock with a record date after
the Effective Time of the Merger shall be paid to the holder of any
unsurrendered Certificate with respect to the shares of HEALTHSOUTH Common Stock
represented thereby and no cash payment in lieu of fractional shares shall be
paid to any such holder pursuant to Section 2.2(e) until the surrender of such
Certificate in accordance with this Section 2. Subject to the effect of
applicable laws, following surrender of any such Certificate, there shall be
paid to the holder of the certificate representing whole shares of HEALTHSOUTH
Common Stock issued in exchange therefor, without interest, (i) at the time of
such surrender, the amount of any cash payable in lieu of a fractional share of
HEALTHSOUTH Common Stock to which such holder is entitled pursuant to Section
2.2(e) and the amount of dividends or other distributions with a record date
after the Effective Time of the Merger theretofore paid with respect to such
whole shares of HEALTHSOUTH Common Stock, and (ii) at the appropriate payment
date, the amount of dividends or other distributions with a record date after
the Effective Time of the Merger but prior to such surrender and with a payment
date subsequent to such surrender payable with respect to such whole shares of
HEALTHSOUTH Common Stock.
(d) No Further Ownership Rights in SHC Shares. All shares of HEALTHSOUTH
Common Stock issued upon the surrender for exchange of Certificates in
accordance with the terms of this Section 2 (including any cash paid pursuant to
Section 2.2(c) or 2.2(e) ) shall be deemed to have been issued (and paid) in
full satisfaction of all rights pertaining to the SHC Shares theretofore
represented by such Certificates. If, after the Effective Time of the Merger,
Certificates are presented to the Surviving Corporation or the Exchange Agent
for any reason, they shall be canceled and exchanged as provided in this Section
2, except as otherwise provided by law.
(e) No Fractional Shares. No certificates or scrip representing fractional
shares of HEALTHSOUTH Common Stock shall be issued upon the surrender for
exchange of Certificates, and such fractional share interests will not entitle
the owner thereof to vote or to any rights of a stockholder of HEALTHSOUTH.
Notwithstanding any other provision of this Plan of Merger, each holder of SHC
Shares exchanged pursuant to the Merger who would otherwise have been entitled
to receive a fraction of a share of HEALTHSOUTH Common Stock (after taking into
account all Certificates delivered by such holder) shall receive, in lieu
thereof, cash (without interest) in an amount equal to such fractional part of a
share of HEALTHSOUTH Common Stock multiplied by the Base Period Trading Price.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the holders of the Certificates for six months after
the Effective Time of the Merger shall be delivered to HEALTHSOUTH, upon demand,
and any holders of the Certificates who have not theretofore complied with this
Section 2 shall thereafter look only to HEALTHSOUTH for payment of HEALTHSOUTH
Common Stock, any cash in lieu of fractional shares of HEALTHSOUTH Common Stock
and any dividends or distributions with respect to HEALTHSOUTH Common Stock.
(g) No Liability. None of HEALTHSOUTH, the Subsidiary, SHC or the Exchange
Agent shall be liable to any person in respect of any shares of HEALTHSOUTH
Common Stock (or dividends or distributions with respect thereto) or cash from
the Exchange Fund delivered to a public official pursuant to any applicable
<PAGE>
abandoned property, escheat or similar law. If any Certificates shall not have
been surrendered prior to seven years after the Effective Time of the Merger (or
immediately prior to such earlier date on which any shares of HEALTHSOUTH Common
Stock, any cash in lieu of fractional shares of HEALTHSOUTH Common Stock or any
dividends or distributions with respect to HEALTHSOUTH Common Stock in respect
of such Certificates would otherwise escheat to or become the property of any
governmental entity), any such shares, cash, dividends or distributions in
respect of such Certificates shall, to the extent permitted by applicable law,
become the property of the Surviving Corporation, free and clear of all claims
or interest of any person previously entitled thereto.
(h) Investment of Exchange Fund. The Exchange Agent shall invest any cash
included in the Exchange Fund, as directed by HEALTHSOUTH, on a daily basis. Any
interest and other income resulting from such investments shall be paid to
HEALTHSOUTH.
(i) The Merger will not be treated as a liquidation, dissolution or winding
up of SHC under the liquidation provisions of SHC's Certificate of
Incorporation.
2.3 Certificate of Incorporation of Surviving Corporation. The Certificate of
Incorporation of SHC shall be amended and restated, effective at the Effective
Time, in a manner satisfactory to HEALTHSOUTH. The Certificate of Incorporation
of SHC, as so amended and restated, shall become the Certificate of
Incorporation of the Surviving Corporation from and after the Effective Time and
until thereafter amended as provided by law.
2.4 Bylaws of the Surviving Corporation. The Bylaws of the Subsidiary shall
be the Bylaws of the Surviving Corporation from and after the Effective Time of
the Merger and until thereafter altered, amended or repealed in accordance with
the laws of the State of Delaware, the Certificate of Incorporation of SHC and
the said Bylaws.
2.5 Directors and Officers of the Surviving Corporation. The Directors and
officers of the Subsidiary immediately prior to the Effective Time shall be the
Directors and officers of the Surviving Corporation, each to hold office in
accordance with the Certificate of Incorporation and Bylaws of the Surviving
Corporation.
2.6 Assets, Liabilities, Reserves and Accounts. At the Effective Time, the
assets, liabilities, reserves and accounts of each of Subsidiary and SHC shall
be taken up on the books of the Surviving Corporation at the amounts at which
they respectively shall be carried on the books of said corporations immediately
prior to the Effective Time, except as otherwise set forth in the Plan of Merger
and subject to such adjustments, or elimination of intercompany items, as may be
appropriate in giving effect to the Merger in accordance with generally accepted
accounting principles.
2.7 Corporate Acts of the Subsidiary. All corporate acts, plans, policies,
approvals and authorizations of the Subsidiary, its sole stockholder, its Board
of Directors, committees elected or appointed by the Board of Directors, and all
officers and agents, valid immediately prior to the Effective Time of the
Merger, shall be those of the Surviving Corporation and shall be as effective
and binding thereon as they were with respect to the Subsidiary. The employees
and agents of the Subsidiary shall become the employees and agents of the
Surviving Corporation and continue to be entitled to the same rights and
benefits which they enjoyed as employees and agents of the Subsidiary.
Section 3. Representations and Warranties of SHC.
SHC hereby represents and warrants to HEALTHSOUTH and the Subsidiary as
follows:
3.1 Organization, Existence and Good Standing. SHC is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. SHC has all necessary corporate power to own its properties and assets
and to carry on its business as presently conducted. SHC is not, and has not
been within the two years immediately preceding the date of this Plan of Merger,
a subsidiary or division of another corporation, nor has SHC within such time
owned, directly or indirectly, any shares of HEALTHSOUTH Common Stock or
Subsidiary Common Stock, except to the extent that shares of HEALTHSOUTH Common
Stock are beneficially owned by Richard M. Scrushy and Charles W. Newhall III,
Directors of SHC.
<PAGE>
3.2 SHC Capital Stock. SHC's authorized capital consists of (i) 60,000,000
shares of SHC Common Stock, of which 21,951,901 shares were issued and
outstanding, as of January 16, 1995, and none of which shares are issued and
held as treasury shares, (ii) 5,450,624 shares of Series A Preferred Stock, par
value $.01 per share, 1,911,902 of which shares are issued and outstanding as of
the date of this Plan of Merger and none of which are issued and held as
treasury shares; (iii) 6,000,000 shares of Series B Preferred Stock, par value
$.01 per share, 3,961,413 of which shares are issued and outstanding as of the
date of this Plan of Merger and none of which shares are issued and held as
treasury shares; (iv) 3,571,429 shares of Series C Preferred Stock, $.01 per
share, 3,439,692 of which shares are issued and outstanding as of the date of
this Plan of Merger and none of which are issued and held as treasury shares;
(v) 10,000,000 shares of undesignated preferred stock, par value $.01 per share,
none of which shares are issued and outstanding as of the date of this Plan of
Merger and none of which are issued and held as treasury shares; and (vi)
700,000 shares of Non-Voting Common Stock, par value $.0025, none of which
shares are issued and outstanding and none of which shares are issued and held
as treasury shares. All of the issued and outstanding SHC Shares are duly and
validly issued, fully paid and nonassessable. Except as set forth on Exhibit 3.2
attached hereto or otherwise disclosed in the SHC Documents (hereinafter
defined), there are no options, warrants, or similar rights granted by SHC or
any other agreements to which SHC is a party providing for the issuance or sale
by it of any additional securities which would remain in effect after the
Effective Time. There is no liability for dividends declared or accumulated but
unpaid with respect to any of the SHC Shares. SHC has not made any distributions
to any holders of SHC Shares or participated in or effected any issuance,
exchange or retirement of SHC Shares, or otherwise changed the equity interests
of holders of SHC Shares, in contemplation of effecting the Merger within the
two years immediately preceding the date of this Plan of Merger. Any SHC Shares
that SHC has re-acquired during the two years immediately preceding the date of
this Plan of Merger have been so re-acquired only for purposes other than
"business combinations", as such term is defined in Accounting Principles Board
Opinion No. 16, as amended ("Business Combinations").
3.3 Subsidiaries and Affiliated Partnerships. (a) Attached hereto as Exhibit
3.3 is a list of all subsidiaries of SHC (individually, an "SHC Subsidiary", and
collectively, the "SHC Subsidiaries") and their states of incorporation. Except
as set forth on Exhibit 3.3, SHC does not own stock in and does not control,
directly or indirectly, any other corporation, association or business
organization other than the SHC Partnerships (as defined below).
(b) Also disclosed on Exhibit 3.3 is a list of all general or limited
partnerships in which the general partner is SHC or an SHC Subsidiary
(individually, an "SHC Partnership" and collectively, the "SHC Partnerships")
and their states of organization. Except as set forth on Exhibit 3.3, neither
SHC nor any SHC Subsidiary owns an equity interest in, nor does such entity
control, directly or indirectly, any other joint venture or partnership.
3.4 Organization, Existence and Good Standing of SHC Subsidiary and/or SHC
Partnerships. (a) Each SHC Subsidiary is a corporation duly organized, validly
existing and in good standing under the laws of its respective state of
incorporation. Each SHC Subsidiary has all necessary corporate power to own its
properties and assets and to carry on its business as presently conducted.
(b) Each SHC Partnership is a limited partnership validly formed and in good
standing under the laws of its respective state of organization. Each SHC
Partnership has all necessary power to own its property and assets and to carry
on its business as presently conducted.
3.5 Foreign Qualifications. SHC, each SHC Subsidiary and each SHC Partnership
is qualified to do business as a foreign corporation or foreign general or
limited partnership, as the case may be, and is in good standing in each
jurisdiction where the nature or character of the property owned, leased or
operated by it or the nature of the business transacted by it makes such
qualification necessary, except where the failure to so qualify would not have a
material adverse effect on SHC.
3.6 Power and Authority. Subject to the satisfaction of the conditions
precedent set forth herein, SHC has the corporate power to execute, deliver and
perform the Plan of Merger and all agreements and other documents executed and
delivered or to be executed and delivered by it pursuant to the Plan of Merger,
and, subject to the satisfaction of the conditions precedent set forth herein
<PAGE>
has taken all action required by its Certificate of Incorporation, Bylaws or
otherwise, to authorize the execution, delivery and performance of the Plan of
Merger and such related documents. Except as set forth on Exhibit 3.6, the
execution and delivery of the Plan of Merger does not and, subject to the
receipt of required stockholder and regulatory approvals and any other required
third-party consents or approvals, the consummation of the Merger will not,
violate any provisions of the Certificate of Incorporation of SHC or any
provisions of, or result in the acceleration of any obligation under, any
mortgage, lien, lease, agreement, instrument, order, arbitration award, judgment
or decree, to which SHC or any SHC Subsidiary or SHC Partnership is a party, or
by which it is bound, or violate any restrictions of any kind to which it is
subject which, if violated or accelerated would have a material adverse effect
on SHC. The execution and delivery of this Agreement has been approved by the
Board of Directors of SHC (or by a committee appointed by such Board of
Directors for the purpose of approving such execution and delivery).
3.7 SHC Public Information. SHC has heretofore furnished HEALTHSOUTH with
the following documents:
(i)its Registration Statement on Form S-1 (Registration No. 33-77042)
relating to the offer and sale of $75,000,000 aggregate principal amount of
11-1/2% Senior Subordinated Notes due 2004 of SHC;
(ii) its 1993 Annual Report on Form 10-K; and
(iii) its Quarterly Reports on Form 10-Q for the fiscal quarters ended
September 30, 1993, June 30, 1994 and September 30, 1994
(documents (i)--(iii) above being collectively referred to herein as the "SHC
Documents"). As of their respective dates, the SHC Documents did not contain any
untrue statements of material facts or omit to state material facts required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. As of their respective
dates, the descriptions of the business, operations and financial condition of
SHC contained in the SHC Documents complied in all material respects with the
applicable requirements of the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended, and the regulations promulgated
under such statutes. The financial statements contained in the SHC Documents,
together with the notes thereto, have been prepared in accordance with generally
accepted accounting principles consistently followed throughout the periods
indicated, reflect all known liabilities of SHC, including all known contingent
liabilities as of the end of each period reflected therein, and present fairly
the financial condition of SHC at said dates and the consolidated results of
operations and cash flows of SHC for the periods then ended. The consolidated
balance sheet of SHC at September 30, 1994 included in the SHC Documents is
herein sometimes referred to as the "SHC Balance Sheet".
3.8 Properties and Assets. SHC (including, as applicable, the SHC
Subsidiaries and the SHC Partnerships) owns all of the real and personal
property included in the SHC Balance Sheet (except assets recorded under capital
lease obligations and such property as has been disposed of during the ordinary
course of SHC's business since the date of the SHC Balance Sheet), free and
clear of any liens, claims, charges, exceptions or encumbrances, except for
those (i) if any, which in the aggregate are not material and which do not
materially affect continued use of such property, or (ii) which are disclosed in
the SHC Documents or set forth in Exhibit 3.8.
3.9 Legal Proceedings. Except as listed on Exhibit 3.9 attached to this Plan
of Merger or described in the SHC Documents, SHC has no knowledge of any pending
or threatened litigation, governmental investigation, condemnation or other
proceeding against or relating to or affecting SHC or the transactions
contemplated by this Plan of Merger for which SHC is uninsured or which, if
resolved adversely to SHC, would have a material adverse effect on SHC and, to
the knowledge of SHC, no basis for any such action exists.
