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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 9, 1996
REGISTRATION NO. 33-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
Registration Statement Under The Securities Act of 1933
HEALTHSOUTH CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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Delaware 8062 63-0860407
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
Incorporation or Organization) Classification Code Number) Number)
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Two Perimeter Park South, Birmingham, Alabama 35243
(205) 967-7116
(Address, including Zip Code, and Telephone Number,
including Area Code, of Registrant's Principal Executive Offices)
RICHARD M. SCRUSHY
Chairman of the Board
and Chief Executive Officer
HEALTHSOUTH Corporation
Two Perimeter Park South
Birmingham, Alabama 35243
(205) 967-7116
(Name, Address, including Zip Code, and Telephone Number,
including Area Code, of Agent for Service)
Copies to:
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J. BROOKE JOHNSTON, JR., ESQ. RICHARD R. KELLY, ESQ.
Haskell Slaughter Young & Johnston, WILLIAM W. HORTON, ESQ. DOUGLAS A. ZINGALE, ESQ.
Professional Association Group Vice President -- Legal Services Mintz, Levin, Cohn, Ferris,
1200 AmSouth/Harbert Plaza HEALTHSOUTH Corporation Glovsky and Popeo, P.C.
1901 Sixth Avenue North Two Perimeter Park South One Financial Center
Birmingham, Alabama 35203 Birmingham, Alabama 35243 Boston, Massachusetts, 02111
(205) 251-1000 (205) 967-7116 (617) 542-6000
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Approximate date of commencement of proposed sale to the public:
At the effective time of the merger of Advantage Health Corporation with a
wholly-owned subsidiary of the Registrant, as described in the
Prospectus-Proxy Statement included herein.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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Proposed Proposed Maximum
Title of Each Amount Maximum Aggregate Amount of
Class of Securities to be Offering Price Offering Registration
to be Registered Registered(1) Per Unit Price(2) Fee(3)
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Common Stock, par value $.01 per 10,564,835
share............................ shares Inapplicable $295,957,358 $102,054.27
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[FN]
(1) The amount of common stock, par value $.01 per share (the "HEALTHSOUTH
Common Stock"), of Registrant to be registered has been determined based
upon 5,653,114 shares of common stock, par value $.01 per share (the
"Advantage Health Common Stock"), of Advantage Health Corporation
outstanding and options to acquire 685,660 shares of Advantage Health
Common Stock, in each case as of February 7, 1996, and an Exchange Ratio
of 1.6667 shares of HEALTHSOUTH Common Stock per share of Advantage Health
Common Stock, the maximum Exchange Ratio provided for in the Agreement and
Plan of Merger among HEALTHSOUTH Corporation, Aladdin Acquisition
Corporation and Advantage Health Corporation, dated as of December 16,
1995 (the "Plan").
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(f)(1) of the Securities Act of 1933, as amended (the
"Securities Act"). Pursuant to Rule 457(f)(1), the maximum aggregate
offering price is the product of (a) $46.69, representing the average of
the high and low sales prices of Advantage Health Common Stock as reported
on the National Association of Securities Dealers Automated Quotation
System ("Nasdaq") National Market on February 6, 1996, and (b) 6,338,774,
the maximum number of shares of Advantage Health Common Stock to be
acquired by the Registrant in connection with the acquisition of Advantage
Health pursuant to the Plan.
(3) The registration fee for the securities registered hereby, $102,054.27,
has been calculated pursuant to Section 6(b) of the Securities Act and
Rule 457(f) promulgated thereunder. Of such registration fee, $59,159.62
was paid in connection with the filing of preliminary proxy materials
relating to the Special Meeting of Stockholders of Advantage Health, which
were filed on January 12, 1996.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further Amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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HEALTHSOUTH CORPORATION
CROSS-REFERENCE SHEET
(PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING THE LOCATION IN THE
PROSPECTUS-PROXY
STATEMENT OF THE RESPONSES TO THE ITEMS OF PART I OF FORM S-4)
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ITEM LOCATION IN PROSPECTUS-PROXY STATEMENT
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1. Forepart of the Registration Statement and Outside Facing Page; Cross Reference Sheet; Outside Front Cover Page
Front Cover Page of Prospectus ..................... of Prospectus-Proxy Statement
2. Inside Front and Outside Back Cover Pages of Table of Contents; Available Information; Incorporation of
Prospectus ......................................... Certain Information by Reference
3. Risk Factors, Ratio of Earnings to Fixed Charges Summary of Prospectus-Proxy Statement; Risk Factors; The
and Other Information .............................. Special Meeting
Summary of Prospectus-Proxy Statement; The Special Meeting;
The Merger; Description of Capital Stock of HEALTHSOUTH;
Comparison of Rights of Advantage Health and HEALTHSOUTH
Stockholders; Operations and Management of HEALTHSOUTH after
4. Terms of the Transaction ........................... the Merger
5. Pro Forma Financial Information .................... Pro Forma Condensed Financial Information
6. Material Contacts with the Company Being Acquired . Not Applicable
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters ..... Not Applicable
8. Interests of Named Experts and Counsel ............. Experts
9. Disclosure of Commission Position on Comparison of Rights of Advantage Health and HEALTHSOUTH
Indemnification for Securities Act Liabilities ..... Stockholders
10. Information with Respect to S-3 Registrants ....... Incorporation of Certain Documents by Reference
11. Incorporation of Certain Information by Reference . Incorporation of Certain Documents by Reference
12. Information with Respect to S-2 or S-3 Registrants Not Applicable
13. Incorporation of Certain Information by Reference . Not Applicable
14. Information with Respect to Registrants Other than
S-2 or S-3 Registrants.............................. Not Applicable
15. Information with Respect to S-3 Companies ......... Incorporation of Certain Documents by Reference
16. Information with Respect to S-2 or S-3 Companies .. Not Applicable
17. Information with Respect to Companies Other than
S-2 or S-3 Companies ............................... Not Applicable
18. Information if Proxies, Consents or Authorizations Incorporation of Certain Documents by Reference; Summary of
are to be Solicited................................. Prospectus-Proxy Statement; The Special Meeting; The Merger
19. Information if Proxies, Consents or Authorizations
are not to be Solicited in an Exchange Offer ...... Not Applicable
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ADVANTAGE HEALTH CORPORATION
304 Cambridge Road
Woburn, Massachusetts 01801
February 12, 1996
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
Advantage Health Corporation ("Advantage Health") on March 14, 1996. Details as
to the time and place of the meeting are set forth in the accompanying Notice of
Special Meeting of Stockholders.
The purpose of the meeting is to consider and vote upon the approval of an
Agreement and Plan of Merger (the "Plan") providing for the merger (the
"Merger") of a wholly-owned subsidiary of HEALTHSOUTH Corporation
("HEALTHSOUTH") with and into Advantage Health. If the Merger is consummated,
Advantage Health will become a wholly-owned subsidiary of HEALTHSOUTH, and
stockholders of Advantage Health will be entitled to receive shares of
HEALTHSOUTH Common Stock (subject to adjustment as set forth in the attached
Prospectus-Proxy Statement) valued at $47.50 per share of Advantage Health
Common Stock (but not more than 1.6667 shares of HEALTHSOUTH Common Stock nor
less than 1.3768 shares of HEALTHSOUTH Common Stock per share of Advantage
Health Common Stock) for each share of their Advantage Health Common Stock.
Stockholders may call 1-800-433-3868 beginning at 5:00 p.m., Eastern Time, on
March 12, 1996 for information concerning the Exchange Ratio as finally
determined. The Board of Directors believes that HEALTHSOUTH and Advantage
Health are strategically complementary and that the combined companies will be
able to compete more effectively in the changing healthcare marketplace.
After careful consideration, your Board of Directors has unanimously
concluded that the proposed Merger is in the best interests of Advantage Health
stockholders and recommends that you vote FOR the approval of the Plan.
The attached Prospectus-Proxy Statement describes the Plan and the proposed
Merger more fully and includes other information about HEALTHSOUTH and Advantage
Health. Please give this information your thoughtful attention.
Approval of the Plan by the stockholders of Advantage Health requires the
affirmative vote of the holders of a majority of the outstanding shares of
Advantage Health Common Stock. Therefore, you are urged to mark, sign, date and
return promptly the accompanying proxy card for the meeting even if you plan to
attend. You may vote in person at that time if you so desire.
Sincerely,
RAYMOND J. DUNN, III
Chairman of the Board, President
and Chief Executive Officer
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ADVANTAGE HEALTH CORPORATION
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 14, 1996
To the Stockholders of Advantage Health Corporation:
Notice is hereby given that a Special Meeting of Stockholders of Advantage
Health Corporation, a Delaware corporation ("Advantage Health"), will be held at
the Burlington Marriott, One Mall Road, Burlington, Massachusetts 01803, on
March 14, 1996, at 9:30 a.m., Eastern Time, for the following purposes:
1. To consider and vote upon a proposal to approve the Agreement and Plan
of Merger, dated as of December 16, 1995, among Advantage Health, Aladdin
Acquisition Corporation, a Delaware corporation (the "Subsidiary") wholly
owned by HEALTHSOUTH Corporation, a Delaware corporation ("HEALTHSOUTH"), and
HEALTHSOUTH (as it may be amended, supplemented or otherwise modified from
time to time, the "Plan"), pursuant to which, among other things, the
Subsidiary will be merged with and into Advantage Health upon the terms and
subject to the conditions contained in the Plan (the "Merger"), and Advantage
Health will become a wholly-owned subsidiary of HEALTHSOUTH, as described in
the accompanying Prospectus-Proxy Statement.
At the effective time of the Merger (the "Effective Time"), (i) the
Subsidiary will be merged with and into Advantage Health, with Advantage
Health surviving the Merger as a wholly-owned subsidiary of HEALTHSOUTH, (ii)
each share of Common Stock, par value $.01 per share (the "Advantage Health
Common Stock"), of Advantage Health issued and outstanding immediately prior
to the Effective Time (other than shares of Advantage Health Common Stock
that are owned by Advantage Health or its subsidiaries as treasury stock)
will be converted into the right to receive a number of shares (in whole
shares only) of Common Stock, par value $.01 per share, of HEALTHSOUTH
determined as provided in Section 2.1 of the Plan, and (iii) each share of
Advantage Health Common Stock issued and outstanding immediately prior to the
Effective Time and owned by Advantage Health or its subsidiaries will cease
to be outstanding, will be cancelled and retired without payment of any
consideration therefor, and will cease to exist. The Plan also provides that,
at the Effective Time, all holders of options to purchase Advantage Health
Common Stock which are then outstanding, whether or not then exercisable,
shall receive as promptly as practicable after the Closing (as defined in the
Plan) a number of shares of HEALTHSOUTH Common Stock as provided in Section
2.1 of the Plan. For your reference, a copy of the Plan is attached hereto as
Annex A and incorporated herein by reference.
2. To consider and act upon such other matters as may properly come before
the Special Meeting, including any adjournments or postponements thereof.
The Board of Directors of Advantage Health has fixed the close of business on
February 7, 1996 as the record date for the determination of stockholders
entitled to notice of and to vote at the Special Meeting, and only stockholders
of record at such time will be entitled to notice of and to vote at the Special
Meeting.
A form of Proxy and a Prospectus-Proxy Statement containing more detailed
information with respect to the matters to be considered at the Special Meeting
accompany this notice and form a part hereof.
You are cordially invited and urged to attend the Special Meeting in person.
Whether or not you intend to attend the Special Meeting, please complete, sign,
date and promptly return the enclosed Proxy in the enclosed self-addressed,
postage pre-paid envelope. If you attend the Special Meeting and desire to
revoke your Proxy and vote in person, you may do so. In any event, your Proxy
may be revoked at any time before it is voted.
By Order of the Board of Directors,
ROBERT E. SPENCER
Secretary
February 12, 1996
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IMPORTANT NOTICES
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY, WHETHER OR NOT YOU PLAN
TO ATTEND THE SPECIAL MEETING. YOUR PROXY WILL BE REVOCABLE, EITHER IN WRITING
OR BY VOTING IN PERSON AT THE SPECIAL MEETING, AT ANY TIME PRIOR TO ITS
EXERCISE. PLEASE DO NOT SEND IN STOCK CERTIFICATES AT THIS TIME.
THE BOARD OF DIRECTORS OF ADVANTAGE HEALTH CORPORATION UNANIMOUSLY RECOMMENDS
THAT STOCKHOLDERS VOTE TO APPROVE THE PLAN.
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PROSPECTUS-PROXY STATEMENT
PROXY STATEMENT
OF
ADVANTAGE HEALTH
CORPORATION
FOR THE SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 14, 1996
PROSPECTUS
OF
HEALTHSOUTH CORPORATION
This Prospectus relates to up to 10,564,835 shares of the Common Stock, par
value $.01 per share (the "HEALTHSOUTH Common Stock"), of HEALTHSOUTH
Corporation (together with its subsidiaries, controlled partnerships and limited
liability companies, as applicable, "HEALTHSOUTH") issuable to the
securityholders of Advantage Health Corporation (together with its subsidiaries
and controlled partnerships, as applicable, "Advantage Health") upon
consummation of the Merger (as defined below). Such number of shares represents
the maximum number of shares that may be issued, assuming that the Base Period
Trading Price (as defined below) is equal to or less than $28.50 and that all
outstanding options to purchase shares of Advantage Health Common Stock (as
defined below) are exchanged for shares of HEALTHSOUTH Common Stock according to
the formula set forth in the Plan (as defined below). This Prospectus also
serves as the Proxy Statement of Advantage Health for its special meeting of
stockholders to be held on March 14, 1996, and any adjournments and
postponements thereof (the "Special Meeting"). See "THE SPECIAL MEETING".
This Prospectus-Proxy Statement describes the terms of a proposed business
combination between HEALTHSOUTH and Advantage Health, pursuant to which
HEALTHSOUTH will acquire Advantage Health by means of the merger (the "Merger")
of Aladdin Acquisition Corporation, a wholly-owned subsidiary of HEALTHSOUTH
(the "Subsidiary"), with and into Advantage Health, with Advantage Health being
the surviving corporation (the "Surviving Corporation"). After the Merger, the
combined operations of HEALTHSOUTH and Advantage Health are expected to be
conducted with Advantage Health as a wholly-owned subsidiary of HEALTHSOUTH and
the present subsidiaries of Advantage Health continuing as subsidiaries of
Advantage Health and thus indirect subsidiaries of HEALTHSOUTH. The Merger will
be effective pursuant to the terms and subject to the conditions of the
Agreement and Plan of Merger, dated as of December 16, 1995, among HEALTHSOUTH,
the Subsidiary and Advantage Health (as it may be amended, supplemented or
otherwise modified from time to time, the "Plan"). The Plan is attached to this
Prospectus-Proxy Statement as Annex A and is incorporated herein by reference.
HEALTHSOUTH and Advantage Health are hereinafter sometimes referred to as the
"Companies" and individually as a "Company".
Upon consummation of the Merger, except as described herein, each outstanding
share of Common Stock, par value $.01 per share, of Advantage Health, other than
shares owned by Advantage Health or any subsidiary of Advantage Health (the
"Advantage Health Common Stock" or the "Advantage Health Shares"), will be
cancelled, and the holders of such Advantage Health Shares will be entitled to
receive that number of shares of HEALTHSOUTH Common Stock determined by dividing
$47.50 by the Base Period Trading Price (as defined below), as may be adjusted
as provided below, computed to four
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decimal places (the "Exchange Ratio") for each Advantage Health Share so held;
provided, however, that if the Base Period Trading Price is greater than $34.50,
then the Exchange Ratio shall be 1.3768; and provided further, that if the Base
Period Trading Price is less than $28.50, then the Exchange Ratio shall be
1.6667.
The term "Base Period Trading Price" means the average of the daily closing
prices per share of HEALTHSOUTH Common Stock for the 20 consecutive trading days
on which such shares are actually traded ending at the close of business on the
second New York Stock Exchange trading day before the date of the Special
Meeting. Advantage Health stockholders will receive cash (without interest) in
lieu of fractional shares of HEALTHSOUTH Common Stock. For a more complete
description of the terms of the Merger, see "THE MERGER".
The Plan provides that, at the Effective Time, all holders of options to
purchase Advantage Health Common Stock which are then outstanding, whether or
not then exercisable (the "Advantage Health Stock Options"), shall receive at or
as promptly as practicable after the Closing (as defined in the Plan) a number
of shares of HEALTHSOUTH Common Stock determined as follows: (i) if the Base
Period Trading Price is neither greater than $34.50 nor less than $28.50, that
number of shares which is equal to the quotient obtained by dividing (a) $47.50
minus the exercise price of such option (the "spread") by (b) the Base Period
Trading Price, with such quotient then being multiplied by the number of shares
of Advantage Health Common Stock which are subject to such option, or (ii) if
the Base Period Trading Price is greater than $34.50 or less than $28.50, that
number of shares calculated as provided in the preceding clause (i), except that
the spread shall be divided by $34.50 or $28.50, as the case may be (rather than
the Base Period Trading Price), prior to being multiplied by the number of
shares of Advantage Health Common Stock subject to such option. The Board of
Directors of Advantage Health, based upon the advice of its independent
compensation consultant, believes that the foregoing formula represents the fair
value of the Advantage Health Stock Options.
