<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registration [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[x] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
HEALTHSOUTH Corporation
________________________________________________
(Name of Registrant as Specified In Its Charter)
________________________________________________
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1),
or 14a-6(j)(2).
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)and 0-11.
(1) Title of each class of securities to which transaction applies:
_______________________________________________________________________
(2) Aggregate number of securities to which transaction applies:
_______________________________________________________________________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: *1
_______________________________________________________________________
(4) Proposed maximum aggregate value of transaction:
_______________________________________________________________________
*1 Set forth the amount on which the filing fee is calculated and state
how it was determined.
[x] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount previously paid:
_______________________________________________________________________
(2) Form, Schedule or Registration Statement No.:
_______________________________________________________________________
(3) Filing Party:
_______________________________________________________________________
(4) Date Filed:
_______________________________________________________________________
<PAGE>
HEALTHSOUTH Corporation
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
May 13, 1995
The Annual Meeting of Stockholders of HEALTHSOUTH Corporation (the "Company")
will be held at Two Perimeter Park South, Birmingham, Alabama, on Tuesday, June
6, 1995, at 2:00 p.m., C.D.T., for the following purposes:
1. To elect twelve Directors to serve until the next Annual Meeting of
Stockholders and until their successors are duly elected and qualified.
2. To approve the 1995 Stock Option Plan of the Company.
3. To vote on an Amendment to the Restated Certificate of Incorporation of
the Company to increase the authorized Common Stock of the Company to
150,000,000 shares of Common Stock, par value $.01 per share.
4. To transact such other business as may properly come before the Annual
Meeting or any adjournment thereof.
Stockholders of record at the close of business on April 25, 1995, are
entitled to notice of, and to vote at, the Annual Meeting or any adjournment
thereof.
If you cannot attend the Annual Meeting in person, please date and execute
the accompanying Proxy and return it promptly to the Company. If you attend the
Annual Meeting, you may revoke your Proxy and vote in person if you desire to do
so, but attendance at the Annual Meeting does not of itself serve to revoke your
Proxy.
ANTHONY J. TANNER
Secretary
<PAGE>
HEALTHSOUTH Corporation
PROXY STATEMENT
INTRODUCTION
This Proxy Statement is furnished to the holders of Common Stock, par value
$.01 per share, of HEALTHSOUTH Corporation (the "Company") in connection with
the solicitation of Proxies by and on behalf of the Board of Directors of the
Company for use at the Annual Meeting of Stockholders to be held on June 6, 1995
or any adjournment thereof. A form of Proxy for use at the Annual Meeting is
also enclosed. Any such Proxy may be revoked by a stockholder at any time before
it is exercised by either giving written notice of such revocation to the
Secretary of the Company or submitting a later-dated Proxy to the Company prior
to the Annual Meeting. A stockholder attending the Annual Meeting may revoke his
Proxy and vote in person if he desires to do so, but attendance at the Annual
Meeting will not of itself revoke the Proxy.
The Company's principal executive offices are located at Two Perimeter Park
South, Birmingham, Alabama 35243. The Company's telephone number is (205)
967-7116.
Proxy materials will be mailed to stockholders by the Management of the
Company on or about May 13, 1995. The Company has retained Chemical Bank to
solicit proxies on its behalf and will pay Chemical Bank a fee of $6,000 for
those services. The Company will reimburse Chemical Bank for out-of-pocket
expenses incurred in connection with such solicitation. Additional solicitation
may be made by mail, telephone or telegram by the officers or regular employees
of the Company, who will receive no additional compensation therefor.
Arrangements will also be made with brokerage houses, custodians, nominees and
fiduciaries for the forwarding of proxy materials to the beneficial owners of
Common Stock held of record by such persons, and the Company will reimburse such
brokerage houses, custodians, nominees and fiduciaries for reasonable
out-of-pocket expenses incurred by them in connection therewith. The entire
expense of solicitation, including the cost of preparing, assembling and mailing
the proxy materials, will be borne by the Company.
The purposes of the Annual Meeting of Stockholders are (a) to elect a Board
of Directors to serve until the next Annual Meeting of Stockholders, (b) to
approve the 1995 Stock Option Plan of the Company, and (c) to approve and adopt
an Amendment to the Restated Certificate of Incorporation of the Company to
increase the authorized Common Stock of the Company to 150,000,000 shares of
Common Stock, par value $.01 per share. The Company is not aware at this time of
any other matters that will come before the Annual Meeting. If any other matters
properly come before the Annual Meeting, it is the intention of the persons
designated as proxies to vote in accordance with their judgment on such matters.
Shares represented by executed and unrevoked Proxies will be voted in accordance
with instructions contained therein or, in the absence of such instructions, in
accordance with the recommendations of the Board of Directors. Abstentions and
broker non-votes will not be counted for purposes of determining whether any
given proposal has been approved by the stockholders of the Company.
Accordingly, abstentions and broker non-votes will not affect the votes to be
taken on the election of Directors or the approval of the 1995 Stock Option
Plan, which require for approval the affirmative vote of a majority of the
shares of Common Stock present or represented and entitled to vote at the Annual
Meeting. Because the proposal to amend the Company's Restated Certificate of
Incorporation requires the affirmative vote of a majority of the issued and
outstanding shares of Common Stock of the Company, abstentions and broker
non-votes will be the equivalents of votes against this proposal.
As to all matters that may come before the Annual Meeting, each stockholder
will be entitled to one vote for each share of Common Stock of the Company held
by him at the close of business on April 25, 1995. The holders of a majority of
the shares of Common Stock of the Company present in person or by proxy and
entitled to vote will constitute a quorum at the Annual Meeting. Abstentions and
broker non-votes will be counted for purposes of determining the presence of a
quorum. At April 25, 1995, the record date for the Annual Meeting, there were
71,620,487 shares of Common Stock outstanding.
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Dissenters' Rights of Appraisal
There are no dissenters' rights of appraisal in connection with the vote of
stockholders to be taken with respect to the 1995 Stock Option Plan or the
proposed Amendment to the Company's Restated Certificate of Incorporation.
Proposals by Stockholders
Any proposals by stockholders of the Company intended to be presented at the
1996 Annual Meeting of Stockholders must be received by the Company for
inclusion in the Company's Proxy Statement and form of Proxy by January 13,
1996.
ELECTION OF DIRECTORS
Nominees for Director
At the Annual Meeting, twelve Directors are to be elected. The Bylaws of the
Company permit the Board of Directors to determine the number of Directors of
the Company. Unless other instructions are specified, the enclosed Proxy will be
voted in favor of the persons named below to serve until the next Annual Meeting
of Stockholders and until their successors shall have been duly elected and
qualified. The affirmative vote of a majority of the shares of Common Stock
present or represented and entitled to vote at the Annual Meeting is required
for the election of each Director. In the event any of the nominees shall be
unable to serve as a Director, it is the intention of the persons designated as
proxies to vote for substitutes selected by the Board of Directors. The Board of
Directors of the Company has no reason to believe that any of the nominees named
below will be unable to serve if elected.
The following table sets forth certain information concerning the twelve
nominees for Director of the Company:
<TABLE>
<CAPTION>
Principal Occupation
and All Positions With the A Director
Name Age Company Since
------ ------ ---------------- -----------
<S> <C> <C> <C>
Richard M. Scrushy ...... 42 Chairman of the Board and Chief Executive Officer and
Director 1984
Phillip C. Watkins, M.D. 53 Physician, Birmingham, Alabama, and Director 1984
George H. Strong ........ 68 Private Investor, Locust, New Jersey, and Director 1984
C. Sage Givens .......... 38 General Partner, First Century Partners, and Director 1985
Charles W. Newhall III . 50 Partner, New Enterprise Associates Limited 1985
Partnerships, and Director
Aaron Beam, Jr. ......... 51 Executive Vice President and Chief Financial Officer 1993
and Director
James P. Bennett ........ 37 President and Chief Operating Officer and Director 1993
Larry R. House .......... 51 Chairman of the Board, President and Chief Executive 1993
Officer, MedPartners, Inc., and Director
Anthony J. Tanner ....... 46 Executive Vice President -- Administration and 1993
Secretary and Director
John S. Chamberlin ...... 66 Private Investor, Princeton, New Jersey, and Director 1993
Richard F. Celeste ...... 57 Principal of Celeste and Sabaty, Ltd., and Director 1991
President -- HEALTHSOUTH Outpatient Centers and
P. Daryl Brown .......... 40 Director 1995
</TABLE>
Richard M. Scrushy, one of the Company's management founders, has served
as Chairman of the Board and Chief Executive Officer of the Company since
1984, and also served as President of the Company from 1984 until March 1995.
From 1979 to 1984, Mr. Scrushy was with Lifemark Corporation,
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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 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.
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 and the Subspecialty Board of Cardiovascular
Disease. He is also a Fellow of the American College of Cardiology.
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 continued to act as a
director of Universal Health Services, Inc., a publicly-traded hospital
management corporation, until 1993. Mr. Strong is also a director of Core Funds,
a public mutual fund group, Integrated Health Services, Inc., a publicly-traded
healthcare corporation, and AmeriSource, Inc., a large drug wholesaler.
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- traded
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, to President and Chief Operating Officer --
HEALTHSOUTH Rehabilitation Hospitals in June 1992, to President -- HEALTHSOUTH
Inpatient Operations in February 1993 and to President and Chief Operating
Officer of the Company in March 1995. Mr. Bennett was elected as 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.
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.
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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 1994. He is a principal of Celeste and Sabaty, Ltd., a business
advisory firm located in Columbus, Ohio, which assists United States companies
in building 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.
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. He was elected as a Director
in March 1995. 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.
Directors hold office until the next Annual Meeting of Stockholders of the
Company and until their successors are elected and qualified. Officers are
elected annually by the Board of Directors and serve at the discretion of the
Board of Directors.
Management Matters
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 such person was or is to be elected as a
Director or an executive officer, except the Employment Agreement between the
Company and Richard M. Scrushy described under "Executive Compensation and Other
Information -- Audit and Compensation Committee Report on Executive Compensation
- - - -- Chief Executive Officer Compensation" in this Proxy Statement. There are no
family relationships between any Directors, nominees for Director or executive
officers of the Company, except that Gerald P. Scrushy, Senior Vice President --
Physical Resources of the Company, is the brother of Richard M. Scrushy. The
Board of Directors of the Company held a total of nine meetings and acted by
unanimous written consent one time during 1994.
There are no employment contracts between the Company and any executive
officer named in the Summary Compensation Table under "Executive Compensation
and Other Information -- Executive Compensation -- General", other than the
Employment Agreement with Richard M. Scrushy described under "Executive
Compensation and Other Information -- Audit and Compensation Committee Report on
Executive Compensation -- Chief Executive Officer Compensation" in this Proxy
Statement. Except for such Employment Agreement and except for the broad-based
retirement plans of the Company described under "Executive Compensation and
Other Information -- Retirement Investment Plan" and "Executive Compensation and
Other Information -- Employee Stock Benefit Plan", there are no compensatory
plans or arrangements with respect to any such executive officer which result or
will result from the resignation, retirement or any other termination of such
executive officer's employment with the Company and its subsidiaries or from a
change in control of the Company or from a change in such executive officer's
responsibilities following a change in control of the Company.
The Audit and Compensation Committee of the Board is responsible for
reviewing all reports from the Company's auditors, monitoring internal controls
and reviewing the Company's compensation pro-
4
<PAGE>
gram. On May 6, 1994, C. Sage Givens, George H. Strong and Phillip C. Watkins,
all of whom are outside Directors, were appointed to serve on this committee for
a period of one year or until their successors are appointed. They continue to
serve in such capacity. This committee held one meeting during 1994.
The Board of Directors has an Independent Stock Option Committee to assist in
the administration of the 1988 Non-Qualified Stock Option Plan, the 1989 Stock
Option Plan, the 1990 Stock Option Plan, the 1991 Stock Option Plan, the 1992
Stock Option Plan and the 1993 Stock Option Plan with respect to the
participation of Directors of the Company. C. Sage Givens and Charles W. Newhall
III, both outside Directors, were appointed to serve on this Committee in June
1991 for a period of one year or until their successors are appointed. They
continue to serve in such capacity. See "1995 Stock Option Plan --
Administration of the 1995 Plan", below. The Independent Stock Option Committee
acted one time by unanimous written consent in 1994.
The Company has no other standing audit, nominating or compensation
committees of the Board of Directors.
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 SEC 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
Section 16(a) filing requirements applicable to them.