3.10 Contracts, etc. (a) SHC has made available to HEALTHSOUTH true copies of
all written, and has disclosed to HEALTHSOUTH all oral, outstanding contracts,
obligations and commitments of SHC (including the SHC Subsidiaries and SHC
Partnerships) entered into in connection with and related to the business and
<PAGE>
operations of SHC (including the SHC Subsidiaries and SHC Partnerships) or has
otherwise disclosed such contracts, commitments or obligations in an Exhibit
hereto or to the SHC Documents which are material to the operations of SHC, the
SHC Subsidiaries and the SHC Partnerships, taken as a whole. Except as otherwise
indicated on Exhibit 3.10, all of such contracts, obligations and commitments
are valid, binding and enforceable in accordance with their terms (assuming the
other parties thereto are bound) and are in full force and effect, except where
such invalidity or unenforceability would not have a material adverse effect on
SHC. Except as set forth or incorporated by reference on such Exhibit, no
default or alleged default by SHC (including the SHC Subsidiaries and SHC
Partnerships) exists thereunder, except for defaults or alleged defaults which
would not have a material adverse effect on SHC.
(b) Except as set forth on Exhibit 3.10, no contract or agreement to which
SHC or any SHC Subsidiary or SHC Partnership is a party will, by its terms,
terminate as a result of the transactions contemplated hereby or require any
consent from any obligor thereto in order to remain in full force and effect
immediately after the Effective Time, except for contracts or agreements which,
if terminated, would not have a material adverse effect on SHC.
(c) Except as set forth on Exhibit 3.10, none of SHC, any SHC Subsidiary or
any SHC Partnership has granted any right of first refusal or similar right in
favor of any third party with respect to any material portion of its properties
or assets (excluding liens described in Section 3.8) or entered into any
non-competition agreement or similar agreement restricting its ability to engage
in any business in any location.
3.11 Subsequent Events. Except as set forth on Exhibit 3.11 attached to this
Plan of Merger or disclosed in the SHC Documents, SHC has not, since the date of
the SHC Balance Sheet:
(a) Incurred any material adverse change.
(b) Discharged or satisfied any material lien or encumbrance, or paid or
satisfied any material obligation or liability (absolute, accrued, contingent or
otherwise) other than (i) liabilities shown or reflected on the SHC Balance
Sheet or (ii) liabilities incurred since the date of the SHC Balance Sheet in
the ordinary course of business, which discharge or satisfaction would have a
material adverse effect on SHC.
(c) Increased or established any reserve for taxes or any other liability on
its books or otherwise provided therefor which would have a material adverse
effect on SHC, except as may have been required due to income or operations of
SHC since the date of the SHC Balance Sheet.
(d) Mortgaged, pledged or subjected to any lien, charge or other encumbrance
any of the assets, tangible or intangible, which assets are material to the
consolidated business or financial condition of SHC.
(e) Sold or transferred any of the assets material to the consolidated
business of SHC, cancelled any material debts or claims or waived any material
rights, except in the ordinary course of business.
(f) Granted any general or uniform increase in the rates of pay of employees
or any material increase in salary payable or to become payable by SHC to any
officer or employee, consultant or agent (other than normal merit increases), or
by means of any bonus or pension plan, contract or other commitment, increased
in a material respect the compensation of any officer, employee, consultant or
agent.
(g) Except for this Plan of Merger and any other agreement executed and
delivered pursuant to this Plan of Merger, entered into any material transaction
other than in the ordinary course of business or permitted under other Sections
hereof.
(h) Issued any stock, bonds or other securities, other than stock options
granted to employees or consultants of SHC or warrants granted to third parties,
all of which are disclosed on Exhibit 3.2.
<PAGE>
3.12 Accounts Receivable. (a) Since the date of the SHC Balance Sheet, SHC
has not changed any principle or practice with respect to the recordation of
accounts receivable or the calculation of reserves therefor, or any material
collection, discount or write-off policy or procedure. Accounts receivable are
recorded on the SHC Balance Sheet (and the other consolidated balance sheets of
SHC included in the SHC Documents) in amounts estimated to be net of contractual
allowances related to third-party payor arrangements. SHC (including the SHC
Subsidiaries and SHC Partnerships) is in compliance with the terms and
conditions of all third-party payor arrangements relating to its accounts
receivable, except to the extent that such noncompliance would not have a
material adverse effect on SHC.
(b) Without limiting the generality of the foregoing, SHC and each SHC
Subsidiary or SHC Partnership is in compliance with all Medicare and Medicaid
provider agreements to which it is a party, except to the extent that such
noncompliance would not have a material adverse effect on SHC.
3.13 Tax Returns. SHC has filed all tax returns required to be filed by it or
requests for extensions to file such returns or reports have been timely filed
and granted and have not expired, except to the extent that such failures to
file, taken together, do not have a material adverse effect on SHC. Except as
disclosed on Exhibit 3.13, SHC has made all payments shown as due on such
returns. Except as disclosed on Exhibit 3.13, SHC has not been notified that any
tax returns of SHC are currently under audit by the Internal Revenue Service or
any state or local tax agency. No agreements have been made by SHC for the
extension of time or the waiver of the statute of limitations for the assessment
or payment of any federal, state or local taxes.
3.14 Commissions and Fees. Except for fees payable to Alex. Brown & Sons
Incorporated ("Alex. Brown"), there are no valid claims for brokerage
commissions or finder's or similar fees in connection with the transactions
contemplated by this Plan of Merger which may be now or hereafter asserted
against HEALTHSOUTH resulting from any action taken by SHC or its shareholders,
officers or Directors, or any of them.
3.15 Employee Benefit Plans; Employment Matters. (a) Except as set forth on
Exhibit 3.15(a) attached to this Plan of Merger, SHC has neither established nor
maintains nor is obligated to make contributions to or under or otherwise
participate in (i) any bonus or other type of incentive compensation plan,
program, agreement, policy, commitment, contract or arrangement (whether or not
set forth in a written document), (ii) any pension, profit-sharing, retirement
or other plan, program or arrangement, or (iii) any other employee benefit plan,
fund or program, including, but not limited to, those described in Section 3(3)
of ERISA. Except as disclosed on Exhibit 3.15(a), all such plans listed on
Exhibit 3.15(a) (individually, a "Plan" and collectively, the "Plans") have been
operated and administered in all material respects in accordance with, as
applicable, ERISA, the Internal Revenue Code of 1986, as amended, Title VII of
the Civil Rights Act of 1964, as amended, the Equal Pay Act of 1967, as amended,
the Age Discrimination in Employment Act of 1967, as amended, and the related
rules and regulations adopted by those federal agencies responsible for the
administration of such laws. Except as disclosed on Exhibit 3.15(a), no act or
failure to act by SHC has resulted in a "prohibited transaction" (as defined in
ERISA) with respect to the Plans that is not subject to a statutory or
regulatory exception. No "reportable event" (as defined in ERISA) has occurred
with respect to any of the Plans which is subject to Title IV of ERISA. SHC has
not previously made, is not currently making, and is not obligated in any way to
make, any contributions to any multi-employer plan within the meaning of the
Multi-Employer Pension Plan Amendments Act of 1980.
(b) Except as set forth on Exhibit 3.15(b), SHC is not a party to any oral or
written (i) union, guild or collective bargaining agreement which agreement
covers employees in the United States (nor is it aware of any union organizing
activity currently being conducted in respect to any of its employees), (ii)
agreement with any executive officer or other key employee the benefits of which
are contingent, or the terms of which are materially altered, upon the
occurrence of a transaction of the nature contemplated by this Plan of Merger
and which provides for the payment of in excess of $100,000, or (iii) agreement
or plan, including any stock option plan, stock appreciation rights plan,
restricted stock plan or stock purchase plan, any of the benefits of which will
be increased, or the vesting, the benefits of which will be accelerated, by the
occurrence of any of the transactions contemplated by this Plan of Merger or the
value of any of the benefits of which will be calculated on the basis of any of
the transactions contemplated by this Plan of Merger.
<PAGE>
3.16 Compliance with Laws in General. Except as set forth on Exhibit 3.16 or
disclosed in the SHC Documents, SHC has not received any notices of material
violations of any federal, state and local laws, regulations and ordinances
relating to its business and operations, including, without limitation, the
Federal Environmental Protection Act, the Occupational Safety and Health Act,
the Americans with Disabilities Act, the Medicare or applicable Medicaid
statutes and regulations and any Environmental Laws, and no notice of any
pending inspection or violation of any such law, regulation or ordinance has
been received by SHC which, if it were determined that a violation had occurred,
would have a material adverse effect on SHC.
3.17 Regulatory Approvals. SHC and each SHC Subsidiary and SHC Partnership,
as applicable, holds all licenses, certificates of need and other regulatory
approvals required or necessary to be applied for or obtained in connection with
its business as presently conducted or as proposed to be conducted, except where
the failure to obtain such license, certificate of need or regulatory approval
would not have a material adverse effect on SHC. All such licenses, certificates
of need and other regulatory approvals relating to the business, operations and
facilities of SHC and each Subsidiary and SHC Partnership are in full force and
effect, except where any failure of such license, certificate of need or
regulatory approval to be in full force and effect would not have a material
adverse effect on SHC. Except as disclosed in the SHC Documents, any and all
past litigation concerning such licenses, certificates of need and regulatory
approvals, and all claims and causes of action raised therein, has been finally
adjudicated. No such license, certificate of need or regulatory approval has
been revoked, conditioned (except as may be customary) or restricted, and,
except as disclosed in the SHC Documents, no action (equitable, legal or
administrative), arbitration or other process is pending, or to the best
knowledge of SHC, threatened, which in any way challenges the validity of, or
seeks to revoke, condition or restrict any such license, certificate of need, or
regulatory approval. Subject to compliance with applicable securities laws and
the Hart Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSR
Act"), the consummation of the Merger will not violate any law or restriction to
which SHC is subject which, if violated, would have a material adverse effect on
SHC.
3.18 Retirement or Re-Acquisition of HEALTHSOUTH Common Stock. SHC is not a
party to any agreement the effect of which would be to require HEALTHSOUTH
directly or indirectly to retire or re-acquire all or part of the shares of
HEALTHSOUTH Common Stock issued pursuant to Section 2.1 hereof.
3.19 Disposition of Assets of Surviving Corporation. Except as provided in
Exhibit 3.11 with the consent of HEALTHSOUTH, SHC is not a party to any plan to
dispose of a significant part of the assets of the Surviving Corporation within
two years after the Closing Date, other than dispositions in the ordinary course
of business of the Surviving Corporation and dispositions intended to eliminate
duplicate facilities or excess capacity.
3.20 Vote Required. The affirmative vote of the holders of a majority of each
class of the outstanding Preferred Stock entitled to vote thereon and a majority
of the outstanding SHC Shares entitled to vote thereon is the only vote of the
holders of any class or series of SHC capital stock necessary to approve this
Plan of Merger, the Merger and the transactions contemplated hereby.
3.21 Opinion of Financial Advisor. SHC has received the oral opinion of Alex.
Brown to the effect that, as of the date hereof, the Merger Consideration is
fair to the holders of SHC Shares from a financial point of view, a written copy
of which opinion will be delivered by SHC to HEALTHSOUTH prior to the date on
which the definitive proxy materials for the Proxy Statement (as defined in
Section 7.4(a)) are filed with the Securities and Exchange Commission.
3.22 No Untrue Representations. No representation or warranty by SHC in this
Plan of Merger, and no Exhibit or certificate issued by SHC and furnished or to
be furnished to HEALTHSOUTH pursuant hereto, or in connection with the
transactions contemplated hereby, contains or will contain any untrue statement
of a material fact in response to the disclosure requested, or omits or will
omit to state a material fact necessary to make the statements or facts
contained therein in response to the disclosure requested not misleading in
light of all of the circumstances then prevailing.
<PAGE>
Section 4. Representations and Warranties of the Subsidiary and HEALTHSOUTH.
The Subsidiary and HEALTHSOUTH, jointly and severally, hereby represent and
warrant to SHC as follows:
4.1 Organization, Existence and Capital Stock. The Subsidiary is a
corporation duly organized and validly existing and is in good standing under
the laws of the State of Delaware. The Subsidiary's authorized capital consists
of 1,000 shares of Common Stock, par value $.01 per share, all of which shares
are issued and registered in the name of HEALTHSOUTH. The Subsidiary has not,
within the two years immediately preceding the date of this Plan of Merger,
owned, directly or indirectly, any shares of SHC Common Stock.
4.2 Power and Authority. The Subsidiary has corporate power to execute,
deliver and perform the Plan of Merger and all agreements and other documents
executed and delivered, or to be executed and delivered, by it pursuant to the
Plan of Merger, and, subject to the satisfaction of the conditions precedent set
forth herein subject to stockholder approval as required by Delaware law, has
taken all actions required by law, its Certificate of Incorporation, its Bylaws
or otherwise, to authorize the execution and delivery of the Plan of Merger and
such related documents. The execution and delivery of the Plan of Merger does
not and, subject to the receipt of required stockholder and regulatory approvals
and any other required third-party consents or approvals, the consummation of
the Merger contemplated hereby will not, violate any provisions of the
Certificate of Incorporation or Bylaws of the Subsidiary, or any agreement,
instrument, order, judgment or decree to which the Subsidiary is a party or by
which it is bound, violate any restrictions of any kind to which the Subsidiary
is subject, or result in the creation of any lien, charge or encumbrance upon
any of the property or assets of the Subsidiary.
4.3 Commissions and Fees. Except for fees owed to Smith Barney Inc., there
are no claims for brokerage commissions, investment bankers' fees or finder's
fees in connection with the transaction contemplated by the Plan of Merger
resulting from any action taken by the Subsidiary or any of its officers,
Directors or agents.
4.4 No Subsidiaries. The Subsidiary does not own stock in, and does not
control directly or indirectly, any other corporation, association or business
organization. The Subsidiary is not a party to any joint venture or partnership.
4.5 Legal Proceedings. There are no actions, suits or proceedings pending or
threatened against the Subsidiary, at law or in equity, relating to or affecting
the Subsidiary, including the Merger. The Subsidiary does not know or have any
reasonable grounds to know of any justification for any such action, suit or
proceeding.
4.6 No Contracts or Liabilities. Other than the obligations created under the
Plan of Merger, the Subsidiary is not obligated under any contracts, claims,
leases, liabilities (contingent or otherwise), loans or otherwise.
