<PAGE>
PRELIMINARY COPY
HEALTHSOUTH Corporation
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
May ____, 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
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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 ____, 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.
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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 a
the presence of a quorum. At April 25, 1995, the record date for the Annual
Meeting, there were ____________ shares of Common Stock outstanding.
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
_________________, 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.
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The following table sets forth certain information concerning the
twelve nominees for Director of the Company:
<TABLE>
<CAPTION>
Principal Occupation
and All Positions A Director
Name Age With the Company Since
----- ------ -------------------
<S> <C> <C> <C>
Richard M. Scrushy 42 Chairman of the Board and 1984
Chief Executive Officer and
Director
Phillip C. Watkins, M.D. 53 Physician, Birmingham, Alabama, 1984
and Director
George H. Strong 68 Private Investor, Locust, New Jersey, 1984
and Director
C. Sage Givens 38 General Partner, 1985
First Century Partners, and Director
Charles W. Newhall III 50 Partner, New Enterprise 1985
Associates Limited Partnerships,
and Director
Aaron Beam, Jr. 51 Executive Vice President and 1993
Chief Financial Officer
and Director
James P. Bennett 37 President and Chief Operating 1993
Officer and Director
Larry R. House 51 Chairman of the Board, President 1993
and Chief Executive Officer,
MedPartners, Inc., and Director
Anthony J. Tanner 46 Executive Vice President -- 1993
Administration and Secretary
and Director
John S. Chamberlin 66 Private Investor, 1993
Princeton, New Jersey,
and Director
Richard F. Celeste 57 Principal of Celeste and Sabaty, Ltd. 1991
and Director
P. Daryl Brown 40 President -- HEALTHSOUTH 1995
Outpatient Centers and Director
</TABLE>
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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.
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, again 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.
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Larry R. House is Chairman of the Board, President and Chief Executive
Officer of MedPartners, Inc. a publicly-held physician practice management firm,
a position he assumed as his principal occupation in August 1993. Mr. House was
elected a Director of the Company in February 1993. At the same time he became
President -- HEALTHSOUTH International, Inc. and New Business Ventures, a
position which he held until August 31, 1994, when he terminated his employment
with the Company to concentrate on his duties at MedPartners. Mr. House joined
the Company in September 1985 as Director of Marketing, subsequently served as
Senior Vice President and Chief Operating Officer of the Company, and in June
1992 became President and Chief Operating Officer -- HEALTHSOUTH Medical
Centers. Prior to joining the Company, Mr. House was president and chief
executive officer of a provider of clinical contract management services for
more than ten years.
Anthony J. Tanner, Sc.D., a management founder, serves as Executive
Vice President -- Administration and Secretary of the Company and was elected a
Director in February 1993. From 1980 to 1984, Mr. Tanner was with Lifemark
Corporation in the Shared Services Division as director, clinical and
professional programs (1982-1984) and director, quality assurance and education
(1980-1982), where he was responsible for the development of clinical programs
and marketing programs.
John S. Chamberlin retired in 1988 as president and chief operating
officer of Avon Products, Inc., a position he had held since 1985. From 1976
until 1985, he served as chairman and chief executive officer of Lenox,
Incorporated, after 22 years in various assignments for General Electric. From
1990 to 1991, he served as chairman and chief executive officer of New Jersey
Publishing Co. Mr. Chamberlin is chairman of the board of Life Fitness Company
and WNS, Inc., and is a director of The Scotts Company. He is a member of the
Board of Trustees of the Medical Center at Princeton and the Board of Overseers
of Parsons School of Design and is a trustee of the Woodrow Wilson National
Fellowship Foundation.
Richard F. Celeste originally joined the Board of Directors in 1991,
took a leave of absence from the Board of Directors in August 1993 to head the
Democratic National Committee's healthcare reform campaign, and rejoined the
Board in May 1995. He is a principal of Celeste and Sabaty, Ltd., a business
advisory firm located in Columbus, Ohio, which assists United States companies
to build strategic business alliances in Europe, Africa, South Asia and the
Pacific Rim. He served as Governor of Ohio from 1983 to 1991, during which time
he chaired the National Governors' Association Committee on Science and
Technology, and directed the United States Peace Corps from 1979 to 1981. He is
a member of the Advisory Council of the Carnegie Commission on Science,
Technology and Government, and chairs Carnegie's Task Force on Science,
Technology and the States. He is a director of Navistar International, Inc. and
Republic Engineered Steels, Inc., both of which are publicly-traded companies.