1995 STOCK OPTION PLAN
General
The Company's Board of Directors has adopted the 1995 Stock Option Plan (the
"1995 Plan") for the Company's Directors, executives and other key employees of
the Company and its subsidiaries. The 1995 Plan is intended to advance the
Company's interests by providing such persons with additional incentives to
promote the success of the Company's business, to increase their proprietary
interest in the success of the Company and to encourage them to remain in the
Company's employ. Management believes that the 1995 Plan is a necessary tool to
help the Company compete effectively with other enterprises for the services of
new employees and to retain key employees and Directors, all as may be required
for the future development of the Company's business. Management intends for the
1993 Plan to complement the Company's 1984 Incentive Stock Option Plan (the "ISO
Plan"), 1988 Non-Qualified Stock Option Plan (the "NQSO Plan"), 1989 Stock
Option Plan (the "1989 Plan"), 1990 Stock Option Plan (the "1990 Plan"), 1991
Stock Option Plan (the "1991 Plan"), 1992 Stock Option Plan (the "1992 Plan")
and 1993 Stock Option Plan (the "1993 Plan") by making additional shares
available for issuance pursuant to options granted under the 1995 Plan. See
"Executive Compensation -- Stock Option Plans".
It should be noted that each Director, each nominee for Director and each
officer and employee of the Company has, by reason of being eligible to receive
options under the 1995 Plan, an interest in seeing that the 1995 Plan is adopted
by the stockholders.
Set forth below is a summary of the major features of the 1995 Plan. This
summary does not purport to be a complete statement of all the provisions of the
1995 Plan, and is qualified in its entirety by the text of the composite copy of
the 1995 Plan attached to this Proxy Statement as Appendix A. See "Executive
Compensation -- Stock Option Plans" in this Proxy Statement for information with
respect to stock options granted to certain Directors and executives of the
Company under the ISO Plan, the NQSO Plan, the 1989 Plan, the 1990 Plan, the
1991 Plan, the 1992 Plan and the 1993 Plan.
5
<PAGE>
Nature of Options to be Granted Pursuant to the 1995 Plan
The 1995 Plan provides for the grant of both non-qualified stock options
("NQSOs") and options intended to qualify as "incentive stock options" ("ISOs")
under Section 422(b) of the Internal Revenue Code of 1986 (the "Code"). Options
designated as ISOs by the Audit and Compensation Committee of the Board of
Directors (the "Committee") will contain terms designed to comply with the
provisions of Section 422(b). All options issued pursuant to the 1995 Plan and
not expressly designated as ISOs shall be conclusively deemed to be NQSOs.
Common Stock Subject to the 1995 Plan
The aggregate number of shares of Common Stock initially covered by the 1995
Plan is 3,500,000 shares. Shares issued upon exercise of options under the 1995
Plan may be either authorized but unissued shares or shares re-acquired by the
Company. If, on or prior to the termination of the 1995 Plan, an option granted
thereunder expires or is terminated for any reason without having been exercised
in full, the unpurchased shares covered thereby will again become available for
the grant of options under the 1995 Plan. Shares of stock covered by options
surrendered in connection with the exercise of other options shall be deemed to
have been exercised and shall not again become available for the grant of
options under the 1995 Plan.
Under the terms of the 1995 Plan, the number of shares of Common Stock for
which options may be granted under such plan shall automatically increase on the
first trading day of each calendar year during the term of the 1995 Plan,
beginning with the 1996 calendar year, by an amount equal to 0.9% of the shares
of Common Stock outstanding on December 31 of the immediately preceding year.
However, such additional shares shall be available only for the grant of NQSOs
under the 1995 Plan and not for the grant of ISOs. The maximum number of shares
of Common Stock for which any individual may be granted options under the 1995
Plan during any calendar year is 1,000,000.
The purchase price of the shares of Common Stock covered by each option
granted under the 1995 Plan will be at least 100% of the fair market value, but
in no event less than the par value, of the Common Stock at the time the option
is granted. No option granted to any person who, at the time of such grant,
owns, taking into account the attribution rules of Section 425(d) of the Code,
stock possessing more than 10% of the total combined voting power of all classes
of the Company's stock or of the stock of any of its corporate subsidiaries, may
be designated as an ISO unless at the time of such grant the purchase price of
the shares of Common Stock covered by such option is at least 110% of the fair
market value, but in no event less than the par value, of such shares.
Notwithstanding any contrary provision contained in the 1993 Plan, the aggregate
fair market value (determined as of the time each ISO is granted) of the shares
of Common Stock with respect to which ISOs issued to any one person thereunder
are exercisable for the first time during any calendar year shall not exceed
$100,000.
The 1995 Plan prohibits any reduction of the exercise price of outstanding
options granted under the plan except by reason of an adjustment pursuant to a
stock split, merger, business combination, recapitalization or similar change in
the capitalization of the Company. The 1995 Plan likewise prohibits the
cancellation of outstanding options accompanied by the reissuance of substitute
options at a lower exercise price.
The 1995 Plan provides that if the Common Stock is listed upon a national
securities exchange or exchanges, such fair market value shall be deemed to be
the last reported sale price at which the shares of Common Stock were traded on
such securities exchange or exchanges immediately prior to the commencement of
the meeting of the Committee at which the option is granted, or if no sale of
the Common Stock was made on any national securities exchange on such date, then
on the next preceding day on which there was a sale of the Common Stock. The
1995 Plan prescribes other methodologies for determining fair market value if
the Common Stock is not listed upon a national securities exchange or exchanges.
Since September 13, 1989, the Common Stock has been listed on the New York Stock
Exchange.
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Administration of the 1995 Plan
The 1995 Plan is administered by the Audit and Compensation Committee of the
Board of Directors (the "Committee", as defined above), each member of which is
an outside director who is a "disinterested person" within the meaning of Rule
16b-3(c)(1) under the Exchange Act. The Committee has full and exclusive
authority to determine the grant of options under the 1995 Plan. Under the terms
of the 1995 Plan, each outside Director, including the members of the Committee,
is to receive an annual grant of options covering 25,000 shares of Common Stock,
such grant to be made at the Annual Meeting of the Board of Directors.
Currently, Phillip C. Watkins, M.D., C. Sage Givens and George H. Strong serve
as the Committee.
Purchase of Common Stock Under the 1995 Plan
Each option granted under the 1995 Plan shall be granted pursuant to and
subject to the terms and conditions of a stock option agreement (a "Stock Option
Agreement") to be entered into between HEALTHSOUTH and the optionholder at the
time of such grant. Any such Stock Option Agreement shall incorporate by
reference all of the terms and provisions of the 1995 Plan as in effect at the
time of grant and may contain such other terms and provisions as shall be
approved and adopted by the Board of Directors (or, in the case of options
granted to directors, by the Independent Committee).
The expiration date of an option granted under the 1995 Plan shall be as
determined by the Board of Directors or the Independent Committee, as the case
may be, at the time of grant, provided that each such option shall expire not
more than ten years after the date such option is granted. Notwithstanding the
preceding sentence, no option granted to any person who, at the time of such
grant, owns, taking into account the attribution rules of Section 425(d) of the
Code, stock possessing more than 10% of the total combined voting power of all
classes of Common Stock or the stock of any of the Company's corporate
subsidiaries, may be designated as an ISO unless by its terms each such option
shall expire not more than five years after the date such option was granted.
Each option shall become exercisable in whole, in part or in installments at
such time or times as the Board of Directors or the Independent Committee may
prescribe and specify in the Stock Option Agreement at the time the option is
granted.
In the event of a "Change in Control" (as defined), of the Company, options
granted under the 1993 Plan which are, by their terms, exercisable in
installments, will become immediately exercisable in full. A "Change in Control"
is defined to include the acquisition of more than 25% of the outstanding voting
securities of the Company by a single person or group, the election to the Board
of Directors of persons constituting a majority of the Board of Directors who
are not "Incumbent Directors" (as defined), or the approval by the stockholders
of the Company of (i) a merger, reorganization or similar transaction which
results in the then-current stockholders of the Company owning less than 75% of
the combined voting power of the reorganized or merged entity, (ii) the
liquidation or dissolution of the Company, or (iii) the sale of all or
substantially all of the assets of the Company. These provisions of the 1993
Plan may have some deterrent effect on certain mergers, tender offers or other
takeover attempts, thereby having some potential adverse effect on the market
price of the Company's Common Stock.
The exercise price for options granted under the 1995 Plan may be paid in any
of the following ways, which may be combined for any given exercise: (a) the
exercise price may be paid in cash; (b) the exercise price may be paid by
tendering outstanding shares of Common Stock having a fair market value equal to
the aggregate exercise price for the options being exercised; or (c) subject to
applicable requirements of the Exchange Act, the optionholder may deliver with
his exercise notice irrevocable instructions to a broker to promptly deliver to
the Company an amount of sale or loan proceeds sufficient to pay the exercise
price. In addition, with respect to optionholders who are subject to reporting
requirements under Section 16(a) of the Exchange Act, the optionholder may
surrender unexercised options having a "Spread" equal to the exercise price of
the options sought to be exercised. For purposes of the 1995 Plan, "Spread"
means, with respect to a surrendered option, (i) the average price per share of
Common Stock on the date of exercise, less (ii) the exercise price of the
surrendered option.
Options granted under the 1993 Plan shall be assignable or transferable only
by will or pursuant to the laws of descent and distribution, and shall be
exercisable during the optionholder's lifetime only by
7
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the optionholder himself or herself. No holder of any option shall have any
rights to dividends or other rights of a stockholder with respect to shares
subject to an option prior to the purchase of such shares upon exercise of the
option.
Termination of Employment, Death or Disability of Optionholder
With respect to an option which, by its terms, is not exercisable for one
year from the date on which it is granted, if an optionholder's employment by,
or other relationship with, the Company or any of its subsidiaries terminates
for any reason other than death within one year after the date an unexercised
option is granted under the 1995 Plan, the option shall terminate on the date of
termination of such employment or other relationship. With respect to all
options granted under the 1995 Plan, if an optionholder's employment by, or
other relationship with, the Company is terminated by reason of his death, the
option shall terminate one year after the date of death, unless the option
otherwise expires. If an optionholder's employment by, or other relationship
with, the Company terminates for any other reason, or at any other time, other
than as set forth above, the option shall terminate three months after the date
of termination of such employment or other relationship, unless the option
earlier expires, provided that: (a) if the optionholder dies within such
three-month period, the option shall terminate one year after the date of his
death, unless the option earlier expires; (b) the Board of Directors may, at any
time prior to any termination of such employment or other relationship under the
circumstances covered herein, determine in its discretion that the option shall
terminate on the date of termination of such employment or other relationship;
and (c) the exercise of any option after termination of such employment or other
relationship shall be subject to satisfaction of the conditions precedent that
the optionholder refrain from engaging, directly or indirectly, in any activity
which is competitive with any activity of the Company or any subsidiary and from
otherwise acting, either prior to or after termination of such employment or
other relationship, in any manner inimical or in any way contrary to the best
interests of the Company and that the optionholder furnish to the Company such
information with respect to the satisfaction of the foregoing conditions
precedent as the Board of Directors shall reasonably request.
Expiration, Termination and Amendment of the 1995 Plan
The 1995 Plan will terminate on the earliest of (a) June 5, 2005, (b) the
date on which all shares of Common Stock reserved for issuance under the 1995
Plan shall have been acquired through exercise of options granted thereunder, or
(c) such earlier time as the Board of Directors may determine. Any option
outstanding under the 1995 Plan at the time of its termination shall remain in
effect in accordance with its terms and conditions and those of the 1995 Plan.
The 1995 Plan may, at any time or from time to time, be terminated, modified
or amended by the stockholders of the Company by the affirmative vote of the
holders of a majority of the outstanding shares of Common Stock entitled to
vote. The Board of Directors may, insofar as permitted by law, from time to time
with respect to any shares of Common Stock at the time not subject to options,
suspend or discontinue the 1995 Plan or revise or amend it in any respect
whatsoever, except that, without approval of the stockholders of the Company, no
such revision or amendment shall increase the number of shares subject to the
1995 Plan, decrease the price at which the options may be granted, permit
exercise of options unless full payment is made at the time of exercise (except
as provided in the 1995 Plan), extend the period during which options may be
exercised, or change the provisions relating to adjustment to be made upon
changes in capitalization. Subject to the provisions described above, the Board
of Directors has the power to amend the 1995 Plan and any outstanding options
granted thereunder in such respects as the Board of Directors shall, in its sole
discretion, deem advisable in order to incorporate in the 1995 Plan or any such
option any new provision or change designed to comply with or take advantage of
requirements or provisions of the Code or other statute, or rules or regulations
of the Internal Revenue Service or other federal or state governmental agency
enacted or promulgated after the adoption of the 1995 Plan.
