<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(Mark One)
[x] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required] For the fiscal year ended December
31, 1994; or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] For the transition period from
______ to ______
Commission File Number 1-10315
HEALTHSOUTH Corporation
----------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 63-0860407
-------------------------------- ----------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
Two Perimeter Park South
Birmingham, Alabama 35243
-------------------------------- ---------
(Address of Principal Executive (Zip Code)
Offices)
Registrant's Telephone Number, Including Area Code: (205) 967-7116
--------------
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
---------------------------- -----------------------
Common Stock, par value New York Stock Exchange
$.01 per share
9.5% Senior Subordinated New York Stock Exchange
Notes due 2001
5% Convertible Subordinated New York Stock Exchange
Debentures due 2001
Securities Registered Pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all Reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such Reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant as of March 3, 1995:
Common Stock, par value $.01 per share-$1,383,817,854
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at March 3, 1995
----------------------- ----------------------------
Common Stock, par value
$.01 per share 35,565,387 shares
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into this
Annual Report on Form 10-K.
================================================================================
Index to Exhibits Page ___
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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 the Company, including certain factors
related to the acquisition by the Company of 28 inpatient rehabilitation
facilities and 45 associated outpatient rehabilitation locations from NME,
effective December 31, 1993 (the "NME Selected Hospitals Acquisition"), as well
as factors related to the acquisition transaction between the Company and
ReLife, Inc., which was effective December 29, 1994 (the "ReLife Acquisition").
The ReLife Acquisition was accounted for as a pooling of interests, and, unless
otherwise indicated, all amounts shown in the following discussion have been
restated to reflect the effect of the Relife Acquisition. This discussion and
analysis should be read in conjunction with the Company's consolidated financial
statements and notes thereto included elsewhere in this Annual Report on Form
10-K.
During the periods discussed below, governmental, commercial and
private payors have increasingly recognized the need to contain their costs for
healthcare services. These payors are turning to closer monitoring of services,
prior authorization requirements, utilization review and increased utilization
of outpatient services. The Company has experienced an increased effort by these
payors to contain costs through negotiated discount pricing for health
maintenance organizations and similar patient referral services. The Company
views these efforts as an opportunity to demonstrate the effectiveness of its
clinical programs and its ability to provide its rehabilitative healthcare
services efficiently. The Company has entered into a number of contracts with
payors to provide services and has realized an increased volume of patients as a
result.
The Company provides rehabilitative healthcare services through its
inpatient and outpatient rehabilitation facilities and medical centers. The
Company has expanded its operations through the acquisition or opening of new
facilities and satellite locations and by enhancing its existing operations. The
Company's revenues increased from $464,288,000 in 1992 to $1,127,441,000 in
1994, an increase of 143%. As of December 31, 1994, the Company has 402
locations in 33 states, the District of Columbia and Ontario, Canada, including
238 outpatient rehabilitation locations (including 111 outpatient rehabilitation
centers and 127 associated satellite clinics), 66 inpatient rehabilitation
locations with 39 associated satellite outpatient clinics, five medical centers,
and 54 locations providing other patient care services.
The Company'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.
The Company, in many cases, operates more than one site within a
market. In such markets, there is customarily an outpatient center or inpatient
facility with associated satellite outpatient locations. For purposes of the
following discussion and analysis, same store 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.
Effective December 31, 1993, the Company acquired 28 inpatient
rehabilitation facilities and 45 associated outpatient rehabilitation locations
from NME. After giving effect to the NME Selected Hospitals Acquisition, the
Company's pro forma revenues were $979,456,000 and $1,030,215,000 for the years
ended December 31, 1992 and 1993, respectively.
2
<PAGE>
Effective December 29, 1994, the Company consummated the ReLife
Acquisition as a merger accounted for as a pooling of interests. In connection
with the ReLife Acquisition, the Company acquired 31 inpatient rehabilitation
facilities and 12 outpatient rehabilitation centers. The ReLife operations
generated operating revenues of $118,874,000 for the fiscal year ending
September 30, 1994, compared to $93,042,000 for the fiscal year ending September
30, 1993, an increase of 27.8%. The results for HEALTHSOUTH described below are
based on a combination of HEALTHSOUTH's results for its December 31 fiscal year
and ReLife's results for its September 30 fiscal year for all periods presented.
All data set forth relating to revenues derived from Medicare and Medicaid do
not take into account revenues of the ReLife facilities, because ReLife did not
separately track such revenues prior to consummation of the ReLife Acquisition.
The Company 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
term of partnerships where applicable. The Company 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 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 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, the Company's carrying value of
the asset will be reduced by the estimated shortfall of cash flows.
Results of Operations of the Company
Twelve-Month Periods Ended December 31, 1992 and 1993
The Company operated 171 outpatient rehabilitation locations at
December 31, 1993, compared to 126 outpatient rehabilitation locations at
December 31, 1992. In addition, the Company operated 39 inpatient facilities and
four medical centers at December 31, 1993, compared to 22 inpatient facilities
and four medical centers at December 31, 1992. In 1993, the Company 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.
The Company's operations generated revenues of $575,346,000 in 1993, an
increase of $111,058,000, or 23.9%, as compared to 1992 revenues. Same store
revenues for the twelve months ended December 31, 1993 were $539,377,000 an
increase of $75,089,000, or 16.1%, as compared to the same period in 1992. New
store revenues for 1993 were $35,969,000. 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 the Company's revenues. During 1993, same store outpatient visits
and inpatient days increased 19.9% and 8.2%, respectively. Revenue per
outpatient visit and revenue per inpatient day for same store operations
increased by 0.6% and 6.3%, respectively.
Operating expenses, at the operating unit level, were $418,981,000, or
72.8% of revenues, for 1993, compared to 74.8% of revenues for 1992. Same store
operating expenses for 1993 were $391,409,000, or 72.6% of related revenues. New
store operating expenses were $27,572,000, or 76.7% 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 $14,418,000 in 1992 to
$20,018,000 in 1993. As a percentage of revenues, corporate general and
administrative expenses increased from 3.1% in 1992 to 3.5% in 1993. Total
operating expenses were $438,999,000, or 76.3% of revenues, for 1993, compared
to $361,491,000, or 77.9% of revenues, for 1992. The provision for doubtful
accounts was $13,875,000, or 2.4% of revenues, for 1993, compared to
$11,842,000, or 2.6% of revenues, for 1992.
3
<PAGE>
Depreciation and amortization expense was $39,376,000 for 1993,
compared to $26,737,000 for 1992. The increase represents the investment in
additional assets by the Company. Interest expense increased to $14,261,000 in
1993 compared to $11,295,000 for 1992 primarily because of the increased
borrowings during the year under the Company's revolving line of credit. For
1993, interest income was $3,698,000, compared to $5,121,000 for 1992. The
reduction in interest income is 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, the Company
recognized an expense of approximately $49,742,000 during the year ended
December 31, 1993. By recognizing this expense, the Company accrued
approximately $3,000,000 for costs related to certain employee separations and
relocations. The Company expects the plan of consolidation to take up to 24
months. The $3,000,000 accrual, which is the only cash expense included in the
acquisition-related expense, will be paid over that same period. In addition,
the Company 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 the Company'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. For further discussion, see Note 10 of "Notes to Consolidated
Financial Statements".
Income before minority interests and income taxes for 1993 was
$22,791,000, compared to $54,379,000 for 1992. The provision for income taxes
for 1993 was $9,009,000, compared to $18,383,000 for 1992, resulting in
effective tax rates of 39.9% for 1993 and 34.7% for 1992. Net income for 1993
was $13,592,000.
Twelve-Month Periods Ended December 31, 1993 and 1994
The Company 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, the
Company operated 66 inpatient facilities and five medical centers at December
31, 1994, compared to 39 inpatient facilities and four medical centers at
December 31, 1993.
The Company's operations generated revenues of $1,127,441,000 in 1994,
an increase of $552,095,000, or 96.0%, as compared to 1993 revenues. Same store
revenues for the twelve months ended December 31, 1994 were $660,973,000, an
increase of $85,627,000, or 14.9%, as compared to the same period in 1993. New
store revenues for 1994 were $466,468,000. New store revenues reflect (1) the 28
inpatient rehabilitation facilities and 45 associated outpatient rehabilitation
locations associated with the NME Selected Hospitals Acquisition, (2) the
acquisition of a specialty medial center in Dallas, Texas, (3) the opening of
three new inpatient rehabilitation facilities, (4) the acquisition of outpatient
locations in 28 new markets, (5) the acquisition of a contract therapist
provider, and (6) the acquisition of a diagnostic imaging company. See Note 10
of "Notes to Consolidated Financial Statements". 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 the Company'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 the Company's historical experience in its
existing facilities. During 1994, same store outpatient visits and inpatient
days increased 21.8% and 23.0%, respectively. Revenue per outpatient visit and
revenue per inpatient day for the same store operations decreased by 7.8% and
8.4%, respectively. 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 $835,888,000, or
74.1% of revenues, for 1994, compared to 72.8% 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 $496,870,000, or
75.2% of related revenues. New store operating expenses were $339,018,000, or
72.7% of related revenues. Corporate general and administrative expenses
increased from $20,018,000 in 1993 to $37,139,000 in 1994. As a percentage of
revenues, corporate general and administrative expenses decreased from 3.5% in
1993 to 3.3% in 1994. Total operating expenses were $873,027,000, or 77.4% of
revenues, for 1994, compared to $438,999,000, or 76.3% of revenues, for 1993.
