<PAGE>
===============================================================================
As filed with the Securities and Exchange Commission on September 28, 1995
Registration No. 33-__________
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)
--------------
<TABLE>
<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)
</TABLE>
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 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:
<TABLE>
<CAPTION>
<S> <C> <C>
J. BROOKE JOHNSTON, JR., ESQ WILLIAM W. HORTON, ESQ. CHRISTOPHER R. MANNING, ESQ. Burke, Warren
BEALL D. GARY, JR., ESQ. Group Vice President--Legal Services & MacKay, P.C. 24th Floor, 225 West
Haskell Slaughter Young & Johnston, HEALTHSOUTH Corporation Washington Street Chicago, Illinois
Professional Association Two Perimeter Park South 60606-3418 (312) 357-0800
1200 AmSouth/Harbert Plaza Birmingham, Alabama 35243
1901 Sixth Avenue North
Birmingham, Alabama 35203
</TABLE>
--------------
Approximate date of commencement of proposed sale to the public:
At the effective time of the merger of Sutter Surgery Centers, Inc. with a
wholly-owned subsidiary of the Registrant, as described in the
Prospectus-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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==============================================================================================================================
Title of Each Proposed Maximum Proposed Maximum
Class of Securities Amount to be Offering Price Aggregate Offering Amount of
to be Registered Registered Per Unit(1) Price(1) Registration Fee (2)
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per
share................................ 1,777,778 shares $ 23.25 $ 41,333,338 $ 5,128
===============================================================================================================================
<FN>
(1) Estimated based on the closing price of HEALTHSOUTH Common Stock on the New
York Stock Exchange on September 27, 1995.
(2) Computed in accordance with Rule 457(f)(2), solely for the purpose of
calculating the registration fee, based upon the book value of the SSCI
Shares (as defined herein) at June 30, 1995, the latest practicable
date prior to the date of filing of this Registration Statement.
</TABLE>
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.
===============================================================================
<PAGE>
HEALTHSOUTH Corporation
CROSS-REFERENCE SHEET
(Pursuant to Item 501(b) of Regulation S-K showing the Location
in the Prospectus-Proxy Statement of the responses to th
Items of Part I of Form S-4)
<TABLE>
<CAPTION>
Item Location in Prospectus-Proxy Statement
---- --------------------------------------
<S> <C>
1. Forepart of the Registration Statement and Outstanding
Front Cover Page of Prospectus ....................... Facing Page; Outside Front Cover Page of
Prospectus-Proxy Statement
2. Inside Front and Outside Back Cover Pages of
Prospectus............................................ Table of Contents; Available Information
3. Risk Factors, Ratio of Earnings to Fixed Charges and
Other Information..................................... Summary of Prospectus-Proxy Statement; The Special
Meeting
4. Terms of the Transaction.............................. Summary of Prospectus-Proxy Statement; The Special
Meeting; The Merger; Description of Capital Stock of
HEALTHSOUTH; Operations and Management of HEALTHSOUTH
after the Merger; Comparison of Rights of SSCI 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........... Summary of Prospectus-Proxy Statement; The Merger;
Pro Forma Condensed Financial Information; Selected
Financial Information of HEALTHSOUTH; Management's
Discussion and Analysis of Financial Condition and
Results of Operations--HEALTHSOUTH; Business of
HEALTHSOUTH; Consolidated Financial Statements of
HEALTHSOUTH Corporation and Subsidiaries
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-2 or S-3 Companies....... Not Applicable
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-Proxy Statement; The Merger;
Pro Forma Condensed Financial Information; Selected
Financial Information of SSCI; Management's
Discussion and Analysis of Financial Condition and
Results of Operations--SSCI; Business of SSCI;
Financial Statements of Sutter Surgery Centers, Inc.
and Consolidated Partnerships
18. Information if Proxies, Consents or Authorizations are
to be Solicited ...................................... Summary of Prospectus-Proxy Statement; The Special
Meeting; The Merger
19. Information if Proxies, Consents or Authorizations are
not to be Solicited or in an Exchange Offer........... Not Applicable
</TABLE>
<PAGE>
October , 1995
Dear Stockholder:
You are cordially invited to attend a special meeting of stockholders (the
"Special Meeting") of Sutter Surgery Centers, Inc. ("SSCI") to be held at the
executive offices of SSCI at 1201 Alhambra Boulevard, Suite 330, Sacramento,
California 95816 at .m, Pacific Time, on 1995.
At this important meeting, you will be asked to consider and vote upon the
approval of a Plan and Agreement of Merger, dated as of August 23, 1995 (the
"Plan"), which provides for the merger of SSCI with a wholly-owned subsidiary of
HEALTHSOUTH Corporation ("HEALTHSOUTH") with the result that SSCI will become a
wholly-owned subsidiary of HEALTHSOUTH. If the proposed merger (the "Merger") is
consummated, each outstanding share of SSCI Common Stock will be entitled to
receive that number of whole shares of HEALTHSOUTH Common Stock that is equal to
the number of Aggregate Buyer Shares (as hereinafter defined) divided by the
number of exchanging SSCI Shares, plus cash in lieu of fractional shares. As
used herein, the term "Aggregate Buyer Shares" means 1,777,778 shares of
HEALTHSOUTH Common Stock; provided, however, that in the event that the Average
Closing Date Price (as hereinafter defined) shall be greater than $25.00, then
the number of Aggregate Buyer Shares shall be equal to $44,444,450 divided by
the Average Closing Date Price. As used herein, the term "Average Closing Date
Price" shall mean the average of the 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. Cash
will be paid in lieu of fractional shares.
Approval of the Plan requires the affirmative vote of a majority of the votes
entitled to be cast by the holders of record of SSCI Common Stock.
Attached hereto are the (i) Notice of Special Meeting, (ii) Prospectus-Proxy
Statement, and (iii) Proxy for the Special Meeting. The Prospectus-Proxy
Statement describes in more detail the Plan 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 SSCI stockholders. It also describes certain
financial and other information pertaining to SSCI and HEALTHSOUTH. Please give
this information your careful attention.
The Plan and consummation of the transactions contemplated therein have been
approved by the Board of Directors of SSCI and the Board of Directors recommends
that you vote FOR approval and adoption of the Plan and consummation of the
transactions contemplated therein. For a discussion of the recommendations of
the Board of Directors, the reasons underlying such recommendations and certain
factors that should be considered in evaluating your vote, see "THE MERGER --
Reasons for the Merger; Recommendations of SSCI'S Board of Directors" in the
Prospectus-Proxy Statement attached hereto.
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,
John N. Kapoor, Ph.D
Chairman of the Board
<PAGE>
SUTTER SURGERY CENTERS, INC.
Notice of Special Meeting of Stockholders
to be held , 1995
To the Stockholders of Sutter Surgery Centers, Inc.
Notice is hereby given that a Special Meeting of Stockholders of Sutter
Surgery Centers, Inc., a Delaware corporation ("SSCI"), will be held at the
executive offices of SSCI at 1201 Alhambra Boulevard, Suite 330, Sacramento,
California 95816 on , 1995 at .m. Pacific Time, for the following purposes:
1. To consider and vote upon a proposal to approve the Plan and Agreement of
Merger, dated as of August 23, 1995 (the "Plan"), providing for the merger of
SSCI Acquisition Corporation, a Delaware corporation (the "Subsidiary")
wholly owned by HEALTHSOUTH Corporation, a Delaware corporation ("HEALTHSOUTH"),
into SSCI, and further providing that each outstanding share of Common Stock of
SSCI (collectively, the "SSCI Shares") will be cancelled and the holders of such
SSCI Shares will be entitled to receive a specified fraction of a share of
HEALTHSOUTH Common Stock for each such SSCI Share, as described in the
accompanying Prospectus-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 SSCI has fixed the close of business on , 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-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 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,
AUGUST A. SAIBENI
Secretary
October , 1995
<PAGE>
Prospectus-Proxy Statement
PROXY STATEMENT
of
SUTTER SURGERY CENTERS, INC.
for the Special Meeting of Stockholders
to be held on _______________, 1995
PROSPECTUS
of
HEALTHSOUTH Corporation
This Prospectus relates to up to 1,777,778 shares of the Common Stock, par
value $.01 per share (the "HEALTHSOUTH Common Stock"), of HEALTHSOUTH
Corporation (together with its subsidiaries, "HEALTHSOUTH") issuable to the
stockholders of Sutter Surgery Centers, Inc., a Delaware corporation (together
with its consolidated partnerships, "SSCI"), upon consummation of the Merger (as
defined below). Such number of shares represents the maximum number of shares of
HEALTHSOUTH Common Stock that may be issued. This Prospectus also serves as the
Proxy Statement of SSCI for its special meeting of stockholders to be held on
_______________, 1995, and any adjournments and postponements thereof (the
"Special Meeting"). See "THE SPECIAL MEETING".
This Prospectus-Proxy Statement describes the terms of a proposed business
combination between HEALTHSOUTH and SSCI, pursuant to which HEALTHSOUTH will
acquire SSCI by means of the merger (the "Merger") of SSCI Acquisition
Corporation, a Delaware corporation which is a wholly-owned subsidiary of
HEALTHSOUTH (the "Subsidiary"), with and into SSCI, with SSCI being the
surviving corporation (the "Surviving Corporation"). The Merger will be effected
pursuant to the terms and subject to the conditions of the Plan and Agreement of
Merger, dated as of August 23, 1995, among HEALTHSOUTH, the Subsidiary and SSCI
(the "Plan"). The Plan is attached to this Prospectus-Proxy Statement as Annex A
and is incorporated herein by reference. HEALTHSOUTH and SSCI are hereinafter
sometimes referred to as the "Companies" and individually as a "Company".
Upon consummation of the Merger, except as otherwise described herein, each
issued and outstanding share of Common Stock, par value $.01 per share (the
"SSCI Common Stock" or the "SSCI Shares"), of SSCI will be canceled, and the
holder of such share will be entitled to receive that number of whole shares of
HEALTHSOUTH Common Stock that is equal to the number of Aggregate Buyer Shares
(as hereinafter defined) divided by the number of Exchanging SSCI Shares (as
hereinafter defined), plus cash in lieu of fractional shares. As used herein,
the term "Aggregate Buyer Shares" means 1,777,778 shares of HEALTHSOUTH Common
Stock; provided, however, that in the event that the Average Closing Date Price
(as hereinafter defined) shall be greater than $25.00, then the number of
Aggregate Buyer Shares shall be equal to $44,444,450 divided by the Average
Closing Date Price. As used herein, the term "Average Closing Date Price" shall
mean the average of the 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 used
herein, the term "Exchanging SSCI Shares" shall mean all shares of SSCI Common
Stock outstanding immediately prior to the Effective Time (other than SSCI
Shares held in the treasury of SSCI immediately prior to the Effective Time, and
SSCI Shares issued, outstanding and owned by HEALTHSOUTH or any of its
wholly-owned subsidiaries immediately prior to the Effective Time).
There is no guarantee as to the value of the HEALTHSOUTH Common Stock that
SSCI stockholders will receive; however, SSCI may terminate the Plan prior to
the Effective Time if the Average Closing Date Price is less than $18.00.
<PAGE>
This Prospectus-Proxy Statement and the form of Proxy are first being mailed
to stockholders of SSCI on or about ____________, 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-PROXY STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus-Proxy Statement is October , 1995.
2
<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-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 is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files periodic reports, proxy statements and other information with
the SEC relating to its business, financial statements and other matters. The
Registration Statement, as well as such reports, proxy statements 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, 13th Floor, 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, and the
Registration Statement, reports, proxy statements and certain other information
filed by 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-Proxy Statement incorporates documents by reference 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 Meeting.
There are hereby incorporated by reference into this Prospectus-Proxy
Statement and made a part hereof the following documents filed by HEALTHSOUTH:
1. The Company's Annual Report on Form 10-K, as amended, for the fiscal year
ended December 31, 1994.
2. The Company's Quarterly Reports on Form 10-Q, as amended, for the quarters
ended March 31 and June 30, 1995.
3. The Company's Current Report on Form 8-K, as amended, filed January 13,
1995 (relating to the ReLife Acquisition).
4. The Company's Current Report on Form 8-K, as amended, filed February 1,
1995 (relating to the SHC Acquisition).
5. The Company's Current Report on Form 8-K, as amended, filed February 21,
1995 (relating to the NovaCare Rehabilitation Hospitals Acquisition).
6. The Company's Current Report on Form 8-K filed August 15, 1995 (relating
to the SHC Acquisition).
7. The Company's Current Report on Form 8-K filed September 7, 1995 (relating
to the acquisition of Sutter Surgery Centers, Inc.).
3
<PAGE>
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-Proxy Statement and
prior to the Special Meeting shall be deemed to be incorporated by reference
into this Prospectus-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-Proxy Statement with respect to
HEALTHSOUTH was supplied by HEALTHSOUTH, and all information contained in this
Prospectus-Proxy Statement with respect to SSCI was supplied by SSCI. Although
neither HEALTHSOUTH nor SSCI has actual knowledge that would indicate that any
statements or information (including financial statements) relating to the other
party contained herein are inaccurate or incomplete, neither HEALTHSOUTH nor
SSCI warrants the accuracy or completeness of such statements or information as
they relate to or were provided by the other party.
No person is authorized to give any information or to make any representation
not contained in this Prospectus-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-Proxy Statement nor any
distribution of the securities to which this Prospectus-Proxy Statement relates
shall, under any circumstances, create any implication that there has been no
change in the information concerning HEALTHSOUTH or SSCI contained in this
Prospectus-Proxy Statement since the date of such information.
4
<PAGE>
TABLE OF CONTENTS
Page
----
AVAILABLE INFORMATION ................................................... 3
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE ....................... 3
SUMMARY OF PROSPECTUS-PROXY STATEMENT ................................... 7
The Companies ........................................................... 7
Recent Developments ..................................................... 7
The Special Meeting ..................................................... 7
Vote Required ........................................................... 8
The Merger .............................................................. 8
Market and Market Prices ................................................ 14
Operations and Management of HEALTHSOUTH After the Merger .............. 15
COMPARATIVE PER SHARE INFORMATION ....................................... 16
HEALTHSOUTH AND SSCI SELECTED PRO FORMA FINANCIAL INFORMATION
(Unaudited) ............................................................. 17
THE SPECIAL MEETING ..................................................... 18
General ................................................................. 18
Date, Place and Time .................................................... 18
Record Date; Quorum ..................................................... 18
Vote Required ........................................................... 18
Voting and Revocation of Proxies ........................................ 18
Solicitation of Proxies ................................................. 19
THE MERGER .............................................................. 20
Terms of the Merger ..................................................... 20
Background of the Merger ................................................ 21
Reasons for the Merger; Recommendation of SSCI........................... 22
Board of Directors ...................................................... 22
Effective Time of the Merger ............................................ 22
Exchange of Certificates ................................................ 23
Conditions to the Merger ................................................ 23
Regulatory Approvals .................................................... 24
Business Pending the Merger ............................................. 25
Termination ............................................................. 26
Indemnification ......................................................... 26
Options.................................................................. 27
Accounting Treatment .................................................... 27
Certain Federal Income Tax Consequences ................................. 27
Resale of HEALTHSOUTH Common Stock by Affiliates ........................ 29
Appraisal Rights ........................................................ 29
Expenses ................................................................ 31
NYSE Listing ............................................................ 31
PRO FORMA CONDENSED FINANCIAL INFORMATION (Unaudited) ................... 32
SELECTED CONSOLIDATED FINANCIAL DATA-HEALTHSOUTH......................... 41
MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- HEALTHSOUTH............................................. 42
General.................................................................. 42
Results of Operations of HEALTHSOUTH..................................... 43
Liquidity and Capital Resources.......................................... 47
BUSINESS OF HEALTHSOUTH ................................................. 48
General.................................................................. 48
Company Strategy......................................................... 48
Patient Care Services.................................................... 49
Marketing of Facilities and Services..................................... 52
<PAGE>
Sources of Revenues...................................................... 53
Competition.............................................................. 54
Regulation............................................................... 54
Insurance................................................................ 58
Employees................................................................ 58
Legal Proceedings........................................................ 58
Properties............................................................... 59
MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- SSCI.................................................... 65
Business of SSCI......................................................... 66
Operations of SSCI Surgery Centers....................................... 66
Quality Assurance Controls............................................... 67
Marketing................................................................ 68
Sources of Revenue....................................................... 68
Competition.............................................................. 68
Properties............................................................... 68
Government Healthcare Regulation......................................... 69
Employees................................................................ 71
Litigation............................................................... 72
DESCRIPTION OF CAPITAL STOCK OF HEALTHSOUTH.............................. 72
Common Stock............................................................. 72
Fair Price Provision..................................................... 72
Section 203 of the DGCL.................................................. 73
Preferred Stock.......................................................... 73
Transfer Agent........................................................... 73
COMPARISON OF RIGHTS OF SSCI AND HEALTHSOUTH STOCKHOLDERS................ 74
Classes and Series of Capital Stock...................................... 74
Size and Election of the Board of Directors.............................. 74
Removal of Directors..................................................... 75
Other Voting Rights...................................................... 75
Dividends................................................................ 75
Fair Price Provision..................................................... 75
Amendment or Repeal of the Certificate of Incorporation and Bylaws ...... 76
Special Meetings of Stockholders......................................... 76
Compromise and Reorganization............................................ 76
Liability of Directors................................................... 77
Indeminification of Directors and Officers............................... 77
OPERATIONS AND MANAGEMENT OF HEALTHSOUTH AFTER THE MERGER .............. 78
Operations .............................................................. 78
Management .............................................................. 78
EXPERTS ................................................................. 78
LEGAL MATTERS ........................................................... 78
INDEX TO FINANCIAL STATEMENTS ........................................... F-1
ANNEXES: ................................................................
A. Plan and Agreement of Merger, dated as of August 23, 1995 ........... A-1
B. Appraisal Rights--Section 262 of the Delaware General Corporation Law B-1
6
<PAGE>
SUMMARY OF PROSPECTUS-PROXY STATEMENT
The following is a summary of certain information contained elsewhere in this
Prospectus-Proxy Statement. Certain capitalized terms used in this Summary are
defined elsewhere in this Prospectus-Proxy Statement. Reference is made to, and
this Summary is qualified in its entirety by, the more detailed information
contained in this Prospectus-Proxy Statement and in the Annex hereto.
The Companies
HEALTHSOUTH. HEALTHSOUTH is the nation's largest provider of outpatient and
rehabilitative healthcare services. It provides these services to its national
network of outpatient and inpatient rehabilitation facilities, outpatient
surgery centers, medical centers and other health care facilities. HEALTHSOUTH
believes that it provides patients, physicians and payors with high-quality
health care services at significantly lower costs than traditional inpatient
hospitals. Additionally, HEALTHSOUTH's national network, reputation for quality
and focus on outcomes has enabled it to secure contracts with national and
regional managed care payors. At August 31, 1995, HEALTHSOUTH had over 500
patient care locations in 38 states, the District of Columbia and Ontario,
Canada. See "BUSINESS OF HEALTHSOUTH".
At June 30, 1995, HEALTHSOUTH had consolidated assets of approximately
$2,063,049,000 and consolidated stockholders' equity of approximately
$518,132,000, and employed approximately 21,500 persons.
HEALTHSOUTH was incorporated under the laws of Delaware in 1984. The
principal executives offices are located at Two Perimeter Park South,
Birmingham, Alabama 35243 and its telephone number is (205) 967-7116.
SSCI. At June 30, 1995, SSCI had consolidated assets of approximately
$41,739,660 and consolidated stockholders' equity of approximately $14,871,046,
and employed approximately 238 persons.
SSCI was incorporated under the laws of Delaware in 1992. The principal
executive offices of SSCI are located at 1201 Alhambra Boulevard, Suite 330,
Sacramento, California 95816, and its telephone number is (916) 731-7830. See
"BUSINESS OF SSCI".
SSCI Acquisition Corporation. 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
On September 8, 1995, HEALTHSOUTH filed a Registration Statement on Form S-3
with the Securities and Exchange Commission (the "SEC") for the issuance and
sale of 13,000,000 shares of its Common Stock (plus up to an additional
1,950,000 shares of such HEALTHSOUTH Common Stock, in the event that the
underwriters exercise an over-allotment option). The Registration Statement was
declared effective on September 27, 1995, and it is anticipated that the
offering will be consummated on October 3, 1995. The net proceeds of the
offering, estimated to be $291,220,000 ($334,978,000 if the Underwriters'
over-allotment option is exercised in full), will be used to reduce indebtedness
under HEALTHSOUTH's $1,000,000,000 revolving credit facility.
The Special Meeting
The Special Meeting of SSCI's stockholders to consider and vote on the Plan
will be held on _______________, 1995, at _______________ ____.m., Pacific Time,
at the executive offices of SSCI at 1201 Alhambra Boulevard, Suite 330,
Sacramento, California 95816. Only holders of record of SSCI
7
<PAGE>
Shares at the close of business on __________, 1995 (the "Record Date"), will be
entitled to notice of and to vote at the Special Meeting. At such date, there
were outstanding and entitled to vote 19,615,443 shares of SSCI Common Stock.
Each issued and outstanding SSCI Share is entitled to one vote on each matter to
be presented at the Special Meeting. No meeting of HEALTHSOUTH's stockholders to
consider and vote on the Plan is required or will be held.
For additional information relating to the Special Meeting, see "THE SPECIAL
MEETING".
Vote Required
Approval and adoption of the Plan by the stockholders of SSCI requires the
affirmative vote of a majority of the votes cast by the holders of SSCI Shares
entitled to vote thereon. Approval and adoption of the Plan by the stockholders
of HEALTHSOUTH is not required.
As of the Record Date, EJ Financial Investments, L.P., a Delaware limited
partnership ("EJ") and Sutter Ambulatory Care Corporation, a California
nonprofit public benefit corporation ("SACC", and jointly with EJ, the
"Principal Stockholders"), collectively owned 99.96% of the issued and
outstanding SSCI Common Stock. While each of the Principal Stockholders has
agreed to be bound by the terms and conditions of the Plan, the Plan does not
commit either of the Principal Stockholders to vote FOR the Plan.
If, after all of the SSCI stockholders have received and had an opportunity
to review this Prospectus-Proxy Statement, SSCI determines that the requisite
percentage of the SSCI stockholders approve of the Merger and intend to vote FOR
the Merger, it is possible that the stockholder vote required under the General
Corporation Law of the State of Deleware (the "DGCL) to approve the Merger will
be accomplished without a meeting by written action of the SSCI stockholders in
accordance with Delaware law.
See "THE SPECIAL MEETING--Vote Required", "THE MERGER--Conditions to the
Merger" and "--Interests of Certain Persons in the Merger".
The Merger
Terms of the Merger. SSCI will be acquired by HEALTHSOUTH pursuant to the
Plan as follows: At the effective time of the Merger (the "Effective Time"), the
Subsidiary will merge with and into SSCI with SSCI being the Surviving
Corporation. The Certificate of Incorporation and Bylaws of the Subsidiary in
effect at the Effective Time, as amended to the satisfaction of HEALTHSOUTH,
will govern the Surviving Corporation until amended or repealed in accordance
with applicable law. At the Effective Time, each issued and outstanding SSCI
Share will be entitled to receive that number of whole shares of HEALTHSOUTH
Common Stock that is equal to the number of Aggregate Buyer Shares (as
hereinafter defined) divided by the number of Exchanging SSCI Shares, plus cash
in lieu of fractional shares. As used herein, the term "Aggregate Buyer Shares"
means 1,777,778 shares of HEALTHSOUTH Common Stock; provided, however, that in
the event that the Average Closing Date Price (as hereinafter defined) shall be
greater than $25.00, then the number of Aggregate Buyer Shares shall be equal to
$44,444,450 divided by the Average Closing Date Price. As used herein, the term
"Average Closing Date Price" shall mean the average of the 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 used herein, the term "Exchanging SSCI Shares" shall mean
all shares of SSCI Common Stock outstanding immediately prior to the Effective
Time (other than SSCI Shares held in the treasury of SSCI immediately prior to
the Effective Time, and SSCI Shares issued, outstanding and owned by HEALTHSOUTH
or any of its wholly-owned subsidiaries immediately prior to the Effective
Time).
8
<PAGE>
There is no guarantee as to the value of the HEALTHSOUTH Common Stock that
SSCI stockholders will receive; however, SSCI may terminate the Plan prior to
the Effective Time if the Average Closing Date Price is less than $18.00.
The following table sets forth the exchange ratio to be applied assuming
various Average Closing Date Prices as set out in Column 1, with the resulting
"value" to be received for each SSCI Share:
Average "Value" to be
Closing Exchange received for each
Date Price Ratio SSCI Share
(Col. 1) (Col. 2) (Col. 1 x Col. 2)
---------- -------- ---------------
$17.00........... .0906$ 1.54
18.00........... .0906 1.63
20.00........... .0906 1.81
22.00........... .0906 1.99
25.00........... .0906 2.27
28.00........... .0809 2.27 (1)
30.00........... .0755 2.27 (1)
_________
(1) If the Average Closing Date Price is higher than $25.00, the number of
shares of HEALTHSOUTH Common Stock to be issued in the Merger shall be
determined by dividing $44,444,450 by the Average Closing Date Price.
The holder of an outstanding option (an "Option") to purchase SSCI Shares
shall receive an option to purchase shares of HEALTHSOUTH Common Stock (such
exchanged Options are hereinafter referred to as "Exchanged Options"). The
number of shares of HEALTHSOUTH Common Stock subject to each such Exchanged
Option shall be determined based upon the same exchange ratio as that
established for the SSCI Shares.
The number of shares of HEALTHSOUTH Common Stock which would have been issued
with respect to Dissenting Shares shall not be issued as part of the Merger
Consideration. As used herein, "Dissenting Shares" shall mean SSCI Shares
outstanding at the Effective Time which are held by a holder (if any) who shall
not have voted in favor of the Plan and who properly demands to be paid the fair
cash value for such shares in accordance with Section 262 of the DGCL. See "THE
MERGER" and "DESCRIPTION OF CAPITAL STOCK OF HEALTHSOUTH".
After consummation of the Merger, SSCI will operate under such name as
HEALTHSOUTH shall designate, other than the one using the word "Sutter" or any
variation thereof (the "Surviving Corporation"). No material disposition or
restructuring of either HEALTHSOUTH or SSCI or any material part thereof is
contemplated as a result of the Merger. See "OPERATIONS AND MANAGEMENT OF
HEALTHSOUTH AFTER THE MERGER".
Recommendation of the Board of Directors of SSCI. The Board of Directors of
SSCI has approved the Plan, and recommends a vote FOR the Plan. SSCI's Board of
Directors believes the Plan is fair to and in the best interests of the
stockholders of SSCI.
The Board of Directors of SSCI believes that the Merger is desirable for the
following reasons, among others:
(i) The terms and conditions of the proposed Merger, including the value of
the consideration to be received by the stockholders of SSCI and the fact that
the Merger is expected to be treated as a tax-free reorganization.
(ii) The opportunity for holders of SSCI Shares to receive shares of
HEALTHSOUTH Common Stock following the Merger.
9
<PAGE>
(iii) The business reputation and capabilities of HEALTHSOUTH and its
management, HEALTHSOUTH's financial strength, prospects, market position and
strategic objectives, and the liquidity and historical performance of
HEALTHSOUTH Common Stock.
(iv) The perceived strengths of SSCI and HEALTHSOUTH combined, including the
potential developments and information that are expected to be shared between
the two companies after the Merger is consummated, and the belief of the
directors that SSCI could be integrated into HEALTHSOUTH without disrupting or
adversely affecting the business of HEALTHSOUTH or SSCI.
(v) The likelihood that the Merger will be consummated.
On August 29, 1995, the HEALTHSOUTH Board of Directors ratified the execution
of the Plan. The Merger will become effective upon the filing of a Certificate
of Merger by the Subsidiary and SSCI under the DGCL, or at such later time as
may be specified in such Certificate of Merger. The Plan requires that these
filings be made, subject to satisfaction of the separate conditions to the
obligations of each party to consummate the Merger, as soon as practicable after
the Closing Date, or at such other time as may be agreed by HEALTHSOUTH and
SSCI. It is presently anticipated that such filing will be made immediately
after the Special Meeting on __________, 1995, and that the Effective Time will
occur upon such filing, although there can be no assurance as to whether or when
the Merger will occur. The HEALTHSOUTH Board of Directors believes that the
Merger is desirable for the following reasons, among others: (i) the Merger will
expand HEALTHSOUTH's network of outpatient surgery centers and enhance its
position as a leading provider of outpatient surgery services; (ii)
HEALTHSOUTH's belief that its existing managed care relationships and national
network would significantly enhance SSCI's patient volume and make SSCI more
competitive in its markets; (iii) HEALTHSOUTH's belief that there is a natural
strategic fit between HEALTHSOUTH and SSCI in view of the large number of
surgical patients who require rehabilitative healthcare services; and (iv)
HEALTHSOUTH's belief that significant operating synergies would exist in the
areas of cost of capital, purchasing power and overhead reductions.
See "THE MERGER--Reasons for the Merger; Recommendation of SSCI's Board of
Directors" and "--Effective Time of the Merger".
Effective Time of the Merger. The Merger will become effective upon the
filing of a Certificate of Merger by the Subsidiary and SSCI under the DGCL, or
at such later time as may be specified in such Certificate of Merger. The Plan
requires that these filings be made, subject to satisfaction of the separate
conditions to the obligations of each party to consummate the Merger, as soon as
practicable on or after the Closing Date, or at such other time as may be agreed
by HEALTHSOUTH and SSCI. See "THE MERGER--Effective Time of the Merger".
Exchange of Certificates. As soon as reasonably practicable on or after the
Effective Time, transmittal materials will be provided to each holder of record
of SSCI 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. Notwithstanding the
foregoing, to the extent practicable, arrangements will be made to effect the
exchange of certificates directly between HEALTHSOUTH and the holders of SSCI
Shares on the Closing Date. 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)
the representations and warranties of SSCI set forth in the Plan shall be true
and correct as of the dates specified in the Plan; (ii) SSCI shall, in all
material respects, have performed all of its obligations and agreements and
complied with all of its covenants contained in the Plan which are required to
be performed or complied with on or prior to the Closing Date; (iii) SSCI shall
have obtained consents under the
10
<PAGE>
contracts identified on the Disclosure Schedule to the Plan as requiring
consents prior to consummation of the Merger, or, at HEALTHSOUTH's option,
HEALTHSOUTH shall have obtained new contracts which permit the continued use or
supply of the products or services provided for by such contracts following the
Merger; (iv) except as listed in the Disclosure Schedule to the Plan, since
December 31, 1994, there shall not have been any material adverse change in the
business of SSCI (other than as a result of changes in conditions, including
economic or political developments, applicable to the business of healthcare
generally or the operation of outpatient surgical centers in particular); (v)
the holders of SSCI Common Stock shall have approved the Plan and the Merger and
any other matters submitted to them in accordance with the provisions of the
Plan; (vi) the promissory notes given by the Principal Stockholders of SSCI
shall have been renewed on such terms and conditions as each of such
stockholders and HEALTHSOUTH shall mutually agree to, provided that Ernst &
Young LLP shall have advised HEALTHSOUTH and SSCI that the renewal of such
promissory notes shall not disqualify the Merger for "pooling-of-interests"
accounting treatment; (vii) title policies for certain real property shall have
been delivered to HEALTHSOUTH; and (viii) HEALTHSOUTH shall have received the
opinion of counsel to SSCI with respect to certain matters.
The obligation of SSCI to consummate the Merger is subject to, among others,
the following conditions: (i) 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; (ii) HEALTHSOUTH shall, in all material respects,
have performed all of its obligations and agreements and complied with all of
its covenants contained in the Plan which are required to be performed or
complied with on or prior to the Closing Date; (iii) there shall have been no
material adverse change in the business properties, operations or financial
condition of HEALTHSOUTH; and (iv) SSCI shall have received the opinion of
counsel to HEALTHSOUTH and the Subsidiary with respect to certain matters.
The obligation of each of HEALTHSOUTH, the Subsidiary and SSCI to consummate
the Merger is subject to certain additional conditions, including the following:
(i) no federal or state court shall have entered an injunction or similar order
enjoining consummation of the transactions provided for in the Plan, and no
action or proceeding shall have been threatened or instituted and remain pending
by any governmental agency to restrain or prohibit the transactions contemplated
by the Plan, nor shall any governmental agency have notified any party to the
Plan that consummation of the contemplated transactions would constitute a
violation of the laws of the United States and that it intends to commence
proceedings to restrain the consummation of the contemplated transactions unless
such agency shall have withdrawn such notice prior to the Effective Time; (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 of which this
Prospectus-Proxy Statement is a part shall have been declared effective and no
stop order with respect thereto shall be in effect; and (v) HEALTHSOUTH and SSCI
shall have receive letters from Ernst & Young LLP to the effect that the Merger
shall qualify for "pooling-of-interests" accounting treatment. 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. As of September 21, 1995, HEALTHSOUTH and SSCI had completed 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 October 21, 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
11
<PAGE>
stock or assets of SSCI. 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.
Business Pending the Merger. The Plan provides that, until the Effective
Time, except as provided in the Plan, HEALTHSOUTH and SSCI will conduct their
respective businesses in the usual, regular and ordinary course in substantially
the same manner as previously conducted, and SSCI will use all reasonable
efforts to preserve intact its present business organization, maintain its
rights and franchises and preserve its relationships with customers, suppliers
and others having business dealings with it. See "THE MERGER--Business Pending
the Merger".
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 SSCI:
(i) by mutual written consent of HEALTHSOUTH and SSCI; (ii) by SSCI, if the
Average Closing Date Price is less than $18.00; (iii) by SSCI or HEALTHSOUTH,
if, without any fault of the Terminating Party, the Effective Time shall not
have occurred on or before November 30, 1995, or such later date as may be
approved in writing by HEALTHSOUTH and SSCI; or (iv) by HEALTHSOUTH or SSCI if
any court of competent jurisdiction or other governmental entity shall have
issued, enacted, entered, promulgated or enforced, an order, judgment,
injunction, restraining order, decree or ruling or taken any other action
permanently enjoining, restraining, or otherwise prohibiting the Merger. If such
judgment, order, decree, injunction, restraining order, rule or other action
shall have become final and non-appealable. If the Plan is terminated for any of
the reasons set forth above, then it shall become void and have no effect,
without liability of any party to the other; provided, that if such termination
results from the willful failure of any party to fulfill a condition to the
performance of the obligations of the other party, failure to perform covenants
of the Plan or breach by either party of any representation or warranty or
agreement contained in the Plan in a willful or grossly negligent manner, then
such party shall be fully liable for any and all losses incurred or suffered by
the other party as a result of such failure or breach.
Indemnification. The Plan provides that the Principal Stockholders of SSCI
shall jointly indemnify HEALTHSOUTH and the Subsidiary, and their respective
officers, directors, employees and representatives against, and hold them
harmless from, all losses, claims and expenses incurred by them as a result of
(i) any misrepresentation by SSCI in the Plan, (ii) any breach or failure by
SSCI to perform any agreement or covenant in the Plan, or (iii) any breach of
any warranty made by SSCI in the Plan; provided, however, that such Principal
Stockholders shall not be so liable unless and only to the extent that the
aggregate amount of losses incurred exceeds $1,000,000. In no event shall the
aggregate obligation of the Principal Stockholders exceed $8,000,000. No claim
for indemnification shall be made unless it, individually, exceeds $50,000. The
Plan also contains provisions requiring HEALTHSOUTH to indemnify the Principal
Stockholders against losses incurred as a result of the same misrepresentations
and breaches by HEALTHSOUTH, and subject to the same quantitative limitations as
those applicable to the Principal Stockholders.
Options. Under the terms of the Plan, each holder of an outstanding Option to
purchase SSCI Shares shall receive an option to purchase shares of HEALTHSOUTH
Common Stock (such exchanged options being referred to as "Exchanged Options").
The number of shares of HEALTHSOUTH Common Stock subject to each such Exchanged
Option shall be determined based upon the same exchange ratio as that
established for the SSCI Shares.
12
<PAGE>
As of the Record Date, the following directors and executive officers of SSCI
held Options to acquire the number of SSCI Shares indicated in the following
table, which Options, assuming an exchange ratio of .0906, would entitle the
holder to acquire the number of shares of HEALTHSOUTH Common Stock set forth
below:
<TABLE>
<CAPTION>
Number of
HEALTHSOUTH
Number of SSCI Shares Subject to
Shares Subject to Exchanged
Name and Principal Position Options(1) Options(1)
- ---------------------------- ---------- ----------
<S> <C> <C>
Marc D. Jang, Vice President -- Finance................ 100,000 9,060
Marc Jones, Vice President -- Operations............... 300,000 27,180
John N. Kapoor, Ph.D., Chairman of the Board .......... 30,000 2,718
Timothy R. Kelly, Director............................. 55,000 4,983
Neil Pennington, Director.............................. 30,000 2,718
Harold Ray, Director................................... 30,000 2,718
August A. Saibeni, President and Chief Executive
Officer and Director................................... 1,031,992 93,498
All directors and officers as a group (7 persons)...... 1,576,992 142,875
</TABLE>
________
(1) Includes vested and unvested options.
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
HEALTHSOUTH and SSCI receive letters from Ernst & Young LLP, which acts as
independent auditors for both parties, to the effect that the Merger shall be
accounted for as a pooling of interests. See "THE MERGER--Accounting Treatment"
and "PRO FORMA CONDENSED FINANCIAL INFORMATION".
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 SSCI Shares upon their receipt of
HEALTHSOUTH Common Stock in exchange for their SSCI Shares, except with respect
to cash received in lieu of fractional shares. The obligation of SSCI 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 SSCI Shares and Options is urged to consult his or her own
personal tax and financial advisors concerning the federal income tax
consequences of the Merger, as well as any applicable state, local or foreign or
other tax consequences, 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 SSCI
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 SSCI or HEALTHSOUTH at the
time of the Special Meeting may be resold by them only in certain permitted
circumstances, and in no event until financial results covering at least 30 days
of combined operations have been published following the Effective Time, so as
to ensure that the Merger qualifies as a pooling of interests for accounting
purposes. HEALTHSOUTH has agreed to publish such results within 15 days after
the end of the first calendar month following at least 30 days after the Closing
Date. See "THE MERGER--Resale of HEALTHSOUTH Common Stock by Affiliates".
Appraisal Rights. Holders of SSCI Common Stock have the right to dissent from
the Merger and, if the Merger is consummated, to receive payment of the fair
value of their shares (determined in accordance with the DGCL) upon compliance
with the provisions of Section 262 of the DGCL, a copy of which is attached to
this Prospectus-Proxy Statement as Annex B and is incorporated herein by
reference. See "THE MERGER--Appraisal Rights".
13
<PAGE>
NYSE Listing. A listing application will be filed prior to the Closing Date
with the NYSE to list the shares of HEALTHSOUTH Common Stock to be issued in the
Merger to the SSCI stockholders and holders of Exchanged Options. Although no
assurance can be given that the NYSE will accept the shares of HEALTHSOUTH
Common Stock so issued for listing, HEALTHSOUTH and SSCI anticipate that these
shares will be listed. It is a condition to the obligation of HEALTHSOUTH, the
Subsidiary and SSCI to consummate the Merger that such shares of HEALTHSOUTH
Common Stock be timely accepted for listing on the NYSE prior to the Effective
Time. See "THE MERGER--NYSE Listing".
Market and Market Prices
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) August 22, 1995, the last business day preceding public announcement
of the Merger, and (ii) September 27, 1995:
Market Price Per Share of
Date HEALTHSOUTH Common Stock
- ----- -------------------------
August 22, 1995 ........... $22.63
September 27, 1995 ........ 23.25
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
quarters indicated. There is no public market for the SSCI Shares. The prices
for HEALTHSOUTH Common Stock are as reported on the NYSE Composite Transactions
Tape. Neither HEALTHSOUTH nor SSCI has ever paid dividends on its capital stock,
and HEALTHSOUTH does not anticipate the payment of dividends in the foreseeable
future.
HEALTHSOUTH
Common Stock
-------------------
High Low
----- -----
1992
First Quarter...................... $ 18.56 $ 12.00
Second Quarter..................... 12.75 7.63
Third Quarter...................... 12.63 9.13
Fourth Quarter..................... 13.25 8.00
1993
First Quarter...................... $ 13.19 $ 7.13
Second Quarter..................... 9.32 6.50
Third Quarter...................... 8.38 6.07
Fourth Quarter..................... 12.82 7.63
1994
First Quarter...................... $ 16.13 $ 11.69
Second Quarter..................... 17.32 12.63
Third Quarter...................... 19.69 12.88
Fourth Quarter..................... 19.32 16.13
1995
First Quarter...................... $ 20.44 $ 18.06
Second Quarter .................... 21.63 16.32
Third Quarter (through September
27) ............................... 24.50 17.25
As of September 27, 1995, there were approximately 1,615 record holders of
HEALTHSOUTH Common Stock. As of the Record Date, there were four record holders
of SSCI Common Stock.
14
<PAGE>
Stockholders of SSCI 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, SSCI will be a
wholly-owned subsidiary of HEALTHSOUTH and all of SSCI'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".
15
<PAGE>
COMPARATIVE PER SHARE INFORMATION
The following summary presents selected comparative per share information for
(i) HEALTHSOUTH on a historical basis in comparison with pro forma information
giving effect to the Merger on a pooling-of-interests basis, and (ii) SSCI 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 SSCI 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 SSCI and the
related notes thereto, and in conjunction with the unaudited pro forma financial
information appearing elsewhere in this Prospectus-Joint Proxy Statement.
Neither HEALTHSOUTH nor SSCI has paid cash dividends since inception. 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.
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 reults of operations in future
periods or future combined financial position.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------- ------------------
1992 1993 1994(4) 1994 1995(4)
---- ---- ------ ---- ------
<S> <C> <C> <C> <C> <C>
Net income (loss) per common share: ......
HEALTHSOUTH ..............................
Historical (primary) (1) ................. $0.47 $0.22 $ 0.59 $0.35 $0.20
Historical (fully diluted) (1) (2) ...... N/A N/A 0.59 N/A N/A
Pro forma combined (primary) (1) ........ $0.46 $0.22 $ 0.58 $0.35 $0.20
Pro forma combined (fully diluted)
(1) (2) .................................. N/A N/A 0.58 N/A N/A
SSCI .....................................
Historical (primary) ..................... $(0.01) $ 0.01 $ 0.03 $0.02 $0.03
Pro forma equivalent (primary) (3) ...... (0.04) 0.02 0.05 0.03 0.02
Pro forma equivalent (fully diluted) (3) N/A N/A 0.05 N/A N/A
</TABLE>
<TABLE>
<CAPTION>
At June 30,
1995
--------
<S> <C>
Stockholders' equity per common share:
HEALTHSOUTH -- historical ............. $ 5.94
HEALTHSOUTH -- pro forma combined .... 5.97
SSCI -- historical .................... 0.76
SSCI -- pro forma equivalent (3) ..... 0.54
<FN>
___________
(1) Adjusted to reflect a two-for-one stock split effected in the form of a 100%
stock dividend paid on April 17, 1995.
(2) 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) SSCI pro forma equivalent per share data have been calculated by multiplying
the pro forma HEALTHSOUTH amounts by an assumed exchange ratio of .0906,
which is the exchange ratio which would be in effect if the Average Closing
Date Price were not greater than $25.00 per share.
(4) Gives effect to the Novacare Rehabilitation Hospitals Acquisition as if the
purchase had occurred at the beginning of the period. See "PRO FORMA
CONDENSED FINANCIAL INFORMATION".
</TABLE>
16
<PAGE>
HEALTHSOUTH's and SSCI's
SELECTED PRO FORMA FINANCIAL INFORMATION (Unaudited)
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 Proxy Statement. See "PRO FORMA CONDENSED FINANCIAL
INFORMATION". The pro forma financial information set forth in this Prospectus
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>
Six Months Ended
Year Ended December 31, June 30,
---------------------------------- ----------------------
1992(1) 1993 1994(5) 1994 1995(5)
-------- -------- -------- -------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data (1):
Revenues ............................... $503,657 $678,425 $1,424,971 $ 603,313 $777,197
Operating expenses: ....................
Operating units......................... 373,984 486,546 1,046,672 449,379 557,079
Corporate general and administrative ... 17,354 26,593 48,606 20,602 21,017
Provision for doubtful accounts......... 13,431 17,947 28,915 12,394 16,781
Depreciation and amortization........... 30,019 47,827 101,954 38,254 59,922
Interest expense........................ 12,667 19,107 88,070 27,720 50,430
Interest income......................... (5,434) (4,352) (4,566) (1,839) (2,96)
Terminated merger expense............... 3,665 -- -- -- --
Merger expenses......................... -- 333 6,520 3,397 29,194
NME Selected Hospitals Acquisition
related expense......................... -- 49,742 -- -- --
Gain on sale of partnership interest ... -- (1,400) -- -- --
Loss on impairment of assets............ -- -- 10,500 -- 11,192
Loss on abandonment of computer
project................................. -- -- 4,500 -- --
445,686 642,343 1,331,171 549,907 742,651
Income before income taxes and minority
interests............................... 57,971 36,082 93,800 53,406 34,546
Provision for income taxes.............. 18,842 12,062 34,474 19,513 11,139
39,129 24,020 59,326 33,893 23,407
Minority interests...................... 4,430 6,684 9,309 4,244 5,620
Net income ............................. $ 34,699 $ 17,336 $ 50,017 $ 29,649 $ 17,787
Weighted average common and common
equivalent shares outstanding (2) ...... 75,990 79,483 86,462 85,750 89,023
Net income per common and common
equivalent share (2) ................... $ 0.46 $ 0.22 $ 0.58 $ 0.35 $ 0.20
Net income per common share-- assuming
full dilution(2)(3)..................... N/A N/A $ 0.58 N/A N/A
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------- June 30,
1992 1993 1994 1995
--------- -------- -------- ----------
<S> <C> <C> <C> <C>
Balance Sheet Data (1):
Cash and marketable securities $ 113,268 $ 94,084 $ 90,066 $ 80,665
Working capital ............... 210,217 216,670 236,876 289,448
Total assets .................. 818,089 1,487,772 1,778,939 2,104,789
Long-term debt (4) ............ 343,477 906,972 1,052,064 1,375,392
Stockholders' equity .......... 312,041 431,811 504,223 531,173
_________
<FN>
(1) In addition to SSCI, reflects the combination of HEALTHSOUTH, ReLife, Inc.
("ReLife") and Surgical Health Corporation ("SHC") for all periods
presented, as HEALTHSOUTH acquired ReLife in December 1994 and SHC in June
1995 in transactions accounted for as poolings of interests.
(2) Adjusted to reflect a two-for-one stock split effected in the form of a 100%
stock dividend paid on April 17, 1995.
(3) Fully-diluted earnings per share in 1994 reflects shares reserved for
issuance upon conversion of HEALTHSOUTH's 5% Convertible Subordinated
Debentures Due 2001.
(4) Includes current portion of long-term debt.
(5) Gives effect to the NocaCare Rehabilitation Hospitals Aquisition as if the
purchase had occurred at the beginning of the period. See "PRO FORMA
CONDENSED FINANCIAL INFORMATION"
</TABLE>
17
<PAGE>
THE SPECIAL MEETING
General
This Prospectus-Proxy Statement is being furnished to holders of SSCI Shares
in connection with the solicitation of proxies by the Board of Directors of SSCI
for use at the Special Meeting to consider and vote upon the approval of the
Plan and to transact such other business as may properly come before the Special
Meeting or any adjournments or postponements thereof. Each copy of this
Prospectus-Proxy Statement mailed or delivered to holders of SSCI Shares is
accompanied by a form of Proxy for use at the Special Meeting.
This Prospectus-Proxy Statement is also furnished to SSCI stockholders as a
Prospectus in connection with the issuance to them of the shares of HEALTHSOUTH
Common Stock upon consummation of the Merger.
Date, Place and Time
The Special Meeting will be held at the principal executive offices of SSCI,
1201 Alhambra Boulevard, Suite 330, Sacramento, California 95816 on __________,
1995, at _____ ____.m. Pacific Time.
Record Date; Quorum
The Board of Directors of SSCI has fixed the close of business on __________,
1995, as the Record Date for the determination of the holders of SSCI Shares
entitled to receive notice of and to vote at the Special Meeting. The presence,
in person or by Proxy, of the holders of SSCI Shares entitled to cast a majority
of the votes entitled to be cast at the Special Meeting will constitute a quorum
at the Special Meeting.