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.
5
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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 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 Corporation 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 program. 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.
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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.
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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 1% 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.
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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 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 1993 Plan, the option shall terminate on
the date of termination of such employment or other relationship. With respect
to all options granted under the 1993 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.
10
<PAGE>
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 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.
11
<PAGE>
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."
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.
12
<PAGE>
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 _____________ shares were issued and outstanding on
April 25, 1995. In addition, as of April 25, 1995, approximately (a)
____________ shares of Common Stock were reserved for issuance under the
Company's Stock Option Plans, under which options to purchase a total of
_____________ shares of Common Stock were outstanding and (b) ______________
shares were reserved for issuance pursuant to the exercise of outstanding
non-qualified stock options not issued pursuant to plans. All such plans and
options are hereinafter referred to collectively as the "Options". Approximately
_____________ 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.
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.
13
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-Term Compensation
Bonus/Annual Stock Long-Term All
Incentive Option Incentive Other Com-
Name and Principal Position Year Salary Award Awards (2) Payouts pensation (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>
Stock Option Grants in 1994
No stock option grants to the Named Executive Officers were made in
1994.
14
<PAGE>
Stock Option Exercises in 1994 and Option Values at December 31, 1994
<TABLE>
<CAPTION>
Number
Shares Value of Unexercised
Acquired Number of Unexercised Options In-the-Money Options
on Value at December 31, 1994 at December 31, 1994
-------------------- --------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard M. Scrushy...... -- -- 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>
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. 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.
[GRAPHIC OMITTED]
December 31 S&P HRC INDEX
----------- ------ ------ ------
1989 100 100 100
1990 96.92 144.84 101.72
1991 126.91 305.71 129.52
1992 136.54 229.35 144.79
1993 149.87 219.57 116.43
1994 150.94 316.98 81.85
15
<PAGE>
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
$10.08 to $15.13 per share. All such options remain in full force and effect in
accordance with their terms and the ISO Plan. Under the ISO Plan, which was
administered by the Board of Directors, key employees could be granted options
to purchase shares of Common Stock at 100% of fair market value on the date of
grant (or 110% of fair market value in the case of a 10% stockholder/grantee).
The outstanding options granted under the ISO Plan must be exercised within ten
years from the date of grant, are cumulatively exercisable with respect to 25%
of the shares covered thereby after the expiration of each of the first through
the fourth years following the date of grant, are nontransferable except by will
or pursuant to the laws of descent and distribution, are protected against
dilution and expire within three months after termination of employment, unless
such termination is by reason of death.
1988 Non-Qualified Stock Option Plan
The Company also has a 1988 Non-Qualified Stock Option Plan (the "NQSO
Plan") covering a maximum of 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 $6.25 to $13.17 per
share. The NQSO Plan, which is administered by the Board of Directors (except
with respect to options granted to Directors, as to which it is administered by
an Independent Stock Option Committee), provides that Directors, executive
officers and other key employees may be granted options to purchase shares of
Common Stock at 100% of fair market value on the date of grant. The NQSO Plan
terminates on the earliest of (a) February 28, 1998, (b) such time as all shares
of Common Stock reserved for issuance under the NQSO Plan have been acquired
through the exercise of options granted thereunder or (c) such earlier time as
the Board of Directors of the Company may determine. Except for options covering
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.