The provision for doubtful accounts was $20,583,000, or 1.8% of revenues, for
1994, compared to $13,875,000, or 2.4% of revenues, for 1993.
4
<PAGE>
Depreciation and amortization expense was $75,588,000 for 1994,
compared to $39,376,000 for 1993. The increase represents the investment in
additional assets by the Company. Interest expense increased to $57,255,000 in
1994, compared to $14,261,000 for 1993, primarily because of the increased
borrowings during the year under the Company'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. See Note 7 of "Notes to Consolidated Financial
Statements". For 1994, interest income was $4,224,000 compared to $3,698,000 for
1993. The increase in interest income is primarily attributable to the increase
in the Company's cash position during the year.
During 1994, the Company began implementation of the plan of
consolidation related to the NME Selected Hospitals Acquisition. The $3,000,000
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 $17,911,000 were written off against the
$39,000,000 provided for the plan of consolidation. Finally, the Company wrote
off all of the $7,700,000 in capitalized development projects. The Company 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. See Note
10 of "Notes to Consolidated Financial Statements".
As a result of the ReLife Acquisition in the fourth quarter of 1994,
the Company has recognized $2,949,000 in ReLife merger expenses during 1994.
This amount represents costs and expenses incurred or accrued in connection with
completing the ReLife Acquisition. See Note 2 of "Notes to Consolidated
Financial Statements".
During 1994, the Company 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. The Company determined not to attempt
to reopen such damaged facility because, under its existing licensure, the
facility was not consistent with the Company's plans. Also during 1994, the
Company recognized a $4,500,000 loss on abandonment of a ReLife computer
project. See Note 16 of "Notes to Consolidated Financial Statements".
Income before minority interests and income taxes for 1994 was
$87,263,000, compared to $22,791,000 for 1993. Minority interests reduced income
before income taxes by $203,000, compared to $190,000 for 1993. The provision
for income taxes for 1994 was $33,835,000, compared to $9,009,000 for 1993,
resulting in effective tax rate of 38.9% for 1994 and 39.9% for 1993. Net income
for 1994 was $53,225,000.
Liquidity and Capital Resources
At December 31, 1994, the Company had working capital of $218,681,000,
including cash and marketable securities of $82,577,000. Working capital at
December 31, 1993 was $198,352,000, including cash and marketable securities of
$77,299,000. For 1994, cash provided by operations was $132,050,000, compared to
$59,787,000 for 1993. The Company used $234,816,000 for investing activities
during 1994, compared to $570,916,000 for 1993. Additions to property, plant and
equipment and acquisitions accounted for $123,575,000 and $85,967,000,
respectively, during 1994. Those same investing activities accounted for
$113,161,000 and $428,307,000, respectively, in 1993. Financing activities
provided $100,384,000 and $493,095,000 during 1994 and 1993, respectively. Net
borrowing proceeds (borrowings less principal reductions) for 1994 and 1993 were
$87,603,000 and $494,979,000, respectively.
Net Accounts receivable were $222,720,000 at December 31, 1994,
compared to $165,586,000 at December 31, 1993. The number of days of average
revenues in average receivables was 69.9 at December 31, 1994, compared to 69.5
at December 31, 1993 (excluding the receivables acquired from NME at December
31, 1993). The concentration of net accounts receivable from patients,
third-party payors, insurance companies and others at December 31, 1994 is
consistent with the related concentration of revenues for the period then ended.
5
<PAGE>
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.
Additionally, the Company purchased underlying insurance which will cover all
claims once established limits have been exceeded. The funding requirements for
the self-insurance plan will be based on an independent actuarial determination.
The funding requirements are not expected to have a material impact on the
Company's liquidity and capital positions.
The Company has a $550,000,000 revolving line of credit with
NationsBank of North Carolina and 15 other participating banks. Interest is paid
quarterly based on LIBOR plus a predetermined margin, prime, or competitively
bid rates from the participating banks. This credit facility revolves until June
1, 1997, at which time the outstanding principal balance converts to a term loan
to be repaid in 15 quarterly payments beginning June 30, 1997. The Company
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 5.94% for the
year ended December 31, 1994, compared to the average prime rate of 7.15% during
the same period. At December 31, 1994, the Company had drawn $510,000,000 under
its revolving line of credit. The Company has received a fully-underwritten
commitment to amend and restate the credit agreement, which will increase the
size of the facility to $1,000,000,000.
The Company intends to pursue the acquisition or development of
additional healthcare operations, including comprehensive outpatient
rehabilitation facilities, inpatient rehabilitation facilities 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,
the Company anticipates that over the next twelve months it will spend
approximately $50,000,000 for the acquisition and/or development of new
comprehensive outpatient rehabilitation facilities and approximately $70,000,000
for inpatient facility projects and the construction and equipping of additions
to existing inpatient facilities.
As of January 22, 1995, the Company entered into an Amended and
Restated Plan and Agreement of Merger with Surgical Health Corporation ("SHC"),
pursuant to which the Company has agreed to acquire SHC through a
stock-for-stock merger to be accounted for as a pooling of interests. SHC
operates 36 outpatient surgery centers. Under the terms of the Plan and
Agreement of Merger, the Company will issue shares of its Common Stock to all
holders of SHC's Common Stock pursuant to an exchange ratio calculated to
provide $4.60 in value of HEALTHSOUTH Common Stock for each share of SHC's
capital stock, subject to adjustment in certain circumstances. The transaction
is subject to the satisfaction of various conditions, including the receipt of
all required regulatory approvals and the termination or expiration of the
waiting period under the HSR Act. The Company currently expects the transaction
to be consummated during the second quarter of 1995 and is working toward the
satisfaction of all such conditions and the obtaining of all regulatory
approvals. Management expects the SHC acquisition to positively affect the
Company's liquidity, capital resources and results of operations as a result of
improved cash flow and leverage.
In addition, on February 3, 1995, the Company entered into a Stock
Purchase Agreement with NovaCare, Inc. and NC Resources, Inc., pursuant to which
the Company has agreed to acquire the operations of NovaCare, Inc.'s
rehabilitation hospital division. NC Resources, Inc. is a wholly-owned
subsidiary of NovaCare, Inc. NC Resources, Inc. in turn owns all of the capital
stock of Rehab Systems Company ("RSC"), the holding company for the acquired
division. In connection with that transaction, the Company will pay a cash
purchase price of $215,000,000, and will assume liabilities of approximately
$20,000,000. The transaction is subject to various conditions, including the
expiration or termination of the waiting period under the HSR Act. The Company
expects the transaction to be consummated early in the second quarter of 1995.
Although the Company is continually considering and evaluating
acquisitions and opportunities for future growth, the Company has not entered
into any agreements with respect to material future acquisitions other than the
transactions with SHC and NovaCare. The Company believes that existing cash,
cash flow from operations, and borrowings under the revolving line of credit, as
increased pursuant to the new commitment, will be sufficient to satisfy the
Company's estimated cash requirements for the next twelve months, and for the
reasonably foreseeable future.
Inflation in recent years has not had a significant effect on the
Company's business, and is not expected to adversely affect the Company in the
future unless it increases significantly.
6
<PAGE>
Item 8. Financial Statements and Supplementary Data.
Consolidated financial statements of the Company meeting the
requirements of Regulation S-X are filed on the succeeding pages of this Item 8
of this Annual Report on Form 10-K, as listed below:
Page
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1993 and 1994
Consolidated Statements of Income for the Years Ended
December 31, 1992, 1993 and 1994
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1992, 1993 and 1994
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1992, 1993 and 1994
Notes to Consolidated Financial Statements
Other financial statements and schedules required under Regulation S-X
are listed in Item 14(a)2, and filed under Item 14(d), of this Annual Report on
Form 10-K.
7
<PAGE>
Report of 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. Our audits also
included the financial statement schedule listed in the Index at Item 14 (a).
These financial statements and schedule 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. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
Birmingham, Alabama
February 24, 1995
8
<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) $ 68,331 $ 65,949
Other marketable securities (Note 3) 8,968 16,628
Accounts receivable, net of allowances for doubtful
accounts and contractual adjustments of $118,746,000 in
1993 and $141,859,000 in 1994 165,586 222,720
Inventories 21,139 22,262
Prepaid expenses and other current assets 41,814 68,401
--------------------
Total current assets 305,838 395,960
Other assets:
Loans to officers 1,488 1,240
Other (Note 4) 21,950 40,692
--------------------
23,438 41,932
Property, plant and equipment, net (Note 5) 744,084 789,538
Intangible assets, net (Note 6) 208,162 324,904
----------------------
Total assets $1,281,522 $1,552,334
----------------------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
December 31
-----------------------
1993 1994
-----------------------
(In thousands)
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 45,737 $ 83,180
Salaries and wages payable 26,877 32,672
Accrued interest payable and other liabilities 29,857 46,714
Current portion of long-term debt and leases (Note 7) 5,015 14,713
-----------------------
Total current liabilities 107,486 177,279
Long-term debt (Note 7) 813,334 930,061
Deferred income taxes (Note 11) 9,647 7,882
Deferred revenue (Note 15) - 7,526
Other long-term liabilities (Note 16) 458 5,655
Minority interests--limited partnerships (Note 9) (1,799) (2,203)
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-33,195,000 in 1993 and 34,230,000
in 1994 332 342
Additional paid-in capital 285,679 306,565
Retained earnings 85,640 137,027
Treasury stock, at cost (91,000 shares) (323) (323)
Receivable from Employee Stock Ownership Plan (Note 13) (18,932) (17,477)
-----------------------
Total stockholders' equity 352,396 426,134
-----------------------
Total liabilities and stockholders' equity $ 1,281,522 $ 1,552,334
-----------------------
</TABLE>
See accompanying notes.