Vote Required
As of the Record Date, there were outstanding and entitled to vote 19,615,443
shares of SSCI Common Stock. Each share of SSCI Common Stock is entitled to one
vote on each matter that comes before the Special Meeting.
The affirmative vote of the holders of shares of SSCI Shares entitled to cast
a majority of the votes entitled to be cast by the holders of record of the SSCI
Common Stock is required to approve and adopt the Plan. Accordingly, approval of
the Plan will require the affirmative vote of the holders of 9,807,722 shares of
SSCI Common Stock.
If, after all of the SSCI stockholders have received and had an opportunity
to review this Prospectus-Proxy Statement, SSCI determines that all of the SSCI
stockholders approve of the Merger and intend to vote FOR the Merger, it is
possible that the stockholder vote required under the DGCL to approve the Merger
will be accomplished without a meeting by written action of the SSCI
stockholders sufficient under Delaware law to authorize and approve the
transaction.
As of the Record Date, EJ Financial Investments, L.P., a Delaware limited
partnership ("EJ") and Sutter Ambulatory Care Corporation, a California
nonprofit public benefit corporation ("SACC", and jointly with EJ, the
"Principal Stockholders"), collectively owned 99.96% of the issued and
outstanding SSCI Common Stock. While each of the Principal Stockholders has
agreed to be bound by the terms and conditions of the Plan, the Plan does not
commit either of the Principal Stockholders to vote FOR the Plan.
Voting and Revocation of Proxies
Shares of SSCI Common Stock represented by a Proxy properly signed and
received at or prior to the 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 SSCI
Common Stock 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
18
<PAGE>
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 SSCI prior to or at
the Special Meeting, or by voting in person at the Special Meeting. Attendance
at the 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 votes that are withheld will, therefore, have
the same effect as negative votes AGAINST approval of the Plan.
The Board of Directors of SSCI is not aware of any business to be acted upon
at the Special Meeting other than as described herein. If, however, other
matters are properly brought before the 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.
Solicitation of Proxies
In addition to solicitation by mail, directors, officers and employees of
SSCI, who will not be specifically compensated for such services, may solicit
proxies from the stockholders of SSCI personally or by telephone or telegram or
other forms of communication. Except as otherwise provided in the Plan, SSCI
will bear its own expenses in connection with the solicitation of proxies for
the Special Meeting. See "THE MERGER--Expenses".
SSCI 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 IN THIS PROSPECTUS-PROXY STATEMENT. SEE "THE MERGER--Exchange of
Certificates".
19
<PAGE>
THE MERGER
The description of the Merger contained in this Prospectus-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 SSCI stockholders are urged to read Annex A in
its entirety.
Terms of the Merger
The acquisition of SSCI by HEALTHSOUTH will be effected by means of the
merger of SSCI with and into the Subsidiary, with SSCI being the surviving
corporation (the "Surviving Corporation"). The Certificate of Incorporation 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, SSCI shall continue as the Surviving Corporation
under such name as HEALTHSOUTH shall designate, other than one using the word
"Sutter" or any variation thereof.
At the Effective Time, each issued and outstanding SSCI Share will be
canceled and the holder of such share or fraction thereof will be entitled to
receive that number of whole shares of HEALTHSOUTH Common Stock that is equal to
the number of Aggregate Buyer Shares (as hereinafter defined) divided by the
number of Exchanging SSCI Shares (as hereinafter defined), plus cash in lieu of
fractional shares. As used herein, the term "Aggregate Buyer Shares" means
1,777,778 shares of HEALTHSOUTH Common Stock; provided, however, that in the
event that the Average Closing Date Price (as hereinafter defined) shall be
greater than $25.00, then the number of Aggregate Buyer Shares shall be equal to
$44,444,450 divided by the Average Closing Date Price. As used herein, the term
"Average Closing Date Price" shall mean the average of the 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 used herein, the term "Exchanging SSCI shares" shall mean
all shares of SSCI Common Stock outstanding immediately prior to the Effective
Time (other than SSCI Shares held in the treasury of SSCI immediately prior to
the Effective Time, and SSCI Shares issued, outstanding and owned by HEALTHSOUTH
or any of its wholly-owned subsidiaries immediately prior to the Effective
Time).
The following table indicates the exchange ratio assuming various Average
Closing Date Prices, with the resulting "value" to be received for each SSCI
share.
Average "Value" to be
Closing Exchange received for each
Date Price Ratio SSCI Share
(Col. 1) (Col. 2) (Col. 1 x Col. 2)
---------- -------- ---------------
$17.00........... .0906 $ 1.54
18.00........... .0906 1.63
20.00........... .0906 1.81
22.00........... .0906 1.99
25.00........... .0906 2.27
28.00........... .0809 2.27 (1)
30.00........... .0755 2.27 (1)
_________
(1) If the Average Closing Date Price is higher than $25.00, the number of
shares of HEALTHSOUTH Common Stock to be issued in the Merger shall be
determined by dividing $44,444,450 by the Average Closing Date Price.
As of the Effective Time, all such SSCI 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 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 divi
20
<PAGE>
dends or other distributions to which such holder is entitled as a result of the
Merger. Each SSCI Share that is owned by SSCI shall automatically be canceled
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.
Notwithstanding the foregoing, SSCI Shares outstanding immediately prior to
the Effective Time held by a SSCI 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 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. See "Appraisal Rights".
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 Record Date, the stockholders of SSCI will receive approximately 1.5% of the
outstanding shares of HEALTHSOUTH Common Stock anticipated to be outstanding
immediately after the Effective Time.
Background of the Merger
In October 1994, Mr. August A. Saibeni, President and Chief Executive Officer
of SSCI, met with Dr. John N. Kapoor, Chairman of the SSCI Board of Directors
and general partner of the majority stockholder of SSCI, to discuss SSCI's
strategic alternatives for maximizing stockholder value. As a result of their
meeting, Mr. Saibeni and Dr. Kapoor concluded that the best way to maximize
stockholder value was to sell SSCI. At a February 28, 1995 Board of Directors
meeting, Mr. Saibeni and Dr. Kapoor recommended to the SSCI Board that SSCI be
sold, and the Board authorized management to explore both the level of interest
of potential acquirors, including, but not limited to, HEALTHSOUTH, and the
possible engagement of Alex. Brown & Sons Incorporated ("Alex. Brown") as SSCI's
investment banker.
Alex. Brown was engaged on April 24, 1995 to assist SSCI in the sale of SSCI.
During the months of April and May, Alex. Brown contacted a number of potential
buyers of SSCI, including HEALTHSOUTH, and distributed materials describing
SSCI's operations and financial performance. In June 1995, a number of buyers
expressed indications of interest in potentially acquiring SSCI. During the
months of June, July and August, SSCI's management met with potential buyers of
SSCI to discuss SSCI's strategy, operations and financial performance.
During August 1995, potential buyers were asked to submit formal offers for
the acquisition of SSCI. Three such offers were received, and on August 17,
1995, SSCI's Board of Directors met to review the various offers.
Representatives from Alex. Brown were in attendance at the Board meeting and
summarized the sale process as well as the offers the Board was considering. In
addition, representatives from Alex. Brown reviewed HEALTHSOUTH's stock price
performance, valuation and other statistics regarding its historical and
projected financial performance.
Representatives from HEALTHSOUTH and Smith Barney Inc. ("Smith Barney"),
HEALTHSOUTH's investment banker, were asked to join the August 17 Board meeting.
HEALTHSOUTH's representatives addressed the Board and presented an overview of
HEALTHSOUTH's strategy, operations, recent acquisitions and financial
highlights. In addition, a representative from Smith Barney distributed
informational packages regarding HEALTHSOUTH and discussed HEALTHSOUTH's stock
price performance. After answering questions from SSCI's Board, representatives
from HEALTHSOUTH and Smith Barney were excused and the Board resumed its
consideration of the various offers. After discussion, SSCI's Board concluded
that the terms of HEALTHSOUTH's offer were the most favorable among its
alternatives and authorized a Special Committee to work with Alex. Brown and
counsel for SSCI in negotiating a definitive merger agreement with HEALTHSOUTH.
After the Board meeting and over the next several days, negotiations ensued with
HEALTHSOUTH.
21
<PAGE>
A special telephonic meeting of SSCI's Board of Directors was convened on
August 23, 1995 to consider the Plan. Representatives from Alex. Brown and the
Special Committee updated the Board on the status of the negotiations with
HEALTHSOUTH since the Board meeting on August 17, 1995. The Board of Directors
then unanimously passed resolutions approving the Plan, copies of which had been
previously distributed to the Board members, and authorizing the Chairman and
the President and Chief Executive Officer to execute the Plan and to take such
further actions as they deemed necessary or advisable to consummate the Merger
with HEALTHSOUTH.
Reasons for the Merger; Recommendation of SSCI's
Board of Directors
By the unanimous vote of the members of the Board of Directors of SSCI, all
of whom were present in person or by telephone at a special meeting held on
August 23, 1995, the Board of Directors determined that the proposed Merger, and
the terms and conditions of the Plan, were fair to and in the best interest of
SSCI and its stockholders and resolved to recommend that the stockholders of
SSCI 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 SSCI vote FOR the approval and adoption of the Plan, the
Board of Directors of SSCI 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 SSCI and the fact
that the Merger is expected to be treated as a tax-free reorganization.
(ii) The opportunity for holders of SSCI Shares to continue to share in
the potential for long-term gains in SSCI 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 liquidity and historical performance of the
HEALTHSOUTH Common Stock.
(iv) The perceived strengths of SSCI and HEALTHSOUTH combined, including
the potential developments and information that are expected to be shared
between the two companies after the Merger is consummated, and the belief of
the directors that SSCI could be integrated into HEALTHSOUTH without
disrupting or adversely affecting the business of HEALTHSOUTH or SSCI.
(v) The likelihood that the Merger would be consummated.
On August 29, 1995, the HEALTHSOUTH Board of Directors ratified the execution
of the Plan. The HEALTHSOUTH Board of Directors believes that the Merger is
desirable for the following reasons, among others: (i) the Merger will expand
HEALTHSOUTH's network of outpatient surgery centers and enhance its position as
a leading provider of outpatient surgery services; (ii) HEALTHSOUTH's belief
that its existing managed care relationships and national network would
significantly enhance SSCI's patient volume and make SSCI more competitive in
its markets; (iii) HEALTHSOUTH's belief that there is a natural strategic fit
between HEALTHSOUTH and SSCI in view of the large number of surgical patients
who require rehabilitative healthcare services; and (iv) HEALTHSOUTH's belief
that significant operating synergies would exist in the areas of cost of
capital, purchasing power and overhead reductions.
Effective Time of the Merger
The Merger will become effective upon the filing of a Certificate of Merger
by the Subsidiary and SSCI under the DGCL, or at such later time as may be
specified in such Certificate of Merger. The Plan requires that those filings be
made, subject to satisfaction of the separate conditions to the obligations of
each party to consummate the Merger, as soon as practicable after the Closing
Date, or at such other time as may be agreed by HEALTHSOUTH and SSCI. It is
presently anticipated that such filings will
22
<PAGE>
be made immediately after the Special Meeting on __________, 1995, and that the
Effective Time will occur upon such filings, although there can be no assurance
as to whether or when the Merger will occur. See "--Conditions to the Merger".
Exchange of Certificates
From and after the Effective Time, each holder of a stock certificate which
immediately prior to the Effective Time represented outstanding SSCI 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 SSCI 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. Notwithstanding the foregoing, to the extent practicable,
arrangements will be made to effect the exchange of certificates directly
between HEALTHSOUTH and the holders of SSCI Shares on the Closing Date.
As soon as reasonably practicable after the Effective Time, HEALTHSOUTH will
deliver, through the Exchange Agent to each holder of record of shares of SSCI
Common Stock at the Effective Time, transmittal materials for use in exchanging
the stock certificates that formerly represented such shares for certificates
for the shares of HEALTHSOUTH Common Stock into which such shares have been
converted. After the Effective Time, there will be no transfers on the stock
transfer books of SSCI of shares of SSCI Common Stock 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, through the Exchange Agent directly to each
holder of SSCI Common Stock who would otherwise be entitled to a fractional
share, an amount in cash determined by multiplying such holder's fractional
interest by the Average Closing Date Price. See "--Terms of the Merger".
The certificates representing shares of HEALTHSOUTH Common Stock and the
fractional share payment (if any) which any SSCI stockholder is entitled to
receive in exchange for his shares of SSCI Common Stock, and any dividends or
other distributions paid on such HEALTHSOUTH Common Stock prior to the delivery
to HEALTHSOUTH of such stockholder's certificates representing shares of SSCI
Common Stock, will not be delivered to such stockholder until the certificates
representing such shares of SSCI Common Stock 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 SSCI Common Stock immediately prior to the
Effective Time will cease to be, and shall have no rights as, stockholders of
SSCI, 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 shares pursuant to the effective exercise
of appraisal rights under the DGCL. See "--Appraisal Rights". Holders of SSCI
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 SSCI Shares for certificates of HEALTHSOUTH Common Stock as
provided in the Plan.
Neither HEALTHSOUTH nor SSCI will be liable to any holder of shares of SSCI
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.
23
<PAGE>
Conditions to the Merger
The obligation of HEALTHSOUTH and the Subsidiary to consummate the Merger is
subject to, among others, the following conditions: (i) the representations and
warranties of SSCI set forth in the Plan shall be true and correct as of the
dates specified in the Plan; (ii) SSCI shall, in all material respects, have
performed all of its obligations and agreements and complied with all of its
covenants contained in the Plan which are required to be performed or complied
with on or prior to the Closing Date; (iii) SSCI shall have obtained consents
under the contracts identified on the Disclosure Schedule to the Plan as
requiring consents prior to consummation of the Merger, or, at HEALTHSOUTH's
option, HEALTHSOUTH shall have obtained new contracts which permit the continued
use or supply of the products or services provided for by such contracts
following the Merger; (iv) except as listed in the Disclosure Schedule to the
Plan, since December 31, 1994, there shall not have been any material adverse
change in the business of SSCI (other than as a result of changes in conditions,
including economic or political developments, applicable to the business of
healthcare generally or the operation of outpatient surgical centers in
particular); (v) the holders of SSCI Common Stock shall have approved the Plan
and the Merger and any other matters submitted to them in accordance with the
provisions of the Plan; (vi) the promissory notes given by the Principal
Stockholders of SSCI shall have been renewed on such terms and conditions as
each of such stockholders and HEALTHSOUTH shall mutually agree to, provided that
Ernst & Young LLP shall have advised HEALTHSOUTH and SSCI that the renewal of
such promissory notes shall not disqualify the Merger for "pooling-of-interests"
accounting treatment; (vii) title policies for certain real property shall have
been delivered to HEALTHSOUTH; and (viii) HEALTHSOUTH shall have received the
opinion of counsel to SSCI with respect to certain matters.
The obligation of SSCI to consummate the Merger is subject to the following
conditions: (i) the representations and warranties of HEALTHSOUTH and the
Subsidiary set forth in the Plan are true and correct as of the dates specified
in the Plan; (ii) HEALTHSOUTH shall, in all material respects, have performed
all of its obligations and agreements and complied with all of its covenants
contained in the Plan which are required to be performed or complied with on or
prior to the Closing Date; and (iii) SSCI shall have received the opinion of
counsel to HEALTHSOUTH and the Subsidiary with respect to certain matters.
The obligation of each of HEALTHSOUTH, the Subsidiary and SSCI to consummate
the Merger is subject to certain additional conditions, including the following:
(i) no federal or state court shall have entered an injunction or similar order
enjoining consummation of the transactions provided for in the Plan, and no
action or proceeding shall have been threatened or instituted and remain pending
by any governmental agency to restrain or prohibit the transactions contemplated
by the Plan, nor shall any governmental agency have notified any party to the
Plan that consummation of the contemplated transactions would constitute a
violation of the laws of the United States and that it intends to commence
proceedings to restrain the consummation of the contemplated transactions unless
such agency shall have withdrawn such notice prior to the Effective Time; (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 of which
this Prospectus-Proxy Statement is a part shall have been declared effective
under the Securities Act and no stop order with respect thereto shall be in
effect; and (v) HEALTHSOUTH and SSCI shall have received letters from Ernst &
Young LLP to the effect that the Merger shall qualify for "pooling-of-interests"
accounting treatment.
Regulatory Approvals
As conditions precedent to the consummation of the Merger, the Plan requires,
among other things, that no statute, rule or regulation shall have been enacted
by the government (or any governmental agency) of the United States or any
state, county, municipality or other political subdivision thereof that makes
the consummation of the Merger and any other transaction contemplated thereby
illegal.
24
<PAGE>
Certain 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 seek 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
will not be successful. Neither HEALTHSOUTH nor SSCI 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 Federal Trade Commission or other
objections, unless required to do so by applicable law.
The operations of each of HEALTHSOUTH and SSCI 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 health care businesses and
facilities. As a result of the Merger, a number of the arrangements between SSCI
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 SSCI 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 may be required to be obtained. It is anticipated
that, prior to the time this Prospectus-Proxy Statement is mailed to the
stockholders of SSCI, all filings required to be made 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 not
anticipated that the Companies will be unable to obtain any required consent or
approval.
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 SSCI will
conduct their respective businesses in the usual, regular and ordinary course in
substantially the same manner as previously conducted, and SSCI will use all
reasonable efforts to preserve intact its present business organizations,
maintain its rights and franchises and preserve its relationships with
customers, suppliers and others having business dealings with it.
Under the Plan, until the Closing Date, except as may be approved by
HEALTHSOUTH, SSCI shall: (i) use all commercially reasonable efforts to operate
its business only in the usual, regular and ordinary course and manner; (ii)
maintain its books, accounts and records relating to its and their business
operations in the usual, regular and ordinary manner, and on a basis consistent
with its financial statements; (iii) other than in the ordinary course of
business, and except as set forth in the Disclosure Schedule attached to the
Plan, or as may otherwise be required by applicable law, not increase or make
any other material change in the compensation range for any employee from that
in effect as of August 1, 1995; (iv) not issue, sell, deliver or pledge or
authorize or propose the issuance, sale, delivery or pledge of (a) additional
shares of capital stock of any class, or securities convertible into shares of
SSCI Common Stock, or any rights, warrants or obligations to acquire any such
shares of SSCI Common Stock or other convertible securities, other than such
issuance of shares of SSCI Common Stock pursuant to the exercise or acceleration
of stock options or warrants for SSCI Common Stock outstanding on the date of
execution of the Plan, (b) any other securities in respect of, in lieu of, or in
substitution for the shares of SSCI Common Stock outstanding on the date of the
execution of the Plan, or (c) any of its interests in any of its consolidated
partnerships; (v) except in the usual and ordinary course of business, sell or
dispose of, or agree to sell or dispose of, any of its assets, or suffer or
permit the creation of any mortgage, pledge, lien or other encumbrance, security
interest or imperfection of title which individually or in the aggregate
materially and adversely affects the value of its assets when taken as a whole;
(vi) continue to carry its existing insurance with respect to its business and
not allow any breach of its insurance policies or agreements to occur or exist;
(vii) use all commercially reasonable efforts not to do any act or permit to do
any act, or permit any act which shall cause a material breach by it of any of
its contracts; (viii) duly comply with all laws, statutes, regulations, rules
and orders which are material to the business of SSCI and use all commercially
reasonable efforts to duly comply with all laws, statutes, regulations, rules
and orders as may be required to effect the Merger; (ix) to the extent that SSCI
shall have knowledge thereof, promptly notify HEALTHSOUTH of (a) any notice or
other communication
25
<PAGE>
alleging that the consent of such person is or may be required in connection
with the transaction contemplated by the Plan, (b) any notice or other
communication from any governmental authority in connection with the
transactions contemplated by the Plan, (c) any material adverse change in the
business of SSCI, (d) any actions, suits, claims, investigations or proceedings
commenced or threatened against, relating to or involving or otherwise affecting
the business of SSCI that, if pending on the date of execution of the Plan,
would have been required to have been disclosed pursuant to the Plan; (x) not
amend its Certificate of Incorporation or Bylaws; (xi) not merge with or into
any other corporation or sell, assign, transfer, pledge or encumber any part of
its assets or agree to do any of the foregoing; (xii) continue to maintain all
employee benefit plans in accordance with applicable regulations, and ensure
that no employee benefit plan, nor any trust related thereto, shall be amended
or terminated prior to the Closing Date, except for any such amendment as may be
required to comply with applicable regulations; (xiii) collect its accounts
receivable and pay its accounts payable, in each case in the ordinary course of
business consistent with past practice, and not fail to pay or discharge when
due any liabilities; (xiv) not settle or compromise any suit or claim or
threatened suit relating to the transactions contemplated by the Plan; (xv) not
enter into or commit to enter into any contract, agreement, arrangement or
understanding having a term longer than six months unless such contract,
agreement, arrangement or understanding may be canceled by SSCI without penalty
on not more than 60 days' notice or does not require expenditure by SSCI or any
of its partnerships of more than $50,000; (xvi) not authorize, propose or enter
into, or announce an intention to authorize, propose or enter into, or recommend
or announce an intention to recommend, an agreement in principle or an agreement
with respect to, any merger, consolidation, joint venture, liquidation,
dissolution or business combination (other than the Merger), or any material
change in its capitalization, not in the ordinary course of business and
consistent with past practice; (xvii) not authorize or make any capital
expenditure in excess of $50,000, except for obligations incurred prior to the
date of the execution of the Plan as described in the Disclosure Schedule
attached to the Plan; (xviii) not make any tax election or settle or compromise
any income tax liability material to SSCI; (xx) not change any of the accounting
principles or practices used by it to prepare its statements; and (xxi) not
declare or pay any dividends or other distributions in respect of its capital
stock.
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 SSCI: (i) by mutual
written consent of HEALTHSOUTH and SSCI; (ii) by SSCI, if the Average Closing
Date Price is less than $18.00; (iii) by SSCI or HEALTHSOUTH, if, without any
fault of the terminating party, the Effective Time shall not have occurred on or
before November 30, 1995, or such later date as may be approved in writing by
HEALTHSOUTH and SSCI; or (iv) by HEALTHSOUTH or SSCI if any court of competent
jurisdiction or other governmental entity shall have issued, enacted, entered,
promulgated or enforced, an order, judgment, injunction, restraining order,
decree or ruling or taken any other action permanently enjoining, restraining,
or otherwise prohibiting the Merger. If such judgment, order, decree,
injunction, restraining order, rule or other action shall have become final and
non-appealable. If the Plan is terminated for any of the reasons set forth
above, then it shall become void and have no effect, without liability of any
party to the other; provided, that if such termination results from the willful
failure of any party to fulfill a condition to the performance of the
obligations of the other party, failure to perform covenants of the Plan or
breach by either party of any representation or warranty or agreement contained
in the Plan in a willful or grossly negligent manner, then such party shall be
fully liable for any and all losses incurred or suffered by the other party as a
result of such failure or breach.
Indemnification
The Plan provides that the Principal Stockholders of SSCI shall jointly
indemnify HEALTHSOUTH and the Subsidiary, and their respective officers,
directors, employees and representatives against, and hold them harmless from,
all losses, claims and expenses incurred by them as a result of (i) any
misrepresentation by SSCI in the Plan, (ii) any breach or failure by SSCI to
perform any agreement or covenant in the Plan, or (iii) any breach of any
warranty made by SSCI in the Plan; provided, however, that such Principal
Stockholders shall not be so liable unless and only to the extent that the
aggregate
26
<PAGE>
amount of losses incurred exceeds $1,000,000. In no event shall the aggregate
obligation of the Principal Stockholders exceed $8,000,000. No claim for
indemnification shall be made unless it, individually, exceeds $50,000. The Plan
also contains provisions requiring HEALTHSOUTH to indemnify the Principal
Stockholders against losses incurred as a result of the same misrepresentations
and breaches by HEALTHSOUTH, and subject to the same quantitative limitations as
those applicable to the Principal Stockholders.
Options
Under the terms of the Plan, each holder of an outstanding Option to purchase
SSCI Shares shall receive an option to purchase shares of HEALTHSOUTH Common
Stock (such exchanged options being referred to as "Exchange Options"). The
number of shares of HEALTHSOUTH Common Stock subject to each such Exchanged
Option shall be determined based upon the same exchange ratio as that
established for the SSCI Shares.
As of the Record Date, the following directors and executive officers of SSCI
held Options to acquire the number of SSCI Shares indicated in the following
table, which Option, assuming an exchange ratio of .0906, would entitle the
holder to acquire the number of shares of HEALTHSOUTH Common Stock set forth
below:
<TABLE>
<CAPTION>
Number of
HEALTHSOUTH
Number of SSCI Shares Subject to
Shares Subject to Exchanged
Name and Principal Position Options(1) Options(1)
- ---------------------------- ------------- ---------------
<S> <C> <C>
Marc D. Jang, Vice President -- Finance................. 100,000 9,060
Marc Jones, Vice President -- Operations................ 300,000 27,180
John N. Kapoor, Ph.D., Chairman of the Board ........... 30,000 2,718
Timothy R. Kelly, Director.............................. 55,000 4,983
Neil Pennington, Director............................... 30,000 2,718
Harold Ray, Director.................................... 30,000 2,718
August A. Saibeni, President and Chief Executive
Officer and Director.................................... 1,031,992 93,498
All directors and officers as a group (7 persons)....... 1,576,992 142,875
_________
<FN>
(1) Includes vested and unvested options.
</TABLE>
Accounting Treatment
Consummation of the Merger is conditioned upon the receipt by HEALTHSOUTH and
SSCI of a letter from Ernst & Young LLP to the effect that the Merger will
qualify for pooling-of-interests accounting treatment if consummated in
accordance with the Plan. HEALTHSOUTH, the Subsidiary and SSCI have agreed not
to intentionally take any action that would disqualify treatment of the Merger
as a pooling of interests for accounting purposes.
Under the pooling-of-interests method of accounting, the historical basis of
the assets and liabilities of HEALTHSOUTH and SSCI will be combined at the
Effective Time and carried forward at their previously recorded amounts, the
stockholders' equity accounts of HEALTHSOUTH and SSCI will be combined on
HEALTHSOUTH's consolidated balance sheet and no goodwill or other intangible
assets will be created. Consolidated financial statements of HEALTHSOUTH issued
after the Merger will be restated retroactively to reflect the consolidated
operations of HEALTHSOUTH and SSCI as if the Merger had taken place prior to the
periods covered by such consolidated financial statements.
The unaudited pro forma financial information contained in this
Prospectus-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 and the exchange by the holders of SSCI Shares of such shares for shares
of HEALTHSOUTH Common Stock is included for general information only. This
summary is not a complete description of all the consequences of the
27
<PAGE>
Merger. 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 SSCI stockholder 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 SSCI 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 SSCI 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 SSCI 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 SSCI 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 SSCI
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 SSCI pursuant to
Section 368(a) of the Code. Each holder of SSCI 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 SSCI to proceed with the Merger that SSCI shall have received an
opinion from Burke, Warren & MacKay, P.C., its special 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) of the Code, and HEALTHSOUTH, the Subsidiary and SSCI 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, SSCI or the
Subsidiary as a result of the Merger;
(iii) No gain or loss will be recognized by a SSCI stockholder who receives
solely shares of HEALTHSOUTH Common Stock in exchange for SSCI 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 redeemed as provided in Section 302(a) of the Code;
(v) The tax basis of the shares of HEALTHSOUTH Common Stock received by a
SSCI stockholder will be equal to the tax bases of the SSCI Shares exchanged
therefor, excluding any basis allocable to a fractional share of HEALTHSOUTH
Common Stock for which cash is received;
(vi) The holding period of the shares of HEALTHSOUTH Common Stock received by
a SSCI stockholder will include the holding period or periods of the SSCI Shares
exchanged therefor, provided that the SSCI 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.
28
<PAGE>
The discussion does not address the tax consequences arising under the laws of
any state, locality or foreign jurisdiction. Holders of SSCI 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 SSCI in connection
with the Merger has been registered under the Securities Act. HEALTHSOUTH Common
Stock received by the stockholders of SSCI 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 SSCI 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 SSCI or HEALTHSOUTH at the time of Special Meeting
(generally, directors, certain executive officers and major stockholders).
Affiliates of SSCI 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 was current with its Exchange Act information filings and such
Affiliate was 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.
Further, each of the stockholders of SSCI who is an Affiliate is expected to
agree with HEALTHSOUTH that he will not sell, transfer or otherwise dispose of
any shares of HEALTHSOUTH Common Stock received by him in the Merger until
financial results covering at least 30 days of combined operations have been
published following the Effective Time so as to ensure that the Merger qualifies
as a pooling of interests for accounting purposes. HEALTHSOUTH has agreed to
publish such results within 15 days after the end of the first calendar month
following at least 30 days after the Closing Date.
Appraisal Rights
Under the DGCL, holders of SSCI Shares will be entitled to dissenters' rights
of appraisal in connection with the Merger.
Any holder of SSCI Shares may dissent from the Merger and receive in cash the
"fair value" as of the Effective Time of the SSCI 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 SSCI Shares wishes to dissent from the Merger, such
stockholder must file with SSCI, prior to or at the 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 SSCI Shares, and must not vote in favor of
the Merger. Such written demand must be filed either by mail or in person with
SSCI at its executive offices located at 1201 Alhambra Boulevard, Suite 330,
Sacramento, California 95816, Attention: Secretary. A failure to vote against
the Plan and the Merger does not constitute a waiver of appraisal rights, nor
does
29
<PAGE>
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 SSCI Shares is entitled to assert appraisal rights for the SSCI Shares
registered in such holder's name. Such appraisal rights may be asserted with
respect to all or less than all of the SSCI Shares held of record by such
holder. If the SSCI 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 SSCI Shares as a nominee for the beneficial owner
may exercise appraisal rights with respect to the SSCI 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 SSCI
Shares covered by it. If there are no number of SSCI Shares expressly mentioned
in the written demand, the demand will be presumed to cover all SSCI Shares held
in the name of the record holder.
Within ten days after the Effective Time, SSCI 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 SSCI are unable to reach agreement
as to the "fair value" of the SSCI Shares within 120 days after the Effective
Time of the Merger, SSCI or the dissenting stockholder may file a petition in
the Delaware Court of Chancery demanding a determination of the value of the
SSCI 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 SSCI who
has complied with the requirement for exercise of appraisal rights is entitled,
upon written request to SSCI, to receive from SSCI a statement setting forth the
aggregate number of SSCI 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 SSCI Shares. Such statement must be mailed within ten
days after the written request therefor has been received by SSCI. 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.
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 SSCI stockholder who has demanded his
appraisal rights shall be entitled to vote his SSCI 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 SSCI 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 SSCI
stockholder delivers to SSCI 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 SSCI, 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 SSCI 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".
30
<PAGE>
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-PROXY STATEMENT. ANY STOCKHOLDER
INTENDING TO EXERCISE DISSENTERS' RIGHTS IS URGED TO REVIEW CAREFULLY ANNEX B SO
AS TO BE IN STRICT COMPLIANCE WITH THE PROVISIONS OF THE DGCL.
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.
NYSE Listing
A listing application will be filed with the NYSE to list the shares of
HEALTHSOUTH Common Stock to be issued to SSCI 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 SSCI
anticipate that these shares will qualify for listing on the NYSE upon official
notice of issuance thereof.
31
<PAGE>
PRO FORMA CONDENSED FINANCIAL INFORMATION
The following pro forma condensed financial information and explanatory notes
are presented to reflect the effect of the Merger of SSCI with the Subsidiary on
the historical financial statements of HEALTHSOUTH and SSCI. 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, ReLife, Inc. ("ReLife") and Surgical Health Corporation ("SHC") for
all periods presented, as HEALTHSOUTH acquired ReLife in December 1994 and SHC
in June 1995 in transactions accounted for as poolings of interests.
In addition, the pro forma condensed financial information reflects the
impact of HEALTHSOUTH's acquisition, effective April 1, 1995, from NovaCare,
Inc. ("NovaCare") of 11 rehabilitation hospitals, 12 other facilities and two
Certificates of Need (the "NovaCare Rehabilitation Hospitals Acquisition") on
the results of operations for the year ended December 31, 1994 and the six
months ended June 30, 1995.
The pro forma condensed balance sheet assumes that the Merger was consummated
on June 30, 1995, and the pro forma condensed income statements assume that the
Merger was consummated on January 1, 1992. The assumptions are described in the
accompanying Notes to Pro Forma Condensed Financial Information.
All HEALTHSOUTH shares outstanding and per share amounts have been adjusted
to reflect a two-for-one stock split effected in the form of a 100 percent stock
dividend payable on April 17, 1995.
The pro forma information should be read in conjunction with the historical
financial statements of HEALTHSOUTH and SSCI and the related notes thereto
appearing elsewhere in this Prospectus-Proxy Statement. 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 described above been consummated at the date
indicated, nor is it necessarily indicative of the results of operations of
future periods or future combined financial position.
32
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Pro Forma Condensed Combined Balance Sheet (Unaudited)
June 30, 1995
<TABLE>
<CAPTION>
Pro Forma Pro Forma
HEALTHSOUTH SSCI Adjustments Combined
------------ ---- ----------- ----------
(In thousands)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 62,336 $ 4,750 $ 0 $ 67,086
Other marketable securities.................... 13,579 0 0 13,579
Accounts receivable............................ 281,283 4,012 0 285,295
Inventories, prepaid expenses and other
current assets................................. 110,538 2,578 0 113,116
Total current assets........................... 467,736 11,340 0 479,076
Other assets................................... 60,953 50 0 61,003
Property, plant and equipment, net............. 1,042,444 14,941 0 1,057,385
Intangible assets, net......................... 491,916 15,409 0 507,325
Total assets................................... $ 2,063,049 $41,740 $ 0 $2,104,789
LIABILITIES AND STOCKHOLDER'S EQUITY .........
Current liabilities:
Accounts payable............................... $ 93,094 $ 1,605 $ 3,000(1) $ 97,699
Salaries and wages payable..................... 44,496 892 0 45,388
Accrued interest payable and other
liabilities.................................... 28,250 404 (1,170)(1) 27,484
Current portion of long-term debt.............. 16,750 2,307 0 19,057
Total current liabilities...................... 182,590 5,208 1,830 189,628
Long-term debt................................. 1,340,549 15,786 0 1,356,335
Deferred income taxes.......................... 6,518 509 0 7,027
Other long-term liabilities.................... 4,071 0 0 4,071
Deferred revenue............................... 7,266 0 0 7,266
Minority interests............................. 3,923 5,366 0 9,289
Stockholders' equity:
Preferred Stock, $.10 par value................ 0 0 0 0
Common Stock, $.01 par value................... 801 196 (178)(2) 819
Additional paid-in capital..................... 381,743 18,905 178 (2) 400,826
Retained earnings.............................. 151,797 1,013 (1,830)(1) 150,980
Treasury stock................................. (323) 0 0 (323)
Receivable from Employee Stock Ownership Plan . (15,886) 0 0 (15,886)
Notes receivable from stockholders............. 0 (5,243) 0 (5,243)
Total stockholders' equity..................... 518,132 14,871 (1,830) 531,173
Total liabilities and stockholders' equity .... $ 2,063,049 $41,740 $ 0 $2,104,789
</TABLE>
See accompanying notes.
33
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Pro Forma Condensed Combined Income Statement (Unaudited)
Year Ended December 31, 1994
<TABLE>
<CAPTION>
Acquisition
------------------------------------
Pro Forma Pro Forma Pro Forma Pro Forma
HEALTHSOUTH NovaCare Adjustments Combined SSCI Adjustments Combined
------------ -------- ------------- ----------- -------- ----------- -----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............... $ 1,236,190 $ 142,548 $ 8,058 (5) $1,386,796 $ 38,175 $ 0 $ 1,424,971
Operating expenses: ..
Operating units........ 906,712 128,233 (12,406)(2) 1,022,539 24,133 0 1,046,672
Corporate general and
administrative......... 45,895 0 0 45,895 2,711 0 48,606
Provision for doubtful
accounts............... 23,739 1,269 0 25,008 3,907 0 28,915
Depreciation and
amortization........... 86,678 7,041 (1,918)(1) 91,801 2,627 0 94,428
7,526 (3)
Interest expense....... 65,286 11,096 10,100 (4) 83,908 1,588 0 85,496
Interest income........ (4,308) 0 0 (5,792) (258) 0 (5,536)
Merger expenses........ 6,520 0 0 6,520 0 0 6,520
Loss on impairment of
assets................. 10,500 0 0 10,500 0 0 10,500
Loss on abandonment of
computer project....... 4,500 0 0 4,500 0 0 4,500
------------ -------- ------------- ----------- -------- ----------- -----------
1,145,522 147,639 3,302 1,296,463 34,708 0 1,331,171
------------ -------- ------------- ----------- -------- ----------- -----------
Income before income
taxes and minority
interests.............. 90,668 (5,091) 4,756 90,333 3,467 0 93,800
Provision for income
taxes.................. 34,305 (1,084) 780 (6) 34,001 473 0 34,474
------------ -------- ------------- ----------- -------- ----------- -----------
56,363 (4,007) 3,976 56,332 2,994 0 59,326
Minority interests .... 6,402 445 0 6,847 2,462 0 9,309
------------ -------- ------------- ----------- -------- ----------- -----------
Net income............. $ 49,961 $ (4,452) $ 3,976 $ 49,485 $ 532 $ 0 $ 50,017
============ ======== ============= =========== ======== =========== ===========
Weighted average
common and common
equivalent shares
outstanding............ 84,687 N/A N/A 84,687 19,612 (17,833)(2) 86,464
============ ======== ============= =========== ======== =========== ===========
Net income per common
and common equivalent
share.................. $ 0.59 N/A N/A $0.58 $ 0.03 $ N/A $ 0.58
============ ======== ============= =========== ======== =========== ===========
Net income per common
share -- assuming full
dilution............... $ 0.59 N/A N/A $0.58 $ N/A $ N/A $ 0.58
============ ======== ============= =========== ======== =========== ===========
</TABLE>
See accompanying notes.
34
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Pro Forma Condensed Combined Income Statement (Unaudited)
Year Ended December 31, 1993
<TABLE>
<CAPTION>
Pro Forma Pro Forma
HEALTHSOUTH SSCI Adjustments Combined
----------- ------- ----------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues.......................................... $ 656,329 $22,096 $ 0 $ 678,425
Operating expenses: ..............................
Operating units................................... 471,778 14,768 0 486,546
Corporate general and administrative.............. 24,329 2,264 0 26,593
Provision for doubtful accounts................... 16,181 1,766 0 17,947
Depreciation and amortization..................... 46,224 1,603 0 47,827
Interest expense.................................. 18,495 612 0 19,107
Interest income................................... (3,924) (428) 0 (4,352)
Merger expense.................................... 333 0 0 333
NME Selected Hospitals Acquisition related
expense........................................... 49,742 0 0 49,742
Gain on sale of partnership interest.............. (1,400) 0 0 (1,400)
621,758 20,585 0 642,343
Income before income taxes and minority
interests......................................... 34,571 1,511 0 36,082
Provision for income taxes........................ 11,930 132 0 12,062
22,641 1,379 0 24,020
Minority interests................................ 5,444 1,240 0 6,684
Net income........................................ $ 17,197 $ 139 $ 0 $ 17,336
Weighted average common and common equivalent
shares outstanding................................ 77,709 19,608 (17,832)(2) 79,485
Net income per common and common equivalent
share............................................. $ 0.22 $ 0.01 N/A $ 0.22
</TABLE>
See accompanying notes.
35
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Pro Forma Condensed Combined Income Statement (Unaudited)
Year Ended December 31, 1992
<TABLE>
<CAPTION>
Pro Forma Pro Forma
HEALTHSOUTH SSCI(3) Adjustments Combined
----------- ------ ----------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues..................................... $ 501,046 $ 2,611 $ 0 $ 503,657
Operating expenses: .........................
Operating units.............................. 372,169 1,815 0 373,984
Corporate general and administrative ........ 16,878 476 0 17,354
Provision for doubtful accounts.............. 13,254 177 0 13,431
Depreciation and amortization................ 29,834 185 0 30,019
Interest expense............................. 12,623 44 0 12,667
Interest income.............................. (5,415) (19) 0 (5,434)
Terminated merger expense.................... 3,665 0 0 3,665
443,008 2,678 0 445,686
Income (loss) before income taxes and minority
interests.................................... 58,038 (67) 0 57,971
Provision for income taxes................... 18,864 (22) 0 18,842
39,174 (45) 0 39,129
Minority interests........................... 4,245 185 0 4,430
Net income (loss)............................ $ 34,929 $ (230) $ 0 $ 34,699
Weighted average common and common
equivalent shares outstanding................ 74,214 19,608 (17,832)(2) 75,990
Net income (loss) percommon and common equivalent
share........................................ $ 0.47 $ (0.01) $ N/A $ $0.46
</TABLE>
See accompanying notes.
36
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Pro Forma Condensed Combined Income Statement (Unaudited)
Six Months Ended June 30, 1995
<TABLE>
<CAPTION>
Acquisition
--------------------------------------
Pro Forma Pro Forma Pro Forma Pro Forma
HEALTHSOUTH NovaCare Adjustments Combined SSCI Adjustments Combined
----------- --------- ------------ ------------- ------- ----------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............... $ 716,949 $ 37,942 $ 1,860 (5) $ 756,751 $20,446 $ 0 $ 777,197
Operating expenses: ..
Operating units........ 513,038 33,065 (910)(2) 545,193 11,886 0 557,079
Corporate general and
administrative......... 19,645 0 0 19,645 1,372 0 21,017
Provision for doubtful
accounts............... 14,119 322 0 14,441 2,340 0 16,781
Depreciation and
amortization........... 55,663 1,996 (999)(1) 58,542 1,380 0 59,922
1,882 (3)
Interest expense....... 44,292 2,595 2,684 (4) 49,571 859 0 50,430
Interest income........ (2,770) 0 0 (2,770) (194) 0 (2,964)
Merger cost............ 29,194 0 0 29,194 0 0 29,194
Loss on impairment of
assets................. 11,192 0 0 11,192 0 0 11,192
684,373 37,978 2,657 725,008 17,643 0 742,651
Income before income
taxes and minority
interests.............. 32,576 (36) (797) 31,743 2,803 0 34,546
Provision for income
taxes.................. 10,895 (101) (259)(6) 10,535 604 0 11,139
21,681 65 (538) 21,208 2,199 0 23,407
Minority interests .... 3,904 89 0 3,993 1,627 0 5,620
Net income............. $ 17,777 $ (24) $ (538) $ 17,215 $ 572 $ 0 $ 17,787
Weighted average
common and common
equivalent shares
outstanding............ 87,246 NA NA 87,246 19,615 (17,838)(2) 89,023
Net income per common
and common equivalent
share.................. $ 0.20 $ NA $ NA $ 0.20 $ 0.03 $ N/A $ 0.20
</TABLE>
See accompanying notes.
37
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Pro Forma Condensed Combined Income Statement (Unaudited)
Six Months Ended June 30, 1994
<TABLE>
<CAPTION>
Pro Forma Pro Forma
HEALTHSOUTH SSCI Adjustments Combined
----------- ------ ----------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues..................................... $ 584,183 $19,130 $ 0 $ 603,313
Operating expenses: .........................
Operating units.............................. 437,643 11,736 0 449,379
Corporate general and administrative ........ 19,191 1,411 0 20,602
Provision for doubtful accounts.............. 10,287 2,107 0 12,394
Depreciation and amortization................ 36,962 1,292 0 38,254
Interest expense............................. 26,980 740 0 27,720
Interest income.............................. (1,598) (241) 0 (1,839)
Merger costs................................. 3,397 0 0 3,397
532,862 17,045 0 549,907
Income before income taxes and minority
interests.................................... 51,321 2,085 0 53,406
Provision for income taxes................... 19,104 409 0 19,513
32,217 1,676 0 33,893
Minority interests........................... 2,991 1,253 0 4,244
Net income................................... $ 29,226 $ 423 $ 0 $ 29,649
Weighted average common and common
equivalent shares outstanding................ 83,974 19,608 (17,832) (2) 85,750
Net income per common and common equivalent
share........................................ $ 0.35 $ 0.02 $N/A $ 0.35
</TABLE>
See accompanying notes.
38
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Pro Forma Condensed Financial Information
A. The NovaCare Rehabilitation Hospitals Acquisition
Effective April 1, 1995 HEALTHSOUTH completed the acquisition of 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 was approximately $234,807,000. The
transaction was accounted for as a purchase and, accordingly, the results of the
acquired NovaCare facilities are included in HEALTHSOUTH's historical financial
statements from the effective date of the acquisition. HEALTHSOUTH financed the
cost of the NovaCare Rehabilitation Hospitals Acquisition through additional
borrowings under its existing credit facilities, as amended.
The accompanying pro forma income statements for the year ended December 31,
1994 and the six months ended June 30, 1995 assume that the transaction was
consummated at the beginning of the periods presented.
Certain assets and liabilities of Rehab Systems Company (a wholly owned
subsidiary of NovaCare, Inc.) were excluded from the NovaCare Rehabilitation
Hospitals Acquisition. The excluded assets and liabilities are as follows (in
thousands):
Cash and cash equivalents.......................... $ 4,973
Accounts receivable................................ 259
Other current assets............................... 42
Equipment, net..................................... 4,719
Intangible assets, net............................. 56,321
Other assets (primarily investments in
subsidiaries)...................................... 40,637
Accounts payable................................... (454)
Other current liabilities.......................... (275)
Current portion of long term debt.................. (146)
Long term debt..................................... (38,620)
Payable to affiliates.............................. (92,377)
Net excluded (liability)........................... $(24,921)
The following pro forma adjustments are necessary for the NovaCare
Rehabilitation Hospitals Acquisition:
1. To exclude historical depreciation and amortization expense related to the
excluded assets described above. The total expense excluded amounts to
$1,918,000 for the year ended December 31, 1994 and $999,000 for the six months
ended June 30, 1995.
2. To eliminate intercompany management fees and royalty fees totaling
$12,406,000 for the year ended December 31, 1994 and $910,000 for the six months
ended June 30, 1995 of the acquired NovaCare facilities.
3. To adjust depreciation and amortization expense to reflect the
allocation of the excess purchase price over the net tangible asset value as
follows (in thousands):
Purchase Price
Allocation Useful Annual Quarterly
Adjustment Life Amortization Amortization
------------ ---------- -------------- -------------
Leasehold
value.......... $ 128,333 20 years $ 6,417 $ 1,605
Goodwill....... 44,365 40 years 1,109 277
$ 7,526 $ 1,882
No additional adjustments to NovaCare's historical depreciation and
amortization are necessary. The remaining net assets acquired approximate their
fair value.
39
<PAGE>
Because NovaCare's results of operations before intercompany items (described
in Note 2 above) are profitable, both on a historical and pro forma basis, the
40-year amortization period for goodwill is appropriate and consistent with
HEALTHSOUTH policy. Leasehold value is being amortized over the weighted average
remaining terms of the leases, which is 20 years.
4. To increase interest expense by $19,559,000 for the year ended December
31, 1994 and $4,889,000 for the six months ended June 30, 1995 to reflect pro
forma borrowings of $234,807,000, described above, at a 8.33% variable interest
rate, which represents HEALTHSOUTH's weighted average cost of debt, as if they
were outstanding for the entire period, and to decrease interest expense by
$9,459,000 for the year ended December 31, 1994 and $2,205,000 for the six
months ended June 30, 1995, which represents interest on NovaCare debt not
assumed by HEALTHSOUTH. A .125% variance in the assumed interest rate would
change annual pro forma interest expense by approximately $294,000.
5. To adjust estimated Medicare reimbursement for the changes in
reimbursable expenses described in items 1, 2, 3 and 4 above. These changes
are as follows (in thousands);
Year Ended Six months ended
December 31, June 30,
1994 1995
------------ ----------------
Depreciation and amortization
(Note 1)................................... $ (1,918) $ (999)
Intercompany management fees
(Note 2)................................... (4,196) (910)
Depreciation and amortization
(Note 3)................................... 7,526 1,882
Interest expense (Note 4).................. 10,100 2,684
11,512 2,657
Assumed Medicare utilization............... 70% 70%
Increased reimbursement.................... $ 8,058 $1,860
The Medicare utilization rate of 70% assumes a slight improvement in NovaCare's
historical Medicare percentage of 78% as a result of bringing these facilities
into the HEALTHSOUTH network.
6. To adjust the NovaCare provision for income taxes to an effective rate
of 39% (net of minority interests).
B. The SSCI Merger
The proposed Merger is intended to be accounted for as a pooling of
interests. The pro forma condensed income statements assume that the Merger was
consummated on January 1, 1992. The pro forma condensed balance sheet assumes
that the Merger was consummated on June 30, 1995.