16
<PAGE>
1989, 1990, 1992, 1992 and 1993 Stock Option Plans
The Company also has a 1989 Stock Option Plan (the "1989 Plan"), a 1990
Stock Option Plan (the "1990 Plan"), a 1991 Stock Option Plan (the "1991 Plan"),
a 1992 Stock Option Plan (the "1992 Plan"), and a 1993 Stock Option Plan (the
"1993 Plan"), under each of which incentive stock options ("ISOs") and
non-qualified stock options ("NQSOs") may be granted. The 1989, 1990, 1991, 1992
and 1992 Plans cover a maximum of 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 $10.08 to $15.13
per share under the 1989 Plan, 1,357,526 shares of Common Stock at prices
ranging from $14.58 to $15.13 per share under the 1990 Plan, 4,712,158 shares of
Common Stock at an exercise price of $15.13 per share under the 1991 Plan,
2,449,250 shares of Common Stock at exercise prices ranging from $15.13 to
$15.25 per share under the 1992 Plan, and 2,140,410 shares of Common Stock at
prices ranging from $13.50 to $36.50 per share under the 1993 Plan. Each of the
1989, 1990, 1991, 1992 and 1993 Plans is administered in the same manner as the
NQSO Plan and provides that Directors, executive officers and other key
employees may be granted options to purchase shares of Common Stock at 100% of
fair market value on the date of grant. Each of the 1989, 1990, 1991, 1992 and
1993 Plans terminate on the earliest of (a) October 25, 1999, October 15, 2000,
June 19, 2001, June 16, 2002, and April 19, 2003, respectively, (b) such time as
all shares of Common Stock reserved for issuance under the respective Plan have
been acquired through the exercise of options granted thereunder, or (c) such
earlier times as the Board of Directors of the Company may determine. Options
granted under these Plans which are designated as ISOs contain vesting
provisions similar to those contained in options granted under the ISO Plan and
have a ten-year term. NQSOs granted under these Plans, if any, will have a
ten-year term. Options granted under these Plans are nontransferable except by
will or pursuant to the laws of descent and distribution, are protected against
dilution and will expire within three months of termination of association with
the Company as a Director or termination of employment, unless such termination
is by reason of death.
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 shares
of Common Stock at prices ranging from $13.50 to $36.50 per share. The 1993
Consultants' Plan, which is administered in the same manner as the NQSO Plan,
provides that certain non-employee consultants who provide significant services
to the Company may be granted options to purchase shares of Common Stock at such
prices as are determined by the Board of Directors or the appropriate committee.
The 1993 Consultants' Plan terminates on the earliest of (a) February 25, 2003,
(b) such time as all shares of Common Stock reserved for issuance under the 1993
Consultants' Plan have been acquired through the exercise of options granted
thereunder, or (c) such earlier time as the Board of Directors of the Company
may determine. Options granted under the 1993 Consultants' Plan have a ten-year
term. Options granted under the 1993 Consultants' Plan are nontransferable
except by will or pursuant to the laws of descent and distribution, are
protected against dilution and expire within three months of termination of
association with the Company as a consultant, unless such termination is by
reason of death.
Executive Loans
In order to enhance equity ownership by senior management, in 1989 the
Company adopted a program of making loans to officers holding the position of
Group Vice President and above to facilitate the exercise of stock options held
by such persons. Each loan bears interest at the prime rate announced from time
to time by AmSouth Bank N.A., Birmingham, Alabama and is secured by a first lien
on the shares of Common Stock acquired with the proceeds of the loan. Each loan
has a ten-year term, and the Company's lien on the shares of Common Stock is
released as the indebtedness is repaid at the rate of one share per the weighted
average option exercise price repaid. The only loan currently outstanding under
such program is a loan made on May 7, 1992, to P. Daryl Brown, President --
HEALTHSOUTH Outpatient Centers, which had an original principal balance of
$213,613 and of which $190,000 remained outstanding at December 31, 1994.
17
<PAGE>
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.
The ESOP was established with a $10,000,000 loan from the Company, the
proceeds of which were used to purchase 413,793 shares of the Company's Common
Stock. In 1992, an additional $10,000,000 loan was made to the ESOP, which was
used to purchase an additional 416,666 shares of Common Stock. Under the ESOP, a
Company Common Stock account (a "company stock account") is established and
maintained for each eligible employee who participates in the ESOP. In each plan
year, such account is credited with such employee's allocable share of the
Common Stock held by the ESOP and allocated with respect to such plan year. Each
employee's allocable share for any given plan year is determined according to
the ratio which such employee's compensation for such plan year bears to the
compensation of all eligible participating employees for the same plan year.
Under the ESOP, eligible employees who participate in the ESOP and who
have attained age 55 and have completed 10 years of participation in the ESOP
may elect to diversify the assets in their company stock account by directing
the plan administrator to transfer to the 401(k) Plan a portion of their company
stock account to be invested, as the eligible employee directs, in one or more
of the investment options available under the 401(k) Plan. See Note 12 of "Notes
to Consolidated Financial Statements".