10
<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 $ 464,288 $ 575,346 $ 1,127,441
Operating expenses:
Operating units 347,073 418,981 835,888
Corporate general and administrative 14,418 20,018 37,139
Provision for doubtful accounts 11,842 13,875 20,583
Depreciation and amortization 26,737 39,376 75,588
Interest expense 11,295 14,261 57,255
Interest income (5,121) (3,698) (4,224)
ReLife merger expense (Note 2) - - 2,949
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 - -
-------------------------------------------
409,909 552,555 1,040,178
-------------------------------------------
Income before income taxes and
minority interests 54,379 22,791 87,263
Provision for income taxes (Note 11) 18,383 9,009 33,835
-------------------------------------------
35,996 13,782 53,428
Minority interests 1,402 190 203
-------------------------------------------
Net income $ 34,594 $ 13,592 $ 53,225
-------------------------------------------
Weighted average common and common
equivalent shares outstanding 34,418 34,717 37,938
-------------------------------------------
Net income per common and common
equivalent share $ 1.01 $ .39 $ 1.40
-------------------------------------------
Net income per common share--assuming
full dilution $ N/A $ N/A $ 1.39
-------------------------------------------
</TABLE>
See accompanying notes.
11
<PAGE>
<TABLE>
<CAPTION>
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
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 30,978 $ 310.4 $246,105.4 $52,079.0 $ (60.0) $(10,000.0) $288,434.8
Proceeds from issuance of
common shares 949 9.5 24,341.5 -- -- -- 24,351.0
Proceeds from exercise of
options 956 9.6 6,873.6 -- -- -- 6,883.2
Income tax benefits related to
Incentive Stock Options -- -- 5,634.7 -- -- -- 5,634.7
Common shares exchanged in the
exercise of options (4) -- (95.6) -- -- -- (95.6)
Loan to Employee Stock
Ownership Plan -- -- -- -- -- (10,000.0) (10,000.0)
Reduction in Receivable from
Employee Stock Ownership
Plan -- -- -- -- -- 358.0 358.0
Purchase of limited
partnership units 21 .2 499.8 (10,193.4) -- -- (9,693.4)
Net income -- -- -- 34,594.0 -- -- 34,594.0
-----------------------------------------------------------------------------------
Balance at December 31, 1992 32,900 329.7 283,359.4 76,479.6 (60.0) (19,642.0) 340,466.7
Proceeds from exercise of
options 224 2.2 1,734.4 -- -- -- 1,736.6
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 -- -- -- (4,431.7) -- -- (4,431.7)
Purchase of treasury stock (20) -- -- -- (263.0) -- (263.0)
Net income -- -- -- 13,592.1 -- -- 13,592.1
-----------------------------------------------------------------------------------
Balance at December 31, 1993 33,104 331.9 285,678.5 85,640.0 (323.0) (18,931.9) 352,395.5
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity (continued)
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>
Proceeds from issuance of
common shares at $27.17
per share 19 $ .2 $ 532.8 $ -- $ -- $ -- $ 533.0
Proceeds from exercise of
options 1,027 10.3 14,205.4 -- -- -- 14,215.7
Income tax benefits related to
Incentive Stock Options -- -- 6,469.6 -- -- -- 6,469.6
Common shares exchanged in the
exercise of options (11) (.1) (321.3) -- -- -- (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 -- -- -- 53,225.0 -- -- 53,225.0
---------------------------------------------------------------------------------------
Balance at December 31, 1994 34,139 $342.3 $306,565.0 $137,027.0 $(323.0) $(17,476.9) $426,134.4
---------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
13
<PAGE>
<TABLE>
<CAPTION>
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31
----------------------------------
1992 1993 1994
----------------------------------
(In thousands)
<S> <C> <C> <C>
Operating activities
Net income $ 34,594 $ 13,592 $ 53,225
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 26,737 39,376 75,588
Provision for doubtful accounts 11,842 13,875 20,583
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 1,402 190 203
Provision (benefit) for deferred income taxes 4,501 (6,554) (1,199)
Provision for deferred revenue (279) (49) (164)
Gain on sale of property, plant and equipment - - (627)
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable (32,894) (24,195) (66,781)
Inventories, prepaid expenses and other current
assets (12,956) (15,639) (21,166)
Accounts payable and accrued expenses 6,245 (10,551) 57,388
----------------------------------
Net cash provided by operating activities 39,192 59,787 132,050
Investing activities
Purchases of property, plant and equipment (88,503) (113,161) (123,575)
Proceeds from sale of property, plant and equipment - - 59,025
Additions to intangible assets, net of effects of
acquisitions (25,206) (39,156) (59,307)
Assets obtained through acquisitions, net of
liabilities assumed (53,961) (428,307) (85,434)
Changes in other assets 1,834 (4,846) (17,526)
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 (164,795) (570,916) (234,283)
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Year ended December 31
----------------------------------------------------
1992 1993 1994
----------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Financing activities
Proceeds from borrowings $ 169,800 $ 512,710 $ 940,084
Principal payments on long-term debt and leases (61,313) (17,731) (852,481)
Proceeds from exercise of options 6,788 1,736 13,895
Proceeds from issuance of common stock 19,004 -- --
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 971 614 44
Purchase of limited partnership interests (11,495) (3,784) (1,090)
Payment of cash distributions to limited partners (2,833) (897) (2,056)
----------------------------------------------------
Net cash provided by financing activities 111,280 493,095 99,851
----------------------------------------------------
Decrease in cash and cash equivalents (14,323) (18,034) (2,382)
Cash and cash equivalents at beginning of year 100,688 86,365 68,331
----------------------------------------------------
Cash and cash equivalents at end of year $ 86,365 $ 68,331 $ 65,949
----------------------------------------------------
Supplemental disclosures of cash flow
information
Cash paid during the year for:
Interest $ 12,899 $ 12,344 $ 48,668
Income taxes 10,466 20,326 28,029
</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 year ended December 31,
1994, the Company issued 19,000 common shares, with a market value of
$533,000, as consideration for an acquisition.
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.
15
<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.
16
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
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.
Interest cost incurred during the construction of a facility is capitalized. The
Company incurred interest of $13,274,000, $16,645,000 and $59,014,000 of which
$1,979,000, $2,384,000 and $1,759,000 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. 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 40,299,000 shares in 1994) assumes conversion of
the 5% Convertible Subordinated Debentures due 2001 (see Note 7).
17
<PAGE>
1. Significant Accounting Policies (continued)
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 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. Merger
Effective December 29, 1994, the Company merged with ReLife, Inc. (ReLife) and
in connection therewith issued 5,512,645 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 $2.9 million incurred by HEALTHSOUTH in connection with
the merger have been recorded in operations in 1994 and reported as ReLife
merger expenses in the accompanying consolidated statements of income.
Combined and separate results of the Company and ReLife are as follows (in
thousands):
<TABLE>
<CAPTION>
HEALTHSOUTH ReLife Combined
------------------------------------------------------------
<S> <C> <C> <C>
Year ended December 31, 1992
Revenues $ 406,968 $ 57,320 $ 464,288
Net income 29,738 4,856 34,594
Year ended December 31, 1993
Revenues 482,304 93,042 575,346
Net income 6,687 6,905 13,592
Year ended December 31, 1994
Revenues 1,008,567 118,874 1,127,441
Net income (loss) 54,047 (822) 53,225
</TABLE>
18
<PAGE>
There were no transactions between the Company and ReLife prior to the merger.
The effects of conforming the accounting policies of the two 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 $ 39,916 $ 56,849
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 68,331 65,949
--------------------------
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) $ 77,299 $ 82,577
--------------------------
</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.
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 3,991 6,007
Real estate investments 3,023 10,022
Escrow funds 394 -
Other 3,880 2,189
--------------------------
$ 21,950 $ 40,692
--------------------------
</TABLE>
19
<PAGE>
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 $ 61,822 $ 52,250
Buildings 470,181 476,620
Leasehold improvements 17,616 28,352
Furniture, fixtures and equipment 223,271 288,067
Construction in progress 29,274 43,374
-----------------------------------
802,164 888,663
Less accumulated depreciation and amortization 58,080 99,125
-----------------------------------
$ 744,084 $ 789,538
-----------------------------------
</TABLE>
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 $ 42,919 $ 77,882
Debt issue costs 1,653 18,848
Noncompete agreements 24,862 35,253
Cost in excess of net asset value of purchased facilities 169,106 245,008
--------------------------
238,540 376,991
Less accumulated amortization 30,378 52,087
--------------------------
$ 208,162 $ 324,904
--------------------------
</TABLE>
20
<PAGE>
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
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% 37,572 25,680
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 12,701 1,721
--------------------------------
818,349 944,774
Less amounts due within one year 5,015 14,713
--------------------------------
$ 813,334 $ 930,061
--------------------------------
</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 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 $37.625 per
share, subject to adjustment in the occurrence of certain events.