Federal Tax Consequences
Pursuant to the Code, upon the exercise of an NQSO under the 1995 Plan, the
Company is generally entitled to a tax deduction in an amount equal to the
difference between the option price and the
8
<PAGE>
fair market value of the Common Stock on the date the NQSO is exercised. For
Federal tax purposes, the person exercising the option must pay personal income
taxes on an amount equal to the difference between the option price and the fair
market value of the Common Stock on the date the NQSO is exercised. The basis of
the Common Stock obtained by exercising the NQSO will be the option price paid
plus the amount equal to the difference between the option price and the fair
market value of the Common Stock on the date the NQSO is exercised, which amount
was subject to Federal income tax. A subsequent sale of the Common Stock by the
person exercising the NQSO will result in a long- or short-term capital gain or
loss depending on the total period of time that the shares of Common Stock are
held. Generally, no taxable event occurs under the Code upon the grant of an
NQSO under the 1995 Plan.
Pursuant to the Code, the holder of an ISO will recognize no taxable income
(or loss) upon the grant or exercise of an ISO. Upon the sale of the underlying
shares of Common Stock, the optionholder will incur a long-term capital gain or
loss if the provisions of Section 422(b) of the Code are complied with. In such
case, there is no taxable event for the Company. The principal requirement of
Section 422(b), other than the limitations on option price, duration of option
period, time of exercise and volume exercisable in one year described above, is
that, in order for an option to qualify for ISO treatment, shares received
pursuant to exercise of the option may not be disposed of within two years from
the date of grant and one year from the date of exercise of the option. If an
option designated as an ISO ceases to qualify as an ISO, the tax effects for the
optionholder and the Company will be identical to those described above for
NQSOs.
New Plan Benefits
No options have been granted under the 1995 Plan. The number of shares
covered by particular options to be granted under the 1995 Plan is not
determinable at this time.
Vote Required; Recommendation of the Board of Directors
Management recommends a vote FOR the adoption of the 1995 Stock Option Plan.
The affirmative vote of the holders of a majority of the outstanding shares of
the Common Stock present or represented and entitled to vote at the Annual
Meeting will be necessary for stockholder approval of the 1995 Stock Option
Plan.
AMENDMENT TO RESTATED CERTIFICATE OF INCORPORATION
TO INCREASE AUTHORIZED COMMON STOCK
At a meeting of the Board of Directors of the Company on March 10, 1995, the
Company's Directors approved an amendment to Article FOURTH of the Company's
Restated Certificate of Incorporation (the "Restated Certificate of
Incorporation") to increase the number of authorized shares of Common Stock of
the Company from 100,000,000 to 150,000,000 shares of Common Stock, par value
$.01 per share. Such approval was subject to the approval of the holders of a
majority of the outstanding shares of Common Stock.
In connection with such proposal, the following resolution will be introduced
at the Annual Meeting:
RESOLVED, that the first paragraph of Article FOURTH of the Restated
Certificate of Incorporation of this Corporation be amended to read as follows:
"FOURTH. The total number of shares of stock which the Corporation shall have
authority to issue is One Hundred Fifty-One Million Five Hundred Thousand
(151,500,000) shares, consisting of One Hundred Fifty Million (150,000,000)
shares of Common Stock, par value One Cent ($.01) per share, and One Million
Five Hundred Thousand (1,500,000) shares of Preferred Stock, par value Ten Cents
($.10) per share."
9
<PAGE>
Increase in Authorized Common Stock
The Board of Directors recommends that the Company's stockholders approve the
proposed Amendment to the Certificate of Incorporation to increase the
authorized Common Stock of the Company to 150,000,000 shares of Common Stock,
par value $.01 per share, because it considers such proposal to be in the best
long-term and short-term interests of the Company, its stockholders and its
other constituencies. Substantially all shares of Common Stock currently
authorized are either outstanding or reserved for issuance. The proposed
increase in the number of shares of authorized Common Stock will ensure that a
sufficient number of shares will be available, if needed, for issuance in
connection with any possible future transactions approved by the Board of
Directors, including, among others, stock splits, stock dividends, acquisitions,
financings and other corporate purposes. The Board of Directors believes that
the availability of the additional shares of Common Stock for such purposes
without delay or the necessity for a special stockholders' meeting (except as
may be required by applicable law or regulatory authorities or by the rules of
any stock exchange on which the Company's securities may then be listed) will be
beneficial to the Company by providing it with the flexibility required to
consider and respond to future business opportunities and needs as they arise.
The availability of additional authorized shares of Common Stock will also
enable the Company to act promptly when the Board of Directors determines that
the issuance of additional shares of Common Stock is advisable. It is possible
that shares of Common Stock may be issued at a time and under circumstances that
may increase or decrease earnings per share and increase or decrease the book
value per share of shares presently held.
Except for issuance in connection with the various stock options referred to
in this Proxy Statement, the Company does not have any immediate plans,
agreements, arrangements, commitments or understandings with respect to the
issuance of any of the remaining additional shares of Common Stock which would
be authorized by the proposed Amendment to the Certificate of Incorporation.
Under the Restated Certificate of Incorporation, the Corporation presently
has authority to issue 100,000,000 shares of Common Stock, par value $.01 per
share, of which 71,620,487 shares were issued and outstanding on April 25, 1995.
In addition, as of April 25, 1995, approximately 12,541,580 shares of Common
Stock were reserved for issuance under the Company's Stock Option Plans, under
which options to purchase a total of 11,718,172 shares of Common Stock were
outstanding. All such plans and options are hereinafter referred to collectively
as the "Options". Approximately 823,408 shares were available for issuance on
April 25, 1995.
The Company intends to apply to the New York Stock Exchange, on which the
shares of Common Stock are currently listed, for the listing thereon of the
additional shares to be issued and reserved for future issuance upon the
approval of the Amendment to the Restated Certificate of Incorporation.
The Board of Directors recommends that stockholders vote FOR the adoption of
the Amendment to the Certificate of Incorporation to increase the authorized
shares of Common Stock to 150,000,000 shares of Common Stock, par value $.01 per
share. The affirmative vote of the holders of a majority of the outstanding
shares of Common Stock entitled to vote at the Annual Meeting will be necessary
for the approval of the Amendment to the Restated Certificate of Incorporation.
10
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
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.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
-------------------------------- ----------------------
Bonus/Annual Stock Long-Term All
Incentive Option Incentive Other
Name and Principal Position Year Salary Award Awards(2) Payouts Compensation(3)
--------------------------- ----- ---------- ------------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Richard M. Scrushy .............. 1992 $ 730,666 $ 509,904 3,450,000 -- $ 8,794
Chairman of the Board, President 1993 820,768 1,900,000 542,000 -- 10,796
and Chief Executive Officer (1) 1994 1,207,228 2,000,000 -- 12,991
James P. Bennett ................ 1992 $ 158,862 $ 75,000 190,000 -- $ 4,650
President -- HEALTHSOUTH ........ 1993 250,514 130,000 80,000 -- 6,640
Inpatient Operations (1) ........ 1994 357,740 250,000 -- 10,760
Aaron Beam, Jr. ................. 1992 $ 241,709 $ 90,000 200,000 -- $ 6,811
Executive Vice President ........ 1993 252,039 100,000 50,000 -- 9,342
and Chief Financial Officer .... 1994 298,223 175,000 -- 11,272
Anthony J. Tanner ............... 1992 $ 196,066 $ 100,000 200,000 -- $ 6,693
Executive Vice President -- .... 1993 194,341 105,000 50,000 -- 8,401
Administration and Secretary ... 1994 277,985 175,000 -- 10,329
P. Daryl Brown .................. 1992 $ 164,538 $ 100,000 190,000 -- $ 6,765
President -- HEALTHSOUTH ........ 1993 182,707 160,000 -- 7,701
Outpatient Centers .............. 1994 272,573 200,000 10,226
<FN>
(1) Effective March 10, 1995, Mr. Bennett was named President and Chief
Operating Officer of the Company. Mr. Scrushy remains Chairman of the Board and
Chief Executive Officer of the Company.
(2) All share numbers have been restated to reflect a two-for-one split of
the Company's Common Stock effective April 17, 1995.
(3) Includes car allowances of $500 per month for Mr. Scrushy and $350 per
month for the other Named Executive 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 "Executive Compensation
and Other Information -- Retirement Investment Plan" and "Executive Compensation
- - - -- Employee Stock Benefit Plan".
</TABLE>
11
<PAGE>
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 of Value of Unexercised
Shares Number of Unexercised Options In-the-Money Options
Acquired at December 31, 1994 at December 31, 1994
------------------------------- ----------------------------
on Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ---------- --------- ----------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Richard M. Scrushy -- -- 5,679,680 -- $ 61,765,800 $ --
James P. Bennett .. 22,500 330,825 197,500 37,500 2,105,646 399,806
Aaron Beam, Jr..... 100,325 1,705,904 173,100 26,250 1,863,881 279,864
Anthony J. Tanner . -- -- 433,750 26,250 4,773,675 279,864
P. Daryl Brown..... -- -- 288,500 37,500 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 Principal Stockholders.
(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>
12
<PAGE>
Stockholder Return Comparison
Set forth below is a line graph comparing the total returns of the Company's
Common Stock, the Standard & Poor's 500 (S&P 500) Index and a peer group index
("Rehab Index") compiled by the Company, consisting of Tenet Healthcare
Corporation, Continental Medical Systems, Inc. and NovaCare, Inc.,
publicly-traded healthcare companies whose businesses are similar in some
respects to that of the Company. As permitted by the rules of the Securities and
Exchange Commission, the Company has constructed the Rehab Index because of its
belief that no published industry or line-of-business index reflects issuers
whose business is comparable to that of the Company. The three companies
constituting the Rehab Index were the largest publicly-traded providers of
rehabilitative healthcare services other than the Company during the five-year
period presented. The Company selected such companies for the Rehab Index based
upon the nature of such companies' businesses. The graph assumes $100 invested
on December 31, 1989, in HEALTHSOUTH Common Stock and each of the indices. The
Rehab Index has been weighted for market capitalization, and the Company assumes
reinvestment of dividends for purposes of the graph.
******************
GRAPH APPEARS HERE
******************
HRC S&P Index
------ ------ ------
1989 100 100 100
1990 144.84 96.92 101.72
1991 305.71 126.91 129.52
1992 229.35 136.54 144.79
1993 219.57 149.87 116.43
1994 316.98 150.94 81.85
Stock Option Plans
Set forth below is information concerning the various stock option plans of
the Company at December 31, 1994. All share amounts and exercise prices have
been restated to reflect a two-for-one split of the Company's Common Stock
effective April 17, 1995.
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 2,400,000 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 29,466
shares of the Company's Common Stock at prices ranging from $5.04 to $7.57 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
13
<PAGE>
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 2,400,000 shares of Common Stock. As of December 31, 1994,
there were outstanding under the NQSO Plan options to purchase 172,680 shares of
the Company's Common Stock at prices ranging from $3.13 to $6.59 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
67,000 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 345,000 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 1993 Plans cover a maximum of 1,200,000 shares, 1,800,000 shares, 5,600,000
shares, 2,800,000 shares and 2,800,000 shares, respectively, of the Company's
Common Stock. As of December 31, 1994, there were outstanding options to
purchase 437,384 shares of Common Stock at prices ranging from $5.04 to $7.57
per share under the 1989 Plan, 1,357,526 shares of Common Stock at prices
ranging from $7.29 to $7.57 per share under the 1990 Plan, 4,712,158 shares of
Common Stock at an exercise price of $7.29 per share under the 1991 Plan,
2,449,250 shares of Common Stock at exercise prices ranging from $7.29 to $7.63
per share under the 1992 Plan, and 2,140,410 shares of Common Stock at prices
ranging from $6.75 to $18.25 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
terminates 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 such 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.
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
1,500,000 shares of Common Stock. As of December 31, 1994, there were
outstanding under the 1993 Consultants' Plan options to purchase 745,000
14
<PAGE>
shares of Common Stock at exercise prices ranging from $6.75 to $18.25 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 of Alabama, 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.
15
<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 of such employee's compensation for such plan year 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 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 "Executive Compensation and Other Information -- Stock Option
Plans" above.