This Prospectus-Proxy Statement and the form of Proxy are first being mailed
to securityholders of Advantage Health on or about February 12, 1996.
See "Risk Factors" at page 20 for a discussion of certain factors that should
be considered by holders of shares of Advantage Health Common Stock and
Advantage Health Stock Options.
THE SECURITIES TO BE ISSUED HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION (THE "SEC") OR BY ANY STATE
SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS-PROXY STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS-PROXY STATEMENT IS FEBRUARY 12, 1996.
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AVAILABLE INFORMATION
HEALTHSOUTH has filed a Registration Statement on Form S-4 under the
Securities Act of 1933, as amended (the "Securities Act"), with the Securities
and Exchange Commission (the "SEC") covering the shares of HEALTHSOUTH Common
Stock to be issued in connection with the Merger (including exhibits and
amendments thereto, the "Registration Statement"). As permitted by the rules and
regulations of the SEC, this Prospectus-Proxy Statement omits certain
information contained in the Registration Statement. For further information
pertaining to the securities offered hereby, reference is made to the
Registration Statement.
HEALTHSOUTH and Advantage Health are subject to the information requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file periodic reports, proxy statements and other
information with the SEC relating to their respective businesses, financial
statements and other matters. The Registration Statement, as well as such
reports, proxy statements and other information, may be inspected at the public
reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549 and should be available for inspection
and copying at the regional offices of the SEC located at Seven World Trade
Center, Suite 1300, New York, New York, 10048; 5670 Wilshire Boulevard, 11th
Floor, Los Angeles, California 90036-3648; and Citicorp Center, 500 West Madison
Street, Room 1400, Chicago, Illinois 60661-2511. Copies of such material can be
obtained at prescribed rates by writing to the SEC, Public Reference Section,
450 Fifth Street, N.W., Washington, D.C. 20549. The HEALTHSOUTH Common Stock is
listed on the New York Stock Exchange (the "NYSE"), and the Registration
Statement and other information with respect to HEALTHSOUTH should be available
for inspection at the library of the New York Stock Exchange, Inc., 20 Broad
Street, 7th Floor, New York, New York 10005. The Advantage Health Common Stock
is listed on the Nasdaq National Market, and the Registration Statement and
other information with respect to Advantage Health may be obtained by calling
the Nasdaq Public Reference Room Disclosure Information Group at (800) 638-8241
or (202) 728-8298.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
This Prospectus-Proxy Statement incorporates documents by reference which are
not presented herein or delivered herewith. Copies of such reports, proxy
statements and other information filed by HEALTHSOUTH, other than exhibits to
such documents unless such exhibits are specifically incorporated herein by
reference, are available without charge, upon written or oral request, from the
Secretary of HEALTHSOUTH Corporation, Two Perimeter Park South, Birmingham,
Alabama 35243, telephone (205) 967-7116. Copies of such reports, proxy
statements and other information filed by Advantage Health, other than exhibits
to such documents unless such exhibits are specifically incorporated herein by
reference, are available, without charge, upon written or oral request, from the
Secretary of Advantage Health Corporation, 304 Cambridge Road, Woburn,
Massachusetts 01801, telephone (617) 935-2500. In order to ensure timely
delivery of the documents, any request should be made by five days prior to the
Special Meeting.
There are hereby incorporated by reference into this Prospectus-Proxy
Statement and made a part hereof the following documents filed by HEALTHSOUTH:
1. HEALTHSOUTH's Annual Report on Form 10-K, as amended, for the fiscal
year ended December 31, 1994.
2. HEALTHSOUTH's Quarterly Reports on Form 10-Q, as amended, for the quarters
ended March 31, June 30 and September 30, 1995.
3. HEALTHSOUTH's Current Report on Form 8-K, as amended, filed January 13,
1995 (relating to the acquisition of ReLife, Inc.).
4. HEALTHSOUTH's Current Report on Form 8-K, as amended, filed February 1,
1995 (relating to the acquisition of Surgical Health Corporation).
5. HEALTHSOUTH's Current Report on Form 8-K, as amended, filed February 21,
1995 (relating to the acquisition of certain rehabilitation hospitals from
NovaCare, Inc.).
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6. HEALTHSOUTH's Current Report on Form 8-K filed August 15, 1995 (relating
to the acquisition of Surgical Health Corporation).
7. HEALTHSOUTH's Current Report on Form 8-K, as amended, filed September 7,
1995 (relating to the acquisition of Sutter Surgery Centers, Inc.).
8. HEALTHSOUTH's Current Report on Form 8-K, as amended, filed October 20,
1995 (relating to the acquisition of Surgical Care Affiliates, Inc.).
9. HEALTHSOUTH's Current Report on Form 8-K filed October 30, 1995 (relating
to the acquisition of Caremark Orthopedic Services Inc.).
10. HEALTHSOUTH's Current Report on Form 8-K filed November 13, 1995
(relating to the consummation of the acquisition of Sutter Surgery Centers,
Inc.).
11. HEALTHSOUTH's Current Report on Form 8-K, as amended, filed January 3,
1996 (relating to the acquisition of Advantage Health).
12. HEALTHSOUTH's Current Report on Form 8-K filed January 29, 1996 (relating
to the consummation of the acquisition of Surgical Care Affiliates, Inc.)
13. The description of HEALTHSOUTH's capital stock contained in HEALTHSOUTH's
Registration Statement on Form 8-A filed August 26, 1989.
14. The disclosure appearing under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing on pages 8-13 of the
Prospectus filed pursuant to Rule 424(b)(4) in connection with HEALTHSOUTH's
Registration Statement on Form S-3 (Commission File No. 3-62475).
15. HEALTHSOUTH's audited consolidated financial statements for the years
ended December 31, 1992, 1993 and 1994 and unaudited consolidated financial
statements for the nine months ended September 30, 1994 and 1995 appearing on
pages F-1 through F-27 of the Prospectus-Joint Proxy Statement included in
HEALTHSOUTH's Registration Statement on Form S-4 (Commission File No. 3-64935).
There are also hereby incorporated by reference into this Prospectus-Proxy
Statement and made a part hereof the following documents filed by Advantage
Health:
1. Advantage Health's Annual Report on Form 10-K, as amended, for the fiscal
year ended August 31, 1995.
2. Advantage Health's Current Report on Form 8-K filed December 29, 1995
(relating to the acquisition by HEALTHSOUTH).
3. Advantage Health's Quarterly Report on Form 10-Q for the quarter ended
November 30, 1995.
4. Advantage Health's Current Report on Form 8-K filed February 1, 1996
(relating to the acquisition of Harmarville Rehabilitation Center, Inc.).
All documents filed by HEALTHSOUTH and Advantage Health, respectively,
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the
date of this Prospectus-Proxy Statement and prior to the Closing Date of the
Merger shall be deemed to be incorporated by reference into this
Prospectus-Proxy Statement and to be made a part hereof from the date of the
filing of such documents. Any statement contained in a document incorporated by
reference herein shall be deemed to be modified or superseded for the purpose
hereof to the extent that a statement contained herein (or in any other
subsequently filed document which also is incorporated by reference herein) is
modified or superseded by such statement. Any statement so modified or
superseded shall not be deemed to constitute a part hereof, except as so
modified or superseded.
All information contained in this Prospectus-Proxy Statement or incorporated
herein by reference with respect to HEALTHSOUTH was supplied by HEALTHSOUTH, and
all information contained in this Prospectus-Proxy Statement or incorporated
herein by reference with respect to Advantage Health was supplied by Advantage
Health. Although neither HEALTHSOUTH nor Advantage Health has actual knowledge
that would indicate that any statements or information (including financial
statements)
4
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relating to the other party contained or incorporated by reference herein are
inaccurate or incomplete, neither HEALTHSOUTH nor Advantage Health warrants the
accuracy or completeness of such statements or information as they relate to the
other party.
No person is authorized to give any information or to make any representation
not contained in this Prospectus-Proxy Statement, and, if given or made, such
information or representation should not be relied upon as having been
authorized. Neither the delivery of this Prospectus-Proxy Statement nor any
distribution of the securities to which this Prospectus-Proxy Statement relates
shall, under any circumstances, create any implication that there has been no
change in the information concerning HEALTHSOUTH or Advantage Health contained
in this Prospectus-Proxy Statement since the date of such information. This
Prospectus-Proxy Statement does not constitute an offer to sell, or a
solicitation of an offer to purchase, any securities other than the securities
to which it relates, or an offer to sell, or a solicitation of an offer to
purchase, the securities offered by this Prospectus-Proxy Statement in any
jurisdiction in which such an offer or solicitation is not lawful.
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TABLE OF CONTENTS
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AVAILABLE INFORMATION ......................................................................... 3
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE ............................................. 3
SUMMARY OF PROSPECTUS-PROXY STATEMENT.......................................................... 8
RISK FACTORS................................................................................... 19
THE SPECIAL MEETING ........................................................................... 19
General ...................................................................................... 19
Date, Place and Time ......................................................................... 19
Record Date; Quorum .......................................................................... 19
Vote Required ................................................................................ 19
Voting and Revocation of Proxies ............................................................. 20
Solicitation of Proxies ...................................................................... 20
THE MERGER..................................................................................... 21
Terms of the Merger .......................................................................... 21
Background of the Merger ..................................................................... 22
Reasons for the Merger; Recommendations of Advantage Health's Board of Directors ............. 24
Opinion of Financial Advisor to Advantage Health.............................................. 25
Effective Time of the Merger ................................................................. 28
Exchange of Certificates and Options.......................................................... 28
Representations and Warranties................................................................ 29
Conditions to the Merger ..................................................................... 30
Regulatory Approvals ......................................................................... 31
Business Pending the Merger .................................................................. 32
Waiver and Amendment ......................................................................... 33
Termination .................................................................................. 33
Break-up Fee; Third Party Bids................................................................ 33
Interests of Certain Persons in the Merger ................................................... 33
Indemnification and Insurance................................................................. 35
Accounting Treatment ......................................................................... 36
Certain Federal Income Tax Consequences ...................................................... 36
Resale of HEALTHSOUTH Common Stock by Affiliates ............................................. 37
No Appraisal Rights .......................................................................... 38
No Solicitation of Transactions............................................................... 38
Expenses...................................................................................... 38
NYSE Listing.................................................................................. 38
SELECTED CONSOLIDATED FINANCIAL DATA--HEALTHSOUTH.............................................. 39
SELECTED CONSOLIDATED FINANCIAL DATA--ADVANTAGE HEALTH......................................... 40
PRO FORMA CONDENSED FINANCIAL INFORMATION ..................................................... 41
BUSINESS OF HEALTHSOUTH ....................................................................... 52
General....................................................................................... 52
Company Strategy.............................................................................. 52
Patient Care Services......................................................................... 53
Marketing of Facilities and Services.......................................................... 56
Sources of Revenues........................................................................... 57
Competition................................................................................... 58
Regulation.................................................................................... 58
Insurance..................................................................................... 62
Employees..................................................................................... 62
Legal Proceedings............................................................................. 63
Properties.................................................................................... 63
6
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PAGE
------
BUSINESS OF ADVANTAGE HEALTH .................................................................. 69
General....................................................................................... 69
Rehabilitation/Multi-Use Hospitals............................................................ 74
Managed Rehabilitation and Sub-Acute Contracts................................................ 74
Outpatient Rehabilitation Centers............................................................. 75
Home Healthcare............................................................................... 76
Senior Living Facilities...................................................................... 76
Sources of Revenue and Reimbursement.......................................................... 76
Competition................................................................................... 77
Regulation.................................................................................... 78
Insurance..................................................................................... 79
Employees and Medical Staff................................................................... 79
Properties.................................................................................... 80
Legal Proceedings............................................................................. 80
ACQUISITION OF ASSETS BY ADVANTAGE HEALTH...................................................... 81
ADVANTAGE HEALTH AND HARMARVILLE UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION ........... 81
PRINCIPAL STOCKHOLDERS OF ADVANTAGE HEALTH..................................................... 87
DESCRIPTION OF CAPITAL STOCK OF HEALTHSOUTH ................................................... 88
Common Stock ................................................................................. 88
Fair Price Provision ......................................................................... 88
Section 203 of the DGCL....................................................................... 89
Preferred Stock .............................................................................. 89
Transfer Agent................................................................................ 89
COMPARISON OF RIGHTS OF ADVANTAGE HEALTH AND HEALTHSOUTH STOCKHOLDERS ......................... 90
Classes and Series of Capital Stock........................................................... 90
Size and Election of the Board of Directors .................................................. 90
Removal of Directors ......................................................................... 91
Other Voting Rights........................................................................... 91
Dividends..................................................................................... 91
Conversion and Dissolution.................................................................... 92
Fair Price Provision ......................................................................... 92
Amendment or Repeal of the Certificate of Incorporation ...................................... 93
Special Meeting of Stockholders............................................................... 93
Liability of Directors........................................................................ 94
Indemnification of Directors and Officers..................................................... 94
OPERATIONS AND MANAGEMENT OF HEALTHSOUTH AFTER THE MERGER...................................... 95
Operations ................................................................................... 95
Management ................................................................................... 95
EXPERTS ....................................................................................... 95
LEGAL MATTERS.................................................................................. 95
ADDITIONAL INFORMATION......................................................................... 95
Other Business................................................................................ 95
Stockholder Proposals......................................................................... 96
ANNEXES:
A. Agreement and Plan of Merger .............................................................. A-1
B. Opinion of Alex. Brown & Sons Incorporated................................................. B-1
C. Harmarville Rehabilitation Center, Inc. and Subsidiaries Audited Consolidated Financial
Statements................................................................................. C-1
</TABLE>
7
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SUMMARY OF PROSPECTUS-PROXY STATEMENT
The following is a summary of certain information contained elsewhere in
this Prospectus-Proxy Statement. Certain capitalized terms used in this Summary
are defined elsewhere in this Prospectus-Proxy Statement. Reference is made to,
and this Summary is qualified in its entirety by, the more detailed information
contained in this Prospectus-Proxy Statement, the Annexes hereto and the
documents incorporated by reference herein.
THE COMPANIES
HEALTHSOUTH. HEALTHSOUTH is the nation's largest provider of outpatient and
rehabilitative healthcare services. It provides these services through its
national network of outpatient and inpatient rehabilitation facilities,
outpatient surgery centers, medical centers and other healthcare facilities.
HEALTHSOUTH believes that it provides patients, physicians and payors with
high-quality health care services at significantly lower costs than traditional
inpatient hospitals. Additionally, HEALTHSOUTH's national network, reputation
for quality and focus on outcomes has enabled it to secure contracts with
national and regional managed care payors. At January 31, 1996, HEALTHSOUTH had
over 700 patient care locations in 42 states, the District of Columbia and
Ontario, Canada. See "BUSINESS OF HEALTHSOUTH".
At September 30, 1995, HEALTHSOUTH had consolidated assets of approximately
$2,150,680,000 and consolidated stockholders' equity of approximately
$547,547,000, and employed approximately 21,900 persons.
HEALTHSOUTH was incorporated under the laws of Delaware in 1984. Its
principal executive offices are located at Two Perimeter Park South, Birmingham,
Alabama 35243, and its telephone number is (205) 967-7116.
Advantage Health. Advantage Health operates the largest network (based on the
number of inpatient beds and sites of service) of comprehensive medical
rehabilitation facilities, and is a leading provider of the continuum of
post-acute care services, in New England. At January 31, 1996, Advantage
Health's network of a total of 136 sites of service included four freestanding
rehabilitation hospitals, one freestanding multi-use hospital, one nursing home,
68 outpatient rehabilitation facilities, 14 inpatient managed rehabilitation
units, 24 rehabilitation services management contracts and six managed sub-acute
rehabilitation units also located in general acute-care hospitals. As part of
its continuum of post-acute care services, Advantage Health delivers a full
array of home healthcare services (including comprehensive rehabilitation
services) to individuals through its 12 home healthcare locations and six senior
living facilities in four states. See "BUSINESS OF ADVANTAGE HEALTH".
At November 30, 1995, Advantage Health had consolidated assets of
$137,318,000 and consolidated stockholders' equity of $60,060,000, and employed
approximately 6,500 persons.
Advantage Health was incorporated under the laws of Massachusetts in 1982,
and reincorporated in Delaware in 1990. The principal executive offices of
Advantage Health are located at 304 Cambridge Road, Woburn, Massachusetts,
01801, and its telephone number is (617) 935-2500.
Aladdin Acquisition Corporation. The Subsidiary is a direct, wholly-owned
subsidiary of HEALTHSOUTH and has not engaged in any business activity unrelated
to the Merger. The principal executive offices of the Subsidiary are located at
Two Perimeter Park South, Birmingham, Alabama 35243, and its telephone number is
(205) 967-7116.