Richard M. Scrushy, Chairman of the Board, President and Chief
Executive Officer of the Company, Aaron Beam, Jr., Executive Vice President and
Chief Financial Officer of the Company, and Anthony J. Tanner, Executive Vice
President -- Administration and Secretary of the Company, serve as Trustees of
the ESOP, which is administered by the Company.
18
<PAGE>
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.
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 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.
19
<PAGE>
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.
20
<PAGE>
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.
In addition to cash incentive compensation, as a growth company, the
Company has always utilized equitybased 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.
21
<PAGE>
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 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.
22
<PAGE>
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 consideration. 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
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of April ___, 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.
23
<PAGE>
<TABLE>
<CAPTION>
Percentage
Name and Number of Shares of
Address of Owner Beneficially Owned (1) Common Stock
---------------- ---------------------- ------------
<S> <C> <C>
Richard M. Scrushy 5,794,782 (2) 7.53%
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 283,358 (5) *
Phillip C. Watkins, M.D. 358,398 (6) *
Aaron Beam, Jr. 205,550 (7) *
James P. Bennett 235,000 (8) *
Larry R. House 397,926 (9) *
Anthony J. Tanner 496,000 (10) *
Richard F. Celeste 60,000 (3) *
P. Daryl Brown 365,000 (11) *
Forstmann-Leff Associates, Inc. 4,071,522 (12) 5.72%
55 East 52nd Street
New York, New York 10055
The Travelers Inc. 3,649,028 (13) 5.13%
65 East 55th Street
New York, New York 10022
American Express Company 3,766,000 (14) 5.29%
American Express Tower
World Financial Center
New York, New York 10285
All Executive Officers and Directors as a Group 9,425,810 (15) 11.76%
(16 persons)
- -------------------------
<FN>
(1) The persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by
them, except as otherwise indicated.
(2) Includes 5,779,680 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 200,000 shares subject to currently exercisable non-qualified
stock options.
(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".
24
<PAGE>
(8) Includes 197,500 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 Compensa- tion 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 326,000 shares subject to currently exercisable stock options.
See "Executive Compensa- tion 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 9,024,290 shares subject to currently exercisable stock options
held by officers and Directors.
* Less than 1%
</TABLE>
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, President 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,
President 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 purchaser 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.
25
<PAGE>
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, President 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 owns approximately 6.1%, Mr. House owns approximately 8.2%, and the
Company owns 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.
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, President 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.
26
<PAGE>
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.
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 and RETURN the enclosed Proxy promptly.
By Order of the Board of Directors:
ANTHONY J. TANNER
Secretary
May ___, 1995
27
<PAGE>
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.
28
<PAGE>
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.
(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 1% 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.
29
<PAGE>
(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.
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.
30
<PAGE>
(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
(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
31
<PAGE>
(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.
32
<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.
33
<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.
34
<PAGE>
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 Corporation 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.
35
<PAGE>
APPENDIX B
TABLE OF CONTENTS
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-4
Audited Consolidated Financial Statements of
HEALTHSOUTH Corporation and Subsidiaries
Report of Independent Auditors.............................. B-8
Consolidated Balance Sheets................................. B-9
Consolidated Statements of Income........................... B-11
Consolidated Statements of Stockholders' Equity............. B-12
Consolidated Statements of Cash Flows....................... B-14
Notes to Consolidated Financial Statements.................. B-16
Audited Combined Financial Statements of Selected Rehabilitation
Hospitals of National Medical Enterprises, Inc..............
Independent Auditors' Report................................
Combined Balance Sheets.....................................
Combined Statements of Income...............................
Combined Statements of Owners' Equity.......................
Combined Statements of Cash Flows...........................
Notes to Combined Financial Statements......................
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-32
<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)
Statement of Income Data:
<S> <C> <C> <C> <C> <C>
Revenues $ 180,482 $ 225,485 $ 406,968 $ $
Net Income 12,923 22,371 29,738
Weighted Average Common and
Common Equivalent Shares
Outstanding(1) 18,208 25,905 28,887
Net Income Per Common and
Common Equivalent Share(1) $ .71 $ .86 $ 1.00 $ $
Net Income Per Common Share -
Assuming Full Dilution(1) .64 .83 N/A
Dividends None None None None
Balance Sheet Data:
Working Capital $ 110,585 $ 165,524 $ 170,126 $ $
Total Assets 301,180 461,622 641,799
Total Debt and Leases 151,195 165,848 302,415
Retained Earnings 27,331 48,848 68,393
Stockholders' Equity 127,901 279,341 290,132
- --------------------
<FN>
(1) Adjusted for a three-for-two stock split effected in the form of a 50 percent dividend paid on December 31, 1991.