21
<PAGE>
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.
Principal maturities of long-term debt are as follows:
Year ending December 31 (In thousands)
- ------------------------ ----------------
1995 $ 14,713
1996 12,246
1997 112,233
1998 143,334
1999 140,605
After 1999 521,643
----------------
$ 944,774
----------------
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:
1992 1993 1994
------------------------------------
Options outstanding January 1: 3,368,571 5,339,742 6,875,786
Granted 2,762,000 1,770,000 330,000
Exercised 765,328 180,455 981,286
Cancelled 25,501 53,501 202,563
------------------------------------
Options outstanding at
December 31 5,339,742 6,875,786 6,021,937
------------------------------------
<TABLE>
<CAPTION>
1992 1993 1994
----------------------------------------------------------
<S> <C> <C> <C>
Option price range for options granted
during the period $15.25-$19.88 $13.50-$16.88 $28.38-$36.50
Option price range for options
exercised during the period $5.67-$21.41 $5.91-$19.17 $8.67-$16.88
Options exercisable at
December 31 4,155,817 5,332,940 5,186,809
Options available for grant at
December 31 546,050 324,550 550,204
</TABLE>
22
<PAGE>
9. Limited Partnerships
HEALTHSOUTH operates a number of rehabilitation centers as limited partnerships.
HEALTHSOUTH serves as the general partner and operates the partnerships as
comprehensive outpatient rehabilitation facilities or inpatient rehabilitation
facilities. These limited partnerships are included in the consolidated
financial statements (as more fully described in Note 1 under "Minority
Interests"). The limited partners share in the profit or loss of the
partnerships based on their respective ownership percentage (ranging from 1% to
50% at December 31, 1994) during their ownership period.
Beginning in 1992, due to federal and state regulatory requirements, the Company
began the process of buying back the partnership interests of its physician
limited partners. The buyback prices for the interests were in general based on
a 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.
10. Acquisitions
At various dates during 1994, the Company acquired 53 separate outpatient
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 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. This excess is being amortized over a forty-year period on a
straight-line basis. No 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 pro forma effect of this acquisition on 1993 operations and net income per
common and common equivalent share is reflected in the pro forma summary in Note
17.
23
<PAGE>
As a result of the NME Selected Hospitals Acquisition, HEALTHSOUTH recognized an
expense of approximately $49,742,000 during the year ended December 31, 1993.
This expense represents management's estimate of the cost to consolidate
operations of thirteen existing HEALTHSOUTH facilities (three inpatient
facilities and ten outpatient facilities) into the operations of certain
facilities acquired from NME. This plan was formulated by HEALTHSOUTH management
in order to more efficiently provide services in markets where multiple
locations now exist as a result of the acquisition. The plan of consolidation
calls for the affected operations to be merged into the operations of the
acquired facilities over a period of twelve to twenty-four months from the date
of the NME Selected Hospitals Acquisition. Due to the single-use nature of these
properties, the consolidation plan does not provide for the sale of these
facilities.
The total expense of $49,742,000 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):
<TABLE>
<CAPTION>
Inpatient Outpatient
Facilities Facilities Total
----------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
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
----------------------------------------------------------
</TABLE>
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.
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.
24
<PAGE>
Also at various dates during 1993, the Company acquired 27 separate outpatient
operations located throughout the United States. The total consideration paid
for these acquired outpatient 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 acquisitions exceeded the fair value of the net assets
acquired by approximately $18,747,000. This excess is being amortized on a
straight-line basis over a forty-year period. 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. Pebound
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
operations located throughout the United States. The combined purchase price of
these acquired outpatient operations was approximately $25,964,000.
The fair value of the net assets acquired in 1992 was approximately $21,956,000.
The total cost of the 1992 acquisitions exceeded the fair value of the assets
acquired by approximately $26,897,000, 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.
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.
25
<PAGE>
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 -- $31,117 $31,117
Other 340 - 340
-------------------------------------------------
Total deferred tax liabilities 340 31,117 31,457
Deferred tax assets:
NME Selected Hospitals
Acquisition related expense -- 19,399 19,399
Other 3,549 2,071 5,620
---------------------------------------------------
Total deferred tax assets 3,549 21,470 25,019
----------------------------------------------------
Net deferred tax (assets)
liabilities $(3,209) $ 9,647 $ 6,438
----------------------------------------------------
</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 -- $24,068 $24,068
----------------------------------------------------
Total deferred tax liabilities -- 24,068 24,068
Deferred tax assets:
NME Selected Hospitals Acquisition related
expense -- 15,241 15,241
Other 2,643 945 3,588
----------------------------------------------------
Total deferred tax assets 2,643 16,186 18,829
----------------------------------------------------
Net deferred tax (assets) liabilities $(2,643) $ 7,882 $ 5,239
----------------------------------------------------
</TABLE>
The current portion of the Company's deferred tax asset is included with prepaid
expenses and other current assets on the accompanying balance sheet.
26
<PAGE>
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 $ 12,255 $ 13,876 $ 30,593
State 1,627 1,687 4,441
--------------------------------------------------------
13,882 15,563 35,034
Deferred expense (benefit):
Federal 4,010 (5,884) (983)
State 491 (670) (216)
--------------------------------------------------------
4,501 (6,554) (1,199)
--------------------------------------------------------
Total provision $ 18,383 $ 9,009 $ 33,835
--------------------------------------------------------
</TABLE>
27
<PAGE>
11. Income Taxes (continued)
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 21
--------
$ 4,501
--------
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 $ 18,013 $ 7,910 $ 30,471
Add (deduct):
State income taxes, net of federal
tax benefit 1,054 1,121 $2,671
Tax-exempt interest income (1,076) (454) (276)
Other 392 432 969
----------------------------------------
$ 18,383 $ 9,009 $ 33,835
----------------------------------------
12. Commitments and Contingencies
At December 31, 1994, anticipated capital expenditures for the next twelve
months approximate $120,000,000. 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.
28
<PAGE>
12. Commitments and Contingencies (continued)
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.
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 $15,902,000, $23,417,000 and
$58,529,000 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 $ 50,173
1996 46,383
1997 42,493
1998 38,554
1999 33,618
After 1999 96,667
--------------
Total minimum payments required $ 307,888
--------------
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 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.
29
<PAGE>
14. Terminated Merger
On January 2, 1992, the Company and Continental Medical System, Inc. (CMS)
jointly announced an agreement to combine their business operations as provided
in an Agreement and Plan of Reorganization (the Plan). On May 6, 1992, the
Company and CMS jointly announced the termination of the Plan. Accordingly, all
costs and expenses incurred in connection with the Plan were charged to
operations in 1992 and reported as terminated merger expense in the accompanying
statements of income.
15. Sale of Assets
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.
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.
During 1994, ReLife entered into a contract for a new information system.
Payments under the contract and related costs were capitalized during the year.
After the agreement to merge with HEALTHSOUTH was entered into (see Note 2), the
computer project was abandoned resulting in a write-off of capitalized cost of
$4,500,000.
The above amounts are shown as operating expenses in the consolidated statement
of income.
17. Subsequent Events
On January 24, 1995, the Company signed an agreement to merge with Surgical
Health Corporation (SHC). SHC operates 36 outpatient surgery centers in eleven
states. Under the terms of the agreement, all shares of common and preferred
stock of SHC will be exchanged for shares of the Company's Common Stock pursuant
to an exchange ratio that will yield an aggregate value of approximately
$155,000,000 to SHC shareholders. The transaction will be accounted for as a
pooling of interests and is subject to certain regulatory and governmental
reviews, and to approval by the shareholders of both companies. The transaction
is expected to be completed early in the second quarter of 1995. The effects of
conforming the accounting policies of the two companies is not expected to be
material.
30
<PAGE>
The following table summarizes the unaudited consolidated pro forma results of
operations, assuming the SHC acquisition described above had occurred at the
beginning of each of the following periods. This pro forma summary does not
necessarily reflect the results of operations as they would have been had the
Company and the acquired entities constituted a single entity during such
periods. The 1993 amounts reflect the pro forma effect of the NME Selected
Hospital Acquisition (see Note 10).
Year ended December 31
1992 1993 1994
------------------------------------------------
(In thousands, except for per share amounts)
Revenues $ 501,046 $1,111,198 $1,236,190
Net income 34,929 25,076 49,961
Net income per common and common
equivalent share 0.95 0.65 1.19
On February 3, 1995, the Company entered into a definitive agreement to purchase
the operations of the rehabilitation hospital division of NovaCare, Inc.,
consisting of 11 rehabilitation hospitals in seven states, 12 other facilities
and certificates of need to build two additional facilities. The purchase price
will be approximately $215,000,000 in cash and the assumption of $20,000,000 in
liabilities for a total consideration of $235,000,000. The transaction is
expected to be completed in the second quarter of 1995.