RECENT DEVELOPMENTS
HEALTHSOUTH. On October 27, 1995, HEALTHSOUTH consummated the acquisition of
Sutter Surgery Centers, Inc. ("SSCI") in a transaction accounted for as a
pooling of interests. In the transaction, SSCI stockholders received an
aggregate of 1,776,002 shares of HEALTHSOUTH Common Stock. SSCI operated 12
ambulatory surgery centers located in California, Arizona and Utah.
8
<PAGE>
On December 6, 1995, HEALTHSOUTH consummated the acquisition of Caremark
Orthopedic Services Inc. ("COSI"). Under the agreement, COSI's sole stockholder
was paid $127,500,000, subject to certain adjustments, for the transfer of all
of the issued and outstanding shares of COSI to HEALTHSOUTH. COSI operated over
120 outpatient rehabilitation facilities in 13 states.
On January 17, 1996, HEALTHSOUTH consummated the acquisition of Surgical Care
Affiliates, Inc. ("SCA") in a transaction accounted for as a pooling of
interests. In the transaction, SCA stockholders received an aggregate of
45,928,339 shares of HEALTHSOUTH Common Stock. SCA operated 67 outpatient
surgery centers in 24 states.
Advantage Health. On December 14, 1995, Advantage Health executed an Asset
Purchase Agreement with The Federation of Independent School Alumnae (the
"Federation"), Harmarville Rehabilitation Center, Inc. ("HRC") (the Federation
and HRC being referred to collectively herein as "Harmarville") and Advantage
Health Harmarville Rehabilitation Corporation ("AHHRC"), pursuant to which AHHRC
will acquire certain assets and assume certain liabilities of Harmarville (the
"Harmarville Acquisition"). Subject to the terms and conditions set forth in
such Asset Purchase Agreement, the purchase price for the Harmarville assets is
approximately $20,858,000 plus the assumption of certain liabilities. The
Harmarville Acquisition includes the 202-bed Harmarville Rehabilitation Center
located in Pittsburgh, Pennsylvania, as well as certain satellite outpatient
rehabilitation centers. The consummation of the transaction is subject to
various regulatory approvals, including clearance under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), approval of both
a merger of the Federation and HRC immediately prior to the closing of the
Harmarville Acquisition and the Harmarville Acquisition by members of the
Federation, approval of the transaction by the Court of Common Pleas of
Allegheny County (Pennsylvania), Orphans Court Division, and to the satisfaction
of certain other conditions. A copy of the Harmarville Rehabilitation Center,
Inc. and Subsidiaries Audited Consolidated Financial Statements is attached as
Annex C to this Prospectus-Proxy Statement and incorporated herein by reference.
See "ACQUISITION OF ASSETS BY ADVANTAGE HEALTH" and "ADVANTAGE HEALTH AND
HARMARVILLE UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION".
THE SPECIAL MEETING
The Special Meeting of Advantage Health's stockholders (the "Special
Meeting") to consider and vote on a proposal to approve the Plan will be held on
March 14, 1996, at 9:30 a.m., Eastern Time, at the Burlington Marriott, One Mall
Road, Burlington, Massachusetts 01803. Only holders of record of Advantage
Health Shares at the close of business on February 7, 1996 (the "Advantage
Health Record Date"), will be entitled to notice of and to vote at the Special
Meeting. At such date, there were outstanding and entitled to vote 5,653,114
shares of Advantage Health Common Stock. Each issued and outstanding Advantage
Health Share is entitled to one vote on each matter to be presented at the
Special Meeting. For additional information relating to the Special Meeting, see
"THE SPECIAL MEETING".
VOTE REQUIRED
Approval of the Plan by the stockholders of Advantage Health requires the
affirmative vote of the holders of a majority of the outstanding shares of
Advantage Health Common Stock entitled to vote thereon. Accordingly, approval of
the Plan at the Special Meeting will require the affirmative vote of the holders
of at least 2,826,558 shares of Advantage Health Common Stock.
As of the Advantage Health Record Date, directors and executive officers of
Advantage Health and their affiliates beneficially owned an aggregate of
1,891,803 shares of Advantage Health Common Stock (excluding shares issuable
upon exercise of options), or approximately 33%, of the Advantage Health Shares
outstanding on such date.
9
<PAGE>
In the event that the Plan is not approved by Advantage Health stockholders,
the Plan may be terminated by HEALTHSOUTH or Advantage Health in accordance with
its terms. Such approval is also a condition to HEALTHSOUTH's and Advantage
Health's obligations to consummate the Merger. See "THE SPECIAL MEETING -- Vote
Required", "THE MERGER -- Conditions to the Merger" and "-- Termination".
As a condition to entering into the Plan, HEALTHSOUTH required that Raymond
J. Dunn, III, Chairman of the Board, President and Chief Executive Officer of
Advantage Health, enter into a Proxy Agreement with HEALTHSOUTH, whereby he
agreed that, until the date on which the Plan is terminated and following such
termination during such time as a Third Party Acquisition Event (as defined
herein) exists with respect to Advantage Health, but in no event after the close
of business one year following the termination of the Plan, he will vote an
aggregate of 819,000 shares of Advantage Health Common Stock (a) in favor of
approval of the Plan and the Merger at every meeting of the stockholders of
Advantage Health at which such matters are considered and at every adjournment
thereof, and (b) against any other proposal for any reorganization. The shares
subject to the Proxy Agreement represent approximately 14.5% of the votes
eligible to be cast at the Special Meeting as of the Advantage Health Record
Date. In addition, Robert E. Spencer, Chief Financial Officer, Treasurer,
Secretary and a Director of Advantage Health, and Michael F. Curran, Ph.D., a
Director of Advantage Health, have provided letters to the Board of Directors of
Advantage Health indicating that they intend to vote at the Special Meeting all
shares of Advantage Health Common Stock owned by them in favor of approval of
the Plan and the Merger. See "THE MERGER -- Interests of Certain Persons in the
Merger".
THE MERGER
Terms of the Merger. Advantage Health will be acquired by HEALTHSOUTH
pursuant to and subject to the terms and conditions of the Plan, which provides
that at the effective time of the Merger (the "Effective Time"), the Subsidiary
will merge with and into Advantage Health with Advantage Health being the
Surviving Corporation. The Certificate of Incorporation of Advantage Health and
the Bylaws of the Subsidiary in effect at the Effective Time will govern the
Surviving Corporation until amended or repealed in accordance with applicable
law. At the Effective Time, each outstanding Advantage Health Share (excluding
shares held by Advantage Health and any of its subsidiaries) will be converted
into the right to receive that number of shares of HEALTHSOUTH Common Stock (the
"Merger Consideration") determined by dividing $47.50 by the Base Period Trading
Price (as defined below), as may be adjusted as provided below, computed to four
decimal places (the "Exchange Ratio"), for each Advantage Health Share so held;
provided, however, that if the Base Period Trading Price is greater than $34.50,
then the Exchange Ratio shall be 1.3768; and provided further that if the Base
Period Trading Price is less than $28.50, then the Exchange Ratio shall be
1.6667.
The term "Base Period Trading Price" is defined in the Plan as the average of
the daily closing prices per share of HEALTHSOUTH Common Stock for the 20
consecutive trading days on which such shares are actually traded ending at the
close of business on the second New York Stock Exchange trading day before the
date of the Special Meeting. The daily closing price per share shall be the
closing price for NYSE-Composite Transactions as reported in The Wall Street
Journal-Eastern Edition or, if not reported therein, any other authoritative
source. Fractional shares of HEALTHSOUTH Common Stock will not be issuable in
connection with the Merger. Advantage Health stockholders will receive cash
(without interest) in lieu of fractional shares of HEALTHSOUTH Common Stock. See
"THE MERGER" and "DESCRIPTION OF CAPITAL STOCK OF HEALTHSOUTH".
10
<PAGE>
The following table indicates the Exchange Ratio assuming various Base Period
Trading Prices, with the resulting "value" to be received for each Advantage
Health Share:
VALUE TO BE
BASE PERIOD RECEIVED FOR
TRADING PRICE EXCHANGE RATIO EACH ADVANTAGE HEALTH SHARE
(COL. 1) (COL. 2) (COL. 1 X COL. 2)
- --------------- ---------------- ----------------------------
25.50........ 1.6667 42.50
26.50........ 1.6667 44.17
27.50........ 1.6667 45.83
28.50........ 1.6667 47.50
29.50........ 1.6102 47.50
30.50........ 1.5574 47.50
31.50........ 1.5079 47.50
32.50........ 1.4615 47.50
33.50........ 1.4179 47.50
34.50........ 1.3768 47.50
35.50........ 1.3768 48.88
36.50........ 1.3768 50.25
37.50........ 1.3768 51.63
The Plan provides that, at the Effective Time, all holders of options to
purchase Advantage Health Common Stock which are then outstanding, whether or
not then exercisable (the "Advantage Health Stock Options"), shall receive at or
as promptly as practicable after the Closing (as defined in the Plan) a number
of shares of HEALTHSOUTH Common Stock determined as follows: (i) if the Base
Period Trading Price is neither greater than $34.50 nor less than $28.50, that
number of shares which is equal to the quotient obtained by dividing (a) $47.50
minus the exercise price of such option (the "spread"), by (b) the Base Period
Trading Price, with such quotient then being multiplied by the number of shares
of Advantage Health Common Stock which are subject to such option, or (ii) if
the Base Period Trading Price is greater than $34.50 or less than $28.50, that
number of shares calculated as provided in the preceding clause (i) except that
the spread shall be divided by $34.50 or $28.50, as the case may be (rather than
the Base Period Trading Price), prior to being multiplied by the number of
shares of Advantage Health Common Stock subject to such option. The Board of
Directors of Advantage Health, based upon the advice of its independent
compensation consultant, believes that the foregoing formula represents the fair
value of the Advantage Health Stock Options.
Stockholders and option holders may call 1-800-433-3868 beginning at 5:00
p.m., Eastern Time, on March 12, 1996 for information concerning the Exchange
Ratio as finally determined.
Recommendation of the Board of Directors. The Board of Directors of Advantage
Health has adopted and approved the Plan and has recommended a vote FOR approval
of the Plan. The Board of Directors believes the Plan is fair to and in the best
interests of the stockholders of Advantage Health.
The Board of Directors of Advantage Health believes that the Plan is in the
best interests of the Advantage Health stockholders based on a number of
factors, including, without limitation and without assigning relative weights
thereto, the following factors:
(i) the consideration offered by HEALTHSOUTH represented significant
appreciation over the highest stock price for the Advantage Health Common
Stock since its initial public offering, and there could be no assurance that
Advantage Health's performance would result, within a reasonable time, in a
market price greater in value than the Merger Consideration, (ii) a
combination with HEALTHSOUTH would likely enable Advantage Health to benefit
from, rather that be adversely affected by, further industry consolidation,
(iii) HEALTH
11
<PAGE>
SOUTH's managed care relationships enhance Advantage Health's ability to
compete for large managed-care contracts, (iv) HEALTHSOUTH's financial and
management resources would be advantageous to Advantage Health's healthcare
partners, (v) HEALTHSOUTH's management infrastructure would enhance Advantage
Health's ability to deliver services, (vi) the expanded capacity for and
diversification of offered services in a combined company would create
opportunities for cross-referrals, (vii) the combined company would offer
additional opportunities to Advantage Health's employees, (viii) the opinion
of Alex. Brown & Sons Incorporated ("Alex. Brown") that as of December 15,
1995, subject to certain assumptions, factors and limitations set forth in
such opinion, the Merger Consideration was fair, from a financial point of
view and (ix) the terms and conditions with HEALTHSOUTH made prompt
consummation of the Merger substantially likely and significantly more likely
than alternative transactions.
See "THE MERGER -- Reasons for the Merger; Recommendation of Advantage
Health's Board of Directors".
Opinion of Financial Advisor to Advantage Health. Alex. Brown has served as
financial advisor to Advantage Health in connection with the Merger and has
delivered its written opinion, dated December 15, 1995, to Advantage Health
that, as of such date, the consideration to be received by the holders of
Advantage Health Common Stock pursuant to the Plan is fair from a financial
point of view to such stockholders. Alex. Brown subsequently confirmed such
opinion in a written opinion dated the date of this Prospectus-Proxy Statement.
A copy of the opinion of Alex. Brown dated the date of this Prospectus-Proxy
Statement is attached as Annex B to this Prospectus-Proxy Statement and
incorporated herein by reference. Advantage Health stockholders are urged to,
and should, read such opinion carefully in its entirety in conjunction with this
Prospectus-Proxy Statement for assumptions made, matters considered and the
limits of the review by Alex. Brown. See "THE MERGER -- Opinion of Financial
Advisor to Advantage Health".
Effective Time of the Merger. The Merger will become effective upon the
filing of a Certificate of Merger by the Subsidiary and Advantage Health under
the General Corporation Law of the State of Delaware (the "DGCL"), or at such
later time as may be specified in such Certificate of Merger. The Plan requires
that this filing be made, subject to satisfaction of the conditions to the
respective obligations of each party to consummate the Merger, no later than two
business days after satisfaction or waiver of the various conditions to the
Merger set forth in the Plan, or at such other time as may be agreed by
HEALTHSOUTH and Advantage Health. See "THE MERGER -- Effective Time of the
Merger" and "-- Conditions to the Merger".
Exchange of Certificates; Issuance of Stock for Options. As soon as
reasonably practicable after the Effective Time, transmittal materials will be
mailed to each holder of record of Advantage Health Shares for use in exchanging
such holder's stock certificates for certificates evidencing shares of
HEALTHSOUTH Common Stock and for receiving cash in lieu of fractional shares and
any dividends or other distributions to which such holder is entitled as a
result of the Merger. STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH
THEIR PROXY CARDS.
As soon as reasonably practicable after the Effective Time of the Merger,
HEALTHSOUTH shall deliver to the holders of Advantage Health Stock Options
appropriate notices setting forth such holders' rights under the Plan and shall
cause appropriate certificates for shares of HEALTHSOUTH Common Stock to be
issued to each such holder.
See "THE MERGER -- Exchange of Certificates and Options".
Representations and Warranties. The Plan contains certain representations
and warranties made by each of the parties thereto. See "THE MERGER --
Representations and Warranties".
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<PAGE>
Conditions to the Merger. The obligation of each of HEALTHSOUTH, the
Subsidiary and Advantage Health to consummate the Merger is subject to certain
conditions, including approval of the Plan by the Advantage Health stockholders.
See "THE MERGER -- Conditions to the Merger".
Regulatory Approvals. The HSR Act provides that certain business mergers
(including the Merger) may not be consummated until certain information has been
furnished to the Department of Justice (the "DOJ") and the Federal Trade
Commission (the "FTC") and certain waiting period requirements have been
satisfied. On January 22, 1996, HEALTHSOUTH and Advantage Health made their
respective filings with the DOJ and the FTC with respect to the Plan. Under the
HSR Act, the filings commenced a 30-day waiting period during which the Merger
could not be consummated, which waiting period will expire on February 21, 1996
unless extended by a request for additional information. Notwithstanding the
expiration of the HSR Act waiting period, at any time before or after the
Effective Time, the FTC, the DOJ or others could take action under the antitrust
laws, including seeking to enjoin the consummation of the Merger or seeking the
divestiture by HEALTHSOUTH of all or any part of the stock or assets of
Advantage Health. There can be no assurance that a challenge to the Merger on
antitrust grounds will not be made or, if such a challenge were made, that it
would not be successful.
The operations of each Company are subject to a substantial body of federal,
state, local and accrediting body laws, rules and regulations relating to the
conduct, licensing and development of healthcare businesses and facilities. As a
result of the Merger, certain of the licenses for facilities operated by
Advantage Health will be deemed to have been transferred, requiring the consents
or approvals of various state licensing and/or health planning agencies. In some
instances, new licenses will be required to be obtained. In addition, certain of
the arrangements between Advantage Health and third-party payors may be deemed
to have been transferred, requiring the approval and consent of such payors. See
"THE MERGER -- Regulatory Approvals".
Business Pending the Merger. The Plan provides that, until the Effective
Time, except as provided in the Plan, Advantage Health will use its reasonable
best efforts to preserve intact its present business organizations, to keep
available to HEALTHSOUTH and the Surviving Corporation the services of its
present employees and to preserve the goodwill of customers, suppliers and
others having business dealings with it. See "THE MERGER -- Business Pending the
Merger".
Amendment. The Plan provides that, at any time prior to the Effective Time,
the parties may, under certain circumstances, amend or otherwise change the
Plan. See "THE MERGER -- Waiver and Amendment".
Termination. The Plan may be terminated at any time prior to the Effective
Time, whether before or after approval of the Plan by the stockholders of
Advantage Health, under certain circumstances which are set forth in the Plan.
See "THE MERGER -- Termination".