Audit and Compensation Committee Report on Executive Compensation
General
The Board of Directors of the Company has an Audit and Compensation Committee
(the "Committee"), consisting of Ms. Givens, Mr. Strong and Dr. Watkins. The
Committee is charged by the Board of Directors with establishing a compensation
plan which will enable the Company to compete effectively for the services of
qualified officers and key employees, to give such employees appropriate
incentive to pursue the maximization of long-term stockholder value, and to
recognize such employees' success in achieving both qualitative and quantitative
goals for the benefit of the Company. The Committee makes recommendations to the
full Board of Directors as to appropriate levels of compensation for specific
individuals, as well as compensation and benefit programs for the Company as a
whole.
16
<PAGE>
Compensation Philosophy and Policies for Executive Officers
As its first principle, the Committee believes that executives of the Company
should be rewarded based upon their success in meeting the Company's operational
goals, improving its earnings, establishing its leadership role in the health
and rehabilitative services fields, and generating returns for its stockholders,
and the Committee strives to establish levels of compensation that take such
factors into account and provide appropriate recognition for past achievement
and incentive for future success. The Committee recognizes that the demand for
executives with expertise and experience in the healthcare and rehabilitative
services fields is intense. In order to attract and retain qualified persons,
the Committee believes that the Company must offer current compensation at
levels consistent with other publicly-held healthcare and rehabilitative
services companies. In addition, the Committee believes that it is in the best
interests of the Company's stockholders to offer its executives meaningful
equity participation in the Company, in order that those executives' interests
will be aligned with those of the Company's stockholders. The Committee feels
that the historic mix of cash compensation and equity participation has proven
to be effective in stimulating the Company's executives to meet both long-term
and short-term goals.
The Company's compensation program has three distinct elements: base salary;
incentive compensation, including both cash incentive compensation and
equity-based compensation; and retirement compensation. These elements are
discussed below.
Base Salary: While the demand for experienced managers in the healthcare and
rehabilitative services fields continues to grow, the Company has been very
successful in attracting and retaining key executives, many of whom have been
with the Company since its early days. The Company believes that its
compensation package is instrumental in such success. The Committee endeavors to
establish base salary levels for those key executives which are consistent with
those provided for similarly situated executives of other publicly-held
healthcare companies, taking into account each executive's areas and level of
responsibility, historical performance and tenure with the Company. In
establishing such levels, the Company considers compensation for executives of
other publicly-held providers of rehabilitative healthcare services, such as
Continental Medical Systems and NovaCare, Inc., as well as other publicly-held
healthcare companies, such as Columbia/HCA and Tenet Healthcare Corporation.
Compensation decisions are not targeted to specific levels in the range of
compensation paid by such companies, nor does the Company maintain a reference
record of where its compensation stands with respect to such other companies.
However, the Committee and the Board of Directors take such levels of
compensation into account in determining appropriate levels of compensation for
the Company's executives.
Incentive Compensation: In addition to base salary, the Committee recommends
to the Board of Directors cash incentive compensation for executives of the
Company, based upon each such executive's success in meeting qualitative and
quantitative performance goals on an annual basis. The total incentive bonus
pool available for the Company's executives is capped at the lesser of (a) the
amount by which the Company's annual net income exceeds the budgeted annual net
income established by the Board of Directors and (b) 10% of the Company's annual
net income. No bonuses are payable unless annual net income exceeds budgeted net
income. Individual incentive bonuses within such bonus pool are not determined
in a formulary manner, but are determined on a basis that takes into account
each executive's success in achieving standards of performance which may or may
not be quantitative, established by the Board of Directors and such executive's
superiors. Bonus determinations are made on a case-by-case basis, taking into
account appropriate quantitative and qualitative factors, and there is no fixed
relationship between any particular performance factor and the amount of a given
executive's bonus. Historically, incentive compensation has been a major
component of the Company's executive compensation, and the Committee believes
that placing executives at risk for such a component has been effective in
motivating such executives to achieve such goals.
In 1994, the Committee engaged William M. Mercer, Inc. as a consultant to
perform a study of the Company's executive compensation programs. The Mercer
report concluded that the Company's compensation mix was significantly more
highly-leveraged, at risk and performance-focused than other companies selected
by Mercer for comparison, with 41% of the Company's cash compensation for
executive officers being at-risk, performance-based compensation, compared to
29% for the other companies reviewed by Mercer.
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<PAGE>
In addition to cash incentive compensation, as a growth company, the Company
has always utilized equity-based compensation, in the form of stock options, as
a tool to encourage its executives to work to meet its operational goals and
maximize long-term stockholder value. Because the value of stock options granted
to an executive is directly related to the Company's success in enhancing its
market value over time, the Committee feels that its stock option programs have
been very effective in aligning the interests of management and stockholders.
The Board of Directors, in consultation with the Committee, determines stock
option grants under the Company's various stock option plans, all of which are
described above under "Executive Compensation and Other Information -- Stock
Option Plans". Specific grants are determined taking into account an executive's
current responsibilities and historical performance, as well as the executive's
perceived contribution to the Company's results of operations. Options are also
used to give incentive to newly-promoted officers at the time that they are
asked to assume greater responsibilities. In evaluating option grants, the Board
of Directors considers prior grants and shares currently held, as well as the
recipient's success in meeting operational goals and the recipient's level of
responsibility. However, no fixed formula is utilized to determine particular
grants. The Committee believes that the opportunity to acquire a significant
equity interest in the Company has been a strong motivation for the Company's
executives to pursue the long-term interests of the Company and its
stockholders, and has promoted longevity and retention of key executives.
Information relating to stock options granted to the five most
highly-compensated executive officers of the Company is set forth elsewhere in
this Proxy Statement.
In connection with the Company's use of stock options as a significant
component of compensation, the Mercer study referred to above indicated that
most companies in Mercer's long-term incentive survey utilized two long-term
incentive plans, while the Company used stock options as its only long-term
incentive plan. The Mercer study noted that the Company's use of stock options
was very consistent with the practices of high-growth companies that wished to
increase the ownership stake of executives in the company and to conserve cash
by using stock rather than cash in long-term plans.
Retirement Compensation: As described under "Executive Compensation and Other
Information -- Retirement Investment Plan", in 1991 the Company adopted a 401(k)
retirement plan in order to give all full-time employees an opportunity to
provide for their retirement on a tax-advantaged basis. In order to further tie
employees' interests to the long-term market value of the Company, the Company
adopted an Employee Stock Benefit Plan (the "ESOP") in 1991, which gives all
full-time employees an opportunity to invest a portion of their retirement funds
in Common Stock of the Company on a tax-advantaged basis. See "Executive
Compensation and Other Information -- Employee Stock Benefit Plan". While these
plans provide benefits to all full-time employees, the Committee believes that
the ESOP provides additional incentive to executives to maximize stockholder
value over the long term.
Chief Executive Officer Compensation
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 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, excluding incentive compensation of $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 compensation 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 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
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<PAGE>
as the Company's success in achieving annual budgeted net income targets. 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's employment 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.
The Committee reports to the Board of Directors on compensation arrangements
with Mr. Scrushy, and recommends to the Board of Directors the level of
incentive compensation, both cash and equity-based, which is appropriate for Mr.
Scrushy with respect to each fiscal year of the Company. In making such
recommendation, the Committee takes into account the Company's performance in
the marketplace, its success in meeting strategic goals and its success in
meeting monthly and annual budgets established by the Board of Directors. Again,
ultimate compensation decisions are not made in a formulary manner, but in a
manner which takes into account the Company's competitive position, its position
in the financial markets, and the significant contributions made by Mr. Scrushy
to the success of the Company. In making its decisions with respect to Mr.
Scrushy's compensation, the Committee believes that it is appropriate to
recognize that, as a management founder of the Company, Mr. Scrushy has played
an instrumental role in establishing the Company as the industry leader in
rehabilitative healthcare services and that, under his leadership, the Company
has significantly enhanced stockholder value over a period of years and
continues to grow in assets, net revenues, net income and market value. Mr.
Scrushy's stewardship of the Company has led it to 35 consecutive profitable
quarters since the second quarter of 1986, with steadily increasing earnings per
share. The Company's assets increased by 21.1% from December 31, 1993, to
December 31, 1994; its net revenues and income (excluding the effect of one-time
charges in 1993) rose 95.9% and 100.6%, respectively, in the same period; and
its stock price increased by 44.4% over the same period. This represents an
increase of $506,947,000, or 57.8%, in stockholder value over the period. In
view of these accomplishments, the Committee believes that it is important to
ensure that, if Mr. Scrushy is successful in leading the Company to achieve the
goals set by the Board of Directors, his compensation will be at a level
commensurate with that of chief executive officers of similarly-situated public
companies and that he will continue to have the opportunity to obtain a
significant equity interest in the Company.
Section 162(m) of the Internal Revenue Code
The Omnibus Budget Reconciliation Act of 1993 contains a provision under
which a publicly-held corporation is sometimes precluded from taking a federal
income tax deduction for compensation in excess of $1,000,000 that is paid to
the chief executive officer and the four other most highly-compensated
executives of the corporation during a corporation's tax year. Compensation in
excess of $1,000,000 continues to be deductible if that compensation is
"performance based" within the meaning of that term under Section 162(m) of the
Internal Revenue Code. Certain transition rules apply with respect to stock
option plans which were approved prior to December 20, 1993, pursuant to Rule
16b-3(b) under the Exchange Act.
The Company believes that the 1995 Stock Option Plan, as proposed, meets the
requirements of Section 162(m) as a performance-based plan. The Company's other
stock option plans will be amended to the extent necessary to meet such
requirements during the period allowed by the transition rules. The Committee
and the Board of Directors have currently made a decision not to amend the
Company's cash compensation programs to meet all requirements of Section 162(m)
because such a decision would not be in the best interests of the Company's
stockholders. The Committee believes that, in establishing bonus and incentive
awards, certain subjective factors must be taken into account in particular
cases, based upon the experienced judgment of the Committee members as well as
on factors which may be objectively quantified. The preservation of tax
deductibility of all compensation is an important consid-
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<PAGE>
eration. However, the Committee believes that it is important that the Company
retain the flexibility to reward superior effort and accomplishment even where
all cash compensation may not be fully deductible. The Committee will continue
to review the requirements for deductibility under Section 162(m) and will take
such requirements into account in the future as it deems appropriate and in the
best interests of the Company's stockholders. A portion of Mr. Scrushy's
compensation paid with respect to 1994 will not be deductible; however, the
Company believes that all other compensation paid to executive officers will be
fully deductible.
Conclusion
The Committee believes that the levels and mix of compensation provided to
the Company's executives during 1994 were appropriate and were instrumental in
the achievement of the Company's goals for 1994. It is the intent of the
Committee to ensure that the Company's compensation programs continue to
motivate its executives and reward them for being responsive to the long-term
interests of the Company and its stockholders.
The foregoing report is submitted by the following Directors of the Company,
comprising all of the members of the Committee of the Board of Directors:
C. Sage Givens
George H. Strong
Phillip C. Watkins, Chairman
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of April 25, 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>
Number of Shares
Beneficially Percentage of
Name and Address of Owner Owned(1) Common Stock
------------------------- --------------- ------------
<S> <C> <C>
Richard M. Scrushy ............................ 5,794,782 (2) 7.50%
Two Perimeter Park South Birmingham, Alabama
35243 .........................................
John S. Chamberlin ............................ 80,000 (3) *
C. Sage Givens ................................ 200,000 (3) *
Charles W. Newhall III ........................ 280,720 (4) *
George H. Strong .............................. 226,001 (5) *
Phillip C. Watkins, M.D. ...................... 358,398 (6) *
Aaron Beam, Jr. ............................... 205,550 (7) *
James P. Bennett .............................. 285,000 (8) *
Larry R. House ................................ 397,926 (9) *
Anthony J. Tanner ............................. 496,000(10) *
Richard F. Celeste ............................ 60,000 (3) *
P. Daryl Brown ................................ 395,000(11) *
Forstmann-Leff Associates, Inc. ............... 4,071,522(12) 5.68%
55 East 52nd Street New York, New York 10055
The Travelers Inc. ............................ 3,649,028(13) 5.09%
65 East 55th Street New York, New York 10022
American Express Company ...................... 3,766,000(14) 5.26%
American Express Tower World Financial Center
New York, New York 10285 ......................
All Executive Officers and Directors as a
Group (16 persons)............................. 9,198,902(15) 11.44%
<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 5,679,680 shares subject to currently exercisable non-qualified
stock options. See "Executive Compensation and Other Information -- Stock Option
Plans".
(3) All of the shares are subject to currently exercisable non-qualified
stock options.
(4) Includes 420 shares owned by members of Mr. Newhall's immediate family,
and 280,000 shares are subject to currently exercisable non-qualified stock
options.