</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 1984
Chief Executive Officer and
Director
Aaron Beam, Jr. 51 Executive Vice President and Chief 1984
Financial Officer and Director
Anthony J. Tanner 46 Executive Vice President -- Administration 1984
and Secretary and Director
Thomas W. Carman 43 Executive Vice President-- 1985
Corporate Development
P. Daryl Brown 40 President -- HEALTHSOUTH 1986
Outpatient Centers and Director
James P. Bennett 37 President and Chief Operating 1991
Officer and Director
Denis J. Devane 57 Executive Vice President-- 1993
Medical Center Operations
William T. Owens 36 Senior Vice President-- 1986
Finance and Controller
Michael D. Martin 34 Senior Vice President-- 1989
Finance and Treasurer
William W. Horton 35 Group Vice President-- 1994
Legal Services and
Assistant Secretary
</TABLE>
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.
B-3
<PAGE>
Aaron Beam, Jr., C.P.A., a management founder, serves as Executive Vice
President and Chief Financial Officer of the Company and was elected a Director
in February 1993. From 1980 to 1984, Mr. Beam was employed by Lifemark
Corporation in several financial and operational management positions for the
Shared Services Division, including division controller. Mr. Beam is a director
of Ramsey Healthcare, Inc.
Anthony J. Tanner, Sc.D., a management founder, serves as Executive
Vice President Administration and Secretary of the Company and was elected a
Director in February 1993. From 1980 to 1984, Mr. Tanner was with Lifemark
Corporation in the Shared Services Division as director, clinical and
professional programs (1982-1984) and director, quality assurance and education
(1980-1982), where he was responsible for the development of clinical programs
and marketing programs.
Thomas W. Carman joined the Company in 1985 as Regional Director --
Corporate Development, and now serves as Executive Vice President -- Corporate
Development. From 1983 to 1985, Mr. Carman was director of development for
Medical Care International. From 1981 to 1983, Mr. Carman was assistant
administrator at the Children's Hospital of Birmingham, Alabama.
P. Daryl Brown, President and Chief Operating Officer -- HEALTHSOUTH
Outpatient Centers, joined the Company in April 1986 and served until June 1992
as Group Vice President -- Outpatient Operations. From 1977 to 1986, Mr. Brown
served with the American Red Cross, Alabama Region, in several positions,
including chief operating officer, administrative director for finance and
administration and controller.
James P. Bennett joined the Company in May 1991 as Director of
Inpatient Operations, was promoted to Group Vice President -- Inpatient
Rehabilitation Operations in September 1991, again to President and Chief
Operating Officer -- HEALTHSOUTH Rehabilitation Hospitals in June 1992, 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.
B-5
<PAGE>
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.
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.
Results of Operations of the Company
Twelve-Month Periods Ended December 31, 1992 and 1993
The Company operated 171 outpatient rehabilitation locations at
December 31, 1993, compared to 126 outpatient rehabilitation locations at
December 31, 1992. In addition, the Company operated 39 inpatient facilities and
four medical centers at December 31, 1993, compared to 22 inpatient facilities
and four medical centers at December 31, 1992. In 1993, the Company opened the
Vanderbilt Stallworth Rehabilitation Hospital in Nashville, Tennessee, and
acquired 13 inpatient facilities from Rebound, Inc. The foregoing information
does not give effect to the facilities acquired effective December 31, 1993 in
the NME Selected Hospitals Acquisition.
The Company's operations generated revenues of $575,346,000 in 1993, an
increase of $111,058,000, or 23.9%, as compared to 1992 revenues. Same store
revenues for the twelve months ended December 31, 1993 were $539,377,000, an
increase of $75,089,000, or 16.1%, as compared to the same period in 1992. New
store revenues for 1993 were $35,969,000. The increase in revenues is primarily
attributable to increases in patient volume and the addition of 45 outpatient
rehabilitation locations and 13 inpatient locations. Revenues generated from
patients under Medicare and Medicaid plans respectively accounted for 30.6% and
1.0% of revenues for 1993, compared to 29.3% and 1.3% of revenues for 1992.