Break-up Fee; Third Party Bids. If the Plan is terminated by Advantage Health
pursuant to a determination by Advantage Health's Board of Directors, in the
exercise of its fiduciary duties under applicable law, not to recommend the
Merger to the holders of Advantage Health Shares, or the Advantage Health Board
of Directors shall have withdrawn such recommendation, or shall have approved,
recommended or endorsed any Acquisition Transaction (as defined in the Plan)
other than the Plan, and within one year after the effective date of such
termination Advantage Health is the subject of a Third Party Acquisition Event
(as defined in the Plan), then at the time of consummation of such a Third Party
Acquisition Event Advantage Health shall pay to HEALTHSOUTH a break-up fee of
$10,000,000. See "THE MERGER -- Break-up Fee; Third Party Bids".
Interests of Certain Persons in the Merger. In considering the recommendation
of the Board of Directors of Advantage Health with respect to the Plan and the
transactions contemplated thereby,
13
<PAGE>
stockholders of Advantage Health should be aware that certain members of the
management of Advantage Health and its Board of Directors have certain interests
in the Merger in addition to the interests of stockholders generally.
Concurrently with the execution of the Plan, HEALTHSOUTH entered into a proxy
agreement (the "Proxy Agreement") with Raymond J. Dunn, III, Chairman of the
Board, President and Chief Executive Officer of Advantage Health. HEALTHSOUTH
has agreed to cause Mr. Dunn to be appointed as a Director of HEALTHSOUTH
immediately following the Effective Time.
In addition, at the Closing, HEALTHSOUTH has agreed to cause Advantage Health
to enter into Employment Agreements with each of Mr. Dunn and Robert E. Spencer,
Chief Financial Officer, Treasurer, Secretary and a director of Advantage
Health. HEALTHSOUTH has also agreed, at or as promptly as practicable after the
Closing, to cause Advantage Health to offer to enter into Employment Agreements
with each of the following persons currently serving Advantage Health in the
capacities indicated: Michael F. Curran, Ph.D., director; Gerald E. Borgal,
Chief Operating Officer, Medical Division and Chief Executive Officer of Region
II; Ellen Ferrante, Chief Executive Officer of Region III; Carolyn Markey, Chief
Executive Officer, Home Health Division; and Gregg Stanley, Chief Executive
Officer of Region I. Certain members of management of Advantage Health and
members of the Advantage Health Board of Directors also hold Advantage Health
Stock Options which will be exchanged for HEALTHSOUTH Common Stock at the
Effective Time.
See "THE MERGER -- Interests of Certain Persons in the Merger".
Accounting Treatment. It is intended that the Merger will be accounted for as
a pooling of interests. It is a condition to the consummation of the Merger that
each of HEALTHSOUTH and Advantage Health receive a letter from Ernst & Young LLP
regarding that firm's concurrence with the conclusions of the managements of
HEALTHSOUTH and Advantage Health, respectively, as to the appropriateness of
pooling-of-interests accounting for the Merger under Accounting Principles Board
Opinion No. 16 ("APB 16") if closed and consummated in accordance with the Plan.
See "THE MERGER -- Accounting Treatment" and "PRO FORMA CONDENSED FINANCIAL
INFORMATION".
Certain Federal Income Tax Consequences. The Merger is intended to qualify as
a reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"). If the Merger so qualifies, no gain or
loss will be recognized by holders of Advantage Health Shares upon their receipt
of HEALTHSOUTH Common Stock in exchange for their Advantage Health Shares,
except with respect to cash received in lieu of fractional shares. The
obligation of Advantage Health and HEALTHSOUTH to consummate the Merger is
conditioned upon their receipt of opinions from their respective counsel to the
effect that the Merger will qualify as a reorganization within the meaning of
Section 368(a) of the Code. In addition, holders of Advantage Health Stock
Options will recognize ordinary income upon the receipt of HEALTHSOUTH Common
Stock provided to offset the cancellation of such stock options. Each holder of
Advantage Health Shares and each holder of Advantage Health Stock Options is
urged to consult his or her personal tax and financial advisors concerning the
federal income tax consequences of the Merger, as well as any state, local,
foreign or other tax consequences of the Merger, based upon such holder's own
particular facts and circumstances. See "THE MERGER -- Certain Federal Income
Tax Consequences".
Resale Restrictions. All shares of HEALTHSOUTH Common Stock received by
Advantage Health stockholders and option holders in the Merger will be freely
transferable, except that shares of HEALTHSOUTH Common Stock received by persons
who are deemed to be "affiliates" (as such term is defined under the Securities
Act) of Advantage Health at the time of the Special Meeting may be resold by
them only in certain permitted circumstances. See "THE MERGER -- Resale of
HEALTHSOUTH Common Stock by Affiliates".
14
<PAGE>
Appraisal Rights. Holders of Advantage Health Common Stock are not
entitled to appraisal rights under the DGCL with respect to the Merger. See
"THE MERGER -- No Appraisal Rights".
NYSE Listing. A listing application will be filed with the NYSE to list the
shares of HEALTHSOUTH Common Stock to be issued to the Advantage Health
stockholders and option holders in the Merger. Although no assurance can be
given that the NYSE will accept such shares of HEALTHSOUTH Common Stock for
listing, HEALTHSOUTH and Advantage Health anticipate that these shares will
qualify for listing. It is a condition to the obligation of HEALTHSOUTH, the
Subsidiary and Advantage Health to consummate the Merger that such shares of
HEALTHSOUTH Common Stock be approved for listing on the NYSE upon official
notice of issuance at the Effective Time. See "THE MERGER -- NYSE Listing".
MARKET AND MARKET PRICE
The HEALTHSOUTH Common Stock is listed under the symbol HRC on the NYSE. Set
forth below are the closing prices per share of HEALTHSOUTH Common Stock on the
NYSE on (i) December 15, 1995, the last business day preceding public
announcement of the Merger, and (ii) February 8, 1996:
MARKET PRICE
PER SHARE OF
HEALTHSOUTH
DATE COMMON STOCK
---- ------------
December 15, 1995............... $30.88
February 8, 1996................ $33.25
Advantage Health Common Stock is listed under the symbol ADHC on the Nasdaq
National Market. Set forth below are the closing prices per share of Advantage
Health Common Stock on the Nasdaq National Market on (i) December 15, 1995, the
last business day preceding public announcement of the Merger, and (ii) February
8, 1996.
MARKET PRICE
PER SHARE OF
DATE ADVANTAGE HEALTH COMMON STOCK
---- -----------------------------
December 15, 1995............. $36.75
February 8, 1996.............. $47.13
The following table sets forth certain information as to the high and low
reported sale prices per share of HEALTHSOUTH Common Stock for the periods
indicated. The prices for HEALTHSOUTH Common Stock are as reported on the NYSE
Composite Transactions Tape. HEALTHSOUTH has never paid dividends on its capital
stock. All prices shown have been adjusted for a two-for-one stock split
effected in the form of a 100% stock dividend paid on April 17, 1995.
HEALTHSOUTH
COMMON STOCK
-------------
HIGH LOW
---- ---
1994
First Quarter........................ $16.13 $11.69
Second Quarter....................... 17.32 12.63
Third Quarter........................ 19.69 12.88
Fourth Quarter ...................... 19.32 16.13
1995
First Quarter ....................... $20.44 $18.06
Second Quarter....................... 21.63 16.32
Third Quarter........................ 25.75 17.25
Fourth Quarter ...................... 32.38 22.50
1996
First Quarter (through February 8,
1996)............................... $33.50 $27.00
15
<PAGE>
The following table sets forth certain information as to the high and low
reported sale prices per share of Advantage Health Common Stock for the periods
indicated, as obtained from the Nasdaq National Market.
ADVANTAGE HEALTH
COMMON STOCK
------------------
PERIOD HIGH LOW
------ ---- ---
Fiscal 1994
First Quarter......................... $ 13.25 $ 8.50
Second Quarter........................ 17.75 10.50
Third Quarter......................... 22.63 16.25
Fourth Quarter........................ 23.75 19.75
Fiscal 1995
First Quarter......................... $ 33.75 $ 22.25
Second Quarter ....................... 35.13 24.50
Third Quarter ........................ 29.25 23.25
Fourth Quarter ....................... 32.25 25.50
Fiscal 1996
First Quarter......................... $ 37.50 $ 32.50
Second Quarter (through February 8,
1996)................................ 47.13 33.50
As of January 31, 1996, there were approximately 1,797 record holders of
HEALTHSOUTH Common Stock. As of the Advantage Health Record Date, there were
approximately 64 record holders of Advantage Health Common Stock.
Holders of Advantage Health Shares and Advantage Health Stock Options are
advised to obtain current market quotations for HEALTHSOUTH Common Stock and
Advantage Health Common Stock. No assurance can be given as to the market price
of HEALTHSOUTH Common Stock at the Effective Time or at any other time.
OPERATIONS AND MANAGEMENT OF HEALTHSOUTH AFTER THE MERGER
Pursuant to the Plan, following the Effective Time, Advantage Health will be
a wholly-owned subsidiary of HEALTHSOUTH, and all of Advantage Health's
subsidiaries will be indirect subsidiaries of HEALTHSOUTH. HEALTHSOUTH will
continue its operations as prior to the Merger and will continue to be managed
by the same Board of Directors and executive officers, except that HEALTHSOUTH
has agreed to cause Raymond J. Dunn, III, Chairman of the Board, President and
Chief Executive Officer of Advantage Health, to be appointed to the Board of
Directors of HEALTHSOUTH immediately following the Effective Time. See "THE
MERGER -- Interests of Certain Persons in the Merger" and "OPERATIONS AND
MANAGEMENT OF HEALTHSOUTH AFTER THE MERGER".
16
<PAGE>
COMPARATIVE PER SHARE INFORMATION
The following summary presents selected comparative per share information (i)
for HEALTHSOUTH on a historical basis in comparison with pro forma equivalent
information giving effect to the Merger on a pooling-of-interests basis, and
(ii) for Advantage Health on a historical basis in comparison with its pro forma
equivalent information after giving effect to the Merger, including receipt of
shares of HEALTHSOUTH Common Stock to be issued in exchange for each Advantage
Health Share in accordance with the Exchange Ratio. This financial information
should be read in conjunction with the historical consolidated financial
statements of HEALTHSOUTH and Advantage Health and the related notes thereto
contained elsewhere herein or in documents incorporated herein by reference, and
in conjunction with the unaudited pro forma financial information appearing
elsewhere in this Prospectus-Proxy Statement. See "INCORPORATION OF CERTAIN
INFORMATION BY REFERENCE" and "PRO FORMA CONDENSED FINANCIAL INFORMATION".
HEALTHSOUTH has not paid cash dividends since inception. It is anticipated
that HEALTHSOUTH will retain all earnings for use in the expansion of the
business and therefore does not anticipate paying any cash dividends in the
foreseeable future. The payment of future dividends will be at the discretion of
the Board of Directors of HEALTHSOUTH and will depend, among other things, upon
HEALTHSOUTH's earnings, capital requirements, financial condition and debt
covenants.
The following information is not necessarily indicative of the combined
results of operations or combined financial position that would have resulted
had the Merger been consummated at the beginning of the periods indicated, nor
is it necessarily indicative of the combined results of operations in future
periods or future combined financial position.
Nine Months
Ended
Year Ended December 31, September 30,
---------------------- -------------
1992 1993 1994 1994 1995
(UNAUDITED)
Net income per common share:
HEALTHSOUTH(1)
Historical (primary)................ $.47 $ .22 $ .59 $ .54 $ .51
Historical (fully diluted)(2)....... N/A N/A .59 N/A .51
Pro forma combined (primary)........ $.53 $ .45 $ .61 $ .55 $ .59
Pro forma combined (fully
diluted)(2) ....................... N/A N/A .61 N/A .59
Advantage Health
Historical (primary)(3)............. $.96 $1.07 $1.37 $1.00 $1.23
Pro forma equivalent (primary)(4)... .80 .68 .92 .83 .89
Pro forma equivalent (fully
diluted)(4)........................ N/A N/A .92 N/A .89
AT SEPTEMBER
30,
1995
----------------
(UNAUDITED)
Stockholders' equity per weighted average common and common
equivalent share outstanding:
HEALTHSOUTH -- historical....................................... $6.24
HEALTHSOUTH -- pro forma combined............................... 5.68
Advantage Health -- historical(3)............................... 9.37
Advantage Health -- pro forma equivalent(4)..................... 8.56
- -------------
(1) Adjusted to reflect a two-for-one stock split effected in the form of a
100% stock dividend paid on April 17, 1995.
(2) Fully diluted earnings per share in 1994 and for the nine months ended
September 30, 1995 reflect shares reserved for issuance upon exercise of
dilutive stock options and shares reserved for issuance upon conversion of
HEALTHSOUTH's 5% Convertible Subordinated Debentures Due 2001.
(3) Advantage Health has historically reported on a fiscal year ending on
August 31. The historical results of operations for Advantage Health have
been recast to a November 30 fiscal year end to more closely conform to
HEALTHSOUTH's fiscal year. Additionally, historical stockholders' equity
for Advantage Health is set forth as of August 31, 1995.
(4) Advantage Health pro forma equivalent per share data have been calculated
by multiplying the pro forma HEALTHSOUTH amounts by an assumed Exchange
Ratio of 1.5079, which is based on an assumed Base Period Trading Price
for the HEALTHSOUTH Common Stock of $31.50, the midpoint of the range of
$28.50 to $34.50 per share.
17
<PAGE>
HEALTHSOUTH'S AND ADVANTAGE HEALTH'S
SELECTED PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following selected pro forma financial information for the combined
Companies gives effect to the Merger as a pooling of interests. All of the
following selected pro forma financial information should be read in conjunction
with the pro forma financial information, including the notes thereto, appearing
elsewhere in this Prospectus-Proxy Statement. See "PRO FORMA CONDENSED FINANCIAL
INFORMATION". The pro forma financial information set forth in this
Prospectus-Proxy Statement is not necessarily indicative of the results that
would have actually occurred had the Merger been consummated on the dates
indicated or that may be obtained in the future.
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
----------------------------------- -------------------------
1992 1993 1994 (5) 1994 1995 (5)
---- ---- -------- ---- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data(1):
Revenues ................................. $750,134 $979,206 $1,799,805 $1,198,502 $1,509,851
Operating expenses:
Operating units ......................... 521,619 668,201 1,281,093 857,221 1,046,457
Corporate general and administrative .... 25,667 37,043 61,640 41,697 40,479
Provision for doubtful accounts........... 16,553 20,026 34,173 23,289 28,494
Depreciation and amortization ............ 42,107 63,572 123,118 76,294 107,753
Interest expense.......................... 18,237 24,200 94,840 51,792 80,314
Interest income........................... (8,595) (5,903) (6,387) (5,036) (6,244)
Terminated merger expense ................ 3,665 0 0 0 0
Merger expenses........................... 0 333 6,520 3,571 29,194
Loss on extinguishment of debt ........... 883 0 0 0 0
NME Selected Hospitals Acquisition related
expense ................................. 0 49,742 0 0 0
Gain on sale of partnership interest ..... 0 (1,400) 0 0 0
Gain on sale of MCA Stock................. 0 0 (7,727) (6,882) 0
Loss on impairment of assets.............. 0 0 10,500 0 11,192
Loss on abandonment of computer project .. 0 0 4,500 0 0
Loss on disposal of surgery centers....... 0 0 13,197 0 0
----------- ----------- ------------- ------------- -------------
620,136 855,814 1,615,467 1,041,946 1,337,639
----------- ----------- ------------- ------------- -------------
Income before income taxes and minority
interests................................ 129,998 123,392 184,338 156,556 172,212
Provision for income taxes ............... 38,550 37,993 64,817 56,499 55,424
----------- ----------- ------------- ------------- -------------
91,448 85,399 119,521 100,057 116,788
Minority interests........................ 25,943 29,377 31,914 21,380 30,855
----------- ----------- ------------- ------------- -------------
Income from continuing operations......... 65,505 56,022 87,607 78,677 85,933
Income from discontinued operations....... 3,283 4,452 0 0 0
----------- ----------- ------------- ------------- -------------
Net income................................ $ 68,788 $ 60,474 $ 87,607 $ 78,677 $ 85,933
=========== =========== ============= ============= =============
Weighted average common and common
equivalent shares outstanding(2)......... 129,630 135,077 143,067 142,803 146,569
=========== =========== ============= ============= =============
Net income per common and common
equivalent share(2) ..................... $ 0.53 $ 0.45 $ 0.61 $ 0.55 $ 0.59
=========== =========== ============= ============= =============
Net income per common share--assuming full
dilution(2)(3)........................... N/A N/A $ 0.61 N/A $ 0.59
=========== =========== ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
December 31, September 30,
----------------------------------- ----------------
1992 1993 1994 1995
----------- ----------- ----------- ----------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA(1):
Cash and marketable securities $ 179,725 $ 148,308 $ 129,971 $ 145,203
Working capital............... 269,120 284,691 278,166 362,357
Total assets.................. 1,145,192 1,884,675 2,236,246 2,687,842
Long-term debt(4)............. 413,656 1,008,429 1,139,087 1,533,371
Stockholders' equity.......... 582,045 646,397 757,584 832,259
</TABLE>
(1) In addition to Advantage Health, reflects combination of HEALTHSOUTH,
ReLife, SHC, SSCI and Surgical Care Affiliates, Inc. ("SCA") for all
periods presented, as HEALTHSOUTH acquired ReLife in December 1994, SHC in
June 1995, SSCI in October 1995 and SCA in January 1996 in transactions
accounted for as poolings of interests.