(5) Includes 100,000 shares subject to currently exercisable non-qualified
stock options.
</TABLE>
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<PAGE>
(6) Includes 275,000 shares subject to currently exercisable non-qualified
stock options and 998 shares held in trust for his children.
(7) Includes 184,350 shares subject to currently exercisable stock options
and 200 shares owned by his spouse. See "Executive Compensation and Other
Information -- Stock Option Plans".
(8) Includes 247,500 shares which are subject to currently exercisable stock
options. See "Executive Compensation and Other Information -- Stock Option
Plans".
(9) Includes 276,884 shares subject to currently exercisable stock options.
See "Executive Compensation and Other Information -- Stock Option Plans".
(10) Includes 460,000 shares subject to currently exercisable stock options,
36,000 held in trust by Mr. Tanner for his children. See "Executive Compensation
and Other Information -- Stock Option Plans".
(11) Includes 356,000 shares subject to currently exercisable stock options.
See "Executive Compensation and Other Information -- Stock Option Plans".
(12) Shares held of record for various investment funds for which
Forstmann-Leff Associates Inc. ("FLA") acts as investment advisor. Includes
2,117,326 shares as to which FLA claims sole voting power, 1,986,196 shares as
to which FLA claims shared voting power, 3,029,558 shares as to which FLA claims
sole investment power and 1,041,962 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 1,149,200 shares as to
which American Express claims shared voting power and 3,766,000 shares as to
which American Express claims shared dispositive power.
(15) Includes 8,797,382 shares subject to currently exercisable stock options
held by officers and Directors.
* Less than 1%
CERTAIN TRANSACTIONS
During 1994, the Company paid $7,962,000 for the purchase of new NCR computer
equipment from GG Enterprises, a value-added reseller of computer equipment
which is owned by Grace Scrushy, the mother of Richard M. Scrushy, Chairman of
the Board and Chief Executive Officer of the Company, and Gerald P. Scrushy,
Senior Vice President -- Physical Resources of the Company. Such purchases were
made in the ordinary course of the Company's business. The price paid for this
equipment was more favorable to the Company than that which could have been
obtained from an independent third party seller.
During 1994, the Company paid $670,000 to Caretenders Health Corp., a
provider of home healthcare services and related services, for services provided
by Caretenders to the Company. Richard M. Scrushy, Chairman of the Board and
Chief Executive Officer of the Company, and Michael D. Martin, Senior Vice
President and Treasurer of the Company, served until August 1994 as directors of
Caretenders Health Corp. In addition, the Company beneficially owns
approximately 30% of the issued and outstanding shares of common stock of
Caretenders. Such purchases were made in the ordinary course of the Company's
business. The Company believes that the price paid for the services provided by
Caretenders was no less favorable to the Company than that which could have been
obtained from an independent third-party provider.
During 1994, the Company paid $1,409,000 to MedPartners, Inc. for management
services rendered to certain physician practices owned by the Company. Richard
M. Scrushy, Chairman of the Board and Chief Executive Officer of the Company,
and Larry R. House, a Director of the Company, are directors of MedPartners,
Inc. Mr. House also serves as Chairman of the Board, President and Chief
Executive Officer of MedPartners, Inc., a position which has been his principal
occupation since August 1993. At March 1, 1995, Mr. Scrushy owned approximately
6.1%, Mr. House owned approximately 8.2%, and the Company owned approximately
8.3% of the issued and outstanding Common Stock of MedPartners, Inc. The Company
believes that the price paid for such services was no less favorable to the
Company than that which could have been obtained from an independent third-party
provider.
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<PAGE>
In June 1994, the Company sold six ancillary hospital facilities, three
outpatient rehabilitation facilities and one research facility to Capstone
Capital Corporation ("Capstone"), a publicly-traded real estate investment
trust. The net proceeds of the Company as a result of the transaction were
approximately $49,025,000, approximately $30,000,000 of which was applied to
reduce indebtedness under the Company's revolving credit facility. The Company
leases back substantially all these properties from Capstone and guarantees the
associated operating leases, payments under which aggregate approximately
$5,728,200 annually. Actual 1994 lease payments were $2,940,000. Richard M.
Scrushy, Chairman of the Board and Chief Executive Officer of the Company, and
Michael D. Martin, Senior Vice President -- Finance and Treasurer of the
Company, were among the founders of Capstone and serve on its Board of
Directors. At March 1, 1995, Mr. Scrushy owned approximately 2.5% of the issued
and outstanding capital stock of Capstone, and Mr. Martin owned approximately
0.2% of the issued and outstanding capital stock of Capstone. In addition, the
Company owned approximately 1.2% of the issued and outstanding capital stock of
Capstone at March 1, 1995. The Company acquired its shares pursuant to a
transaction wherein Mr. Scrushy and Mr. Martin assigned to the Company certain
of their rights to purchase shares of Capstone's capital stock in connection
with its initial capitalization. The Company paid Mr. Scrushy $90,200 and Mr.
Martin $8,800 for the assignment of such rights, which amounts were determined
based upon the ratio that the rights assigned to the Company bore to the initial
investment by Mr. Scrushy and Mr. Martin in Capstone's predecessor. The Company
believes that all transactions involving Capstone were effected on terms no less
favorable than those which could have been obtained in transactions with
independent third parties.
In order to enhance equity ownership by senior management, the Company has
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. See "Executive Compensation -- Executive Loans".
At various times in 1992 and 1993, the Company has made loans to executive
officers to assist them in meeting financial obligations at certain times when
they were requested by the Company to refrain from selling Common Stock in the
open market. At January 1, 1994, loans in the following original principal
amounts were outstanding: $425,000 to Aaron Beam, Jr., Executive Vice President
and Chief Financial Officer, $460,000 to Larry R. House, a Director and a former
executive officer, and $140,000 to William T. Owens, Senior Vice President and
Controller. Outstanding principal balances at December 31, 1994 were $-0- for
Mr. Beam, $383,000 for Mr. House and $126,000 for Mr. Owens. Such loans bear
interest at the rate of 1-1/4% per annum below the prime rate of AmSouth Bank of
Alabama, Birmingham, Alabama, and are payable on demand.
RELATIONSHIP WITH
INDEPENDENT PUBLIC ACCOUNTANTS
Ernst & Young LLP, Birmingham, Alabama, has been engaged by the Board of
Directors of the Company as independent public accountants for the Company and
its subsidiaries for the fiscal year 1994 and it is expected that such firm will
serve in that capacity for the 1995 fiscal year. Management expects that a
representative of Ernst & Young LLP will be present at the Annual Meeting to
make a statement if he or she desires to do so and to be available to answer
appropriate questions posed by stockholders.
FINANCIAL STATEMENTS
The Company's audited financial statements for the fiscal year ended December
31, 1994, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other selected information are
included in Appendix B to this Proxy Statement.
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors of the Company
does not know of any business which will be presented for consideration at the
Annual Meeting other than that specified herein and in the Notice of Annual
Meeting of Stockholders, but if other matters are presented, it is the intention
of the persons designated as proxies to vote in accordance with their judgment
on such matters.
23
<PAGE>
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1994, INCLUDING THE FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES THERETO, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, WILL BE
FURNISHED WITHOUT CHARGE TO ANY STOCKHOLDER OF THE COMPANY WHOSE PROXY IS
SOLICITED BY THE FOREGOING PROXY STATEMENT, UPON THE WRITTEN REQUEST OF ANY SUCH
PERSON ADDRESSED TO ANTHONY J. TANNER, SECRETARY, HEALTHSOUTH Corporation, TWO
PERIMETER PARK SOUTH, BIRMINGHAM, ALABAMA 35243. SUCH A REQUEST FROM A
BENEFICIAL OWNER OF THE COMPANY'S COMMON STOCK MUST CONTAIN A GOOD-FAITH
REPRESENTATION BY SUCH PERSON THAT, AS OF APRIL 25, 1995, HE WAS A BENEFICIAL
OWNER OF THE COMPANY'S COMMON STOCK.
Please SIGN, DATE and RETURN the enclosed Proxy promptly.
By Order of the Board of Directors:
ANTHONY J. TANNER
Secretary
May 13, 1995
24
<PAGE>
APPENDIX A
HEALTHSOUTH Corporation
1995 STOCK OPTION PLAN
1. Purpose of the Plan. The purpose of the 1995 Stock Option Plan
(hereinafter called the "Plan") of HEALTHSOUTH Corporation, a Delaware
corporation (hereinafter called the "Corporation"), is to provide incentive for
future endeavor and to advance the interests of the Corporation and its
stockholders by encouraging ownership of the Common Stock, par value $.01 per
share (hereinafter called the "Common Stock"), of the Corporation by its
Directors, executives and other key employees, upon whose judgment, interest and
continuing special efforts the Corporation is largely dependent for the
successful conduct of its operations, and to enable the Corporation to compete
effectively with other enterprises for the services of such new Directors,
executives and employees as may be needed for the continued improvement of the
Corporation's business, through the grant of options to purchase shares of the
Common Stock. It is intended that certain Options issued under the Plan and so
designated pursuant to Section 6(c) hereof by the Committee (as defined in
Section 5 hereof) shall qualify as "incentive stock options" (hereinafter called
"ISOs") under Section 422(b) of the Internal Revenue Code of 1986, as amended
from time to time (hereinafter called the "Code"), and, where applicable, the
terms of the Plan shall be interpreted in accordance with such intention. Other
Options may be issued under the Plan and designated by the Committee or such
Independent Stock Option Committee, as the case may be, as non-qualified stock
options (hereinafter called "NQSOs"). Any Option issued under the Plan and not
expressly designated as an ISO shall be conclusively deemed to be an NQSO.
2. Participants. Options may be granted under the Plan to Directors of the
Corporation and to such executives and key employees of the Corporation and its
subsidiaries as shall be determined by the Committee appointed by the Board of
Directors as set forth in Section 5 of the Plan; provided, however, that no
Option may be granted to any person if such grant would cause the Plan to cease
to be an "employee benefit plan" as defined in Rule 405 of Regulation C
promulgated under the Securities Act of 1933; and provided further that no ISO
may be granted to any person ineligible to be granted ISOs under Section 422(b)
of the Code.
3. Term of the Plan. The Plan shall become effective as of June 6, 1995,
subject to the approval by the holders of a majority of the shares of issued and
outstanding Common Stock of the Corporation at the 1995 Annual Meeting of
Stockholders of the Corporation. The Plan shall terminate on the earliest of (a)
June 5, 2005, (b) such time as all shares of Common Stock reserved for issuance
under the Plan have been acquired through the exercise of Options granted under
the Plan, or (c) such earlier time as the Board of Directors of the Corporation
may determine. Any Option outstanding under the Plan at the time of its
termination shall remain in effect in accordance with its terms and conditions
and those of the Plan. No Option shall be granted under the Plan after June 5,
2005.
4. Stock Subject to the Plan. (a) Subject to the provisions of Section 13,
the aggregate number of shares of Common Stock for which Options may be granted
under the Plan shall not exceed 3,500,000 shares plus such number of shares as
is added pursuant to Section 4(b), and the maximum number of shares of Common
Stock for which any individual may be granted Options under the Plan during any
calendar year is 1,000,000. If, on or prior to the termination of the Plan as
provided in Section 3, an Option granted under the Plan shall have expired or
terminated for any reason without having been exercised in full, the unpurchased
shares covered thereby shall again become available for the grant of Options
under the Plan. Shares covered by Options surrendered in connection with the
exercise of other Options pursuant to Section 9(e) shall be deemed, for purposes
of this Section 4, to have been exercised, and such shares shall not again
become available for the grant of Options under the Plan.
The shares to be delivered upon exercise of Options under the Plan shall be
made available, at the discretion of the Board of Directors, either from
authorized but previously unissued shares as permitted by the Certificate of
Incorporation of the Corporation or from shares re-acquired by the Corporation,
including shares of Common Stock purchased in the open market, and shares held
in the treasury of the Corporation.
A-1
<PAGE>
(b) The number of shares of Common Stock for which Options may be granted
under the Plan shall automatically increase on the first trading day of each
calendar year during the term of the Plan, beginning with the 1996 calendar
year, by an amount equal to 0.9% of the shares of Common Stock outstanding on
December 31 of the immediately preceding year. However, such additional shares
shall be available only for the grant of NQSOs under the Plan and not for the
grant of ISOs.