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 following pro forma adjustments are necessary for the SSCI Merger:
1. The pro forma condensed income statements do not reflect non-recurring
costs resulting directly from the Merger. The management of HEALTHSOUTH
estimates that these costs will approximate $3,000,000 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. However, this estimated
expense, net of taxes of $1,170,000, has been charged to retained earnings in
the accompanying pro forma balance sheet.
2. To adjust pro forma share amounts based on historical share amounts,
converting each outstanding SSCI Share into .0906 shares of HEALTHSOUTH Common
Stock. The conversion ratio is based upon an assumed Average Closing Date Price
for HEALTHSOUTH's Common Stock not greater than $25.00 per share.
40
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA -- HEALTHSOUTH
The consolidated income statement data set forth below for the years ended
December 31, 1990, 1991, 1992, 1993 and 1994 and the consolidated balance sheet
data at December 31, 1990, 1991, 1992, 1993 and 1994 are derived from
consolidated financial statements audited by HEALTHSOUTH's independent auditors.
The data for the six months ended June 30, 1994 and 1995 and at June 30, 1995
are derived from the unaudited consolidated financial statements of HEALTHSOUTH.
In the opinion of HEALTHSOUTH, the consolidated income statement data for the
six months ended June 30, 1994 and 1995, and the consolidated balance sheet data
at June 30, 1995, reflect all adjustments (which consist of only normal
recurring adjustments) necessary for a fair presentation of results of interim
periods. Operating results for the six months ended June 30, 1995, are not
necessarily indicative of results for the full fiscal year or for any future
interim period. The consolidated income statement data set forth below for the
years ended December 31, 1992, 1993 and 1994 and the consolidated balance sheet
data at December 31, 1993 and 1994 are qualified by reference to the audited
consolidated financial statements included elsewhere herein. The consolidated
income statement data set forth below for the six months ended June 30, 1994 and
1995 and the consolidated balance sheet data at June 30, 1995 are qualified by
reference to the unaudited consolidated financial statements included elsewhere
herein. The financial information for all periods set forth below has been
restated to reflect the acquisition of ReLife, Inc. ("ReLife") in December 1994
and the acquisition of Surgical Health Corporation ("SHC") in June 1995, each of
which has been accounted for as a pooling of interests.
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
1990 1991 1992 1993 1994 1994 1995
-------- -------- -------- -------- ---------- ------ --------
(In thousands, except per share data) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues .................................. $207,390 $277,655 $501,046 $656,329 $1,236,190 $ 584,183 $716,949
Operating expenses: .......................
Operating units ........................... 151,970 200,350 372,169 471,778 906,712 437,643 513,038
Corporate general and administrative ..... 7,025 10,901 16,878 24,329 45,895 19,191 19,645
Provision for doubtful accounts............ 5,608 6,092 13,254 16,181 23,739 10,287 14,119
Depreciation and amortization ............. 11,388 15,115 29,834 46,224 86,678 36,962 55,663
Interest expense........................... 12,058 10,507 12,623 18,495 65,286 26,980 44,292
Interest income............................ (4,166) (5,835) (5,415) (3,924) (4,308) (1,598) (2,770)
Merger expense (1) ........................ -- -- -- 333 6,520 3,397 29,194
Loss on impairment of assets (2) .......... -- -- -- -- 10,500 -- 11,192
Loss on abandonment of computer project
(2)........................................ -- -- -- -- 4,500 -- --
NME Selected Hospitals Acquisition related
expense (2) ............................... -- -- -- 49,742 -- -- --
Terminated merger expense (2) ............. -- -- 3,665 -- -- -- --
Gain on sale of partnership interest ..... -- -- -- (1,400) -- -- --
183,883 237,130 443,008 621,758 1,145,522 532,862 684,373
Income before income taxes and minority
interests.................................. 23,507 40,525 58,038 34,571 90,668 51,321 32,576
Provision for income taxes ................ 8,153 13,582 18,864 11,930 34,305 19,104 10,895
Income before minority interests........... 15,354 26,943 39,174 22,641 56,363 32,217 21,681
Minority interests......................... 929 1,272 4,245 5,444 6,402 2,991 3,904
Net income ................................ $ 14,425 $ 25,671 $ 34,929 $ 17,197 $ 49,961 $ 29,226 $ 17,777
Weighted average common and common
equivalent shares outstanding.............. 41,337 57,390 74,214 77,709 84,687 83,974 87,246
Net income per common and common
equivalent share (3) ...................... $ 0.35 $ 0.45 $ 0.47 $ 0.22 $ 0.59 $ 0.35 $ 0.20
Net income per common share--assuming full
dilution (3) (4) .......................... $ 0.32 $ 0.43 $ 0.47 $ 0.22 $ 0.59 $ 0.35 $ 0.20
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, Ended June 30,
1990 1991 1992 1993 1994 1994 1995
-------- -------- -------- -------- ---------- ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and marketable securities......... $ 74,774 $126,508 $111,524 $ 89,999 $ 85,363 $ 75,915
Working capital........................ 114,761 184,729 204,065 211,063 231,327 285,146
Total assets........................... 321,383 503,797 795,367 1,444,418 1,736,336 2,063,049
Long-term debt (5)..................... 157,585 171,275 338,000 888,181 1,034,394 1,357,299
Stockholders' equity................... 132,009 299,097 386,244 418,298 489,920 518,132
<FN>
<PAGE>
(1) Expenses related to SHC's Ballas merger in 1993, the ReLife and Heritage
Acquisitions in 1994 and the SHC Acquisition and NovaCare Rehabilitation
Hospitals Acquisition in 1995.
(2) See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--HEALTHSOUTH" and "Notes to Consolidated Financial
Statements".
(3) Adjusted to reflect a three-for-two stock split effected in the form of a
50% stock dividend paid on December 31, 1991 and a two-for-one stock split
effected in the form of a 100% stock dividend paid on April 17, 1995.
(4) 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 conversion of HEALTHSOUTH's 5% Convertible
Subordinated Debentures due 2001.
(5) Includes current portion of long-term debt.
</TABLE>
41
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- HEALTHSOUTH
General
The following discussion is intended to facilitate the understanding and
assessment of significant changes and trends related to the results of
operations and financial condition of HEALTHSOUTH, including certain factors
related to recent acquisitions by HEALTHSOUTH, the timing and nature of which
have significantly affected HEALTHSOUTH's results of operations. This discussion
and analysis should be read in conjunction with HEALTHSOUTH's consolidated
financial statements and notes thereto included elsewhere in this
Prospectus-Proxy Statement.
HEALTHSOUTH completed the following acquisitions over the last two years.
o On December 31, 1993, HEALTHSOUTH acquired substantially all of the assets
of the rehabilitation services division of National Medical Enterprises,
Inc. (the "NME Selected Hospitals Acquisition"). The purchase price was
approximately $315,000,000, plus net working capital. HEALTHSOUTH acquired
28 inpatient rehabilitation facilities, with an aggregate of 2,296 licensed
beds, and 45 outpatient rehabilitation centers.
o On December 29, 1994, HEALTHSOUTH acquired ReLife, Inc. (the "ReLife
Acquisition"). A total of 11,025,290 shares of HEALTHSOUTH Common Stock
were issued in the transaction, representing a value of $180,000,000 at the
time of the acquisition. At that time, 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 also provided outpatient rehabilitation
services at 12 centers.
o On May 19, 1995, HEALTHSOUTH purchased the operations of the rehabilitation
hospital division of NovaCare, Inc. (the "NovaCare Rehabilitation Hospitals
Acquisition"). The purchase price was approximately $235,000,000. The
NovaCare Rehabilitation Hospitals consisted of 11 rehabilitation hospitals
in seven states, 12 other facilities and two Certificates of Need.
o On June 13, 1995, HEALTHSOUTH acquired Surgical Health Corporation (the
"SHC Acquisition"). A total of 8,531,480 shares of HEALTHSOUTH Common Stock
were issued in the transaction, representing a value of $155,000,000 at the
time of the acquisition. HEALTHSOUTH also purchased SHC's $75,000,000
aggregate principal amount of 11.5% Senior Subordinated Notes due 2004 for
an aggregate consideration of approximately $86,000,000. At that time, SHC
operated a network of 36 free-standing surgery centers in 11 states, and
five mobile lithotripsy units.
The NME Selected Hospitals Acquisition and the NovaCare Rehabilitation
Hospitals Acquisition each were accounted for under the purchase method of
accounting and, accordingly, such operations are included in HEALTHSOUTH's
consolidated financial information from their respective dates of acquisition.
The ReLife Acquisition and the SHC Acquisition were each accounted for as a
pooling of interests and, unless otherwise indicated, all amounts shown in the
following discussion have been restated to reflect such acquisitions. The
results of operations of SHC in turn reflect SHC's 1994 acquisition of Heritage
Surgical Corporation (the "Heritage Acquisition"), which also was accounted for
as a pooling of interests.
HEALTHSOUTH determines the amortization period of the cost in excess of net
asset value of purchased facilities based on an evaluation of the facts and
circumstances of each individual purchase transaction. The evaluation includes
an analysis of historic and projected financial performance, an evaluation of
the estimated useful life of the buildings and fixed assets acquired, the
indefinite useful life of certificates of need and licenses acquired, the
competition within local markets, lease terms where applicable, and the legal
terms of partnerships where applicable. HEALTHSOUTH utilizes independent
appraisers and relies on its own management expertise in evaluating each of the
factors noted above. With respect to the carrying value of the excess of cost
over net asset value of purchased facilities and
42
<PAGE>
other intangible assets, HEALTHSOUTH determines on a quarterly basis whether an
impairment event has occurred by considering factors such as the market value of
the asset, a significant adverse change in legal factors or in the business
climate, adverse action by regulators, history of operating losses or cash flow
losses, or a projection of continuing losses associated with an operating
entity. The carrying value of excess cost over net asset value of purchased
facilities and other intangible assets will be evaluated if the facts and
circumstances suggest that it has been impaired. If this evaluation indicates
that the value of the asset will not be recoverable, as determined based on the
undiscounted cash flows of the entity acquired over the remaining amortization
period, HEALTHSOUTH's carrying value of the asset will be reduced by the
estimated shortfall of cash flows.
Governmental, commercial and private payors have increasingly recognized the
need to contain their costs for healthcare services. These payors, accordingly,
are turning to closer monitoring of services, prior authorization requirements,
utilization review and increased utilization of outpatient services. During the
periods discussed below, HEALTHSOUTH has experienced an increased effort by
these payors to contain costs through negotiated discount pricing. HEALTHSOUTH
views these efforts as an opportunity to demonstrate the effectiveness of its
clinical programs and its ability to provide its rehabilitative healthcare
services efficiently. HEALTHSOUTH has entered into a number of contracts with
payors to provide services and has realized an increased volume of patients as a
result.
HEALTHSOUTH's revenues include net patient service revenues and other
operating revenues. net patient service revenues are reported at estimated net
realizable amounts from patients, insurance companies, third-party payors
(primarily Medicare and Medicaid) and others for services rendered. Revenues
from third-party payors also include estimated retroactive adjustments under
reimbursement agreements which are subject to final review and settlement by
appropriate authorities. Management determines allowances for doubtful accounts
and contractual adjustments based on historical experience and the terms of
payor contracts. Net accounts receivable include only those amounts estimated by
management to be collectible. HEALTHSOUTH, in many cases, operates more than one
site in a market. In such markets, there is customarily an outpatient center or
inpatient facility with associated satellite outpatient locations. For purposes
of the following discussion and analysis, same store operations are measured on
locations within markets in which similar operations existed at the end of the
period and include the operations of additional locations opened within the same
market. New store operations are measured on locations within new markets.
Results of Operations of HEALTHSOUTH
Six-Month Periods Ended June 30, 1995 and 1994
HEALTHSOUTH operated 318 outpatient rehabilitation locations (excluding
outpatient satellites of inpatient facilities) at June 30, 1995, compared to 199
outpatient rehabilitation locations at June 30, 1994. In addition, HEALTHSOUTH
operated 77 inpatient rehabilitation facilities, five medical centers and 43
surgery centers at June 30, 1995, compared with 61 inpatient facilities, five
medical centers and 32 surgery centers at June 30, 1994.
HEALTHSOUTH's operations generated revenues of $716,949,000 for the six
months ended June 30, 1995, an increase of $132,766,000, or 22.7%, as compared
to the same period in 1994. The increase in revenues is primarily attributable
to increases in patient volume and the completion of the NovaCare Rehabilitation
Hospitals Acquisition, which was effective April 1, 1995, and the addition of
new outpatient centers. Same store revenues for the period ended June 30, 1995
were $639,443,000, an increase of $55,260,000, or 9.5%, as compared to the same
period in 1994. New store revenues were $77,506,000. Revenues generated from
patients under Medicare and Medicaid plans respectively accounted for 41.1% and
2.3% of revenue for the first six months of 1995, compared to 41.3% and 3.4% for
the same period in 1994. Revenues from any other single third-party payor were
not significant in relation to HEALTHSOUTH's revenues. During the first six
months of 1995, same store outpatient visits, inpatient days and surgical cases
increased 24.1%, 6.4% and 14.1%, respectively. Revenue per outpatient visit for
the same store operations decreased by 1.5%, while revenue per inpatient day and
revenue per surgical case for the same store operations increased by 0.3% and
0.7%, respectively.
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Operating expenses, at the operating unit level, were $513,038,000, or 71.6%
of revenues, for the six months ended June 30, 1995, as compared to
$437,643,000, or 74.9% of revenues, for the first six months of 1994. Same store
operating expenses were $456,608,000, or 71.4% of comparable revenue. New store
operating expenses were $56,430,000, or 72.8% of comparable revenue. Corporate
general and administrative expenses increased from $19,191,000 during the first
six months of 1994 to $19,645,000 during the first six months of 1995. As a
percentage of revenues, corporate general and administrative expenses decreased
from 3.3% in the 1994 period to 2.7% in the 1995 period. The provision for
doubtful accounts was $14,119,000, or 2.0% of revenues, for the first six months
of 1995, compared to $10,287,000, or 1.8% of revenues, for the same period in
1994. HEALTHSOUTH's management believes that this provision is adequate to cover
any uncollectible revenues.
Depreciation and amortization expense was $55,663,000 for the six-month
period ended June 30, 1995, compared to $36,962,000 for the same period in 1994.
The increase represents the investment in additional assets by HEALTHSOUTH.
Interest expense was $44,292,000 for the six-month period ended June 30, 1995,
compared to $26,980,000 for the six-month period ended June 30, 1994. The
increase in interest expense corresponds to the increase in long-term debt by
HEALTHSOUTH. For the first six months of 1995, interest income was $2,770,000,
compared to $1,598,000 for the first six months of 1994.
As a result of the NovaCare Rehabilitation Hospitals Acquisition and the SHC
Acquisition, HEALTHSOUTH recognized $29,194,000 in merger costs during the
second quarter of 1995. Fees related to legal, accounting and financial advisory
services accounted for $3,400,000 of the expense. Costs and expenses related to
the SHC Bond Tender Offer (see "Liquidity and Capital Resources") totaled
$14,606,000. Accruals for employee separations were approximately $1,188,000. In
addition, HEALTHSOUTH has provided approximately $10,000,000 for the write-down
of certain assets to net realizable value as the result of a planned facility
consolidation. The consolidation is applicable in a market where HEALTHSOUTH's
existing services overlap with those of an acquired facility.
During the second quarter of 1995, HEALTHSOUTH recognized an $11,192,000 loss
on impairment of assets. The impaired assets relate to six SHC facilities in
which the projected undiscounted cash flows did not support the book value of
the long-lived assets of such facilities.
Income before minority interests and income taxes and non-recurring expenses
for the first six months of 1995 was $72,962,000, compared to $54,718,000 for
the same period in 1994. Income before minority interests and income taxes for
the first six months of 1995 was $32,576,000. Minority interests decreased
income before income taxes by $3,904,000 for the six month period ended June 30,
1995, compared to decreasing income before income taxes by $2,991,000 for the
same period of 1994. The provision for income taxes (excluding non-recurring
expenses) for the first six months of 1995 was $26,242,000, compared to
$20,446,000 for the same period in 1994, resulting in effective tax rates of
38.0% and 39.5%, respectively. The provision for income taxes (including
non-recurring expenses) for the first six months of 1995 was $10,895,000,
resulting in an effective tax rate of 38.0%. Income (excluding non-recurring
expenses and related income tax benefits) for the first six months of 1995 was
$42,817,000, compared to $31,281,000 for the same period in 1994. Net income for
the six months ended June 30, 1995 (including non-recurring expenses) was
$17,777,000, compared to $29,226,000 for the same period in 1994.
Twelve-Month Periods Ended December 31, 1994 and 1993
HEALTHSOUTH operated 238 outpatient rehabilitation locations (excluding
outpatient satellites of inpatient facilities) at December 31, 1994, compared to
171 outpatient rehabilitation locations at December 31, 1993. In addition,
HEALTHSOUTH operated 66 inpatient facilities, 36 surgery centers and five
medical centers at December 31, 1994, compared to 39 inpatient facilities, 28
surgery centers and four medical centers at December 31, 1993.
HEALTHSOUTH's operations generated revenues of $1,236,190,000 in 1994, an
increase of $579,861,000, or 88.3%, as compared to 1993 revenues. Same store
revenues for the twelve months ended December 31, 1994 were $746,709,000, an
increase of $90,380,000, or 13.8%, as compared to the same period in 1993. New
store revenues for 1994 were $489,481,000. New store revenues primarily
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reflect the 28 inpatient rehabilitation facilities and 45 associated outpatient
rehabilitation locations associated with the NME Selected Hospitals Acquisition.
The increase in revenues is primarily attributable to the addition of these
operations and increases in patient volume. Revenues generated from patients
under Medicare and Medicaid plans respectively accounted for 41.0% and 3.2% of
total revenues for 1994, compared to 30.6% and 1.0% of total revenues for 1993.
Revenues from any other single third-party payor were not significant in
relation to HEALTHSOUTH's total revenues. The increase in Medicare revenues is
primarily attributable to the NME Selected Hospitals Acquisition, since the
acquired facilities had a greater proportion of Medicare patients than
HEALTHSOUTH's historical experience in existing facilities. During 1994, same
store outpatient visits, inpatient days and surgery center cases increased
21.8%, 23.0% and 5.0%, respectively. Revenue per outpatient visit and revenue
per inpatient day for the same store operations decreased by 7.8% and 8.4%,
respectively, while revenue per surgery case increased by 0.9%. These decreases
were offset by increased volume from managed care and national accounts and by
control of expenses.
Operating expenses, at the operating unit level, were $906,712,000, or 73.3%
of revenues, for 1994, compared to 71.9% of revenues for 1993. This change was
due to the decrease in revenue per visit and revenue per inpatient day described
above. Same store operating expenses for 1994 were $563,915,000, or 75.5% of
related revenues. New store operating expenses were $342,797,000, or 70.0% of
related revenues. Corporate general and administrative expenses increased from
$24,329,000 in 1993 to $45,895,000 in 1994. As a percentage of revenues,
corporate general and administrative expenses remained at 3.7% in 1993 and 1994.
Total operating expenses were $952,607,000, or 77.1% of revenues, for 1994,
compared to $496,107,000, or 75.6% of revenues, for 1993. The provision for
doubtful accounts was $23,739,000, or 1.9% of revenues, for 1994, compared to
$16,181,000, or 2.5% of revenues, for 1993.
Depreciation and amortization expense was $86,678,000 for 1994, compared to
$46,224,000 for 1993. The increase represents the investment in additional
assets by HEALTHSOUTH. Interest expense increased to $65,286,000 in 1994,
compared to $18,495,000 for 1993, primarily because of the increased borrowings
during the year under HEALTHSOUTH's revolving line of credit, the issuance of
$250,000,000 principal amount of 9.5% Senior Subordinated Notes due 2001 and the
issuance of $115,000,000 principal amount of 5% Convertible Subordinated
Debentures due 2001. For 1994, interest income was $4,308,000, compared to
$3,924,000 for 1993. The increase in interest income is primarily attributable
to the increase in interest rates.
During 1994, HEALTHSOUTH began implementation of the plan of consolidation
related to the NME Selected Hospitals Acquisition. The $3,338,000 accrual for
costs related to employee separations and relocations was reduced by
approximately $758,000. A total of 208 employees were affected during 1994. In
addition, assets with a net book value of $17,911,000 were written off against
the $39,000,000 provided for the plan of consolidation. Finally, HEALTHSOUTH
wrote off all of the $7,700,000 in capitalized development projects. HEALTHSOUTH
will complete the plan of consolidation during 1995. It is management's opinion
that the remaining accrual of $23,669,000 is adequate to complete the plan.
Merger costs in 1994 of $6,520,000 represent costs incurred or accrued in
connection with completing the ReLife Acquisition ($2,949,000) and the Heritage
Acquisition ($3,571,000).
During 1994, HEALTHSOUTH recognized a $10,500,000 loss on impairment of
assets. This amount relates to the termination of a ReLife management contract
and a permanently damaged ReLife facility. HEALTHSOUTH determined not to attempt
to reopen such damaged facility because, under its existing licensure, the
facility was not consistent with HEALTHSOUTH's plans. Also during 1994,
HEALTHSOUTH recognized a $4,500,000 loss on abandonment of a ReLife computer
project.
Income before minority interests and income taxes for 1994 was $90,668,000,
compared to $34,571,000 for 1993. Minority interests reduced income before
income taxes by $6,402,000, compared to $5,444,000 for 1993. The provision for
income taxes for 1994 was $34,305,000, compared to $11,930,000 for 1993,
resulting in effective tax rate of 40.7% for 1994 and 41.0% for 1993. Net income
for 1994 was $49,961,000.
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Twelve-Month Periods Ended December 31, 1993 and 1992
HEALTHSOUTH operated 171 outpatient rehabilitation locations (excluding
outpatient satellites of inpatient facilities) at December 31, 1993, compared to
126 outpatient rehabilitation locations at December 31, 1992. In addition,
HEALTHSOUTH operated 39 inpatient facilities, 28 surgery centers and four
medical centers at December 31 1993, compared to 22 inpatient facilities, 20
surgery centers and four medical centers at December 31, 1992. In 1993,
HEALTHSOUTH opened the Vanderbilt Stallworth Rehabilitation Hospital in
Nashville, Tennessee, and acquired 13 inpatient facilities from Rebound, Inc.
The foregoing information does not give effect to the facilities acquired
effective December 31, 1993 in the NME Selected Hospitals Acquisition.
HEALTHSOUTH's operations generated revenues of $656,329,000 in 1993, an
increase of $155,283,000, or 31.0%, as compared to 1992 revenues. Same store
revenues for the twelve months ended December 31, 1993 were $583,251,000, an
increase of $82,205,000, or 16.4%, as compared to the same period in 1992. New
store revenues for 1993 were $73,078,000. The increase in revenues is primarily
attributable to increases in patient volume and the addition of 45 outpatient
rehabilitation locations and 13 inpatient locations. Revenues generated from
patients under Medicare and Medicaid plans respectively accounted for 30.6% and
1.0% of revenues for 1993, compared to 29.3% and 1.3% of revenues for 1992.
Revenues from any other single third-party payor were not significant in
relation to HEALTHSOUTH's revenues. During 1993, same store outpatient visits,
inpatient days and surgical cases increased 19.9%, 8.2% and 13.0%, respectively.
Revenue per outpatient visit, revenue per inpatient day and revenue per surgical
case for same store operations increased by 0.6%, 6.3% and 6.1%, respectively.
Operating expenses, at the operating unit level, were $471,778,000, or 71.9%
of revenues, for 1993, compared to 74.3% of revenues for 1992. Same store
operating expenses for 1993 were $420,093,000, or 72.0% of related revenues. New
store operating expenses were $51,685,000, or 70.7% of related revenues. The
decrease in operating expenses as a percentage of revenues is primarily
attributable to increased patient volume and controlled expenses. Corporate
general and administrative expenses increased from $16,878,000 in 1992 to
$24,329,000 in 1993. As a percentage of revenues, corporate general and
administrative expense increased from 3.4% in 1992 to 3.7% in 1993. Total
operating expenses were $496,107,000, or 75.6% of revenues, for 1993, compared
to $389,047,000, or 77.6% of revenues, for 1992. The provision for doubtful
accounts was $16,181,000, or 2.5% of revenues, for 1993, compared to
$13,254,000, or 2.6% of revenues, for 1992.
Depreciation and amortization expense was $46,224,000 for 1993, compared to
$29,834,000 for 1992. The increase represents the investment in additional
assets by HEALTHSOUTH. Interest expense increased to $18,495,000 in 1993
compared to $12,623,000 for 1992 primarily because of the increased borrowings
during the year under HEALTHSOUTH's revolving line of credit. For 1993, interest
income was $3,924,000, compared to $5,415,000 for 1992. The reduction in
interest income was primarily attributable to the reduction in rates received on
invested funds and a decrease in the cash balance.
As a result of the NME Selected Hospitals Acquisition, HEALTHSOUTH recognized
an expense of approximately $49,742,000 during the year ended December 31, 1993.
By recognizing this expense, HEALTHSOUTH accrued approximately $3,338,000 for
costs related to certain employee separations and relocations. HEALTHSOUTH
expects the plan of consolidation to take up to 24 months. The $3,338,000
accrual, which is the only cash expense included in the acquisition-related
expense, will be paid over the same period. In addition, HEALTHSOUTH has
provided approximately $39,000,000 for the write-down of certain assets to net
realizable value as the result of planned facility consolidations, and
approximately $7,700,000 for the write-off of certain capitalized development
projects. The consolidations are applicable in selected markets where
HEALTHSOUTH's services overlap with those of the acquired facilities. The costs
of development projects in certain target markets that were previously
capitalized were written off due to the acquisition of NME facilities in or near
those markets.
Income before minority interests and income taxes for 1993 was $34,571,000,
compared to $58,038,000 for 1992. The provision for income taxes for 1993 was
$11,930,000, compared to $18,864,000 for 1992, resulting in effective tax rates
of 41.0% for 1993 and 35.1% for 1992. Net income for 1993 was $17,197,000.
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Liquidity and Capital Resources
As of June 30, 1995, HEALTHSOUTH had working capital of $285,146,000,
including cash and marketable securities of $75,915,000. Working capital at
December 31, 1994 was $231,327,000, including cash and marketable securities of
$85,363,000. For the first six months of 1995, cash provided by operations was
$87,776,000, compared to $60,561,000 for the same period in 1994. Additions to
property, plant, and equipment and acquisitions accounted for $70,235,000 and
$284,090,000, respectively, during the first six months of 1995. Those same
investing activities accounted for $68,320,000 and $34,645,000, respectively, in
the same period in 1994. Financing activities provided $273,558,000 and
$74,959,000 during the first six months of 1995 and 1994, respectively. Net
borrowing proceeds (borrowing less principal reductions) for the first six
months of 1995 and 1994 were $277,393,000 and $68,330,000, respectively.
Accounts receivable were $281,283,000 at June 30, 1995, compared to
$242,659,000 at December 31, 1994. The number of days of average revenues in
ending receivables was 64.5 at June 30, 1995 (excluding accounts receivable and
revenue from the facilities acquired from NovaCare during the second quarter of
1995), compared to 71.6 at December 31, 1994. The concentration of net accounts
receivable from patients, third-party payors, insurance companies and others at
June 30, 1995 is consistent with the related concentration of revenues for the
period then ended.
At June 30, 1995, HEALTHSOUTH had a $1,000,000,000 revolving line of credit
with NationsBank of North Carolina and 28 other banks. Interest is paid based on
LIBOR plus a predetermined margin, prime or competitively bid rates from the
participating banks. This credit facility has an initial maturity date of June
1, 1998, with two one-year renewals. HEALTHSOUTH provided a negative pledge on
all assets and granted the banks a first priority security interest in all
shares of stock of its subsidiaries and rights and interests in its controlled
partnerships. The effective interest rate on the average outstanding balance
under the revolving line of credit was 7.27% for the six months ended June 30,
1995, compared to the average prime rate of 8.91% during the same period. At
June 30, 1995, HEALTHSOUTH had drawn $895,000,000 under its revolving line of
credit.
On June 20, 1995, HEALTHSOUTH purchased $67,500,000 of the $75,000,000
outstanding principal amount of 11.5% Senior Subordinated Notes due 2004 of SHC
(the "SHC Bond Tender Offer") for 115% of the face value of the Notes.
Subsequent to June 30, 1995, the remaining $7,500,000 balance was purchased on
the open market.
HEALTHSOUTH intends to pursue the acquisition or development of additional
healthcare operations, including outpatient rehabilitation facilities, inpatient
facilities, ambulatory surgery centers, and companies engaged in the provision
of rehabilitation-related services, and to expand certain of its existing
facilities. While it is not possible to estimate precisely the amounts which
will actually be expended in the foregoing areas, HEALTHSOUTH anticipates that
over the next twelve months, it will spend approximately $80,000,000 for the
acquisition and/or development of new outpatient facilities and approximately
$70,000,000 for inpatient facility projects and the construction and equipping
of additions to inpatient facilities.
Although HEALTHSOUTH is continually considering and evaluating acquisitions
and opportunities for future growth, HEALTHSOUTH has not entered into any
agreements with respect to material future acquisitions other than the pending
acquisition of SSCI. HEALTHSOUTH believes that existing cash, cash flow from
operations, and borrowings under the revolving line of credit will be sufficient
to satisfy HEALTHSOUTH's estimated cash requirements for the next twelve months
and thereafter.
Inflation in recent years has not had a significant effect on HEALTHSOUTH's
business, and is not expected to adversely affect HEALTHSOUTH in the future
unless it increases significantly.
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BUSINESS OF HEALTHSOUTH
General
HEALTHSOUTH is the nation's largest provider of outpatient and rehabilitative
healthcare services. HEALTHSOUTH provides these services through its national
network of outpatient and inpatient rehabilitation facilities, outpatient
surgery centers, medical centers and other healthcare facilities. HEALTHSOUTH
believes that it provides patients, physicians and payors with high-quality
healthcare services at significantly lower costs than traditional inpatient
hospitals. Additionally, HEALTHSOUTH's national network, reputation for quality
and focus on outcomes has enabled the Company to secure contracts with national
and regional managed care payors. HEALTHSOUTH has over 500 patient care
locations in 38 states, the District of Columbia and Ontario, Canada.
In its outpatient and inpatient rehabilitation facilities, HEALTHSOUTH
provides 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. Independent studies have shown that rehabilitation services like those
provided by HEALTHSOUTH can save money for payors and employers.
HEALTHSOUTH operates the third largest network of free-standing outpatient
surgery centers in the United States. HEALTHSOUTH's outpatient surgery centers
provide the facilities and medical support staff necessary for physicians to
perform non-emergency surgical procedures. While outpatient surgery is widely
recognized as generally less expensive than surgery performed in a hospital,
HEALTHSOUTH believes that outpatient surgery performed at a free-standing
outpatient surgery center is generally less expensive than hospital-based
outpatient surgery. Approximately 95% of HEALTHSOUTH's surgery center facilities
are located in markets served by its rehabilitative service facilities, enabling
HEALTHSOUTH to pursue opportunities for cross-referrals.
Over the last two years, HEALTHSOUTH has completed several significant
acquisitions in the rehabilitation business and has expanded into the surgery
center business. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS-- HEALTHSOUTH". HEALTHSOUTH believes that
these acquisitions complement its historical operations and enhance its market
position. HEALTHSOUTH further believes that its expansion into the outpatient
surgery business provides it with a platform for future growth.
Company Strategy
HEALTHSOUTH's principal objective is to be the provider of choice for
patients, physicians and payors alike for outpatient and rehabilitative
healthcare services throughout the United States. HEALTHSOUTH's growth strategy
is based upon four primary elements: (i) the implementation of HEALTHSOUTH's
integrated service model in appropriate markets, (ii) successful marketing to
managed care organizations and other payors, (iii) the provision of
high-quality, cost-effective healthcare services, and (iv) the expansion of its
national network.
o Integrated Service Model. HEALTHSOUTH seeks, where appropriate, to provide
an integrated system of healthcare services, including outpatient rehabilitation
services, inpatient rehabilitation services, ambulatory surgery services and
outpatient diagnostic services. HEALTHSOUTH believes that its integrated system
offers payors the convenience of dealing with a single provider for multiple
services. Additionally, it believes that its facilities can provide extensive
referral opportunities. For example, HEALTHSOUTH estimates that approximately
one-third of its outpatient rehabilitation patients have had outpatient surgery,
virtually all inpatient rehabilitation patients will require some form of
outpatient rehabilitation, and virtually all inpatient rehabilitation patients
have had some type of diagnostic procedure. HEALTHSOUTH has implemented its
integrated service model in certain of its markets, and intends to expand the
model into other appropriate markets.
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o Marketing to Managed Care Organizations and Other Payors. Since the late
1980s, HEALTHSOUTH has focused on the development of contractual
relationships with managed care organizations, major insurance companies,
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 healthcare services at
reasonable prices has enhanced its attractiveness to such entities and has
given HEALTHSOUTH a competitive advantage over smaller and regional
competitors. These relationships have increased patient flow to
HEALTHSOUTH's facilities and contributed to HEALTHSOUTH's same-store
growth.
o Cost-Effective Services. HEALTHSOUTH's goal is to provide high-quality
healthcare services in cost-effective settings. To that end, 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, and its support of clinical research in
its facilities. Further, independent studies estimate that, for every
dollar spent on rehabilitation, $11 to $35 is saved. Finally, surgical
procedures typically are less expensive in outpatient surgery centers than
in hospital settings. HEALTHSOUTH believes that outpatient and
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.
o Expansion of National Network. As the largest provider of outpatient and
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 national network
affords HEALTHSOUTH 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, to achieve
more efficient costs of capital and labor and to more effectively recruit
and retain clinicians. HEALTHSOUTH believes that its recent and pending
acquisitions in the outpatient surgery and diagnostic imaging fields will
further enhance its national presence by broadening the scope of its
existing services and providing new opportunities for growth. These
national benefits are realized without sacrificing local market
responsiveness. HEALTHSOUTH's objective is to provide those outpatient and
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 quality into the local
setting.
Patient Care Services
HEALTHSOUTH began its operations in 1984 with a focus on providing
comprehensive orthopaedic and musculoskeletal rehabilitation services on an
outpatient basis. Over the succeeding 11 years, HEALTHSOUTH has consistently
sought and implemented opportunities to expand its services through acquisitions
and de novo development activities that complement its historic focus on
orthopaedic, sports medicine and occupational medicine services and that provide
independent platforms for growth. HEALTHSOUTH's acquisitions and internal growth
have enabled it to become the largest provider of rehabilitative healthcare
services, both inpatient and outpatient, in the United States. In addition,
HEALTHSOUTH has added outpatient surgery services, diagnostic imaging services
and other outpatient services which provide natural enhancements to its
rehabilitative healthcare locations and facilitate the implementation of its
integrated service model. HEALTHSOUTH believes that these additional businesses
also provide opportunities for growth in other areas not directly related to the
rehabilitative business, and HEALTHSOUTH intends to pursue further expansion in
those businesses.
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Rehabilitative Services: General
When a patient is referred to one of HEALTHSOUTH's rehabilitation facilities,
he undergoes an initial evaluation and assessment process that results in the
development of a rehabilitation care plan designed specifically for that
patient. Depending upon the patient's disability, this evaluation process may
involve the services of a single discipline, such as physical therapy for a knee
injury, or of multiple disciplines, as in the case of a complicated stroke
patient. HEALTHSOUTH has developed numerous rehabilitation programs, which
include stroke, head injury, spinal cord injury, neuromuscular and work injury,
that combine certain services to address the needs of patients with similar
disabilities. In this way, all of the facilities' patients, regardless of the
severity and complexity of their disabilities, can receive the level and
intensity of those services necessary for them to be restored to as productive,
active and independent a lifestyle as possible.
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 August
31, 1995, HEALTHSOUTH provided outpatient rehabilitative healthcare services
through 341 outpatient locations, including freestanding outpatient centers and
their satellites and outpatient satellites of inpatient facilities.
The continuing emphasis on containing the increases in healthcare costs, as
evidenced by Medicare's prospective payment system, the growth in managed care
and the various alternative healthcare reform proposals, results in the early
discharge of patients from acute-care facilities. As a result, many hospital
patients do not receive the intensity of services that may be necessary for them
to achieve a full recovery from their diseases, disorders or traumatic
conditions. HEALTHSOUTH's outpatient rehabilitation services play a significant
role in the continuum of care because they provide hospital-level services, in
terms of intensity, quality and frequency, in a more cost-efficient setting.
Patients treated at HEALTHSOUTH's outpatient centers will undergo varying
courses of therapy depending upon their needs. Some patients may only require a
few hours of therapy per week for a few weeks, while others may spend up to five
hours per day in therapy for six months or more, depending on the nature,
severity and complexity of their injuries.
In general, HEALTHSOUTH initially establishes an outpatient center in a given
market, either by acquiring an existing private therapy practice or through de
novo development, and institutes its clinical protocols and programs in response
to the community's general need for services. HEALTHSOUTH will then establish
satellite clinics that are dependent upon the main facility for management and
administrative services. These satellite clinics generally provide a specific
evaluative or specialty service/program, such as hand therapy or foot and ankle
therapy, in response to specific market demands. HEALTHSOUTH's outpatient
rehabilitation facilities range in size from 1,200 square feet for specialty
clinics to 20,000 square feet for large, full-service facilities. Currently, the
typical outpatient facility configuration ranges in size from 2,000 to 5,000
square feet and costs less than $500,000 to build and equip.
Patient utilization of HEALTHSOUTH's outpatient rehabilitation facilities
cannot be measured in the conventional manner applied to acute-care hospitals,
nursing homes and other healthcare providers which have a fixed number of
licensed beds and serve patients on a 24-hour basis. Utilization patterns in
outpatient rehabilitation facilities will be affected by the market to be
served, the types of injuries treated, the patient mix and the number of
available therapists, among other factors. Moreover, because of variations in
size, location, hours of operation, referring physician base and services
provided and other differences among each of HEALTHSOUTH's outpatient
facilities, it is not possible to accurately assess patient utilization against
a norm.
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Inpatient Services
Inpatient Rehabilitation Facilities. At August 31, 1995, HEALTHSOUTH operated
77 inpatient rehabilitation facilities with 4,618 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.
Inpatient rehabilitation patients are typically those who are experiencing
significant physical disabilities due to various conditions, such as head
injury, spinal cord injury, stroke, certain orthopaedic problems and
neuromuscular disease. HEALTHSOUTH's inpatient rehabilitation facilities provide
the medical, nursing, therapy and ancillary services required to comply with
local, state and federal regulations as well as accreditation standards of the
Joint Commission on Accreditation of Healthcare Organizations (the "JCAHO") and
the Commission on Accreditation of Rehabilitation Facilities.
All of HEALTHSOUTH's inpatient rehabilitation facilities utilize an
interdisciplinary team approach to the rehabilitation process and involve the
patient and family, as well as the payor, in the determination of the goals for
the patient. Internal case managers monitor each patient's progress and provide
documentation of patient status, achievement of goals, functional outcomes and
efficiency.
HEALTHSOUTH acquires or develops inpatient rehabilitation facilities in those
communities where it believes there is a demonstrated need for comprehensive
inpatient rehabilitation services. Depending upon the specific market
opportunity, these facilities may be licensed as rehabilitation hospitals or
skilled nursing facilities. HEALTHSOUTH believes that it can provide
high-quality rehabilitation services in either type of facility, but prefers to
utilize the rehabilitation hospital form.
In certain markets where the it does not provide free-standing outpatient
facilities, HEALTHSOUTH's rehabilitation hospitals may provide outpatient
rehabilitation services as a complement to their inpatient services. Typically,
this opportunity arises when patients complete their inpatient course of
treatment but remain in need of additional therapy that can be accomplished on
an outpatient basis. Depending upon the demand for outpatient services and
physical space constraints, the rehabilitation hospital may establish the
services either within its building or in a satellite location. In either case,
the clinical protocols and programs developed for use in the free-standing
outpatient centers will be utilized by these facilities.
HEALTHSOUTH's Nashville, Tennessee (Vanderbilt University), Memphis,
Tennessee (Methodist Hospitals), Dothan, Alabama (Southeast Alabama Medical
Center) and Charleston, South Carolina (North Trident Regional Medical Center)
hospital facilities have been developed in conjunction with local tertiary-care
facilities. This strategy of developing effective referral and service networks
prior to opening results in improved operating efficiencies for the new
facilities. HEALTHSOUTH is utilizing this same concept in rehabilitation
hospitals under development with the University of Missouri and the University
of Virginia.
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.
HEALTHSOUTH acquired its five medical centers as outgrowths of its
rehabilitative healthcare services. Often, patients require medical and surgical
interventions prior to the initiation of their rehabilitative care. In each of
the markets in which HEALTHSOUTH has acquired a medical center, HEALTHSOUTH had
well-established relationships with the medical communities serving each
facility. In addition, each of the facilities enjoyed well-established
reputations in orthopaedics and/or sports medicine prior to their acquisition by
HEALTHSOUTH. Following the acquisition of each of its medical centers,
HEALTHSOUTH has provided the resources to improve upon the physical plant and
expand services through the introduction of new technology. HEALTHSOUTH has also
developed additional relationships between these facilities and certain
university facilities, including the University of Miami, Auburn University and
the University of Alabama at Birmingham. Through these relationships, the influx
of celebrity athletes and personalities and the acquisition of new technology,
all five medical centers have improved their operating efficiencies and enhanced
census.
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Each of the five medical center facilities is licensed as an acute-care
hospital, is accredited by the JCAHO and participates in the Medicare
prospective payment system. See "Business -- Regulation".
Inpatient Facility Utilization. In measuring patient utilization of
HEALTHSOUTH's inpatient facilities, various factors must be considered. Due to
market demand, demographics, start-up status, renovation, patient mix and other
factors, HEALTHSOUTH may not treat all licensed beds in a particular facility as
available beds, which sometimes results in a material variance between licensed
beds and beds actually available for utilization at any specific time.
HEALTHSOUTH is in a position to increase the number of available beds at such
facilities as market conditions dictate. During the year ended December 31,
1994, HEALTHSOUTH's inpatient facilities achieved an overall utilization, based
on patient days and available beds, of 61.0%.
Surgery Centers
As a result of the SHC acquisition, HEALTHSOUTH became the third largest
operator of outpatient surgery centers in the United States. It currently
operates 43 free-standing surgery centers, including five mobile lithotripsy
units, in 12 states, and has an additional five free-standing surgery centers
under development. Approximately 95% of these facilities are located in markets
served by HEALTHSOUTH outpatient and rehabilitative service facilities, enabling
HEALTHSOUTH to pursue opportunities for cross-referrals between surgery and
rehabilitative facilities as well as to centralize administrative functions.
HEALTHSOUTH'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. Its typical surgery center is a
free-standing facility with two to six fully equipped operating and procedure
rooms and ancillary areas for reception, preparation, recovery and
administration. Each of HEALTHSOUTH's surgery centers is available for use only
by licensed physicians, oral surgeons and podiatrists, and the centers do not
perform surgery on an emergency basis.
Outpatient surgery centers, unlike hospitals, have not historically provided
overnight accommodations, food services or other 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 HEALTHSOUTH's surgery centers currently provide for extended
recovery stays. HEALTHSOUTH's ability to develop such recovery care facilities
is dependent upon state regulatory environments in the particular states where
its centers are located.
HEALTHSOUTH's outpatient surgery centers implement quality control procedures
to evaluate the level of care provided the centers. Each center has a medical
advisory committee of three to ten physicians which reviews the professional
credentials of physicians applying for medial staff privileges at the center.
Other Patient Care Services
In certain of its markets, HEALTHSOUTH provides other patient care services,
including home healthcare, diagnostic services, physician services and contract
management of hospital-based rehabilitative healthcare services. HEALTHSOUTH
evaluates market opportunities on a case-by-case basis in determining whether to
provide additional services of these types, which may be complementary to
facility-based services provided by HEALTHSOUTH or stand-alone businesses.
Marketing of Facilities and Services
HEALTHSOUTH markets its facilities, and their services and programs, on
local, regional and national levels. Local and regional marketing activities are
typically coordinated by facility-based marketing personnel, whereas large-scale
regional and national efforts are coordinated by corporate-based personnel.
In general, HEALTHSOUTH develops a marketing plan for each facility based on
a variety of factors, including population characteristics, physician
characteristics and incidence of disability statistics, in order to identify
specific service opportunities. Facility-oriented marketing programs are focused
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on increasing the volume of patient referrals to the specific facility and
involve the development of ongoing relationships with area schools, businesses
and industries as well as physicians, health maintenance organizations and
preferred provider organizations.
HEALTHSOUTH's larger-scale marketing activities are focused more broadly on
efforts to generate patient referrals to multiple facilities and the creation of
new business opportunities. Such activities include the development and
maintenance of contractual relationships or national pricing agreements with
large third-party payors, such as CIGNA, Metrahealth (MetLife/Travelers) or
other national insurance companies, with national HMO/PPO companies, such as
Healthcare-COMPARE/AFFORDABLE, Hospital Network of America and Multiplan, with
national case management companies, such as INTRACORP and Crawford & Co., and
with national employers, such as Wal-Mart, Georgia-Pacific Corporation, Dillard
Department Stores, Goodyear Tire & Rubber and Winn-Dixie. In addition, since the
facilities acquired by HEALTHSOUTH during the past two years had very limited
contractual relationships with payors, managed care providers, employers and
others, HEALTHSOUTH is expanding its existing payor relationships to include
these facilities.
HEALTHSOUTH carries out broader programs designed to further enhance its
public image. Among these is the HEALTHSOUTH Sports Medicine Council, headed by
Bo Jackson, which is dedicated to developing educational programs focused on
athletics for use in high schools. Healthsouth has ongoing relationships with
the Ladies Professional Golf Association, the Southeastern Conference and more
than 400 universities, colleges and high schools to provide sports medicine
coverage of events and rehabilitative healthcare services for injured athletes.
In addition, HEALTHSOUTH has established relationships with or provided
treatment services for athletes from some 35 to 40 major professional sports
teams, as well as providing sports medicine services for Olympic and amateur
athletes.
HEALTHSOUTH is a national sponsor of the United Cerebral Palsy Association
and the National Arthritis Foundation and supports many other charitable
organizations on national and local levels. Through these endeavors, HEALTHSOUTH
provides its employees with opportunities to support their communities.
Sources of Revenues
Private pay revenue sources represent the majority of HEALTHSOUTH's revenues.
The following table sets forth the percentages of HEALTHSOUTH's revenues from
various sources for the periods indicated:
Year Ended
December 31, Year Ended
Source 1993 December 31, 1994
- ------ ---------- -----------------
Medicare............. 30.6 % 41.0 %
Commercial (1)....... 36.3 34.1
Workers'
Compensation......... 16.4 10.9
All Other Payors
(2).................. 16.7 14.0
100.0 % 100.0 %
(1) Includes commercial insurance, HMOs, PPOs and other managed care plans.
(2) Medicaid is included in this category, but is insignificant in amount.
The above table does not reflect the ReLife facilities or the SHC facilities
for either period. The NME Selected Hospitals are included in the 1994 figures
only. Comparable information for the ReLife and SHC facilities is not available
and is not reflected in either year in the table. The percentage of revenues
derived from Medicare increased in 1994 as a result of the NME Selected
Hospitals Acquisition. HEALTHSOUTH has expanded its existing payor relationships
to include the former NME and ReLife facilities.
See "-- Regulation -- Medicare Participation and Reimbursement" for a
description of the reimbursement regulations applicable to the Company's
facilities.
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Competition
HEALTHSOUTH competes in the geographic markets in which its facilities are
located. In addition, HEALTHSOUTH's rehabilitation facilities compete on a
regional and national basis with other providers of specialized services such as
sports medicine and work hardening, and specific concentrations such as head
injury rehabilitation and orthopaedic surgery. The competition faced in each of
these markets is similar, with variations arising from the number of healthcare
providers in the given metropolitan area. The primary competitive factors in the
rehabilitation services business are quality of services, projected patient
outcomes, charges for services, responsiveness to the needs of the patients,
community and physicians, and ability to tailor programs and services to meet
specific needs of the patients. Competitors and potential competitors include
hospitals, private practice therapists, rehabilitation agencies and others. Some
of these competitors may have greater patient referral support and financial and
personnel resources in particular markets than HEALTHSOUTH. Management believes
that HEALTHSOUTH competes successfully within the marketplace based upon its
reputation for quality, competitive prices, positive rehabilitation outcomes,
innovative programs, clean and bright facilities and responsiveness to needs.