(2) Adjusted to reflect a two-for-one split effected in the form of a 100%
stock dividend paid on April 17, 1995.
(3) Fully-diluted earnings per share reflects shares reserved for issuance
upon conversion of HEALTHSOUTH's 5% Convertible Subordinated Debentures
Due 2001, where applicable.
(4) Includes current portion of long-term debt.
(5) Gives effect to the NovaCare Rehabilitation Hospitals Acquisition as if
the purchase had occurred on January 1, 1994. See "PRO FORMA CONDENSED
FINANCIAL INFORMATION".
18
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus-Proxy Statement, the
following should be considered carefully by holders of Advantage Health Shares
and Advantage Health Stock Options.
Regulation. As a result of the continued escalation of healthcare costs and
the inability of many individuals to obtain health insurance, numerous proposals
have been or may be introduced in the United States Congress and state
legislatures relating to healthcare reform. There can be no assurance as to the
ultimate content, timing or effect of any healthcare reform legislation, nor is
it possible at this time to estimate the impact of potential legislation, which
may be material, on HEALTHSOUTH or on the combined Companies. HEALTHSOUTH is
also subject, and the combined Companies will be subject, to various other types
of regulation at the federal and state levels, including, but not limited to,
licensure and certification laws, Certificate of Need laws and laws relating to
financial relationships among providers of healthcare services, Medicare fraud
and abuse and physician self-referral. See "BUSINESS OF HEALTHSOUTH --
Regulation" and "BUSINESS OF ADVANTAGE HEALTH -- Regulation".
THE SPECIAL MEETING
GENERAL
This Prospectus-Proxy Statement is being furnished to holders of Advantage
Health Shares in connection with the solicitation of proxies by the Board of
Directors of Advantage Health for use at the Special Meeting to consider and
vote upon a proposal to approve the Plan and to transact such other business as
may properly come before the Special Meeting or any adjournments or
postponements thereof.
Each copy of this Prospectus-Proxy Statement mailed to holders of Advantage
Health Common Stock is accompanied by a form of Proxy for use at the Special
Meeting.
This Prospectus-Proxy Statement is also furnished to holders of Advantage
Health Shares and Advantage Health Stock Options as a Prospectus in connection
with the issuance to them of the shares of HEALTHSOUTH Common Stock upon
consummation of the Merger.
DATE, PLACE AND TIME
The Special Meeting will be held at the Burlington Marriott, One Mall
Road, Burlington, Massachusetts 01803 on March 14, 1996 at 9:30 a.m., Eastern
Time.
RECORD DATE; QUORUM
The Board of Directors of Advantage Health has fixed the close of business on
February 7, 1996, as the Advantage Health Record Date for the determination of
holders of Advantage Health Shares entitled to receive notice of and to vote at
the Special Meeting. The presence, in person or by Proxy, of the holders of
Advantage Health Shares entitled to cast a majority of the votes entitled to be
cast at the Special Meeting will constitute a quorum at the Special Meeting.
VOTE REQUIRED
As of the Advantage Health Record Date, there were outstanding and entitled
to vote 5,653,114 shares of Advantage Health Common Stock. Each of such
Advantage Health Shares is entitled to one vote on each matter that comes before
the Special Meeting. Approval of the Plan will require the affirmative vote of
the holders of a majority of the outstanding shares of Advantage Health Common
Stock entitled to vote at the Special Meeting. Accordingly, approval of the Plan
will require the affirmative vote of the holders of at least 2,826,558 shares of
Advantage Health Common Stock.
As of the Advantage Health Record Date, Advantage Health's directors and
executive officers and their affiliates beneficially owned an aggregate of
1,891,803 shares, or approximately 33%, of Advantage Health Common Stock
outstanding on such date (excluding shares issuable upon exercise of options).
19
<PAGE>
By the unanimous vote of the members of the Board of Directors of Advantage
Health at a special meeting held on December 15, 1995, the Advantage Health
Board of Directors determined that the proposed Merger, and the terms and
conditions of the Plan, were in the best interests of Advantage Health and its
stockholders. The Plan and the Merger were adopted and approved unanimously by
the entire Advantage Health Board of Directors, which also unanimously resolved
to recommend that the stockholders of Advantage Health vote FOR approval of the
Plan.
In the event that the Plan is not approved by Advantage Health stockholders,
the Plan may be terminated in accordance with its terms. See"THE MERGER --
Termination".
VOTING AND REVOCATION OF PROXIES
Advantage Health Shares represented by a Proxy properly signed and received
at or prior to the Special Meeting, unless subsequently revoked, will be voted
in accordance with the instructions thereon. If a Proxy for the Special Meeting
is properly executed and returned without indicating any voting instructions,
Advantage Health Shares represented by the Proxy will be voted FOR approval of
the Plan. Any Proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before the Proxy is voted by the filing of an
instrument revoking it or of a duly executed Proxy bearing a later date with the
Secretary of Advantage Health, prior to or at the Special Meeting, or by voting
in person at the Special Meeting. Attendance at the Special Meeting will not in
and of itself constitute a revocation of a Proxy. Only votes cast for approval
of the Plan or other matters constitute affirmative votes. Abstentions and
broker non-votes will, therefore, have the same effect as votes against approval
of the Plan with respect to the Special Meeting.
The Board of Directors of Advantage Health is not aware of any business to be
acted upon at the Special Meeting of the Company's stockholders other than as
described herein. If, however, other matters are properly brought before the
Special Meeting, or any adjournments or postponements thereof, the persons
appointed as proxies will have discretion to vote or act thereon according to
their best judgment and subject to applicable rules of the SEC and Delaware law.
SOLICITATION OF PROXIES
In addition to solicitation by mail, directors, officers and employees of
Advantage Health, who will not be specifically compensated for such services,
may solicit proxies from the stockholders of Advantage Health, personally or by
telephone or telegram or other forms of communication. Brokerage houses,
nominees, fiduciaries and other custodians will be requested to forward
soliciting materials to beneficial owners and will be reimbursed for their
reasonable expenses incurred in doing so.
STOCKHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY CARDS. THE
PROCEDURE FOR THE EXCHANGE OF SHARES AND OPTIONS AFTER THE MERGER IS CONSUMMATED
IS SET FORTH ELSEWHERE IN THIS PROSPECTUS-PROXY STATEMENT. SEE "THE MERGER --
EXCHANGE OF CERTIFICATES AND OPTIONS".
20
<PAGE>
THE MERGER
The description of the Merger contained in this Prospectus-Proxy Statement
summarizes the principal provisions of the Plan; it is not complete and is
qualified in its entirety by reference to the Plan, the full text of which is
attached hereto as Annex A. All stockholders and option holders are urged to
read Annex A in its entirety.
TERMS OF THE MERGER
The acquisition of Advantage Health by HEALTHSOUTH will be effected by means
of the merger of the Subsidiary with and into Advantage Health, with Advantage
Health being the Surviving Corporation. The Certificate of Incorporation of
Advantage Health (the "Advantage Health Certificate") shall become the
Certificate of Incorporation of the Surviving Corporation from and after the
Effective Time and until thereafter amended in accordance with applicable law.
The Bylaws of the Subsidiary as in effect at the Effective Time will govern the
Surviving Corporation until amended or repealed in accordance with applicable
law. At the Effective Time, Advantage Health shall continue as the Surviving
Corporation under the name "Advantage Health Corporation".
At the Effective Time, each outstanding Advantage Health Share (excluding
shares held by Advantage Health and any of its subsidiaries, which shall
automatically be cancelled and retired) will be converted into the right to
receive that number of shares of HEALTHSOUTH Common Stock determined by dividing
$47.50 by the Base Period Trading Price (as defined below), as may be adjusted
as provided below, computed to four decimal places (the "Exchange Ratio");
provided, however, that if the Base Period Trading Price is greater than $34.50,
then the Exchange Ratio shall be 1.3768; and provided further that if the Base
Period Trading Price shall be less than $28.50, then the Exchange Ratio shall be
1.6667.
The term "Base Period Trading Price" means the average of the daily closing
prices per share of HEALTHSOUTH Common Stock for the 20 consecutive trading days
on which such shares are actually traded ending at the close of business on the
second New York Stock Exchange trading day immediately preceding the date of the
Special Meeting. The daily closing price per share shall be the closing price
for NYSE-Composite Transactions as reported in The Wall Street Journal-Eastern
Edition or, if not reported therein, any other authoritative source.
The following table indicates the Exchange Ratio assuming various Base Period
Trading Prices, with the resulting "value" to be received for each Advantage
Health Share:
Value to be
Base Period Received for
Trading Price Exchange Ratio each Advantage Health Share
(Col. 1) (Col. 2) (Col. 1 X COL. 2)
- --------------- ---------------- ----------------------------
25.50......... 1.6667 42.50
26.50......... 1.6667 44.17
27.50......... 1.6667 45.83
28.50......... 1.6667 47.50
29.50......... 1.6102 47.50
30.50......... 1.5574 47.50
31.50......... 1.5079 47.50
32.50......... 1.4615 47.50
33.50......... 1.4179 47.50
34.50......... 1.3768 47.50
35.50......... 1.3768 48.88
36.50......... 1.3768 50.25
37.50......... 1.3768 51.63
Stockholders and option holders may call 1-800-433-3868 beginning at 5:00
p.m., Eastern Time, on March 12, 1996 for information concerning the Exchange
Ratio as finally determined.
21
<PAGE>
As of the Effective Time, all outstanding Advantage Health Shares shall
automatically be cancelled and retired and shall cease to exist, and each holder
of a certificate representing such shares shall cease to have any rights with
respect thereto, except the right to receive shares of HEALTHSOUTH Common Stock,
cash (without interest) in lieu of fractional shares and any dividends or other
distributions to which such holder is entitled as a result of the Merger. Each
Advantage Health Share that is owned by Advantage Health or any subsidiary of
Advantage Health shall automatically be cancelled and retired and shall cease to
exist, and no consideration shall be delivered in exchange therefor.
The Plan provides that, at the Effective Time, all holders of Advantage
Health Stock Options shall receive at or as promptly as practicable after the
Closing (as defined in the Plan) a number of shares of HEALTHSOUTH Common Stock
determined as follows: (i) if the Base Period Trading Price is neither greater
than $34.50 nor less than $28.50, that number of shares which is equal to the
quotient obtained by dividing (a) $47.50 minus the exercise price of such option
(the "spread") by (b) the Base Period Trading Price, with such quotient then
being multiplied by the number of shares of Advantage Health Common Stock which
are subject to such option, or (ii) if the Base Period Trading Price is greater
than $34.50 or less than $28.50, that number of shares calculated as provided in
the preceding clause (i), except that the spread shall be divided by $34.50 or
$28.50, as the case may be (rather than the Base Period Trading Price) prior to
being multiplied by the number of shares of Advantage Health Common Stock
subject to such option. The Board of Directors of Advantage Health, based upon
the advice of its independent compensation consultant, believes that the
foregoing formula represents the fair value of the Advantage Health Stock
Options.
Based upon the number of shares of HEALTHSOUTH Common Stock, excluding shares
obtainable upon exercise of options and convertible securities, outstanding as
of February 7, 1996, the holders of Advantage Health Shares and Advantage Health
Stock Options will receive in the aggregate approximately 7.4% of the
outstanding shares of HEALTHSOUTH Common Stock anticipated to be outstanding
immediately after the Effective Time, assuming an Exchange Ratio of 1.6667.
BACKGROUND OF THE MERGER
From time to time during the past several years, Richard M. Scrushy,
Chairman of the Board and Chief Executive Officer of HEALTHSOUTH, and Raymond J.
Dunn III, Chairman of the Board and Chief Executive Officer of Advantage Health,
had occasion to meet and engage in conversations concerning developments and
trends in the healthcare industry and the perceived effects of those
developments and trends on their two corporations. During this several-year
period, Mr. Dunn also had occasional incidental conversations of the same
general nature with senior executives of other healthcare entities.
On August 30, 1995, Mr. Dunn and Robert E. Spencer, Advantage Health's Chief
Financial Officer, met with Mr. Scrushy and Michael D. Martin, HEALTHSOUTH's
Senior Vice President and Treasurer, at the invitation of Mr. Scrushy. At that
meeting, Messrs. Scrushy and Martin expressed their view that a business
combination of HEALTHSOUTH and Advantage Health was desirable and in the best
interest of the two corporations and their respective stockholders, although no
specific acquisition proposal was made.
At a special meeting of the Board of Directors on September 14, 1995, the
Advantage Health Board decided to retain Alex. Brown & Sons Incorporated ("Alex.
Brown") to evaluate its strategic alternatives. During this meeting, members of
the Board engaged in a discussion with Alex. Brown in which strategic
alternatives were identified and preliminarily discussed. The Board also
discussed with Alex. Brown possible approaches to exploring these alternatives.
During September and October 1995, Advantage Health's management, with the
assistance of Alex. Brown, continued to examine alternatives, including
financing alternatives and the advisability and feasibility of business
combinations. During this time period, Alex. Brown contacted a number of
healthcare companies regarding their interest in a business combination with
Advantage Health. Messrs. Dunn and Spencer and representatives of Alex. Brown
held meetings with several of these companies.
22
<PAGE>
Follow-up meetings and telephone contacts with interested parties continued
into November 1995. Advantage Health's senior management continued to consider
and take steps to accomplish the possible alternative of an equity financing.
On November 15, 1995, Messrs. Dunn and Spencer and representatives of Alex.
Brown met in New York City with Mr. Martin and representatives of Smith Barney
Inc., financial advisor to HEALTHSOUTH. At the meeting, Messrs. Dunn and Spencer
reviewed the recent financial performance of Advantage Health.
During early December, through contacts by Alex. Brown with interested
parties, including HEALTHSOUTH, Advantage Health received indications that
interested parties desired to make proposals to acquire Advantage Health.
Advantage Health, through legal counsel, on or about December 6, 1995, furnished
a proposed form of the Merger Agreement to such interested parties.
On December 8, 1995, Messrs. Dunn and Spencer met with Messrs. Scrushy and
Martin, together with their respective financial advisors, in Washington, D.C.
During that meeting, Messrs. Dunn and Spencer reviewed the recent performance of
Advantage Health and its prospects, and Mr. Scrushy and Mr. Dunn discussed the
benefits of a potential business combination.
During the following week, Advantage Health, directly and through its
advisors, continued discussions with interested parties, including through
telephone conversations with Messrs. Scrushy and Martin, while due diligence
reviews and discussions of possible contract terms took place between
representatives of Advantage Health and such parties.
On December 11, 1995, Advantage Health's Board held a telephonic special
meeting to review the status of discussions with interested parties, including
HEALTHSOUTH.
From December 11 through December 15, 1995, continuous discussions and
negotiations regarding due diligence and possible transaction terms took place
by telephone and in person at the offices of Advantage Health's legal counsel in
Boston between representatives of interested parties and Advantage Health's
representatives.
On December 13 and 14, 1995, Alex. Brown received proposals from interested
parties for the acquisition of Advantage Health. The proposals received included
a proposal from HEALTHSOUTH for the acquisition of Advantage Health at a price
of $47.50 per share payable in HEALTHSOUTH Common Stock, subject to adjustment
if the trading price of such stock were to fall outside the range prescribed in
the definitive merger agreement. Such proposal by HEALTHSOUTH was made subject
to HEALTHSOUTH's completion of certain due diligence activities and to the
approval of its Board of Directors.
At its special meeting on December 15, 1995 held in Boston, Massachusetts,
Mr. Scrushy made a presentation to Advantage Health's Board in which he
described HEALTHSOUTH, its business, strategy and financial performance and the
potential advantages of a HEALTHSOUTH-Advantage Health combination. Board
members asked questions of and received answers from Mr. Scrushy and, after Mr.
Scrushy left the meeting, considered at length the proposals which had been
received and more generally the alternatives available to Advantage Health, the
relative merits thereof and the relative risks of non-consummation, and resolved
to approve and recommend to the Advantage Health stockholders a business
combination on substantially the terms and conditions that had been negotiated
with HEALTHSOUTH, authorizing Mr. Dunn to seek to complete negotiations with
HEALTHSOUTH for a business combination at a price of $47.50 per share of
Advantage Health Common Stock payable in HEALTHSOUTH Common Stock, subject to
adjustment as provided in the Plan. On December 16, 1995, HEALTHSOUTH held a
meeting of its Board of Directors. At such meeting, the HEALTHSOUTH Board
approved the Merger and the execution and delivery of the Plan. Pursuant to such
authorizations, final terms and conditions were negotiated and reflected in the
Plan, which was executed and delivered on December 16, 1995 and announced prior
to the opening of trading on December 18, 1995.