5. Administration of the Plan. With respect to the participation of
executives and key employees of the Corporation and its subsidiaries who are not
also Directors of the Corporation, the Plan shall be administered by the Audit
and Compensation Committee of the Board of Directors of the Corporation
(hereinafter called the "Committee"). The acts of a majority of the Committee,
at any meeting thereof at which a quorum is present, or acts reduced to or
approved in writing by a majority of the members of the Committee, shall be the
valid acts of the Committee. The Committee shall determine the executives and
key employees of the Corporation and its subsidiaries who shall be granted
Options and the number of shares of Common Stock to be subject to each Option.
With respect to the participation of non-employee Directors of the
Corporation, each non-employee Director shall receive, as an annual grant, an
NQSO to purchase 25,000 shares of Common Stock on the date of adoption of the
Plan and in each year thereafter, such Option to be granted at the Annual
Meeting of the Board of Directors. The purchase price of the shares of Common
Stock covered by each such NQSO granted to a non-employee Director shall be 100%
of the fair market value (but in no event less than the par value) of such
shares at the time the Option is granted, determined in accordance with Section
7(c) hereof.
The interpretation and construction of any provision of the Plan or of any
Option granted under it by the Committee shall be final, conclusive and binding
upon all parties, including the Corporation, its stockholders and Directors, and
the executives and employees of the Corporation and its subsidiaries. No member
of the Board of Directors or the Committee shall be liable to the Corporation,
any stockholder, any optionholder or any employee of the Corporation or its
subsidiaries for any action or determination made in good faith with respect to
the Plan or any Option granted under it. No member of the Board of Directors may
vote on any Option to be granted to him.
The expenses of administering the Plan shall be borne by the Corporation.
6. Grant of Options. (a) Options may be granted under the Plan by the
Committee in accordance with the provisions of Section 5 at any time prior to
the termination of the Plan. In making any determination as to Directors,
executives and key employees to whom Options shall be granted and as to the
number of shares to be covered by such Options, the Committee shall take into
account the duties of the respective Directors, executives and key employees,
their present and potential contribution to the success of the Corporation, and
such other factors as the Committee shall deem relevant in connection with the
accomplishment of the purposes of the Plan.
(b) Each Option granted under the Plan shall be granted pursuant to and
subject to the terms and conditions of a stock option agreement to be entered
into between the Corporation and the optionholder at the time of such grant.
Each such stock option agreement shall be in a form from time-to-time adopted
for use under the Plan by the Committee (such form being hereinafter called a
"Stock Option Agreement"). Any such Stock Option Agreement shall incorporate by
reference all of the terms and provisions of the Plan as in effect at the time
of grant and may contain such other terms and provisions as shall be approved
and adopted by the Committee.
(c) At the time of the grant of each Option under this Plan, the Committee
shall determine whether such Option is to be designated as an ISO. If an Option
is to be designated as an ISO, then the provisions of Sections 6(d), 7(b) and
8(b) shall apply to such Options. The Stock Option Agreement relating to the
grant of any option designated as an ISO shall reflect such designation.
(d) Notwithstanding any contrary provision contained in this Agreement, the
aggregate fair market value (determined as of the time each ISO is granted) of
the shares of Common Stock with respect to which ISOs issued to any one person
hereunder are exercisable for the first time during any calendar year shall not
exceed $100,000.
A-2
<PAGE>
7. Option Price. (a) The purchase price of the shares of Common Stock covered
by each Option granted under the Plan shall be at least 100% of the fair market
value (but in no event less than the par value) of such shares at the time the
Option is granted, or such higher purchase price as shall be determined by the
Committee.
(b) Notwithstanding any contrary provision contained in Section 7(a) hereof,
no Option granted to any person who, at the time of such grant, owns, taking
into account the attribution rules of Section 424(d) of the Code, stock
possessing more than 10% of the total combined voting power of all classes of
the Corporation's stock or of the stock of any of its corporate subsidiaries,
may be designated as an ISO unless at the time of such grant the purchase price
of the shares of Common Stock covered by such Option is at least 110% of the
fair market value (but in no event less than the par value) of such shares.
(c) If the Common Stock is not listed upon a national securities exchange or
exchanges, such fair market value shall be as determined by the Board of
Directors of the Corporation (which determination shall be conclusive and
binding for all purposes) or, if applicable, shall be deemed to be the last
reported sale price for the Common Stock as quoted by brokers and dealers
trading in the Common Stock in the over-the-counter market (or if the Common
Stock shall be quoted by the National Association of Securities Dealers
Automated Quotation system, then such NASDAQ quote) immediately prior to the
commencement of the meeting of the Committee at which the Option is granted. If
the Common Stock is listed upon a national securities exchange or exchanges,
such fair market value shall be deemed to be the last reported sale price at
which the shares of Common Stock were traded on such securities exchange or
exchanges immediately prior to the commencement of the meeting of the Committee
at which the Option is granted, or if no sale of the Common Stock was made on
any national securities exchange on such date, then the closing price per share
of the Common Stock on such securities exchange or exchanges on the next
preceding day on which there was a sale of the Common Stock.
(d) The exercise price of any outstanding Options shall not be reduced during
the term of such Options except by reason of an adjustment pursuant to Section
13 hereof, nor shall the Committee or the Board of Directors cancel outstanding
Options and reissue new Options at a lower exercise price in substitution for
the canceled Options.
8. Term of Options. (a) The expiration date of an Option granted under the
Plan shall be as determined by the Committee at the time of grant, provided
that each such Option shall expire not more than ten years after the date
such Option was granted.
(b) Notwithstanding any contrary provision contained in Section 8(a) hereof,
no Option granted to any person who, at the time of such grant, owns, taking
into account the attribution rules of Section 424(d) of the Code, stock
possessing more than 10% of the total combined voting power of all classes of
the Corporation's stock or of the stock of any of its corporate subsidiaries,
may be designated as an ISO unless by its terms each such Option shall expire
not more than five years after the date such Option was granted.
9. Exercise of Options. (a) Each Option shall become exercisable in whole
or in part or in installments at such time or times as the Committee may
prescribe at the time the Option is granted and specify in the Stock Option
Agreement. No Option shall be exercisable after the expiration of ten years
from the date on which it was granted.
(b) Notwithstanding any contrary provision contained herein, unless otherwise
expressly provided in the Stock Option Agreement, any Option granted hereunder
which is, by its terms, exercisable in installments shall become immediately
exercisable in full upon the occurrence of a Change in Control of the
Corporation. For purposes of this Section 9(b), "Change in Control" shall mean
(i) the acquisition (other than from the Company) by any person, entity or
"group" (within the meaning of Sections 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, but excluding, for this purpose, the Corporation or its
subsidiaries, or any employee benefit plan of the Company or its subsidiaries
which acquires beneficial ownership of voting securities of the Company) of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Securities Exchange Act of 1934) of 25% or more of either the then-outstanding
shares of Common Stock or the combined voting power of the Company's
then-outstanding voting securities entitled to vote generally in the election of
Directors; or
A-3
<PAGE>
(ii) individuals who, as of June 6, 1995, constitute the Board of Directors
of the Corporation (as of such date, the "Incumbent Board") cease for any reason
to constitute at least a majority of the Board of Directors; provided, however,
that any person becoming a Director subsequent to such date whose election, or
nomination for election, was approved by a vote of at least a majority of the
Directors then constituting the Incumbent Board (other than an election or
nomination of an individual whose initial assumption of office is in connection
with an actual or threatened election contest relating to the election of
Directors of the Company) shall be, for purposes of this Section 9(b)(ii),
considered as though such person were a member of the Incumbent Board; or
(iii) approval by the stockholders of the Company of a reorganization,
merger, consolidation or share exchange, in each case with respect to which
persons who were the stockholders of the Company immediately prior to such
reorganization, merger, consolidation or share exchange do not, immediately
thereafter, own more than 75% of the combined voting power entitled to vote
generally in the election of directors of the reorganized, merged, consolidated
or other surviving entity's then-outstanding voting securities, or a liquidation
or dissolution of the Corporation or the sale of all or substantially all of the
assets of the Corporation.
(c) Options may be exercised by giving written notice to the Corporation of
intention to exercise, specifying the number of shares to be purchased pursuant
to such exercise in accordance with the procedures set forth in the Stock Option
Agreement. All shares purchased upon exercise of any Option shall be paid for in
full at the time of purchase in accordance with the procedures set forth in the
Stock Option Agreement. Except as provided in Sections 9(d) and 9(e) hereof,
such payment shall be made in cash or through delivery of shares of Common Stock
or a combination of cash and Common Stock as provided in the Stock Option
Agreement. Any shares so delivered shall be valued at their fair market value
determined as of the date of exercise of the Option under the method set forth
in Section 7(c) hereof.
(d) Payment for shares purchased upon exercise of any such Option may be made
by delivery to the Corporation of a properly executed exercise notice together
with irrevocable instructions to a broker to promptly deliver to the Corporation
an amount of sale or loan proceeds sufficient to pay the exercise price.
Additionally, the Corporation will accept, in payment for shares purchased upon
exercise of any such Option, proceeds of a margin loan obtained by the
exercising optionholder from a broker, provided that the exercising optionholder
has, at the same time as delivery to the Corporation of a properly executed
exercise notice, delivered to the Corporation irrevocable instructions to the
Corporation to deliver share certificates directly to such broker upon payment
for such shares.
(e) With respect to Directors and officers of the Corporation who are subject
to reporting requirements under Section 16(a) of the Securities Exchange Act of
1934, payment for shares purchased upon exercise of any Option granted hereunder
may be made by surrender of outstanding Options issued under this Plan or any
other stock option plan of the Corporation having a Spread (as defined below)
equal to the exercise price of the Options sought to be exercised. For purposes
of this Section 9(e), the "Spread" with respect to any unexercised Option shall
be equal to (i) the average price per share of Common Stock on the date of
exercise, as determined by the Corporation from any commercially available
reporting service reflecting trading of the Common Stock on a national
securities exchange, on the National Association of Securities Dealers Automated
Quotation System, or in the over the counter market, as applicable, less (ii)
the exercise price of the surrender of the Option. All Options so surrendered
will be deemed to have been exercised by the optionholder. Such surrender shall
be evidenced in a form satisfactory to the Secretary of the Corporation.
10. Nontransferability of Options. Options granted under the Plan shall be
assignable or transferable only by will or pursuant to the laws of descent
and distribution and shall be exercisable during the optionholder's lifetime
only by him.
11. Stockholder Rights of Optionholder. No holder of any Option shall have
any rights to dividends or other rights of a stockholder with respect to shares
subject to an Option prior to the purchase of such shares upon exercise of the
Option.
A-4
<PAGE>
12. Termination of Option. With respect to any Option which, by its terms, is
not exercisable for one year from the date on which it is granted, if an
optionholder's employment by, or other relationship with, the Corporation or any
of its subsidiaries terminates within one year after the date an unexercised
Option containing such terms is granted under the Plan for any reason other than
death, the Option shall terminate on the date of termination of such employment
or other relationship. With respect to all Options granted under the Plan, if an
optionholder's employment by, or other relationship with, the Corporation is
terminated by reason of his death, the Option shall terminate one year after the
date of death, unless the Option otherwise expires. If an optionholder's
employment by, or other relationship with, the Corporation terminates for any
reason other than as set forth above in this Section 12, the Option shall
terminate three months after the date of termination of such employment or other
relationship unless the Option earlier expires, provided that (a) if the
optionholder dies within such three-month period, the Option shall terminate one
year after the date of his death unless the Option earlier expires; (b) the
Board of Directors may, at any time prior to any termination of such employment
or other relationship under the circumstances covered by this Section 12,
determine in its discretion that the Option shall terminate on the date of
termination of such employment or other relationship with the Corporation; and
(c) the exercise of any Option after termination of such employment or other
relationship with the Corporation shall be subject to satisfaction of the
conditions precedent that the optionholder refrain from engaging, directly or
indirectly, in any activity which is competitive with any activity of the
Corporation or any subsidiary thereof and from otherwise acting, either prior to
or after termination of such employment or other relationship, in any manner
inimical or in any way contrary to the best interests of the Corporation and
that the optionholder furnish to the Corporation such information with respect
to the satisfaction of the foregoing condition precedent as the Board of
Directors shall reasonably request. For purposes of this Section 12, a
"relationship with the Corporation" shall be limited to any relationship that
does not cause the Plan to cease to be an "employee benefit plan" as defined in
Rule 405 of Regulation C under the Securities Act of 1933. The mere ownership of
stock in the Corporation shall not be deemed to be a "relationship with the
Corporation".
Nothing in the Plan or in the Stock Option Agreement shall confer upon any
optionholder the right to continue in the employ of the Corporation or any of
its subsidiaries or in any other relationship thereto or interfere in any way
with the right of the Corporation to terminate such employment or other
relationship at any time.