Revenues from any other single third-party payor were not significant in
relation to the Company's revenues. During 1993, same store outpatient visits
and inpatient days increased 19.9% and 8.2%, respectively. Revenue per
outpatient visit and revenue per inpatient day for same store operations
increased by 0.6% and 6.3%, respectively.
Operating expenses, at the operating unit level, were $418,981,000, or
72.8% of revenues, for 1993, compared to 74.8% of revenues for 1992. Same store
operating expenses for 1993 were $391,409,000, or 72.6% of related revenues. New
store operating expenses were $27,572,000, or 76.7% of related revenues. The
decrease in operating expenses as a percentage of revenues is primarily
attributable to increased patient volume and controlled expenses. Corporate
general and administrative expenses increased from $14,418,000 in 1992 to
$20,018,000 in 1993. As a percentage of revenues, corporate general and
administrative expenses increased from 3.1% in 1992 to 3.5% in 1993. Total
operating expenses were $438,999,000, or 76.3% of revenues, for 1993, compared
to $361,491,000, or 77.9% of revenues, for 1992. The provision for doubtful
accounts was $13,875,000, or 2.4% of revenues, for 1993, compared to
$11,842,000, or 2.6% of revenues, for 1992.
B-6
<PAGE>
Depreciation and amortization expense was $39,376,000 for 1993,
compared to $26,737,000 for 1992. The increase represents the investment in
additional assets by the Company. Interest expense increased to $14,261,000 in
1993 compared to $11,295,000 for 1992 primarily because of the increased
borrowings during the year under the Company's revolving line of credit. For
1993, interest income was $3,698,000, compared to $5,121,000 for 1992. The
reduction in interest income is primarily attributable to the reduction in rates
received on invested funds and a decrease in the cash balance.
As a result of the NME Selected Hospitals Acquisition, the Company
recognized an expense of approximately $49,742,000 during the year ended
December 31, 1993. By recognizing this expense, the Company accrued
approximately $3,000,000 for costs related to certain employee separations and
relocations. The Company expects the plan of consolidation to take up to 24
months. The $3,000,000 accrual, which is the only cash expense included in the
acquisition-related expense, will be paid over that same period. In addition,
the Company has provided approximately $39,000,000 for the write-down of certain
assets to net realizable value as the result of planned facility consolidations,
and approximately $7,700,000 for the write-off of certain capitalized
development projects. The consolidations are applicable in selected markets
where the Company's services overlap with those of the acquired facilities. The
costs of development projects in certain target markets that were previously
capitalized were written off due to the acquisition of NME facilities in or near
those markets. For further discussion, see Note 10 of "Notes to Consolidated
Financial Statements".
Income before minority interests and income taxes for 1993 was
$22,791,000, compared to $54,379,000 for 1992. The provision for income taxes
for 1993 was $9,009,000, compared to $18,383,000 for 1992, resulting in
effective tax rates of 39.9% for 1993 and 34.7% for 1992. Net income for 1993
was $13,592,000.
Twelve-Month Periods Ended December 31, 1993 and 1994
The Company operated 238 outpatient rehabilitation locations (excluding
outpatient satellites of inpatient facilities) at December 31, 1994, compared to
171 outpatient rehabilitation locations at December 31, 1993. In addition, the
Company operated 66 inpatient facilities and five medical centers at December
31, 1994, compared to 39 inpatient facilities and four medical centers at
December 31, 1993.
The Company's operations generated revenues of $1,127,441,000 in 1994,
an increase of $552,095,000, or 96.0%, as compared to 1993 revenues. Same store
revenues for the twelve months ended December 31, 1994 were $660,973,000, an
increase of $85,627,000, or 14.9%, as compared to the same period in 1993. New
store revenues for 1994 were $466,468,000. New store revenues reflect (1) the 28
inpatient rehabilitation facilities and 45 associated outpatient rehabilitation
locations associated with the NME Selected Hospitals Acquisition, (2) the
acquisition of a specialty medial center in Dallas, Texas, (3) the opening of
three new inpatient rehabilitation facilities, (4) the acquisition of outpatient
locations in 28 new markets, (5) the acquisition of a contract therapist
provider, and (6) the acquisition of a diagnostic imaging company. See Note 10
of "Notes to Consolidated Financial Statements". The increase in revenues is
primarily attributable to the addition of these operations and increases in
patient volume. Revenues generated from patients under Medicare and Medicaid
plans respectively accounted for 41.0% and 3.2% of total revenues for 1994,
compared to 30.6% and 1.0% of total revenues for 1993. Revenues from any other
single third-party payor were not significant in relation to the Company's total
revenues. The increase in Medicare revenues is primarily attributable to the NME
Selected Hospitals Acquisition, since the acquired facilities had a greater
proportion of Medicare patients than the Company's historical experience in its
existing facilities. During 1994, same store outpatient visits and inpatient
days increased 21.8% and 23.0%, respectively. Revenue per outpatient visit and
revenue per inpatient day for the same store operations decreased by 7.8% and
8.4%, respectively. These decreases were offset by increased volume from managed
care and national accounts and by control of expenses.