HEALTHSOUTH's medical centers are located in four urban areas of the country,
all with well-established healthcare services provided by a number of
proprietary, not-for-profit, and municipal hospital facilities. HEALTHSOUTH's
facilities compete directly with these local hospitals as well as various
nationally recognized centers of excellence in orthopaedics, sports medicine and
other specialties. Because HEALTHSOUTH's facilities enjoy a national and
international reputation for orthopaedic surgery and sports medicine,
HEALTHSOUTH believes that its medical centers' level of service and continuum of
care enable them to compete successfully, both locally and nationally.
HEALTHSOUTH's surgery centers compete primarily with hospitals and other
operators of freestanding surgery centers in attracting physicians and patients,
and developing new centers and in acquiring existing centers. The primary
competitive factors in the outpatient surgery business are convenience, cost,
quality of service, physician loyalty and reputation. Hospitals have many
competitive advantages in attracting physicians and patients, including
established standing in a community, historical physician loyalty and
convenience for physicians making rounds or performing inpatient surgery in the
hospital. However, HEALTHSOUTH believes that its national market system and its
historical presence in many of the markets where the SHC facilities are located
will enhance HEALTHSOUTH's ability to operate these facilities successfully.
HEALTHSOUTH potentially faces competition any time it initiates a Certificate
of Need ("CON") project or seeks to acquire an existing facility or CON. See "--
Regulation". This competition may arise either from competing companies,
national or regional, or from local hospitals which file competing applications
or oppose the proposed CON project. The necessity for these approvals serves as
a barrier to entry and has the potential to limit competition by creating a
franchise to provide services to a given area. To date HEALTHSOUTH has been
successful in obtaining each of the CONs or similar approvals which it has
sought, although there can be no assurance that it will achieve similar success
in the future.
Regulation
The healthcare industry is subject to regulation by federal, state and local
governments. The various levels of regulatory activity affect HEALTHSOUTH's
business activities by controlling its growth, requiring licensure or
certification of its facilities, regulating the use of its properties and
controlling the reimbursement to HEALTHSOUTH for services provided.
Licensure, Certification and Certificate of Need Regulations
Capital expenditures for the construction of new facilities, the addition of
beds or the acquisition of existing facilities may be reviewable by state
regulators under a statutory scheme which is sometimes referred to as a
Certificate of Need program. States with CON programs place limits on the
construction and acquisition of healthcare facilities and the expansion of
existing facilities and services. In such states,
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<PAGE>
approvals are required for capital expenditures exceeding certain amounts which
involve inpatient rehabilitation facilities or services. Outpatient
rehabilitation facilities and services do not require such approvals in a
majority of states.
State CON statutes generally provide that, prior to the addition of new beds,
the construction of new facilities or the introduction of new services, a state
health planning designated agency (a "SHPDA") must determine that a need exists
for those beds, facilities or services. The CON process is intended to promote
comprehensive healthcare planning, assist in providing high quality healthcare
at the lowest possible cost and avoid unnecessary duplication by ensuring that
only those healthcare facilities that are needed will be built.
Typically, the provider of services submits an application to the appropriate
SHPDA with information concerning the area and population to be served, the
anticipated demand for the facility or service to be provided, the amount of
capital expenditure, the estimated annual operating costs, the relationship of
the proposed facility or service to the overall state health plan and the cost
per patient day for the type of care contemplated. Whether the CON is granted is
based upon a finding of need by the SHPDA in accordance with criteria set forth
in CON statutes and state and regional health facilities plans. If the proposed
facility or service is found to be necessary and the applicant to be the
appropriate provider, the SHPDA will issue a CON containing a maximum amount of
expenditure and a specific time period for the holder of the CON to implement
the approved project.
Licensure and certification are separate, but related, regulatory activities.
The former is usually a state or local requirement and the latter is a federal
requirement. In almost all instances, licensure and certification will follow
specific standards and requirements that are set forth in readily available
public documents. Compliance with the requirements is monitored by annual
on-site inspections by representatives of various government agencies. All of
HEALTHSOUTH's inpatient rehabilitation facilities and medical centers and
substantially all of HEALTHSOUTH's surgery centers are currently required to be
licensed, but only the outpatient rehabilitation facilities located in Alabama,
Arizona, Connecticut, Maryland, Massachusetts and New Hampshire currently must
satisfy such a licensing requirement.
Medicare Participation and Reimbursement
In order to participate in the Medicare program and receive Medicare
reimbursement, each facility must comply with the applicable regulations of the
United States Department of Health and Human Services relating to, among other
things, the type of facility, its equipment, its personnel and its standards of
medical care, as well as compliance with all state and local laws and
regulations. All of HEALTHSOUTH's inpatient facilities, except for the St. Louis
head injury center, participate in the Medicare program. Ninety-two of
HEALTHSOUTH's outpatient rehabilitation facilities currently participate in, or
are awaiting the assignment of a provider number to participate in, the Medicare
program. All of HEALTHSOUTH's surgery centers are certified (or awaiting
certification) under the Medicare program. Its Medicare-certified facilities,
inpatient and outpatient, undergo annual on-site Medicare certification surveys
in order to maintain their certification status. Failure to comply with the
program's conditions of participation may result in loss of program
reimbursement or other governmental sanctions. All such facilities have been
deemed to be in satisfactory compliance on all applicable surveys. HEALTHSOUTH
has developed its operational systems to assure compliance with the various
standards and requirements of the Medicare program and has established ongoing
quality assurance activities to monitor compliance. HEALTHSOUTH believes that
all of such facilities currently meet all applicable Medicare requirements.
As a result of the Social Security Act Amendments of 1983, Congress adopted a
prospective payment system ("PPS") to cover the routine and ancillary operating
costs of most Medicare inpatient hospital services. Under this system, the
Secretary of Health and Human Services has established fixed payment amounts per
discharge based on diagnosis-related groups ("DRGs"). With limited exceptions, a
hospital's payment for Medicare inpatients is limited to the DRG rate,
regardless of the number of services provided to the patient or the length of
the patient's hospital stay. Under PPS, a hospital may retain the difference, if
any, between its DRG rate and its operating costs incurred in furnishing
inpatient services, and is at risk for any operating costs that exceed its DRG
rate. HEALTHSOUTH's medical center facilities are generally subject to PPS with
respect to Medicare inpatient services.
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The PPS program has been beneficial for the rehabilitation segment of the
healthcare industry because of the economic pressure on acute-care hospitals to
discharge patients as soon as possible. The result has been increased demand for
rehabilitation services for those patients discharged early from acute-care
hospitals. Outpatient rehabilitation services and free-standing inpatient
rehabilitation facilities are currently exempt from PPS, and inpatient
rehabilitation units within acute-care hospitals are eligible to obtain an
exemption from PPS upon satisfaction of certain federal criteria.
Currently, four of HEALTHSOUTH's outpatient centers are Medicare-certified
CORFs and 88 are Medicare-certified rehabilitation agencies. CORFs have been
designated cost-reimbursed Medicare providers since 1982. Under the regulations,
CORFs are reimbursed reasonable costs (subject to certain limits) for services
provided to Medicare beneficiaries. Outpatient rehabilitation facilities
certified by Medicare as rehabilitation agencies are reimbursed on the basis of
the lower of reasonable costs for services provided to Medicare beneficiaries or
charges for such services. Outpatient rehabilitation facilities which are
physician-directed clinics, as well as outpatient surgery centers, are
reimbursed by Medicare on a fee screen basis; that is, they receive a fixed fee,
which is determined by the geographical area in which the facility is located,
for each procedure performed. HEALTHSOUTH's outpatient rehabilitation facilities
submit monthly bills to their fiscal intermediaries for services provided to
Medicare beneficiaries, and HEALTHSOUTH files annual cost reports with the
intermediaries for each such facility. Adjustments are then made if costs have
exceeded payments from the fiscal intermediary or vice versa.
HEALTHSOUTH's inpatient facilities (other than the medical center facilities)
either are not currently covered by PPS or are exempt from PPS, and are also
cost-reimbursed, receiving the lower of reasonable costs or charges. Typically,
the fiscal intermediary pays a set rate based on the prior year's costs for each
facility. As with outpatient facilities subject to cost-based reimbursement,
annual cost reports are filed with HEALTHSOUTH's fiscal intermediary and payment
adjustments are made, if necessary.
Congress has directed the United States Department of Health and Human
Services to develop regulations, which could subject inpatient rehabilitation
hospitals to PPS in place of the current "reasonable cost within limits" system
of reimbursement. In addition, informal proposals have been made for a
prospective payment system for Medicare outpatient care. Other proposals for a
prospective payment system for rehabilitation hospitals are also being
considered by the federal government. Therefore, HEALTHSOUTH cannot predict at
this time the effect that any such changes may have on its operations.
Regulations relating to prospective payment or other aspects of reimbursement
may be developed in the future which could adversely affect reimbursement for
services provided by HEALTHSOUTH.
Over the past several years an increasing number of healthcare providers have
been accused of violating the federal False Claims Act. That Act prohibits the
knowing presentation of a false claim to the United States government. Because
HEALTHSOUTH performs thousands of similar procedures a year for which it is
reimbursed by Medicare and there is a relatively long statute of limitations, a
billing error could result in significant civil penalties. HEALTHSOUTH does not
believe that it is or has been in violation of the False Claims Act.
Relationships with Physicians and Other Providers
Various state and federal laws regulate relationships among providers of
healthcare services, including employment or service contracts and investment
relationships. These restrictions include a federal criminal law prohibiting (i)
the offer, payment, solicitation or receipt of remuneration by individuals or
entities, to induce referrals of patients for services reimbursed under the
Medicare or Medicaid programs or (ii) the leasing, purchasing, ordering,
arranging for or recommending the lease, purchase or order of any item, good,
facility or service covered by such programs (the "Fraud and Abuse Law"). In
addition to federal criminal sanctions, violators of the Fraud and Abuse Law may
be subject to significant civil sanctions, including fines and/or exclusion from
the Medicare and/or Medicaid programs.
In 1991, the Office of the Inspector General ("OIG") of the United States
Department of Health and Human Services promulgated regulations describing
compensation arrangements which are not viewed as illegal remuneration under
the Fraud and Abuse Law (the "Safe Harbor Rules"). The Safe
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Harbor Rules create certain standards ("Safe Harbors") for identified types of
compensation arrangements which, if fully complied with, assure participants in
the particular arrangement that the OIG will not treat such participation as a
criminal offense under the Fraud and Abuse Law or as the basis for an exclusion
from the Medicare and Medicaid programs or an imposition of civil sanctions.
HEALTHSOUTH operates five of its rehabilitation hospitals and almost all of
its outpatient rehabilitation facilities as limited partnerships. Three of the
rehabilitation hospital partnerships involve physician investors, and two of the
rehabilitation hospital partnerships involve other institutional healthcare
providers. Seven of the outpatient partnerships currently have a total of 21
physician limited partners, some of whom refer patients to the partnerships.
Those partnerships which are providers of services under the Medicare program,
and their limited partners, are subject to the Fraud and Abuse Law. A number of
the relationships established by HEALTHSOUTH with physicians and other
healthcare providers do not fit within any of the Safe Harbors. The Safe Harbor
Rules do not expand the scope of activities that the Fraud and Abuse Law
prohibits, nor do they provide that failure to fall within a Safe Harbor
constitutes a violation of the Fraud and Abuse Law; however, the OIG has
informally indicated that failure to fall within a Safe Harbor may subject an
arrangement to increased scrutiny.
Most of HEALTHSOUTH's surgery centers are owned by limited partnerships,
which include as limited partners physicians who perform surgical procedures at
such centers. Subsequent to the promulgation of the Safe Harbor Rules in 1991,
the Department of Health and Human Services 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
Safe Harbor would protect payments to be made to surgeons as a return on
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
HEALTHSOUTH is an investor in each limited partnership which owns a surgery
center, HEALTHSOUTH's arrangements with physician investors do not fit within
the Safe Harbor for ambulatory surgery centers as currently proposed.
HEALTHSOUTH is unable at this time to predict whether the proposed ambulatory
surgery center 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 HEALTHSOUTH will
ever meet the criteria under this new Safe Harbor as proposed or as it may be
adopted in final form. HEALTHSOUTH believes, however, that its arrangements with
physicians with respect to its surgery center facilities should not fall within
the activities prohibited by the Fraud and Abuse Law.
While several federal court decisions have aggressively applied the
restrictions of the Fraud and Abuse Law, they provide little guidance as to the
application of the Fraud and Abuse Law to HEALTHSOUTH's limited partnerships.
HEALTHSOUTH believes that it is in compliance with the current requirements of
applicable federal and state law, but no assurances can be given that a federal
or state agency charged with enforcement of the Fraud and Abuse Law and similar
laws might not assert a contrary position or that new federal or state laws, or
new interpretations of existing laws, might not adversely affect relationships
established by HEALTHSOUTH with physicians or other healthcare providers or
result in the imposition of penalties on HEALTHSOUTH or certain of its
facilities. Even the assertion of a violation could have a material adverse
effect upon HEALTHSOUTH.
The so-called "Stark II" provisions of the Omnibus Budget Reconciliation Act
of 1993 amend the federal Medicare statute to prohibit the making by a physician
of referrals for "designated health services" (including physical therapy and
occupational therapy) to an entity in which the physician has an investment
interest or other financial relationship, subject to certain exceptions. Such
prohibition took effect on January 1, 1995 and applies to all of HEALTHSOUTH's
outpatient rehabilitation facility partnerships with physician limited partners.
In addition, a number of states have passed or are considering statutes which
prohibit or limit physician referrals of patients to facilities in which they
have an investment interest. In response to these regulatory activities,
HEALTHSOUTH has restructured most of its rehabilitation facility partnerships
which involve physician investors, in order to eliminate physician ownership
interests not permitted by applicable law. HEALTHSOUTH intends to take such
actions as may be required to cause the remaining partnerships to be in
compliance with applicable laws and
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regulations, including, if necessary, the prohibition of physician partners from
referring patients. HEALTHSOUTH believes that this restructuring has not
adversely affected and will not adversely affect the operations of its
facilities.
Ambulatory surgery is not identified as a "designated health service", and
HEALTHSOUTH does not believe that ambulatory surgery is subject to the
restrictions set forth in Stark II. However, lithotripsy facilities operated by
HEALTHSOUTH 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 Stark II. Similarly,
physicians frequently perform endoscopic procedures in the procedure rooms of
HEALTHSOUTH's surgery centers, and it is also possible to construe these
services to be "designated health services". While HEALTHSOUTH does not believe
that Stark II was intended to apply to such services, if that were determined to
be the case, HEALTHSOUTH intends to take steps necessary to cause the operation
of its facilities to comply with the law.
HEALTHSOUTH cannot predict whether other regulatory or statutory provisions
will be enacted by federal or state authorities which would prohibit or
otherwise regulate relationships which HEALTHSOUTH has established or may
establish with other healthcare providers or the possibility of materially
adverse effects on its business or revenues arising from such future actions.
Management of HEALTHSOUTH believes, however, that HEALTHSOUTH will be able to
adjust its operations so as to be in compliance with any regulatory or statutory
provision as may be applicable. See " -- Sources of Revenues" and " -- Patient
Care Services".
Insurance
Beginning December 1, 1993, HEALTHSOUTH became self-insured for professional
liability and comprehensive general liability. HEALTHSOUTH purchased coverage
for all claims incurred prior to December 1, 1993. In addition, HEALTHSOUTH
purchased underlying insurance which would cover all claims once established
limits have been exceeded. It is the opinion of management that at August 31,
1995, HEALTHSOUTH has adequate reserves to cover losses on asserted and
unasserted claims. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
Employees
As of August 31, 1995, HEALTHSOUTH employed 22,531 persons, of whom 14,803
were full-time employees and 7,728 were part-time employees. Of the above
employees, 412 are employed at HEALTHSOUTH's headquarters in Birmingham,
Alabama. Except for approximately 100 employees at one rehabilitation hospital
(about 20% of that facility's workforce), none of HEALTHSOUTH's employees is
represented by a labor union, and HEALTHSOUTH is not aware of any current
activities to organize its employees at other facilities. Management of
HEALTHSOUTH considers the relationship between HEALTHSOUTH and its employees to
be good.
Legal Proceedings
In the ordinary course of its business, HEALTHSOUTH may be subject, from time
to time, to claims and legal actions by patients and others. HEALTHSOUTH does
not believe that any such pending actions, if adversely decided, would have a
material adverse effect on its financial condition. See " -- Insurance" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- HEALTHSOUTH" for a description of HEALTHSOUTH's insurance coverage
arrangements.
From time to time, HEALTHSOUTH appeals decisions of various rate-making
authorities with respect to Medicare rates established for HEALTHSOUTH's
facilities. These appeals are initiated in the ordinary course of business.
Management believes that adequate reserves have been established for possible
adverse decisions on any pending appeals and that the outcomes of currently
pending appeals, either individually or in the aggregate, will have no material
adverse effect on HEALTHSOUTH's operations.
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Properties
HEALTHSOUTH's executive offices currently occupy approximately 120,000 square
feet of leased space in Birmingham, Alabama. In August 1995, HEALTHSOUTH
announced plans to construct new executive offices on property acquired by
HEALTHSOUTH earlier in the year. The expanded executive offices are expected to
be fully available by December 1996. All of HEALTHSOUTH's outpatient operations
are carried out in leased facilities, except for its outpatient rehabilitation
facilities located in Birmingham and Montgomery, Alabama, Orlando, Florida and
one of its facilities in Baltimore, Maryland. HEALTHSOUTH owns 33 of its
inpatient rehabilitation facilities and leases or operates under management
contracts 44 of its inpatient rehabilitation facilities. HEALTHSOUTH constructed
its rehabilitation hospitals in Florence and Columbia, South Carolina, Kingsport
and Nashville, Tennessee, Concord, New Hampshire, and Dothan, Alabama on
property leased under long-term ground leases. The property on which
HEALTHSOUTH's Memphis, Tennessee rehabilitation hospital is located is owned in
partnership by HEALTHSOUTH and Methodist Hospitals of Memphis. HEALTHSOUTH owns
its four medical center facilities in Birmingham, Alabama, Richmond, Virginia
and Miami, Florida and leases its medical center facility in Dallas, Texas.
HEALTHSOUTH currently owns, and from time to time may acquire, certain other
improved and unimproved real properties in connection with its business. See
Notes 4 and 6 of "Notes to Consolidated Financial Statements" for information
with respect to the properties owned by HEALTHSOUTH and certain indebtedness
related thereto.
In Management's opinion, HEALTHSOUTH's physical properties are adequate for
HEALTHSOUTH's needs for the foreseeable future, and are consistent with
HEALTHSOUTH's expansion plans described elsewhere in this Prospectus. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- HEALTHSOUTH".
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The following table sets forth a listing of the Company's patient care
services locations at August 31, 1995:
<TABLE>
<CAPTION>
Inpatient
Outpatient Rehabilitation
Rehabilitation Facilities Medical Surgery Diagnostic Other
State Market Centers(1) (Beds) (2) Centers (Beds)(2) Centers Centers Services
- ----- ------ ---------- ---------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Alabama Birmingham 6 6(225) 1(219)
Dothan 1(34)
Auburn 1
Valley 1
Opelika 1
Florence 2
Gadsden 2
Huntsville 3 1(50)
Mobile 2
Montgomery 1 1(80)
Muscle Shoals 1
Tuscaloosa 1 1 1
Arizona Tucson 2 1(80)
Phoenix 4 1(60) 1
Scottsdale 3 1(43)
Arkansas Fort Smith 1(80)
Little Rock 1
California Bakersfield 1(60)
Fresno 2
Huntington 2 1
Marina Del Rey 1 2
Newport Beach 1
Redding 1
San Carlos 1
San Diego 2 3
San Francisco 1 1
Santa Rosa 2
Van Nuys 2
Woodland Hills 1
Colorado Colorado
Springs 6
Englewood 3
Longmont 1
Wheat Ridge 4
Denver 3 2
Fort Collins 2
Connecticut Fairfield 1
District of
Columbia Washington 1 1
Florida Boca Raton 2 2
60
<PAGE>
Fort Lauderdale 1 1(108) 1
Jacksonville 2
Lake Worth 1
Largo 1(40)
Melbourne 3 1(80) 1
Merritt Island 3
Panama City 3
Coral Gables 2
Miami 2 2(165) 2(397) 1 1 1
Naples 1
Ocala 2
Ocoee 2 1
Orlando 6 2
Palm Bay 2
Port St. Lucie 3 1
Sarasota 2 1(60) 1
Tallahassee 2 1(70)
Tampa 4
Tarpon Springs 1
Vero Beach 1 1(70) 1
West Palm Beach 2 1
Georgia Atlanta 6 1(14) 3 1
Columbus 1
Macon 2 2(75)
Idaho Boise 1 (3)
Illinois Caronbdale 1
Palos Heights 2
Wilmette 2 1
Arlington
Heights 4 1
Elgin 3
DuPage 2
Columbia 2
Indiana Evansville 1(80)
Muncie 8
Iowa Des Moines 3
Kansas Leawood 1 1
Kansas City 2
Great Bend 1
Kentucky Edgewood 1(40)
Louisville 2
Louisiana Baton Rouge 1 1(43)
Metairie 1
Shreveport 1
Maine Bangor 2
Maryland Baltimore 10 1
Barlow 1
Chevy Chase 1
Rockville 1 1
Salisbury 1(44)
Wheaton 1
Massachusetts Abington 1
Michigan Monroe 1
Mississippi Jackson 1
Pascagoula 1
Meridian 1
Missouri Cape Girardeau 3
Columbia 3
Blue Springs 1
Kansas City 2(21)
61
<PAGE>
Lake Ozark 1
Springfield 3
St. Louis 15 1(26) 4 2
Nebraska Omaha 2
Nevada Las Vegas 2
New Hampshire Bedford 3
Dover 2
Manchester 1
Concord 1 1(100)
New Jersey Atlantic City 1
Bridgewater 1 1
Brunswick 1 1(15)
Edison 2
Emerson 2
Haddonfield 1
Linden 2
Madison 1
Manahawkin 1
North Bergen 1
Newton 1
Paramus 2
Tinton Falls 1
Toms River 1 1(155)
Upper Saddle
River 2
Washington 1
New Mexico Albuquerque 3 1(60)
New York Syracuse 1
Liverpool 1
Monsey 1
Pulaski 1
Huntington 1
North
Carolina Asheville 1
Charlotte 1
Kinston 1(17)
Concord 1
Statesville 1
Ohio Ashtabula 1
Cincinnati 1
Dayton 1
Toledo 1
Lorain 5
Oklahoma Oklahoma City 4 1(111) 2 1
Ada 2
Tulsa 2
Weatherford 1
Ontario,
Canada Etabicoke 1
Pennsylvania Altoona 2 1(66)
Erie 1 2(207)
Harrisburg 3
Mechanicsburg 2 2(201)
Pittsburgh 6 1(89)
Pleasant Gap 4 1(88)
York 3 1(88)
South
Carolina Charleston 1(36)
Columbia 2 1(89)
Florence 1 1(88)
Lancaster 2(54)
Tennessee Chattanooga 3 1(80) 1
Clarksville 1
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<PAGE>
Kingsport 1(50)
Knoxville 2
Dyersburg 1
Collierville 1
Union City 1
Martin 1(40)
Memphis 4 1(80)
Nashville 2 1(80)
Texas Amarillo 1
Arlington 2 1(60)
Austin 5 1(80) 1
Beaumont 1
Dallas 3 3(175) 1(96) 1 1
El Paso 1
Fort Worth 2 1(60) 1
Houston 11 2(186) 5 1 1
Midland 1(60)
San Antonio 10 3(127) 1 5
Texarkana 1 1(60)
Waco 2
Victoria 1
Utah Sandy 1 1(86)
Virginia Alexandria 1
Arlington 1
Richmond 2 3(84) 1(200) 1 1
Roanoke 1
Tyson 1
Virginia Beach 3
Warrenton 1
West Virginia Huntington 1(40)
Morgantown 1(80)
Parkersburg 1(40)
Princeton 1(40)
Wisconsin Green Bay 1
____________
<FN>
(1) Includes freestanding outpatient centers and their satellites and outpatient
satellites of inpatient rehabilitation facilities.
(2) "Beds" refers to the number of beds for which a license or certificate of
need has been granted, which may vary materially from beds available for
use.
(3) Under construction.
</TABLE>
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<PAGE>
SELECTED FINANCIAL INFORMATION -- SSCI
Sutter Surgery Centers, Inc. and Consolidated Partnerships
The selected consolidated financial data presented below as of and for the
years ended December 31, 1992, 1993 and 1994 have been derived from the audited
consolidated financial statements of SSCI. The data for the six months ended
June 30, 1994 and 1995 are derived from the unaudited consolidated financial
statements of SSCI. In the opinion of SSCI, the consolidated income statement
data for the six months ended June 30, 1994 and 1995, and the consolidated
balance sheet data at June 30, 1995, reflect all adjustments (which consist of
only normal recurring adjustments) necessary for a fair presentation of results
of interim periods. Operating results for the six months ended June 30, 1995,
are not necessarily indicative of results for the full fiscal year or for any
future interim period. The consolidated income statement data set forth below
for the years ended December 31, 1993 and 1994, and the consolidated balance
sheet data at December 31, 1993 and 1994, are qualified by reference to the
audited consolidated financial statements included elsewhere herein. The
consolidated income statement data set forth below for the six months ended June
30, 1994 and 1995, and the consolidated balance sheet data at June 30, 1995, are
qualified by reference to the unaudited consolidated financial statements
included elsewhere herein. The selected consolidated financial data set forth
below should be read in conjunction with the Consolidated Financial Statements
of SSCI, the Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--SSCI" included elsewhere in this
Prospectus-Proxy Statement.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
1992(1) 1993 1994 1994 1995
------- ----- ---- ----- ----
(In thousands, except per share data) (unaudited)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net Revenue .............................. $ 2,582 $21,657 $38,030 $ 19,130 $20,446
Operating expenses ....................... 2,468 18,798 30,751 15,253 15,597
Depreciation and amortization ............ 185 1,603 2,627 1,292 1,380
Total operating expenses ................. 2,653 20,401 33,378 16,545 16,977
Operating income (loss) .................. (71) 1,256 4,652 2,585 3,469
Other income (expense): ..................
Management fees .......................... -- 368 41 -- --
Interest income .......................... 19 428 258 241 193
Interest expense ......................... (44) (612) (1,589) (740) (859)
Miscellaneous income ..................... 29 71 105 -- --
Total other income ....................... 4 255 (1,185) (499) (666)
Income (loss) before income taxes and
minority interests in earnings of
consolidated partnerships ................ (67) 1,511 3,467 2,086 2,803
Income tax (provision) benefit ........... 22 (132) (473) (410) (604)
Income (loss) before minority interests
in earnings of consolidated partnerships (45) 1,379 2,994 1,676 2,199
Minority interests in earnings in
consolidated partnerships ................ (185) (1,240) (2,462) (1,253) (1,627)
Net income (loss) ........................ $ (230) $ 139 $ 532 $ 423 $ 572
December 31,
-------------------------- June 30,
1995 1992 1993 1994
---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Cash and marketable securities $ 1,744 $ 4,085 $ 4,703 $ 4,750
Working capital ............... 6,152 5,607 5,549 6,132
Total assets .................. 22,722 43,354 42,603 41,740
Long-term debt (2) ............ 5,477 18,791 17,670 18,093
Stockholders' equity .......... 12,944 13,513 14,303 14,871
_______
<FN>
(1) Period from inception (July 8, 1992) through December 31, 1992.
(2) Includes current portion of long-term debt.
</TABLE>
64
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--SSCI
The following discussion of the results of operations and financial condition
of SSCI should be read in conjunction with SSCI's financial statements and notes
thereto included elsewhere in this Prospectus-Proxy Statement.
On August 23, 1995 HEALTHSOUTH signed an agreement to merge with SSCI in a
transaction to be accounted for as a pooling of interests. SSCI is one of the
largest independent operators of outpatient surgery centers in the United
States, with 12 surgery centers located throughout California and in Utah and
Arizona.
The discussion and analysis of the results of operations of the facilities
set forth below has been prepared by HEALTHSOUTH based solely on an analysis of
the figures and information set forth in the combined financial statements of
the acquired facilities and the notes thereto contained elsewhere in this
Prospectus-Proxy Statement.
Period from Inception, July 8, 1992, through December 31, 1992
and Twelve-Month Period Ended December 31, 1993
SSCI generated net revenues of $21,657,000 in 1993, an increase of
$19,075,000 or, 738.8%, as compared to 1992 revenues. Surgical cases increased
from 2,167 in 1992 to 19,231 in 1993, an increase of 787.4%.
In 1993, operating expenses were $18,798,000, or 86.8% of net revenues,
compared to $2,468,000, or 95.6% of revenues, in 1992. Income (loss) before
income taxes and minority interests increased from ($67,000) in 1992 to
$1,511,000 in 1993. The provision (benefit) for income taxes for 1993 was
$132,000, compared to ($22,000) in 1992, resulting in effective tax rates of
48.7% and 8.7%, respectively. Net income (loss) was $139,000 for 1993 compared
to ($230,000) for 1992, an increase of 160.4%.
Twelve-Month Periods Ended December 31, 1993 and 1994
SSCI generated net revenues of $38,030,000 in 1994, an increase of
$16,373,000, or 75.6% as compared to 1993. Surgical cases increased from 19,231
in 1993 to 34,447 in 1994, an increase of 79.1%.
In 1994, operating expenses were $30,751,000, or 80.9% of net revenues,
compared to $18,798,000 or 86.8% of net revenues, in 1993. Income before income
taxes and minority interests increased from $1,511,000 in 1993 to $3,467,000 in
1994. The provision for income taxes for 1994 was $473,000 compared to $132,000
in 1993, resulting in effective tax rates of 47.0% and 48.7%, respectively. Net
income was $532,000 in 1994, compared to $139,000 for 1993, an increase of
282.7%.
Six Month Periods Ended June 30, 1994 and 1995.
SSCI generated net revenues of $20,446,000 for the first six months of 1995,
an increase of $1,316,000, or 6.9%, as compared to the same period in 1994.
Surgical cases increased from 17,262 during the 1994 period to 17,748 during the
1995 period, an increase of 2.8%.
For the first six months of 1995 operating expenses were $15,597,000, or
76.3% of net revenues, compared to $15,253,000, or 79.7% of net revenues, for
the same period in 1994. Income before income taxes and minority interests
increased from $2,086,000 for the first six months of 1994 to $2,803,000 for the
same period in 1995. The provision for income taxes for the first six months of
1995 was $604,000 compared to $410,000 for the same period in 1994, resulting in
effective tax rates of 51.4% and 49.2%, respectively. Net income was $572,000
for the first six months of 1995 compared to $423,000 for the same period in
1994, an increase of 35.2%.
65
<PAGE>
BUSINESS OF SSCI
SSCI operates a network of 12 freestanding surgery centers in three states
and currently has an aggregate of 44 operating rooms and 10 procedures rooms.
SSCI is one of the largest independent operators of freestanding outpatient
surgery centers in California. SSCI'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 stays.
Operations of SSCI Surgery Centers
SSCI'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. SSCI's
typical surgery center is a freestanding facility with three to five fully
equipped operating and procedure rooms and ancillary areas for reception,
preparation, recovery and administration. Each of SSCI's centers is available
for use only by duly licensed physicians, oral surgeons and podiatrists. SSCI's
surgery centers do not perform surgery on an emergency basis.
The types of procedures typically performed at SSCI's surgery centers, within
various specialties, include:
<TABLE>
<CAPTION>
<S> <C>
Specialty Description of Typical Procedures
- --------- ---------------------------------
Orthopaedic surgery...... Arthroscopy, hand surgery, fracture repair and ligaments
and tendon repair
Pain..................... Pain management
Ear, nose, and throat ... Removal of tonsils and adenoids and insertion of ear
drainage tubes
Gynecology............... Laparoscopy, tubal ligation and dilitation and curettage
Ophthalmology............ Removal of cataracts and lens implantation
General surgery.......... Hernia repair, biopsy and removal of lesions of the female
breast and pilonidal cysts
Gastroenterology......... Cystoscopy and endoscopy
Plastic surgery.......... Face lifts, hand surgery and rhinoplasty
Urology.................. Vasectomy and circumcision
Podiatry................. Foot and ankle surgery
Oral surgery............. Wisdom teeth extraction and dental restoration
</TABLE>
Outpatient surgery centers, unlike hospitals, have not historically provided
overnight accommodations, food services or other similar ancillary services.
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.
SSCI's surgery centers generally employ a staff of between 15 and 55
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".
While SSCI's outpatient surgery centers are typically owned by limited
partnerships in which SSCI owns a general partnership interest, in two instances
the surgery centers are owned and operated by SSCI directly and one surgery
center is operated pursuant to a management agreement.
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<PAGE>
SSCI has concentrated its facilities in the following five markets: San
Francisco/Oakland, Sacramento, Los Angeles/San Diego, Salt Lake City and
Tucson. The following table sets forth certain information with respect to
each of SSCI's centers:
<TABLE>
<CAPTION>
Facility
-------------------------
SSCI Year Date Treatment Square
Center Location Ownership Opened Acquired ORs Rooms Feet
- ---------------- --------- ------ -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
East Bay Surgery Center, L.P.,
Oakland, California.................... 37.2% 1986 10/92 4 2 11,500
Golden Triangle Surgicenter, L.P.
Murrieta, California................... 42.0% 1991 11/92 3 1 8,102
Northern Solano Surgery Center, L.P.
Solano, California..................... 51.0% 1988 11/92 3 1 6,000
San Francisco Surgicenter, L.P. San
Francisco, California.................. 54.4% 1989 12/92 4 2 12,500
Sutter Tucson Surgery Center(1) 1 Pain
Tucson, Arizona........................ 100.0% 1986 12/92 4 Center 7,793
Doctors Surgery Center of Whittier,
L.P. Whittier, California.............. 69.7% 1987 5/93 3 1 8,577(2)
Salt Lake Surgical Center Salt Lake
City, Utah............................. 100.0% 1976 12/93 8 (3) 0 28,000
Fort Sutter Surgery Center, L.P. ...... 45.0% 1986 10/93 4 1 12,000
Alhambra Surgery Center(4) Sacramento,
California............................. 1992 10/93 3 0 8,551
Sutter Surgery Center, L.P............. 70.8% 1976 10/93 4 0 10,000
SacENT Surgery Center (J Street
Site)(5)
Sacramento, California................. 1992 10/93 1 0 1,082
Children's Surgery Center Oakland, Management
California............................. Agreement 1994 5/94 3 1 15,050
</TABLE>
(1) Excludes an additional 1,440 square feet of office space leased for
administrative and business office purposes.
(2) Includes 1,010 square feet leased for a pain center across the hallway.
(3) Four operating rooms are used regularly.
(4) Operated by the Fort Sutter Center managers and nurses.
(5) Managed by the Sutter Surgery Center administrator.
While SSCI is not actively pusuing any acquisitions in new markets at this
time, SSCI may expand in existing markets, may enter into joint ventures with
hospitals and may enter into physicians alliances in existing markets in order
to increase its local market presence and patient flow.
SSCI provides each of its outpatient surgery centers with a full range of
financial, marketing and operating services from SSCI's corporate headquarters.
SSCI 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 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. SSCI, 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, SSCI provides support for
Medicare certification, local regulatory licensure and accreditation efforts.
Quality Assurance Controls
SSCI 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 2 to 15 physicians which reviews the professional
credentials of physicians applying for medical staff privileges at the center.
The
67
<PAGE>
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 in
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. SSCI 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
SSCI markets services offered by its surgery cneters 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
SSCI's principal source of revenue is a facility fee charged by its surgery
centers for surgical procedures performed at the centers. Facility fees an
average range between $1,150 and $2,950 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. SSCI seeks to minimize bad debts by verifying insurance coverage
before admission and through advance collection from the patient, when
permissible.
SSCI receives payments for services rendered to patients from private
insurers, the patients directly and governmental payors under Medicare and
Medicaid. In certain instances, SSCI has agreed with health maintenance
organizations and similar patient referral sources to provide services at
discounted prices. SSCI charges for services rendered on a fee-for-service
basis. The sources and amounts of SSCI'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). Changes
in the mix of SSCI's patients among private pay, Medicare and Medicaid
categories can significantly affect the profitability of SSCI's operations.
Government reimburement 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 SSCI'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 SSCI now or in the future will meet or continue to
meet the requirements for participation in such programs. In addition, SSCI
could be adversely affected by the continuing efforts of governmental and
private third-party payors to control the amount of reimbursement for healthcare
services.
Competition
SSCI competes principally with hospital 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, payors 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, historical physician
loyalty and convenience for physicians making rounds or performing inpatient
surgery in the hospital. SSCI believes that its centers offer 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 SSCI's centers.
Properties
SSCI's surgery centers range from 1,000 to 28,000 square feet, with the
typical surgery center occupying approximately 8,000 to 12,000 square feet.
SSCI's partnerships typically lease their facilities pursuant to long-term lease
agreements all of which contain options to extend the lease period.
68
<PAGE>
SSCI's principal executive offices are located at 1201 Alhambra Boulevard,
Suite 330, Sacramento, California 95816. SSCI leases this property, and the
current lease expires on February 29, 2000.
Government Healthcare Regulation
Regulatory Environment
SSCI 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 SSCI's multispecialty centers in operation
are currently licensed as ambulatory surgery centers.
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 or 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
material adverse effect on SSCI.
Federal Regulation of Physician Investments and Referrals
All of SSCI's surgery centers are certified under the federal government's
Medicare program and, with the exception of the Doctors Surgery Center of
Whittier, L.P., 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 SSCI or any of
its centers or practitioners, such exclusion could result in a significant loss
of reimbursement.
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.
While this administrative ruling was upheld by a federal district court, on
April 9, 1995, a federal appeals court affirmed the ruling in part and reversed
it in part. Specifically, the federal appeals court held that in order to
constitute a violation of the Fraud and Abuse Statute, it is necessary for a
person (i) to know that the Fraud and Abuse Statute prohibits offering or paying
remuneration to induce referrals and (ii) to engage in prohibited conduct with
the specific intent to disobey the law.
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. Al
69
<PAGE>
though 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 SSCI's surgery centers are owned by limited
partnerships which include, as limited partners, physicians who perform surgical
procedures at such centers. SSCI 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 SSCI is an investor in each limited partnership which
owns a surgery center, SSCI's arrangements with physician investors do not fit
within the safe harbor for ambulatory surgery centers as currently proposed.
SSCI 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 SSCI will ever meet the
criteria under this new safe harbor as proposed or as may be adopted in final
form. SSCI 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 SSCI with physicians or other healthcare
providers or result in the imposition of penalties on SSCI or its facilities.
SSCI 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.
SSCI'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.
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 SSCI does not believe that
ambulatory surgery is subject to the Stark restrictions. However, physicians
frequently perform endoscopic procedures in the procedure rooms of centers
operated by SSCI, and it is possible to construe these services to be proscribed
services under the Stark Law. If the Stark Law were found to apply to such
services, SSCI intends to take steps necessary to cause the operation of its
facilities to comply with the law. Similarly, most facilities operated by SSCI
provide laboratory services incidental to the performance of surgical
procedures. As with endoscopic services, it is possible to conclude that these
services are precluded by the Stark Law. Should such a determination be
confirmed, SSCI intends to take steps necessary to cause the operation of its
facilities to comply with all applicable laws and regulations.
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State Anti-Referral Laws
In addition to the investment interest and patient referral prohibitions of
the federal laws described above, certain states in which SSCI 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. SSCI 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-investor who directly provide services
within the entity and are personally involved in the rendering of a care to the
referred patient, or (ii) does not encompass the provider specialty or services
rendered at the center.
A substantial majority of SSCI centers are concentrated in California with
the result that a substantial amount of SSCI's net revenues are derived from the
surgery centers located in that state. Were legislation prohibiting the referral
or treatment of patients to or at centers by healthcare providers with an
investment interest in the centers or other similar legislation to be enacted in
California, such legislation may have a material adverse effect on the
profitability of SSCI's centers in that market, which in turn would result in a
material adverse effect on SSCI'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. SSCI 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 SSCI 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 SSCI'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.
Infectious Waste
As generators of infectious waste, SSCI'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. SSCI believes its centers dispose of such waste properly.
Employees
On September 1, 1995, SSCI had approximately 238 full-time equivalent
employees, of which 15 were corporate personnel. The remaining full-time
employees, most of whom are nurses and office personnel, work at the centers.
None of SSCI's employees is covered by a collective bargaining agreement. SSCI
considers relations with its employees to be good.
Litigation
From time to time, SSCI is party to certain claims, suits and complaints
which arises in the ordinary course of business. Currently, there are no claims,
suits or complaints which, in the opinion of SSCI, would have a material adverse
effect on SSCI's financial position or results of operations.
DESCRIPTION OF CAPITAL STOCK OF HEALTHSOUTH
HEALTHSOUTH is authorized by its Restated Certificate of Incorporation to
issue up to 151,500,000 shares of capital stock, of which 150,000,000 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 September 27, 1995, there were 80,585,684 shares of HEALTHSOUTH Common
Stock outstanding.
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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 holders 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.
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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.
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COMPARISON OF RIGHTS OF SSCI
AND HEALTHSOUTH STOCKHOLDERS
Both SSCI and HEALTHSOUTH are incorporated in Delaware. Holders of the SSCI
Shares 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 SSCI stockholder under the SSCI Certificate of
Incorporation (the "SSCI Certificate") and SSCI's Bylaws (the "SSCI 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 SSCi
Certificate and the SSCI Bylaws.
Classes and Series of Capital Stock
SSCI. SSCI is authorized by the SSCI Certificate to issue up to 60,000,000
shares of capital stock of which 50,000,000 are designated Common Stock, par
value $.01 per share, and 10,000,000 are designated Preferred Stock, par value
$.01 per share. As of September 27, 1995, there were 19,615,443 shares of SSCI
Common Stock outstanding. The Board of Directors of SSCI has the authority to
issue the SSCI 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 September , 1995 there were no
shares of SSCI Preferred Stock issued and outstanding and the Board of Directors
of SSCI has no present intention of issuing shares of SSCI Preferred Stock.
HEALTHSOUTH. HEALTHSOUTH is authorized by the HEALTHSOUTH Certificate to
issue up to 151,500,000 shares of capital stock, of which 150,000,000 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 September 27, 1995,
there were 80,585,684 shares of HEALTHSOUTH Common Stock outstanding. In
addition, there were reserved for issuance pursuant to options under HEALTHSOUTH
stock option plans an additional 14,589,830 shares of HEALTHSOUTH Common Stock.
Furthermore, 6,112,956 shares are currently reserved for issuance upon
conversion of HEALTHSOUTH's outstanding $115,000,000 principal amount of 5%
Convertible Subordinated Debentures due 2001, and 76,039 shares are reserved for
issuance upon exercise of outstanding warrants. 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
SSCI. The SSCI Bylaws provide that the SSCI Board of Directors shall consist
of at least one, but not more than five, directors, with the exact number,
within the foregoing limits, to be determined by resolution of the Board of
Directors or by the stockholders at an annual meeting. The affirmative vote of
at least two-thirds of the Directors then in office or of the SSCI Shares
eligible to be cast at an annual meeting is required to change the number of
directors. Directors of SSCI are elected by a majority of the SSCI Shares issued
and outstanding and entitled to vote at 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 to be filled by the
affirmative vote of at least two-thirds of the directors then in office.
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
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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
SSCI. In accordance with Delaware law, any SSCI director, or the entire
SSCI Board of Directors, may be removed, with or without cause, by the
holders of a majority of the SSCI Shares then entitled to vote at an election
of directors.
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
SSCI. The SSCI Common Stock is not divided into classes, and SSCI has no
other classes or series of capital stock issued or outstanding other than the
SSCI Common Stock. Each SSCI stockholder holding shares of SSCI 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 SSCI Common Stock held by such stockholder as of the
record date for such meeting. Except as specifically provided otherwise by law
or by the SSCI Certificate or the SSCI 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 SSCI
stockholders.
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
SSCI. The SSCI Bylaws provide that dividends on SSCI's capital stock may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, property, or in shares of SSCI's capital
stock.
HEALTHSOUTH. Neither HEALTHSOUTH Certificate nor the HEALTHSOUTH Bylaws
contain any provisions similar to the dividend provisions of the SSCI Bylaws set
forth above.
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Fair Price Provision
SSCI. Neither the SSCI Certificate nor the SSCI Bylaws contain any "fair
price" provision or other provisions restricting or otherwise relating to the
ability of SSCI to enter into any business combinations, including, but not
limited to, mergers, sales of all or substantially all of SSCI's assets or sales
of SSCI stock in exchange for cash or other securities.
HEALTHSOUTH. The HEALTHSOUTH Certificate provides that the vote of the
holders of 662/3% 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% 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% 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 and Bylaws
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 entitle 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.
SSCI. SSCI's Certificate provides that it may be amended, altered, changed or
repealed only in the manner prescribed by Delaware law as in effect from time to
time. SSCI's Bylaws may be altered, amended or repealed with the approval of at
least 66 2/3 % of the outstanding shares entitled to vote thereon at any annual
or special meeting or with the approval of at least two-thirds of the SSCI
directors at any meeting of the Board of Directors,
HEALTHSOUTH. The HEALTHSOUTH Certificate requires approval by holders of at
least 662/3% 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.
The HEALTHSOUTH Bylaws provide that the HEALTHSOUTH Bylaws may be amended,
altered or repealed by the affirmative vote of a majority of the Board of
Directors or at a meeting of HEALTHSOUTH stockholders by the affirmative vote of
the holders of a majority of the outstanding shares of HEALTHSOUTH stock
entitled to vote thereat.
Special Meetings of Stockholders
SSCI. The SSCI Bylaws provide that a special meeting of the SSCI stockholders
may be called either by SSCI's President or upon the written request of a
majority of SSCI's 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% of the outstanding shares of capital stock of
HEALTHSOUTH entitled to vote in the election of directors.
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Compromise and Reorganization
SSCI. The SSCI Certificate provides that whenever a compromise or arrangement
is proposed between SSCI and its creditors and/or between SSCI and its
stockholders, any court of equitable jurisdiction within the State of Delaware
may, on summary application of SSCI or an SSCI stockholder or on the application
of any duly appointed receiver or trustee in dissolution for SSCI, order a
meeting of the creditors or stockholders of SSCI, as the case may be. If the
compromise or arrangement and any reorganization of SSCI resulting from such
compromise or arrangement is agreed to by a majority in number representing
three-fourths in value of the creditors and/or of the stockholders of SSCI, as
the case may be, and is sanctioned by the court to which application has been
made, the compromise or arrangement and resulting reorganization shall be
binding on creditors and/or stockholders of SSCI, as the case may be, and on
SSCI.
HEALTHSOUTH. The HEALTHSOUTH Certificate contains no provisions similar to
the compromise and reorganization provisions of the SSCI Certificate set forth
above.
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 SSCI Certificate includes such a provision, as
set forth below, to the maximum effect permitted by law.
Each of the HEALTHSOUTH Certificate and the SSCI 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.
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
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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 SSCI
Bylaws contain indemnification provisions substantially the same as those
contained in the HEALTHSOUTH Bylaws.
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 SSCI 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.
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OPERATIONS AND MANAGEMENT OF
HEALTHSOUTH AFTER THE MERGER
Operations
After the consummation of the Merger, SSCI will be a wholly-owned subsidiary
of HEALTHSOUTH. HEALTHSOUTH will continue to engage in the business of providing
rehabilitative healthcare services as prior to the Merger, working with the
management of SSCI to operate and continue to expand SSCI'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 SSCI".