A holder of an Option under the Plan may make written designation of a
beneficiary on forms prescribed by and filed with the Secretary of the
Corporation. Such beneficiary, or if no such designation of any beneficiary has
been made, the legal representative of such optionholder or such other person
entitled thereto as determined by a court of competent jurisdiction, may
exercise, in accordance with and subject to the provisions of this Section 12,
any unterminated and unexpired Option granted to such optionholder to the same
extent that the optionholder himself could have exercised such Option were he
alive or able; provided, however, that no Option granted under the Plan shall be
exercisable for more shares than the optionholder could have purchased
thereunder on the date his employment by, or other relationship with, the
Corporation and its subsidiaries was terminated.
13. Adjustment of and Changes in Capitalization. In the event that the
outstanding shares of Common Stock shall be changed in number or class by reason
of split-ups, combinations, mergers, consolidations or recapitalizations, or by
reason of stock dividends, the number or class of shares which thereafter may be
purchased through exercise of Options granted under the Plan, both in the
aggregate and as to any individual, and the number and class of shares then
subject to Options theretofore granted and the price per share payable upon
exercise of such Option shall be adjusted so as to reflect such change, all as
determined by the Board of Directors of the Corporation. In the event there
shall be any other change in the number or kind of the outstanding shares of
Common Stock, or of any stock or other securities into which such Common Stock
shall have been changed, or for which it shall have been exchanged, then if the
Board of Directors shall, in its sole discretion, determine that such change
equitably requires an adjustment in any Option theretofore granted or which may
be granted under the Plan, such adjustment shall be made in accordance with such
determination.
A-5
<PAGE>
Notice of any adjustment shall be given by the Corporation to each holder of
an Option which shall have been so adjusted and such adjustment (whether or not
such notice is given) shall be effective and binding for all purposes of the
Plan.
Fractional shares resulting from any adjustment in Options pursuant to this
Section 13 may be settled in cash or otherwise as the Board of Directors may
determine.
14. Securities Acts Requirements. No Option granted pursuant to the Plan
shall be exercisable in whole or in part, and the Corporation shall not be
obligated to sell any shares of Common Stock subject to any such Option, if such
exercise and sale would, in the opinion of counsel for the Corporation, violate
the Securities Act of 1933 or other Federal or state statutes having similar
requirements, as they may be in effect at that time. Each Option shall be
subject to the further requirement that, at any time that the Board of Directors
or the Committee, as the case may be, shall determine, in their respective
discretion, that the listing, registration or qualification of the shares of
Common Stock subject to such Option under any securities exchange requirements
or under any applicable law, or the consent or approval of any governmental
regulatory body, is necessary or desirable as a condition of, or in connection
with, the granting of such Option or the issuance of shares thereunder, such
Option may not be exercised in whole or in part unless such listing,
registration, qualification, consent or approval shall have been effected or
obtained free of any conditions not acceptable to the Board of Directors or the
Committee, as the case may be.
As a condition to the issuance of any shares upon exercise of an Option under
the Plan, the Board of Directors or the Committee, as the case may be, may
require the optionholder to furnish a written representation that he is
acquiring the shares for investment and not with a view to distribution of the
shares to the public and a written agreement restricting the transferability of
the shares solely to the Corporation, and may affix a restrictive legend or
legends on the face of the certificate representing such shares. Such
representation, agreement and/or legend shall be required only in cases where in
the opinion of the Board of Directors or the Committee, as the case may be, and
counsel for the Corporation, it is necessary to enable the Corporation to comply
with the provisions of the Securities Act of 1933 or other Federal or state
statutes having similar requirements, and any stockholder who gives such
representation and agreement shall be released from it and the legend removed at
such time as the shares to which they applied are registered or qualified
pursuant to the Securities Act of 1933 or other Federal or state statutes having
similar requirements, or at such other time as, in the opinion of the Board of
Directors or the Committee, as the case may be, and counsel for the Corporation,
the representation and agreement and legend cease to be necessary to enable the
Corporation to comply with the provisions of the Securities Act of 1933 or other
Federal or state statutes having similar requirements.
15. Amendment of the Plan. The Plan may, at any time or from time to time, be
terminated, modified or amended by the stockholders of the Corporation by the
affirmative vote of the holders of a majority of the outstanding shares of the
Corporation's Common Stock entitled to vote. The Board of Directors of the
Corporation may, insofar as permitted by law, from time to time with respect to
any shares of Common Stock at the time not subject to Options, suspend or
discontinue the Plan or revise or amend it in any respect whatsoever; provided,
however, that, without approval of the stockholders of the Corporation, no such
revision or amendment shall increase the number of shares subject to the Plan,
decrease the price at which the Options may be granted, permit exercise of
Options unless full payment is made at the time of exercise (except as so
provided in Section 9 hereof), extend the period during which Options may be
exercised, or change the provisions relating to adjustment to be made upon
changes in capitalization.
16. Changes in Law. Subject to the provisions of Section 15, the Board of
Directors shall have the power to amend the Plan and any outstanding Options
granted thereunder in such respects as the Board of Directors shall, in its sole
discretion, deem advisable in order to incorporate in the Plan or any such
Option any new provision or change designed to comply with or take advantage of
requirements or provisions of the Code or any other statute, or Rules or
Regulations of the Internal Revenue Service or any other Federal or state
governmental agency enacted or promulgated after the adoption of the Plan.
17. Legal Matters. Every right of action by or on behalf of the Corporation
or by any stockholder against any past, present or future member of the Board of
Directors, officer or employee of the Cor
A-6
<PAGE>
poration arising out of or in connection with this Plan shall, irrespective of
the place where such action may be brought and irrespective of the place of
residence of any such Director, officer or employee, cease and be barred by the
expiration of three years from whichever is the later of (a) the date of the act
or omission in respect of which such right of action arises, or (b) the first
date upon which there has been made generally available to stockholders an
annual report of the Corporation and a proxy statement for the Annual Meeting of
Stockholders following the issuance of such annual report, which annual report
and proxy statement alone or together set forth, for the related period, the
aggregate number of shares for which Options were granted; and any and all right
of action by any employee or executive of the Corporation (past, present or
future) against the Corporation arising out of or in connection with this Plan
shall, irrespective of the place where such action may be brought, cease and be
barred by the expiration of three years from the date of the act or omission in
respect of which such right of action arises.
This Plan and all determinations made and actions taken pursuant hereto shall
be governed by the law of Delaware, applied without giving effect to any
conflicts-of-law principles, and construed accordingly.
A-7
<PAGE>
APPENDIX B
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Page
Number
Business................................................................................. B-2
Selected Financial Data.................................................................. B-2
Directors and Executive Officers......................................................... B-3
Management's Discussion and Analysis of Financial Condition and Results of Operations ... B-5
Audited Consolidated Financial Statements of HEALTHSOUTH Corporation and Subsidiaries ..
Report of Independent Auditors........................................................... B-11
Consolidated Balance Sheets.............................................................. B-12
Consolidated Statements of Income........................................................ B-13
Consolidated Statements of Stockholders' Equity.......................................... B-14
Consolidated Statements of Cash Flows.................................................... B-15
Notes to Consolidated Financial Statements............................................... B-16
Market for the Company's Common Equity and Related Stockholders Matters.................. B-31
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .... B-31
</TABLE>
B-1
<PAGE>
BUSINESS
HEALTHSOUTH Corporation, a Delaware corporation ("HEALTHSOUTH" or the
"Company"), is the nation's largest provider of rehabilitative healthcare
services. In its outpatient and inpatient rehabilitation facilities, the Company
has established interdisciplinary programs for the rehabilitation of patients
experiencing disability due to a wide variety of physical conditions, such as
stroke, head injury, orthopaedic problems, neuromuscular disease and
sports-related injuries. The Company's rehabilitation services include physical
therapy, sports medicine, work hardening, neurorehabilitation, occupational
therapy, respiratory therapy, speech-language pathology and rehabilitation
nursing. In addition to rehabilitation services, HEALTHSOUTH's medical center
facilities also provide general and specialty medical and surgical healthcare
services.
SELECTED FINANCIAL DATA
Set forth below is a summary of selected consolidated financial data for the
Company for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1990 1991 1992 1993 1994
-------- --------- --------- ---------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Income Data (1):
Revenues ............................ $198,087 $267,346 $464,288 $ 575,346 $1,127,441
Net Income .......................... 13,587 25,198 34,594 13,592 53,225
Weighted Average Common and Common
Equivalent Shares Outstanding (2) .. 40,650 56,148 68,836 69,434 75,876
Net Income Per Common and Common
Equivalent Share (2) ................ $ .33 $ .45 $ .50 $ .20 $ .70
Net Income Per Common Share --
Assuming Full Dilution (2)........... .30 .42 N/A N/A .70
Dividends ........................... None None None None None
Balance Sheet Data: .................
Working Capital ..................... $114,513 $183,023 $195,016 $ 198,352 $ 218,681
Total Assets ........................ 316,594 491,004 701,210 1,281,522 1,552,334
Total Debt and Leases ............... 156,560 170,175 306,082 818,349 944,774
Retained Earnings ................... 27,735 52,079 76,480 85,640 137,027
Stockholders' Equity ................ 128,898 288,434 340,466 352,396 426,134
<FN>
(1) All amounts reflect the combined results of HEALTHSOUTH and ReLife, Inc.,
which was acquired by HEALTHSOUTH in a pooling-of-interests transaction on
December 29, 1994.
(2) Adjusted to reflect a three-for-two stock split effected in the form of a
50% stock dividend paid on December 31, 1991 and a two-for-one stock split
effected in the form of a 100% stock dividend paid on April 17, 1995.
</TABLE>
B-2
<PAGE>
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
Company's executive officers:
<TABLE>
<CAPTION>
All Positions An Officer
Name Age With the Company Since
---- --- ---------------- -----------
<S> <C> <C> <C>
Richard M. Scrushy 42 Chairman of the Board Chief Executive
Officer and Director 1984
Aaron Beam, Jr. .. 51 Executive Vice President and Chief
Financial Officer and Director 1984
Anthony J. Tanner 46 Executive Vice President -- Administration
and Secretary and Director 1984
Thomas W. Carman . 43 Executive Vice President -- Corporate
Development 1985
P. Daryl Brown ... 40 President -- HEALTHSOUTH Outpatient
Centers and Director 1986
James P. Bennett . 37 President and Chief Operating Officer and
Director 1991
Denis J. Devane .. 57 Executive Vice President -- Medical Center
Operations 1993
William T. Owens . 36 Senior Vice President -- Finance and
Controller 1986
Michael D. Martin 34 Senior Vice President -- Finance and
Treasurer 1989
William W. Horton 35 Group Vice President -- Legal Services and
Assistant Secretary 1994
</TABLE>
Richard M. Scrushy, one of the Company's management founders, has served as
Chairman of the Board and Chief Executive Officer of the Company since 1984, and
also served as President of the Company from 1984 until March 1995. 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 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.
B-3
<PAGE>
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, to President and Chief Operating Officer --
HEALTHSOUTH Rehabilitation Hospitals in June 1992, to President -- HEALTHSOUTH
Inpatient Operations in February 1993 and to President and Chief Operating
Officer of the Company in March 1995. Mr. Bennett was elected as 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 May 1992. 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 Healthdyne, Inc.
and 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.
See "Election of Directors" in the Proxy Statement to which this Appendix B
is attached for identification of the Directors of the Company.
B-4
<PAGE>
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 the Proxy Statement to which
this Appendix B is attached.
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.
B-5
<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 utililizes 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 reve-
B-6
<PAGE>
nues. 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.
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
B-7
<PAGE>
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.
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 Hospital 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 of $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 as a
transitional living facility, the facility could not be operated on a basis
which would allow it to cover the associated lease costs, and the Company did
not believe it likely that any change in licensure could be obtained. 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. 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.
B-8
<PAGE>
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 (borrowing 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.
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
are 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
B-9
<PAGE>
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 thereafter.
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.
B-10
<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
B-11
<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
========== ==========
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.
B-12
<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.
B-13
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Additional Total
Common Common Paid-In Retained Treasury Receivable Stockholders'
Shares Stock Capital Earnings Stock from ESOP Equity
-------- --------- ------------ ----------- ----------- ------------ ---------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1991 ......... 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
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.
B-14
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------
1992 1993 1994
-------- ---------- ---------
(In thousands)
<S> <C> <C> <C>
Operating activities
Net income ...................................................................... $ 34,594 $ 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)
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>
See accompanying notes.