Section 5. Representations and Warranties of HEALTHSOUTH.
HEALTHSOUTH hereby represents and warrants to SHC as follows:
5.1 Organization, Existence and Good Standing. HEALTHSOUTH is a corporation
duly organized and validly existing and is in good standing under the laws of
the State of Delaware. HEALTHSOUTH has all necessary corporate power to own its
properties and assets and to carry on its business as presently conducted.
HEALTHSOUTH is duly qualified to do business and is in good standing in all
jurisdictions in which the character of the property owned, leased or operated
or the nature of the business transacted by it makes qualification necessary.
HEALTHSOUTH is not, and has not been within the two years immediately preceding
the date of this Plan of Merger, a subsidiary or division of another
corporation, nor has HEALTHSOUTH within such time owned, directly or indirectly,
any shares of SHC Common Stock.
5.2 Power and Authority. HEALTHSOUTH has corporate power to execute, deliver
and perform the Plan of Merger and all agreements and other documents executed
and delivered, or to be executed and delivered, by it pursuant to the Plan of
<PAGE>
Merger, and, subject to the satisfaction of the conditions precedent set forth
herein has taken all actions required by law, its Certificate of Incorporation,
its Bylaws or otherwise, to authorize the execution and delivery of the Plan of
Merger and such related documents. The execution and delivery of the Plan of
Merger does not and, subject to the receipt of required stockholder and
regulatory approvals and any other required third-party consents or approvals,
the consummation of the Merger contemplated hereby will not, violate any
provisions of the Certificate of Incorporation or Bylaws of HEALTHSOUTH, or any
provision of, or result in the acceleration of any obligation under, any
mortgage, lien, lease, agreement, instrument, order, arbitration award, judgment
or decree to which HEALTHSOUTH is a party or by which it is bound, or violate
any restrictions of any kind to which HEALTHSOUTH is subject. The execution and
delivery of this Agreement has been approved by the Board of Directors of
HEALTHSOUTH.
5.3 HEALTHSOUTH Common Stock. On the Closing Date, HEALTHSOUTH will have a
sufficient number of authorized but unissued and/or treasury shares of its
Common Stock available for issuance to the holders of SHC Shares in accordance
with the provisions of the Plan of Merger. The HEALTHSOUTH Common Stock to be
issued pursuant to the Plan of Merger will, when so delivered, be (i) duly and
validly issued, fully paid and nonassessable, (ii) issued pursuant to an
effective registration statement under the Securities Act of 1933, as amended,
and (iii) authorized for listing on the New York Stock Exchange, Inc. (the
"Exchange") upon official notice of issuance.
5.4 Capitalization. HEALTHSOUTH has an authorized capitalization of 1,500,000
shares of Preferred Stock, par value $.10 per share, of which no shares are
issued and outstanding, and no shares are held in treasury, and 100,000,000
shares of Common Stock, par value $.01 per share, of which 35,533,661 shares are
issued and outstanding, and 91,000 shares are held in treasury. All of the
issued and outstanding shares of HEALTHSOUTH Common Stock have been duly and
validly issued and are fully paid and non-assessable. Except as disclosed in the
HEALTHSOUTH Documents (as hereinafter defined), and except as described on
Exhibit 5.4, there are no options, warrants or similar rights granted by
HEALTHSOUTH or any other agreements to which HEALTHSOUTH is a party providing
for the issuance or sale by it of any additional securities. There is no
liability for dividends declared or accumulated but unpaid with respect to any
shares of HEALTHSOUTH Common Stock. HEALTHSOUTH has not made any distributions
to any holder of HEALTHSOUTH Common Stock or participated in or effected any
issuance, exchange or retirement of HEALTHSOUTH Common Stock, or otherwise
changed the equity interests of holders of HEALTHSOUTH Common Stock, in
contemplation of effecting the Merger within the two years immediately preceding
the date of this Plan of Merger. Any shares of HEALTHSOUTH Common Stock that
HEALTHSOUTH has re-acquired during the two years immediately preceding the date
of this Plan of Merger have been so re-acquired only for purposes other than
Business Combinations.
5.5 Subsidiary Common Stock. HEALTHSOUTH owns, beneficially and of record,
all of the issued and outstanding shares of Subsidiary Common Stock, which are
validly issued and outstanding, fully paid and nonassessable, free and clear of
all liens and encumbrances. HEALTHSOUTH has the corporate power to endorse and
surrender such Subsidiary Shares for cancellation pursuant to the Plan of
Merger. HEALTHSOUTH has taken all such actions as may be required in its
capacity as the sole stockholder of the Subsidiary to approve the Merger.
5.6 HEALTHSOUTH Documents. HEALTHSOUTH has heretofore furnished SHC with
the following documents:
(i) its Annual Report on Form 10-K for the Fiscal Year Ended December 31,
1993;
(ii) its 1993 Annual Report to Stockholders;
(iii) the Proxy Statement utilized in soliciting proxies in connection
with the 1994 Annual Meeting of Stockholders of HEALTHSOUTH;
(iv) its Quarterly Reports on Form 10-Q for the fiscal quarters ended
March 31, June 30 and September 30, 1994;
(v) the Registration Statement on Form S-3 (Registration No. 33-52111)
relating to a recent public offering of debt securities of HEALTHSOUTH,
together with Amendments No. 1, No. 2 and No. 3 thereto; and
<PAGE>
(vi) the Proxy Statement -- Prospectus relating to its recent merger with
ReLife, Inc.
(documents (i)- (vi) above being collectively referred to herein as the
"HEALTHSOUTH Documents"). As of their respective dates, the HEALTHSOUTH
Documents did not contain any untrue statements of material facts or omit to
state material facts required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. As of their respective dates, the descriptions of the business,
operations and financial condition of HEALTHSOUTH contained in the HEALTHSOUTH
Documents complied in all material respects with the applicable requirements of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended, and the regulations promulgated under such statutes. The financial
statements contained in the HEALTHSOUTH Documents, together with the notes
thereto, have been prepared in accordance with generally accepted accounting
principles consistently followed throughout the periods indicated, reflect all
known liabilities of HEALTHSOUTH, including all known contingent liabilities as
of the end of each period reflected therein, and present fairly the financial
condition of HEALTHSOUTH at said dates and the consolidated results of
operations and cash flows of HEALTHSOUTH for the periods then ended.
5.7 Investment Intent. HEALTHSOUTH is acquiring the SHC Shares hereunder for
its own account and not with a view to the distribution or sale thereof, and
HEALTHSOUTH has no understanding, agreement or arrangement to sell, distribute,
partition or otherwise transfer or assign all or any part of the SHC Shares to
any other person, firm or corporation.
5.8 Commissions and Fees. Except for fees owed to Smith Barney Inc., there
are no claims for brokerage commissions, investment bankers' fees or finder's
fees in connection with the transactions contemplated by the Plan of Merger
resulting from any action taken by HEALTHSOUTH or any of its officers, Directors
or agents.
5.9 Legal Proceedings. Except as disclosed in the HEALTHSOUTH Documents,
there is no material litigation, governmental investigation or other proceeding
pending or, so far as is known to HEALTHSOUTH, threatened against or relating to
HEALTHSOUTH, its properties or business, or the transaction contemplated by the
Plan of Merger and, so far as is known to HEALTHSOUTH, no basis for any such
action exists.
5.10 No Violations. Subject to compliance with applicable securities laws and
the HSR Act, the consummation of the Merger will not violate any law or
restriction to which HEALTHSOUTH is subject.
5.11 No Material Changes. Since September 30, 1994, except as set forth on
Exhibit 5.11, there has not been (i) any material adverse change in the
financial condition, business, properties, or assets of HEALTHSOUTH and its
subsidiaries; (ii) any material loss or damage to any of the properties or
assets of HEALTHSOUTH and its subsidiaries (whether or not covered by insurance)
which affects or impairs the ability of HEALTHSOUTH and its subsidiaries to
conduct their businesses or any labor trouble or any other event or condition of
any character which has materially and adversely affected HEALTHSOUTH's business
or the business of any of its subsidiaries; (iii) any mortgage or pledge of any
of the properties or assets of HEALTHSOUTH or any of its subsidiaries, or any
indebtedness incurred by HEALTHSOUTH or any of its subsidiaries maturing more
than one year from the date the indebtedness was incurred; (iv) any purchase,
redemption, or other acquisition by HEALTHSOUTH of any shares of its Common
Stock; (v) any payment or declaration of a dividend or any other distribution or
payment in respect of HEALTHSOUTH Common Stock; (vi) any issuance, sale, or
other disposition of any shares, options or warrants of HEALTHSOUTH Common Stock
or of any shares of capital stock of any subsidiary of HEALTHSOUTH or any
evidence of indebtedness or securities of HEALTHSOUTH or any of HEALTHSOUTH's
subsidiaries, except upon exercise of previously outstanding stock options or in
the ordinary course of HEALTHSOUTH's business; or (vii) any notice received by
HEALTHSOUTH or any of its subsidiaries from any state or federal taxing
authorities notifying that HEALTHSOUTH or any of its subsidiaries is subject to
any material action or proceeding for assessment or collection of taxes asserted
against HEALTHSOUTH or any of its subsidiaries other than actions or proceedings
or claims for assessment or collection of taxes which are being contested in
good faith by appropriate proceedings.
<PAGE>
5.12 Retirement or Re-Acquisition of HEALTHSOUTH Common Stock. HEALTHSOUTH
has not agreed directly or indirectly to retire or re-acquire all or part of the
shares of HEALTHSOUTH Common Stock issued pursuant to Section 2.1 hereof.
5.13 Disposition of Assets of Surviving Corporation. HEALTHSOUTH does not
intend or plan to dispose of, or to cause the Surviving Corporation to dispose
of, a significant part of the assets of the Surviving Corporation within two
years after the Effective Time, other than dispositions in the ordinary course
of business of the Surviving Corporation and dispositions intended to eliminate
duplicate facilities or excess capacity.
5.14 Vote Required. The affirmative vote of the holders of a majority of the
outstanding shares of HEALTHSOUTH Common Stock entitled to vote thereon is the
only vote of the holders in each class or series of HEALTHSOUTH capital stock
necessary to approve this Plan of Merger, the Merger and the transactions
contemplated by this Plan of Merger.
5.15 Opinion of Financial Advisor. HEALTHSOUTH has received the oral opinion
of Smith Barney Inc. to the effect that, as of the date hereof, the Merger
Consideration is fair to HEALTHSOUTH from a financial point of view, a written
copy of which opinion will be delivered by HEALTHSOUTH to SHC prior to the date
on which the definitive proxy materials for the Proxy Statement (as defined in
Section 7.4(a)) are filed with the Securities and Exchange Commission.
5.16 Tax Returns. HEALTHSOUTH has filed all tax returns required to be filed
by it or requests for extensions to file such returns or reports have been
timely filed and granted and have not expired, except to the extent that such
failures to file, taken together, do not have a material adverse effect on
HEALTHSOUTH. HEALTHSOUTH has made all payments shown as due on such returns.
HEALTHSOUTH has not been notified that any tax returns of HEALTHSOUTH are
currently under audit by the Internal Revenue Service or any state or local tax
agency. No agreements have been made by HEALTHSOUTH for the extension of time or
the waiver of the statute of limitations for the assessment or payment of any
federal, state or local taxes.
5.17 Employee Benefit Plans; Employment Matters. (a) Except as disclosed in
the HEALTHSOUTH Documents, HEALTHSOUTH has neither established nor maintains nor
is obligated to make contributions to or under or otherwise participate in (i)
any bonus or other type of incentive compensation plan, program, agreement,
policy, commitment, contract or arrangement (whether or not set forth in a
written document), (ii) any pension, profit-sharing, retirement or other plan,
program or arrangement, or (iii) any other employee benefit plan, fund or
program, including, but not limited to, those described in Section 3(3) of
ERISA. All such plans have been operated and administered in all material
respects in accordance with, as applicable, ERISA, the Internal Revenue Code of
1986, as amended, Title VII of the Civil Rights Act of 1964, as amended, the
Equal Pay Act of 1967, as amended, the Age Discrimination in Employment Act of
1967, as amended, and the related rules and regulations adopted by those federal
agencies responsible for the administration of such laws. No act or failure to
act by HEALTHSOUTH has resulted in a "prohibited transaction" (as defined in
ERISA) with respect to the Plans that is not subject to a statutory or
regulatory exception. No "reportable event" (as defined in ERISA) has occurred
with respect to any of the Plans which is subject to Title IV of ERISA. Except
as disclosed in the HEALTHSOUTH Documents, HEALTHSOUTH has not previously made,
is not currently making, and is not obligated in any way to make, any
contributions to any multi-employer plan within the meaning of the
Multi-Employer Pension Plan Amendments Act of 1980.
(b) Except as disclosed in the HEALTHSOUTH Documents, HEALTHSOUTH is not a
party to any oral or written (i) union, guild or collective bargaining agreement
which agreement covers employees in the United States (nor is it aware of any
union organizing activity currently being conducted in respect to any of its
employees), (ii) agreement with any executive officer or other key employee the
benefits of which are contingent, or the terms of which are materially altered,
upon the occurrence of a transaction of the nature contemplated by this Plan of
Merger and which provides for the payment of in excess of $100,000, or (iii)
agreement or plan, including any stock option plan, stock appreciation rights
plan, restricted stock plan or stock purchase plan, any of the benefits of which
<PAGE>
will be increased, or the vesting the benefits of which will be accelerated, by
the occurrence of any of the transactions contemplated by this Plan of Merger or
the value of any of the benefits of which will be calculated on the basis of any
of the transactions contemplated by this Plan of Merger.
5.18 Compliance with Laws in General. Except as disclosed in the HEALTHSOUTH
Documents, HEALTHSOUTH has not received any notices of material violations of
any federal, state and local laws, regulations and ordinances relating to its
business and operations, including, without limitation, the Federal
Environmental Protection Act, the Occupational Safety and Health Act, the
Americans with Disabilities Act, the Medicare or applicable Medicaid statutes
and regulations and any Environmental Laws, and no notice of any pending
inspection or violation of any such law, regulation or ordinance has been
received by HEALTHSOUTH with respect to any alleged violation which, if it were
determined that a violation occurred, would have a material adverse effect on
HEALTHSOUTH.