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 and schedule of HEALTHSOUTH
Corporation, the consolidated financial statements of Sutter Surgery Centers,
Inc., the consolidated financial statements of Surgical Health Corporation, the
consolidated financial statements of Rehab Systems Company and the consolidated
financial statements of Relife, Inc. appearing or incorporated by reference in
this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, to the extent indicated in their reports thereon also
appearing elsewhere herein and in the Registration Statement or incorporated by
reference. Such consolidated financial statements have been included herein or
incorporated by reference in reliance upon such reports given upon the authority
of such firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of HEALTHSOUTH Common Stock to be issued to the
stockholders of SSCI pursuant to the Merger will be passed upon by Haskell
Slaughter Young & Johnston, Professional Association.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
Page
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<S> <C>
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 1992, 1993 and 1994
Report of Independent Auditors ............................. F-2
Consolidated Balance Sheets ................................ F-3
Consolidated Statements of Income .......................... F-4
Consolidated Statements of Stockholders' Equity ........... F-5
Consolidated Statements of Cash Flows ...................... F-6
Notes to Consolidated Financial Statements.................. F-8
Six months ended June 30, 1994 and 1995
Consolidated Balance Sheet (unaudited)...................... F-24
Consolidated Statements of Income (unaudited)............... F-25
Consolidated Statements of Cash Flows (unaudited) .......... F-26
Notes to Consolidated Financial Statements (unaudited) ..... F-27
Sutter Surgery Centers, Inc. and Consolidated Partnerships
Consolidated Financial Statements
Periods ended December 31, 1992, 1993 and 1994
Report of Independent Auditors.............................. F-30
Consolidated Balance Sheets................................. F-31
Consolidated Statements of Operations....................... F-32
Consolidated Statements of Stockholders' Equity............. F-33
Consolidated Statements of Cash Flows....................... F-34
Notes to Consolidated Financial Statements.................. F-36
Six months ended June 30, 1994 and 1995
Consolidated Balance Sheet (unaudited)...................... F-44
Consolidated Statements of Income (unaudited)............... F-45
Consolidated Statements of Cash Flows (unaudited) .......... F-46
Notes to Consolidated Financial Statements (unaudited) ..... F-47
</TABLE>
F-1
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors
HEALTHSOUTH Corporation
We have audited the accompanying consolidated balance sheets of HEALTHSOUTH
Corporation and Subsidiaries as of December 31, 1993 and 1994, and the related
consolidated statements of income, stockholders' 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's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of HEALTHSOUTH
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
Birmingham, Alabama
March 1, 1995, except for
Notes 2 and 17, as to
which the date is June 13, 1995
F-2
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
-----------------------
1993 1994
---------- ----------
(In thousands)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents (Note 3)................................. $ 81,031 $ 68,735
Other marketable securities (Note 3)............................... 8,968 16,628
Accounts receivable, net of allowances for doubtful accounts and
contractual adjustments of $120,810,000 in 1993 and $144,427,000
in 1994............................................................ 179,761 242,659
Inventories........................................................ 24,078 26,151
---------- ----------
Prepaid expenses and other current assets.......................... 44,674 71,029
---------- ----------
Total current assets............................................... 338,512 425,202
Other assets: .....................................................
Loans to officers.................................................. 1,488 1,240
Other (Note 4)..................................................... 23,983 41,834
---------- ----------
25,471 43,074
Property, plant and equipment, net (Note 5)........................ 791,097 857,372
Intangible assets, net (Note 6) ................................... 289,338 410,688
---------- ----------
Total assets....................................................... $1,444,418 $1,736,336
========== ==========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable................................................... $ 50,432 $ 87,153
Salaries and wages payable......................................... 28,229 34,102
Accrued interest payable and other liabilities..................... 33,614 55,922
Current portion of long-term debt and leases (Note 7) ............. 15,174 16,698
---------- ----------
Total current liabilities.......................................... 127,449 193,875
Long-term debt (Note 7)............................................ 873,007 1,017,696
Deferred income taxes (Note 11).................................... 10,853 8,595
Deferred revenue (Note 15)......................................... -- 7,526
Other long-term liabilities (Note 16).............................. 3,285 8,398
Minority interests-limited partnerships (Note 9)................... 11,526 10,326
Commitments and contingent liabilities (Notes 12 and 17)
Stockholders' equity:
Preferred Stock, $.10 par value-1,500,000 shares authorized;
issued and outstanding-none........................................ -- --
Common Stock, $.01 par value-100,000,000 shares authorized;
issued-74,896,000 in 1993 and 76,991,000 in 1994................... 749 770
Additional paid-in capital......................................... 347,163 369,186
Retained earnings.................................................. 89,641 137,764
Treasury stock, at cost (91,000 shares)............................ (323) (323)
Receivable from Employee Stock Ownership Plan (Note 13) ........... (18,932) (17,477)
---------- ----------
Total stockholders' equity......................................... 418,298 489,920
---------- ----------
Total liabilities and stockholders' equity......................... $1,444,418 $1,736,336
========== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------
1992 1993 1994
-------- -------- ---------
(In thousands, except for per
share amounts)
<S> <C> <C> <C>
Revenues........................................... $501,046 $656,329 $1,236,190
Operating expenses: ...............................
Operating units.................................... 372,169 471,778 906,712
Corporate general and administrative............... 16,878 24,329 45,895
Provision for doubtful accounts.................... 13,254 16,181 23,739
Depreciation and amortization...................... 29,834 46,224 86,678
Interest expense................................... 12,623 18,495 65,286
Interest income.................................... (5,415) (3,924) (4,308)
Merger expenses (Note 2)........................... -- 333 6,520
Loss on impairment of assets (Note 16)............. -- -- 10,500
Loss on abandonment of computer project (Note 16) . -- -- 4,500
NME Selected Hospitals Acquisition related expense
(Note 10).......................................... -- 49,742 --
Terminated merger expense (Note 14)................ 3,665 -- --
Gain on sale of partnership interest............... -- (1,400) --
-------- -------- ---------
443,008 621,758 1,145,522
-------- -------- ---------
Income before income taxes and minority interests . 58,038 34,571 90,668
Provision for income taxes (Note 11)............... 18,864 11,930 34,305
-------- -------- ---------
39,174 22,641 56,363
Minority interests................................. 4,245 5,444 6,402
-------- -------- ---------
Net income......................................... $ 34,929 $ 17,197 $ 49,961
======== ======== =========
Weighted average common and common equivalent
shares outstanding................................. 74,214 77,709 84,687
======== ======== =========
Net income per common and common equivalent share . $ 0.47 $ .22 $ .59
======== ======== =========
Net income per common share-assuming full
dilution........................................... $ N/A $ N/A $ .59
======== ======== =========
</TABLE>
See accompanying notes.
F-4
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Additional Total
Common Common Paid-In Retained Treasury Receivable Stockholders'
Shares Stock Capital Earnings Stock from ESOP Equity
------ ------ --------- ---------- ----------- ------------ ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1991 .... 64,993 649.6 $ 257,660.8 $ 53,925.1 $ (60.0) $ (10,000.0) $ 302,175.5
Proceeds from issuance of common
shares........................... 6,436 64.4 60,286.3 -- -- -- 60,350.7
Proceeds from exercise of
options.......................... 1,917 19.2 6,871.9 -- -- -- 6,891.1
Income tax benefits related to
Incentive Stock Options.......... -- -- 5,634.7 -- -- -- 5,634.7
Common shares exchanged in the
exercise of options.............. (8) -- (95.6) -- -- -- (95.6)
Loan to Employee Stock Ownership
Plan............................. -- -- -- -- -- (10,000.0) (10,000.0)
Reduction in Receivable from
Employee Stock Ownership
Plan............................. -- -- -- -- -- 358.0 358.0
Purchase of limited partnership
units............................ 42 .4 499.6 (11,318.4) -- -- (10,818.4)
Net income....................... -- -- -- 34,929.0 -- -- 34,929.0
------ ------ --------- ---------- ----------- -------- -----------
Balance at December 31, 1992 .... 73,380 733.6 330,857.7 77,535.7 (60.0) (19,642.0) 389,425.0
Proceeds from exercise of
options.......................... 462 4.6 1,732.9 -- -- -- 1,737.5
Proceeds from issuance of common
shares........................... 1,074 10.7 13,987.9 -- -- -- 13,998.6
------ ------ --------- ---------- ----------- -------- -----------
Income tax benefits related to
Incentive Stock Options.......... -- -- 584.7 -- -- -- 584.7
Reduction in Receivable from
Employee Stock Ownership
Plan............................. -- -- -- -- -- 710.1 710.1
Purchase of limited partnership
units............................ -- -- -- (5,091.7) -- -- (5,091.7)
Purchase of treasury stock ...... (20) -- -- -- (263.0) -- (263.0)
Net income....................... -- -- -- 17,197.0 -- -- 17,197.0
------ ------ --------- ---------- ----------- -------- -----------
Balance at December 31, 1993 .... 74,896 748.9 347,163.2 89,641.0 (323.0) (18,931.9) 418,298.2
Proceeds from issuance of common
shares at $27.17 per share ...... 38 .4 532.6 -- -- -- 533.0
Proceeds from exercise of
options.......................... 2,079 20.8 15,341.8 -- -- -- 15,362.6
Income tax benefits related to
Incentive Stock Options.......... -- -- 6,469.6 -- -- -- 6,469.6
Common shares exchanged in the
exercise of options.............. (22) (.2) (321.2) -- -- -- (321.4)
Reduction in receivable from
Employee Stock Ownership Plan ... -- -- -- -- -- 1,455.0 1,455.0
Purchase of limited partnership
units............................ -- -- -- (1,838.0) -- -- (1,838.0)
Net income....................... -- -- -- 49,961.0 -- -- 49,961.0
------ ------ --------- ---------- ----------- -------- -----------
Balance at December 31, 1994 .... $76,991 $ 769.9 $ 369,186.0 $ 137,764.0 $ (323.0)$ (17,476.9) $ 489,920.0
====== ====== ========= ========== =========== ======== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1992 1993 1994
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Operating activities
Net income........................................................... $ 34,929 $ 17,197 $ 49,961
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization........................................ 29,834 46,224 86,678
Provision for doubtful accounts...................................... 13,254 16,181 23,739
Provision for losses on impairment of assets......................... -- -- 10,500
Provision for losses on abandonment of computer project ............. -- -- 4,500
NME Selected Hospitals Acquisition related expense................... -- 49,742 --
Income applicable to minority interests of limited partnerships ..... 4,245 5,444 6,402
Provision (benefit) for deferred income taxes........................ 4,596 (5,685) (1,541)
Provision for deferred revenue....................................... (279) (49) (164)
Gain on sale of property, plant and equipment........................ -- -- (627)
Gain on sale of partnership interests................................ -- (1,400) --
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable.................................................. (38,503) (28,965) (74,636)
Inventories, prepaid expenses and other current assets............... (13,660) (18,054) (21,757)
Accounts payable and accrued expenses................................ 9,236 (7,673) 62,766
--------- --------- ---------
Net cash provided by operating activities............................ 43,652 72,962 145,821
Investing activities
Purchases of property, plant and equipment........................... (98,343) (131,222) (160,785)
Proceeds from sale of property, plant and equipment.................. -- -- 68,317
Additions to intangible assets, net of effects of acquisitions ...... (25,206) (39,156) (59,307)
Assets obtained through acquisitions, net of liabilities assumed .... (75,487) (454,013) (89,266)
Changes in other assets.............................................. 192 (9,582) (23,020)
Proceeds received on sale of other marketable securities ............ 14,041 20,554 1,660
Investments in other marketable securities........................... (13,000) (6,000) (9,126)
--------- --------- ---------
Net cash used in investing activities................................ (197,803) (619,419) (271,527)
</TABLE>
F-6
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Statements of Cash Flows--(Continued)
<TABLE>
<CAPTION>
Year ended December 31
----------------------------
1992 1993 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Financing activities
Proceeds from borrowings......................... $181,076 $553,258 $1,045,263
Principal payments on long-term debt and leases . (65,221) (32,239) (937,872)
Proceeds from exercise of options................ 6,788 1,736 13,895
Proceeds from issuance of common stock........... 46,519 13,999 342
Purchase of treasury stock....................... -- (263) --
Loans to Employee Stock Ownership Plan........... (10,000) -- --
Reduction in Receivable from Employee Stock
Ownership Plan................................... 358 710 1,455
Proceeds from investment by minority interests .. 2,886 6,476 2,252
Purchase of limited partnership interests ....... (11,495) (3,784) (1,090)
Payment of cash distributions to limited
partners......................................... (5,873) (5,913) (10,835)
Net cash provided by financing activities ....... 145,038 533,980 113,410
Decrease in cash and cash equivalents ........... (9,113) (12,477) (12,296)
Cash and cash equivalents at beginning of year .. 102,621 93,508 81,031
-------- -------- ----------
Cash and cash equivalents at end of year ........ $ 93,508 $ 81,031 $ 68,735
======== ======== ==========
Supplemental disclosures of cash flow
information
Cash paid during the year for:
Interest......................................... $ 14,174 $ 16,241 $ 51,778
Income taxes..................................... 10,466 22,144 29,129
</TABLE>
Non-cash investing activities:
The Company assumed liabilities of $57,091,000, $88,566,000 and $24,659,000
during the years ended December 31, 1992, 1993 and 1994, respectively, in
conjunction with its acquisitions. During the years ended December 31, 1992,
1993 and 1994, the Company issued 1,182,000, 69,000 and 19,000 common shares,
respectively, with a market value of $12,853,000, $954,000 and $533,000,
respectively, as consideration for acquisitions.
Non-cash financing activities:
The Company received a tax benefit from the disqualifying disposition of
incentive stock options of $5,635,000, $585,000 and $6,470,000 for the years
ended December 31, 1992, 1993 and 1994, respectively.
During the years ended December 31, 1992 and 1994, respectively, 4,000 and
11,000 common shares were exchanged in the exercise of options. The shares
exchanged had market values on the date of exchange of $95,600 and $321,400,
respectively.
See accompanying notes.
F-7
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1994
1. Significant Accounting Policies
The significant accounting policies followed by HEALTHSOUTH Corporation
(formerly HEALTHSOUTH Rehabilitation Corporation) and its subsidiaries (the
Company) are presented as an integral part of the consolidated financial
statements.
Principles of Consolidation
The consolidated financial statements include the accounts of HEALTHSOUTH
Corporation (HEALTHSOUTH) and its wholly-owned subsidiaries, as well as its
limited partnerships (see Note 9). All significant intercompany accounts and
transactions have been eliminated in consolidation.
HEALTHSOUTH Corporation is engaged in the business of providing comprehensive
rehabilitative and clinical healthcare services on an inpatient and outpatient
basis.
Marketable Securities
Marketable equity securities and debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, if material, reported as a separate
component of stockholders' equity, net of tax. The adjusted cost of the specific
security sold method is used to compute gain or loss on the sale of securities.
Interest and dividends on securities classified as available-for-sale are
included in investment income. Marketable equity securities and debt securities
of the Company have maturities of less than one year.
Accounts Receivable and Third-Party Reimbursement Activities
Receivables from patients, insurance companies and third-party contractual
insured accounts (Medicare and Medicaid) are based on payment agreements which
generally result in the Company collecting an amount different from the
established rates. Final determination of the settlement is subject to review by
appropriate authorities. Adequate allowances are provided for doubtful accounts
and contractual adjustments. Uncollectible accounts are written off against the
allowance for doubtful accounts after adequate collection efforts are made. Net
accounts receivable include only those amounts estimated by management to be
collectible.
The concentration of net accounts receivable from third-party contractual
payors and others, as a percentage of total net accounts receivable, was as
follows:
December 31
--------------
1993 1994
---- ----
Medicare ......................... 33% 36%
Medicaid ......................... 4 6
Other............................. 63 58
---- ----
100% 100%
==== ====
Inventories
Inventories are stated at the lower of cost or market using the specific
identification method.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Upon sale or retirement
of property, plant or equipment, the cost and related accumulated depreciation
are eliminated from the respective account and the resulting gain or loss is
included in the results of operations.
F-8
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries -
Notes to Consolidated Financial Statements
December 31, 1994--(Continued)
Interest cost incurred during the construction of a facility is capitalized.
The Company incurred interest of $14,644,000, $21,159,000 and $67,680,000 of
which $2,021,000, $2,664,000 and $2,394,000 was capitalized during 1992, 1993
and 1994, respectively.
Depreciation and amortization is computed using the straight-line method over
the estimated useful lives of the assets or the term of the lease, as
appropriate. The estimated useful life of buildings is 30-40 years and the
general range of useful lives for leasehold improvements, furniture, fixtures
and equipment is 10-15 years.
Intangible Assets
Cost in excess of net asset value of purchased facilities is amortized over
20 to 40 years using the straight-line method. Organization and start-up costs
incurred prior to opening a new facility and partnership formation costs are
deferred and amortized on a straight-line basis over a period of 36 months.
Organization, partnership formation and start-up costs for a project that is
subsequently abandoned are charged to operations in that period. Debt issue
costs are amortized over the term of the debt. Noncompete agreements are
amortized using the straight-line method over the term of the agreements.
Minority Interests
The equity of minority investors in limited partnerships of the Company is
reported on the balance sheet as minority interests. Minority interests reported
in the income statement reflect the respective shares of income or loss of the
limited partnerships attributable to the minority investors, the effect of which
is removed from the results of operations of the Company.
Revenues
Revenues include net patient service revenues and other operating revenues.
Net patient service revenues are reported at the estimated net realizable
amounts from patients, third-party payors and others for services rendered,
including estimated retroactive adjustments under reimbursement agreements with
third-party payors.
Income Per Common and Common Equivalent Share
Income per common and common equivalent share is computed based on the
weighted average number of common shares and common equivalent shares
outstanding during the periods, as adjusted for the two-for-one stock split
declared subsequent to year end (see Note 17). Common equivalent shares include
dilutive employees' stock options, less the number of treasury shares assumed to
be purchased from the proceeds using the average market price of the Company's
common stock. Fully diluted earnings per share (based on 89,409,000 shares in
1994) assumes conversion of the 5% Convertible Subordinated Debentures due 2001
(see Note 7).
Impairment of Assets
Long-lived assets, such as property, plant and equipment and identifiable
intangible assets are reviewed for impairment losses when certain impairment
indicators exist. If an impairment exists, the related asset is adjusted to the
lower of book value or estimated future undiscounted cash flows from the use and
eventual disposal of the asset.
With respect to the carrying value of the excess of cost over net asset value
of purchased facilities and other intangible assets, the Company determines on a
quarterly basis whether an impairment event has occurred by considering factors
such as: the market value of the asset; a significant adverse change in legal
factors or in the business climate; adverse action by a regulator; a history of
operating or cash flow
F-9
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries -
Notes to Consolidated Financial Statements
December 31, 1994--(Continued)
losses or a projection of continuing losses associated with an operating entity.
The carrying value of net asset value of purchased facilities and other
intangible assets will be evaluated if the facts and circumstances suggest that
it has been impaired. If this evaluation indicates that the value of the asset
will not be recoverable, as determined based on the undiscounted cash flows of
the entity acquired over the remaining amortization period, the Company's
carrying value of the asset will be reduced by the estimated shortfall of cash
flows.
2. Mergers
Effective December 29, 1994, the Company merged with ReLife, Inc. ("ReLife")
and in connection therewith issued 11,025,290 shares of its Common Stock for all
of ReLife's outstanding common stock. ReLife provides a system of rehabilitation
services and operates 31 inpatient facilities with an aggregate of approximately
1,100 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 provides outpatient
rehabilitation services at twelve outpatient centers.
The merger was accounted for as a pooling of interests and, accordingly, the
Company's financial statements have been restated to include the results of
ReLife for all periods presented. Prior to the merger, ReLife reported on a
fiscal year ending on September 30. The accompanying financial statements are
based on a combination of the Company's results for its December 31 fiscal year
and ReLife's results for its September 30 fiscal year for all periods presented.
Costs and expenses of $2,949,000 incurred by HEALTHSOUTH in connection with the
merger have been recorded in operations in 1994 and reported as merger expenses
in the accompanying consolidated statements of income.
Effective June 13, 1995, the Company merged with Surgical Health Corporation
("SHC") and in connection therewith issued 8,531,480 shares of its Common Stock
for all of SHC's common and preferred stock. SHC operates a network of 41
freestanding surgery centers (including four mobile lithotripters) in eleven
states, with an aggregate of 156 operating and procedure rooms.
The merger of the Company and SHC was accounted for as a pooling of interests
and, accordingly, the Company's financial statements have been restated to
include the results of SHC for all periods presented. Costs and expenses of
approximately $29,194,000 incurred by the Company in connection with the SHC
merger have been recorded in operations during the quarter ended June 30, 1995.
SHC merged with Ballas Outpatient Management, Inc. and Midwest Anesthesia,
Inc. on February 11, 1993 in a transaction accounted for as a pooling of
interests. SHC recorded merger costs of $333,000 in connection with this
transaction in 1993. SHC merged with Heritage Surgical Corporation on January
18, 1994 in a transaction accounted for as a pooling of interests. SHC recorded
merger costs of $3,571,000 in connection with this transaction in 1994. SHC's
historical financial statements for the periods prior to the two mergers
described above have been restated to include the results of the acquired
companies for all periods presented.
F-10
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries -
Notes to Consolidated Financial Statements
December 31, 1994--(Continued)
Combined and separate results of the Company, ReLife and SHC are as follows
(in thousands):
<TABLE>
<CAPTION>
HEALTHSOUTH ReLife SHC Combined
----------- ------ --- --------
<S> <C> <C> <C> <C>
Year ended December 31, 1992
Revenues................... $ 406,968 $ 57,320 $ 36,758 $ 501,046
Net income................. 29,738 4,856 335 34,929
Year ended December 31, 1993
Revenues................... 482,304 93,042 80,983 656,329
Net income................. 6,687 6,905 3,605 17,197
Year ended December 31, 1994
Revenues................... 1,008,567 118,874 108,749 1,236,190
Net income (loss).......... 54,047 (822) (3,264) 49,961
</TABLE>
There were no transactions among the Company, ReLife and SHC prior to the
respective mergers. The effects of conforming the accounting policies of the
companies are not material.
3. Cash, Cash Equivalents and Other Marketable Securities
Cash, cash equivalents and other marketable securities consisted of the
following:
<TABLE>
<CAPTION>
December 31
----------------
1993 1994
---- -----
(In thousands)
<S> <C> <C>
Cash........................................................... $ 52,616 $ 59,635
Municipal put bonds............................................ 9,800 2,100
Tax advantaged auction preferred stocks........................ 4,000 7,000
Municipal put bond mutual funds................................ 2,000 --
Money market funds............................................. 8,410 --
United States Treasury bills................................... 4,205 --
--------- ---------
Total cash and cash equivalents................................ 81,031 68,735
United States Treasury notes................................... -- 1,004
Certificates of deposit........................................ 1,108 2,135
Municipal put bonds............................................ 1,860 3,975
Municipal put bond mutual funds................................ 5,000 8,514
Collateralized mortgage obligations............................ 1,000 1,000
--------- ---------
Total other marketable securities.............................. 8,968 16,628
--------- ---------
Total cash, cash equivalents and other marketable securities
(approximates market value).................................... $ 89,999 $ 85,363
========= =========
</TABLE>
For purposes of the consolidated balance sheets and statements of cash flows,
marketable securities purchased with an original maturity of ninety days or less
are considered cash equivalents.
F-11
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries -
Notes to Consolidated Financial Statements
December 31, 1994--(Continued)
4. Other Assets
Other assets consisted of the following:
<TABLE>
<CAPTION>
December 31
--------------
1993 1994
----- -----
(In thousands)
<S> <C> <C>
Notes and accounts receivable................... $ 3,280 $ 15,104
Investment in Caretenders Health Corp. ......... 7,382 7,370
Investments in other unconsolidated
subsidiaries.................................... 4,460 6,007
Real estate investments......................... 3,023 10,022
Escrow funds.................................... 394 --
Other........................................... 5,444 3,331
--------- -------
$ 23,983 $ 41,834
========= ========
</TABLE>
The Company has a 24% ownership interest in Caretenders Health Corp.
("Caretenders"). Accordingly, the Company's investment is being accounted for
using the equity method of accounting. The investment was initially valued at
$7,250,000. The Company's equity in earnings of Caretenders for the years ended
December 31, 1992, 1993 and 1994 was not material to the Company's results of
operations.
It was not practicable to estimate the fair value of the Company's various
investments in other unconsolidated subsidiaries (involved in operations similar
to those of the Company) because of the lack of a quoted market price and the
inability to estimate fair value without incurring excessive costs. The carrying
amount at December 31, 1994 represents the original cost of the investments,
which management believes is not impaired.
5. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31
--------------
1993 1994
----- -----
(In thousands)
<S> <C> <C>
Land.......................................... $ 65,857 $ 55,511
Buildings..................................... 473,239 491,372
Leasehold improvements........................ 27,224 43,410
Furniture, fixtures and equipment............. 254,047 335,959
Construction in progress...................... 37,385 45,709
--------- -------
857,752 971,961
Less accumulated depreciation and
amortization.................................. 66,655 114,589
--------- -------
$ 791,097 $857,372
========= ========
</TABLE>
F-12
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries -
Notes to Consolidated Financial Statements
December 31, 1994--(Continued)
6. Intangible Assets
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
December 31
------------------
1993 1994
------- --------
(In thousands)
<S> <C> <C>
Organization, partnership formation and start-up
costs............................................... $ 53,342 $ 93,499
Debt issue costs.................................... 1,653 18,848
Noncompete agreements............................... 24,862 35,253
Cost in excess of net asset value of purchased
facilities.......................................... 243,303 323,608
--------- --------
323,160 471,208
Less accumulated amortization....................... 33,822 60,520
--------- --------
$ 289,338 $410,688
========= ========
</TABLE>
7. Long-Term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31
--------------------
1993 1994
-------- ---------
(In thousands)
<S> <C> <C>
Notes and bonds payable: ......................................
Advances under a $390,000,000 credit agreement with a bank .... $ 370,000 $ --
Advances under a $550,000,000 credit agreement with a bank .... -- 510,000
9.5% Senior Subordinated Notes due 2001........................ -- 250,000
5% Convertible Subordinated Debentures due 2001................ --- 115,000
11.5% Senior Subordinated Notes due 2004....................... -- 75,000
Due to National Medical Enterprises, Inc....................... 361,164 --
Notes payable to banks and various other notes payable, at
interest rates from 5.5% to 9.0%............................... 99,988 34,680
Noncompete agreements payable with payments due at varying
intervals through December 2004................................ 12,050 17,610
Hospital revenue bonds payable................................. 24,862 24,763
Other.......................................................... 20,117 7,341
--------- ----------
888,181 1,034,394
Less amounts due within one year............................... 15,174 16,698
--------- ----------
$ 873,007 $1,017,696
========= ==========
</TABLE>
The fair value of total long-term debt approximates book value at December
31, 1994 and 1993. The fair values of the Company's long-term debt are estimated
using discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
During 1994, the Company entered into a Credit Agreement with NationsBank of
North Carolina, N.A. and other participating banks (the 1994 Credit Agreement)
which consists of a $550,000,000 revolving facility and term loan. The 1994
Credit Agreement replaced a previous $390,000,000 Credit Agreement with
NationsBank. Interest is paid quarterly based on LIBOR rates plus a
predetermined margin, a base rate, or competitively bid rates from the
participating banks. The Company is required to pay a
F-13
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries -
Notes to Consolidated Financial Statements
December 31, 1994--(Continued)
fee on the unused portion of the 1994 revolving credit facility ranging from
0.25% to 0.5%, depending on certain defined ratios. The principal amount is
payable in 15 equal quarterly installments beginning on June 30, 1997. The
Company has provided a negative pledge of all its assets and has granted a first
priority security interest in and lien on all shares of stock of its
subsidiaries and rights and interests in its partnerships. At December 31, 1994,
the effective interest rate associated with the 1994 Credit Agreement was
approximately 6.75%.
The amount shown as Due to National Medical Enterprises, Inc. at December
31, 1993 was subsequently repaid from proceeds of other notes and bonds.
On March 24, 1994, the Company issued $250,000,000 principal amount of 9.5%
Senior Subordinated Notes due 2001 (the Notes). Interest is payable on April 1
and October 1. The Notes are senior subordinated obligations of the Company and
as such will be subordinated to all existing and future senior indebtedness of
the Company, and also will be effectively subordinated to all existing and
future liabilities of the Company's subsidiaries and partnerships. The Notes
rank senior to all subordinated indebtedness of the Company, including the 5%
Convertible Subordinated Debentures due 2001 described below. The Notes mature
on April 1, 2001.
Also on March 24, 1994, the Company issued $100,000,000 principal amount of
5% Convertible Subordinated Debentures due 2001 (the Convertible Debentures). An
additional $15,000,000 principal amount of Convertible Debentures was issued in
April 1994 to cover underwriters' over allotments. Interest is payable on April
1 and October 1. The Convertible Debentures are convertible into Common Stock of
the Company at the option of the holder at a conversion price of $18.8125 per
share, subject to adjustment in the occurrence of certain events.
The net proceeds from the issuance of the Notes and Convertible Debentures
were used by the Company to pay down indebtedness outstanding under its other
existing credit facilities.
In June, 1994, Surgical Health Corporation (see Note 2) issued $75 million of
11.5% Senior Subordinated Notes due July 15, 2004 (the "SHC Notes"). The
proceeds of the SHC Notes were used by SHC to pay down indebtedness outstanding
under its other existing credit facilities. Subsequent to December 31, 1994, the
Company purchased the entire $75,000,000 outstanding principal amount of the SHC
Notes for 115% of their face value. Because the SHC Notes were purchased using
proceeds from the Company's other long-term credit facilities, the entire
balance of the SHC Notes is classified as non-current in the accompanying
balance sheet.
Principal maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year ending December 31 (In thousands)
- ------------------------ ---------------
<S> <C>
1995................... $ 16,698
1996................... 14,262
1997................... 113,303
1998................... 143,816
1999................... 149,626
After 1999............. 596,689
----------
$1,034,394
==========
</TABLE>
F-14
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries -
Notes to Consolidated Financial Statements
December 31, 1994--(Continued)
8. Stock Options
The Company has various stockholder-approved stock option plans which provide
for the grant of options to Directors, officers and other key employees to
purchase common stock at 100% of the fair market value as of the date of grant.
The Board of Directors administers the stock option plans. Options may be
granted as incentive stock options or as non-qualified stock options. Incentive
stock options vest 25% annually, commencing upon completion of one year of
employment subsequent to the date of grant. Non-qualified stock options
generally are not subject to any vesting provisions. The options expire at dates
ranging from five to ten years from the date of grant.
The following table summarizes activity in the stock option plans:
<TABLE>
<CAPTION>
1992 1993 1994
--------- ---------- ----------
<S> <C> <C> <C>
Options outstanding January 1:.................... 6,737,142 11,357,490 14,807,500
Granted........................................... 6,207,272 3,944,252 944,246
Exercised......................................... 1,535,922 374,602 1,976,874
Cancelled......................................... 51,002 119,640 744,174
Options outstanding at December 31................ 11,357,490 14,807,500 13,030,698
Option price range for options granted during the
period............................................ $1.50-$9.94 $6.75-$8.44 $ 13.94-$18.25
Option price range for options exercised during
the period........................................ $1.50-$10.71 $1.50-$9.59 $ 1.50-$8.44
Options exercisable at December 31................ 8,311,634 10,665,880 10,882,308
Options available for grant at December 31 ....... 1,092,100 649,100 1,100,408
</TABLE>
9. Limited Partnerships
HEALTHSOUTH and its subsidiaries operate a number of rehabilitation and
surgery centers as limited partnerships. HEALTHSOUTH serves as the general
partner. These limited partnerships are included in the consolidated financial
statements (as more fully described in Note 1 under "Minority Interests"). The
limited partners share in the profit or loss of the partnerships based on their
respective ownership percentage (ranging from 1% to 50% at December 31, 1994)
during their ownership period.
Beginning in 1992, due to federal and state regulatory requirements, the
Company began the process of buying back selected partnership interests of its
physician limited partners. The buyback prices for the interests were in general
based on a predetermined multiple of projected cash flows of the partnerships.
The excess of the buyback price over the book value of the limited partners'
capital amounts was charged to the Company's retained earnings.
F-15
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries -
Notes to Consolidated Financial Statements
December 31, 1994--(Continued)
10. Acquisitions
At various dates during 1994, the Company acquired 53 separate outpatient
rehabilitation operations located throughout the United States. The combined
purchase price of these acquired outpatient operations was approximately
$53,947,000. The Company also acquired a specialty medical center in Dallas,
Texas, a contract therapist provider and a diagnostic imaging company. The
combined purchase price of these three operations was approximately $25,861,000.
The form of consideration comprising the total purchase prices of $79,808,000
was approximately $68,359,000 in cash, $10,916,000 in notes payable and
approximately 19,000 shares of Common Stock valued at $533,000. In connection
with the acquisition of the contract therapist provider, there is additional
contingent consideration payable of up to $9,000,000 if the acquired company
achieves certain levels of future earnings. Such contingency payments will be
paid to the former owners each fiscal year in which the acquired company's
annual pretax income exceeds a certain threshold. The contingent payments will
cease upon the earlier of the payment of the maximum amount of contingent
payments allowed or ten years. The Company accrues, as an operating expense, for
this contingency in accordance with Statement of Financial Accounting Standards
No. 5, "Accounting for Contingencies." As of December 31, 1994, the Company has
accrued $99,000 in contingent consideration.
In connection with these transactions, the Company entered into non-compete
agreements with former owners totaling $10,814,000. In general these non-compete
agreements are payable in monthly or quarterly installments over periods ranging
from five to ten years.
The fair value of the total net assets relating to the 1994 acquisitions
described above was approximately $11,087,000. The total cost for 1994
acquisitions exceeded the fair value of the net assets acquired by approximately
$68,721,000. The Company evaluated each acquisition, independently, to determine
the appropriate amortization period for the cost in excess of net asset value of
purchased facilities. Each evaluation included an analysis of historic and
projected financial performance, evaluation of the estimated useful life of
buildings and fixed assets acquired, the indefinite life of Certificates of Need
and licenses acquired, the competition within local markets, lease terms where
applicable, and the legal term of partnerships where applicable. Based on these
evaluations, the Company determined that the cost in excess of net asset value
of purchased facilities relating to the 1994 acquisitions should be amortized
over periods ranging from twenty-five to forty years on a straight line basis.
No other identifiable intangible assets were recorded in the acquisitions
described above.
All of the 1994 acquisitions described above were accounted for as purchases
and, accordingly, the results of operations of the acquired businesses (not
material individually or in the aggregate) are included in the accompanying
consolidated financial statements from their respective dates of acquisition.
Effective December 31, 1993, the Company completed an acquisition from
National Medical Enterprises, Inc. (NME) of 28 inpatient rehabilitation
facilities and 45 outpatient rehabilitation centers, which constituted
substantially all of NME's rehabilitation services division (the NME Selected
Hospitals Acquisition). The purchase price was approximately $296,661,000 cash,
plus net working capital of $64,503,000, subject to certain adjustments, the
assumption of approximately $16,313,000 of current liabilities and the
assumption of approximately $17,111,000 in long-term debt.
The Company's pro forma 1993 revenues, net income and net income per common
and common equivalent share giving effect to the NME acquisiton were
$1,111,598,000, $25,076,000 and $.32, respectively.
As a result of the NME Selected Hospitals Acquisition, HEALTHSOUTH recognized
an expense of approximately $49,742,000 during the year ended December 31, 1993.
This expense represents management's estimate of the cost to consolidate
operations of thirteen existing HEALTHSOUTH facilities (three inpatient
facilities and ten outpatient facilities) into the operations of certain
facilities acquired
F-16
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries -
Notes to Consolidated Financial Statements
December 31, 1994--(Continued)
from NME. This plan was formulated by HEALTHSOUTH management in order to more
efficiently provide services in markets where multiple locations now exist as a
result of the acquisition. The plan of consolidation calls for the affected
operations to be merged into the operations of the acquired facilities over a
period of twelve to twenty-four months from the date of the NME Selected
Hospitals Acquisition. Due to the single-use nature of these properties, the
consolidation plan does not provide for the sale of these facilities.
The total expense of $49,742,000 consists of several components. First,
approximately $39,000,000 relates to the writedown of the assets of the affected
HEALTHSOUTH facilities to their estimated net realizable value. Of this
$39,000,000, approximately $31,500,000 relates to the assets of the three
inpatient facilities and approximately $7,500,000 relates to the assets of the
ten outpatient facilities. The $39,000,000 is broken down into the following
asset categories (net of any related accumulated depreciation or amortization):
Inpatient Outpatient
Facilities Facilities Total
----------- ----------- -------
(In thousands)
Land............. $ 2,898 $ -- $ 2,898
Buildings........ 16,168 -- 16,168
Equipment........ 4,326 2,920 7,246
Intangible
assets........... 6,111 3,455 9,566
Other assets..... 1,997 1,125 3,122
----------- ----------- -------
$ 31,500 $ 7,500 $39,000
=========== =========== =======
During the year ended December 31, 1994, management discontinued operations
in two of the inpatient facilities and three of the outpatient facilities
affected by the plan and merged them into the operations of the acquired
facilities. Accordingly, assets with a net book value of approximately
$17,911,000 were written off in 1994 against the reserves established at
December 31, 1993. The two inpatient facilities and three outpatient facilities
affected by the plan in 1994 had revenues of approximately $11,441,000,
$8,640,000 and $9,125,000 for the years ended December 31, 1992, 1993 and 1994,
respectively. These same facilities had net operating income (loss) before
income taxes of $(489,000), $(844,000) and $67,000 for the years ended December
31, 1992, 1993 and 1994, respectively. Operations at the remaining inpatient
facility and the remaining seven outpatient facilities identified in the plan
will be discontinued during 1995.
Second, $7,700,000 relates to the write-off of certain capitalized
development projects. These projects relate to planned facilities that, if
completed, would be in direct competition with certain of the acquired NME
facilities. These development projects were written off in 1994 against the
reserves established at December 31, 1993.
Finally, approximately $3,000,000 was accrued for costs of employee
separations, relocations and other direct costs related to the planned
consolidation of the affected operations. During the second quarter of 1994,
management revised its estimate of the cost of the employee separations and
relocations. The revised estimate calls for approximately 150 employees to be
affected by separations and approximately 400 to be affected by relocations.
Separation benefits under the revised plan range from one month's to one year's
compensation and total approximately $2,188,000. Relocation benefits are
estimated to be $2,000 per employee and total $800,000. An additional $350,000
has been provided for additional direct administrative costs associated with the
implementation of the plan, including outplacement services, travel and legal
fees. Accordingly, the total revised estimated cost of employee separations and
relocations is $3,338,000. The difference between the initial estimate and the
revised estimate was treated as a change in accounting estimate and charged to
operations in the second quarter of 1994.
F-17
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries -
Notes to Consolidated Financial Statements
December 31, 1994--(Continued)
During the year ended 1994, a total of 208 employees were affected by
terminations and relocations at a cost of approximately $758,000. This cost is
the only cash expense included in the acquisition-related expense.
It is management's opinion that remaining accrual at December 31, 1994 of
$23,669,000, is adequate to complete the plan of consolidation of the affected
operations.
Also at various dates during 1993, the Company acquired 27 separate
outpatient rehabilitation operations located throughout the United States. The
total consideration paid for these acquired outpatient rehabilitation operations
was approximately $23,943,000, consisting of $21,634,000 in cash and $2,309,000
in notes payable. The fair value of the net assets acquired was approximately
$5,196,000. The total cost of the 1993 outpatient rehabilitation acquisitions
exceeded the fair value of the net assets acquired by approximately $18,747,000.
The Company also acquired nine outpatient surgery center operations during 1993.
The total consideration paid for these acquired outpatient surgery center
operations was approximately $33,494,000, consisting of $26,901,000 in cash,
$5,639,000 in notes payable and common stock value at $954,000. The total cost
of the 1993 outpatient surgery acquisitions exceeded the fair value of the net
assets acquired by approximately $3,832,000. Based on the evaluation of each
acquisition, utilizing the criteria described above, the Company determined that
the cost in excess of net asset value of purchased facilities relating to the
1993 acquisitions should be amortized over a forty-year period on a straight
line basis. No other identifiable intangible assets were recorded in the
acquisitions described above.
Also during 1993, the Company acquired 100% of the stock of Rebound, Inc.
(Rebound) for net consideration of approximately $14,000,000 in cash. Rebound
operates 293 beds in thirteen facilities. The purchase price exceeded the fair
value of the net assets acquired by approximately $11,200,000, which was
allocated to excess of cost over net asset value of purchased facilities.
Effective February 1, 1992, the Company acquired substantially all of the
assets and/or stock of Dr. John T. Macdonald Health Systems, Inc. and
Subsidiaries (collectively, JTM Health Systems). JTM Health Systems includes two
general acute-care hospitals and other healthcare-related entities located in
the Miami, Florida metropolitan area. The total purchase price paid was
approximately $16,893,000 in cash.
Also in 1992 the Company acquired 100% of the stock of Renaissance America,
Inc. (Renaissance) for net consideration of approximately $5,996,000 consisting
of $649,000 cash and $5,347,000 in the Company's Common Stock (214,885 shares).
Also at various dates during 1992, the Company acquired 28 separate
outpatient rehabilitation operations located throughout the United States. The
combined purchase price of these acquired outpatient rehabilitation operations
was approximately $25,964,000. The Company also acquired 14 outpatient surgery
centers during 1992. The combined purchase price of these acquired surgery
center operations was approximately $50,014,000.
The fair value of the net assets acquired in 1992 was approximately
$38,330,000. The total cost of the 1992 acquisitions exceeded the fair value of
the assets acquired by approximately $60,537,000, which is being amortized over
a forty-year period on a straight line basis.
All of the 1993 and 1992 acquisitions described above were accounted for as
purchases and, accordingly, the results of operations of the acquired businesses
are included in the accompanying consolidated financial statements from their
respective dates of acquisition.
11. Income Taxes
HEALTHSOUTH and its subsidiaries file a consolidated federal income tax
return. The limited partnerships file separate income tax returns. HEALTHSOUTH's
allocable portion of each partnership's income or loss is included in the
taxable income of the Company. The remaining income or loss of each partnership
is allocated to the limited partners.
F-18
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries -
Notes to Consolidated Financial Statements
December 31, 1994--(Continued)
Effective January 1, 1993, the Company changed its method of accounting for
income taxes to the liability method required by Financial Accounting Standards
Board (FASB) Statement No. 109, "Accounting for Income Taxes". The cumulative
effect of adopting Statement No. 109 was not material. Previously, the Company
had used the liability method as prescribed by FASB Statement No. 96.
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of December 31, 1993 are as
follows:
<TABLE>
<CAPTION>
Current Noncurrent Total
------- ---------- -------
(In thousands)
<S> <C> <C> <C>
Deferred tax liabilities:
Depreciation and amortization.................... $ -- $ 32,787 $32,787
------- ---------- -------
Other............................................ 340 255 595
------- ---------- -------
Total deferred tax liabilities................... 340 33,042 33,382
Deferred tax assets: ............................
NME Selected Hospitals Acquisition related
expense.......................................... -- 19,399 19,399
Other............................................ 3,549 2,790 6,339
------- ---------- -------
Total deferred tax assets........................ 3,549 22,189 25,738
------- ---------- -------
Net deferred tax (assets) liabilities............ $ (3,209) $ 10,853 $ 7,644
======= ========== =======
</TABLE>
Significant components of the Company's deferred tax liabilities and assets
as of December 31, 1994 are as follows:
<TABLE>
<CAPTION>
Current Noncurrent Total
------- ---------- -------
(In thousands)
<S> <C> <C> <C>
Deferred tax liabilities:
Depreciation and amortization.................... $ -- $ 26,343 $26,343
Other............................................ -- 385 385
------- ---------- -------
Total deferred tax liabilities................... -- 26,728 26,728
Deferred tax assets:
NME Selected Hospitals Acquisition related
expense.......................................... -- 15,241 15,241
Other............................................ 2,643 2,892 5,535
------- ---------- -------
Total deferred tax assets........................ 2,643 18,133 20,776
------- ---------- -------
Net deferred tax (assets) liabilities............ $ (2,643) $ 8,595 $ 5,952
======= ========== =======
</TABLE>
The current portion of the Company's deferred tax assets is included with
prepaid expenses and other current assets on the accompanying balance sheet.
F-19
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries -
Notes to Consolidated Financial Statements
December 31, 1994--(Continued)
The provision for income taxes was as follows:
<TABLE>
<CAPTION>
Year ended December 31
1992 1993 1994
------ ------- -------
(In thousands)
<S> <C> <C> <C>
Currently payable:
Federal................... $12,556 $15,616 $31,363
State..................... 1,772 2,101 4,634
------ ------- -------
14,328 17,717 35,997
Deferred expense (benefit):
Federal................... 4,041 (5,213) (1,414)
State..................... 495 (574) (278)
------ ------- -------
4,536 (5,787) (1,692)
------ ------- -------
Total provision........... $18,864 $11,930 $34,305
====== ======= =======
</TABLE>
The components of the provision for deferred income taxes for the year ended
December 31, 1992 are as follows:
(In thousands)
------------
Depreciation and
amortization................. $ 5,599
Bad debts.................... (1,119)
Other........................ 56
----------
$ 4,536
==========
The difference between the provision for income taxes and the amount computed
by applying the statutory federal income tax rate to income before taxes was as
follows:
Year ended December 31
---------------------------
1992 1993 1994
------ ------- -------
(In thousands)
Federal taxes at statutory rates............. $19,733 $12,100 $31,734
Add (deduct): ...............................
State income taxes, net of federal tax
benefit...................................... 1,665 792 2,734
Tax-exempt interest income................... (1,076) (454) (276)
------ ------- -------
Other........................................ (1,458) (508) 113
------ ------- -------
$18,864 $11,930 $34,305
====== ======= =======
12. Commitments and Contingencies
At December 31, 1994, anticipated capital expenditures for the next twelve
months approximate $130,000,000. This amount includes expenditures for the
construction and equipping of additions to existing facilities, the construction
of two inpatient rehabilitation facilities for which regulatory approval is
being obtained and the acquisition or development of comprehensive outpatient
rehabilitation facilities.
Beginning December 1, 1993, the Company became self-insured for professional
liability and comprehensive general liability. The Company purchased coverage
for all claims incurred prior to December 1, 1993. In addition, the Company
purchased underlying insurance which would cover all claims once established
limits have been exceeded. It is the opinion of management that at December 31,
1994 the Company has adequate reserves to cover losses on asserted and
unasserted claims.
F-20
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries -
Notes to Consolidated Financial Statements
December 31, 1994--(Continued)
Operating leases
Operating leases generally consist of short-term lease agreements for
buildings where facilities are located. These leases generally have 5-year
terms, with one or more renewal options, with terms to be negotiated at the time
of renewal. Total rental expense for all operating leases was $17,777,000,
$29,373,000 and $66,056,000 for the years ended December 31, 1992, 1993 and
1994, respectively.
The following is a schedule of future minimum lease payments under all
operating leases having initial or remaining non-cancelable lease terms in
excess of one year:
Year ending December 31 (In thousands)
- ------------------------ ---------------
1995........................... $ 57,659
1996........................... 53,836
1997........................... 49,752
1998........................... 45,663
1999........................... 40,438
After 1999..................... 129,327
----------
Total minimum payments
required....................... $ 376,675
==========
13. Employee Benefit Plans
The Company has a 401(k) savings plan which matches 15% of the first 4% of
earnings that an employee contributes. All contributions are in the form of
cash. All employees who have completed one year of service with a minimum of
1,000 hours worked are eligible to participate in the plan. Company
contributions are gradually vested over a seven-year service period.
Contributions to the plan by the Company were approximately $521,000, $490,000
and $1,094,000 in 1992, 1993 and 1994, respectively.
In 1991, the Company established an Employee Stock Ownership Plan (ESOP) for
the purpose of providing substantially all employees of the Company the
opportunity to save for their retirement and acquire a proprietary interest in
the Company. The ESOP currently owns approximately 830,000 shares of the
Company's Common Stock, which were purchased with funds borrowed from the
Company, $10,000,000 in 1991 (the 1991 ESOP Loan) and $10,000,000 in 1992 (the
1992 ESOP Loan). At December 31, 1994, the combined ESOP Loans had a balance of
$17,477,000. The 1991 ESOP Loan, which bears an interest rate of 10%, is payable
in annual installments covering interest and principal over a ten-year period
beginning in 1992. The 1992 ESOP Loan, which bears an interest rate of 8.5%, is
payable in annual installments covering interest and principal over a ten-year
period beginning in 1993. Company contributions to the ESOP began in 1992 and
shall at least equal the amount required to make all ESOP Loan amortization
payments for each plan year. The Company recognizes compensation expense based
on the shares allocated method. The total compensation expense related to the
ESOP recognized by the Company was $1,701,000, $3,198,000 and $3,673,000 in
1992, 1993 and 1994, respectively. Interest incurred on the ESOP Loans was
approximately $964,000, $1,743,000 and $1,608,000 in 1992, 1993 and 1994,
respectively. Approximately 213,000 shares owned by the ESOP have been allocated
to participants at December 31, 1994.