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
B-15
<PAGE>
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.
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.
B-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.
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.
B-16
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries -
Notes to Consolidated Financial Statements (Continued)
1. Significant Accounting Policies--Continued
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).
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.
B-17
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries -
Notes to Consolidated Financial Statements (Continued)
1. Significant Accounting Policies--Continued
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>
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.
B-18
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries -
Notes to Consolidated Financial Statements (Continued)
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>
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.
B-19
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries -
Notes to Consolidated Financial Statements (Continued)
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>
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>
B-20
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries -
Notes to Consolidated Financial Statements (Continued)
7. Long-Term Debt--Continued
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.
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:
<TABLE>
<CAPTION>
Year ending December 31 (In thousands)
- - - ------------------------ ------------
<S> <C>
1995 ................... $ 14,713
1996 ................... 12,246
1997 ................... 112,233
1998 ................... 143,334
1999 ................... 140,605
After 1999 ............. 521,643
$944,774
</TABLE>
B-21
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries -
Notes to Consolidated Financial Statements (Continued)
8. Stock Options
The Company has various stockholder-approved stock option plans which provide
for the grant of options to Directors, officers and other key employees to
purchase common stock at 100% of the fair market value as of the date of grant.
The Board of Directors administers the stock option plans. Options may be
granted as incentive stock options or as non-qualified stock options. Incentive
stock options vest 25% annually, commencing upon completion of one year of
employment subsequent to the date of grant. Non-qualified stock options
generally are not subject to any vesting provisions. The options expire at dates
ranging from five to ten years from the date of grant.
The following table summarizes activity in the stock option plans:
<TABLE>
<CAPTION>
1992 1993 1994
--------- --------- -----------
<S> <C> <C> <C>
Options outstanding January 1: 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
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>
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.
B-22
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries -
Notes to Consolidated Financial Statements (Continued)
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, as an operating expense, for this contingency in accordance
with Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies." As of December 31, 1994, the Company has accrued $99,000 in
contingent consideration.
In connection with these transactions, the Company entered into non-compete
agreements with former owners totaling $10,814,000. In general these non-compete
agreements are payable in monthly or quarterly installments over periods ranging
from five to ten years.
The fair value of the total net assets relating to the 1994 acquisitions
described above was approximately $11,087,000. The total cost for 1994
acquisitions exceeded the fair value of the net assets acquired by approximately
$68,721,000. The Company evaluated each acquisition, independently, to determine
the appropriate amortization period for the cost in excess of net asset value of
purchased facilities. Each evaluation included an analysis of historic and
projected financial performance, evaluation of the estimated useful life of
buildings and fixed assets acquired, the indefinite Life of Certificates of Need
and licenses acquired, the competition within local markets, lease terms where
applicable, and the legal term of partnerships where applicable. Based on these
evaluations, the Company determined that the cost of excess of net asset value
of purchased facilities relating to the 1994 acquisitions should be amortized
over periods ranging from twenty-five to forty years on a straight line basis.
No other identifiable intangible assets were recorded in the acquisitions
described above.
All of the 1994 acquisitions described above were accounted for as purchases
and, accordingly, the results of operations of the acquired businesses (not
material individually or in the aggregate) are included in the accompanying
consolidated financial statements from their respective dates of acquisition.
Effective December 31, 1993, the Company completed an acquisition from
National Medical Enterprises, Inc. (NME) of 28 inpatient rehabilitation
facilities and 45 outpatient rehabilitation centers, which constituted
substantially all of NME's rehabilitation services division (the NME Selected
Hospitals Acquisition). The purchase price was approximately $296,661,000 cash,
plus net working capital of $64,503,000, subject to certain adjustments, the
assumption of approximately $16,313,000 of current liabilities and the
assumption of approximately $17,111,000 in long-term debt.
The 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.
B-23
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries -
Notes to Consolidated Financial Statements (Continued)
10. Acquisitions--Continued
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>
Outpatient
Inpatient 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.
B-24
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries -
Notes to Consolidated Financial Statements (Continued)
10. Acquisitions--Continued
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.
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. Based on the evaluation of
each acquisition, utilizing the criteria described above, the Company determined
that the cost in excess of net asset value of purchased facilities relating to
the 1993 acquisitions should be amortized over a forty-year period on a straight
line basis. No other identifiable intangible assets were recorded in the
acquisitions described above.
Also during 1993, the Company acquired 100% of the stock of Rebound, Inc.
(Rebound) for net consideration of approximately $14,000,000 in cash. 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.
B-25
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries -
Notes to Consolidated Financial Statements (Continued)
10. Acquisitions--Continued
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.
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>
B-26
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries -
Notes to Consolidated Financial Statements (Continued)
11. Income Taxes--Continued
The current portion of the Company's deferred tax asset is included with
prepaid expenses and other current assets on the accompanying balance sheet.
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>
The components of the provision for deferred income taxes for the year ended
December 31, 1992 are as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Depreciation and amortization $ 5,599
Bad debts .................... (1,119)
Other ........................ 21
$ 4,501
</TABLE>
The difference between the provision for income taxes and the amount computed
by applying the statutory federal income tax rate to income before taxes was as
follows:
<TABLE>
<CAPTION>
Year ended December 31
------------------------------
1992 1993 1994
-------- -------- ---------
(In thousands)
<S> <C> <C> <C>
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
</TABLE>
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.
B-27
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries -
Notes to Consolidated Financial Statements (Continued)
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:
<TABLE>
<CAPTION>
Year ending December 31 (In thousands)
- - - ----------------------- ------------
<S> <C>
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
</TABLE>
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.
B-28
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries -
Notes to Consolidated Financial Statements (Continued)
13. Employee Benefit Plans--Continued
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.
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.
B-29
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries -
Notes to Consolidated Financial Statements (Continued)
16. Impairment of Long-Term Assets--Continued
During 1994, ReLife entered into a contract for a new information system.
During the period ended September 30, 1994, ReLife's expenditures related to
this contract totalled approximately $4,363,000. The system was not operational
during this period, thus those expenditures are considered non-recurring. The
Company will retain certain equipment, with an approximate cost of $750,000,
which was included in the expenditures noted above. The remainder of the
expenditures, $3,613,000, is included in the loss on abandonment of the computer
project. The Company has also established a reserve of approximately $887,000
for settlement of the contract. The contract contains a provision for
cancellation by ReLife, without cause, upon at least 180 days' prior written
notice. The application of this termination provision could result in a
settlement of up to $6,500,000. The Company is currently in negotiations to
settle the contract and believes that it is probable that the settlement will be
for an amount approximately equal to the reserve established.
The above amounts are shown as operating expenses in the consolidated
statement of income.
17. Subsequent Events
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.
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).
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------
1992 1993 1994
---- ---- ----
(In thousands, except for per share amounts)
<S> <C> <C> <C>
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
</TABLE>
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.
B-30
<PAGE>
-
(Continued)
MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDERS MATTERS
HEALTHSOUTH's Common Stock is listed for trading on the New York Stock
Exchange (Symbol: HRC). The following table sets forth for the fiscal periods
indicated the high and low reported sale prices for the Company's Common Stock,
giving effect to a two-for-one stock split effected April 17, 1995.
Reported
Sale Price(1)
----------------
High Low
------ -------
1993
First Quarter .. $ 13.19 $ 7.13
Second Quarter . 9.32 6.50
Third Quarter .. 8.38 6.07
Fourth Quarter . 12.82 7.63
1994
First Quarter .. $ 16.13 $ 11.69
Second Quarter . 17.32 12.63
Third Quarter .. 19.69 12.88
Fourth Quarter . 19.32 16.13
The closing price for the Common Stock on the New York Stock Exchange on May
5, 1995, was $16.75. There were approximately 1,329 holders of record of the
Common Stock as of April 25, 1995, excluding those shares held by depository
companies for certain beneficial owners.
The Company has never paid cash dividends on its Common Stock and does not
anticipate the payment of cash dividends in the foreseeable future. The Company
currently anticipates that any future earnings will be retained to finance the
Company's operations.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The Company has not changed independent accountants within the twenty-four
months prior to December 31, 1994.
B-31
<PAGE>
APPENDIX C
PROXY
HEALTHSOUTH Corporation
ANNUAL MEETING OF STOCKHOLDERS -- June 6, 1995
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints RICHARD M. SCRUSHY and AARON BEAM, JR. or
_________________________________________, and each of them, with several powers
of substitution, proxies to vote the shares of Common Stock, par value $.01 per
share, of HEALTHSOUTH Corporation which the undersigned could vote if personally
present at the Annual Meeting of Stockholders of HEALTHSOUTH Corporation to be
held at Two Perimeter Park South, Birmingham, Alabama, on Tuesday, June 6, 1995,
at 2:00 p.m., C.D.T., and any adjournment thereof:
1. Election of Directors
[ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY to vote
(except as marked to the contrary for all nominees listed below
below)
INSTRUCTION: To withhold authority to vote for any individual nominee,
mark a line through the nominee's name in the list below.
Richard M. Scrushy Charles W. Newhall III Anthony J. Tanner
Phillip C. Watkins Aaron Beam, Jr. John S. Chamberlin
George H. Strong James P. Bennett Richard F. Celeste
C. Sage Givens Larry R. House P. Daryl Brown
(Continued and to be signed on other side)
<PAGE>
(Continued from other side)
2. Approval of the 1995 Stock Option Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Adoption and approval of an Amendment to the Restated Certificate of
Incorporation of the Company to increase the authorized Common Stock of the
Company to 150,000,000 shares of Common Stock, par value $.01 per share.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. In their discretion, to act upon any matters incidental to the foregoing
and such other business as may properly come before the Annual Meeting or any
adjournment thereof.
This Proxy, when properly executed, will be voted in the manner directed
herein by the undersigned stockholder. If no direction is made, this Proxy will
be voted FOR Items 1, 2 and 3 above. Any stockholder who wishes to withhold the
discretionary authority referred to in Item 4 above should mark a line through
the entire Item.
DATED___________________, 1995
_________________________________
Signature(s)
(Please sign exactly and as fully
as your name appears on your
stock certificate. If shares are
held jointly, each stockholder
should sign.)
PLEASE MARK, SIGN, DATE AND RETURN PROMPTLY, USING THE ENCLOSED ENVELOPE.
NO POSTAGE IS REQUIRED.
C-2
<PAGE>
APPENDIX D
PROXY
HEALTHSOUTH Corporation
ANNUAL MEETING OF STOCKHOLDERS -- June 6, 1995
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints RICHARD M. SCRUSHY and AARON BEAM, JR. or
__________________________________________, and each of them, with several
powers of substitution, proxies to vote the shares of Common Stock, par value
$.01 per share, of HEALTHSOUTH Corporation which the undersigned could vote if
personally present at the Annual Meeting of Stockholders of HEALTHSOUTH
Corporation to be held at Two Perimeter Park South, Birmingham, Alabama, on
Tuesday, June 6, 1995, at 2:00 p.m., C.D.T., and any adjournment thereof:
(Continued and to be signed on other side)
<PAGE>
1. Election of Directors
[ ] For all nominees
listed at right
(except as marked
to the contrary)
INSTRUCTION: To withhold authority to vote for any individual nominee, mark a
line through the nominee's name in the list below.
Richard M. Scrushy Charles W. Newhall III Anthony J. Tanner
Phillip C. Watkins Aaron Beam, Jr. John S. Chamberlin
George H. Strong James P. Bennett Richard F. Celeste
C. Sage Givens Larry R. House P. Daryl Brown
2. Approval of the 1995
Stock Option Plan
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Adoption and approval of an Amendment to the Restated Certificate of
Incorporation of the Company to increase the authoized Common Stock of the
Company to 150,000,000 shares of Common Stock, par value $.01 per shares.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. In their discretion, to act upon any matters incidental to the foregoing
and such other business as may properly come before the Annual Meeting or any
adjournment thereof.
This Proxy, when properly executed, will be voted in
the manner directed herein by the undersigned
stockholder. If no direction is made, this Proxy will
be voted FOR Items 1, 2 and 3 above. Any stockholder
who wishes to withhold the discretionary authority
referred to in Item 4 above should mark a line
through the entire Item.
Dated:_____________________________________ , 1995
_____________________________________________________
Signature(s)
_____________________________________________________
(Please sign exactly and as fully as your name
appears on your stock certificate. If shares are held
jointly, each stockholder should sign.)
Please mark, sign, date and return promptly, using the enclosed Envelope. No
postage is required.
D-2
<PAGE>