5.19 Regulatory Approvals. HEALTHSOUTH holds all licenses, certificates of
need and other regulatory approvals required or necessary to be applied for or
obtained in connection with its business as presently conducted or as proposed
to be conducted, except where the failure to obtain such license, certificate of
need or regulatory approval would not have a material adverse effect on
HEALTHSOUTH. All such licenses, certificates of need and other regulatory
approvals relating to the business, operations and facilities of HEALTHSOUTH are
in full force and effect. Except as disclosed in the HEALTHSOUTH Documents, any
and all past litigation concerning such licenses, certificates of need and
regulatory approvals, and all claims and causes of action raised therein, has
been finally adjudicated. No such license, certificate of need or regulatory
approval has been revoked, conditioned (except as may be customary) or
restricted, and, except as disclosed in the HEALTHSOUTH Documents, no action
(equitable, legal or administrative), arbitration or other process is pending,
or to the best knowledge of HEALTHSOUTH, threatened, which in any way challenges
the validity of, or seeks to revoke, condition or restrict any such license,
certificate of need, or regulatory approval. Subject to compliance with
applicable securities laws and the HSR Act, the consummation of the Merger will
not violate any law or restriction to which HEALTHSOUTH is subject.
5.20 No Untrue Representation. No representation or warranty by HEALTHSOUTH
in this Plan of Merger, and no Exhibit or Certificate issued by HEALTHSOUTH and
furnished or to be furnished to SHC pursuant hereto, or in connection with the
transactions contemplated hereby, contains or will contain any untrue statement
of a material fact in response to the disclosure requested, or omits or will
omit to state a material fact necessary to make the statement or facts contained
therein in response to the disclosure requested not misleading in light of all
of the circumstances then prevailing.
Section 6. Access to Information and Documents.
6.1 Access to Information. Between the date hereof and the Closing Date, each
of SHC and HEALTHSOUTH will give to the other party and its counsel, accountants
and other representatives full access to all the properties, documents,
contracts, personnel files and other records of such party and shall furnish the
other party with copies of such documents and with such information with respect
to the affairs of such party as the other party may from time to time reasonably
request. Each party will disclose and make available to the other party and its
representatives all books, contracts, accounts, personnel records, letters of
intent, papers, records, communications with regulatory authorities and other
documents relating to the business and operations of such party. In addition,
SHC shall make available to HEALTHSOUTH all such banking, investment and
financial information as shall be necessary to allow for the efficient
integration of SHC's banking, investment and financial arrangements with those
of HEALTHSOUTH at the Effective Time.
6.2 Return of Records. If the transactions contemplated hereby are not
consummated and this Plan of Merger terminates, each party agrees to promptly
return all documents, contracts, records or properties of the other party and
all copies thereof furnished pursuant to this Section 6 or otherwise. All
information disclosed by any party or any affiliate of such party shall be
deemed to be confidential information, unless and until such information becomes
public otherwise than through the act or omission of the other party. Each party
agrees that it will not cause any confidential information to be disclosed to
<PAGE>
unauthorized persons and that it will not, without the prior written consent of
the affected person, disclose or make use of such confidential information
except in connection with the transactions contemplated by this Plan of Merger
or as otherwise required by applicable law.
6.3 Effect of Access. (a) Nothing contained in this Section 6 shall be deemed
to create any duty or responsibility on the part of either party to investigate
or evaluate the value, validity or enforceability of any contract, lease or
other asset included in the assets of the other party.
(b) With respect to matters as to which any party has made express
representations or warranties herein, the parties shall be entitled to rely upon
such express representations and warranties irrespective of any investigations
made by such parties, except to the extent that such investigations result in
actual knowledge of the inaccuracy or falsehood of particular representations
and warranties.
Section 7. Covenants.
7.1 Preservation of Business. SHC will use its best efforts to preserve the
business organization of SHC intact, to keep available to HEALTHSOUTH and the
Surviving Corporation the services of the present employees of SHC, and to
preserve for HEALTHSOUTH and the Surviving Corporation the goodwill of the
suppliers, customers and others having business relations with SHC.
7.2 Material Transactions. Prior to the Closing Date, SHC will not (other
than as required pursuant to the terms of the Plan of Merger and the related
documents), without first obtaining the written consent of HEALTHSOUTH:
(a) Encumber any asset or enter into any transaction or make any contract or
commitment relating to the properties, assets and business of SHC, other than in
the ordinary course of business or as otherwise disclosed herein.
(b) Enter into any employment contract which is not terminable upon notice of
30 days or less, at will, and without penalty to SHC except as provided herein.
(c) Except in connection with the ongoing construction or development of new
surgery centers as disclosed to HEALTHSOUTH, enter into any contract or
agreement (i) which cannot be performed within three months or less, or (ii)
which involves the expenditure of over $100,000.
(d) Issue or sell, or agree to issue or sell, any shares of capital stock or
other securities of SHC, except upon exercise of currently outstanding stock
options or warrants.
(e) Except for contributions to the Outpatient/Midwest Retirement Plan, make
any payment or distribution to the trustee under any bonus, pension,
profit-sharing or retirement plan or incur any obligation to make any such
payment or contribution which is not in accordance with SHC's usual past
practice, or make any payment or contributions or incur any obligation pursuant
to or in respect of any other plan or contract or arrangement providing for
bonuses, executive incentive compensation, pensions, deferred compensation,
retirement payments, profit-sharing or the like, establish or enter into any
such plan, contract or arrangement, or terminate any Plan.
(f) Extend credit to anyone, except in the ordinary course of business
consistent with prior practices.
(g) Guarantee the obligation of any person, firm or corporation, except in
the ordinary course of business consistent with prior practices.
(h) Amend its Certificate of Incorporation or Bylaws.
(i) Take any action of a character described in Section 3.11(a) to
3.11(h), inclusive.
7.3 Meetings of Stockholders. (a) Each of HEALTHSOUTH and SHC will take all
steps necessary in accordance with their respective Certificates of
Incorporation and Bylaws to call, give notice of, convene and hold meetings of
their respective stockholders as soon as practicable after the effectiveness of
the Registration Statement (as defined in Section 7.4 hereof), for the purpose
of approving this Plan of Merger and for such other purposes as may be
necessary. Unless this Plan of Merger shall have been validly terminated as
<PAGE>
provided herein, the Boards of Directors of HEALTHSOUTH and SHC (subject, in the
case of SHC, to the provisions of Section 8.1(d) hereof) will (i) recommend to
their respective stockholders the approval of this Plan of Merger, the
transactions contemplated hereby and any other matters to be submitted to the
stockholders in connection therewith, to the extent that such approval is
required by applicable law in order to consummate the Merger, and (ii) use their
respective reasonable, good faith efforts to obtain the approval by their
respective stockholders of this Plan of Merger and the transactions contemplated
hereby.
(b) Nothing contained herein shall affect the right of HEALTHSOUTH, the
Subsidiary and SHC to take action by written consent in lieu of meeting to the
extent permitted by applicable law and their respective Certificates of
Incorporation and Bylaws.
7.4 Registration Statement. (a) HEALTHSOUTH shall prepare and file with the
Securities and Exchange Commission and any other applicable regulatory bodies,
as soon as reasonably practicable, a Registration Statement on Form S-4 with
respect to the shares of HEALTHSOUTH Common Stock to be issued in the Merger
(the "Registration Statement"), and will otherwise proceed promptly to satisfy
the requirements of the Securities Act of 1933, including Rule 145 thereunder.
Such Registration Statement shall contain a joint proxy statement of HEALTHSOUTH
and SHC containing the information required by the Securities Exchange Act of
1934 (the "Proxy Statement"). HEALTHSOUTH shall take all reasonable steps to
cause the Registration Statement to be declared effective and to maintain such
effectiveness until all of the shares covered thereby have been distributed.
HEALTHSOUTH shall promptly amend or supplement the Registration Statement to the
extent necessary in order to make the statements therein not misleading or to
correct any misstatements which have become false or misleading. HEALTHSOUTH
shall use its reasonable, good faith efforts to have the Proxy Statement
approved by the SEC under the provisions of the Securities Exchange Act of 1934.
(b) Prior to the Closing Date, HEALTHSOUTH shall use its reasonable, good
faith efforts to cause the shares of HEALTHSOUTH Common Stock to be issued
pursuant to the Merger to be registered or qualified under all applicable
securities or Blue Sky laws of each of the states and territories of the United
States, and to take any other actions which may be necessary to enable the
Common Stock to be issued pursuant to the Merger to be distributed in each such
jurisdiction.
(c) Prior to the Closing Date, HEALTHSOUTH shall file an additional listing
application (the "Listing Application") with the Exchange relating to the shares
of HEALTHSOUTH Common Stock to be issued in connection with the Merger, and
shall use its reasonable, good faith efforts to cause such shares of HEALTHSOUTH
Common Stock to be approved for listing on the Exchange, upon official notice of
issuance, prior to the Closing Date.
(d) SHC shall furnish all information to HEALTHSOUTH with respect to SHC and
the SHC Subsidiaries and SHC Partnerships as HEALTHSOUTH may reasonably request
for inclusion in the Registration Statement, the Proxy Statement and the Listing
Application, and shall otherwise cooperate with HEALTHSOUTH in the preparation
and filing of such documents.
7.5 Exemption from State Takeover Laws. SHC shall take all reasonable steps
necessary to exempt SHC and the Merger from the requirements of any state
takeover statute or other similar state law which would prevent or impede the
consummation of the transactions contemplated hereby, by action of SHC's Board
of Directors or otherwise.
7.6 HSR Act Compliance. HEALTHSOUTH and SHC shall promptly make their
respective filings, and shall thereafter use their reasonable, good faith
efforts to promptly make any required submissions, under the HSR Act with
respect to the Merger and the transactions contemplated hereby. HEALTHSOUTH and
SHC will use their respective reasonable, good faith efforts to obtain all other
permits, authorizations, consents and approvals from third parties and
governmental authorities necessary to consummate the Merger and the transactions
contemplated hereby.
7.7 Public Disclosures. HEALTHSOUTH and SHC will consult with each other
before issuing any press release or otherwise making any public statement with
respect to the transactions contemplated by this Plan of Merger, and shall not
issue any such press release or make any such public statement prior to such
<PAGE>
consultation except as may be required by applicable law or requirements of the
Exchange. The parties shall issue a joint press release, mutually acceptable to
HEALTHSOUTH and SHC, promptly upon execution and delivery of this Plan of
Merger.
7.8 Resignation of SHC Directors. On or prior to the Closing Date, SHC shall
deliver to HEALTHSOUTH evidence satisfactory to HEALTHSOUTH of the resignation
of the Directors of SHC, such resignations to be effective on the Closing Date.
7.9 Notice of Subsequent Events. Each party hereto shall notify the other
parties of any changes, additions or events which would cause any material
change in or material addition to any Exhibit delivered by the notifying party
under this Plan of Merger, promptly after the occurrence of the same. If the
effect of such change or addition would, individually or in the aggregate with
the effect of changes or additions previously disclosed pursuant to this Section
7.9, constitute a material adverse effect on the notifying party, the
non-notifying party may, within ten days after receipt of such notice, elect to
terminate this Plan of Merger. If the non-notifying party does not give written
notice of such termination within such 10-day period, the non-notifying party
shall be deemed to have consented to such change or addition and shall not be
entitled to terminate this Plan of Merger by reason thereof (except to the
extent that a material adverse change with respect to the notifying party occurs
when the effect of such change or addition is aggregated with the effect of
subsequently-disclosed changes or additions).
7.10 No Solicitations. SHC may, directly or indirectly, furnish information
and access, in response to unsolicited requests therefor, to the same extent
permitted by Section 6.1, to any corporation, partnership, person or other
entity or group, pursuant to appropriate confidentiality agreements, and may
participate in discussions and negotiate with such corporation, partnership,
person or other entity or group concerning any proposal to acquire SHC upon a
merger, purchase of assets, purchase of or tender offer for SHC Shares or
similar transaction (an "Acquisition Transaction"), if the Board of Directors of
SHC determines in its good faith judgment in the exercise of its fiduciary
duties, after consultation with legal counsel and its financial advisors, that
such action is appropriate in furtherance of the best interest of its
stockholders. Except as set forth above, SHC shall not, and will direct each
officer, director, employee, representative and agent of SHC not to, directly or
indirectly, encourage, solicit, participate in or initiate discussions or
negotiations with or provide any information to any corporation, partnership,
person or other entity or group (other than HEALTHSOUTH or an affiliate or
associate or agent of HEALTHSOUTH) concerning any merger, sale of assets, sale
of or tender offer for SHC Shares or similar transactions involving SHC. SHC
shall promptly notify HEALTHSOUTH if it shall, on or after the date hereof, have
entered into a confidentiality agreement with any third party in response to any
unsolicited request for information and access in connection with a possible
Acquisition Transaction involving such party, such notification to include the
identity of such third party and the proposed terms of such possible Acquisition
Transaction.
7.11 Other Actions. Subject to the provisions of Section 7.10 hereof, SHC
shall not knowingly or intentionally take any action that would, or reasonably
might be expected to, result in any of its representations and warranties set
forth herein being or becoming untrue in any material respect, or in any of the
conditions to the Merger set forth in this Plan of Merger not being satisfied,
or (unless such action is required by applicable law) which would adversely
affect the ability of SHC or HEALTHSOUTH to obtain any consents or approvals
required for the consummation of the Merger without imposition of a condition or
restriction which would have a material adverse effect on the Surviving
Corporation.
7.12 Accounting Methods. Neither HEALTHSOUTH nor SHC shall change its methods
of accounting in effect at its most recent fiscal year end, except as required
by changes in generally accepted accounting principles as concurred by such
parties' independent accountants.
7.13 Pooling and Tax-Free Reorganization Treatment. Neither HEALTHSOUTH nor
SHC shall intentionally take or cause to be taken any action, whether on or
before the Effective Time, which would disqualify the Merger as a "pooling of
interests" for accounting purposes or as a "reorganization" within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended.
7.14 Affiliate and Pooling Agreements. HEALTHSOUTH and SHC will each use
their respective reasonable, good faith efforts to cause each of their
respective Directors and executive officers and each of their respective
"affiliates" (within the meaning of Rule 145 under the Securities Act of 1933,
as amended) to execute and deliver to HEALTHSOUTH as soon as practicable an
<PAGE>
agreement in the form attached hereto as Appendix 7.14 relating to the
disposition of the SHC Shares and shares of HEALTHSOUTH Common Stock held by
such person and the shares of HEALTHSOUTH Common Stock issuable pursuant to this
Plan of Merger.