During 1993 the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 93-6, "Employers Accounting for Employee Stock
Ownership Plans." Among other provisions, SOP 93-6 requires that compensation
expense relating to employee stock ownership plans be measured based on the fair
market value of the shares when allocated to the employees. The provisions of
SOP 93-6 apply only to leveraged ESOPs formed after December 31, 1992, or shares
newly acquired
F-21
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries -
Notes to Consolidated Financial Statements
December 31, 1994--(Continued)
by an existing leveraged ESOP after December 31, 1992. Because all shares owned
by the Company's ESOP were acquired prior to December 31, 1992, the Company's
accounting policies for the shares currently owned by the ESOP are not affected
by SOP 93-6.
14. Terminated Merger
On January 2, 1992, the Company and Continental Medical Systems, Inc. ("CMS")
jointly announced an agreement to combine their business operations as provided
in an Agreement and Plan of Reorganization (the Plan). On May 6, 1992, the
Company and CMS jointly announced the termination of the Plan. Accordingly, all
costs and expenses incurred in connection with the Plan were charged to
operations in 1992 and reported as terminated merger expense in the accompanying
statements of income.
15. Sale of Assets and Partnership Interest
During the second quarter of 1994, the Company consummated the sale of
selected properties to Capstone Capital Corporation ("Capstone"), a real estate
investment trust. These properties include six ancillary hospital facilities,
three outpatient rehabilitation facilities, and one research facility. The net
proceeds to the Company as a result of this transaction were approximately
$49,025,000. The net book value of the properties was approximately $41,335,000.
Because the Company is leasing back substantially all of the properties from
Capstone, payments which aggregate $5.7 million annually, the resulting gain on
sale of approximately $7,690,000 has been recorded on the accompanying
consolidated balance sheet as deferred revenue and will be amortized into income
over the initial lease terms of the properties. The Company is accounting for
each of the new leases as an operating lease with an initial lease term of 15
years. The Company and certain Company officers own approximately 3.9% of the
outstanding common stock of Capstone.
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
$1,400,000 from this sale.
16. Impairment of Long-Term Assets
During 1994, certain events have occurred impairing the value of specific
long-term assets of ReLife (see Note 2). A hospital in Missouri with a distinct
part unit which ReLife was managing was purchased in 1994 by an acute care
provider which terminated the contract with ReLife. Remaining goodwill of
$1,700,000 and costs allocated to the management contract of $1,300,000 were
written off as there is no value remaining for the terminated contract.
A ReLife facility in central Florida incurred tornado damage and has not been
operating since September 1993. During 1994, management of ReLife has determined
that it is probable that this facility will not reopen. Start-up costs of
$1,600,000 were written off. This facility is leased under an operating lease as
described in Note 12 through the year 2001. An impairment accrual has been
established based on the projected undiscounted net cash flows related to this
non-operating facility for the remainder of the lease term. The accrual totals
$5,900,000 and consists of $4,700,000 in lease payments and $1,200,000 in fixed
costs and operating expenses, including property taxes, maintenance, security
and other related costs. The current portion of the accrual approximates
$600,000 and is included with accrued interest payable and other liabilities in
the accompanying December 31, 1994 balance sheet. The remaining long-term
portion of the accrual is included with other long-term liabilities in the
accompanying December 31, 1994 balance sheet.
F-22
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries -
Notes to Consolidated Financial Statements
December 31, 1994--(Continued)
During 1994, ReLife entered into a contract for a new information system.
During the period ended September 30, 1994, ReLife's expenditures related to
this contract totalled approximately $4,363,000. The system was not operational
during this period, thus those expenditures are considered non-recurring. The
Company will retain certain equipment with an approximate cost of $750,000,
which was included in the expenditures noted above. The remainder of the
expenditures, $3,613,000, is included in loss on abandonment of the computer
project. The Company has also established a reserve of approximately $887,000
for settlement of the contract. The contract contains a provision for
cancellation by ReLife, without cause, upon at least 180 days' prior written
notice. The application of this termination provision could result in a
settlement of up to $6,500,000. The Company is currently in negotiations to
settle the contract and believes that it is probable that the settlement will be
for an amount approximately equal to the reserve established.
The above amounts are shown as operating expenses in the consolidated
statement of income.
17. Subsequent Events
Effective June 13, 1995, the Company merged with Surgical Health Corporation
in a transaction accounted for as a pooling of interests (see Note 2).
Effective April 1, 1995, the Company completed the acquisition of the
rehabilitation hospitals division of NovaCare, Inc. ("NovaCare"), consisting of
11 rehabilitation hospitals, 12 other facilities and certificates of need to
build two other facilities. The total purchase price for the NovaCare facilities
was approximately $235,000,000.
Effective April 17, 1995, the Company declared a two-for-one stock split paid
in the form of a 100% stock dividend. Accordingly, all share and per share
information have been restated to give effect to this transaction for all
periods presented.
Subsequent to December 31, 1994, the Company received a fully underwritten
commitment to amend and restate the 1994 Credit Agreement (see Note 7) which
will increase the size of the facility to $1 billion.
F-23
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Balance Sheet (Unaudited)
June 30, 1995
----------
(In thousands)
Assets
Current Assets:
Cash and cash equivalents ................................... $ 62,336
Other marketable securities ................................. 13,579
Accounts receivable ......................................... 281,283
Inventories, prepaid expenses, and other current assets .... 110,538
----------
Total current assets ........................................ 467,736
Other assets................................................. 60,953
Property, plant and equipment--net .......................... 1,042,444
Intangible assets--net ...................................... 491,916
----------
Total assets ................................................ $2,063,049
==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ............................................ $ 93,094
Salaries and wages payable .................................. 44,496
Accrued interest payable and other liabilities .............. 28,250
Current portion of long-term debt ........................... 16,750
-----------
Total current liabilities ................................... 182,590
Long-term debt .............................................. 1,340,549
Deferred income taxes ....................................... 6,518
Other long-term liabilities ................................. 4,071
Deferred revenue............................................. 7,266
Minority interests--limited partnerships..................... 3,923
Stockholders' equity: .......................................
Preferred Stock, $.10 par value--1,500,000 shares
authorized; issued and outstanding--none .................... --
Common Stock, $.01 par value--150,000,000 shares authorized;
80,128,000 shares issued .................................... 801
Additional paid-in capital .................................. 381,743
Retained earnings ........................................... 151,797
Treasury stock .............................................. (323)
Receivable from Employee Stock Ownership Plan ............... (15,886)
----------
Total stockholders' equity .................................. 518,132
----------
Total liabilities and stockholders' equity .................. $2,063,049
==========
See accompanying notes.
F-24
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------
1994 1995
---- ----
(In thousands, except
for per share data)
<S> <C> <C>
Revenues .............................................. $584,183 $716,949
Operating expenses: ...................................
Operating units ....................................... 437,645 513,038
Corporate general and administrative .................. 19,191 19,645
Provision for doubtful accounts ....................... 10,287 14,119
Depreciation and amortization ......................... 36,962 55,663
Interest expense ...................................... 26,980 44,292
Interest income ....................................... (1,598) (2,770)
Merger expenses........................................ 3,397 29,194
Loss on impairment of assets .......................... 0 11,192
------- -------
532,862 684,373
Income before income taxes and minority interests .... 51,321 32,576
Provision for income taxes ............................ 19,104 10,895
------- -------
32,217 21,681
Minority interests .................................... 2,991 3,904
------- -------
Net income ............................................ $ 29,226 $ 17,777
======= =======
Weighted average common and common equivalent shares
outstanding ........................................... 83,974 87,246
======= =======
Net income per common and common equivalent share .... $ 0.35 $ 0.20
======= =======
</TABLE>
See accompanying notes.
F-25
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1994 1995
---- ----
(In thousands)
<S> <C> <C>
Operating Activities
Net income ..................................................................... $ 29,226 $ 17,777
Adjustments to reconcile net income to net cash provided by operating
activities: ....................................................................
Depreciation and amortization .................................................. 36,962 55,663
Provision for doubtful accounts ................................................ 10,287 14,119
Income applicable to minority interests of limited partnerships ............... 2,991 3,904
Loss on impairment of assets ................................................... -- 11,192
Merger costs ................................................................... 3,397 29,194
Provision for deferred income taxes ............................................ 13,588 9,354
Provision for deferred revenue ................................................. -- (260)
Changes in operating assets and liabilities, net of effects of acquisitions: ..
Accounts receivable ............................................................ (40,149) (6,935)
Inventories, prepaid expenses and other current assets ......................... (6,393) (3,316)
Accounts payable and accrued expenses .......................................... 10,652 (42,916)
--------- --------
Net cash provided by operating activities ...................................... 60,561 87,776
Investing Activities
Purchases of property, plant and equipment ..................................... (68,320) (70,235)
Proceeds from sale of property, plant and equipment ............................ 50,867 14,786
Additions to intangible assets, net of effects of acquisitions ................. (19,778) (26,464)
Assets obtained through acquisitions, net of liabilities assumed .............. (34,645) (284,090)
Changes in other assets ........................................................ (15,561) (6,895)
Proceeds received on sale of other marketable securities ....................... 2,085 11,596
Investments in other marketable securities ..................................... (3,004) (10,926)
--------- --------
Net cash used in investing activities........................................... (88,356) (372,228)
Financing Activities
Proceeds from borrowings ....................................................... 488,536 650,744
Principal payments on long-term debt and leases ................................ (420,206) (373,351)
Proceeds from exercise of options............................................... 8,797 5,448
Reduction in receivable from Employee Stock Ownership Plan ..................... 1,455 1,590
Proceeds from investment by minority interests ................................. 1,319 --
Purchase of limited partnership interests ...................................... (266) --
Payment of cash distributions to limited partners .............................. (4,676) (10,873)
--------- --------
Net cash provided from financing activities .................................... 74,959 273,558
--------- --------
(Decrease) increase in cash and cash equivalents ............................... 47,164 (10,894)
Cash and cash equivalents at beginning of period ............................... 81,031 73,230
--------- --------
Cash and cash equivalents at end of period ..................................... $ 128,195 $ 62,336
========= ========
Supplemental Disclosures of Cash Flow Information ..............................
Cash paid during the year for: .................................................
Interest ....................................................................... $ 19,165 $ 42,298
Income taxes ................................................................... 13,127 32,176
</TABLE>
Non-cash financing activities:
During 1995, the Company declared a two-for-one stock split on its Common
Stock, which was effected in the form of a 100% stock dividend.
See accompanying notes.
F-26
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Six Months Ended June 30, 1995 and 1994
(Unaudited)
NOTE 1 -- The accompanying consolidated financial statements include the
accounts of HEALTHSOUTH Corporation (the "Company") and its
subsidiaries. This information should be read in conjunction with the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994, as amended. It is management's opinion that the
accompanying consolidated financial statements reflect all adjustments
(which are normal recurring adjustments, except as otherwise
indicated) necessary for a fair presentation of the results for the
interim period and the comparable period presented.
NOTE 2 -- During 1994, the Company entered into a $550,000,000 revolving
line of credit with NationsBank of North Carolina, N.A.
("NationsBank") and other participating banks (the "1994 Credit
Agreement"). On April 11, 1995, the Company amended and restated the
1994 Credit Agreement with NationsBank to increase the size of the
credit facility to $1,000,000,000. At June 30, 1995, the Company had
drawn $895,000,000 under the restated 1994 Credit Agreement.
On March 24, 1994, the Company issued $250,000,000 principal amount of
9.5% Senior Subordinated Notes due 2001 (the "Notes"). Interest is
payable on April 1 and October 1. The Notes are senior subordinated
obligations of the Company and, as such, are subordinated to all
existing and future senior indebtedness of the Company. Also on March
24, 1994, the Company issued $100,000,000 principal amount of 5%
Convertible Subordinated Debentures due 2001 (the "Convertible
Debentures"). An additional $15,000,000 principal amount of
Convertible Debentures was issued in April 1994 to cover underwriters'
overallotments. Interest is payable on April 1 and October 1. The
Convertible Debentures are convertible into Common Stock of the
Company at the option of the holder at a conversion price of $18.81
per share, subject to adjustment in certain events. The net proceeds
from the issuance of the Notes and Convertible Debentures were used by
the Company to pay down indebtedness outstanding under its other
existing credit facilities.
At June 30, 1995, long-term debt consisted of the following:
<TABLE>
<CAPTION>
June 30, 1995
---------------
(In thousands)
<S> <C>
Advances under the $1,000,000,000 1994 Credit
Agreement.......................................... $ 895,000
9.5% Senior Subordinated Notes due 2001............ 250,000
5% Convertible Subordinated Debentures due 2001 ... 115,000
Other long-term debt............................... 97,299
-----------
1,357,299
Less amounts due within one year................... 16,750
-----------
$1,340,549
===========
</TABLE>
NOTE 3 -- Effective December 29, 1994, the Company merged with ReLife, Inc.
("ReLife") in a transaction that was accounted for as a pooling of
interests. Accordingly, the Company's historical financial statements
for all periods prior to the effective date of the merger have been
restated to include the results of ReLife. Prior to the merger, ReLife
reported on a fiscal year ending on September 30. The restated
financial statements for all periods prior to and including December
31, 1994 are based on a combination of the Company's results for its
December 31 fiscal year and ReLife's results for its September 30
fiscal year. Beginning
F-27
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries -
Notes to Consolidated Financial Statements
Six Months Ended June 30, 1995 and 1994--(Continued)
(Unaudited)
January 1, 1995, all facilities acquired in the ReLife merger adopted
a December 31 fiscal year end; accordingly, all consolidated financial
statements for periods after Decem ber 31, 1994 are based on a
consolidation of all of the Company's subsidiaries on a December 31
year end. ReLife's historical results of operations for the three
months ended December 31, 1994 are not included in the Company's
consolidated statements of income or cash flows. An adjustment has
been made to stockholders' equity as of January 1, 1995 to adjust for
the effect of excluding ReLife's results of operations for the three
months ended December 31, 1994. The following is a summary of ReLife's
results of operations and cash flows for the three months ended
December 31, 1994 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Statement of Income Data:
Revenues......................................... $ 38,174
Operating expense: ..............................
Operating Units.................................. 31,797
Corporate general and administrative............. 2,395
Provision for doubtful accounts.................. 541
Depreciation and amortization.................... 1,385
Interest expense................................. 858
Interest income.................................. (91)
HEALTHSOUTH merger expense....................... 3,050
Loss on disposal of fixed assets................. 1,000
Loss on abandonment of computer project ......... 973
--------
41,908
--------
Income before income taxes and minority
interests........................................ (3,734)
Provision for income taxes....................... --
--------
Net income....................................... $ (3,734)
========
Statement of Cash Flow Data:
Net cash provided by operating activities ....... $ 38,077
Net cash used by investing activities............ (9,632)
Net cash used in financing activities............ (23,950)
--------
Net increase in cash ............................ $ 4,495
========
</TABLE>
NOTE 4 -- Effective June 13, 1995, the Company merged with Surgical Health
Corporation ("SHC") and in connection therewith issued 8,531,480
shares of its Common Stock for all of SHC's outstanding common and
preferred stock. SHC operates a network of 41 freestanding surgery
centers (including four mobile lithotripters) in eleven states, with
an aggregate of 156 operating and procedure rooms.
The merger was accounted for as a pooling of interests and,
accordingly, the Company's financial statements have been restated to
include the results of SHC for all periods presented. Costs and
expenses of $29,194,000 incurred by the Company in connection with the
merger have been recorded in operations during the quarter ending June
30, 1995 and reported as Merger Costs in the accompanying consolidated
statements of income (see Note 8).
There were no material transactions between the Company and SHC prior
to the merger. The effects of conforming the accounting policies of
the two companies are not material.
F-28
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries -
Notes to Consolidated Financial Statements
Six Months Ended June 30, 1995 and 1994--(Continued)
(Unaudited)
NOTE 5 -- Effective April 1, 1995, the Company completed the acquisition of
the rehabilitation hospitals division of NovaCare, Inc. ("NovaCare"),
consisting of 11 rehabilitation hospitals, 12 other facilities, and
certificates of need to build two other facilities. The total purchase
price for the NovaCare facilities was approximately $235,000,000. The
cost in excess of net asset value was approximately $173,000,000. Of
this excess, approximately $129,000,000 has been allocated to
leasehold value and the remaining $44,000,000 to goodwill.
During the first six months of 1995, the Company acquired or opened 28
outpatient rehabilitation facilities and one outpatient surgery
center. The total purchase price of the acquired facilities was
approximately $54,385,000. The Company also entered into non-compete
agreements totaling approximately $5,020,000 in connection with these
transactions. The cost in excess of the acquired facilities' net asset
value was approximately $39,463,000. The results of operations (not
material individually or in the aggregate) of these acquisitions are
included in the consolidated financial statements from their
respective acquisition dates.
NOTE 6 - During the first six months of 1995, the Company granted incentive
and nonqualified stock options to certain Directors, employees and
others for 2,947,500 shares of Common Stock at an exercise price of
$16.75 per share.
NOTE 7 -- Effective April 17, 1995, the Company declared a two-for-one stock
split paid in the form of a 100% stock dividend. Accordingly, all
share and per share information have been restated to give effect to
this transaction for all periods presented.
NOTE 8 -- As a result of the NovaCare acquisition and SHC merger, the
Company recognized $29,194,000 in merger costs during 1995. Fees
related to legal, accounting and financial advisory services accounted
for $3,400,000 of the expense. Costs and expenses related to the SHC
Bond Tender Offer (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources") totaled $14,606,000. Accruals for employee separations
were approximately $1,188,000. In addition, the Company has provided
approximately $10,000,000 for the write-down of certain assets to net
realizable value as the result of a planned facility consolidation.
The consolidation is applicable in a market where the Company's
existing services overlap with those of an acquired facility. Also
during the quarter ended June 30, 1995, the Company recognized an
$11,192,000 loss on impairment of assets. The impaired assets relate
to six SHC facilities in which the projected undiscounted cash flows
did not support the book value of the long-lived assets of such
facilities.
F-29
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors
Centers, Inc.
We have audited the accompanying consolidated balance sheets of Sutter
Surgery Centers, Inc. and consolidated partnerships as of December 31, 1994 and
1993, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years then ended and the period from inception
(July 8, 1992) through December 31, 1992. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sutter Surgery
Centers, Inc. and consolidated partnerships at December 31, 1994 and 1993, and
the consolidated results of their operations and their cash flows for the years
then ended and the period from inception (July 8, 1992) through December 31,
1992 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Sacramento, California
March 31, 1995
F-30
<PAGE>
Report of Ernst & Young LLP, Independent Auditors (Continued)
Sutter Surgery Centers, Inc.
and Consolidated Partnerships
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
1994 1993
---------- ----------
<S> <C> <C>
Assets
Current assets:
Cash and equivalents ........................................................ $ 4,703,373 $ 4,085,279
Patient accounts receivable, less allowance for doubtful accounts of
$575,319 ($458,669 in 1993).................................................. 4,323,698 4,466,058
Receivables from related parties............................................. 72,324 53,881
Supplies inventory........................................................... 1,247,252 1,169,687
Prepaid expenses and other current assets.................................... 633,535 829,543
Deferred tax assets.......................................................... 429,800 237,800
---------- ----------
Total current assets......................................................... 11,409,982 10,842,248
Property and equipment, including assets under capital leases: .............
Buildings.................................................................... 6,061,208 6,049,184
Medical and office equipment................................................. 11,459,738 10,307,070
Leasehold improvements....................................................... 4,017,467 3,920,960
---------- ----------
21,538,413 20,277,214
---------- ----------
Less accumulated depreciation and amortization............................... (6,115,458) (4,278,361)
15,422,955 15,998,853
Intangible assets:
Goodwill, less accumulated amortization of $1,582,777 ($921,605 in 1993) .... 15,174,207 15,835,379
Other, less accumulated amortization of $524,676 ($439,960 in 1993) ......... 596,218 677,236
---------- ----------
15,770,425 16,512,615
---------- ----------
$42,603,362 $43,353,716
========== ==========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable -- trade ................................................... $ 1,260,240 $ 994,056
Payables to related parties.................................................. 1,205,811 1,801,321
Accrued payroll and related expenses......................................... 746,392 618,867
Income taxes payable......................................................... 203,660 --
Interest payable............................................................. 19,512 27,438
Current portion of long-term debt............................................ 2,425,307 1,793,222
Total current liabilities.................................................... 5,860,922 5,234,904
---------- ----------
Long-term debt, less current portion......................................... 15,244,917 16,998,479
Deferred rent expense........................................................ 1,052,560 850,073
Deferred tax liability....................................................... 509,000 395,000
Minority interests in consolidated partnerships.............................. 5,633,270 6,362,553
Commitments and contingencies ...............................................
Stockholders' equity: .......................................................
Preferred stock, $.01 par value; 10,000,000 shares authorized, none issued
or outstanding............................................................... -- --
Common stock, $.01 par value; 50,000,000 shares authorized, 19,615,443
shares issued and outstanding (19,607,843 in 1993)........................... 196,154 196,078
Additional paid-in capital................................................... 18,905,076 18,897,552
Retained earnings (accumulated deficit)...................................... 441,442 (90,944)
---------- ----------
19,542,672 19,002,686
Notes receivable from stockholders........................................... (5,239,979) (5,489,979)
---------- ----------
Total stockholders' equity .................................................. 14,302,693 13,512,707
---------- ----------
$42,603,362 $43,353,716
========== ==========
</TABLE>
See accompanying notes.
F-31
<PAGE>
Report of Ernst & Young LLP, Independent Auditors (Continued)
Sutter Surgery Centers, Inc.
and Consolidated Partnerships
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Period From
Inception
(July 8,
1992) Through
Year Ended December 31, December 31,
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Net revenue........................................... $38,029,506 $21,656,700 $ 2,581,908
Operating expenses:
Salaries and employee benefits........................ 12,194,254 7,707,646 1,001,290
Purchased services.................................... 2,677,644 1,697,593 400,397
Supplies.............................................. 6,169,868 3,672,899 479,024
Repairs and maintenance............................... 663,080 571,692 57,258
Utilities............................................. 475,589 291,223 27,841
Equipment and building rental......................... 2,790,099 1,874,771 153,086
Depreciation and amortization......................... 2,626,785 1,603,421 184,907
Insurance............................................. 360,629 205,512 26,172
Provision for bad debts............................... 3,907,011 1,765,977 177,485
Other................................................. 1,512,655 1,009,743 145,001
---------- ---------- ----------
Total operating expenses.............................. 33,377,614 20,400,477 2,652,461
---------- ---------- ----------
Operating income (loss)............................... 4,651,892 1,256,223 (70,553)
Other income (expense):
Management fees....................................... 40,532 367,856 --
Interest income....................................... 258,284 427,816 19,178
Interest expense...................................... (1,588,478) (612,027) (44,003)
Miscellaneous income.................................. 105,093 71,693 28,738
Total other income (expense).......................... (1,184,569) 255,338 3,913
Income (loss) before minority interests in earnings
of consolidated partnerships and income taxes ........ 3,467,323 1,511,561 (66,640)
Minority interests in earnings of consolidated
partnerships.......................................... (2,462,237) (1,240,159) (184,906)
Income (loss) before income tax (provision) benefit .. 1,005,086 271,402 (251,546)
Income tax (provision) benefit........................ (472,700) (132,300) 21,500
Net income (loss)..................................... $ 532,386 $ 139,102 $ (230,046)
Net income (loss) per share........................... $ .03 $ .01 $ (.01)
Weighted average shares outstanding................... 19,612,000 19,608,000 19,608,000
</TABLE>
See accompanying notes.
F-32
<PAGE>
Report of Ernst & Young LLP, Independent Auditors (Continued)
Sutter Surgery Centers, Inc.
and Consolidated Partnerships
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1994 and 1993 and the
period from inception (July 8, 1992) through December 31, 1992
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings Notes Total
------------------- Paid-In (Accumulated Receivable From Stockholders'
Shares Amount Capital Deficit) Stockholders Equity
------ ------ ---------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Capital contribution.......... 19,607,843 $196,078 $18,897,552 $ -- $ -- $ 19,093,630
Issuance of stockholders
notes receivable.............. -- -- -- -- (5,919,667) (5,919,667)
Net loss...................... -- -- -- (230,046) -- (230,046)
---------- -------- ---------- ----------- ----------- -----------
Balances at December 31,
1992 19,607,843 196,078 18,897,552 (230,046) (5,919,667) 12,943,917
Payments received on
stockholders notes
receivable.................... -- -- -- -- 429,688 429,688
Net income.................... -- -- -- 139,102 -- 139,102
---------- -------- ---------- ----------- ----------- -----------
Balances at December 31,
1993 19,607,843 196,078 18,897,552 (90,944) (5,489,979) 13,512,707
Exercise of stock options at
$1.00/share................... 7,600 76 7,524 -- -- 7,600
Payments received on
stockholders notes
receivable.................... -- -- -- -- 250,000 250,000
Net income.................... -- -- -- 532,386 -- 532,386
---------- -------- ---------- ----------- ----------- -----------
Balances at December 31, 1994 19,615,443 $196,154 $18,905,076 $ 441,442 $ (5,239,979) $ 14,302,693
========== ======== ========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-33
<PAGE>
Report of Ernst & Young LLP, Independent Auditors (Continued)
Sutter Surgery Centers, Inc.
and Consolidated Partnerships
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Equivalents
<TABLE>
<CAPTION>
Period From
Inception
(July 8,
1992) Through
Year Ended December 31, December 31,
1994 1993 1992
--------- ---------- ----------
<S> <C> <C> <C>
Operating activities
Net income (loss) ..................................... $ 532,386 $ 139,102 $ (230,046)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: .....................
Minority interests in earnings of consolidated
partnerships........................................... 2,462,237 1,240,159 184,906
Depreciation and amortization.......................... 2,626,785 1,603,421 184,907
Provision for bad debts................................ 3,907,011 1,765,977 177,485
Loss on sale of medical and office equipment .......... 4,071 -- 1,969
Deferred rent expense.................................. 202,487 133,669 16,345
Deferred income taxes, net............................. (78,000) 69,700 (28,500)
Changes in operating assets and liabilities: .........
Patient accounts receivable............................ (3,764,651) (2,528,239) (827,836)
Supplies inventory..................................... (77,565) (54,884) 9,125
Prepaid expenses and other current assets.............. (501,015) (8,200)
Accounts payable -- trade ............................. 196,008 (64,467) 344,003
Payables to related parties............................ 266,184 574,816 166,386
Accrued payroll and related expenses................... (595,510) 262,438 69,392
Income taxes payable................................... 127,525 -- --
Interest payable....................................... 203,660 (3,272) 30,710
(7,926)
Net cash provided by operating activities.............. 6,004,702 2,637,405 90,646
Investing activities ..................................
Purchases of net assets of partnerships, net of cash
acquired............................................... -- (6,066,955) (6,278,665)
(Increase) decrease in receivables from related
parties................................................ (18,443) 4,278,859 329,697
Purchases of property and equipment.................... (942,617) (706,627) (15,182)
Proceeds from sale of property and equipment .......... 12,998 -- 3,106
Increase in other intangible assets.................... (3,698) (176,536) (28,197)
Net cash used in investing activities.................. (951,760) (2,671,259) (5,989,241)
</TABLE>
See accompanying notes.
F-34
<PAGE>
Report of Ernst & Young LLP, Independent Auditors (Continued)
Sutter Surgery Centers, Inc.
and Consolidated Partnerships
Consolidated Statements of Cash Flows -- (Continued)
Increase (Decrease) in Cash and Equivalents
<TABLE>
<CAPTION>
Period From
Inception
(July 8,
1992) Through
Year ended December 31, December 31,
1994 1993 1992
---------- ---------- ------------
<S> <C> <C> <C>
Financing activities
Proceeds from sale of common stock, net of loans to
stockholders........................................ $ 7,600 $ $ 7,839,885
Payments received on stockholders notes receivable . 250,000 429,688 --
Principal payments on long-term debt................ (1,708,807) (847,368) (197,606)
Proceeds from issuance of long-term debt............ 207,879 4,398,806 --
Distributions to minority interests................. (3,207,720) (1,605,677) --
Proceeds from sale of partnership interest ......... 16,200 -- --
---------- ---------- ------------
Net cash provided by financing activities .......... (4,434,848) 2,375,449 7,642,279
---------- ---------- ------------
Net increase in cash and equivalents................ 618,094 2,341,595 1,743,684
Cash and equivalents at beginning of period ........ 4,085,279 1,743,684 --
========== ========== ============
Cash and equivalents at end of period............... $ 4,703,373 $ 4,085,279 $ 1,743,684
Supplementary disclosures of cash flow information
and noncash transactions: ..........................
Cash paid for interest.............................. $ 1,596,000 $ 615,299 $ 34,213
========== ========== ============
Cash paid for income taxes.......................... $ 186,000 $ 72,400 $ 7,000
Long-term debt and capital lease obligations
incurred for the purchase of property and equipment
and interests in consolidated partnerships ......... $ 379,000 $ 9,167,891 $ --
========== ========== ============
In connection with the purchase of interests in
consolidated partnerships (Note 2), the Company
assumed liabilities approximately as follows:
Fair value of assets acquired....................... $ -- $17,898,000 $10,718,000
Cash paid for partnership interests................. -- (7,780,000) (6,540,000)
---------- ---------- ------------
Liabilities assumed................................. $ -- $10,118,000 $ 4,178,000
========== ========== ============
</TABLE>
See accompanying notes.
F-35
<PAGE>
Sutter Surgery Centers, Inc.
and Consolidated Partnerships
Notes to Consolidated Financial Statements
December 31, 1994 and 1993
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Sutter Surgery Centers, Inc. (SSCI) (formerly American Surgery Centers,
Inc.) is a Delaware Corporation formed on July 8, 1992 to acquire and manage
free-standing surgery centers.
SSCI has two primary stockholders. Sutter Ambulatory Care Corporation (SACC)
is a California nonprofit benefit corporation which holds 9,607,843 shares or
48.98% of the outstanding common stock. E J Financial Investments, L.P. (EJ
Financial) is a Delaware limited partnership which holds 10,000,000 shares or
50.98% of the outstanding common stock. Others own 7,600 shares or .04% of the
outstanding common stock.
Principles of Consolidation
The consolidated financial statements include the accounts of SSCI, Sutter
Tucson Surgery Center and Salt Lake Surgery Center which are partnerships wholly
owned by SSCI and all partnerships in which SSCI has a majority interest or
exercises significant influence over the operating and financing policies as the
General Partner (collectively the Company). Investments in these consolidated
partnerships (Consolidated Partnerships) as of December 31, 1994 are shown
below:
Date of Ownership
Partnerships Acquisition Percentages
- ------------ ----------- -----------
Doctor's Surgery Center of
Whittier........................... May 1, 1993 69.70%
East Bay Surgery Center............ October 1, 1992 37.24%
Fort Sutter Surgery Center......... October 1, 1993 45.00%
Golden Triangle SurgiCenter........ November 1, 1992 42.00%
Northern Solano Surgery Center .... November 1, 1992 51.00%
Salt Lake Surgical Center.......... December 7, 1993 100.00%
San Francisco SurgiCenter.......... November 30, 1992 54.40%
Sutter Surgery Center, Ltd......... October 1, 1993 70.80%
Sutter Tucson Surgery Center ...... November 30, 1992 100.00%
All significant intercompany accounts and transactions have been eliminated
in consolidation.
Cash and Equivalents
For purposes of the statement of cash flows, the Company considers highly
liquid investments with original maturities of three months or less as cash
equivalents. As of December 31, 1994, cash equivalents consisted of money market
funds. The Company maintains demand deposits with several financial institutions
in the normal course of business, to meet its operating needs. The Company's
credit risk is the exposure to loss of uninsured demand deposits in the event of
nonperformance by the financial institutions. The amount at risk as of December
31, 1994 was approximately $3,207,000.
F-36
<PAGE>
Notes to Consolidated Financial Statements
Sutter Surgery Centers, Inc.
and Consolidated Partnerships (Continued)
Patient Accounts Receivable
The Company provides care to patients that participate in programs that do
not pay full charges. As a result, the Company is exposed to certain credit
risks. The Company manages its risk by regularly reviewing its accounts and
contracts and providing appropriate allowances for uncollectible amounts. The
Company believes that adequate provisions for uncollectible amounts have been
made in the accompanying consolidated financial statements. Significant
concentrations of gross patient accounts receivable as of December 31, 1994, are
approximately as follows:
HMO/PPO and other contracts............ 42%
Self-pay and other commercial
insurance.............................. 37
Medicare............................... 11
Medical................................ 10
Total.................................. 100%
Supplies Inventory
Supplies inventory is stated at the lower of cost, determined using the
first-in, first-out basis, or market value.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the buildings and
equipment. Leasehold improvements are being amortized using the straight-line
method over the term of the lease or the improvement's estimated useful life,
whichever is shorter. Amortization of equipment under capital leases is included
in the provision for depreciation and amortization. The cost of maintenance and
repairs is charged to expense as incurred; significant renewals or betterments
are capitalized.
The estimated useful lives of property and equipment are as follows:
Estimated Useful
Lives
----------------
Buildings....................... 31.5 to 39 Years
Medical and office equipment ... 5 to 20 Years
Leasehold improvements.......... 6 to 31.5 Years
Intangible Assets
Goodwill represents the excess of purchase price over the value of the
partnership's net assets purchased by SSCI. Goodwill is being amortized using
the straight-line method over the estimated useful lives of the partnerships
purchased, which range from 10 to 30 years.
Other intangible assets consist of organization costs, lease premiums and
deferred loan fees. These costs are being amortized on a straight-line basis
over estimated useful lives of 5 to 30 years.
Deferred Rent Expense
The Company accounts for operating leases that have scheduled rent increases
(Note 5) by normalizing the minimum lease payments over the term of the lease on
a straight-line basis. Accordingly, a deferred rent liability has been recorded
on the accompanying consolidated balance sheets, reflecting the difference
between normalized rent expense and rent paid.
F-37
<PAGE>
Sutter Surgery Centers, Inc.
and Consolidated Partnerships (Continued)
Minority Interests
Minority interests represent the minority partners' proportionate share of
the equity and operations of certain Consolidated Partnerships.
Net Revenue
Net revenue consists primarily of patient service revenue, which is recorded
net of estimated contractual allowances and other billing discounts. Payments
for services rendered to patients covered by these contractual programs and
contract arrangements are generally less than established rates and contractual
allowances are recorded to reflect these differences.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 109) "Accounting for Income Taxes."
SFAS 109 requires an asset and liability approach for accounting for income
taxes. Under this approach, deferred tax assets and liabilities are recognized
for the tax consequences of temporary differences between the financial
statement and tax basis of existing assets and liabilities.
Net Income (Loss) Per Share
Net income (loss) per share is computed using the weighted average number of
shares of common stock outstanding during the periods presented.
2. BUSINESS COMBINATIONS
During 1992, the Company acquired one wholly-owned surgery center, majority
ownership interests in three other surgery centers and a controlling financial
ownership interest in an additional surgery center. Of the combined $10,718,000
purchase price, $4,629,000 was recorded as excess of purchase price over net
assets acquired.
During 1993, the Company acquired one wholly owned surgery center, majority
ownership interests in two other surgery centers and a controlling financial
ownership interest in an additional surgery center. Of the combined $17,898,000
purchase price, $7,878,000 was recorded as excess of purchase price over net
assets acquired.
These acquisitions have been accounted for under the purchase method of
accounting. The results of operations of the acquired surgery centers have been
included in the consolidated statements of income from the date of acquisition.
F-38
<PAGE>
Sutter Surgery Centers, Inc.
and Consolidated Partnerships (Continued)
3. RECEIVABLES FROM RELATED PARTIES
Receivables from related parties consist of the following as of December 31,
1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Note receivable from E J Financial; due on demand; bearing interestat a
variable rate (6.66% at December 31, 1994), secured bycommon stock of SSCI ..... $ 2,933,402 $ 3,183,402
Unsecured amount due from E J Financial; due on demand after repayment of the
note receivable from E J Financial; under the provisions of a stock purchase
agreement; non-interest bearing................................................. 1,316,598 1,316,598
Unsecured amount due from SACC; due on demand after repayment of receivables
from E J Financial; under the provisions of a stock purchase agreement;
non-interest bearing............................................................ 989,979 989,979
Other receivables............................................................... 68,042 51,257
Interest receivable............................................................. 4,282 2,624
--------- ---------
5,312,303 5,543,860
Less: notes receivable from stockholders reported as a reduction of
stockholders' equity ........................................................... (5,239,979) (5,489,979)
--------- ---------
$ 72,324 $ 53,881
========= =========
</TABLE>
The Company recorded approximately $155,000, $213,000 and $19,000 in interest
income on receivables from related parties during the years ended December 31,
1994, 1993 and the period from inception (July 8, 1992) through December 31,
1992, respectively.
4. LONG-TERM DEBT
Long-term debt consists of the following as of December 31, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Sutter Surgery Centers, Inc.
Credit agreement with a bank; due in monthly installments of $52,000 beginning
May 1994 through November 2000; interest is payable monthly at prime plus 1.25%
(aggregating 9.75% at December 31, 1994); secured by virtually all of the
Company's assets................................................................. $3,672,591 $4,034,678
Notes payable to SACC; due in quarterly principal payments ranging from $99,000
to $165,000 beginning December 1995 through June 2002 and one final payment of
$5,395,000 on September 30, 2002; interest is payable monthly at prime plus 2%,
not to exceed 10% (aggregating 9.75% atDecember 31, 1994); secured by virtually
all of the Company's assets; subordinate to the credit agreement with a bank .... 8,883,000 8,883,000
Other............................................................................ 8,774 14,818
Doctors Surgery Center of Whittier ..............................................
Capital lease obligations; due in monthly installments of approximately $3,000
including interest at rates ranging from 9.4% to 17.8%; maturing at various
dates through December 1996; secured by leased equipment with a carrying value
of approximately $61,400 as of December 31, 1994................................. 61,483 --
East Bay Surgery Center .........................................................
Note payable to a bank; due in monthly installments of approximately $2,000
through December 1995 and one final payment of approximately $53,000 in January
1996; interest at 7.25%; secured by virtually all of East Bay Surgery Center's
asset............................................................................ 71,390 89,029
F-40
<PAGE>
Sutter Surgery Centers, Inc. -
and Consolidated Partnerships (Continued)
Fort Sutter Surgery Center
</TABLE>
<TABLE>
<S> <C> <C>
Note payable to a bank; due in monthly installments, of approximately $6,000
through August 1997; interest at 6.5%; secured by virtually all of Fort Sutter
Surgery Center's assets.......................................................... 214,407 519,490
Other............................................................................ 67,928 35,711
Golden Triangle SurgiCenter
Note payable to a bank; due in monthly installments, of $18,000 through November
1997 and all unpaid principal and accrued interest are due December 1997;
interest at prime plus 1.5% (aggregating 10% at December 31, 1994); secured by
equipment and leasehold improvements with a carrying value of approximately
$1,136,000 as of December 31, 1994............................................... 1,293,015 1,401,808
Unsecured demand notes payable to various physicians with interest at 10% ....... 207,879 211,000
Other............................................................................ 15,248 14,457
Northern Solano Surgery Center
Capital lease obligations; due in monthly installments of approximately $7,500
including interest at rates ranging from 6% to 15%; maturing at various dates
through February 1999; secured by equipment with a carrying value of
approximately $195,900 as of December 31, 1994................................... 195,944 108,585
Note payable to a bank; due in monthly installments of approximately $5,000
through August 1996; interest at prime plus 2% (aggregating 10.5% at December
31, 1994); secured by Northern Solano Surgery Center's patient accounts
receivable and supplies inventory................................................ 114,851 169,851
Other............................................................................ 19,092 42,651
San Francisco SurgiCenter
Unsecured note payable to SACC; due in monthly installments ofapproximately
$16,000 through March 2002; interest at prime plus 1% (aggregating 9.50% at
December 31, 1994)............................................................... 1,111,054 1,229,692
Note payable to a bank; due in monthly installments of approximately $27,000
through August 1995 and all unpaid principal is due September 1995; interest at
prime plus .88% (aggregating 9.38% at December 31, 1994); secured by
substantially all of San Francisco SurgiCenter's assets.......................... 876,188 1,204,760
Unsecured note payable to Sutter Health; due in monthly installments of interest
only through September 1995 and approximately $27,000 during the period October
1995 through September 1999; interest at prime plus .88% (aggregating 9.38% at
December 31, 1994)............................................................... 705,450 705,450
Capital lease obligations; due in monthly installments of approximately $3,000
interest at rates ranging from 2% to 12%; maturing at various dates through
October 1999; secured by equipment with a carrying value of approximately
$125,700 as of December 31, 1994................................................. 125,745 102,721
Sutter Surgery Center Ltd. ......................................................
Capital lease obligation; due in monthly installments of approximately $790
including interest at 10.5%; maturing March 1998; secured by leased equipment
with a carrying value of approximately $26,000 as of December 31, 1994 .......... 26,185 --
F-41
<PAGE>
Sutter Surgery Centers, Inc.
and Consolidated Partnerships (Continued)
</TABLE>
<TABLE>
<S> <C> <C>
Suffer Tucson Surgery Center
Capital lease obligation; paid in full during 1994............................... -- 24,000
17,670,224 18,791,701
Less: current portion of long-term debt.......................................... (2,425,307) (1,793,222)
---------- ----------
$15,244,917 $16,998,479
========== ==========
</TABLE>
As of December 31, 1994, aggregate future principal payments by year on
long-term debt are due as follows:
1995.................... $ 2,425,307
1996.................... 1,931,900
1997.................... 2,719,910
1998.................... 1,329,459
1999.................... 1,360,833
Thereafter ............. 7,902,815
----------
$17,670,224
==========
Certain of the Company's and Consolidated Partnerships' long-term debt
obligations contain restrictive and/or financial covenants. The Company and
Consolidated Partnerships were either in compliance with the covenants as of
December 31, 1994 or had received waivers from the lenders through January 1,
1996.
The Company recorded approximately $970,000, $317,000 and $16,000 in interest
expense on notes payable to related parties during the years ended December 31,
1994, 1993 and the period from inception (July 8, 1992) through December 31,
1992, respectively.
5. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company and Consolidated Partnerships lease a majority of their
facilities, office space and some equipment under operating lease agreements.
Certain of these leases are with related parties. The leases expire over various
terms ranging from two to thirty-four years and several of the leases contain
renewal options for periods of up to twenty-five years. In addition, the
facilities and office space leases generally include escalating rent payments
based upon annual increases in a Consumer Price Index which is indexed to a
"base year" of the respective lease.
Future minimum lease payments as of December 31, 1994, by year, under
long-term noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
Related
Parties Others Total
--------- --------- ----------
<S> <C> <C> <C>
1995........ $ 956,000 $1,244,000 $ 2,200,000
1996........ 964,000 1,073,000 2,037,000
1997........ 813,000 897,000 1,710,000
1998........ 659,000 911,000 1,570,000
1999........ 469,000 613,000 1,082,000
Thereafter . 535,000 4,666,000 5,201,000
--------- --------- ----------
$4,396,000 $9,404,000 $13,800,000
========= ========= ==========
</TABLE>
F-41
<PAGE>
Sutter Surgery Centers, Inc.
and Consolidated Partnerships (Continued)
Rent expense under leases with related parties amounted to approximately
$945,000, $745,000 and $295,000 during the years ended December 31, 1994, 1993
and the period from inception (July 8, 1992) through December 31, 1992,
respectively.
Malpractice Insurance
The Consolidated Partnerships maintain malpractice insurance coverage under
claims-made policies. Should the claims-made policies not be renewed or replaced
with equivalent insurance, claims based on occurrences during the policy terms,
but reported subsequently, will be uninsured. Management intends to maintain its
current insurance coverage for the foreseeable future. In management's opinion,
losses associated with unreported incidents, if any, would not have a material
adverse effect on the Company's financial position.
6. STOCK OPTION PLANS
On December 1, 1992, the Company established a nonqualified stock option plan
(the "Nonqualified Plan"). Concurrent with the establishment of the Nonqualified
Plan the Company granted an option to purchase 1,031,992 shares of common stock
at $1.00 per share to the Company's President and Chief Executive Officer. This
option vests in unequal annual amounts during the period January 1, 1993 through
January 1, 1997, and it expires on December 1, 2002. On May 16, 1994, the
Company granted additional options to several consultants to purchase 65,625
shares of common stock at $1.00 per share. The options vest in equal annual
amounts during the period May 16, 1995 through May 15, 1999, and expire on May
15, 2000. As of December 31, 1994, 628,870 shares were vested. No options under
the Nonqualified Plan have been exercised through December 31, 1994.
In May 1993, the Company established the 1993 Stock Option Plan (the "1993
Plan") under which employees and directors of the Company and Consolidated
Partnerships may participate. The options granted under the 1993 Plan may be
nonstatutory stock options or incentive stock options. The vesting and term of
the options granted under the 1993 Plan are determined by the Company's board of
directors. Generally, the option price cannot be less than 100% of the fair
market value of the stock at the date of grant for incentive stock options and
85% for nonqualified stock options. The fair market value is determined by the
Company's board of directors. As of December 31, 1994, incentive stock options
for 1,395,200 shares of common stock have been granted at $1.00 per share of
which 534,900 have been cancelled. Options for 7,600 shares have been exercised.
All of the options granted under the 1993 Plan vest in equal annual amounts over
periods of four or five years from the date of grant and expire ten years from
the date of grant. Of the 852,700 options still outstanding as of December 31,
1994, 101,875 were vested.
7. INCOME TAXES
The income tax (provision) benefit for the years ended December 31, 1994,
1993 and for the period from inception (July 8, 1992) through December 31, 1992
consisted of the following components.
<TABLE>
<CAPTION>
1994 1993 1992
---------------------- --------------------- --------------------
Current Deferred Current Deferred Current Deferred
--------- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Federal . $(425,900) $ 60,620 $(44,000) $ (50,800) $ -- $ 21,500
State.... (124,800) 17,380 (18,600) (18,900) (5,000) 5,000
--------- -------- -------- --------- --------- ---------
$(550,700) $ 78,000 $(62,600) $ (69,700) $ (5,000) $ 26,500
========= ======== ======== ========= ========= =========
</TABLE>
F-42
<PAGE>
Sutter Surgery Centers, Inc.
and Consolidated Partnerships (Continued)
The significant components of the Company's deferred tax assets and liability
as of December 31, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1994 1993
------- ------
<S> <C> <C>
Deferred tax assets:
Deferred rent expense.................... $ 244,200 $ 103,700
Contractual allowances and allowance for
doubtful accounts........................ 88,200 85,600
Accrued bonuses.......................... 45,200 48,500
State taxes.............................. 36,100 --
Others, net.............................. 16,100 --
-------- -------
$ 429,800 $ 237,800
======== =======
Deferred tax liability:
Equipment and leasehold improvements .... $ 509,000 $ 395,000
======== =======
</TABLE>
The components of deferred tax assets and liabilities above arise primarily
from temporary differences attributable to differing accounting methods for book
and tax purposes, consequently, management believes that it is more likely than
not that the deferred income tax assets will be fully realized and that no
valuation allowance is required.
The principal reasons for the differences between the effective tax rate and
the Federal statutory income tax rate for the years ended December 31, 1994,
1993 and for the period from inception (July 8, 1992) through December 31, 1992,
are presented in the following table.
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Federal provision (benefit) expected at
statutory rates.............................. $341,700 $ 93,500 $(85,500)
State provision (benefit), net of federal ... 61,700 16,900 (15,400)
Syndication costs............................ -- -- 79,400
Goodwill..................................... 59,200 18,900 --
Others, net.................................. 10,100 3,000 --
------- ------- -------
$472,700 $132,300 $(21,500)
======= ======= =======
</TABLE>
8. RELATED PARTY TRANSACTIONS
Additional related party transactions not presented or disclosed elsewhere in
these consolidated financial statements or notes thereto are as follows:
SACC furnishes personnel to certain Consolidated Partnerships, and is
responsible for the compensation and fringe benefits for the personnel. The
Consolidated Partnerships reimbursed SACC for actual costs incurred for the
personnel. The amounts charged to expense by the Company for the SACC personnel
totaled approximately $3,913,000, $906,000 and $230,000, for the years ended
December 31, 1994, 1993 and the period from inception (July 8, 1992) through
December 31, 1992, respectively. These amounts are included in the consolidated
statements of operations as salaries and employee benefits. The unpaid balances
of salaries and benefits purchased from SACC are included on the consolidated
balance sheets as payables to related parties and amounted to approximately
$212,000 and $207,000 as of December 31, 1994 and 1993, respectively.
The Company has purchased supplies and other services from SACC and its
related entities. The total amount paid by the Company during the period from
inception (July 8, 1992) through December 31, 1992 totaled approximately $40,000
(none during 1993 or 1994).