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Reasons for the Merger; Recommendation of Advantage Health's Board of Directors
The Board of Directors of Advantage Health, in approving the Merger and
recommending it to Advantage Health's stockholders, believes that the terms of
the Merger are fair to the stockholders of Advantage Health and in the best
interest of Advantage Health. The Merger Consideration of $47.50 per share,
subject to adjustment, was negotiated on an arm's length basis between
representatives of Advantage Health and representatives of HEALTHSOUTH. The
Board of Directors unanimously concluded, based on the factors stated below,
that the Merger should be approved and recommends that the Advantage Health
stockholders vote in favor of the Merger.
In reaching the determinations and recommendations described above, the Board
of Directors of Advantage Health considered the following factors:
(i) Based on its familiarity with Advantage Health's business, financial
condition, earnings and prospects, current conditions and uncertainties in the
industry in which Advantage Health operates, and the historical and current
market prices for Advantage Health's Common Stock, the Board of Directors was of
the view that there could be no assurance that Advantage Health's financial or
other performance would result, within a reasonable time, in a market price
greater in value than the consideration offered by HEALTHSOUTH, which (subject
to possible adjustment), represented appreciation of approximately 30% in
Advantage Health's stock price at the time of announcement and a significant
premium over Advantage Health's highest closing stock price since its initial
public offering in 1992. The enhanced liquidity and perceived greater likelihood
of stability in HEALTHSOUTH Common Stock for the Advantage Health stockholders
were also viewed favorably.
(ii) The Board believed that for Advantage Health to grow, including
geographic expansion beyond the Northeast, it would have had to raise
significant capital, and there was no assurance that such financing could be
accomplished on terms that would produce a valuation for Advantage Health which
would be as favorable to existing stockholders as the terms of the Merger.
(iii) The Board anticipated that combining with HEALTHSOUTH, the nation's
leading provider of comprehensive rehabilitation and outpatient surgery
services, would likely enable it and its stockholders to benefit from, rather
than possibly be adversely affected by, further industry consolidation.
(iv) HEALTHSOUTH's existing managed care relationships were seen as enhancing
Advantage Health's ability to compete for large managed-care contracts.
(v) HEALTHSOUTH's financial and management resources were seen by the Board
as potentially advantageous for Advantage Health's healthcare partners,
particularly in circumstances requiring significant financial commitments.
(vi) HEALTHSOUTH's management infrastructure was perceived by the Board as
enhancing Advantage Health's ability to deliver services and better meet the
needs of its partners, patients and employees.
(vii) The Board identified opportunities for cross-referrals which were
regarded as becoming available because of the expanded breadth of services
offered by a combined company.
(viii) The sophistication and national scope of HEALTHSOUTH's business was
seen as offering opportunities for Advantage Health employees to advance and
perform satisfying work in their positions.
(ix) The Board received and considered Alex. Brown's oral opinion delivered
on December 15, 1995, and later confirmed in writing, that as of such date, and
subject to certain assumptions, factors and limitations set forth in such
opinion, the consideration to be received by the Advantage Health stockholders
in the Merger was fair, from a financial point of view, to such stockholders.
(x) The Board regarded the terms and conditions, other than price, which were
negotiated with HEALTHSOUTH as providing a high likelihood that the Merger would
be consumated.
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For all of the foregoing reasons, the Advantage Health Board concluded that
the Merger offered an opportunity for Advantage Health's stockholders to realize
a substantial premium over current and historical stock price levels, and to
enhance the prospects for future equity value through ownership in the much
larger and more diversified company. For Advantage Health itself, joining a
leading national organization was seen as strengthening Advantage Health and
giving it greater resources to address the future needs of its various
constituencies.
In making its recommendation, the Board did not assign particular weight to
any one or more of these factors. The Board did not perceive that there were
significant factors militating against its determinations and recommendation.
OPINION OF FINANCIAL ADVISOR TO ADVANTAGE HEALTH
The Advantage Health Board of Directors retained Alex. Brown to serve as its
financial advisor in connection with the Merger. On December 15, 1995, Alex.
Brown made a presentation to the Advantage Health Board of Directors with
respect to the Merger and rendered its oral opinion, which was subsequently
confirmed in writing, that as of such date, based upon the facts and
circumstances as they existed at that time, and subject to certain assumptions,
factors and limitations set forth in such opinion, the consideration to be
received by the holders of Advantage Health Common Stock pursuant to the Plan
was fair from a financial point of view to such stockholders. Alex. Brown
subsequently confirmed its December 15, 1995 opinion by delivery of a written
opinion as of the date of this Prospectus-Proxy Statement.
The full text of the written opinion of Alex. Brown, dated the date of this
Prospectus-Proxy Statement, which sets forth, among other things, assumptions
made, matters considered and limitations on the review undertaken, is attached
as Annex B to this Prospectus-Proxy Statement and is incorporated herein by
reference. Advantage Health stockholders are urged to read such opinion in its
entirety. Alex. Brown's opinion addresses only the fairness from a financial
point of view of the consideration to be received by holders of Advantage Health
Common Stock pursuant to the Plan and does not constitute a recommendation to
any such stockholder as to how such stockholder should vote at the Special
Meeting. The summary of the opinion of Alex. Brown set forth in this
Prospectus-Proxy Statement is qualified in its entirety by reference to the full
text of such opinion.
In arriving at its opinion, Alex. Brown reviewed the Plan and certain
publicly available financial information concerning Advantage Health and
HEALTHSOUTH. Alex. Brown reviewed certain internal financial analyses made
available to it by Advantage Health and HEALTHSOUTH and held discussions with
the members of the senior management of Advantage Health and HEALTHSOUTH
regarding the businesses and prospects of their respective companies as
independent entities and the joint prospects for a combined company. In
addition, Alex. Brown (i) reviewed the reported price and trading activity for
the Advantage Health Common Stock and the HEALTHSOUTH Common Stock, (ii)
compared certain financial and stock information for Advantage Health and
HEALTHSOUTH with similar information for certain publicly-traded companies,
(iii) reviewed the financial terms of certain recent business combinations and
(iv) performed such other studies and analyses and took into account such other
matters as Alex. Brown deemed necessary.
As described in the opinion, Alex. Brown assumed and relied upon, without
independent verification, the accuracy and completeness of the information
furnished to or otherwise reviewed by or discussed with it for purposes of its
opinion. With respect to the financial projections used in its analyses, Alex.
Brown assumed that they had been reasonably prepared on bases reflecting the
best currently available estimates and judgments of the senior management of
Advantage Health and HEALTHSOUTH as to the likely future financial performance
of their respective companies. Alex. Brown also assumed, with the consent of the
Advantage Health Board of Directors, that the Merger will qualify for
pooling-of-interests accounting treatment and that the holders of Advantage
Health Common Stock will not be subject to U.S. federal income tax as a result
of the Merger. Alex. Brown did not make an independent evaluation or appraisal
of the assets of Advantage Health or HEALTHSOUTH, nor was it furnished with any
such evaluation or appraisal. Alex. Brown's opinion stated that it was based on
market, economic and other conditions as they existed and could be evaluated as
of the date of its opinion. Alex.
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Brown's opinion does not imply any conclusion as to the likely trading range of
the HEALTHSOUTH Common Stock following consummation of the Merger nor does it
constitute a recommendation to any stockholder of Advantage Health as to how
such stockholder should vote with respect to the Merger.
The following is a summary of the presentation by Alex. Brown made to the
Advantage Health Board of Directors on December 15, 1995. Alex. Brown
subsequently confirmed such opinion in a written opinion dated the date of this
Prospectus-Proxy Statement. A copy of the opinion of Alex. Brown dated the date
of this Prospectus-Proxy Statement is attached as Annex B and incorporated
herein by reference.
Stock Trading History. Alex. Brown reviewed the historical market prices for
Advantage Health over the period from February 14, 1992 (the date of its initial
public offering) to December 13, 1995 and reviewed the historical trading volume
and market prices for Advantage Health over the period from December 13, 1994 to
December 13, 1995. This analysis showed that the $47.50 per share offer price
was higher than the highest closing price for Advantage Health Common Stock over
the entire period since its initial public offering. Alex. Brown also reviewed
the historical market prices for HEALTHSOUTH over the period from December 11,
1992 to December 13, 1995 and the historical trading volume and market prices
for HEALTHSOUTH over the period from December 13, 1994 to December 13, 1995.
Alex. Brown compared the daily closing prices of the Common Stock of Advantage
Health and HEALTHSOUTH with a composite index of certain publicly-traded
companies (described below) and the Standard & Poor's 500 Index ("S&P 500") over
the periods from February 14, 1992 and December 13, 1994 to December 13, 1995.
Alex. Brown noted that over the period from February 14, 1992, the relative
stock price performance of Advantage Health and HEALTHSOUTH was similar and that
over the period from December 13, 1994 HEALTHSOUTH outperformed Advantage
Health, the S&P 500 and the composite index of certain publicly-traded
companies. Alex. Brown also reviewed the historical exchange ratio of Advantage
Health and HEALTHSOUTH market prices over the same periods.
Analysis of Certain Publicly-Traded Companies. Alex. Brown analyzed and
compared certain data and ratios for Advantage Health with corresponding data
and ratios for the following group of six publicly-traded companies: Genesis
Health Ventures, Inc., Health Care & Retirement Corp., HEALTHSOUTH (pro forma
for its pending merger with Surgical Care Affiliates, Inc.), Horizon/CMS
Healthcare Corporation, Manor Care, Inc. and Vencor, Inc., (the "Advantage
Comparable Companies"). Such financial information included market value,
enterprise value (market value adjusted by adding debt and subtracting cash and
marketable securities), profitability, returns, growth rates and implied
multiples of the latest publicly reported twelve months ("LTM") revenues,
earnings before depreciation, amortization, interest and taxes less minority
interest ("EBITDA"), earnings per share ("EPS") and projected EPS based on the
compilation of publicly available research estimates available through the
Institutional Brokers Estimate Systems, for the 1995 and 1996 calendar years.
This analysis showed that as of December 13, 1995, the multiple of enterprise
value to LTM revenues was 1.9x for the Merger Consideration compared to a range
for the Advantage Comparable Companies of 1.5x to 3.3x, with a mean of 2.1x; and
the multiple of enterprise value to LTM EBITDA was 13.2x for the Merger
Consideration compared to a range for the Advantage Comparable Companies of 8.9x
to 17.7x, with a mean of 12.4x. Alex. Brown further noted that the multiple of
market value to the EPS estimate for the 1995 calendar year was 27.2x for the
Merger Consideration compared to a range for the Advantage Comparable Companies
of 17.0x to 29.1x, with a mean of 21.9x; and the multiple of market value to the
EPS estimate for the 1996 calendar year was 22.7x for the Merger Consideration
compared to a range for the Advantage Comparable Companies of 13.7x to 22.2x,
with a mean of 17.7x.
Alex. Brown analyzed and compared certain publicly available information for
HEALTHSOUTH (pro forma for its pending merger with Surgical Care Affiliates,
Inc.) with corresponding data and ratios for the following group of six
publicly-traded companies: Advantage Health, Genesis Health Ventures, Inc.,
Health Care & Retirement Corp., Horizon/CMS Healthcare Corporation, Manor Care,
Inc. and Vencor, Inc., (the "HEALTHSOUTH Comparable Companies"). This analysis
also showed that as of December 13, 1995, the multiple of enterprise value to
LTM revenues was 3.3x for HEALTHSOUTH compared to a range for the HEALTHSOUTH
Comparable Companies of 1.5x to 2.6x, with a mean of 1.8x; and the multiple of
enterprise value to LTM EBITDA was 12.4x for HEALTHSOUTH compared
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to a range for the HEALTHSOUTH Comparable Companies of 8.9x to 17.7x, with a
mean of 12.0x. Alex. Brown further noted that the multiple of market value to
the EPS estimate for the 1995 calendar year was 29.1x for HEALTHSOUTH compared
to a range for the HEALTHSOUTH Comparable Companies of 17.0x to 22.2x, with a
mean of 20.6x; and the multiple of market value to the EPS estimate for the 1996
calendar year was 22.2x for HEALTHSOUTH compared to a range for the HEALTHSOUTH
Comparable Companies of 13.7x to 18.3x, with a mean of 16.4x.
Alex. Brown noted that no company used in the analysis described in the two
preceding paragraphs was identical to Advantage Health or HEALTHSOUTH and that,
accordingly, an analysis of the results of the foregoing necessarily involved
complex considerations and judgments concerning differences in the financial and
operating characteristics of Advantage Health and HEALTHSOUTH and other factors
that could affect the public trading value of the companies to which they were
being compared.
Analysis of Recent Mergers and Acquisitions. Alex. Brown reviewed and
analyzed nine pending and completed mergers and acquisitions of rehabilitation
services companies which have been announced since 1993. Alex. Brown noted that
for these transactions the range of multiples of aggregate purchase price
(equity purchase price adjusted by adding debt and subtracting cash and
marketable securities) to LTM revenues was 0.6x to 3.6x, with a mean of 1.6x and
a median of 1.8x, compared to 1.9x for the Merger Consideration; the range of
multiples of aggregate purchase price to LTM EBITDA was 8.1x to 28.8x, with a
mean of 15.8x and a median of 11.5x compared to 13.2x for the Merger
Consideration; the range of multiples of equity purchase price to LTM net income
was 21.3x to 60.7x, with a mean of 35.6x and a median of 27.8x, compared to
29.5x for the Merger Consideration; and the range of multiples of equity
purchase price to forward twelve month net income was 9.0x to 30.3x, with a mean
of 18.9x and a median of 18.0x, compared to 22.7x for the Merger Consideration.
Alex. Brown noted that no transaction reviewed was identical to the Merger
and that, accordingly, an analysis of the results of the foregoing necessarily
involved complex considerations and judgments concerning differences in the
financial and operating characteristics of Advantage Health and other factors
that would affect the acquisition value of the companies to which it was being
compared.
Discounted Cash Flow Analysis. Alex. Brown performed a discounted cash flow
analysis of Advantage Health, based upon estimates of projected financial
performance for the fiscal years ending August 31, 1996 through 2000. Alex.
Brown aggregated the present value of the cash flows through 2000 with the
present value of a range of terminal values. Alex. Brown discounted these cash
flows back to January 1, 1996 at discount rates ranging from 14% to 18%. The
terminal value was computed based on projected EBITDA less minority interest in
fiscal year 2000 and a range of terminal multiples of 7.0x to 9.0x. This
analysis indicated a range of values for Advantage Health of $40.60 to $63.07
per share.
Contribution Analysis. Alex. Brown reviewed the relative contributions of
Advantage Health and HEALTHSOUTH to the pro forma income statement of the
combined company and compared such contributions to the 5.6% pro forma ownership
of HEALTHSOUTH by the Advantage Health stockholders, based on the exchange ratio
implied by the $47.50 value of the Merger Consideration based on market prices
as of December 13, 1995. This analysis indicated that (i) for the last publicly
reported twelve months, Advantage Health would have contributed 8.1% of
revenues, 4.6% of EBITDA, 5.2% of earnings before interest and taxes less
minority interest and 6.8% of net income, and (ii) for calendar year 1996,
Advantage Health would contribute 5.4% of net income based on the consensus of
analyst estimates.
Pro Forma Earnings Analysis. Alex. Brown analyzed certain pro forma financial
effects of the Merger, including the effect on the projected EPS of HEALTHSOUTH
following the Merger. This analysis showed the Merger to be slightly accretive
to HEALTHSOUTH's projected calendar year 1996 EPS. The actual operating results
or financial position achieved by the combined company may vary from the
projected results, and the variations may be material.
The summary set forth above does not purport to be a complete description of
the presentation by Alex. Brown to the Advantage Health Board of Directors or
the analyses performed and the factors considered by Alex. Brown in connection
with its opinion. Alex. Brown believes that its analyses and the
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summary set forth above must be considered as a whole and that selecting
portions of its analyses, without considering all analyses, or selecting
portions of the above summary, without considering all factors and analyses,
could create an incomplete view of the process underlying the analyses set forth
in Alex. Brown's opinion. In performing its analyses, Alex. Brown made numerous
assumptions with respect to industry performance, general business, economic,
market and financial conditions and other matters, many of which are beyond the
control of Advantage Health and HEALTHSOUTH. The analyses performed by Alex.
Brown are not necessarily indicative of actual values or future results, which
may be significantly more or less favorable than suggested by such analyses.
Alex. Brown is an internationally recognized investment banking firm and, as
a customary part of its investment banking business, is engaged in the valuation
of businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of securities, private
placements and valuations for corporate and other purposes. The Advantage Health
Board of Directors selected Alex. Brown to serve as its financial advisor
because of previous working relationships between Advantage Health and Alex.
Brown and Alex. Brown's reputation and healthcare expertise as well as its
familiarity with Advantage Health, HEALTHSOUTH and their respective businesses.
Alex. Brown has served as financial advisor and has provided financing services
to Advantage Health, including lead-managing its initial public offering, and
received customary fees for such services. In the past, Alex. Brown has also
provided financing services to HEALTHSOUTH and received customary fees for such
services. Alex. Brown regularly publishes research reports regarding the
healthcare industry and the business and securities of publicly-traded companies
in that industry, including Advantage Health and HEALTHSOUTH. Alex. Brown also
makes a market in the Advantage Health Common Stock and the HEALTHSOUTH Common
Stock. In the ordinary course of its trading and brokerage activities, Alex.