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.
31
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
Directors
The following table sets forth certain information with respect to the
Company's Directors.
<TABLE>
<CAPTION>
Principal Occupation
and All Positions A Director
Name Age With the Company Since
---- ---- -------------------- ----------
<S> <C> <C> <C>
Richard M. Scrushy 42 Chairman of the Board, President 1984
and Chief Executive Officer and
Director
Phillip C. Watkins, M.D. 53 Physician, Birmingham, Alabama, 1984
and Director
George H. Strong 68 Private Investor, Locust, New Jersey, 1984
and Director
C. Sage Givens 38 General Partner, 1985
First Century Partners, and Director
Charles W. Newhall III 50 Partner, New Enterprise 1985
Associates Limited Partnerships,
and Director
Aaron Beam, Jr. 51 Executive Vice President and 1993
Chief Financial Officer
and Director
James P. Bennett 37 President -- HEALTHSOUTH 1993
Inpatient Operations
and Director
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
and All Positions A Director
Name Age With the Company Since
----- --- ------------------ ----------
<S> <C> <C> <C>
Larry R. House 51 Chairman of the Board, President 1993
and Chief Executive Officer,
MedPartners, Inc., and Director
Anthony J. Tanner 46 Executive Vice President 1993
Administration and Secretary
and Director
John S. Chamberlin 66 Private Investor, 1993
Princeton, New Jersey,
and Director
Richard F. Celeste 57 Principal of Celeste and Sabaty, Ltd. 1991
and Director
</TABLE>
Richard M. Scrushy, one of the Company's management founders, has
served as Chairman of the Board, President and Chief Executive Officer of the
Company since 1984. From 1979 to 1984, Mr. Scrushy was with Lifemark
Corporation, a publicly-owned healthcare corporation, serving in various
operational and management positions. Mr. Scrushy is also a director of
Integrated Health Services, Inc. and MedPartners, Inc., both publicly-traded
healthcare corporations, and is Chairman of the Board of Capstone Capital, Inc.,
a publicaly-traded real estate investment trust. He also serves on the boards of
directors of several privately-held healthcare corporations.
Phillip C. Watkins, M.D., FACC, is and has been in private practice for
more than five years with Cardiovascular Associates, P.C. in Birmingham,
Alabama. A graduate of The Medical College of Alabama, Dr. Watkins is a
Diplomate of the American Board of Internal Medicine. He is also a Fellow of the
American College of Cardiology and the Subspecialty Board of Cardiovascular
Disease.
George H. Strong retired as senior vice president and chief financial
officer of Universal Health Services, Inc. in December 1984, a position he held
for more than six years. Mr. Strong is a private investor and a director of
Universal Health Services, Inc., a publicly-owned hospital management
corporation. Mr. Strong is also a director of The Viking Group of Funds, a
public mutual fund group.
C. Sage Givens is a general partner of First Century Partners, a
private venture capital fund capitalized at $100,000,000. Ms. Givens joined
First Century Partners in 1983, where she manages the fund's healthcare
investments. Ms. Givens serves on the boards of directors of PhyCor, Inc., a
publicly-owned healthcare corporation, and several privately-held healthcare
companies.
Charles W. Newhall III is a general partner and founder of New
Enterprise Associates Limited Partnerships, Baltimore, Maryland, where he has
been engaged in the venture capital business since 1978. Mr. Newhall is also a
director of Integrated Health Services, Inc., Genetic Therapy, Inc., Opta Food
Ingredients, Inc. and Sepracor, Inc., all of which are publicly-traded
corporations.
Aaron Beam, Jr., C.P.A., a management founder, serves as Executive Vice
President and Chief Financial Officer of the Company and was elected a Director
in February 1993. From 1980 to 1984, Mr. Beam was employed by Lifemark
Corporation in several financial and operational management positions for the
Shared Services Division, including division controller. Mr. Beam is a director
of Ramsey Healthcare, Inc., a publicly-traded healthcare corporation.
James P. Bennett joined the Company in May 1991 as Director of
Inpatient Operations, was promoted to Group Vice President Inpatient
Rehabilitation Operations in September 1991, again to President and Chief
Operating Officer -- HEALTHSOUTH Rehabilitation Hospitals in June 1992 and to
President -- HEALTHSOUTH Inpatient Operations in February 1993. Mr. Bennett also
was elected a Director in February 1993. From August 1987 to May 1991, Mr.
Bennett was employed by Russ Pharmaceuticals, Inc., Birmingham, Alabama, as Vice
President Operations, Chief Financial Officer, Secretary and director. Mr.
Bennett served as certified public accountant on the audit staff of the
Birmingham, Alabama office of Ernst & Whinney (now Ernst & Young LLP) from
October 1980 to August 1987.
33
<PAGE>
Larry R. House is Chairman of the Board, President and Chief Executive
Officer of MedPartners, Inc. a publicly-held physician practice management firm,
a position he assumed as his principal occupation in August 1993. Mr. House was
elected a Director of the Company in February 1993. At the same time he became
President -- HEALTHSOUTH International, Inc. and New Business Ventures, a
position which he held until August 31, 1994, when he terminated his employment
with the Company to concentrate on his duties at MedPartners. Mr. House joined
the Company in September 1985 as Director of Marketing, subsequently served as
Senior Vice President and Chief Operating Officer of the Company, and in June
1992 became President and Chief Operating Officer -- HEALTHSOUTH Medical
Centers. Prior to joining the Company, Mr. House was president and chief
executive officer of a provider of clinical contract management services for
more than ten years.
Anthony J. Tanner, Sc.D., a management founder, serves as Executive
Vice President -- Administration and Secretary of the Company and was elected a
Director in February 1993. From 1980 to 1984, Mr. Tanner was with Lifemark
Corporation in the Shared Services Division as director, clinical and
professional programs (1982-1984) and director, quality assurance and education
(1980-1982), where he was responsible for the development of clinical programs
and marketing programs.
John S. Chamberlin retired in 1988 as president and chief operating
officer of Avon Products, Inc., a position he had held since 1985. From 1976
until 1985, he served as chairman and chief executive officer of Lenox,
Incorporated, after 22 years in various assignments for General Electric. From
1990 to 1991, he served as chairman and chief executive officer of New Jersey
Publishing Co. Mr. Chamberlin is chairman of the board of Life Fitness Company
and WNS, Inc., and is a director of The Scotts Company. He is a member of the
Board of Trustees of the Medical Center at Princeton and the Board of Overseers
of Parsons School of Design and is a trustee of the Woodrow Wilson National
Fellowship Foundation.
Richard F. Celeste originally joined the Board of Directors in 1991,
took a leave of absence from the Board of Directors in August 1993 to head the
Democratic National Committee's healthcare reform campaign, and rejoined the
Board in May 1995. He is a principal of Celeste and Sabaty, Ltd., a business
advisory firm located in Columbus, Ohio, which assists United States companies
to build strategic business alliances in Europe, Africa, South Asia and the
Pacific Rim. He served as Governor of Ohio from 1983 to 1991, during which time
he chaired the National Governors' Association Committee on Science and
Technology, and directed the United States Peace Corps from 1979 to 1981. He is
a member of the Advisory Council of the Carnegie Commission on Science,
Technology and Government, and chairs Carnegie's Task Force on Science,
Technology and the States. He is a director of Navistar International, Inc. and
Republic Engineered Steels, Inc., both of which are publicly-traded companies.
Executive Officers
The following table sets forth certain information with respect to the
Company's executive officers.
34
<PAGE>
<TABLE>
<CAPTION>
All Positions An Officer
Name Age With the Company Since
---- --- ----------------
<S> <C> <C> <C>
Richard M. Scrushy 42 Chairman of the Board, President 1984
and Chief Executive Officer and
Director
Aaron Beam, Jr. 51 Executive Vice President and Chief 1984
Financial Officer and Director
Anthony J. Tanner 46 Executive Vice President -- Administration 1984
and Secretary and Director
Thomas W. Carman 43 Executive Vice President -- 1985
Corporate Development
P. Daryl Brown 40 President -- HEALTHSOUTH 1986
Outpatient Centers
James P. Bennett 37 President -- HEALTHSOUTH 1991
Inpatient Operations and Director
Denis J. Devane 57 Executive Vice President -- 1993
Medical Center Operations
William T. Owens 36 Senior Vice President -- 1986
Finance and Controller
Michael D. Martin 34 Senior Vice President -- 1989
Finance and Treasurer
William W. Horton 35 Group Vice President -- 1994
Legal Services and
Assistant Secretary
</TABLE>
35
<PAGE>
Richard M. Scrushy, one of the Company's management founders, has
served as Chairman of the Board, President and Chief Executive Officer of the
Company since 1984. From 1979 to 1984, Mr. Scrushy was with Lifemark
Corporation, a publicly-owned healthcare corporation, serving in various
operational and management positions. Mr. Scrushy is also a director of
Integrated Health Services, Inc. and MedPartners, Inc., both publicly-traded
healthcare corporations, and is Chairman of the Board of Capstone Capital, Inc.,
a publicly-traded real estate investment trust. He also serves on the boards of
directors of several privately-held healthcare corporations.