7.15 Cooperation. (a) HEALTHSOUTH and SHC shall together, or pursuant to an
allocation of responsibility agreed to between them, (i) cooperate with one
another in determining whether any filings required to be made or consents
required to be obtained in any jurisdiction prior to the Effective Time in
connection with the consummation of the transactions contemplated hereby and
cooperate in making any such filings promptly and in seeking to obtain timely
any such consents, (ii) use their respective best efforts to cause to be lifted
any injunction prohibiting the Merger, or any part thereof, or the other
transactions contemplated hereby, and (iii) furnish to one another and to one
another's counsel all such information as may be required to effect the
foregoing actions.
(b) Subject to the terms and conditions herein provided, and unless this Plan
of Merger shall have been validly terminated as provided herein, each of
HEALTHSOUTH and SHC shall use all reasonable efforts (i) to take, or cause to be
taken, all actions necessary to comply promptly with all legal requirements
which may be imposed on such party (or any subsidiaries or affiliates of such
party) with respect to the Plan of Merger and to consummate the transactions
contemplated hereby, subject to the votes of its stockholders described above,
and (ii) to obtain (and to cooperate with the other party to obtain) any
consent, authorization, order or approval of, or any exemption by, any
governmental entity and/or any other public or private third party which is
required to be obtained or made by such party or any of its subsidiaries or
affiliates in connection with this Plan of Merger and the transactions
contemplated hereby. Each of HEALTHSOUTH and SHC will promptly cooperate with
and furnish information to the other in connection with any such burden suffered
by, or requirement imposed upon, either of them or any of their subsidiaries or
affiliates in connection with the foregoing.
7.16 SHC Stock Options and Warrants. (a) As soon as reasonably practicable
after the Effective Time of the Merger, HEALTHSOUTH shall deliver to the holders
of SHC stock options and warrants appropriate notices setting forth such
holders' rights pursuant to the stock option plans under which such SHC stock
options were issued and the stock option agreements or warrant agreements
evidencing such options or warrants, which shall continue in full force and
effect on the same terms and conditions (subject to the adjustments required by
Sections 2.1(e) or this Section 7.16 after giving effect to the Merger and the
assumption of such options and warrants by HEALTHSOUTH as set forth herein) as
in effect immediately prior to the Effective Time. HEALTHSOUTH shall comply with
the terms of the stock option plans, the stock option agreements and the warrant
agreements as so adjusted, and shall use its reasonable, good faith efforts to
ensure, to the extent required by, and subject to the provisions of, such plans
or agreements, that the SHC stock options which qualified as incentive stock
options prior to the Effective Time of the Merger shall continue to qualify as
incentive stock options after the Effective Time of the Merger.
(b) HEALTHSOUTH shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of HEALTHSOUTH Common Stock for delivery
upon exercise of the SHC stock options and warrants assumed by HEALTHSOUTH in
accordance with Section 2.1(e). At the Effective Time, HEALTHSOUTH shall file
with the SEC a registration statement on Form S-8 with respect to shares of
HEALTHSOUTH Common Stock subject to such SHC stock options and shall use its
best efforts to maintain the effectiveness of a registration statement or
registration statements covering such options (and maintain the current status
of the prospectus or prospectuses contained therein) for so long as such SHC
stock options remain outstanding. With respect to those individuals who
subsequent to the Merger will be subject to the reporting requirements under
Section 16(a) of the Exchange Act, where applicable, HEALTHSOUTH shall
administer the plans assumed pursuant to Section 2.1(e) hereof in a manner that
complies with Rule 16b-3 promulgated under the Exchange Act to the extent the
applicable plan complied with such rule prior to the Merger.
(c) Except to the extent otherwise agreed to by the parties, all restrictions
or limitations on transfer and vesting with respect to the SHC stock options
awarded under any plan, program, or arrangement of SHC or any of its
subsidiaries, to the extent that such restrictions or limitations shall not have
already lapsed, shall remain in full force and effect with respect to such
options after giving effect to the Merger and the assumption by HEALTHSOUTH as
set forth above.
<PAGE>
7.17 Publication of Combined Results. HEALTHSOUTH agrees that within 15 days
after the end of the first calendar month following at least 30 days after the
Closing Date, HEALTHSOUTH shall cause publication of the combined results of
operations of HEALTHSOUTH and SHC. For purposes of this Section 7.17, the term
"publication" shall have the meaning provided in SEC Accounting Series Release
No. 135.
7.18 Employee Welfare. HEALTHSOUTH agrees that following the Closing Date,
employees of SHC shall be entitled to receive the same customary employee
benefits as HEALTHSOUTH provides its employees. In addition, except for those
employees identified in Section 7.19 below, if during the one-year period
following the Closing Date, any employee of SHC listed on Exhibit 7.18 is
terminated, such terminated employee shall receive a lump sum cash severance
payment in the amount of not less than three months' salary or wages.
7.19 Retention Bonus Agreement; Employment Agreement. Between the date of
this Plan of Merger and the Closing Date, HEALTHSOUTH and SHC shall, subject to
confirmation by Ernst & Young that such agreements do not adversely affect
pooling-of-interests accounting treatment, enter into (i) an Agreement with Rock
A. Morphis in the form of Exhibit 7.19.1 attached hereto; and (ii) an Employment
Agreement with H. Michael Finley in the form of Exhibit 7.19.2 attached hereto.
Section 8. Termination, Amendment and Waiver.
8.1 Termination. This Plan of Merger may be terminated at any time prior to
the Effective Time of the Merger, whether before or after approval of matters
presented in connection with the Merger by the holders of SHC Shares and the
holders of HEALTHSOUTH Common Stock:
(a) by mutual written consent of HEALTHSOUTH, the Subsidiary and SHC;
(b) by either HEALTHSOUTH or SHC:
(i) if, upon a vote at a duly held meeting of stockholders or any adjournment
thereof, any required approval of the holders of SHC Shares or the holders of
HEALTHSOUTH Common Stock shall not have been obtained;
(ii) if the Merger shall not have been consummated on or before June 30,
1995, unless the failure to consummate the Merger is the result of a willful and
material breach of this Plan of Merger by the party seeking to terminate this
Plan of Merger; provided, however, that the passage of such period shall be
tolled for any part thereof (but not exceeding 60 days in the aggregate) during
which any party shall be subject to a nonfinal order, decree, ruling or action
restraining, enjoining or otherwise prohibiting the consummation of the Merger
or the calling or holding of a meeting of stockholders;
(iii) if any court of competent jurisdiction or other governmental entity
shall have issued an order, decree or ruling or taken any other action
permanently enjoining, restraining or otherwise prohibiting the Merger and such
order, decree, ruling or other action shall have become final and nonappealable;
(iv) in the event of a breach by the other party of any representation,
warranty, covenant or other agreement contained in this Plan of Merger which (A)
would give rise to the failure of a condition set forth in Section 9.2(a) or (b)
or Section 9.3(a) or (b), as applicable, and (B) cannot be or has not been cured
within 30 days after the giving of written notice to the breaching party of such
breach (a "Material Breach") (provided that the terminating party is not then in
Material Breach of any representation, warranty, covenant or other agreement
contained in this Plan of Merger); or
(v) if either HEALTHSOUTH or SHC gives notice of termination pursuant to
Section 7.9;
(c) by either HEALTHSOUTH or SHC in the event that (i) all of the conditions
to the obligation of such party to effect the Merger set forth in Section 9.1
shall have been satisfied and (ii) any condition to the obligation of such party
to effect the Merger set forth in Section 9.2 (in the case of HEALTHSOUTH) or
Section 9.3 (in the case of SHC) is not capable of being satisfied prior to the
end of the period referred to in Section 8.1(b)(ii);
<PAGE>
(d) By SHC, if SHC's Board of Directors shall have (i) determined, in the
exercise of its fiduciary duties under applicable law, not to recommend the
Merger to the holders of SHC Shares or shall have withdrawn such recommendation
or (ii) approved, recommended or endorsed any Acquisition Transaction (as
defined in Section 7.10) other than this Plan of Merger or (iii) resolved to do
any of the foregoing;
(e) By either HEALTHSOUTH or SHC, if the condition set forth in Section
9.1(g)(i) is not satisfied by March 1, 1995; or
(f) By HEALTHSOUTH, if the holders of more than 10% of the SHC Shares shall
have given proper written demand for appraisal of the value of such SHC Shares
as provided in Section 262 of the DGCL before the taking of a vote on the Merger
at any meeting of the holders of SHC Shares called for that purpose.
8.2 Effect of Termination. In the event of termination of this Plan of Merger
as provided in Section 8.1, this Plan of Merger shall forthwith become void and
have no effect, without any liability or obligation on the part of any party,
other than the provisions of Sections 6.2, 8.2, 8.6 and 8.7, and except to the
extent that such termination results from the willful and material breach by a
party of any of its representations, warranties, covenants or other agreements
set forth in this Plan of Merger.
8.3 Amendment. This Plan of Merger may be amended by the parties at any time
before or after any required approval of matters presented in connection with
the Merger by the holders of SHC Shares or holders of HEALTHSOUTH Common Stock;
provided, however, that after any such approval, there shall be made no
amendment that pursuant to Section 251(d) of the DGCL requires further approval
by such stockholders without the further approval of such stockholders. This
Plan of Merger may not be amended except by an instrument in writing signed on
behalf of each of the parties.
8.4 Extension; Waiver. At any time prior to the Effective Time of the Merger,
the parties may (a) extend the time for the performance of any of the
obligations or other acts of the other parties, (b) waive any inaccuracies in
the representations and warranties contained in this Plan of Merger or in any
document delivered pursuant to this Plan of Merger or (c) subject to the proviso
of Section 8.3, waive compliance with any of the agreements or conditions
contained in this Plan of Merger. Any agreement on the part of a party to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. The failure of any party to this Plan of
Merger to assert any of its rights under this Plan of Merger or otherwise shall
not constitute a waiver of such rights, except as otherwise provided in Section
7.9.
8.5 Procedure for Termination, Amendment, Extension or Waiver. A termination
of this Plan of Merger pursuant to Section 8.1, an amendment of this Plan of
Merger pursuant to Section 8.3, or an extension or waiver pursuant to Section
8.4 shall, in order to be effective, require in the case of HEALTHSOUTH, the
Subsidiary or SHC, action by its Board of Directors or the duly authorized
designee of the Board of Directors.
8.6 Expenses. All costs and expenses incurred in connection with this Plan of
Merger and the transactions contemplated hereby shall be paid by the party
incurring such expense, except that expenses incurred in connection with
printing and mailing the Proxy Statement and the Registration Statement shall be
shared equally by SHC and HEALTHSOUTH.
8.7 Certain Rights of HEALTHSOUTH. If this Plan of Merger is terminated by
SHC pursuant to Section 8.1(d) and, within six months after the effective date
of such termination, SHC enters into an agreement with another person or entity
(a "Third Party") with respect to an Acquisition Transaction (as defined in
Section 7.10 hereof), SHC shall immediately notify HEALTHSOUTH in writing that
an agreement has been entered into with respect to an Acquisition Transaction.
Each of HEALTHSOUTH and the Third Party shall then have not less than 48 hours
(the exact deadline to be set by SHC) from the time of receipt of written notice
by SHC to submit a final and best offer (a "Final Offer") for a business
combination with SHC, together with a fully-executed definitive agreement,
acceptable to SHC, reflecting the terms of such Final Offer. Not later than 48
hours after receipt of any Final Offer from HEALTHSOUTH and the Third Party (but
in no event sooner than the expiration of the deadline set by SHC unless
<PAGE>
HEALTHSOUTH has expressly declined to submit a Final Offer), SHC shall notify
the party submitting the most favorable Final Offer (as determined by SHC's
Board of Directors after consulting with its legal counsel and financial
advisors) and, subject to the approval of SHC's Board of Directors, SHC shall
enter into a definitive agreement with the party which submitted the most
favorable Final Offer. HEALTHSOUTH agrees that any such determination of the
most favorable Final Offer by SHC's Board of Directors shall be final and
binding, and HEALTHSOUTH agrees not to dispute any such determination in any
forum or jurisdiction; provided, however, that the foregoing covenant not to sue
of HEALTHSOUTH is expressly conditioned upon SHC's obtaining a like covenant not
to sue from the Third Party prior to SHC's determination of the most favorable
Final Offer.
Section 9. Conditions to Closing.
9.1 Mutual Conditions. The respective obligations of each party to effect the
Merger shall be subject to the satisfaction, at or prior to the Closing Date, of
the following conditions (any of which may be waived in writing by HEALTHSOUTH,
the Subsidiary and SHC):
(a) None of HEALTHSOUTH, the Subsidiary or SHC nor any of their respective
subsidiaries shall be subject to any order, decree or injunction by a court of
competent jurisdiction which (i) prevents or materially delays the consummation
of the Merger or (ii) would impose any material limitation on the ability of
HEALTHSOUTH effectively to exercise full rights of ownership of the Common Stock
of the Surviving Corporation or any material portion of the assets or business
of SHC, the SHC Subsidiaries and the SHC Partnerships, taken as a whole.
(b) No statute, rule or regulation shall have been enacted by the government
(or any governmental agency) of the United States or any state, municipality or
other political subdivision thereof that makes the consummation of the Merger
and any other transaction contemplated hereby illegal.
(c) Any waiting period (and any extension thereof) applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated.
(d) The Registration Statement shall have been declared effective and no stop
order with respect to the Registration Statement shall be in effect.
(e) The holders of HEALTHSOUTH Common Stock and the holders of SHC Shares
shall have approved the adoption of this Plan of Merger and any other matters
submitted to them in accordance with the provisions of Section 7.3 hereof.
(f) The shares of HEALTHSOUTH Common Stock to be issued in connection with
the Merger shall have been approved for listing on the Exchange and shall have
been issued pursuant to an effective registration statement (which is subject to
no stop order) or in transactions qualified or exempt from registration under
applicable securities or Blue Sky laws of such states and territories of the
United States as may be required.
(g) The Merger shall qualify for "pooling of interests" accounting treatment,
and HEALTHSOUTH and SHC shall each have received letters to that effect from
Ernst & Young, independent accountants for HEALTHSOUTH and SHC, dated (i) not
later than March 1, 1995, (ii) the date of the mailing of the Proxy Statement
and (iii) the Closing Date.