Brown may from time to time, hold long or short positions may trade or may
otherwise effect transactions, for its own account or for the account of its
customers, in securities of Advantage Health or HEALTHSOUTH. Alex. Brown also
has an indirect beneficial ownership interest in Advantage Health Common Stock
of less than 1% of the outstanding Advantage Health Common Stock.
Pursuant to the terms of an engagement letter dated September 14, 1995,
Advantage Health has agreed to pay Alex. Brown a transaction fee, upon
consummation of the Merger, equal to approximately 1.1% of the aggregate value
of the consideration paid in connection with the Merger. Advantage Health has
also agreed to pay Alex. Brown a fee of $500,000 for rendering its opinion
described above. Such fee will be credited to the transaction fee payable upon
consummation of the Merger. In addition, Advantage Health has agreed to
reimburse Alex. Brown for its reasonable out-of-pocket expenses, including fees
and disbursements of counsel, and to indemnify Alex. Brown and certain related
persons against certain liabilities, including certain liabilities under the
federal securities laws, related to, or arising out of, its engagement.
Effective Time of The Merger
The Merger will become effective upon the filing of a Certificate of Merger
by the Subsidiary and Advantage Health under the DGCL, or at such later time as
may be specified in such Certificate of Merger. The Plan requires that this
filing be made, subject to satisfaction or waiver of the separate conditions to
the obligations of each party to consummate the Merger, no later than two
business days after satisfaction or waiver of the various conditions to the
Merger set forth in the Plan, or at such other time as may be agreed by
HEALTHSOUTH and Advantage Health. It is presently anticipated that such filing
will be made as soon as reasonably possible after the Special Meeting and after
all regulatory approvals have been obtained, and that the Effective Time will
occur upon such filing. However, there can be no assurance as to whether or when
the Merger will occur. See "-- Conditions to the Merger" and "-- Regulatory
Approvals".
Exchange Of Certificates and Options
From and after the Effective Time, each holder of a stock certificate which
immediately prior to the Effective Time represented outstanding Advantage Health
Shares (collectively, the "Certificates") will be entitled to receive in
exchange therefor, upon surrender thereof to the Exchange Agent (as defined in
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the Plan), a certificate or certificates representing the number of whole shares
of HEALTHSOUTH Common Stock into which such holder's Advantage Health Shares
have been converted, cash in lieu of fractional shares and any dividends or
other distributions to which such holder is entitled as a result of the Merger.
As soon as reasonably practicable after the Effective Time, HEALTHSOUTH will
deliver through the Exchange Agent to each holder of record of Advantage Health
Shares at the Effective Time transmittal materials for use in exchanging the
Certificates for certificates for shares of HEALTHSOUTH Common Stock. After the
Effective Time, there will be no transfers on the stock transfer books of
Advantage Health Shares which were issued and outstanding immediately prior to
the Effective Time and converted in the Merger.
No fractional shares of HEALTHSOUTH Common Stock and no certificates or scrip
therefor, or other evidence of ownership thereof, will be issued in the Merger;
instead, HEALTHSOUTH will pay to each holder of Advantage Health Shares who
would otherwise be entitled to a fractional share an amount of cash in an amount
equal to the value of such fractional part of a share of HEALTHSOUTH Common
Stock. See "-- Terms of the Merger".
The certificates representing shares of HEALTHSOUTH Common Stock, the
fractional share payment (if any) which any holder of Advantage Health Shares is
entitled to receive, and any dividends or other distributions paid on such
HEALTHSOUTH Common Stock prior to the delivery to HEALTHSOUTH of the
Certificates, will not be delivered to such stockholder until the Certificates
are delivered to HEALTHSOUTH through the Exchange Agent (as defined in the
Plan). No interest will be paid on dividends or other distributions or on any
fractional share payment which the holder of such shares shall be entitled to
receive upon such delivery.
At the Effective Time, holders of Advantage Health Shares immediately prior
to the Effective Time will cease to be, and shall have no rights as,
stockholders of Advantage Health, other than the right to receive the shares of
HEALTHSOUTH Common Stock into which such shares have been converted and any
fractional share payment and any dividends or other distributions to which they
may be entitled under the Plan. Holders of Advantage Health Shares will be
treated as stockholders of record of HEALTHSOUTH for purposes of voting at any
annual or special meeting of stockholders of HEALTHSOUTH after the Effective
Time, both before and after such time as they exchange their Certificates for
certificates of HEALTHSOUTH Common Stock as provided in the Plan.
Neither HEALTHSOUTH nor Advantage Health will be liable to any holder of
Advantage Health Shares for any shares of HEALTHSOUTH Common Stock (or dividends
or other distributions with respect thereto) or cash in lieu of fractional
shares delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law.
As soon as reasonably practicable after the Effective Time of the Merger,
HEALTHSOUTH shall deliver to the holders of Advantage Health Stock Options
appropriate notices setting forth such holders' rights under the Plan and shall
cause appropriate certificates for shares of HEALTHSOUTH Common Stock to be
issued to each such holder.
Representations and Warranties
The Plan contains various customary representations and warranties of the
parties thereto. The representations and warranties of HEALTHSOUTH and the
Subsidiary, made jointly and severally, include, but are not limited to,
representations as to: (i) the corporate organization of the Subsidiary, (ii)
the power and authority of the Subsidiary to execute and perform the Plan and
(iii) the absence of contracts, liabilities and legal proceedings relating to or
affecting the Subsidiary.
The representations and warranties of HEALTHSOUTH include, but are not
limited to, representations as to: (i) the organization of HEALTHSOUTH, (ii) the
power and authority of HEALTHSOUTH to execute, deliver and perform the Plan,
(iii) the capitalization of HEALTHSOUTH, (iv) ownership of Subsidiary Common
Stock by HEALTHSOUTH, (v) the fact that HEALTHSOUTH has furnished Advantage
Health with true and complete copies of certain reports, schedules, registration
statements
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and proxy statements filed by HEALTHSOUTH with the SEC since January 1, 1994,
(vi) the absence of material legal proceedings against HEALTHSOUTH, (vii) the
validity of HEALTHSOUTH's material contracts, (viii) the fact that HEALTHSOUTH
has not incurred any material adverse changes since December 31, 1994, (ix) the
status of HEALTHSOUTH's accounts receivable, (x) the filing of HEALTHSOUTH's tax
returns, (xi) HEALTHSOUTH's employee benefits, (xii) HEALTHSOUTH's licenses,
accreditation and regulatory approvals, (xiii) HEALTHSOUTH's compliance with
laws in general, (xiv) the absence of any vote required by holders of
HEALTHSOUTH capital stock to approve the Plan, (xv) the opinion of HEALTHSOUTH's
financial advisor, (xvi) HEALTHSOUTH's investment intent with respect to the
Advantage Health Shares acquired, and (xvii) the absence of untrue
representations by HEALTHSOUTH in the Plan or in connection with the Merger.
The representations and warranties of Advantage Health include, but are not
limited to: (i) the organization of Advantage Health and its subsidiaries, (ii)
the power and authority of Advantage Health to execute, deliver and perform the
Plan, (iii) the capitalization of Advantage Health, (iv) the fact that Advantage
Health has furnished HEALTHSOUTH with a true and complete copy of the Advantage
Health 1995 Annual Report on Form 10-K for the fiscal year ended August 31, 1995
(the "Advantage Health Form 10-K"), (v) the absence of legal proceedings against
Advantage Health, (vi) the validity of Advantage Health's material contracts,
(vii) the fact that Advantage Health has not incurred any material adverse
changes since Advantage Health's consolidated balance sheet at August 31, 1995
included in the Advantage Health Form 10-K (the "Advantage Health 1995 Balance
Sheet"), (viii) the status of Advantage Health's accounts receivable, (ix) the
opinion of Advantage Health's financial advisor, (x) the filing of Advantage
Health's tax returns, (xi) Advantage Health's employee benefits, (xii) Advantage
Health's licenses, accreditation and regulatory approvals, (xiii) Advantage
Health's compliance with laws in general, (xiv) the vote required by holders of
Advantage Health capital stock to approve the Plan, and (xv) the absence of
untrue representations by Advantage Health in the Plan or in connection with the
Merger.
Conditions To The Merger
The obligation of HEALTHSOUTH and the Subsidiary to consummate the Merger is
subject to, among others, the following conditions: (i) Advantage Health shall
have performed all of its obligations as contemplated by the Plan at or prior to
the consummation date of the Merger; (ii) the representations and warranties of
Advantage Health set forth in the Plan shall be true and correct in all material
respects as of the dates specified in the Plan; (iii) HEALTHSOUTH shall have
received the opinion of its counsel that the Merger constitutes a tax-free
reorganization under the Code; (iv) HEALTHSOUTH and the Subsidiary shall have
obtained, or obtained the transfer of, any licenses, certificates of need and
other regulatory approvals necessary to allow the Surviving Corporation to
operate the Advantage Health facilities, unless the failure to obtain such
transfer or approval would not have a material adverse effect on the Surviving
Corporation; and (v) HEALTHSOUTH shall have received an opinion of Advantage
Health's counsel substantially in the form specified in the Plan.
The obligation of Advantage Health to consummate the Merger is subject to,
among others, the following conditions: (i) HEALTHSOUTH and the Subsidiary shall
have performed all of their obligations as contemplated by the Plan at or prior
to the consummation of the Merger; (ii) the representations and warranties of
HEALTHSOUTH and the Subsidiary set forth in the Plan shall be true and correct
as of the dates specified in the Plan; (iii) Advantage Health shall have
received the opinion of its counsel that the Merger constitutes a tax-free
reorganization under the Code; and (iv) Advantage Health shall have received an
opinion of HEALTHSOUTH's counsel substantially in the form specified in the
Plan.
The obligation of each of HEALTHSOUTH, the Subsidiary and Advantage Health to
consummate the Merger is subject to certain additional conditions, including the
following: (i) no order, decree or injunction by a court of competent
jurisdiction preventing the consummation of the Merger or imposing any material
limitation on the ability of HEALTHSOUTH effectively to exercise full rights of
ownership of the common stock of the Surviving Corporation or any material
portion of the assets or business of Advantage Health shall be in effect; (ii)
no statute, rule or regulation shall have been enacted by the
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government of the United States or any state, municipality or other political
subdivision thereof that makes the consummation of the Merger or any other
transaction contemplated by the Plan illegal; (iii) the waiting period under the
HSR Act shall have expired or shall have been terminated; (iv) the Registration
Statement shall have been declared effective under the Securities Act and shall
not be subject to any stop order; (v) the Merger shall have been approved by the
requisite vote of the holders of the outstanding Advantage Health Shares
entitled to vote thereon; (vi) the shares of HEALTHSOUTH Common Stock to be
issued in connection with the Merger shall have been approved for listing on the
NYSE upon official notice of issuance; and (vii) the Merger shall qualify for
"pooling of interests" accounting treatment and HEALTHSOUTH and Advantage Health
each shall have received a letter from Ernst & Young LLP, dated the Closing Date
of the Merger, regarding that firm's concurrence with the conclusions of the
managements of HEALTHSOUTH and Advantage Health, respectively, as to the
appropriateness of pooling-of-interests accounting for the Merger under APB 16
if closed and consummated in accordance with the Plan.
Regulatory Approvals
The HSR Act prohibits consummation of the Merger until certain information
has been furnished to the Antitrust Division of the DOJ and the FTC and certain
waiting period requirements have been satisfied. On January 22, 1996,
HEALTHSOUTH and Advantage Health made their respective filings with the DOJ and
the FTC with respect to the Plan. Under the HSR Act, the filings commenced a
30-day waiting period during which the Merger could not be consummated, which
waiting period will expire on February 21, 1996 unless extended by a request for
additional information. Notwithstanding the termination of the HSR Act waiting
period, at any time before or after the Effective Time, the FTC, the DOJ or
others could take action under the antitrust laws, including seeking to enjoin
the consummation of the Merger or seeking the divestiture by HEALTHSOUTH of all
or any part of the stock or assets of Advantage Health. There can be no
assurance that a challenge to the Merger on antitrust grounds will not be made
or, if such a challenge were made, that it would not be successful.
As conditions precedent to the consummation of the Merger, the Plan requires,
among other things: (i) that the HSR Act waiting period has expired or been
terminated, and (ii) that all other governmental approvals required for the
consummation of the Merger have been obtained, except where the failure to
obtain such approvals would not have a material adverse effect on the business
of the Surviving Corporation.
HEALTHSOUTH and Advantage Health believe that the Merger does not violate the
antitrust laws and intend to resist vigorously any assertion to the contrary by
the FTC, the DOJ or others. Any such resistance could delay consummation of the
Merger, perhaps for a considerable period. Prior to the Merger, the FTC or the
DOJ could seek to enjoin the consummation of the Merger under the federal
antitrust laws or require that HEALTHSOUTH or Advantage Health divest certain
assets to avoid such a proceeding. The FTC or DOJ could also, following the
Merger, take action under the federal antitrust laws to rescind the Merger, to
require divestiture of assets of either HEALTHSOUTH or Advantage Health, or to
obtain other relief.
Certain other persons, such as states' attorneys general and private parties,
could challenge the Merger as violative of the antitrust laws and seek to enjoin
the consummation of the Merger and, in the case of private persons, also to
obtain treble damages. There can be no assurance that a challenge to the Merger
on antitrust grounds will not be made or, if such a challenge is made, that it
would not be successful. Neither HEALTHSOUTH nor Advantage Health intends to
seek any further stockholder approval or authorization of the Plan as a result
of any action that it may take to resist or resolve any FTC, DOJ or other
objections, unless required to do so by applicable law.
The operations of each Company are subject to a substantial body of federal,
state, local and accrediting body laws, rules and regulations relating to the
conduct, licensing and development of healthcare businesses and facilities. As a
result of the Merger, certain of the arrangements between Advantage Health and
third-party payors may be deemed to have been transferred, requiring the
approval and consent of such payors. In addition, a number of the facilities
operated by Advantage Health may be deemed to have been transferred, requiring
the consents or approvals of various state licensing
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and/or health regulatory agencies. In some instances, new licenses will be
required to be obtained. It is anticipated that, prior to the time this
Prospectus-Proxy Statement is mailed to the securityholders of Advantage Health,
all filings required to be made prior to such date to obtain the consents and
approvals required from federal and state healthcare regulatory bodies and
agencies will have been made. However, certain of such filings cannot be made
under the applicable laws, rules and regulations until after the Effective Time.
Although no assurances to this effect can be given, it is anticipated that the
Companies will be able to obtain any required consent or approval.
Business Pending The Merger
The Plan provides that, during the period from the date of the Plan to the
Effective Time, except as provided in the Plan, HEALTHSOUTH and Advantage Health
will conduct their respective businesses in the usual, regular and ordinary
course in substantially the same manner as previously conducted, and Advantage
Health will use its reasonable best efforts to preserve intact its present
business organizations and to preserve its relationships with customers,
suppliers and others having business dealings with it.
Under the Plan, Advantage Health may not (other than as required pursuant to
or contemplated by the terms of the Plan and related documents), without first
obtaining the written consent of HEALTHSOUTH, (i) encumber any asset or enter
into any transaction or make any contract or commitment relating to its
properties, assets and business, other than in the ordinary course of business
or as otherwise disclosed in the Plan; (ii) enter into any employment contract
which is not terminable upon notice of 30 days or less, at will and without
penalty to it, except as provided in the Plan; (iii) other than acquisitions or
other commitments not exceeding $15,000,000 in the aggregate, enter into any
contract or agreement which cannot be performed within three months or which
involves the expenditure of over $100,000, except as provided for in the Plan;
(iv) issue or sell, or agree to issue or sell, any shares of its capital stock
or other securities of Advantage Health (other than Advantage Health Stock
Options subsequently issued in the ordinary course of its business or consistent
with past practice), except upon exercise of currently outstanding stock options
or warrants (or upon exercise of such permitted subsequently granted options);
(v) make any payment or distribution to the trustee under any bonus, pension,
profit sharing or retirement plan or incur any obligation to make any such
payment or contribution which is not in accordance with Advantage Health's usual
past practice, or make any payment or contributions or incur any obligation
pursuant to or in respect of any other plan or contract or arrangement providing
for bonuses, executive incentive compensation, pensions, deferred compensation,
retirement payments, profit sharing or the like, establish or enter into any
such plan, contract or arrangement, or terminate any such plan; (vi) extend
credit to anyone, except in the ordinary course of business consistent with past
practices; (vii) guarantee the obligation of any person, firm or corporation,
except in the ordinary course of business consistent with past practices; (viii)
amend its Certificate of Incorporation or Bylaws; (ix) discharge or satisfy any
material lien or encumbrance or pay or satisfy any material obligation or
liability (absolute, accrued, contingent or otherwise) other than liabilities
shown or reflected on the Advantage Health 1995 Balance Sheet; (x) increase or
establish any reserve for taxes or any other liability on its books or otherwise
provide therefor which would have a material adverse effect on Advantage Health,
except as may be required due to income or operations of Advantage Health since
the date of the Advantage Health 1995 Balance Sheet; (xi) mortgage, pledge or
subject to any lien, charge or other encumbrance any of the assets, tangible or
intangible, which assets are material to the consolidated business or financial
condition of Advantage Health; (xii) sell or transfer any of the assets material
to the consolidated business of Advantage Health, cancel any material debts or
claims or waive any material rights, except in the ordinary course of business;
(xiii) grant any general or uniform increase in the rates of pay of employees or
any material increase in salary payable or to become payable by Advantage Health
to any officer or employee, consultant or agent (other than normal merit
increases) or, by means of any bonus or pension plan, contract or other
commitment, increase in a material respect the compensation of any officer,
employee, consultant or agent; (xiv) except for the Plan and the other
agreements executed and delivered pursuant to the Plan, enter into any material
transaction other than in the ordinary course of business or permitted under the
Plan; (xv) issue any stock, bonds or other securities, other than stock issued
pursuant to options or warrants that are disclosed in the Plan; and (xvi) incur
any material adverse change.