Aaron Beam, Jr., C.P.A., a management founder, serves as Executive Vice
President and Chief Financial Officer of the Company and was elected a Director
in February 1993. From 1980 to 1984, Mr. Beam was employed by Lifemark
Corporation in several financial and operational management positions for the
Shared Services Division, including division controller. Mr. Beam is a director
of Ramsey Healthcare, Inc.
Anthony J. Tanner, Sc.D., a management founder, serves as Executive
Vice President -- Administration and Secretary of the Company and was elected a
Director in February 1993. From 1980 to 1984, Mr. Tanner was with Lifemark
Corporation in the Shared Services Division as director, clinical and
professional programs (1982-1984) and director, quality assurance and education
(1980-1982), where he was responsible for the development of clinical programs
and marketing programs.
Thomas W. Carman joined the Company in 1985 as Regional Director --
Corporate Development, and now serves as Executive Vice President -- Corporate
Development. From 1983 to 1985, Mr. Carman was director of development for
Medical Care International. From 1981 to 1983, Mr. Carman was assistant
administrator at the Children's Hospital of Birmingham, Alabama.
P. Daryl Brown, President and Chief Operating Officer -- HEALTHSOUTH
Outpatient Centers, joined the Company in April 1986 and served until June 1992
as Group Vice President -- Outpatient Operations. From 1977 to 1986, Mr. Brown
served with the American Red Cross, Alabama Region, in several positions,
including chief operating officer, administrative director for finance and
administration and controller.
James P. Bennett joined the Company in May 1991 as Director of
Inpatient Operations, was promoted to Group Vice President -- Inpatient
Rehabilitation Operations in September 1991, again to President and Chief
Operating Officer -- HEALTHSOUTH Rehabilitation Hospitals in June 1992 and to
President HEALTHSOUTH -- Inpatient Operations in February 1993. Mr. Bennett also
was elected a Director in February 1993. From August 1987 to May 1991, Mr.
Bennett was employed by Russ Pharmaceuticals, Inc., Birmingham, Alabama, as Vice
President Operations, Chief Financial Officer, Secretary and director. Mr.
Bennett served as certified public accountant on the audit staff of the
Birmingham, Alabama office of Ernst & Whinney (now Ernst & Young LLP) from
October 1980 to August 1987.
Denis J. Devane joined the Company in October 1993 as Executive Vice
President -- Medical Center Operations. Mr. Devane served as Chairman and Chief
Executive Officer and a director of Rebound, Inc., a head injury rehabilitation
company, from July 1989 until joining the Company. From 1987 through 1988, he
was President and Chief Executive Officer of American Rehabilitation Services,
and he previously held executive positions with Healthdyne, Inc. and Lifemark
Corporation, including serving as President of Lifemark's Hospital Division.
William T. Owens, C.P.A., joined the Company in March 1986 as
Controller and was appointed Vice President and Controller in December 1986. He
was appointed Group Vice President -- Finance and Controller in June 1992 and
became Senior Vice President -- Finance and Controller in February 1994. Prior
to joining the Company, Mr. Owens served as a certified public accountant on the
audit staff of the Birmingham, Alabama office of Ernst & Whinney (now Ernst &
Young LLP) from 1981 to 1986.
Michael D. Martin joined the Company in October 1989 as Vice President
and Treasurer, and was named Senior Vice President -- Finance and Treasurer in
February 1994. From 1983 through September 1989, Mr. Martin specialized in
healthcare lending with AmSouth Bank N.A., Birmingham, Alabama, where he was a
vice president immediately prior to joining the Company.
William W. Horton joined the Company in July 1994 as Group Vice
President -- Legal Services. From August 1986 through June 1994, Mr. Horton
practiced corporate, securities and healthcare law with the Birmingham,
Alabama-based firm of Haskell Slaughter Young & Johnston, Professional
Association, where he served as Chairman of the Healthcare Practice Group.
36
<PAGE>
General
Directors of the Company hold office until the next Annual Meeting of
Stockholders of the Company and until their successors are elected and
qualified. Executive officers of the Company are elected annually by, and serve
at the discretion of the Board of Directors. There are no arrangements or
understandings known to the Company between any of the Directors, nominees for
Director or executive officers of the Company and any other person pursuant to
which any of such persons was elected as a Director or an executive officer,
except the Employment Agreement between the Company and Richard M. Scrushy.
There are no family relationships between any Directors, nominees for Director
or executive officers of the Company.
Compliance With Section 16(a) of the
Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and Directors, and persons who beneficially own more than 10%
of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the New York Stock Exchange. Officers, Directors and beneficial owners of
more than 10% of the Company's Common Stock are required by Securities and
Exchange Commission regulations to furnish the Company with copies of all
Section 16(a) forms that they file. Based solely on review of the copies of such
forms furnished to the Company, or written representations that no reports on
Form 5 were required, the Company believes that for the period from January 1,
1994, through December 31, 1994, all of its officers, Directors and
greater-than-10% beneficial owners complied with all Section 16(a) filing
requirements applicable to them.
Item 11. Executive Compensation.
Executive Compensation General
The following table sets forth compensation paid or awarded to the
Chief Executive Officer and each of the other four most highly compensated
executive officers of the Company (the "Named Executive Officers") for all
services rendered to the Company and its subsidiaries in 1992, 1993 and 1994.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-Term Compensation
--------------------------------- ----------------------
Bonus/Annual Stock Long-Term All
Incentive Option Incentive Other Com-
Name and Principal Position Year Salary Award Awards Payouts pensation (1)
- --------------------------- ---- ------- --------- --------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Richard M. Scrushy 1992 730,666 509,904 1,725,000 -- 8,794
Chairman of the Board, President 1993 820,768 1,900,000 271,000 -- 10,796
and Chief Executive Officer 1994 1,207,228 2,000,000 -- 12,991
James P. Bennett 1992 158,862 75,000 95,000 -- 4,650
President -- HEALTHSOUTH 1993 250,514 130,000 40,000 -- 6,640
Inpatient Operations 1994 357,740 250,000 -- 10,760
Aaron Beam, Jr. 1992 241,709 90,000 100,000 -- 6,811
Executive Vice President 1993 252,039 100,000 25,000 -- 9,342
and Chief Financial Officer 1994 298,223 175,000 -- 11,272
Anthony J. Tanner 1992 196,066 100,000 100,000 -- 6,693
Executive Vice President -- 1993 194,341 105,000 25,000 -- 8,401
Administration and Secretary 1994 277,985 175,000 -- 10,329
P. Daryl Brown 1992 164,538 100,000 95,000 -- 6,765
President -- HEALTHSOUTH 1993 182,707 160,000 20,000 -- 7,701
Outpatient Centers 1994 272,573 200,000 -- 10,226
37
<PAGE>
- --------------------
<FN>
(1) Includes car allowances of $500 per month for Mr. Scrushy and
$350 per month for the other named officers. Also includes (a)
matching contributions under the Company's Retirement
Investment Plan for 1992, 1993 and 1994, respectively, of:
$598, $393 and $318 to Mr. Scrushy; $415, $380 and $355 to Mr.
Beam; $450, $453 and $625 to Mr. Bennett; $426, $275 and $334
to Mr. Tanner; and $817, $473 and $274 to Mr. Brown; (b)
awards under the Company's Employee Stock Benefit Plan for
1993 and 1994, respectively, of $3,123 and $4,910 to Mr.
Scrushy; $3,123 and $4,910 to Mr. Beam; $1,102 and $4,910 to
Mr. Bennett; $3,123 and $4,910 to Mr. Tanner; and $2,846 and
$4,910 to Mr. Brown; and (c) split-dollar life insurance
premiums paid in 1993 and 1994 of $1,280 and $1,723 with
respect to Mr. Scrushy; $1,639 and $1,807 with respect to Mr.
Beam; $885 and $1,025 with respect to Mr. Bennett; $804 and
$885 with respect to Mr. Tanner; and $182 and $842 with
respect to Mr. Brown. See this Item, "Executive Compensation
Retirement Investment Plan" and "Executive Compensation
Employee Stock Benefit Plan".
</TABLE>
Stock Option Grants in 1994
No stock option grants to the Named Executive Officers were made in
1994.
Stock Option Exercises in 1994 and Option Values at December 31, 1994
<TABLE>
<CAPTION>
Number
Shares Value of Unexercised
Acquired Number of Unexercised Options In-the-Money Options
on Value at December 31, 1994 at December 31, 1994
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard M. Scrushy...... 2,839,840 $61,765,800 $
James P. Bennett........ 22,500 330,825 98,750 18,750 2,105,646 399,806
Aaron Beam, Jr..........100,325 1,705,904 86,550 13,125 1,863,881 279,864
Anthony J. Tanner....... 216,875 13,125 4,773,675 279,864
P. Daryl Brown.......... 144,250 18,750 3,172,968 399,806
- --------------------
<FN>
(1) Does not reflect any options granted and/or exercised after
December 31, 1994. The net effect of any such grants and exercises
is reflected in the table appearing under Item 12, "Security
Ownership of Certain Beneficial Owners and Management".