B-7
<PAGE>
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. 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 discontinued operations. 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. 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.
B-9
<PAGE>
As of January 22, 1995, the Company entered into an Amended and
Restated Plan and Agreement of Merger with Surgical Health Corporation ("SHC"),
pursuant to which the Company has agreed to acquire SHC through a
stock-for-stock merger to be accounted for as a pooling of interests. SHC
operates 36 outpatient surgery centers. Under the terms of the Plan and
Agreement of Merger, the Company will issue shares of its Common Stock to all
holders of SHC's Common Stock pursuant to an exchange ratio calculated to
provide $4.60 in value of HEALTHSOUTH Common Stock for each share of SHC's
capital stock, subject to adjustment in certain circumstances. The transaction
is subject to the satisfaction of various conditions, including the receipt of
all required regulatory approvals and the termination or expiration of the
waiting period under the HSR Act. The Company currently expects the transaction
to be consummated during the second quarter of 1995 and is working toward the
satisfaction of all such conditions and the obtaining of all regulatory
approvals.
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. In connection with that transaction, the
Company will pay a cash purchase price of $215,000,000, and will assume
liabilities of approximately $20,000,000. The transaction is subject to various
conditions, including the expiration or termination of the waiting period under
the HSR Act. The Company expects the transaction to be consummated early in the
second quarter of 1995.
Although the Company is continually considering and evaluating
acquisitions and opportunities for future growth, the Company has not entered
into any agreements with respect to material future acquisitions other than the
transactions with SHC and NovaCare. The Company believes that existing cash,
cash flow from operations, and borrowings under the revolving line of credit, as
increased pursuant to the new commitment, will be sufficient to satisfy the
Company's estimated cash requirements for the next twelve months, and for the
reasonably foreseeable future.
Inflation in recent years has not had a significant effect on the
Company's business, and is not expected to adversely affect the Company in the
future unless it increases significantly.
B-10
<PAGE>
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 April ___, 1995, was $______.
There were approximately _______ holders of record of the Common Stock
as of April ___, 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-11
<PAGE>
PRELIMINARY COPY
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 35243,
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 (except [ ] WITHHOLD AUTHORITY to vote
as marked to the contrary below) for all nominees listed 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 C. Sage Givens Anthony J. Tanner
Phillip C. Watkins Richard F. Celeste Larry R. House
George H. Strong Charles W. Newhall III James P. Bennett
John S. Chamberlin Aaron Beam, Jr. P. Daryl Brown
2. Approval of the 1995 Stock Option Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued and to be signed on other side)
<PAGE>
- -------------------------------------------------------------------------------
(Continued from other side)
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.
<PAGE>
April 19, 1995
VIA EDGAR
Securities and Exchange Commission
450 Fifth Street, N. W.
Washington, D.C. 20549
Re: HEALTHSOUTH Corporation (Commission File No. 1-10315)
Preliminary Proxy Materials for 1995 Annual Meeting of
Stockholders
Ladies and Gentlemen:
On behalf of our client, HEALTHSOUTH Corporation, a Delaware
corporation (the "Company"), we enclose for filing via EDGAR one copy of the
preliminary proxy materials for the Company's Annual Meeting of Stockholders
scheduled for June 6, 1995. The $125 filing fee has been paid by wire transfer
to the Commission's lock box account.
Should you have any questions about the enclosed filing, please contact
the undersigned at the telephone number listed above, or William W. Horton,
Esq., Group Vice President Legal Services for the Company, at (205) 967-7116.
Very truly yours,
Beall D. Gary, Jr.
Enclosures
cc: J. Brooke Johnston, Jr., Esq.