The Company provided management services in 1993 to Fort Sutter Surgery
Center and Sutter Surgery Center, Ltd. prior to the Company acquiring
partnership interests in them from SACC. Total management fee income recorded by
the Company during the year ended December 31, 1993 prior to the date of
acquisition was approximately $368,000.
F-43
<PAGE>
Sutter Surgery Centers, Inc.
and Consolidated Partnerships
Consolidated Balance Sheet (Unaudited)
June 30, 1995
<TABLE>
<S> <C>
Assets
Current assets:
Cash and equivalents.......................................................... $ 4,749,907
Patient accounts receivable, less allowance for doubtful accounts of
$4,481,770.................................................................... 4,012,448
Receivables from related parties.............................................. 142,579
Supplies inventory............................................................ 1,228,685
Prepaid expenses and other current assets..................................... 812,250
Deferred tax assets........................................................... 394,514
-----------
Total current assets.......................................................... 11,340,383
Property and equipment, including assets under capital leases, net ........... 14,940,683
Intangible assets, net........................................................ 15,408,594
Other assets.................................................................. 50,000
-----------
Total assets.................................................................. $41,739,660
-----------
Liabilities and stockholder's equity
Current liabilities:
Accounts payable -- trade..................................................... $ 1,604,775
Accrued payroll and related expenses.......................................... 891,927
Interest payable.............................................................. 23,121
Other current liabilities..................................................... 380,778
Current portion of long-term debt............................................. 2,306,987
-----------
Total current liabilities..................................................... 5,207,588
Long-term debt, less current portion.......................................... 15,785,713
Deferred tax liability........................................................ 509,000
Minority interests in consolidated partnerships............................... 5,366,313
Stockholder's equity: ........................................................
Preferred stock, $.01 par value; 10,000,000 shares authorized, none issued or
outstanding .................................................................. --
Common stock, $.01 par value; 50,000,000 shares authorized, 19,615,443 shares
issued and outstanding........................................................ 196,154
Additional paid-in capital.................................................... 18,905,076
Retained earnings............................................................. 1,013,378
-----------
Notes receivable from stockholders............................................ (5,243,562)
-----------
Total stockholder's equity.................................................... 14,871,046
-----------
Total liabilities and stockholder's equity.................................... $41,739,660
===========
</TABLE>
See accompanying notes.
F-44
<PAGE>
Sutter Surgery Centers, Inc.
and Consolidated Partnerships
Consolidated Balance Sheet (Unaudited)
June 30, 1995
(Continued)
Sutter Surgery Centers, Inc.
and Consolidated Partnerships
Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
1994 1995
---------- ----------
<S> <C> <C>
Net revenue..................................................... $19,129,826 $20,446,004
Operating expenses:
Salaries and employee benefits.................................. 6,097,039 5,643,535
Purchased services.............................................. 1,250,321 1,605,261
Supplies........................................................ 2,895,916 3,161,320
Utilities....................................................... 226,537 223,366
Equipment and building rental................................... 1,361,826 1,382,504
Depreciation and amortization................................... 1,291,678 1,379,850
Insurance....................................................... 181,239 200,686
Provision for bad debts......................................... 2,106,696 2,339,650
Other........................................................... 1,134,277 1,040,841
---------- ----------
Total operating expenses........................................ 16,545,529 16,977,013
---------- ----------
Operating income................................................ 2,584,297 3,468,991
Other income (expense):
Interest income................................................. 241,259 193,498
Interest expense................................................ (739,520) (859,378)
---------- ----------
Total other income (expense).................................... (498,261) (665,880)
---------- ----------
Income before minority interests in earnings of consolidated
partnerships and income taxes................................... 2,086,036 2,803,111
Minority interests in earnings of consolidated partnerships .... (1,253,053) (1,626,917)
---------- ----------
Income before income tax provision.............................. 832,983 1,176,194
Income tax provision............................................ (409,700) (604,258)
---------- ----------
Net income...................................................... $ 423,283 $ 571,936
</TABLE>
See accompanying notes.
F-45
<PAGE>
Sutter Surgery Centers, Inc.
and Consolidated Partnerships
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------
1994 1995
---- ----
<S> <C> <C>
Operating activities
Net income................................................ $ 423,283 $ 571,936
Adjustments to reconcile net income to cash provided by
oprerating activies:
Minority interests in earnings of consolidated
partnerships............................................ 1,253,053 1,626,917
Depreciation and amortization............................. 1,291,678 1,379,850
Provision for bad debts................................... 2,106,696 2,339,650
Loss on sale of medical and office equipment.............. (1,171) (800)
Deferred rent expense..................................... 98,828 82,930
Deferred income taxes, net................................ (65,800) (35,286)
Changes in operating assets and liabilities:
Patient accounts receivable............................... (2,105,317) (2,032,218)
Supplies inventory........................................ (93,426) 18,567
Prepaid expenses and other current assets................. 258,174 (299,434)
Accounts payable -- trade................................. (94,151) (529,580)
Accrued payroll and related expenses...................... 38,697 (59,766)
Income taxes payable...................................... 200,100 (203,660)
Other current liabilities................................. (712,209) 297,848
Interest payable.......................................... (136,011) (122,789)
Net cash provided by operating activities................. 2,462,424 3,034,165
Investing activities
Purchases of property and equipment....................... (502,358) (464,373)
Purchases of other investments............................ (300,835) 0
Proceeds from sale of property and equipment.............. 2,165 0
Increase in other intangible assets....................... (3,666) 0
Net cash used in investing activities..................... (804,694) (464,373)
Financing activities
Payments received on stockholders notes receivable ....... 211,632 0
Principal payments on long-term debt...................... (336,017) (629,387)
Distributions to minority interests....................... (1,751,770) (2,143,871)
Proceeds from sale of partnership interest................ 0 250,000
Net cash provided by financing activities................. (1,876,155) (2,523,258)
Net increase in cash and equivalents...................... (218,425) 46,534
Cash and equivalents at beginning of period............... 4,085,279 4,703,373
Cash and equivalents at end of period..................... $ 3,866,854 $ 4,749,907
Supplementary disclosures of cash flow information and
noncash transactions:
Cash paid for interest.................................... $ 881,259 $ 991,906
Cash paid for income taxes................................ $ 97,600 $ 1,155,540
</TABLE>
See accompanying notes.
F-46
<PAGE>
Sutter Surgery Centers, Inc. and Consolidated Partnerships
Notes to Consolidated Financial Statements (Unaudited)
Six Months Ended June 30, 1995 and 1994
NOTE 1 -- The accompanying consolidated financial statements include the
accounts of Sutter Surgery Centers, Inc. ("SSCI") and its 37.2 percent
interest in E.B.S.C., L.P., 42 percent interest in Golden Triangle
SurgiCener, L.P., 51 percent interest in Northern Solano Surgery
Centers, L.P., 54.4 percent interest in San Francisco SurgiCenter,
L.P., 100 percent interest in Sutter Tucson Surgery Center, 69.7
percent interest in Doctors Surgery Center of Whittier, L.P., 100
percent interest in Salt Lake Surgical Center, 45 percent interest in
Fort Sutter Surgery Center, (A California Limited Partnership), and
70.8 percent interest in Sutter Surgery Center, L.P. after elimination
of all significant intercompany transactions and accounts. This
information should be read in conjunction with SSCI's Audited
Financial Statements included elsewhere in this document. It is
management's opinion that the accompanying consolidated financial
statements reflect all adjustments (which are normal recurring
adjustments) necessary for a fair presentation of the results for the
interim period and the comparable period presented.
NOTE 2 -- During the first six months of 1995, the Company granted incentive and
nonqualified stock options to certain Directors, employees and others
for 25,000 shares of Common Stock at an exercise price of $1.00 per
share.
NOTE 3 -- On August 25, 1995, SSCI and HEALTHSOUTH Corporation ("HEALTHSOUTH")
jointly announced that they had signed a definitive agreement under
which HEALTHSOUTH will acquire SSCI. Under the terms of the agreement,
all shares of common stock of SSCI will be exchanged for shares of
HEALTHSOUTH common stock pursuant to an exchange ratio that will yield
an approximate value of $38.0 million to the shareholders of SSCI. The
transaction will be accounted for as a pooling of interests and is
expected to close during the fourth quarter of 1995.
F-47
<PAGE>
ANNEX A
PLAN AND AGREEMENT OF MERGER
THIS PLAN AND AGREEMENT OF MERGER (the "Plan of Merger") is made and entered
into as of the 23rd day of August, 1995, by and among HEALTHSOUTH Corporation, a
Delaware corporation ("Buyer"); SSCI Acquisition Corporation, a Delaware
corporation and a wholly-owned subsidiary of Buyer ("Sub"); and Sutter Surgery
Centers, Inc., a Delaware corporation (the "Company" or "SSCI").
RECITALS
WHEREAS, the respective Boards of Directors of Buyer and SSCI have determined
that a business combination between Buyer and SSCI is in the best interests of
their respective companies and presents an opportunity for their respective
companies to achieve strategic and economic benefits;
WHEREAS, the respective Boards of Directors of Buyer, Sub and SSCI have each
approved the acquisition of SSCI by Buyer pursuant to this Plan of Merger and
have each approved the merger (the "Merger") of Sub with and into SSCI in
accordance with the Delaware General Corporation Law (the "Delaware Law") and
upon the terms and conditions set forth in this Plan of Merger;
WHEREAS, the respective Board of Directors of SSCI and Sub have duly resolved
that this Plan of Merger and the Merger be submitted to a vote of their
respective stockholders in accordance with the Delaware Law;
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code");
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 mutual covenants herein contained, the
parties hereby agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. Upon the terms and conditions set forth in this Plan of
Merger and subject to the satisfaction or waiver, if permissible, of the
conditions hereof, and in accordance with the Delaware Law, at the Effective
Time (as defined in Section 1.2 below), Sub shall be merged with and into SSCI.
Immediately following the Merger, the separate corporate existence of Sub shall
cease and SSCI, under such names as the Buyer shall designate, other than one
using the word "Sutter" or any variation thereof (the "Surviving Corporation"),
shall continue to exist under and be governed by the Delaware Law as a direct,
wholly-owned subsidiary of Buyer.
1.2 Effective Time. As soon as practicable after the satisfaction or waiver,
if permissible, of all of the conditions to the Merger, the parties shall cause
the Merger to be consummated by causing a certificate of merger (the
"Certificate of Merger") to be executed, filed and recorded in accordance with
the relevant provisions of the Delaware Law and shall make all other filings or
recordings required under Delaware Law as soon as practicable on or after the
Closing Date (as herein defined). The Merger shall become effective at the time
of the filing with the Secretary of State of the State of Delaware of the
Certificate of Merger in accordance with the relevant provisions of the Delaware
Law or at such later time as is specified in such Certificate of Merger (the
"Effective Time").
1.3 Effects of the Merger. The Merger shall have the effect set forth in
Section 259 of the Delaware Law. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time, all the assets, reserves,
properties, rights, privileges, powers and franchises of SSCI and Sub shall vest
in the
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Surviving Corporation, and all the debts, liabilities and duties of SSCI and Sub
shall become the debts, liabilities and duties of the Surviving Corporation in
the same manner as if the Surviving Corporation had itself incurred them. All
rights of creditors and all liens upon the property of SSCI and Sub shall
thereafter be preserved unimpaired.
1.4 Certificate of Incorporation and Bylaws of the Surviving Corporation. The
Certificate of Incorporation of Sub, as in effect immediately prior to the
Effective Time, shall be the Certificate of Incorporation of the Surviving
Corporation, until thereafter amended in accordance with the provisions thereof
and applicable law; provided, however, that in the event any further amendment
or amendments to the Certificate of Incorporation of the Surviving Corporation
shall be necessary or appropriate in the sole discretion of Buyer, which shall
not be inconsistent with the terms of this Plan of Merger, the parties hereto
agree to execute an appropriate amendment to this Plan of Merger to provide for
such amendment or amendments to be made to the Certificate of Incorporation of
the Surviving Corporation as of the Effective Time. The Bylaws of Sub in Effect
at the Effective Time shall be the Bylaws of the Surviving Corporation until
amended in accordance with the provisions thereof and applicable law.
1.5 Directors. The directors of Sub immediately prior to the Effective Time
shall be the initial directors of the Surviving Corporation and shall hold
office until their respective successors are duly elected and qualified, or
their earlier death, resignation or removal.
ARTICLE II
THE CLOSING
2.1 The Closing. The closing of the Merger (the "Closing") shall take place
at the offices of Haskell Slaughter Young & Johnston, Professional Association,
Birmingham, Alabama, at 10:00 a.m. local 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 Articles VIII and IX hereof) shall be no later than the
fifth business day after satisfaction of the conditions set forth in said
Articles.
ARTICLE III
CONVERSION OF SECURITIES; DISSENTING SHARES
3.1 Conversion of Capital Stock. Except as set forth in Section 3.9, as of
the Effective Time, by virtue of the Merger:
(a) Each of the shares of common stock, par value $.01 per share, of
Sub (the "Sub Common Stock") issued and outstanding immediately prior to
the Effective Time shall be converted into a fully paid and nonassessable
share of the common stock of the Surviving Corporation.
(b) Each share of SSCI common stock, par value $0.01 per share ("SSCI
Common Stock"), held in the treasury of SSCI or any subsidiary of SSCI
immediately prior to the Effective Time shall automatically be canceled and
retired and shall cease to exist and no cash or stock of Buyer or any other
consideration shall be delivered in exchange for such shares.
(c) Each share of SSCI Common Stock issued and outstanding and owned
by Buyer or any of Buyer's wholly-owned subsidiaries, including Sub,
immediately prior to the Effective Time shall be canceled and retired and
shall cease to exist and no cash or stock of Buyer or other consideration
shall be delivered in exchange for such shares.
(d) Each share of SSCI Common Stock outstanding immediately prior to
the Effective Time (other than shares of SSCI Common Stock to be canceled
as provided in Section 3.1(b) and (c) above) ("Exchanging SSCI Shares")
shall automatically be converted at the Effective Time into the right to
receive that number of whole shares of Buyer's common stock, par value $.01
per share ("Buyer Common Stock"), that is equal to the number of Aggregate
Buyer Shares (as hereinafter defined) divided by the number of Exchanging
SSCI Shares, plus cash in lieu of fractional shares as
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<PAGE>
hereinafter provided. As used herein, the term "Aggregate Buyer Shares"
means 1,777,778 shares of Buyer Common Stock; provided, however, that in
the event that the Average Closing Date Price (as herein defined) shall be
greater than $25.00, then the number of Aggregate Buyer Shares shall be
equal to $44,444,450 divided by the Average Closing Date Price. For
example, if the Average Closing Date Price shall be equal to $28.00, then
the Aggregate Buyer Shares shall equal $44,444,450 (divided by) 28 =
1,587,301.7 (rounded to 1,587,302) shares of Buyer Common Stock. For
purposes of this Plan of Merger, the term "Average Closing Date Price"
shall mean the average of the daily closing prices for the shares of Buyer
Common Stock for the twenty (20) consecutive trading days on which such
shares are actually traded (as reported on the New York Stock Exchange (the
"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 SSCI Common Stock 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 shares of SSCI Common Stock shall
cease to have any rights with respect thereto, except, with respect to
holders of Exchanging SSCI Shares, the right to receive the Buyer Common
Stock (plus cash in lieu of fractional shares) upon surrender of such
certificate in accordance with Section 3.2, without interest.
(e) At the Effective Time, all rights with respect to SSCI Common
Stock pursuant to any SSCI stock options which are outstanding at the
Effective Time, whether or not then exercisable ("Options"), shall be
converted into and become rights with respect to the Buyer Common Stock
based upon the exchange ratio determined pursuant to Section 3.1(d) and
Buyer shall assume each Option in accordance with the terms of the plan
under which it was issued and the stock option agreement by which it is
evidenced. It is intended that none of the foregoing provisions shall be
undertaken in a manner that will constitute a "modification" as defined in
Section 425 of the Code, as to any stock option which is an "incentive
stock option", if any.
(f) In the event that Buyer changes the number of shares of Buyer
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 Buyer Common 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 number of Aggregate Buyer
Shares and the Average Closing Date Price shall be adjusted to
appropriately adjust the ratio pursuant to which Exchanging SSCI Shares
will be converted into shares of Buyer Common Stock pursuant to this
Section 3.1, 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 Average Closing Date Price to reflect the market effect of
such stock split, stock dividend, or similar recapitalization.
3.2 Exchange of Certificates.
(a) As of the Effective Time, Buyer shall deposit with a bank or trust
company designated by Buyer (the "Exchange Agent"), to receive Exchanging
SSCI Shares, to deliver Buyer Common Stock to holders of Exchanging SSCI
Shares and to carry out the other procedures set forth herein, for the
benefit of the holders of Exchanging SSCI Shares and for exchange in
accordance with this Article III, certificates representing the shares of
Buyer Common Stock (such shares of Buyer Common Stock, together with any
dividends or distributions with respect to the Buyer Common Stock, with a
record date after the Effective Time of the Merger, being hereinafter
referred to as the "Exchange Fund") as shall be payable or issuable
pursuant to Section 3.1(d) in exchange for Exchanging SSCI Shares.
(b) As soon as reasonably practicable after the Effective Time, the
Exchange Agent shall mail to each holder of a certificate which immediately
prior to the Effective Time represented Exchanging SSCI Shares (the
"Certificates") whose shares were converted into the right to receive
shares of Buyer Common Stock (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
A-3
<PAGE>
to the Exchange Agent and shall be in such form and have such other
reasonable provisions, as Buyer shall specify, and (ii) instructions for
use in effecting the surrender of the Certificates in exchange for
certificates representing shares of Buyer Common Stock. Upon surrender of a
Certificate for cancellation to the Exchange Agent, together with such
letter of transmittal, duly executed, and such other documents as the
Exchange Agent shall reasonably request, the holder of such Certificate
shall be entitled to receive promptly in exchange therefor a certificate
representing the number of whole shares of Buyer Common Stock which such
holder has the right to receive pursuant to the provisions of this Article
III. The Certificate so surrendered shall forthwith be canceled. In the
event of a transfer of ownership of SSCI Common Stock which is not
registered in the transfer records of SSCI, a certificate representing the
proper number of shares of Buyer Common Stock may be issued to a person
other than the person in whose name the Certificate so surrendered is
registered if such Certificate representing such SSCI Common Stock is
presented to the Exchange Agent, accompanied by all documents required to
evidence and effect such transfer, including without limitation a proper
endorsement of the surrendered Certificate evidencing the SSCI Common Stock
(with signature guarantees satisfactory to Buyer) and evidence satisfactory
to Buyer that any applicable stock transfer taxes have been paid and that
such issuance will be in compliance with applicable securities laws. Until
surrendered as contemplated by this Section 3.2, each Certificate shall be
deemed at any time after the Effective Time to represent only the right to
receive upon such surrender the certificate representing the shares of
Buyer Common Stock or a combination of both as contemplated by this Section
3.2, cash in lieu of any fractional shares of Buyer Common Stock as
contemplated by Section 3.5, and any dividends or distributions with a
record date after the Effective Time theretofore paid or payable with
respect to Buyer Common Stock as contemplated by Section 3.3. No interest
will be paid or will accrue on any cash payable for any SSCI Common Stock
or payable in lieu of any fractional shares of Buyer Common Stock.
3.3 Distributions with Respect to Unexchanged Shares. Unless and until the
holder of any unsurrendered Certificate shall surrender such Certificate in
accordance with section 3.2, the holder thereof shall not be entitled to any
dividends or other distributions declared or made after the Effective Time with
respect to Buyer Common Stock with a record date after the Effective Time and to
any cash payment in lieu of fractional shares. Subject to the effect of
applicable laws, following surrender of any such Certificate, there shall be
paid to the record holder of the certificates representing whole shares of Buyer
Common Stock issued in exchange therefor, without interest, (a) at the time of
such surrender, the amount of any cash payable in lieu of a fractional share of
Buyer Common stock to which such holder is entitled pursuant to Section 3.5 and
the amount of dividends or other distributions with a record date after the
Effective Time theretofore paid with respect to such whole shares of Buyer
Common Stock, and (b) at the appropriate payment date, the amount of dividends
or other distributions with a record date after the Effective Time, but prior to
surrender, and with a payment date subsequent to surrender payable with respect
to such whole shares of Buyer Common Stock.
3.4 No Further Ownership Rights in SSCI Common Stock. All shares of Buyer
Common stock issued upon the surrender for exchange of Certificates in
accordance with the terms hereof (including any cash paid pursuant to Sections
3.3 or 3.5) shall be deemed to have been paid or issued in full satisfaction of
all rights pertaining to the SSCI shares represented by such Certificates,
subject, however, to the Surviving Corporation's obligation to pay any dividends
or make any other distributions with a record date prior to the Effective Time
which may have been declared or made by SSCI on such shares of SSCI Common Stock
prior to the date hereof and which remain unpaid at the Effective Time, and at
and after the Effective Time, there shall be no further registration of
transfers on the stock transfer books of the Surviving Corporation of the shares
of SSCI Common Stock which were outstanding immediately prior to the Effective
Time. If, after the Effective Time, Certificates are presented to the Surviving
Corporation for any reason, they shall be canceled and exchanged as provided in
this Article III.
3.5 No Fractional Shares.
(a) No certificates or scrip representing fractional shares of Buyer
Common stock shall be issued upon the surrender for exchange of
Certificates and no dividend, stock split or other change
A-4
<PAGE>
in the capital structure of Buyer shall relate to any fractional security,
and such fractional interests shall not entitle the owner thereof to vote
or to any rights as a security holder of Buyer.
(b) Notwithstanding any other provision of this Plan of Merger, each
holder of SSCI Common Stock exchanged pursuant to the Merger who would
otherwise have been entitled to receive a fraction of a share of Buyer
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 Buyer Common Stock
multiplied by the Average Closing Date Price.
(c) As soon as practicable after the determination of the amount of
cash, if any, to be paid to each holder of Buyer Common Stock in lieu of
any fractional share interests, the Exchange Agent shall mail such amounts
to such holder of Buyer Common Stock; provided that no such amount shall be
paid to any holder of Buyer Common stock prior to the surrender by such
holder of the Certificate formerly representing such holder's SSCI Common
Stock.
3.6 Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the holders of Certificates as of the date which is six
(6) months after the Effective Time shall be delivered to Buyer, upon demand,
and any holder of Certificates who has not theretofore complied with this
Article III shall thereafter look only to Buyer for payment of his or her claim,
for Buyer Common Stock, for any cash in lieu of fractional shares of Buyer
Common Stock and any dividends or distributions with respect to Buyer Common
Stock.
3.7 No Liability. None of Buyer, Sub, the Surviving Corporation or the
Exchange Agent shall be liable to any person in respect of any shares of Buyer
Common Stock (or dividends or distributions with respect thereto) or cash from
the Exchange Fund delivered to a state abandoned property administrator or other
public official pursuant to any applicable abandoned property, escheat or
similar law. If any Certificates shall not have been surrendered prior to seven
(7) years after the Effective Time (or immediately prior to such earlier date on
which any shares of Buyer Common Stock, any cash in lieu of fractional shares of
Buyer Common Stock or any dividends or distributions with respect to Buyer
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.
3.8 Lost Certificates. In the event any Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed, the Exchange Agent
will issue in exchange for such lost, stolen or destroyed Certificate the shares
of Buyer Common Stock (and any dividends or distributions with respect thereto
and any cash pursuant to Section 3.5) deliverable in respect thereof as
determined in accordance with Section 3.1. When authorizing such payment in
exchange for any lost, stolen or destroyed Certificate, the person to whom the
Buyer Common Stock is to be issued shall, as a condition precedent to the
payment or issuance thereof, give Buyer a bond satisfactory to Buyer in such sum
as it may direct or otherwise indemnify Buyer in a manner satisfactory to Buyer
against any claim that may be made against Buyer or the Surviving Corporation
with respect to the Certificate alleged to have been lost, stolen or destroyed.
3.9 Dissenting Shares. Notwithstanding anything in this Plan of Merger to the
contrary, shares of SSCI Common Stock which are issued and outstanding
immediately prior to the Effective Time and which are held by a holder, if any,
who has properly exercised appraisal rights with respect thereto in accordance
with Section 262 of the Delaware Law (the "Dissenting Shares") shall not be
converted into or be exchangeable for the right to receive the consideration to
be paid in the Merger, and such holders shall be entitled to receive payment of
the appraised value of such shares of SSCI Common Stock in accordance with the
provisions of Delaware Law unless and until such holder fails to perfect or
shall have effectively withdrawn or lost such holder's rights to appraisal and
payment under the Delaware Law. If, after the Effective Time, any such holder
fails to perfect or loses any such right to appraisal, such shares of
Outstanding SSCI Shares held by such holder shall be treated as Exchanging SSCI
Shares, without any interest or dividends thereon.
A-5
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SSCI
Except as set forth on the Disclosure Schedule attached hereto, which
Disclosure Schedule shall be cross-referenced to the provision of this Plan of
Merger to which it relates, SSCI represents and warrants to the Buyer and Sub as
follows:
4.1 Organization, Existence and Good Standing. SSCI is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware with all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business as now being conducted. SSCI
is duly qualified and in good standing as a foreign corporation authorized to do
business in each jurisdiction where such qualification is necessary to conduct
its business, except where the failure to be so qualified would not, in the
aggregate, have a Material Adverse Effect. SSCI 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 SSCI within such time
owned, directly or indirectly, any shares of Buyer Common Stock or capital stock
of Sub.
4.2 Capitalization and Share Ownership. SSCI's authorized capital stock
consists of (i) 50,000,000 shares of Common Stock, par value $0.01 per share, of
which 19,615,443 shares were issued and outstanding as of May 31, 1995, and none
of which shares are issued and held as treasury stock and (ii) 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. Except as set forth on the
Disclosure Schedule, all of the SSCI Common Stock has been duly authorized and
validly issued, is fully paid and nonassessable, and was issued in compliance
with all applicable charter documents of SSCI and all applicable federal and
state securities laws. There are, and have been, no preemptive rights with
respect to the issuance of the SSCI Common Stock, except as set forth on the
Disclosure Schedule. Except as set forth on the Disclosure Schedule, there are
no subscriptions, options, warrants, calls, commitments or rights of any
character to purchase or otherwise acquire any capital shares or other
securities of SSCI, whether or not presently issued or outstanding, from SSCI,
at any time, or upon the happening of any stated event. There is no liability
for dividends declared or accumulated but unpaid with respect to any shares of
SSCI Common Stock. SSCI has not made any distributions to any holders of SSCI
Common Stock or participated in or effected any issuance, exchange or retirement
of shares of SSCI Common Stock, or otherwise changed the equity interests of
holders of shares of SSCI Common Stock in contemplation of effecting the Merger
within the two years immediately preceding the date of this Plan of Merger. Any
such shares that SSCI 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.
4.3 Partnerships. The Disclosure Schedule sets forth a list of all
partnerships which are controlled or managed by SSCI (individually,
"Partnership", and collectively, the "Partnerships") and their states of
organization. SSCI has no subsidiaries and, except as set forth on the
Disclosure Schedule, SSCI does not own stock in and does not control, directly
or indirectly, any other corporation, association or business organization other
than the Partnerships. Except as set forth on the Disclosure Schedule, there are
no subscriptions, options, warrants, calls, commitments or rights of any
character to purchase or otherwise acquire any interest in any of the
Partnerships.
4.4 Organization, Existence and Good Standing of the Partnerships. Each
Partnership is a limited partnership duly organized and validly existing under
the laws of its respective state of organization and each Partnership has all
necessary power to own its property and assets and to carry on its business as
presently conducted. Each Partnership is duly qualified and in good standing as
a foreign limited partnership authorized to do business in each jurisdiction
where such qualification is necessary to conduct its business, except where the
failure to be so qualified would not, in the aggregate, have a Material Adverse
Effect.
4.5 Corporate Authority. SSCI has all requisite corporate power and authority
to execute, deliver and perform the Plan of Merger and all agreements and other
documents executed and delivered or to
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<PAGE>
be executed and delivered by it pursuant to the Plan of Merger. Subject to the
satisfaction of the conditions precedent set forth herein, and subject to
stockholder approval, the execution, delivery and performance of this Plan of
Merger has been duly authorized by all necessary corporate action on the part of
SSCI and constitutes the legal, valid and binding obligation of SSCI,
enforceable in accordance with its terms. Except as set forth on the Disclosure
Schedule, 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 SSCI's Certificate of Incorporation 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 SSCI or any Partnership is a party, or by which SSCI or any
Partnership is bound, or violate any restrictions of any kind to which SSCI or
any Partnership is subject, which, if violated or accelerated would have a
Material Adverse Effect. The execution and delivery of this Plan of Merger has
been approved by the Board of Directors of SSCI (or by a committee appointed by
such Board of Directors for the purpose of approving such execution and
delivery).
4.6 Permits and Approvals. SSCI and the Partnerships hold all necessary
licenses, permits, certificates of need and such other approvals or
authorizations as are currently required for the operation of its Business in
accordance with all applicable laws, rules and regulations, and no other
licenses, certificates, permits, or approvals of Federal, state or local
governmental authorities are currently necessary for the operation of the
Business by SSCI except for any failure to hold any of the foregoing which has
not had, and may not reasonably be expected to have, a Material Adverse Effect.
4.7 Financial Statements. SSCI has delivered to Buyer copies of its audited
financial statements, including the notes thereto, as of December 31, 1994 and
for the twelve (12) months then ended, as prepared by SSCI's independent
certified public accountants, Ernst & Young LLP (the "Financial Statements").
The Financial Statements present fairly in all material respects the financial
position of SSCI and the results of its operations as of December 31, 1994 and
the consolidated results of operations and cash flows of SSCI for the periods
then ended, all in conformity with generally accepted accounting principles
("GAAP") and the past accounting practices of SSCI with respect to the Business,
and consistently applied during the period, subject to normal year-end
adjustments, and the Financial Statements make full and adequate provision for
all material obligations and liabilities of SSCI related to the Business as of
the date thereof, to the extent required by GAAP. Except (i) as set forth in the
balance sheet included in the Financial Statements, (the "Balance Sheet") (ii)
liabilities, debts, claims or obligations not required to be reflected on such
financial statements in accordance with GAAP or, (iii) liabilities excluded
pursuant to this Plan of Merger, if any, as of the date of such Financial
Statements, the Financial Statements reflect all known liabilities of SSCI,
including all known contingent liabilities as of the end of each period
reflected therein.
4.8 No Material Adverse Change. Except as set forth in the Disclosure
Schedule and except for regulatory changes applicable to the business of health
care generally or the ownership and operation of outpatient surgery centers in
particular, since December 31, 1994, there has not been (i) any material adverse
change in the condition (financial or otherwise), business, assets, or results
of the Business, (ii) any mortgage or pledge of any of the Assets other than in
the ordinary course of business, (iii) any indebtedness incurred by SSCI or the
Partnerships relating to, or taking as security any interest whatsoever in, the
Assets other than in the ordinary course of business, (iv) any sale or transfer
of the Assets, except in the ordinary course of business, (v) any changes in the
terms of any instruments, accounts, notes, contracts, or other instruments
identified in the exhibits and schedules hereto, other than in the ordinary
course of business, or (vi) any changes in the accounting systems, policies or
practices of SSCI.
4.9 Title to and Condition of Assets. Subject to any required consent of any
third party or governmental authority, SSCI (including where applicable the
Partnerships) has good and marketable title to its Assets free and clear of any
mortgage, lien, pledge, security interest, option, lease (or sublease),
conditional sales agreement, charge, claim, or encumbrance (collectively,
"Liens"), other than Liens which, when taken together, could not reasonably be
expected to have a Material Adverse Effect and except as disclosed on the
Disclosure Schedule hereto. All tangible assets and properties are in good
operating condition and repair and are usable in the ordinary course of the
Business consistent with past practice.
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4.10 Real Property.
(a) Title. All real property and improvements including, without
limitation, all interests in and rights to real property or improvements
which are owned ("Owned Real Property") or leased ("Leased Real Property")
by SSCI or the Partnerships are listed on the Disclosure Schedule
(collectively, the "Real Property"). SSCI or the Partnerships own outright,
and have good and marketable title to, all of the Owned Real Property, free
and clear of all Liens, except the defects, Liens, adverse claims and other
matters which do not materially adversely affect SSCI's or the
Partnership's title to or possession of the Owned Real Property, as shall
be expressly set forth in Schedule B to the commitments for title insurance
policies ("Title Policies") that shall be provided to Buyer prior to the
Effective Time in accordance with Section 8.11.
(b) Access. SSCI is not aware of any restrictions on entrance to or
exit from the Real Property to adjacent public streets nor any conditions
which will result in the termination of the present access from the Real
Property to existing highways and roads.
(c) Eminent Domain. Neither SSCI nor the Partnerships have received
written notice that any governmental body having jurisdiction over the Real
Property intends to exercise the power of eminent domain or a similar power
with respect to all or any part of the Real Property.
(d) No Violations. Neither SSCI nor the Partnerships have received any
written notice from any governmental body that the Real Property or any
improvements erected or situated thereon, or the uses conducted thereon or
therein, violate any regulations of any governmental body having
jurisdiction over the Real Property.
(e) Improvements. The improvements located on the Real Property which
are utilized in the operation of the Business are in good condition and, to
the knowledge of SSCI, are structurally sound, and all mechanical and other
systems located therein are in good operating condition, subject to normal
wear, and no condition exists requiring material repairs, alterations or
corrections.
(f) Environmental Matters. With respect to the Owned Real Property,
except as set forth on the Disclosure Schedule, (i) to SSCI's knowledge,
hazardous substances as defined in any applicable law, statute, regulation,
rule, order, consent decree, settlement agreement or governmental
requirement, which relates to or otherwise imposes liability or standards
of conduct concerning discharges, releases or threatened releases of odors
or any pollutants, contaminants or hazardous or toxic wastes (including
medical wastes), substances or materials into ambient air, water or land,
or otherwise relating to the manufacture, processing, generation,
distribution, use, treatment, storage, disposal, cleanup, transport or
handling of pollutants, contaminants or hazardous or toxic wastes,
substances or materials (including, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C.A.
Section 9601, et seq.) (collectively, "Environmental Laws") have not been
disposed of or otherwise come to be located upon or beneath the Owned Real
Property, and (ii) the Owned Real Property has not been investigated by any
governmental environmental agency, board of health for, and neither SSCI
nor the Partnerships have received any written inquiry from any
governmental environmental agency or board of health with respect to
possible storage or disposal of any such hazardous substances.
4.11 Contracts.
(a) SSCI has made available to Buyer true copies of all written
contracts, obligations and commitments of SSCI and the Partnerships entered
into in connection with and related to the Business, or has otherwise
disclosed such contracts, commitments or obligations in the Disclosure
Schedule, which are material to the Business (the "Contracts"). Except as
otherwise indicated in the Disclosure Schedule, and assuming the other
parties thereto are bound, all such Contracts are valid, binding and
enforceable in accordance with their terms and are in full force and
effect, except where such invalidity or unenforceability would not have a
Material Adverse Effect. Except as set forth or incorporated by reference
on the Disclosure Schedule, no default or alleged default by SSCI or the
Partnerships exists under any Contract, except for defaults or alleged
defaults which would not have a Material Adverse Effect;
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(b) Except as set forth in the Disclosure Schedule, no Contract will,
by its terms, terminate as a result of the transactions contemplated hereby
or require any consent from any other party thereto in order to remain in
full force and effect immediately after the Effective Time, except for
Contracts which, if terminated, would not have a Material Adverse Effect;
and
(c) SSCI and each Partnership are in compliance with all Medicare and
Medicaid provider agreements to which they are a party, except as set forth
on the Disclosure Schedule and except to the extent that such noncompliance
would not have Material Adverse Effect.
4.12 Employee Benefit Plans.
(a) Except as set forth in the Disclosure Schedule, neither SSCI nor
any of the Partnerships is a party to, participates in, or has any
liability or contingent liability with respect to:
(i) any "employee benefit plan" (as that term is defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended) ("ERISA");
(ii) any retirement or deferred compensation plan, incentive
compensation plan, stock plan, unemployment compensation plan,
vacation pay, severance pay, bonus or benefit arrangement, insurance
or hospitalization program or any other fringe benefit arrangements
for any employee, director, consultant or agent, whether pursuant to
contract, arrangement, custom, informal understanding or otherwise,
which does not constitute an employee benefit plan; or
(iii) any employment agreement not terminable upon 30 days' or
less written notice without further liability;
which covers or provides benefits to SSCI's or the Partnership's employees
who work at or are employed on a full time basis by SSCI or the
Partnerships.
(b) A true and correct copy of each of the plans, arrangements or
agreements listed in the Disclosure Schedule (the "Employee Benefit
Plans"), as in effect on the date hereof, has been or shall promptly be
supplied to Buyer by SSCI; provided, however, that SSCI has provided or
shall promptly provide Buyer with an accurate description of each Employee
Benefit Plan that is not in written form. To the extent applicable, a true
and correct copy of the most recent summary plan description with respect
to each Employee Benefit Plan has been or shall promptly be supplied to
Buyer by SSCI.
4.13 Books of Account; Reports. The books of account of SSCI fairly reflect,
in accordance with GAAP, (a) all transactions relating to SSCI and each
Partnership and (b) all items of income and expense, assets and liabilities and
accruals relating to SSCI and each Partnership. Neither SSCI nor any Partnership
has engaged in any transaction, maintained any bank account or used any
corporate funds except for transactions, bank accounts and funds which have been
and are reflected in the normally maintained books and records of SSCI.
4.14 Undisclosed Liabilities. Neither SSCI nor any Partnership has any direct
or indirect liability, indebtedness, obligations, expenses, claims or
deficiencies (the "Liabilities") except for: (a) those Liabilities adequately
and specifically set forth or reserved for on the Balance Sheet and not
heretofore paid or discharged; (b) those Liabilities either arising in the
ordinary course of its business consistent with past practice or under any
contract specifically disclosed on the Disclosure Schedule; and (c) those
Liabilities incurred, consistent with past business practice, in the ordinary
course of its business since the date of the Balance Sheet and not heretofore
paid or discharged.
4.15 Employees. The Disclosure Schedule sets forth the names and current
annual salary rates of all present employees of SSCI and the Partnerships
earning in excess of $50,000 per year, the date of commencement of employment of
each such employee with SSCI or a Partnership, and a summary of such employee's
salary, bonuses and other compensation, if any, paid to such persons in respect
of the fiscal year ended December 31, 1994.
4.16 Compliance with Regulations and Court Orders. Except as set forth in the
Disclosure Schedule, neither SSCI nor any Partnership is in violation of any
applicable statute, law, ordinance, regulation, order or rule of any federal,
state, local or other governmental agency or body (collectively, "Regulations")
or any order of any federal or state court ("Court Orders"). All Court Orders to
which SSCI or any Partnership is a party or is subject to are listed in the
Disclosure Schedule.
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4.17 Litigation. Except as disclosed in the Disclosure Schedule, SSCI has no
knowledge of any actions, suits, arbitrations, or other litigation or
proceedings pending or threatened against or affecting SSCI or any Partnership,
or relating to the transactions contemplated by this Plan of Merger.
4.18 Taxes. Other than with respect to taxes, charges, fees, duties and other
assessments which are imposed by the United States or any state, local or
foreign government in connection with the Business ("Taxes") not yet due and
payable (with respect to which SSCI makes no representation or warranty) all
Taxes required to be paid by SSCI or the Partnerships have been properly
determined in accordance with applicable rules and regulations and have been
paid in full and on time to the extent required. All deposits required by law to
be made by SSCI or the Partnerships with respect to employees withholding taxes
have been made. Except as set forth on the Disclosure Schedule, there are no
liens for Taxes on any of the Assets except liens for Taxes not yet due. SSCI
and the Partnerships have filed all tax returns required to be filed by them or
requests for extensions to file such returns have been timely filed and granted
and have not expired. SSCI has not been notified that any tax returns of SSCI or
any Partnership are currently under audit by the Internal Revenue Service or any
state or local tax agency. No agreements have been made by SSCI or any
Partnership 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.
4.19 Insurance. The Disclosure Schedule contains a true and complete
description of the insurance coverage currently applicable to SSCI and the
Partnerships. All insurance coverage applicable to SSCI and the Partnerships is
in full force and effect, is valid, binding and enforceable in accordance with
its terms against the respective insurers, insures SSCI and each Partnership in
reasonably sufficient amounts against all risks usually insured against by
persons operating similar businesses or properties in the localities where such
businesses or properties are located and has been issued by insurers of
recognized responsibility. To the knowledge of SSCI there is no default under
any such coverage nor has there been any failure to give notice or present any
claim under any such coverage in a due and timely fashion. Except as set forth
on the Disclosure Schedule, and in the ordinary course of business, there are no
outstanding unpaid premiums and no notice of cancellation or nonrenewal of any
such coverage has been received. There are no provisions in such insurance
policies for retroactive or retrospective premium adjustments.
4.20 Labor Matters. Neither SSCI nor any Partnership has any collective
bargaining agreements with any labor union or other representative of employees.
No strike, slowdown, picketing or work stoppage by any union or other group of
employees against SSCI or any Partnership and no secondary boycott with respect
to their products, lockout by them of any of their employees or any other labor
trouble or other occurrence, event or condition of a similar character, has
occurred or been threatened.
4.21 Approvals. Subject to compliance with applicable securities laws and the
Hart-Scott-Rodino Antitrust Improvements Act ("HSR Act"), and except as set
forth on the Disclosure Schedule, the consummation of the Merger does not
require any third party consent or the approval of any federal government or any
state or local government, or any governmental agency of any of the foregoing
and will not violate any law or restrictions to which SSCI is subject.
4.22 Accounts Receivable. All accounts receivable of SSCI reflected on the
SSCI Balance Sheet have arisen out of bona fide transactions in the ordinary
course of business.
4.23 Retirement or Re-Acquisition of Buyer Common Stock. SSCI is not a party
to any agreement the effect of which would be to require Buyer directly or
indirectly to retire or re-acquire all or part of the shares of Buyer Common
Stock issued pursuant to Section 3.1 hereof.
4.24 Disposition of Assets of Surviving Corporation. SSCI 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 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.
4.25 Vote Required. The affirmative vote of the holders of a majority of the
outstanding shares of SSCI Common Stock is the only vote of the holders of any
class or series of SSCI capital stock necessary to approve this Plan of Merger,
the Merger and the transactions contemplated hereby.
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4.24 Material Misrepresentations. No representation or warranty by SSCI in
this Plan of Merger, the Disclosure Schedule or any exhibit or certificate
issued by SSCI and provided or to be provided to Buyer 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 the circumstances then prevailing.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER AND SUB
Buyer and Sub, jointly and severally, represent and warrant to SSCI as
follows:
5.1 Organization, Existence and Capital Stock. Sub is a corporation duly
organized and validly existing and is in good standing under the laws of the
State of Delaware. Sub'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 Buyer.
5.2 Corporate Authority. Sub has all requisite corporate power and authority
to enter into this Plan of Merger and to carry out its obligations under this
Plan of Merger. Subject to the satisfaction of the conditions precedent set
forth herein and subject to such stockholders' approval as shall be required by
Delaware law, the execution, delivery and performance of this Plan of Merger
with Sub has been duly authorized by all necessary corporate action on the part
of Sub and has been duly executed and delivered by Sub and constitutes the
legal, valid and binding obligation of Sub, enforceable in accordance with its
terms. The execution and delivery of this Plan of Merger does not, and, subject
to the receipt of required stockholder and regulatory approvals, the
consummation of the transactions contemplated hereby will not, violate any
provisions of the Certificate of Incorporation or by-laws of Sub or violate any
provision of or result in the acceleration of any obligation or the creation of
any lien or security interest under, any agreement, indenture, instrument,
lease, security, mortgage, lien, order, arbitration award, judgment or decree to
which Sub is a party or by which it or any of its properties is bound, and will
not violate any other restriction of any character to which it is subject.
5.3 Consents. Except as set forth on Schedule 5.3, no notice to, filing with,
authorization of, exemption by, or consent of any person, entity, or
governmental authority is required in order for Sub to consummate the
transactions contemplated hereby.
5.4 Litigation. There are no actions, suits, arbitrations, labor disputes or
other litigation or proceedings pending or, to the knowledge of Sub, threatened
against or affecting Sub which (a) would result in a material adverse change in
the Sub's present condition, including its ability to consummate the transaction
described in this Plan of Merger, (b) materially interfere with the Sub's
ability to obtain any permits or governmental approvals necessary to operate the
Business, or (c) that question the validity or propriety of this Plan of Merger
or any actions to be taken by Sub in furtherance of this Plan of Merger.
5.5 Buyer Common Stock. Buyer has reserved for issuance a sufficient number
of authorized but unissued and/or treasury shares of Buyer Common Stock
sufficient for issuance to the holders of SSCI Common Stock in accordance with
the provisions of the Plan of Merger. The Buyer 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 Exchange upon official notice of issuance.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF BUYER
6.1 Organization, Existence and Good Standing. Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware with all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business as now being con
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ducted. Buyer is duly organized and in good standing as a foreign corporation
authorized to do business in each jurisdiction where such qualification is
necessary to conduct its business, except where the failure to be so qualified
would not, in the aggregate, have a material adverse effect.
6.2 Capitalization and Share Ownership. Buyer's authorized capital stock
consists 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 150,000,000 shares of Common Stock, par value $.01 per share, of which
80,349,816 shares are issued and outstanding and 182,000 shares are held in
treasury. All of the Buyer Common Stock has been duly authorized and will be
validly issued, fully paid and nonassessable, and issued in compliance with all
applicable charter documents of Buyer and all applicable federal and state
securities. Except as disclosed in the Buyer Documents (as hereinafter defined),
and except for grants of stock options under existing plans of Buyer subsequent
to the most recent such Buyer Document, there are: (a) no subscriptions,
options, warrants, calls, commitments or rights of any character to purchase or
otherwise acquire any capital shares or other securities of Buyer, whether or
not presently issued or outstanding, from Buyer, at any time, or upon the
happening of any stated event; and (b) no subscriptions, options, warrants,
calls, commitments or rights to purchase or otherwise acquire from Buyer any
securities of any subsidiary that are convertible into or exchangeable for
capital shares or other securities of Buyer.
6.3 Corporate Authority. Buyer has all requisite corporate power and
authority 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. Subject to the satisfaction of the conditions
precedent set forth herein, the execution, delivery and performance of this Plan
of Merger has been duly authorized by all necessary corporate action on the part
of Buyer and constitutes the legal, valid and binding obligation of Buyer,
enforceable in accordance with its terms. The execution and delivery of the Plan
of Merger and the performance by Buyer hereunder, including, but not limited to,
issuance of the Buyer Common Stock, does not, under the Buyer's Certificate of
Incorporation or Bylaws or under the corporate laws of the State of Delaware,
require that Buyer obtain prior approval from Buyer's stockholders and, subject
to the receipt of any regulatory approvals and any other required third-party
consents or approvals, the consummation of the Merger will not, violate any
provisions of Buyer's Certificate of Incorporation 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
Buyer is a party or by which it is bound, or violate any restrictions of any
kind to which it is subject, violated or accelerated would have a material
adverse effect. The execution and delivery of this Plan of Merger has been
approved by the Board of Directors of Buyer (or by a committee appointed by such
Board of Directors for the purpose of approving such execution and delivery).
6.4 Sub Common Stock. Buyer owns, beneficially and of record, all of the
issued and outstanding shares of common stock (which is the only class of stock
authorized for issuance by Sub), which are validly issued and outstanding, fully
paid and nonassessable, free and clear of all liens and encumbrances. Buyer has
the corporate power to endorse and surrender such Sub shares for cancellation
pursuant to the Plan of Merger. Buyer has taken all such actions as may be
required in its capacity as the sole stockholder of the Sub to approve the
Merger.
6.5 Buyer Disclosure. Buyer has heretofore furnished SSCI with the following
documents:
(i) its Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1994;
(ii) its 1994 Annual Report to Stockholders;
(iii) the Proxy Statement utilized in soliciting proxies in
connection with the 1995 Annual Meeting of stockholders of Buyer; and
(iv) its Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1995 and June 30, 1995, respectively.
(documents (i) -- (iv) above being collectively referred to herein as the "Buyer
Documents"). As of their respective dates, the Buyer 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
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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 Buyer contained in the Buyer 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.