(2) Represents difference between market price of the Company's Common
Stock and the respective exercise prices of the options at
December 31, 1994. Such amounts may not necessarily be realized.
Actual values which may be realized, if any, upon any exercise of
such options will be based on the market price of the Common Stock
at the time of any such exercise and thus are dependent upon
future performance of the Common Stock.
</TABLE>
Stock Option Plans
Set forth below is information concerning the various stock option
plans of the Company at December 31, 1994.
38
<PAGE>
1984 Incentive Stock Option Plan
The Company had a 1984 Incentive Stock Option Plan (the "ISO Plan"),
intended to qualify under Section 422(b) of the Internal Revenue Code of 1986,
as amended (the "Code"), covering an aggregate of 1,200,000 shares of Common
Stock. The ISO Plan expired on February 28, 1994, in accordance with its terms.
As of December 31, 1994, there were outstanding under the ISO Plan options to
purchase 14,733 shares of the Company's Common Stock at prices ranging from
$10.08 to $15.13 per share. All such options remain in full force and effect in
accordance with their terms and the ISO Plan. Under the ISO Plan, which was
administered by the Board of Directors, key employees could be granted options
to purchase shares of Common Stock at 100% of fair market value on the date of
grant (or 110% of fair market value in the case of a 10% stockholder/grantee).
The outstanding options granted under the ISO Plan must be exercised within ten
years from the date of grant, are cumulatively exercisable with respect to 25%
of the shares covered thereby after the expiration of each of the first through
the fourth years following the date of grant, are nontransferable except by will
or pursuant to the laws of descent and distribution, are protected against
dilution and expire within three months after termination of employment, unless
such termination is by reason of death.
1988 Non-Qualified Stock Option Plan
The Company also has a 1988 Non-Qualified Stock Option Plan (the "NQSO
Plan") covering a maximum of 1,200,000 shares of Common Stock. As of December
31, 1994, there were outstanding under the NQSO Plan options to purchase 86,340
shares of the Company's Common Stock at prices ranging from $6.25 to $13.17 per
share. The NQSO Plan, which is administered by the Board of Directors (except
with respect to options granted to Directors, as to which it is administered by
an Independent Stock Option Committee), provides that Directors, executive
officers and other key employees may be granted options to purchase shares of
Common Stock at 100% of fair market value on the date of grant. The NQSO Plan
terminates on the earliest of (a) February 28, 1998, (b) such time as all shares
of Common Stock reserved for issuance under the NQSO Plan have been acquired
through the exercise of options granted thereunder or (c) such earlier time as
the Board of Directors of the Company may determine. Except for options covering
33,500 shares, which contain vesting provisions similar to those contained in
options granted under the ISO Plan, options granted pursuant to the NQSO Plan
have a five-year term (except for options covering 172,500 shares which have a
ten-year term), are exercisable at any time during such period, are
nontransferable except by will or pursuant to the laws of descent and
distribution, are protected against dilution and expire within three months of
termination of association with the Company as a Director or termination of
employment, unless such termination is by reason of death.
1989, 1990, 1992, 1992 and 1993 Stock Option Plans
The Company also has a 1989 Stock Option Plan (the "1989 Plan"), a 1990
Stock Option Plan (the "1990 Plan"), a 1991 Stock Option Plan (the "1991 Plan"),
a 1992 Stock Option Plan (the "1992 Plan"), and a 1993 Stock Option Plan (the
"1993 Plan"), under each of which incentive stock options ("ISOs") and
non-qualified stock options ("NQSOs") may be granted. The 1989, 1990, 1991, 1992
and 1992 Plans cover a maximum of 600,000 shares, 900,000 shares, 2,800,000
shares, 1,400,000 shares and 1,400,000 shares, respectively, of the Company's
Common Stock. As of December 31, 1994, there were outstanding options to
purchase 218,692 shares of Common Stock at prices ranging from $10.08 to $15.13
per share under the 1989 Plan, 678,763 shares of Common Stock at prices ranging
from $11.55 to $15.13 per share under the 1990 Plan, 2,356,079 shares of Common
Stock at an exercise price of $15.13 per share under the 1991 Plan, 1,224,625
shares of Common Stock at exercise prices ranging from $15.13 to $15.25 per
share under the 1992 Plan, and 1,070,205 shares of Common Stock at prices
ranging from $13.50 to $36.50 per share under the 1993 Plan. Each of the 1989,
1990, 1991, 1992 and 1993 Plans is administered in the same manner as the NQSO
Plan and provides that Directors, executive officers and other key employees may
be granted options to purchase shares of Common Stock at 100% of fair market
value on the date of grant. Each of the 1989, 1990, 1991, 1992 and 1993 Plans
terminate on the earliest of (a) October 25, 1999, October 15, 2000, June 19,
2001, June 16, 2002, and April 19, 2003, respectively, (b) such time as all
shares of Common Stock reserved for issuance under the respective Plan have been
acquired through the exercise of options granted thereunder, or (c) such earlier
times as the Board of Directors of the Company may determine. Options granted
under these Plans which are designated as ISOs contain vesting provisions
similar to those contained in options granted under the ISO Plan and have a
ten-year term. NQSOs granted under these Plans, if any, will have a ten-year
term. Options granted under these Plans are nontransferable except by will or
pursuant to the laws of descent and distribution, are protected against dilution
and will expire within three months of termination of association with the
Company as a Director or termination of employment, unless such termination is
by reason of death.
39
<PAGE>
1993 Consultants' Stock Option Plan
The Company also has a 1993 Consultants' Stock Option Plan (the "1993
Consultants' Plan"), under which NQSOs may be granted, covering a maximum of
750,000 shares of Common Stock. As of December 31, 1994, there were outstanding
under the 1993 Consultants' Plan options to purchase 372,500 shares of Common
Stock at prices ranging from $13.50 to $36.50 per share. The 1993 Consultants'
Plan, which is administered in the same manner as the NQSO Plan, provides that
certain non-employee consultants who provide significant services to the Company
may be granted options to purchase shares of Common Stock at such prices as are
determined by the Board of Directors or the appropriate committee. The 1993
Consultants' Plan terminates on the earliest of (a) February 25, 2003, (b) such
time as all shares of Common Stock reserved for issuance under the 1993
Consultants' Plan have been acquired through the exercise of options granted
thereunder, or (c) such earlier time as the Board of Directors of the Company
may determine. Options granted under the 1993 Consultants' Plan have a ten-year
term. Options granted under the 1993 Consultants' Plan are nontransferable
except by will or pursuant to the laws of descent and distribution, are
protected against dilution and expire within three months of termination of
association with the Company as a consultant, unless such termination is by
reason of death.
Executive Loans
In order to enhance equity ownership by senior management, in 1989 the
Company adopted a program of making loans to officers holding the position of
Group Vice President and above to facilitate the exercise of stock options held
by such persons. Each loan bears interest at the prime rate announced from time
to time by AmSouth Bank N.A., Birmingham, Alabama and is secured by a first lien
on the shares of Common Stock acquired with the proceeds of the loan. Each loan
has a ten-year term, and the Company's lien on the shares of Common Stock is
released as the indebtedness is repaid at the rate of one share per the weighted
average option exercise price repaid. The only loan currently outstanding under
such program is a loan made on May 7, 1992, to P. Daryl Brown, President --
HEALTHSOUTH Outpatient Centers, which had an original principal balance of
$213,613 and of which $190,000 remained outstanding at December 31, 1994.
Retirement Investment Plan
Effective January 1, 1990, the Company adopted the HEALTHSOUTH
Retirement Investment Plan (the "401(k) Plan"), a retirement plan intended to
qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended.
The 401(k) Plan is open to all full-time and part-time employees of the Company
who are over the age of 21, have one full year of service with the Company and
have at least 1,000 hours of service in the year in which they enter the 401(k)
Plan. Eligible employees may elect to participate in the Plan on January 1 and
July 1 in each year.
Under the 401(k) Plan, participants may elect to defer up to 20% of
their annual compensation (subject to nondiscrimination rules under the Internal
Revenue Code). The deferred amounts may be invested among four options, at the
participant's direction: a money market fund, a bond fund, a guaranteed
insurance contract or an equity fund. The Company will match a minimum of 10% of
the amount deferred by each participant, up to 4% of such participant's total
compensation, with the matched amount also directed by the participant. See Note
12 of "Notes to Consolidated Financial Statements".
Aaron Beam, Jr., Executive Vice President and Chief Financial Officer
of the Company, and Anthony J. Tanner, Executive Vice President --
Administration and Secretary of the Company, serve as Trustees of the 401(k)
Plan, which is administered by the Company.
Employee Stock Benefit Plan
Effective January 1, 1991, the Company adopted the HEALTHSOUTH
Rehabilitation Corporation and Subsidiaries Employee Stock Benefit Plan (the
"ESOP"), a retirement plan intended to qualify under sections 401(a) and
4975(e)(7) of the Internal Revenue Code of 1986, as amended. The ESOP is open to
all full-time and part-time employees of the Company who are over the age of 21,
have one full year of service with the Company and have at least 1,000 hours of
service in the year in which they begin participation in the ESOP on the next
January 1 or July 1 after the date on which such employee satisfies the
aforementioned conditions.