9.2 Conditions to Obligations of HEALTHSOUTH and the Subsidiary. The
obligations of HEALTHSOUTH and the Subsidiary to consummate the Merger and the
other transactions contemplated hereby shall be subject to the satisfaction, at
or prior to the Closing Date, of the following conditions (any of which may be
waived by HEALTHSOUTH and the Subsidiary):
(a) Each of the agreements of SHC to be performed at or prior to the Closing
Date pursuant to the terms hereof shall have been duly performed in all material
respects, and SHC shall have performed, in all material respects, all of the
acts required to be performed by it at or prior to the Closing Date by the terms
hereof.
(b) The representations and warranties of SHC set forth in Section 3.11(a)
shall be true and correct as of the date of this Plan of Merger and as of the
Closing Date. The representations and warranties of SHC set forth in Sections
3.1, 3.2, 3.6, 3.9, 3.17, 3.18 and 3.19 shall be true and correct in all
<PAGE>
material respects as of the date of this Plan of Merger and as of the Closing
Date as though made on and as of the Closing Date, except to the extent that
such representations and warranties expressly relate to an earlier date (in
which case such representations and warranties shall be true and correct in all
material respects on and as of such earlier date). The representations and
warranties of SHC set forth in this Plan of Merger (other than those set forth
in Section 3.11(a), 3.2, 3.6, 3.9, 3.17, 3.18 and 3.19), shall be true and
correct as of the date of this Plan of Merger and as of the Closing Date as
though made on and as of the Closing Date, (i) except to the extent that such
representations and warranties expressly relate to an earlier date (in which
case such representations and warranties shall be true and correct on and as of
such earlier date) and (ii) except for breaches of representations and
warranties as to matters that do not have a material adverse effect on SHC.
HEALTHSOUTH and the Subsidiary shall have been furnished with a certificate,
executed by a duly authorized officer of SHC, dated the Closing Date, certifying
in such detail as HEALTHSOUTH and the Subsidiary may reasonably request as to
the fulfillment of the foregoing conditions.
(c) HEALTHSOUTH and the Subsidiary shall have obtained, or obtained the
transfer of, any licenses, certificates of need and other regulatory approvals
necessary to allow the Surviving Corporation to operate the SHC facilities,
unless the failure to obtain such transfer or approval would not have a material
adverse effect on SHC.
(d) HEALTHSOUTH shall have received an opinion from Haskell Slaughter Young &
Johnston, Professional Association, to the effect that the merger will
constitute a reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended, which opinion may be based upon reasonable
representations of fact provided by officers of HEALTHSOUTH, SHC and the
Subsidiary.
9.3 Conditions to Obligations of SHC. The obligations of SHC to consummate
the Merger and the other transactions contemplated hereby shall be subject to
the satisfaction, at or prior to the Closing Date, of the following conditions
(any of which may be waived by SHC):
(a) Each of the agreements of HEALTHSOUTH and the Subsidiary to be performed
at or prior to the Closing Date pursuant to the terms hereof shall have been
duly performed, in all material respects, and HEALTHSOUTH and the Subsidiary
shall have performed, in all material respects, all of the acts required to be
performed by them at or prior to the Closing Date by the terms hereof.
(b) The representations and warranties of HEALTHSOUTH set forth in Section
5.11(i) shall be true and correct as of the date of this Plan of Merger and as
of the Closing Date. The representations and warranties of HEALTHSOUTH set forth
in Sections 5.1, 5.2, 5.3, 5.12 and 5.13 shall be true and correct in all
material respects, as of the date of this Plan of Merger and as of the Closing
Date as though made on and as of the Closing Date, except to the extent that
such representations and warranties expressly relate to an earlier date (in
which case such representations and warranties shall be true and correct in all
material respects on and as of such earlier date). The representations and
warranties of HEALTHSOUTH set forth in this Plan of Merger (other than those set
forth in Sections 5.1, 5.2, 5.3, 5.11(i), 5.13 and 5.14) shall be true and
correct as of the date of this Plan of Merger and as of the Closing Date as
though made on and as of the Closing Date (i) except to the extent that such
representations and warranties expressly relate to an earlier date (in which
case such representations and warranties shall be true and correct on and as of
such earlier date), and (ii) except for breaches of representations and
warranties as to matters that do not have a material adverse effect on
HEALTHSOUTH. SHC shall have been furnished with a certificate, executed by duly
authorized officers of HEALTHSOUTH and the Subsidiary, dated the Closing Date,
certifying in such detail as SHC may reasonably request as to the fulfillment of
the foregoing conditions.
(c) SHC shall have received an opinion from Alston & Bird to the effect that
the Merger will constitute a reorganization with the meaning of Section 368(a)
of the Internal Revenue Code of 1986, as amended, which opinion may be based
upon reasonable representations of fact provided by officers of HEALTHSOUTH, SHC
and the Subsidiary.
<PAGE>
Section 10. Miscellaneous.
10.1 Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Plan of Merger or in any instrument
delivered pursuant to this Plan of Merger shall survive the Effective Time.
10.2 Notices. Any communications required or desired to be given hereunder
shall be deemed to have been properly given if sent by hand delivery or by
facsimile and overnight courier to the parties hereto at the following
addresses, or at such other address as either party may advise the other in
writing from time to time:
If to HEALTHSOUTH:
HEALTHSOUTH Corporation
Two Perimeter Park South
Birmingham, Alabama 35243
Attention: Michael D. Martin
Facsimile: (205) 969-4719
with copies to:
William W. Horton, Esq.
HEALTHSOUTH Corporation
Two Perimeter Park South
Birmingham, Alabama 35243
Facsimile: (205) 969-4732
and
J. Brooke Johnston, Jr., Esq.
Haskell Slaughter Young & Johnston,
Professional Association
1200 AmSouth/Harbert Plaza
1901 Sixth Avenue North
Birmingham, Alabama 35203
Facsimile: (205) 324-1133
If to SHC:
Surgical Health Corporation
990 Hammond Drive
Suite 300
Atlanta, Georgia 30328
Attention: Rock A. Morphis
Facsimile: (404) 673-1970
with a copy to:
J. Vaughan Curtis, Esq.
Alston & Bird
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309-3424
Facsimile: (404) 881-7777
All such communications shall be deemed to have been delivered on the date of
hand delivery or on the next business day following the deposit of such
communications with the overnight courier.
10.3 Further Assurances. Each party hereby agrees to perform any further acts
and to execute and deliver any documents which may be reasonably necessary to
carry out the provisions of this Plan of Merger.
<PAGE>
10.4 Indemnification. HEALTHSOUTH and Subsidiary agree that all rights to
indemnification for acts or omissions occurring prior to the Effective Time of
the Merger now existing in favor of the current or former directors or officers
of SHC and the SHC Subsidiaries as provided in their respective certificates or
articles of incorporation or bylaws shall survive the Merger and shall continue
in full force and effect in accordance with their terms. The provisions of this
Section 10.4 are intended to be for the benefit of, and shall be enforceable by,
each such indemnified party and each such indemnified party's heirs and
representatives.
10.5 Governing Law. This Plan of Merger shall be interpreted, construed and
enforced in accordance with the laws of the State of Delaware, applied without
giving effect to any conflicts-of-law principles.
10.6 "Including". The word "including", when following any general statement,
term or matter, shall not be construed to limit such statement, term or matter
to the specific terms or matters as provided immediately following the word
"including" or to similar items or matters, whether or not non-limiting language
(such as "without limitation", "but not limited to", or words of similar import)
is used with reference to the word "including" or the similar items or matters,
but rather shall be deemed to refer to all other items or matters that could
reasonably fall within the broadest possible scope of the general statement,
term or matter.
10.7 "Knowledge". "To the knowledge", "to the best knowledge, information and
belief", or any similar phrase shall be deemed to refer to the knowledge of the
Chairman of the Board, Chief Executive Officer or Chief Financial Officer of a
party and to include the assurance that such knowledge is based upon a
reasonable investigation, unless otherwise expressly provided.
10.8 "Material adverse change" or "material adverse effect". "Material
adverse change" or "material adverse effect" means, when used in connection with
SHC or HEALTHSOUTH, any change, effect, event or occurrence that has, or is
reasonably likely to have, individually or in the aggregate, a material adverse
impact on the business or financial position of such party and its subsidiaries
taken as a whole; provided, however, that "material adverse change" and
"material adverse effect" shall be deemed to exclude the impact of (i) changes
in generally accepted accounting principles, (ii) changes in applicable law, and
(iii) any changes resulting from any restructuring or other similar charges or
write-offs taken by SHC with the consent of HEALTHSOUTH; provided, however, that
no such changes or write-offs will be taken if such would adversely affect
pooling-of-interests accounting treatment for the Merger. Notwithstanding the
foregoing, "material adverse change" or "material adverse effect" shall not
mean, with respect to SHC, any reclassification of long-term indebtedness to
short-term indebtedness solely by reason of SHC's execution, delivery and
performance of its obligations under this Agreement.
10.9 "Hazardous Materials". The term "Hazardous Materials" means any material
which has been determined by any applicable governmental authority to be harmful
to the health or safety of human or animal life or vegetation, regardless of
whether such material is found on or below the surface of the ground, in any
surface or underground water, airborne in ambient air or in the air inside any
structure built or located upon or below the surface of the ground or in
building materials or in improvements of any structures, or in any personal
property located or used in any such structure, including, but not limited to,
all hazardous substances, imminently hazardous substances, hazardous wastes,
toxic substances, infectious wastes, pollutants and contaminants from time to
time defined, listed, identified, designated or classified as such under any
Environmental Laws (as defined in Section 10.10) regardless of the quantity of
any such material.
10.10 Environmental Laws. The term "Environmental Laws" means any federal,
state or local statute, regulation, rule or ordinance, and any judicial or
administrative interpretation thereof, regulating the use, generation, handling,
storage, transportation, discharge, emission, spillage or other release of
Hazardous Materials or relating to the protection of the environment.
10.11 Captions. The captions or headings in this Plan of Merger are made for
convenience and general reference only and shall not be construed to describe,
define or limit the scope or intent of the provisions of this Plan of Merger.
<PAGE>
10.12 Integration of Exhibits. All Exhibits attached to this Plan of Merger
are integral parts of this Plan of Merger as if fully set forth herein, and all
statements appearing therein shall be deemed disclosed for all purposes and not
only in connection with the specific representation in which they are explicitly
referenced.
10.13 Entire Agreement. This instrument, including all Exhibits attached
hereto, contains the entire agreement of the parties and supersedes any and all
prior or contemporaneous agreements between the parties, written or oral, with
respect to the transactions contemplated hereby. It may not be changed or
terminated orally, but may only be changed by an agreement in writing signed by
the party or parties against whom enforcement of any waiver, change,
modification, extension, discharge or termination is sought.
10.14 Counterparts. This Plan of Merger may be executed in several
counterparts, each of which, when so executed, shall be deemed to be an
original, and such counterparts shall, together, constitute and be one and the
same instrument.
10.15 Binding Effect. This Plan of Merger shall be binding on, and shall
inure to the benefit of, the parties hereto, and their respective successors and
assigns, and no other person shall acquire or have any right under or by virtue
of this Plan of Merger. No party may assign any right or obligation hereunder
without the prior written consent of the other parties.
10.16 No Rule of Construction. The parties acknowledge that this Plan of
Merger was initially prepared by HEALTHSOUTH, and that all parties have read and
negotiated the language used in this Plan of Merger. The parties agree that,
because all parties participated in negotiating and drafting this Plan of
Merger, no rule of construction shall apply to this Plan of Merger which
construes ambiguous language in favor of or against any party by reason of that
party's role in drafting this Plan of Merger.
IN WITNESS WHEREOF, HEALTHSOUTH, the Subsidiary and SHC have caused this
Amended and Restated Plan and Agreement of Merger to be executed by their
respective duly authorized officers, and have caused their respective corporate
seals to be hereunto affixed, all as of the day and year first above written.
SURGICAL HEALTH CORPORATION
By
-------------------------------
Rock A. Morphis
President and Chief Executive Officer
ATTEST:
--------------------------------
H. Michael Finley
Secretary
[ CORPORATE SEAL ]
<PAGE>
HEALTHSOUTH Corporation
By
----------------------------------
Richard M. Scrushy
Chariman of the Board, President and
Chief Executive Officer
ATTEST:
------------------------
Anthony J. Tanner
Secretary
[ CORPORATE SEAL ]
ASC ATLANTA ACQUISITION
COMPANY, INC.
By
----------------------------------
Richard M. Scrushy
President
ATTEST:
-----------------------------
Anthony J. Tanner
Secretary
[ CORPORATE SEAL ]
<PAGE>
APPENDIX 7.14
Gentlemen:
I have been advised that I might be considered to be an "affiliate" of
Surgical Health Corporation for purposes of Rule 145 under the Securities
Exchange Act of 1933, as amended (the "1993 Act"), and for purposes of generally
accepted accounting principles as such term relates to pooling of interests
accounting treatment for certain business combinations or the Securities and
Exchange Commission's Staff Accounting Bulletin No. 65.
HEALTHSOUTH Corporation ("HEALTHSOUTH"), ASC Atlanta Acquisition Company,
Inc. and Surgical Health Corporation ("SHC") have entered into a Plan and
Agreement of Merger dated as of the 22nd day of January, 1995 (the "Plan of
Merger"). Upon consummation of the transactions contemplated by the Plan of
Merger (the "Merger"), I will receive shares of capital stock of HEALTHSOUTH for
all of the shares of capital stock of SHC owned by me or as to which I may be
deemed a beneficial owner. I own _______ shares of common stock of SHC. Such
shares will be converted in the Merger into shares of common stock of
HEALTHSOUTH as described in the Plan of Merger. The shares of SHC capital stock
and HEALTHSOUTH capital stock owned by me or as to which I may deemed to be a
beneficial owner prior to the Merger are hereinafter collectively referred to as
the "Pre-Merger Stock" and the shares of HEALTHSOUTH capital stock received by
me in the Merger are hereinafter collectively referred to as the "Exchange
Stock". This agreement is hereinafter referred to as the "Letter Agreement".
I represent and warrant to, and agree with, HEALTHSOUTH, SHC and the
Subsidiary that:
A. I have read this Letter Agreement and the Plan of Merger and have
discussed their requirements and other applicable limitations upon my ability to
sell, transfer or otherwise dispose of the Pre-Merger Stock and Exchange Stock,
to the extent I felt necessary, with my counsel or counsel for SHC.