6.6 Financial Statements. Buyer has delivered to SSCI, as part of the Buyer
Documents, copies of its audited financial statements, including the notes
thereto as of December 31, 1994 and for the twelve (12) months then ended, as
prepared by Buyer's independent certified public accountants, Ernst & Young LLP
(the "Buyer Financial Statements"). The Buyer Financial Statements present
fairly in all material respects the financial position of Buyer and the results
of its operations as of December 31, 1994 and the consolidated results of
operations and cash flows of Buyer for the periods then ended, all in conformity
with GAAP and the past accounting practices of Buyer with respect to its
business operations, and consistently applied during the period and the Buyer
Financial Statements make full and adequate provision for all material
obligations and liabilities of Buyer related to its business as of the date
thereof, to the extent required by GAAP. Except (i) as set forth in the balance
sheet included in the Buyer Financial Statements, (the "Buyer Balance Sheet")
(ii) liabilities, debts, claims or obligations not required to be reflected on
such financial statements in accordance with GAAP, or (iii) liabilities excluded
pursuant to this Plan of Merger, if any, as of the date of such Buyer Financial
Statements, the Buyer Financial Statements reflect all known liabilities of
Buyer, including all known contingent liabilities as of the end of each period
reflected therein.
6.7 No Material Adverse Change. Except for regulatory changes applicable to
the business of healthcare generally, since June 30, 1995, there has not been
(i) any material adverse change in the condition (financial or otherwise),
business, assets, or results of operations of Buyer in any such case, taken as a
whole (ii) any mortgage or pledge of any of the Buyer's properties or assets
other than in the ordinary course of business, (iii) any indebtedness incurred
by Buyer relating to, or taking as security any interest whatsoever in, Buyer's
properties and assets other than in the ordinary course of business, (iv) any
sale or transfer of properties and assets, except in the ordinary course of
business, (v) any changes in the terms of any instruments, accounts, notes,
contracts, or other instruments identified in the exhibits and schedules hereto,
other than in the ordinary course of business, or (vi) any changes in the
accounting systems, policies or practices of Buyer.
6.8 Disposition of Assets of Surviving Corporation. Buyer 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.
6.9 Compliance with Regulations and Court Orders. Except as set forth in the
Buyer Documents, neither Buyer nor any subsidiary is in violation of any
applicable Regulation or Court Order, which violation would have a material
adverse effect on Buyer. The Buyer Documents do not omit to disclose any Court
Order required to be disclosed therein. Buyer and each subsidiary has made all
filings or notifications required to be made by them under any Regulations
applicable to Buyer or any subsidiary, except where the failure to make such
filings would not have a material adverse effect on Buyer.
6.10 Litigation. Except as disclosed in the Buyer Documents, Buyer has no
knowledge of any actions, suits, arbitrations, labor disputes or other
litigation or proceedings pending or threatened against or affecting Buyer, or
relating to the transactions contemplated by this Plan of Merger which, if
resolved adversely to Buyer, would have a material adverse effect on Buyer.
6.11 Approvals. Subject to compliance with applicable securities laws and the
HSR Act, and except as set forth on Schedule 6.11, the consummation of the
Merger does not require any third party consent or the approval of any federal
government or any state or local government, or any governmental agency of any
of the foregoing and will not violate any law or restriction to which Buyer is
subject. No approval is required to be obtained by Buyer from any holder of
Buyer's stock which has voting
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rights under Buyer's Certificate of Incorporation or Delaware law relating to
the execution of this Plan of Merger, consummation of the Merger or issuance of
the Buyer Common Stock in accordance with this Plan of Merger.
6.12 Material Misrepresentations. No representation or warranty by Buyer in
this Plan of Merger, and no schedule or certificate issued by Buyer and provided
or to be provided or to be furnished to SSCI 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.
6.13 Due Diligence. Buyer acknowledges it has been given full opportunity to
conduct any and all due diligence investigation with respect to the Business as
Buyer has deemed necessary or appropriate prior to the execution and delivery of
this Plan of Merger. Buyer shall be entitled to rely on any express
representations of SSCI set forth in this Plan of Merger irrespective of any
such investigation undertaken by Buyer.
ARTICLE VII
COVENANTS
7.1 Buyer's Right of Access and Inspection. From the date hereof to the
Closing Date, Buyer, through its employees, agents and representatives, during
such normal working hours as it deems necessary or advisable, but subject to
such restrictions as SSCI may reasonably impose to protect SSCI's business
records and to avoid disruption of SSCI's operations, may make or cause to be
made such reasonable investigation of SSCI's assets, and the business operations
of SSCI and the Partnerships, as Buyer shall deem advisable. During such period
SSCI shall furnish promptly to Buyer all information concerning SSCI's Assets
and Liabilities and its Business as Buyer may reasonably request. SSCI will
fully cooperate with Buyer, including making offices and knowledgeable employees
available to Buyer's employees, agents and representatives. Buyer's right of
access is conditioned upon its obligations described in Section 7.2 hereof. In
addition, SSCI shall make available to Buyer all such banking, investment and
financial information as shall be reasonably necessary to allow for the
efficient integration of SSCI's banking, investment and financial arrangements
with those of Buyer at the Effective Time.
7.2 Confidentiality of Information. Buyer hereby acknowledges and confirms
that, as SSCI is a privately held company, the information to be made available
to Buyer pursuant to Section 7.1 is confidential, non-public information which
is only being made available for Buyer's due diligence efforts pursuant to this
Plan of Merger. Accordingly, Buyer acknowledges and agrees that any and all
information relating to SSCI and the Partnerships which is reviewed by Buyer
will be held in strict confidence and will not be disclosed to any third party,
other than to the Buyer representatives and agents referred to in Section 7.1,
without the express written consent of SSCI or as otherwise required by
applicable law. The provisions of this Section 7.2 are in addition to, and not
in lieu of, the obligations of Buyer under that certain Confidentiality
Agreement between Buyer and SSCI, dated March 28, 1995 (the "Confidentiality
Agreement").
7.3 Preservation of Business. SSCI shall use all commercially reasonable
efforts to (a) preserve intact its present business organization and personnel,
and (b) preserve the present goodwill and advantageous relationships of SSCI and
the Partnerships with respect to its Business.
7.4 Operation of the Business. Until the Closing Date, except as may be
approved by Buyer, or as otherwise expressly provided in the Plan of Merger,
SSCI shall, and shall cause each of the Partnerships to:
(a) Use all commercially reasonable efforts to operate its business
only in the usual, regular and ordinary course and manner.
(b) Maintain its books, accounts and records relating to its and their
business operations in the usual, regular and ordinary manner, and on a
basis consistent with the Financial Statements.
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(c) Other than in the ordinary course of business, and except as set
forth in the Disclosure Schedule, or as may otherwise be required by
applicable law, not increase or make any other material change in the
compensation arrangements for any employee of SSCI or the Partnerships from
that in effect as of August 1, 1995.
(d) Not issue, sell, deliver or pledge or authorize or propose the
issuance, sale, delivery or pledge of (i) additional shares of capital
stock of any class (including shares of SSCI Common Stock), or securities
convertible into shares of SSCI Common Stock, or any rights, warrants or
options to acquire any such shares of SSCI Common Stock or other
convertible securities, other than such issuance of shares of SSCI Common
Stock pursuant to the exercise or acceleration of stock options or warrants
for SSCI Common Stock outstanding on the date hereof, (ii) any other
securities in respect of, in lieu of, or in substitution for shares of SSCI
Common Stock outstanding on the date hereof, or (iii) any of its interests
in the Partnerships;
(e) Except in the usual and ordinary course of business, not sell or
dispose of, or agree to sell or dispose of, any of its assets, or suffer or
permit the creation of any mortgage, pledge, lien or other encumbrance,
security interest or imperfection of title which individually or in the
aggregate materially and adversely affects the value of its Assets when
taken as a whole.
(f) Continue to carry its existing insurance with respect to its
Business and not allow any breach of such insurance policies or agreements
to occur or exist.
(g) Use all commercially reasonable efforts not to do any act or omit
to do any act, or permit any act or omission to act, which will cause a
material breach by it of any of the Contracts.
(h) Duly comply with all laws, statutes, regulations, rules and orders
which are material to the Business and use all commercially reasonable
efforts to duly comply with all laws, statutes, regulations, rules and
orders as may be required to effect the Merger.
(i) To the extent that SSCI shall have knowledge thereof, promptly
notify Buyer of:
(A) any notice or other communication from any person alleging
that the consent of such person is or may be required in connection
with the transactions contemplated by this Plan of Merger;
(B) any notice or other communication from any governmental
authority in connection with the transactions contemplated by this
Plan of Merger;
(C) any Material Adverse Change in the Business;
(D) any actions, suits, claims, investigations or proceedings
commenced or threatened against, relating to or involving or otherwise
affecting the Business that, if pending on the date of this Plan of
Merger, would have been required to have been disclosed pursuant to
this Plan of Merger.
(j) Not amend its Certificate of Incorporation or By-Laws.
(k) Not merge with or into any other corporation or sell, assign,
transfer, pledge or encumber any part of the Assets or agree to do any of
the foregoing.
(l) Continue to maintain all Employee Benefit Plans in accordance with
applicable regulations, and ensure that no Employee Benefit Plan, nor any
trust related thereto, shall be amended or terminated prior to the Closing
Date, except for any such amendment as may be required to comply with
applicable Regulations.
(m) Collect its accounts receivable and pay its accounts payable, in
each case in the ordinary course of business consistent with past practice,
and not fail to pay or discharge when due any Liabilities.
(n) Not settle or compromise any suit or claim or threatened suit or
claim relating to the transactions contemplated hereby;
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(o) Not enter into or commit to enter into any contract, agreement,
arrangement or understanding having a term longer than six months unless
such contract, agreement, arrangement or understanding may be cancelled by
SSCI or any Partnership without penalty on not more than 60 days' notice or
does not require the expenditure by SSCI or any Partnership of more than
$50,000;
(p) Not authorize, propose or enter into, or announce an intention to
authorize, propose or enter into, or recommend or announce an intention to
recommend, an agreement in principle or an agreement with respect to, any
merger, consolidation, joint venture, liquidation, dissolution, or business
combination (other than the Merger), or any material change in its
capitalization, not in the ordinary course of business and consistent with
past practice;
(q) Not authorize or make any capital expenditure in excess of
$50,000, except for obligations incurred prior to the date hereof, all of
which are described in the Disclosure Schedule;
(r) Not make any Tax election or settle or compromise any income Tax
liability material to SSCI or the Partnerships; and
(s) Not change any of the accounting principles or practices used by
it to prepare the Financial Statements; and
(t) Not declare or pay any dividend or other distribution in respect
of its capital stock.
7.5 Approval of SSCI Stockholders. SSCI shall either (a) promptly take all
steps necessary in accordance with its Certificate of Incorporation and Bylaws
to call, give notice of, convene and hold a meeting of its stockholders for the
purpose of approving this Plan of Merger and for any related matters; or (b)
take action to approve the Plan of Merger and any related matters by written
consent of stockholders in lieu of meeting to the extent permitted by applicable
law and its Certificates of Incorporation and Bylaws.
7.6 Registration Statement.
(a) Buyer shall prepare and file with the Securities and Exchange
Commission and any other applicable regulatory bodies, as soon as
reasonably practicable, a registration statement with respect to the shares
of Buyer 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.
Buyer shall take all reasonable steps to cause the Registration Statement
to be declared effective, to cause the prospectus contained in the
Registration Statement to be distributed to the stockholders of SSCI and to
maintain the effectiveness of the Registration Statement until all of the
shares covered thereby have been distributed. Buyer 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.
(b) Prior to the Closing Date, Buyer shall use its reasonable, good
faith efforts to cause the shares of Buyer 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, Buyer shall file an additional listing
application (the "Listing Application") with the Exchange relating to the
shares of Buyer Common Stock to be issued in connection with the Merger,
and shall use its reasonable, good faith efforts to cause such shares of
Buyer Common Stock to be approved for listing on the Exchange, upon
official notice of issuance, prior to the Closing Date.
(d) SSCI shall furnish all information to Buyer with respect to SSCI
and the Partnerships as Buyer may reasonably request for inclusion in the
Registration Statement and the Listing Application, and shall otherwise
cooperate with Buyer in the preparation and filing of such documents.
7.7 Best Efforts. Subject to the terms and conditions herein provided, each
of the parties to this Plan of Merger agrees to use its best efforts to take, or
cause to be taken, all action, and to do, or cause to be done as promptly as
practicable, all things necessary, proper or advisable to obtain all consents,
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authorizations and approvals from all third parties, including any governmental
agencies, necessary to consummate the Merger and the transactions related
thereto. If at any time after the Effective Time any further action is necessary
or desirable to carry out the purposes of this Plan of Merger, including the
execution of additional instruments, the proper officers and directors of each
party to this Plan of Merger shall take all such necessary action.
7.8 HSR Act Compliance. Buyer and SSCI shall promptly file in accordance
with, 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.
7.9 Announcements. Buyer and SSCI shall cooperate and mutually agree upon any
announcements or other communications that may be made to employees of SSCI or
the Partnerships or to others, prior to the Effective Time concerning the
transactions contemplated by this Plan of Merger; provided, however, that Buyer
may communicate with analysts, institutional investors or similar individuals
with regard to the substance of any items disclosed in any press release
mutually agreed upon by the parties; and, provided further, that nothing
contained herein shall prevent Buyer or SSCI, after giving reasonable advance
notice to the other party hereto, from making any announcement reasonably
determined by it, upon advice of counsel, to be required by law.
7.10 Resignation of SSCI Directors. On or prior to the Closing Date, SSCI
shall deliver to Buyer evidence satisfactory to Buyer of the resignation of the
Directors of SSCI, such resignations to be effective on the Closing Date.
7.11 SSCI Stock Options.
(a) As soon as reasonably practicable after the Effective Time of the
Merger, Buyer shall deliver to the holders of Options appropriate notices
setting forth such holders' rights pursuant to the stock option plans under
which such Options were issued and the stock option agreements evidencing
such Options (the "Plans"), which shall continue in full force and effect
on the same terms and conditions (subject to the adjustments required by
Sections 3.1(e) or this Section 7.11 after giving effect to the Merger and
the assumption of such Options by Buyer as set forth herein) as in effect
immediately prior to the Effective Time. Buyer shall comply with the terms
of the Plans, 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 Options which qualified as incentive
stock options prior to the Effective Time of the Merger, if any, shall
continue to qualify as incentive stock options after the Effective Time of
the Merger.
(b) Buyer shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Buyer Common Stock for delivery
upon exercise of the Options assumed by Buyer in accordance with Section
3.1(e) and this Section 7.11. At the Effective Time, Buyer shall file with
the SEC a registration statement on Form S-8 with respect to shares of
Buyer Common Stock subject to such 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 Options
remain outstanding. With respect to those individuals, if any, who
subsequent to the Merger will be subject to the reporting requirements
under Section 16(a) of the Exchange Act, where applicable, Buyer shall
administer the Plans assumed pursuant to Section 3.1(e) 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
Options awarded under any of the Plans, 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 Buyer as set forth above.
7.12 Accounting Methods. Neither Buyer nor SSCI 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 party's
independent accountants.
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7.13 Affiliate and Pooling Agreements. Buyer and SSCI 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) to execute and deliver
to Buyer as soon as practicable an agreement in the form attached hereto as
Schedule 7.13 relating to the disposition of the Outstanding SSCI Shares and
shares of Buyer Common Stock, if any, held by such person and the shares of
Buyer Common Stock issuable pursuant to this Plan of Merger.
7.14 Pooling and Tax-Free Reorganization Treatment. Neither Buyer nor SSCI
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.
7.15 Cooperation.
(a) Buyer and SSCI 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 Buyer and SSCI 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, 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
Buyer and SSCI 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 Publication of Combined Results. Buyer agrees that, within 15 days after
the end of the first calendar month following at least 30 days after the Closing
Date, Buyer shall cause publication of the combined results of operations of
Buyer and Surviving Corporation. For purposes of this Section 7.16, the term
"publication" shall have the meaning provided in SEC Accounting Series Release
No. 135.
ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATIONS
OF BUYER AND SUB
The obligations of Buyer and Sub under this Plan of Merger are, at the option
of Buyer, subject to satisfaction or waiver of the following conditions
precedent on or before the Closing Date:
8.1 Warranties True and Correct. The representations and warranties of SSCI
contained herein, subject to all applicable qualifications and exceptions
contained herein relating to materiality or Material Adverse Effect, (a) shall
be true in all respects on and as of the date of this Plan of Merger, and (b)
shall also be true in all respects (except for such changes as are contemplated
by, or as not in violation of, the terms of this Plan of Merger) on and as of
the Closing Date with the same force and effect as though made on and as of the
Closing Date.
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8.2 Compliance with Agreements and Covenants: Certificate. SSCI shall, in all
material respects, have performed all of its respective obligations and
agreements and complied with all of its covenants contained in this Plan of
Merger to be performed and complied with by it on or prior to the Closing Date;
and SSCI shall have delivered to Buyer a certificate dated as of the Closing
Date, executed by a duly authorized officer of SSCI, certifying as to compliance
with Section 8.1 and this Section 8.2.
8.3 Expiration of HSR Waiting Period. The applicable waiting period under the
HSR Act shall have expired or have been earlier terminated without action by the
Justice Department or the Federal Trade Commission to prevent consummation of
the Merger.
8.4 Required Consents. SSCI shall have obtained consents (the "Required
Consents") under those Contracts identified on the Disclosure Schedule as
requiring consents prior to consummation of the Merger, or, at the option of
Buyer, Buyer shall have obtained new contracts or agreements which permit the
continued use or supply of the products or services provided for by such
contracts and agreements following the Merger.
8.5 No Prohibitions. No statute, rule or regulation shall have been enacted
by the federal government or any state or local government or governmental
agency of any of the foregoing that would make the Merger and any of the other
related transaction illegal.
8.6 No Material Adverse Change. Except as listed in the Disclosure Schedule,
since December 31, 1994, there shall not have been any material adverse change
in the Business (other than as a result of changes in conditions, including
economic or political developments, applicable to the business of health care
generally or the operation of outpatient surgical centers in particular).
8.7 No Actions or Proceedings. No federal or state court shall have entered
an injunction or other similar order enjoining consummation of the transactions
provided for herein, and no action or proceeding shall have been threatened or
instituted and remain pending before a court or other governmental body by any
governmental agency or public authority to restrain or prohibit the transactions
contemplated by this Plan of Merger, nor shall any governmental agency have
notified any party to this Plan of Merger that consummation of the transactions
contemplated herein would constitute a violation of the laws of the United
States and that it intends to commence proceedings to restrain the consummation
of the transactions contemplated hereby unless such agency shall have withdrawn
such notice prior to the Effective Time.
8.8 Registration Statement. The Registration Statement shall have been
declared effective and no stop order with respect thereto shall be in effect.
8.9 Stockholders Consent. The holders of SSCI Common stock shall have
approved the Merger and this Plan of Merger and any other matters submitted to
them in accordance with the provisions hereof.
8.10 Pooling. The Merger shall qualify for "pooling of interests" account
treatment, and Buyer and SSCI shall each have received letters to that effect
from independent accountants for Buyer and from Ernst & Young LLP, independent
accountants for SSCI, dated (i) not later than October 1, 1995, and (ii) the
Closing Date.
8.11 Renewal of Notes. The promissory notes given by each of the Principal
Stockholders, as reflected on the Financial Statements (the "Notes"), prior to
the Effective Time, shall have been renewed on such terms and conditions,
including, but not limited to, term and rate of interest, as each of the
Principal Stockholders and the buyer shall mutually agree to; provided, however,
that Ernst & Young LLP shall have advised Buyer and SSCI that such renewal of
the Notes shall not disqualify the Merger for "pooling of interests" accounting
treatment.
8.12 Title Policies. The Title Policies for the Owned Real Property shall
have been delivered to Buyer.
8.13 Opinion of Counsel for SSCI. Buyer shall have been furnished with an
opinion of Burke, Warren & MacKay, P.C., counsel for SSCI, substantially to the
effect as set forth in Schedule 8.13.
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ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS OF SSCI
The obligations of SSCI under this Plan of Merger are, at the option of SSCI,
subject to the satisfaction or waiver of the following conditions precedent on
or before the Closing Date:
9.1 Warranties True and Correct. The representations and warranties of Buyer
and Sub contained herein subject to all applicable qualifications and exceptions
contained herein as to materiality and material adverse effect (a) shall be true
in all material respects on and as of the date of this Plan of Merger, and shall
also be true in all material respects (except for such changes as are
contemplated by the terms of this Plan of Merger) on and as of the Closing Date
with the same force and effect as though made by Buyer or Sub on and as of the
Closing Date.
9.2 Compliance with Agreements and Covenants; Certificate. Buyer and Sub
shall, in all material respects, have performed all obligations and agreements
and complied with all covenants contained in this Plan of Merger, to be
performed and complied with by them on or prior to the Closing Date; and Buyer
and Sub shall have delivered to SSCI a certificate, dated as of the Closing
Date, jointly and severally executed by duly authorized officers, of Buyer and
Sub, as applicable, certifying as to their compliance with Section 9.1 and this
Section 9.2.
9.3 Expiration of HSR Waiting Period. The applicable waiting period under the
HSR Act shall have expired or have been earlier terminated without action by the
Justice Department or the Federal Trade Commission to prevent consummation of
the Merger.
9.4 No Prohibitions. No statute, rule or regulation shall have been enacted
by the federal government or any state or local government or any governmental
agency of any of the foregoing that would make the Merger and any related
transactions illegal.
9.5 No Actions or Proceedings. No court, federal or state, shall have entered
an injunction or other similar order enjoining consummation of the transactions
provided for herein, and no action or proceeding shall have been threatened or
instituted and remain pending before a court or other governmental body by any
governmental agency or public authority to restrain or prohibit the transactions
contemplated by this Plan of Merger, nor shall any governmental agency have
notified any party to this Plan of Merger that consummation of the transactions
contemplated herein would constitute a violation of the laws of the United
States and that it intends to commence proceedings to restrain the consummation
of the transactions contemplated hereby unless such agency shall have withdrawn
such notice prior to the Effective Time.
9.6 No Material Adverse Change. There shall have been no material adverse
change in the business, properties, operations or financial condition of Buyer.
9.7 Registration Statement. The Registration Statement shall have been
declared effective and no stop order with respect thereto shall be in effect.
9.8 Pooling. The Merger shall qualify for "pooling of interests" account
treatment, and Buyer and SSCI shall each have received letters to that effect
from independent accountants for Buyer and from Ernst & Young LLP, independent
accountants for SSCI, dated (i) not later than October 1, 1995, and (ii) the
Closing Date.
9.9 Opinion of Counsel. SSCI shall have received an opinion, dated the
Closing Date, of Haskell, Slaughter, Young & Johnston, Professional Association,
counsel to Buyer, to the effect as set forth in Schedule 9.9.
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ARTICLE X
TERMINATION
10.1 Termination. This Plan of Merger may be terminated and the Merger
contemplated hereby may be abandoned at any time on or prior to the Effective
Time notwithstanding approval thereof by SSCI's stockholders:
(a) By the mutual written consent of SSCI and Buyer; or
(b) By SSCI, if the Average Closing Date Price is less than $18.00; or
(c) By SSCI or Buyer, if, without any fault of the terminating party,
the Effective Time shall not have occurred on or before November 30, 1995,
or such later date as may be approved in writing by Buyer and SSCI; or
(d) By Buyer of SSCI if any court of competent jurisdiction or other
governmental entity shall have issued, enacted, entered, promulgated or
enforced, an order, judgment, injunction, restraining order, decree or
ruling or taken any other action permanently enjoining, restraining or
otherwise prohibiting the Merger and such judgment, order, decree,
injunction, restraining order, ruling or other action shall have become
final and nonappealable.
10.2 Effect of Termination. If this Plan of Merger is terminated as permitted
by Section 10.1, this Plan of Merger shall forthwith become void and have no
effect, without liability of any party (or any stockholder, director, officer,
employee, agent, consultant or representative of such party) to the other party
to this Plan of Merger; provided that if such termination shall result from the
willful failure of any party to fulfill a condition to the performance of the
obligations of the other party, failure to perform a covenant of this Plan of
Merger or breach by either party hereto of any representation or warranty or
agreement contained herein in a willful or grossly negligent manner, such party
shall be fully liable for any and all losses incurred or suffered by the other
parties as a result of such failure or breach.
ARTICLE XI
INDEMNIFICATION
11.1 Survival. All of the covenants, agreements, representations or
warranties of the parties hereto contained in this Plan of Merger or in any
certificate or other writing delivered pursuant to, or in connection with, this
Plan of Merger shall survive the Closing until the later of the date when
year-end financial statements are available for the Surviving Corporation or the
first anniversary of the Closing Date. It is understood and agreed that, except
as explicitly provided in this Plan of Merger, after the Closing there shall be
no liability or obligation in respect of a breach or alleged breach of any
representation, warranty, covenant or other agreement.
11.2 Indemnification by Principal Stockholders. Sutter Ambulatory Care
Corporation, a California nonprofit public benefit corporation, and EJ Financial
Investments, L.P., a Delaware limited partnership (herein collectively the
"Principal Stockholders") shall jointly indemnify Buyer and Sub, without
duplication, and each of Buyer's and Sub's respective officers, directors,
employees and representatives ("Affiliates"), against, and defend and hold them
harmless from, any and all losses, claims, demands, liabilities, expenses,
including, but not limited to reasonable attorneys fees (herein "Losses")
incurred or suffered by Buyer, Sub or their Affiliates arising out of any of the
following: (a) any misrepresentation made by SSCI pursuant to this Plan of
Merger, (b) any breach of or failure by SSCI to perform any agreement or
covenant set out in this Plan of Merger, and (c) breach of any warranty made in
this Plan of Merger by SSCI; provided, however, that the Principal Stockholders
shall not be liable under this Section 11.2 unless the aggregate amount of
Losses incurred or suffered by Buyer or any of its Affiliates (or any
combination thereof) exceeds One Million Dollars ($1,000,000.00), and then only
to the extent of such excess amount. Any other provision of this Plan of Merger
notwithstanding, in no event shall the aggregate obligation of Principal
Stockholders to indemnify Buyer or any of its Affiliates pursuant to
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this Article XI for Losses exceed an amount equal to Eight Million Dollars
($8,000,000.00). No claim for indemnification shall be made under this Section
11.2 unless the claim shall, individually, be for an amount in excess of Fifty
Thousand Dollars ($50,000.00).
11.3 Indemnification by Buyer. Buyer shall indemnify the Principal
Stockholders and, without duplication, each of their respective Affiliates
against, and defend and hold them harmless from, any and all Losses incurred or
suffered by the Principal Stockholders or their Affiliates arising out of any of
the following: (a) any misrepresentation made by Buyer or Sub pursuant to this
Plan of Merger, (b) any breach of or failure by Buyer or Sub to perform any
agreement or covenant of Buyer or Sub set out in this Plan of Merger, and (c)
breach of any warranty made in this Plan of Merger by Buyer or Sub; provided,
however, that Buyer shall not be liable under this Section 11.3 unless the
aggregate amount of Losses incurred or suffered by Principal Stockholders or any
of their Affiliates (or any combination thereof) exceeds One Million Dollars
($1,000,000.00), and then only to the extent of such excess amount. Any other
provision of this Plan of Merger notwithstanding, in no event shall the
aggregate obligation of Buyer to indemnify the Principal Stockholders or any of
their Affiliates pursuant to this Article XI for Losses exceed an amount equal
to Eight Million Dollars ($8,000,000.00). No claim for indemnification shall be
made under this Section 11.3 unless the claim shall, individually, be for an
amount in excess of Fifty Thousand Dollars ($50,000.00).
11.4 Losses Net of Insurance. The amount of any Losses for which
indemnification is provided under this Article shall be net of any amounts
recovered by the indemnified party under insurance policies with respect to such
Loss.
11.5 Termination of Indemnification. The obligations to indemnify and hold
harmless a party hereto, shall terminate when the representations and covenants
terminate pursuant to Section 11.1, provided, however, that such obligations to
indemnify and hold harmless shall not terminate with respect to any item as to
which the person to be indemnified or the related party hereto shall have,
before the expiration of the applicable period, previously made a claim by
delivering a notice (stating in reasonable detail the basis of such claim) to
the indemnifying party.
11.6 Notice of Claims; Assumption of Defense. The indemnified party shall
give prompt notice to the indemnifying party, in accordance with the terms of
Section 12.4, of the assertion of any claim, or the commencement of any suit,
action or proceeding by any party in respect of which indemnity may be sought
hereunder, specifying with reasonable particularity the basis therefor and give
the indemnifying party such information with respect thereto as the indemnifying
party may reasonably request (but the giving of such notice shall not be a
condition precedent to indemnification hereunder, except as provided in Section
11.7). The indemnifying party may, at its own expense, (a) participate in and,
(b) upon notice to the indemnified party and the indemnifying party's written
agreement that the indemnified party is entitled to indemnification pursuant to
Section 11.2 or Section 11.3 for all Losses arising out of such claim, suit,
action or proceeding, at any time during the course of any such claim, suit,
action or proceeding, assume control of the defense thereof; provided that the
indemnifying party shall thereafter consult with the indemnified party upon the
indemnified party's reasonable request for such consultation from time to time
with respect to such claim, suit, action or proceeding. If the indemnifying
party assumes such defense, the indemnified party shall have the right (but not
the duty) to participate in the defense thereof and to employ counsel, at its
own expense, separate from the counsel employed by the indemnifying party.
Whether or not the indemnifying party chooses to defend or prosecute any such
claim, suit, action or proceeding, all of the parties hereto shall cooperate in
the defense or prosecution thereof.
11.7 Settlement or Compromise. Whether or not the indemnifying party shall
have assumed the defense of any such claim, suit, action or proceeding of the
kind referred to in Section 11.6, the indemnified party shall not admit any
liability with respect to, or settle, compromise or discharge such claim, suit,
action or proceeding without the indemnifying party's prior written consent
(which will not be unreasonably withheld). The indemnifying party shall obtain
the written consent of the indemnified party before entering into any
settlement, adjustment, compromise or discharge, or ceasing to defend against
any such claim, suit, action or proceeding, only if as a result thereof, there
would be imposed on the indemnified party any liability or obligations not
covered by the indemnity obligations of the indemnifying party under this Plan
of Merger.
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11.8 Failure of Indemnifying Party to Act. In the event that the indemnifying
party does not elect to assume the defense of any claim, suit, action or
proceeding, then any failure of the indemnified party to defend or to
participate in the defense of any such claim, suit, action or,proceeding or to
cause the same to be done, shall not relieve the indemnifying party of its
obligations hereunder, provided, that the indemnified party gives the
indemnifying party at least thirty (30) days' written notice of its proposed
failure to defend or participate and affords the indemnifying party the
opportunity to assume the defense thereof.
11.9 Procedure for Indemnification. Upon becoming aware of a claim for
indemnification hereunder (whether as a result of any claim, suit, action or
proceeding of the kind referred to in Section 11.6, or in connection with any
Losses which the indemnified party deems to be within the ambit of this Article
XI), the indemnified party shall promptly give, in accordance with the terms of
Section 11.4, notice of such claim (a "Claim Notice") to the indemnifying party,
providing reasonable detail of how the claim has arisen and an estimate of the
amount the indemnified party reasonably anticipates that it will be entitled to
on account of indemnification by the indemnifying party; provided, that no
failure to give any such notice shall result in the loss of any rights to
indemnification hereunder except to the extent that the ability of the
indemnifying party to defend a claim was materially prejudiced by the failure to
send such notice. If the indemnifying party does not object to such claim within
forty-five (45) days of receiving notice thereof, the indemnified party shall be
entitled to recover the amount of such claim. If, however, the indemnifying
party advises the indemnified party that it disagrees with the indemnified
party's claim, the parties shall, for a period of forty-five (45) days after the
indemnifying party advises the indemnified party of such disagreement, attempt
to resolve the difference.
ARTICLE XII
MISCELLANEOUS
12.1 Expenses. Each party hereto shall bear and pay its own expenses with
respect to this transaction.
12.2 Amendment. This Plan of Merger may be amended, modified or supplemented
but only in writing signed by all of the parties hereto.
12.3 Brokers. Except for Alex. Brown & Sons Incorporated on behalf of SSCI
(whose fees will be paid by SSCI) and Smith Barney Inc. on behalf of Buyer
(whose fees will be paid by Buyer), each of the parties hereto represents that
no broker or finder has acted for it in connection with this Plan of Merger or
the transactions contemplated hereby and that no broker or finder is entitled to
any brokerage or finder's fee or other commission based on agreements,
arrangements or,understandings made by it.
12.4 Notices. Any notice, request, instruction or other document to be given
hereunder by a party hereto shall be in writing and shall be deemed to have been
given, (a) when received if given in person, (b) on the date of transmission if
sent by telex, telecopy or other wire transmission (provided that a copy of such
transmission is simultaneously posted in the manner provided in clause (c)), (c)
three business days after being deposited in the U.S. mail, certified or
registered mail, postage prepaid, or (d) the next business day after delivery to
a nationally known overnight delivery service:
(i) If to SSCI addressed as follows:
Sutter Surgery Centers, Inc.
1201 Alhambra Blvd., Suite 330
Sacramento, CA 95816
Attn: August A. Saibeni, Chief Executive Officer
with copies to:
EJ Financial Investments, L.P.
225 East Deerpath
Suite 250
Lake Forest, Illinois 60045
Attention: Timothy R. Kelly, Vice President
A-23
<PAGE>
Sutter Ambulatory Care Corp.
One Capitol Mall
Sacramento, CA 95814
Attention: David W. Cox, Sr. Vice President
and
Burke, Warren & MacKay, P.C.
225 W. Washington Street
24th Floor
Chicago, Illinois 60606
Attention: Christopher R. Manning, Esq.
Facsimile: (312) 357-0707
(ii) If to Buyer, addressed as follows:
HEALTHSOUTH Corporation
Two Perimeter Park South
Birmingham, Alabama 35243
Attention: Michael D. Martin,
Senior Vice President and Treasurer
with copies to:
William W. Horton, Esq.
Group Vice President -- Legal Services
HEALTHSOUTH Corporation
Two Perimeter Park South
Birmingham, Alabama 35243
and
J. Brooke Johnston, Jr., Esq.
Haskell Slaughter Young & Johnston,
Professional Association
1200 AmSouth/Harbert Plaza
1901 Sixth Avenue North
Birmingham, Alabama 35203
or to such other individual or address as a party hereto may designate for
itself by notice given as herein provided.
12.5 Amounts in United States Dollars. For purposes of this Plan of Merger,
all figures set out herein which are preceded by the symbol "$" shall be deemed
amounts in United States Dollars.
12.6 Certain Definitions. For convenience and brevity, certain terms used in
various parts of this Plan of Merger are defined and referenced to below:
(a) "Assets" means all of SSCI's and each Partnership's assets,
properties, business, goodwill and rights of every kind and description,
real and personal, tangible and intangible, wherever situated, taken as a
whole.
(b) "Business" means the existing assets, liabilities and financial
condition of SSCI and the Partnerships, taken as a whole.
(c) "Knowledge" or "to the knowledge" or any similar phrase shall be
deemed to refer to the knowledge of the Chief Executive Officer, Vice
President of Operations or Vice President of Finance of a party and to
include the assurance that such knowledge is based upon a reasonable
investigation, unless otherwise expressly provided.
(d) "Material Adverse Effect" means a material adverse effect on the
Business.
A-24
<PAGE>
12.7 Waivers. The failure of a party hereto at any time or times to require
performance of any provision hereof shall in no manner affect its right at a
later time to enforce the same. No waiver by a party of any condition or of any
breach of any term, covenant, representation or warranty contained in this Plan
of Merger shall be effective unless in writing, and no waiver in any one or more
instances shall be deemed to be a further or continuing waiver of any such
condition or breach in other instances or a waiver of any other condition or
breach of any other term, covenant, representation or warranty.
12.8 Counterparts. This Plan of Merger may be executed simultaneously in
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12.9 Headings. The headings preceding the text of Articles and Sections of
this Plan of Merger thereto are for convenience only and shall not be deemed
part of this Plan of Merger.
12.10 Applicable Law. This Plan of Merger shall be governed by and construed
and enforced in accordance with the internal laws of the State of Delaware.
12.11 Assignment. This Plan of Merger shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns;
provided, however, that no assignment or other transfer shall be made without
the prior written approval of each of the parties hereto.
12.12 No Third Party Beneficiaries. This Plan of Merger is solely for the
benefit of the parties hereto and their respective Affiliates and no provision
of this Plan of Merger shall be deemed to confer upon third parties (other than
the Affiliates and stockholders of SSCI) any remedy, claim, liability,
reimbursement, claim of action or other right in excess of those existing
without reference to this Plan of Merger.
12.13 Other Discussions. Upon execution of this Plan of Merger, SSCI and its
Affiliates will discontinue all, and not commence any, discussions and
negotiations with, any other persons, or solicit any other offers, regarding the
sale or transfer of any of the Shares.
12.14 Entire Understanding. This Plan of Merger (including any schedules and
exhibits) and the Confidentiality Agreement set forth the entire agreement and
understanding of the parties hereto in respect to the transactions contemplated
hereby and supersedes all prior agreements, arrangements and understandings
relating to the subject matter hereof. There have been no representations or
statements, oral or written, that have been relied on by any party hereto,
except those expressly set forth in this Plan of Merger and the Confidentiality
Agreement.
A-25
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Plan of Merger to be
executed and delivered by their duly authorized officer as of the date first
above written.
SUTTER SURGERY CENTERS, INC.,
a Delaware corporation
By /s/ August A. Saibeni
------------------------------------
Print Name August A. Saibeni
--------------------------------
Title President and Chief Executive Officer
--------------------------------------
HEALTHSOUTH Corporation
a Delaware corporation
By /s/ Michael D. Martin
-------------------------------------
Print Name Michael D. Martin
---------------------------------
Title Senior Vice President
--------------------------------------
SUBSIDIARY,
a Delaware corporation
By /s/ Michael D. Martin
--------------------------------------
Print Name Michael D. Martin
----------------------------------
Title Vice President
---------------------------------------
A-26
<PAGE>
ACKNOWLEDGEMENT OF PRINCIPAL STOCKHOLDERS
The undersigned Principal Stockholders of SSCI acknowledge that they have
read the above Plan of Merger and agree to be bound by its terms and provisions.
E.J. FINANCIAL INVESTMENTS, L.P.
a Delaware limited partnership
By /s/ John N. Kapoor
--------------------------------------
Print Name John N. Kapoor
----------------------------------
Title General Partner
---------------------------------------
SUTTER AMBULATORY CARE CORPORATION,
a California nonprofit public benefit
corporation
By /s/ Elizabeth Shin
--------------------------------------
Print Name Elizabeth Shin
----------------------------------
Title Senior Vice President
---------------------------------------
A-27
<PAGE>
Schedule 7.13
Gentlemen:
I have been advised that I might be considered to be an "affiliate" of Sutter
Surgery Centers, Inc. ("SSCI") for purposes of Rule 145 under the Securities
Exchange Act of 1933, as amended (the "1933 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.
_______________________, a(n) _________________ corporation ("Buyer"), SSCI
Acquisition Corporation ("Sub") and SSCI have entered into a Plan and Agreement
of Merger dated as of the ___ day of _______, 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 Buyer for all of the shares
of capital stock of SSCI owned by me or as to which I may be deemed a beneficial
owner. I own _______ shares of common stock of SSCI. Such shares will be
converted in the Merger into shares of common stock of Buyer as described in the
Plan of Merger. The shares of SSCI capital stock and Buyer 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 Buyer 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, Buyer, SSCI and Sub 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 SSCI.
B. The shares of Exchange Stock that I shall receive in exchange for my
shares of common stock of SSCI 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 Exchange Stock in
any manner that would violate Rule 145.
I further agree with you that the certificate or certificates representing
such shares of Exchange Stock 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 Buyer, SSCI
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 qualifies 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, (X) 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
A-28
<PAGE>
new 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 (Y) so long as I hold shares of stock subject to the provisions of
the foregoing paragraphs (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 Buyer, 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 or
in accordance with the registration rights provided to the undersigned under the
terms of the Plan of Merger.
This Letter Agreement shall be binding on my heirs, legal representatives and
successors.
Very truly yours,
----------------------------
[Name of Shareholder]
A-29
<PAGE>
SCHEDULE 8.13
OPINION OF COUNSEL FOR SSCI
[To be provided]
A-30
<PAGE>
SCHEDULE 9.9
OPINION OF COUNSEL FOR BUYER
[To be provided]
A-31
<PAGE>
ANNEX B
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 Sections 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 Sections 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.
B-1
<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.
B-2
<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
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<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.
B-4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Section 102(b)(7) of the DGCL 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 Nine of the HEALTHSOUTH
Certificate filed in the Office of the Secretary of the State of Delaware on
November 28, 1994, a copy of which is filed as Exhibit (3)-1 to this
Registration Statement, and is incorporated herein by reference, contains a
provision eliminating or limiting director liability to HEALTHSOUTH and its
stockholders for monetary damages arising from acts or omissions in the
director's capacity as a director. The provision does not, however, eliminate or
limit the personal liability of a director (i) for any breach of such director's
duty of loyalty to HEALTHSOUTH 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 the Delaware statutory provision making directors personally
liable, under a negligence standard, for unlawful dividends or unlawful stock
purchases or redemptions, or (iv) for any transaction from which the director
derived an improper personal benefit. This provision offers persons who serve on
the Board of Directors of HEALTHSOUTH protection against awards of monetary
damages resulting from breaches of their duty of care (except as indicated
above). As a result of this provision, the ability of HEALTHSOUTH or a
stockholder thereof to successfully prosecute an action against a director for a
breach of his duty of care is limited. However, the provision does not affect
the availability of equitable remedies such as an injunction or rescission based
upon a director's breach of his duty of care. The SEC has taken the position
that the provision will have no effect on claims arising under the Federal
securities laws.
Section 145 of the DGCL grants corporations the right to indemnify their
directors, officers, employees and agents in accordance with the provisions
therein set forth. Article Nine of the HEALTHSOUTH Certificate and Article IX of
the HEALTHSOUTH Bylaws, a copy of which is included as Exhibit (3)-2 to this
Registration Statement, and is incorporated herein by reference, provide for
mandatory indemnification rights, subject to limited exceptions, to any
director, officer, employee, or agent of HEALTHSOUTH who, by reason of the fact
that he or she is a director, officer, employee, or agent of HEALTHSOUTH, is
involved in a legal proceeding of any nature. Such indemnification rights
include reimbursement for expenses incurred by such director, officer, employee,
or agent in advance of the final disposition of such proceeding in accordance
with the applicable provisions of the DGCL.
HEALTHSOUTH has entered into agreements with all of its Directors and its
executive officers pursuant to which HEALTHSOUTH has agreed to indemnify such
Directors and executive officers against liability incurred by them by reason of
their services of a Director to the fullest extent allowable under applicable
law.
See Item 22 of this Registration Statement on Form S-4.
II-1
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS (Continued)
Item 21. Exhibits and Financial Statement Schedules.
Exhibits:
<TABLE>
<CAPTION>
<S> <C>
Exhibit
No. Description
- -------- -----------
(2)-1 Plan and Agreement of Merger, dated as of August 23, 1995, among
HEALTHSOUTH Corporation, SSCI Acquisition Corporation and Sutter
Surgery Centers, Inc., attached to the Registration Statement as
Annex A, is hereby incorporated herein by reference. List of
Exhibits to Plan and Agreement of Merger.
(5) Opinion of Haskell Slaughter Young & Johnston, Professional
Association, as to the legality of the shares of HEALTHSOUTH
Common Stock 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 Burke, Warren & MacKay, P.C., as to certain federal
income tax consequences of the Merger (to be filed by Amendment).
(23)-1 and Consents of Ernst & Young LLP. See pages immediately following
(23)-2 signature pages to the Registration Statement.
(23)-3 Consent of Haskell Slaughter Young & Johnston, Professional
Association (included in the opinion filed as Exhibit (5)).
(23)-4 Consent of Burke, Warren & Mackay, P.C. (included in the opinion
filed as Exhibit (8)-2).
(24) Powers of Attorney. See signature pags
(99) SSCI Proxy.
</TABLE>
Financial Statement Schedules: None
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 as follows: that prior to
any public re-offering 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 re-offering prospectus will contain the information called
for by the applicable registration form with respect to re-offerings by persons
who may be deemed underwriters, in addition to the information called for by the
other items of the applicable form.
(3) 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
II-2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS (Continued)
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.
(4) 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.
(5) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporation 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.
II-3
<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 September 27, 1995.
HEALTHSOUTH Corporation
By /s/ RICHARD M. SCRUSHY
-----------------------------------
Richard M. Scrushy
Chairman of the Board 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 powers of substitution for him in any and all
capacities, to sign any amendments, supplements, subsequent registration
statements relating to the offering to which this Registration Statement
relates, 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>
<S> <C> <C>
Signature Title Date
--------- ----- ----
/s/ RICHARD M. SCRUSHY Chairman of the Board and Chief September 27, 1995
- ------------------------------- Executive Officer and Director
Richard M. Scrushy
/s/ AARON BEAM, JR. Executive Vice President and
- ------------------------------- Chief Financial Officer
Aaron Beam, Jr. September 27, 1995
/s/ WILLIAM T. OWENS Senior Vice President and
- ------------------------------- Controller (Principal
William T. Owens Accounting Officer) September 27, 1995
/s/ JAMES P. BENNETT
- -------------------------------
James P. Bennett Director September 27, 1995
/s/ ANTHONY J. TANNER
- -------------------------------
Anthony J. Tanner Director September 27, 1995
/s/ P. DARYL BROWN
- -------------------------------
P. Daryl Brown Director September 27, 1995
/s/ PHILLIP C. WATKINS, M.D.
- -------------------------------
Phillip C. Watkins, M.D. Director September 27, 1995
II-5
<PAGE>
SIGNATURES (Continued)
/s/ GEORGE H. STRONG.
- -------------------------------
George H. Strong Director September 27, 1995
/s/ C. SAGE GIVENS
- -------------------------------
C. Sage Givens Director September 27, 1995
/s/ CHARLES W. NEWHALL III
- -------------------------------
Charles W. Newhall III Director September 27, 1995
/s/ LARRY R. HOUSE
- -------------------------------
Larry R. House Director September 27, 1995
/s/ JOHN S. CHAMBERLIN
- -------------------------------
John S. Chamberlin Director September 27, 1995
/s/ RICHARD F. CELESTE
- -------------------------------
Richard F. Celeste Director September 27, 1995
</TABLE>
II-5
<PAGE>
EXHIBIT 23.1
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 reports on the entities and dated as listed below in the
Registration Statement (Form S-4 No. 33- ) and the related prospectus of
HEALTHSOUTH Corporation:
HEALTHSOUTH Corporation and Subsidiaries .. March 1, 1995 except for Notes 2
and 17, as to which the date is
June 13, 1995
Surgical Health Corporation................ April 18, 1995
ReLife, Inc................................ February 17, 1995
Rehab Systems Company...................... September 8, 1995
Ernst & Young LLP
September 27, 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 31, 1995, with respect to the financial statements
of Sutter Surgery Centers, Inc. included in the Registration Statement (Form
S-4) and related Prospectus of HEALTHSOUTH Corporation for the registration of
1,777,778 shares of its common stock.
ERNST & YOUNG LLP
Sacramento, California
September 26, 1995
<PAGE>
EXHIBIT 99
SUTTER SURGERY CENTERS, INC.
SPECIAL MEETING OF STOCKHOLDERS-- , 1995
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF SUTTER SURGERY CENTERS, INC.
The undersigned hereby appoints and , and each of them, with full powers of
substitution, attorneys and proxies of the undersigned to vote the Common Stock,
par value $.01 per share, of Sutter Surgery Centers, Inc. ("SSCI"), which the
undersigned could vote, and with all power the undersigned would possess, if
personally present at the Special Meeting of Stockholders of SSCI to be held at
the executive offices of SSCI at 1201 Alhambra Boulevard, Suite 330, Sacramento,
California 95816, on, _________, 1995, at _:00 _m., Pacific time, and any
adjournment thereof:
1. To approve and adopt the Plan and Agreement of Merger dated as of
August 23, 1995, attached as Annex A to the Prospectus-Proxy Statement
that has been transmitted in connection with the Special Meeting,
pursuant to which SSCI Acquisition Corporation, a wholly-owned
subsidiary of HEALTHSOUTH Corporation, will merge with and into SSCI,
and stockholders of SSCI will receive a specified fraction of a share
of Common Stock of HEALTHSOUTH Corporation for each share of Common
Stock of SSCI surrendered for exchange, all as described in said
Prospectus-Proxy Statement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. In their discretion, to act upon any matters incidential 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)
- --------------------------------------------------------------------------------
(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.
Receipt of the Prospectus-Proxy Statement dated , 1995, is hereby
acknowledged.
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>