40
<PAGE>
The ESOP was established with a $10,000,000 loan from the Company, the
proceeds of which were used to purchase 413,793 shares of the Company's Common
Stock. In 1992, an additional $10,000,000 loan was made to the ESOP, which was
used to purchase an additional 416,666 shares of Common Stock. Under the ESOP, a
Company Common Stock account (a "company stock account") is established and
maintained for each eligible employee who participates in the ESOP. In each plan
year, such account is credited with such employee's allocable share of the
Common Stock held by the ESOP and allocated with respect to such plan year. Each
employee's allocable share for any given plan year is determined according to
the ratio which such employee's compensation for such plan year bears to the
compensation of all eligible participating employees for the same plan year.
Under the ESOP, eligible employees who participate in the ESOP and who
have attained age 55 and have completed 10 years of participation in the ESOP
may elect to diversify the assets in their company stock account by directing
the plan administrator to transfer to the 401(k) Plan a portion of their company
stock account to be invested, as the eligible employee directs, in one or more
of the investment options available under the 401(k) Plan. See Note 12 of "Notes
to Consolidated Financial Statements".
Richard M. Scrushy, Chairman of the Board, President and Chief
Executive Officer of the Company, Aaron Beam, Jr., Executive Vice President and
Chief Financial Officer of the Company, and Anthony J. Tanner, Executive Vice
President -- Administration and Secretary of the Company, serve as Trustees of
the ESOP, which is administered by the Company.
Stock Purchase Plan
In order to further encourage employees to obtain equity ownership in
the Company, the Company's Board of Directors adopted an Employee Stock Purchase
Plan (the "Stock Purchase Plan") effective January 1, 1994. Under the Stock
Purchase Plan, participating employees may contribute $10 to $200 per pay period
toward the purchase of the Company's Common Stock in open-market transactions.
The Stock Purchase Plan is open to regular full-time or part-time employees who
have been employed for six months and are at least 21 years old. After six
months of participation in the Stock Purchase Plan, the Company will provide a
10% matching contribution to be applied to purchases under the Stock Purchase
Plan. The Company also pays all fees and brokerage commissions associated with
the purchase of the stock. The Stock Purchase Plan is administered by a
broker-dealer firm not affiliated with the Company.
Board Compensation
Directors who are not also employed by the Company are paid Directors'
fees of $10,000 per annum, plus $3,000 for each meeting of the Board of
Directors and $1,000 for each Committee meeting attended. In addition, Directors
are reimbursed for all out-of-pocket expenses incurred in connection with their
duties as Directors. The Directors of the Company, including Mr. Scrushy, have
been granted non-qualified stock options to purchase shares of the Company's
Common Stock. See this Item, "Executive Compensation Stock Option Plans" above.
Chief Executive Officer Employment Agreement
The Company is a party to an Employment Agreement with Richard M.
Scrushy, pursuant to which Mr. Scrushy is employed as Chairman of the Board,
President and Chief Executive Officer of the Company for a five-year term which
ends December 31, 1999. Such term is automatically extended for an additional
year on December 31 of each year. In addition, the Company has agreed to use its
best efforts to cause Mr. Scrushy to be elected as a Director of the Company
during the term of the Agreement. Under the Agreement, Mr. Scrushy received a
base salary of $900,000, including incentive compensation of up to $400,000, in
1994 and is to receive the same base salary in 1995 and each year thereafter,
with incentive compensation of up to $900,000, subject to annual review by the
Board of Directors, and is entitled to participate in any bonus plan approved by
the Board of Directors for the Company's management. The incentive compensation
is earned at $75,000 per month in 1995, contingent upon the Company's success in
meeting certain monthly budgeted earnings per share targets. Mr. Scrushy earned
the entire $400,000 incentive component of his corporation in 1994, as all such
targets were met. In addition, Mr. Scrushy was awarded $2,000,000 under the
management bonus plan. Such additional bonus was based on the Audit and
Compensation Committee's assessment of Mr. Scrushy's contribution to the
establishment of the Company as the industry leader in rehabilitative healthcare
services, including his role in the integration of the NME Selected Hospitals
and his role in the negotiation and consummation of the ReLife acquisition, as
well as the Company's success in achieving annual budgeted net income targets.
41
<PAGE>
Mr. Scrushy is also provided with a car allowance in the amount of $500 per
month and disability insurance through a Company-wide plan or otherwise. Under
the Agreement, Mr. Scrushy may be terminated for cause or if he should become
disabled. Termination of Mr. Scrushy's employment under the Agreement will
result in certain severance pay arrangements. In the event that the Company
shall be acquired, merged or reorganized in such a manner as to result in a
change of control of the Company, Mr. Scrushy has the right to terminate his
employment under the Agreement, in which case he will receive a lump sum payment
equal to three years' annual base salary (including the gross incentive portion
thereof) under the Agreement. Mr. Scrushy has agreed not to compete with the
Company during any period to which any such severance pay relates. Mr. Scrushy
may terminate the Agreement at any time upon 180 days' notice, in which case he
will receive one year's base salary as severance pay.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 3, 1995, (a) by each person
who is known by the Company to own beneficially more than 5% of the Company's
Common Stock, (b) by each of the Company's Directors and (c) by the Company's
five most highly compensated executive officers and all executive officers and
Directors as a group.
<TABLE>
<CAPTION>
Percentage
Name and Number of Shares of
Address of Owner Beneficially Owned (1) Common Stock
---------------- ---------------------- ------------
<S> <C> <C> <C>
Richard M. Scrushy 2,897,391 (2) 7.53%
Two Perimeter Park South
Birmingham, Alabama 35243
John S. Chamberlin 40,000 (3) *
C. Sage Givens 100,000 (3) *
Charles W. Newhall III 140,360 (4) *
George H. Strong 141,679 (5) *
Phillip C. Watkins, M.D. 179,199 (6) *
Aaron Beam, Jr. 102,775 (7) *
James P. Bennett 117,500 (8) *
Larry R. House 198,963 (9) *
Anthony J. Tanner 248,000 (10) *
Richard F. Celeste 30,000 (3) *
P. Daryl Brown 182,500 (11) *
Forstmann-Leff Associates, Inc. 2,035,761 (12) 5.72%
55 East 52nd Street
New York, New York 10055
The Travelers Inc. 1,824,514 (13) 5.13%
65 East 55th Street
New York, New York 10022
American Express Company 1,883,000 (14) 5.29%
American Express Tower
World Financial Center
New York, New York 10285
All Executive Officers and Directors as a Group 4,712,905 (15) 11.76%
(16 persons)
- -------------------------
<FN>
(1) The persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
except as otherwise indicated.
(2) Includes 2,839,840 shares subject to currently exercisable non-qualified
stock options. See Item 11, "Executive Compensation Stock Options".
42
<PAGE>
(3) All of the shares are subject to currently exercisable non-qualified stock
options.
(4) Includes 210 shares owned by members of Mr. Newhall's immediate family, and
140,000 shares are subject to currently exercisable non-qualified stock
options.
(5) Includes 100,000 shares subject to currently exercisable non-qualified
stock options.
(6) Includes 137,500 shares subject to currently exercisable non-qualified
stock options and 499 shares held in trust for his children.
(7) Includes 92,175 shares subject to currently exercisable stock options and
100 shares owned by his spouse. See "Executive Compensation Stock Options"
in Item 11.
(8) Includes 98,750 shares which are subject to currently exercisable stock
options. See "Executive Compensation Stock Options" in Item 11.
(9) Includes 138,442 shares subject to currently exercisable stock options. See
"Executive Compensation Stock Options" in Item 11.
(10) Includes 230,000 shares subject to currently exercisable stock options,
18,000 held in trust by Mr. Tanner for his children. See "Executive
Compensation Stock Options" in Item 11.
(11) Includes 163,000 shares subject to currently exercisable stock options. See
"Executive Compensation Stock Options" in Item 11.
(12) Shares held of record for various investment funds for which Forstmann-Leff
Associates Inc. ("FLA") acts as investment advisor. Includes 1,058,663
shares as to which FLA claims sole voting power, 993,098 shares as to which
FLA claims shared voting power, 1,514,779 shares as to which FLA claims
sole investment power and 520,982 shares as to which FLA claims shared
investment power.
(13) Assumes conversion of convertible debentures held of record by The
Travelers and its subsidiaries as broker-dealer. The Travelers and its
subsidiaries Smith Barney Holdings Inc. and Smith Barney Inc. claim shared
voting and dispositive power with respect to all such shares.
(14) Shares held of record for investment funds for which American Express
Financial Advisors Inc. (together with its parent, American Express
Company, "American Express") acts as investment advisor. Includes 574,600
shares as to which American Express claims shared voting power and
1,883,000 shares as to which American Express claims shared dispositive
power.
(15) Includes 4,512,145 shares subject to currently exercisable stock options
held by officers and Directors.
* Less than 1%
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 1 to be
signed on its behalf by the undersigned, thereunto duly authorized.
HEALTHSOUTH Corporation
By RICHARD M. SCRUSHY
---------------------------
Richard M. Scrushy,
Chairman of the Board
and Chief Executive Officer
Date: April 21, 1995
44
</TABLE>