B. The shares of common stock of HEALTHSOUTH that I shall receive in exchange
for my shares of common stock of SHC are not being acquired by me with a view to
their distribution except to the extent and in the manner provided for in
paragraph (d) of Rule 145 under the 1933 Act.
C. I agree with you not to dispose of any such shares of common stock of
HEALTHSOUTH in any manner that would violate Rule 145.
I further agree with you that the certificate or certificates representing
such shares of common stock of HEALTHSOUTH may bear a legend referring to the
restrictions on disposition thereof in accordance with the provisions of the
foregoing paragraph and that stop transfer instructions may be filed with
respect to such shares with the transfer agent for such shares.
D. I understand that stop transfer instructions will be given to HEALTHSOUTH,
SHC and their respective transfer agents, as the case may be, with respect to
the shares of Pre-Merger Stock and the Exchange Stock in connection with the
restrictions set forth herein.
E. Notwithstanding the foregoing and any other agreements on my part in
connection with the Pre-Merger Stock and the Exchange Stock, I hereby agree (i)
that I will not sell or otherwise reduce my risk relative to any shares of
Pre-Merger Stock during the period of thirty days prior to the effective date of
Merger and (ii) that I will not sell or otherwise reduce my risk relative to any
shares of Exchange Stock until financial results covering at least thirty days
of combined operations have been published following the effective date of the
Merger so as to ensure that the Merger qualified as a pooling of interests for
accounting purposes.
It is understood and agreed that this Letter Agreement shall terminate and be
of no further force and effect if the Plan of Merger is terminated pursuant to
the terms thereof.
The agreements made by me in the foregoing paragraphs are on the
understanding and condition that you agree, in the event that any shares may be
disposed of in accordance with the provisions of paragraph E above, to deliver
in exchange for the certificate or certificates representing such shares a new
<PAGE>
certificate or certificates representing such shares not bearing the legend and
not subject to the stop transfer instruction referred to in paragraph D above,
and so long as I hold shares of stock subject to the provisions of the foregoing
paragraph (but not for a period in excess of two years from the date of
consummation of the Merger) to file with the Securities and Exchange Commission
or otherwise make publicly available all information about HEALTHSOUTH, to the
extent available to you without unreasonable effort or expense, necessary to
enable me to resell shares under the provisions of paragraph (d) of Rule 145.
This Letter Agreement shall be binding on my heirs, legal representatives and
successors.
Very truly yours,
[Name of Shareholder]
<PAGE>
ANNEX B
January 22, 1995
The Board of Directors
HEALTHSOUTH Corporation
Two Perimeter Park South
Birmingham, Alabama
Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to HEALTHSOUTH Corporation ("HEALTHSOUTH") of the consideration to be paid
by HEALTHSOUTH pursuant to the terms and subject to the conditions set forth in
the Plan and Agreement of the Merger, dated as of January 22, 1995 (the "Merger
Agreement"), by and among HEALTHSOUTH, ASC Atlanta Acquisition Company, Inc., a
wholly owned subsidiary of HEALTHSOUTH ("Subsidiary"), and Surgical Health
Corporation ("SHC"). As more fully described in the Merger Agreement, (A)
Subsidiary will be merged with and into SHC (the "Merger") and (B) each
outstanding share of (i) the common stock, par value $0.0025 per share, of SHC
(the "SHC Common Stock"), (ii) the Series A Convertible Preferred Stock, par
value $0.01 per share, of SHC (the "SHC Series A Preferred Stock"), (iii) the
Series B Convertible Preferred Stock, par value $0.01 per share, of SHC (the
"SHC Series B Preferred Stock") and (iv) the Series C Convertible Preferred
Stock, par value $0.01 per share, of SHC (the "SHC Series C Preferred Stock"
and, together with the SHC Common Stock, the SHC Series A Preferred Stock and
the SHC Series B Preferred Stock, the "SHC Shares") will be converted into the
right to receive that fraction of a share of the common stock, par value $0.01
per share, of HEALTHSOUTH (the "HEALTHSOUTH Common Stock") obtained by dividing
$4.60 by the average daily closing prices for the shares of HEALTHSOUTH Common
Stock for the 20 consecutive trading days on which such shares are actually
traded (as reported on the New York Stock Exchange Composite Transaction Tape)
ending at the close of trading on the third trading day immediately preceding
the closing date of the Merger (the "Base Period Trading Price"); provided, that
the Base Period Trading Price will be deemed to equal (i) $37.00 in the event
that the Base Period Trading Price is greater than $37.00 or (ii) $33.00 in the
event that the Base Period Trading Price is less than $33.00 (the ratio of the
number of shares of HEALTHSOUTH Common Stock for which each outstanding SHC
Share is to be exchanged, the "Exchange Ratio").
In arriving at our opinion, we reviewed the Merger Agreement and held
discussions with certain senior officers, directors and other representatives
and advisors of HEALTHSOUTH and certain senior officers and other
representatives and advisors of SHC concerning the businesses, operations and
prospects of HEALTHSOUTH and SHC. We examined certain publicly available
business and financial information relating to HEALTHSOUTH and SHC as well as
certain financial forecasts and other data for HEALTHSOUTH and SHC which were
provided to us by the respective managements of HEALTHSOUTH and SHC, including
information relating to certain strategic implications and operational benefits
anticipated from the Merger. We reviewed the financial terms of the Merger as
set forth in the Merger Agreement in relation to, among other things: current
and historical market prices and trading volumes of the HEALTHSOUTH Common
Stock; the historical and projected earnings of HEALTHSOUTH and SHC; and the
capitalization and financial condition of HEALTHSOUTH and SHC. We considered, to
the extent publicly available, the financial terms of a similar transaction
recently effected which we considered comparable to the Merger and analyzed
certain financial, stock market and other publicly available information
relating to the businesses of other companies whose operations we considered
comparable to those of HEALTHSOUTH and SHC. We also evaluated the potential pro
forma financial impact of the Merger on HEALTHSOUTH. In addition to the
foregoing, we conducted such other analyses and examinations and considered such
other financial, economic and market criteria as we deemed necessary to arrive
at our opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information publicly available or furnished to or otherwise reviewed by or
discussed with us. With respect to financial forecasts and other information
provided to or otherwise reviewed by or discussed with us, we have been advised
by the managements of HEALTHSOUTH and SHC that such forecasts and other
information were reasonably prepared on bases reflecting the best currently
available estimates and judgments of the respective managements of HEALTHSOUTH
and SHC as to the future financial performance of HEALTHSOUTH and SHC and the
strategic implications and operational benefits anticipated from the Merger. We
also have assumed, with your consent, that the Merger will be treated as a
pooling-of-interests in accordance with generally accepted accounting principles
and as a tax-free reorganization for federal income tax purposes. Our opinion,
as set forth herein, relates to the relative values of HEALTHSOUTH and SHC. We
are not expressing any opinion as to what the value of the HEALTHSOUTH Common
Stock actually will be when issued to SHC stockholders pursuant to the Merger or
the price at which the HEALTHSOUTH Common Stock will trade subsequent to the
Merger. We have not made or been provided with an independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise) of HEALTHSOUTH
OR SHC nor have we made any physical inspection of the properties or assets of
HEALTHSOUTH or SHC. We have not been asked to consider, and our opinion does not
address, the relative merits of the Merger as compared to any alternative
business strategies that might exist for HEALTHSOUTH or the effect of any other
transaction in which HEALTHSOUTH might engage. Our opinion is necessarily based
upon information available to us, and financial, stock market and other
conditions and circumstances existing and disclosed to us, as of the date
hereof.
Smith Barney has been engaged to render financial advisory services to
HEALTHSOUTH in connection with the Merger and will receive a fee for such
services. We also will receive a fee upon the delivery of this opinion. In the
ordinary course of our business, we may actively trade the equity and debt
securities of HEALTHSOUTH and the debt securities of SHC for our own account or
for the account of our customers and, accordingly, may at any time hold a long
or short position in such securities. Smith Barney has in the past provided
financial advisory and investment banking services to HEALTHSOUTH and SHC
unrelated to the Merger, and has received compensation for the rendering of such
services.
Our advisory services and the opinion expressed herein are provided solely for
the use of the Board of Directors of HEALTHSOUTH in its evaluation of the
proposed Merger, and our opinion is not intended to be and does not constitute a
recommendation to any stockholder as to how such stockholder should vote on the
proposed Merger. Our opinion may not be published or otherwise used or referred
to, nor shall any public reference to Smith Barney be made, without our prior
written consent.
Based upon and subject to the foregoing, our experience as investment bankers,
our work as described above and other factors we deemed relevant, we are of the
opinion that, as of the date hereof, the Exchange Ratio is fair, from a
financial point of view, to HEALTHSOUTH.
Very truly yours,
/s/ Smith Barney, Inc.
- -----------------------
SMITH BARNEY INC.
<PAGE>
ANNEX C
OPINION OF ALEX. BROWN & SONS INCORPORATED
January 22, 1995
Board of Directors
Surgical Health Corporation
990 Hammond Drive
Suite 300
Atlanta, GA 30328
Dear Sirs:
Surgical Health Corporation ("SHC" or the "Company"), HEALTHSOUTH Corporation
("HEALTHSOUTH") and ASC Atlanta Acquisition Company, Inc., a wholly owned
subsidiary of HEALTHSOUTH ("Subsidiary"), have entered into a Plan and Agreement
of Merger dated as of January 22, 1995 (the "Agreement"). Pursuant to the
Agreement, Subsidiary shall be merged with and into the Company in a transaction
(the "Merger"), in which (i) each share of Common Stock, par value $.0025 per
share, of SHC, (ii) each share of Series A Convertible Preferred Stock, par
value $.01 per share, of SHC, (iii) each share of Series B Convertible Preferred
Stock, par value $.01 per share, of SHC, and (iv) each share of Series C
Convertible Preferred Stock, par value $.01 per share, of SHC, (collectively,
the "SHC Shares") will be converted into the right to receive shares of Common
Stock, par value $.01 per share, of HEALTHSOUTH ("HEALTHSOUTH Common Stock"). As
set forth more fully in the Agreement, each issued and outstanding SHC Share
shall be converted into the right to receive that fraction of a share of
HEALTHSOUTH Common Stock obtained by dividing $4.60 by the average daily closing
price for the shares of HEALTHSOUTH Common Stock for the twenty consecutive
trading days on which shares are actually traded ending at the close of trading
on the third trading day immediately preceding the closing (the "Base Period
Trading Price"); provided, however, that for purposes of such calculation, the
Base Period Trading Price shall be deemed to equal (i) $37.00 in the event the
Base Period Trading Price is greater than $37.00, or (ii) $33.00 in the event
the Base Period Trading Price is less than $33.00. You have requested our
opinion regarding the fairness, from a financial point of view, of the
consideration to be received by the holders of SHC Shares pursuant to the
Agreement.
Alex. Brown & Sons Incorporated, as a customary part of its investment
banking business, is engaged in the valuation of businesses and their securities
in connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of securities, private placements and valuations for corporate and
other purposes. We have served as financial advisor to SHC in connection with
the Merger and will receive a fee for our services, a significant portion of
which is contingent upon consummation of the Merger. In the past, we have
provided various financing services for HEALTHSOUTH and various financing and
financial advisory services for SHC and received customary fees for rendering
such services. We maintain a market in HEALTHSOUTH Common Stock and regularly
publish research reports regarding the health care industry and the businesses
and securities of publicly owned companies in that industry, including
HEALTHSOUTH.
In connection with this opinion, we have reviewed the Agreement and certain
publicly available financial information concerning SHC and HEALTHSOUTH. We have
reviewed certain internal financial analyses of SHC and HEALTHSOUTH made
available to us by their respective managements and have held discussions with
members of the senior management of SHC and HEALTHSOUTH regarding the business
and prospects of their respective companies. In addition, we have (i) reviewed
the reported price and trading activity for HEALTHSOUTH Common Stock, (ii)
<PAGE>
compared certain financial and stock market information for HEALTHSOUTH and
certain financial information for SHC with similar information for certain
publicly traded companies which we deemed similar to HEALTHSOUTH and SHC,
respectively, (iii) reviewed the financial terms of certain recent business
combinations which we deemed comparable in whole or in part and (iv) performed
such other studies and analyses and took into account such other matters as we
deemed necessary.
We have assumed and relied upon, without independent verification, the
accuracy and completeness of the information reviewed by us for purposes of this
opinion. With respect to the financial projections used in our analyses, we have
assumed that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the respective senior management
of SHC and HEALTHSOUTH as to the likely future performance of their respective
companies. We have also assumed that the Merger will qualify for pooling of
interests accounting treatment and as a tax-free transaction for the holders of
SHC Shares. In addition, we have not made an independent valuation or appraisal
of the assets of SHC or HEALTHSOUTH, nor have we been furnished with any such
valuation or appraisal. Our opinion is based on market, economic, financial and
other conditions as they exist and can be evaluated as of the date of this
letter.
Based on the analysis described above and subject to the foregoing
limitations and qualifications, it is our opinion that the consideration to be
received by the holders of SHC Shares pursuant to the Agreement is fair from a
financial point of view to such stockholders as of the date of delivery of this
letter.
Very truly yours,
Alex. Brown & Sons Incorporated
<PAGE>
ANNEX D
Section 262 of the General Corporation Law
of the State of Delaware
262 APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise complied with
subsection (d) of this section and who has neither voted in favor of the merger
or consolidation nor consented thereto in writing pursuant to Section 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of his shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or series
of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to SectionSection 251, 252, 254, 257, 258, 263 or 264 of this
title:
(1) Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the holders of the surviving corporation as
provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights under
this section shall be available for the shares of any class or series of stock
of a constituent corporation if the holders thereof are required by the terms of
an agreement of merger or consolidation pursuant to SectionSection 251, 252,
254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock or depository receipts at the effective
date of the merger or consolidation will be either listed on a national
securities exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash in
lieu of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
<PAGE>
(3) In the event all of the stock of a subsidiary Delaware corporation party
to a merger effected under Section 253 of this title is not owned by the parent
corporation immediately prior to the merger, appraisal rights shall be available
for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsections (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of his
shares shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of his shares. A proxy or vote against the merger or consolidation
shall not constitute such a demand. A stockholder electing to take such action
must do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to Section 228 or
253 of this title, the surviving or resulting corporation, either before the
effective date of the merger or consolidation or within 10 days thereafter,
shall notify each of the stockholders entitled to appraisal rights of the
effective date of the merger or consolidation and that appraisal rights are
available for any or all of the shares of the constituent corporation, and shall
include in such notice a copy of this section. The notice shall be sent by
certified or registered mail, return receipt requested, addressed to the
stockholder at his address as it appears on the records of the corporation. Any
stockholder entitled to appraisal rights may, within 20 days after the date of
mailing of the notice, demand in writing from the surviving or resulting
corporation the appraisal of his shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and that
the stockholder intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the stockholder within 10 days after his written request for such a
statement is received by the surviving or resulting corporation or within 10
days after expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
<PAGE>
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and placed fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publications as the Court deems advisable. The
forms of the notices by mail and by publication shall be approved by the Court,
and the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Registry in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and in the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon application
of a stockholder, the Court may order all or a portion of the expenses incurred
by any stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorney's fees and the fees and expenses of
experts, to be charged pro rata against the value of all the shares entitled to
an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
<PAGE>
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Section 102(b)(7) of the General Corporation Law of the State of Delaware
grants corporations the right to limit or eliminate the personal liability of
their Directors in certain circumstances in accordance with provisions therein
set forth. Article NINTH of HEALTHSOUTH's Restated Certificate of Incorporation
filed with the Office of the Secretary of the State of Delaware on December 30,
1994, provides for the elimination of personal liability of a Director to the
corporation or its stockholders for monetary damage for the breach of the
Director's fiduciary duty to the full extent allowable under such Section
102(b)(7).
Section 145 of the General Corporation Law of the State of Delaware grants
corporations the right to indemnify their directors, officers, employees and
agents in accordance with the provisions therein set forth. Article VI of
HEALTHSOUTH's Bylaws provides for the indemnification of such persons to the
full extent allowable under applicable law.
HEALTHSOUTH has entered into agreements with all of its Directors and its
executive officers pursuant to which the Company has agreed to indemnify such
Directors and executive officers against liability incurred by them by reason of
their services as a Director to the fullest extent allowable under applicable
law.
The Plan provides that all rights to indemnification for acts or omissions
occurring prior to the Effective Time of the Merger now existing in favor of the
current or former directors or officers of SHC and its subsidiaries as provided
in their respective certificates or articles of incorporation or bylaws shall
survive the Merger and shall continue in full force and effect in accordance
with their terms.
Item 21. Exhibits.
Exhibits:
EXHIBIT NO. DESCRIPTION
- ------------ ----------------
(2)-1 Amended and Restated Plan and Agreement of Merger, dated as of
January 22, 1995, among HEALTHSOUTH Corporation, ASC Atlanta
Acquisition Company, Inc. and Surgical Health Corporation,
attached to the Registration Statement as Annex A, is hereby
incorporated herein by reference.
(5) Opinion of Haskell Slaughter Young & Johnston, Professional
Association, as to the legality of the shares of Common Stock of
HEALTHSOUTH being registered (to be filed by Amendment).
(8)-1 Opinion of Haskell Slaughter Young & Johnston, Professional
Association, as to certain federal income tax consequences of the
Merger (to be filed by Amendment).
(8)-2 Opinion of Alston & Bird as to certain federal income tax
consequences of the Merger (to be filed by Amendment).
(23)-1 Consent of Ernst & Young LLP. See pages immediately following
signature pages to the Registration Statement.
(23)-2 Consent of Ernst & Young LLP. See pages immediately following
signature pages to the Registration Statement.
(23)-3 Consent of Arthur Andersen LLP. See pages immediately following
signature pages to the Registration Statement.
(23)-4 Consent of Price Waterhouse LLP. See pages immediately following
signature pages to the Registration Statement.
(23)-5 Consent of Haskell Slaughter Young & Johnston, Professional
Association (included in the opinions to be filed as Exhibits (5)
and (8)-1).
(23)-6 Consent of Alston & Bird (included in the opinion to be filed as
Exhibit (8)-2).
(23)-7 Consent of Alex. Brown & Sons Incorporated (to be filed by
Amendment)
(23)-8 Consent of Smith Barney Inc.
(24) Powers of Attorney. See the signature pages to this Registration
Statement on Form S-4.
<PAGE>
Item 22. Undertakings.
(1) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(2) The undersigned Registrant hereby undertakes that, for the purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering hereof.
(3) The undersigned Registrant herby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is part of the Registration Statement, by any person or party
who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other items of the applicable form.
(4) The Registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (3) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(5) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
(6) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not subject of and included in
the Registration Statement when it became effective.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Birmingham, State of
Alabama, on March 7, 1995.
HEALTHSOUTH Corporation
By: /s/ Richard M. Scrushy
--------------------------------
Richard M. Scrushy,
Chairman of the Board, President
and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard M. Scrushy and Aaron Beam, Jr., and each
of them, his attorney-in-fact with power of substitution for him in any and all
capacities, to sign any amendments, supplements or other instruments he deems
necessary or appropriate, and to file the same, with exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that said attorney-in-fact or his substitute
may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------------- ----------------------------------- ------------------
CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF
<S> <C> <C>
/s/ Richard M. Scrushy
- ------------------------------- Executive Officer and March 7, 1995
Richard M. Scrushy Director
/s/ Aaron Beam, Jr.
- ------------------------------- Executive Vice President and March 7, 1995
Aaron Beam, Jr. Chief Financial Officer
and Director
/s/ William T. Owens
- ------------------------------- Senior Vice President--Finance March 7, 1995
William T. Owens and Controller (Principal
Accounting Officer)
/s/ C. Sage Givens
- -------------------------------
C. Sage Givens Director March 7, 1995
/s/ Charles W. Newhall III
- -------------------------------
Charles W. Newhall III Director March 7, 1995
/s/ George H. Strong
- -------------------------------
George H. Strong Director March 7, 1995
/s/ Phillip C. Watkins
- -------------------------------
Phillip C. Watkins Director March 7, 1995
/s/ John S. Chamberlin
- -------------------------------
John S. Chamberlin Director March 7, 1995
/s/ Larry R. House
- -------------------------------
Larry R. House Director March 7, 1995
/s/ Anthony J. Tanner
- -------------------------------
Anthony J. Tanner Director March 7, 1995
/s/ James P. Bennett
- -------------------------------
James P. Bennett Director March 7, 1995
/s/ Richard F. Celeste
- -------------------------------
Richard F. Celeste Director March 7, 1995
<PAGE>
EXHIBIT INDEX
</TABLE>
<TABLE>
<S> <C> <C>
EXHIBIT NO. DESCRIPTION PAGE
- ------------ ------------------------------------------------------------------ -------
</TABLE>
(2)-1 Amended and Restated Plan and Agreement of Merger, dated as of
January 22, 1995, among HEALTHSOUTH Corporation, ASC Atlanta
Acquisition Company, Inc. and Surgical Health Corporation,
attached to the Registration Statement as Annex A, is hereby
incorporatedherein by reference.
(5) Opinion of Haskell Slaughter Young & Johnston, Professional
Association, as to the legality of the shares of Common Stock of
HEALTHSOUTH being registered (to be filed by Amendment).
(8)-1 Opinion of Haskell Slaughter Young & Johnston, Professional
Association, as to certain federal income tax consequences of the
Merger (to be filed by Amendment).
(8)-2 Opinion of Alston & Bird as to certain federal income tax
consequences of the Merger (to be filed by Amendment).
(23)-1 Consent of Ernst & Young LLP. See pages immediately following
signature pages to the Registration Statement.
(23)-2 Consent of Ernst & Young LLP. See pages immediately following
signature pages to the Registration Statement.
(23)-3 Consent of Arthur Andersen LLP. See pages immediately following
signature pages to the Registration Statement.
(23)-4 Consent of Price Waterhouse LLP. See pages immediately following
signature pages to the Registration Statement.
(23)-5 Consent of Haskell Slaughter Young & Johnston, Professional
Association (included in the opinions to be filed as Exhibits (5)
and (8)-1).
(23)-6 Consent of Alston & Bird (included in the opinion to be filed as
Exhibit (8)-2).
(23)-7 Consent of Alex. Brown & Sons Incorporated (to be filed by
Amendment)
(23)-8 Consent of Smith Barney Inc.
(24) Powers of Attorney. See the signature pages to this Registration
Statement on Form S-4.
<PAGE>
Exhibit (23)-1
CONSENT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4 No. 33- ) and related Prospectus of HEALTHSOUTH
Corporation for the registration of shares of its common stock and to the
incorporation by reference therein of our report dated February 24, 1995, with
respect to the consolidated financial statements and schedule of HEALTHSOUTH
Corporation included in its Annual Report (Form 10-K) for the year ended
December 31, 1994, filed with the Securities and Exchange Commission.
Further, we consent to the incorporation by reference therein of our report
dated February 17, 1995 with respect to the consolidated financial statements of
ReLife, Inc. included in its Current Report on Form 8-K dated March 7, 1995,
filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
Birmingham, Alabama
March 6, 1995
<PAGE>
Exhibit (23)-2
CONSENT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 1, 1995, included in the Proxy Statement of
Surgical Health Corporation which is made a part of Registration Statement (Form
S-4 No. 33- ) and Prospectus of HEALTHSOUTH Corporation for the registration of
shares of its Common Stock.
ERNST & YOUNG LLP
Atlanta, Georgia
March 3, 1995
<PAGE>
Exhibit (23)-3
Consent of Independent Accountants
As independent public accountants, we hereby consent to the use of our
reports for the years ended December 31, 1992 and 1993 (and to all references to
our Firm) included in or made a part of this S-4 registration statement.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
March 6, 1995
<PAGE>
Exhibit 23-4
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-4 of HEALTHSOUTH
Corporation of our report dated March 3, 1995 relating to the consolidated
financial statements of Rehab Systems Company, which appears in the Current
Report on Form 8-K/A of HEALTHSOUTH Corporation dated March 8, 1995. We also
consent to the reference to us under the heading "Experts" in said Prospectus.
PRICE WATERHOUSE LLP
Philadelphia, PA
March 8, 1995
<PAGE>
Exhibit (23)-8
CONSENT
OF
SMITH BARNEY INC.
We hereby consent to (i) the inclusion of our opinion letter to the Board of
Directors of HEALTHSOUTH Corporation ("HEALTHSOUTH") as Annex B to the
Prospectus-Joint Proxy Statement of HEALTHSOUTH and Surgical Health Corporation
("SHC") relating to the proposed merger of a wholly owned subsidiary of
HEALTHSOUTH with and into SHC and (ii) references made to our firm and such
opinion in "SUMMARY OF PROSPECTUS-JOINT PROXY STATEMENT -- The Merger --
Opinions of Financial Advisors -- HEALTHSOUTH" and "THE MERGER -Background of
the Merger" and "-- Opinions of Financial Advisors -HEALTHSOUTH". In giving such
consent, we do not admit that we come within the category of persons whose
consent is required under, and we do not admit and we disclaim that we are
"experts" for purposes of, the Securities Act of 1933, as amended, and the rules
and regulations promulgated thereunder.
By: /s/ SMITH BARNEY INC.
------------------------
SMITH BARNEY INC.
New York, New York
March 8, 1995
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PROXY
HEALTHSOUTH Corporation
SPECIAL MEETING OF STOCKHOLDERS -- April 13, 1995
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS
The undersigned hereby appoints RICHARD M. SCRUSHY and AARON BEAM, JR. or
_________________________________________, and each of them, with several powers
of substitution, proxies to vote the shares of Common Stock, par value $.01 per
share, of HEALTHSOUTH Corporation ("HEALTHSOUTH") which the undersigned could
vote if personally present at the Special Meeting of Stockholders of HEALTHSOUTH
to be held at Two Perimeter Park South, Birmingham, Alabama 35243, on Thursday,
April 13, 1995, at 2:00 p.m., Central Time, and any adjournment thereof:
1. To approve and adopt the Amended and Restated Plan and Agreement of
Merger attached as Annex A to the Prospectus-Joint Proxy Statement, dated March
14, 1995, that has been transmitted in connection with the Special Meeting,
pursuant to which a wholly-owned subsidiary of HEALTHSOUTH will merge into
Surgical Health Corporation ("SHC") and stockholders of SHC will receive a
specified fraction of a share of Common Stock of HEALTHSOUTH for each share of
capital stock of SHC, all as described in said Prospectus-Joint Proxy Statement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. In their discretion, to act upon any matters incidental to the foregoing
and such other business as may properly come before the Special Meeting, or any
adjournment thereof.
(Continued and to be dated and signed on other side)
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(Continued from other side)
This Proxy, when properly executed, will be voted in the manner directed
herein by the undersigned stockholder. If no direction is made, this Proxy will
be voted FOR Item 1 above. Any stockholder who wishes to withhold the
discretionary authority referred to in Item 2 above should mark a line through
the entire Item. Dated: , 1995 Signature(s) (Please sign exactly and as fully as
your name appears on your stock certificate. If shares are held jointly, each
stockholder should sign.)
PLEASE MARK, SIGN, DATE AND RETURN PROMPTLY, USING THE ENCLOSED ENVELOPE.
NO POSTAGE IS REQUIRED.
<PAGE>
SURGICAL HEALTH CORPORATION
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints Rock A. Morphis and H. Michael Finley as
Proxies, each with the power to appoint his substitute, and hereby authorizes
either one or both of them to represent and to vote, as designated below, all
the shares of Common Stock, Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock or Series C Convertible Preferred Stock
(collectively, "SHC Shares") of Surgical Heath Corporation ("SHC") held of
record by the undersigned on February 28, 1995, at the Special Meeting of
Stockholders to be held on April 13, 1995.
1. PROPOSAL TO: approve the Amended and Restated Plan and Agreement of
Merger, dated as of January 22, 1995 (the "Merger Agreement") by and among SHC,
HEALTHSOUTH Corporation ("HEALTHSOUTH"), and ASC Atlanta Acquisition Company,
Inc., a wholly-owned subsidiary of HEALTHSOUTH ("Merger Corp"), pursuant to
which, among other matters, (a) Merger Corp will merge with and into SHC (the
"Merger") and (b) each outstanding SHC Share will be exchanged for a specified
fraction of a share of Common Stock of HEALTHSOUTH, all as more fully described
in the accompanying Prospectus-Joint Proxy Statement.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
(Continued and to be dated and signed on reverse side)
<PAGE>
(Continued from front)
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSAL 1 ABOVE.
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such.
If a corporation, please sign in full corporate name by President or other
authorized officer. If a partnership, please sign in partnership name by
authorized person.
Date: , 1995
Signature:
Signature if held jointly
<PAGE>