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Waiver and Amendment
The Plan provides that, at any time prior to the Effective Time, HEALTHSOUTH
and Advantage Health may (i) extend the time for the performance of any of the
obligations or other acts of the other party contained in the Plan; (ii) waive
any inaccuracies in the representations and warranties of the other party
contained in the Plan or in any document delivered pursuant to the Plan; and
(iii) waive compliance with the agreements or conditions under the Plan. In
addition, the Plan may be amended at any time upon the written agreement of
HEALTHSOUTH and Advantage Health without the approval of stockholders of either
Company, except that after the Special Meeting no amendment may be made which by
law requires a further approval by the stockholders of Advantage Health without
such further approval's being obtained.
Termination
The Plan may be terminated at any time prior to the Effective Time, whether
before or after approval of the Plan by the stockholders of Advantage Health:
(i) by mutual written consent of HEALTHSOUTH, the Subsidiary and Advantage
Health; (ii) by either HEALTHSOUTH or Advantage Health if there is a material
breach on the part of the other party of any representation, warranty, covenant
or other agreement set forth in the Plan which is not cured as provided in the
Plan; (iii) by either HEALTHSOUTH or Advantage Health if any governmental entity
or court of competent jurisdiction shall have issued a final, permanent order,
decree, or ruling or other action enjoining or otherwise prohibiting the Merger
and such order, decree, or ruling or other action shall have become
non-appealable; (iv) by either HEALTHSOUTH or Advantage Health if the Merger has
not been consummated on or before July 31, 1996 (or such later date as may be
determined under the Plan), unless the failure to consummate the Merger by such
time is due to the breach of the Plan by the party seeking to terminate the
Plan; (v) by either HEALTHSOUTH or Advantage Health if any required approval of
the Plan by stockholders of Advantage Health has not been obtained by the
required votes at a duly held meeting of stockholders; (vi) by Advantage Health,
if Advantage Health's Board of Directors shall have determined, in the exercise
of its fiduciary duties under applicable law, not to recommend the Merger to the
stockholders of Advantage Health or shall have withdrawn such recommendation, or
shall have approved, recommended or endorsed any proposal to acquire Advantage
Health upon a merger, purchase of assets, purchase of or tender offer for shares
of Advantage Health or similar transaction other than the Merger, or shall have
resolved to do any of the foregoing; and (vii) by either HEALTHSOUTH or
Advantage Health if such party has not received by January 12, 1996 a letter
from Ernst & Young LLP regarding that firm's concurrence with the conclusions of
the managements of HEALTHSOUTH and Advantage Health, respectively, as to the
appropriateness of pooling-of-interests accounting for the Merger under APB 16
if closed and consummated in accordance with the Plan. Such letter was received
by HEALTHSOUTH and Advantage Health on such date.
Break-up Fee; Third Party Bids
If the Plan is terminated by Advantage Health because its Board of Directors
(i) has determined, in the exercise of its fiduciary duties under applicable
law, not to recommend the Merger to the holders of Advantage Health Shares, or
shall have withdrawn such recommendation, or (ii) shall have approved,
recommended or endorsed an Acquisition Transaction (as defined in the Plan)
other than the Plan, and within one year after the effective date of such
termination Advantage Health is the subject of a Third Party Acquisition Event
(as defined in the Plan), then at the time of consummation of such a Third Party
Acquisition Event Advantage Health shall pay to HEALTHSOUTH a break-up fee of
$10,000,000.
Interests of Certain Persons in the Merger
In considering the recommendations of the Board of Directors of Advantage
Health with respect to the Plan and the transactions contemplated thereby,
stockholders of the Company should be aware that certain members of the
management of Advantage Health and the Board of Directors of Advantage Health
have certain interests in the Merger that are in addition to the interests of
the stockholders generally.
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As a condition to entering into, and concurrently with the execution of, the
Plan, HEALTHSOUTH required that Raymond J. Dunn, III, the Chairman of the Board
of Directors, President and Chief Executive Officer of Advantage Health, enter
into a Proxy Agreement with HEALTHSOUTH, whereby Mr. Dunn agreed that until the
date on which the Plan is terminated, and following such termination, during
such time as a Third Party Acquisition Event (as defined in the Plan) exists
with respect to Advantage Health, but in no event after the close of business
one year following the termination of the Plan, he will vote an aggregate of
819,000 shares of Advantage Health Common Stock (a) in favor of approval of the
Plan and the Merger at every meeting of the stockholders of Advantage Health at
which such matters are considered and at every adjournment thereof, and (b)
against any other proposal for reorganization.
Pursuant to the Plan, HEALTHSOUTH has agreed to cause Mr. Dunn to be
appointed to the Board of Directors of HEALTHSOUTH immediately following the
Effective Time.
At the Closing (as defined in the Plan), HEALTHSOUTH has agreed to cause
Advantage Health to enter into Employment Agreements with each of Mr. Dunn and
Robert E. Spencer, Chief Financial Officer, Treasurer, Secretary and a Director
of Advantage Health. Pursuant to their respective Employment Agreements, each of
Mr. Dunn and Mr. Spencer has agreed, for a period of two years from the date of
his Employment Agreement, to devote up to an aggregate of 100 hours per month in
the performance of business development and retention responsibilities with
respect to affiliations between Advantage Health and certain designated
healthcare providers. Mr. Dunn and Mr. Spencer will be paid annual salaries of
$200,576 and $175,000, respectively. Under their respective Employment
Agreements, in the event of termination of employment either by Advantage Health
without cause or by the employee for cause, each of Mr. Dunn and Mr. Spencer is
entitled to receive, as severance, benefits equal to the amount each would have
received if his employment had continued for the remainder of the two-year
period at the salary in effect on the date of termination.
Mr. Dunn and Mr. Spencer have also agreed in their respective Employment
Agreements that during a Restricted Covenant Period (as defined below), each
will not, whether for his own account or for any person or organization other
than Advantage Health (i) manage, operate, control, assist (directly or
indirectly), or participate in the management, operation or control of, or (ii)
serve as a director, officer, partner, employee or consultant of, or own more
than five percent of the outstanding voting securities of, any enterprise which,
within a Restricted Area (as defined below), is engaged in any business
competitive with the business engaged in by Advantage Health prior to the time
that employment is terminated or is as set forth in a written strategic plan
adopted by Advantage Health, provided that, notwithstanding such limitations,
Mr. Dunn and Mr. Spencer may engage in such activities, act in such capacity and
have such ownership interest in any enterprise that is engaged in the business
of developing, managing, operating, financing, owning or providing services to
(a) assisted living, congregate care senior living residential housing
facilities, or (b) consulting businesses with respect to management protocols.
For purposes of the Employment Agreements, "Restricted Covenant Period" is
defined as the period commencing on the date of the Employment Agreements and
terminating on the first anniversary of termination of employment, provided that
if Mr. Dunn or Mr. Spencer, as the case may be, is terminated by Advantage
Health for cause or elects to terminate his employment without cause, such
period shall continue until the third anniversary of the date of the Employment
Agreement. "Restricted Area" is defined as the area within a 50-mile radius of
any location at which Advantage Health engaged in its business or provided
services while the employee was employed by Advantage Health.
HEALTHSOUTH has also agreed, at or as promptly as practicable after the
Closing, to cause Advantage Health to offer to enter into Employment Agreements
with each of the following persons currently serving Advantage Health in the
capacities indicated: Michael F. Curran, Ph.D., Director; Gerald E. Borgal,
Chief Operating Officer, Medical Division and Chief Executive Officer of Region
II; Ellen Ferrante, Chief Executive Officer of Region III; Carolyn Markey, Chief
Executive Officer, Home Health Division; and Gregg Stanley, Chief Executive
Officer of Region I.
Pursuant to his Employment Agreement, Dr. Curran has agreed, for a period of
nine months from the date of his Employment Agreement, to devote up to an
aggregate of 40 hours per month in the performance of all responsibilities and
functions currently performed by him in service to Advantage
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Health including responsibilities with respect to affiliations between Advantage
Health and certain designated healthcare providers. Dr. Curran will be paid an
annual salary of $100,000. In the event of termination of employment either by
Advantage Health without cause or a termination by Dr. Curran for cause, Dr.
Curran will be entitled to receive, as severance, benefits equal to the amount
he would have received if his employment had continued for the remainder of the
nine month period at his salary in effect on the date of termination. Dr. Curran
is subject to the same covenant against competition to which Mr. Dunn and Mr.
Spencer are subject, except that for purposes of his Employment Agreement,
"Restricted Covenant Period" is defined as the period commencing on the date of
the Employment Agreement and terminating on the first anniversary of termination
of Dr. Curran's employment.
Each of Mr. Spencer and Dr. Curran has provided a letter to the Board of
Directors of Advantage Health indicating that he intends to vote at the Special
Meeting all shares of Advantage Health Common Stock owned by him in favor of
approval of the Plan and the Merger.
Pursuant to their respective Employment Agreements, each of Mr. Borgal, Mr.
Stanley, Ms. Markey and Ms. Ferrante has agreed, for a period of two years from
the date of their Employment Agreements, to devote his or her full-time services
in the performance of all responsibilities and functions currently performed by
him or her in service to Advantage Health, including responsibilities with
respect to affiliations between Advantage Health and certain designated
healthcare providers. Mr. Borgal, Mr. Stanley, Ms. Markey and Ms. Ferrante will
be paid annual salaries of $140,000, $123,600, $123,600 and $123,600,
respectively. Under their respective Employment Agreements, in the event of
termination of employment either by Advantage Health without cause or a
termination by the employee for cause, each of Mr. Borgal, Mr. Stanley, Ms.
Markey and Ms. Ferrante, as the case may be, will be entitled to receive, as
severance, benefits equal to the amount each would have received if his or her
employment had continued for the remainder of the two-year period at the salary
in effect on the date of termination, provided that if the employee's employment
is terminated by Advantage Health without cause within 10 days after the first
anniversary of the date of the employee's Employment Agreement, the employee
will not receive such severance benefits. Each of Mr. Borgal, Mr. Stanley, Ms.
Markey and Ms. Ferrante is subject to the same covenant against competition to
which Mr. Dunn and Mr. Spencer are subject, except that for purposes of their
Employment Agreements: (a) each is not permitted to engage in certain
activities, act in certain capacities or have certain ownership interests in any
enterprise that is engaged in the business of developing, managing, operating,
financing, owning or providing services to (i) assisted living, congregate care
senior living residential housing facilities, or (ii) consulting businesses with
respect to management protocols, and (b) "Restricted Covenant Period" is defined
as the period commencing on the date of his or her Employment Agreement and
terminating on the later of (x) the termination of employment or (y) the end of
any period during which the employee is paid salary under his or her Employment
Agreement.
The Plan provides that, at the Effective Time, all holders of Advantage
Health Stock Options which are then outstanding, whether or not then
exercisable, shall receive at or as promptly as practicable after the Closing a
number of shares of HEALTHSOUTH Common Stock determined as follows: (i) if the
Base Period Trading Price is neither greater than $34.50 nor less than $28.50,
that number of shares which is equal to the quotient obtained by dividing (a)
$47.50 minus the exercise price of such option (the "spread") by (b) the Base
Period Trading Price, with such quotient then being multiplied by the number of
shares of Advantage Health Common Stock which are subject to such option, or
(ii) if the Base Period Trading Price is greater than $34.50 or less than
$28.50, that number of shares calculated as provided in the preceding clause (i)
except that the spread shall be divided by $34.50 or $28.50, as the case may be
(rather the Base Period Trading Price) prior to being multiplied by the number
of shares of Advantage Health Common Stock subject to such option. Certain
members of management of Advantage Health and members of the Advantage Health
Board of Directors hold Advantage Health Stock Options which will be exchanged
for HEALTHSOUTH Common Stock at the Effective Time.
Indemnification and Insurance
The Plan provides that Advantage Health shall, and after the Effective Time
HEALTHSOUTH and the Surviving Corporation shall, indemnify, defend and hold
harmless each person who is, or has ever been at any time prior to the Effective
Time, an officer, director or employee of Advantage Health or any of its
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subsidiaries (the "Indemnified Parties") against all losses, claims, damages,
costs, expenses, liabilities or judgments, or amounts that are paid in
settlement with the approval of the indemnifying party, in connection with any
claim arising, in whole or in part, out of the fact that such person is or was a
director, officer or employee of Advantage Health, pertaining to a matter
occurring or existing at or prior to the Effective Time.
For a period of three years after the Effective Time, HEALTHSOUTH shall cause
to be maintained the current policies of directors and officers liability
insurance maintained by Advantage Health with respect to claims arising from
facts or events which occurred at or prior to the Effective Time; provided,
however, that HEALTHSOUTH will not be required to spend more than 200% of the
amount of Advantage Health's 1995 annual premium for its directors' and
officers' liability insurance.
Accounting Treatment
Consummation of the Merger is conditioned upon the receipt by HEALTHSOUTH and
Advantage Health of an opinion from Ernst & Young LLP, HEALTHSOUTH's independent
auditors, regarding that firm's concurrence with the conclusions of the
managements of HEALTHSOUTH and Advantage Health, respectively, as to the
appropriateness of pooling-of-interests accounting for the Merger under APB 16
if closed and consummated in accordance with the Plan. HEALTHSOUTH and Advantage
Health have agreed not to intentionally take or cause to be taken any action
that would disqualify the Merger as a pooling of interests for accounting
purposes.
Under the pooling-of-interests method of accounting, the historical basis of
the assets and liabilities of HEALTHSOUTH and Advantage Health will be combined
at the Effective Time and carried forward at their previously recorded amounts,
the stockholders' equity accounts of HEALTHSOUTH and Advantage Health will be
combined on HEALTHSOUTH's consolidated balance sheet and no goodwill or other
intangible assets will be created. Financial statements of HEALTHSOUTH issued
after the Merger will be restated retroactively to reflect the consolidated
operations of HEALTHSOUTH and Advantage Health as if the Merger had taken place
prior to the periods covered by such financial statements.
The unaudited pro forma financial information contained in this
Prospectus-Proxy Statement has been prepared using the pooling-of-interests
accounting method to account for the Merger. See "PRO FORMA CONDENSED FINANCIAL
INFORMATION".
Certain Federal Income Tax Consequences
The following is a discussion of the principal federal income tax
consequences of the Merger to the holders of Advantage Health Shares and
Advantage Health Stock Options. The discussion is based on currently existing
provisions of the Code, Treasury Regulations thereunder, certain administrative
rulings and court decisions. All of the foregoing are subject to change and any
such change can affect the continuing validity of this discussion. This summary
applies to holders of Advantage Health Shares who hold their Advantage Health
Shares as capital assets. This summary does not discuss all aspects of income
taxation that may be relevant to a particular holder of Advantage Health Shares
and Advantage Health Stock Options in light of such holder's specific
circumstances or to certain types of holders subject to special treatment under
the federal income tax laws (for example, foreign persons, dealers in
securities, banks and other financial institutions, insurance companies,
tax-exempt organizations and holders who acquired Advantage Health Shares
pursuant to the exercise of options or otherwise as compensation or through a
tax-qualified retirement plan or holders who are subject to the alternative
minimum tax provisions of the Code), and it does not discuss any aspect of
state, local, foreign or other tax law.
It is a condition to the consummation of the Merger that Advantage Health
receive an opinion from its counsel, Mintz, Levin, Cohn, Ferris, Glovsky and
Popeo, P.C. ("Mintz Levin"), and that HEALTHSOUTH receive an opinion from its
counsel, Haskell Slaughter Young & Johnston, Professional Association ("Haskell
Slaughter", and together with Mintz Levin, "Tax Counsel"), substantially to the
effect that for federal income tax purposes the Merger constitutes a
reorganization within the meaning of Section 368(a) of the Code. To satisfy such
condition, such opinions must state that the material federal income tax
consequences of the Merger will be that: (i) no gain or loss will be recognized
by HEALTHSOUTH, the Subsidiary or Advantage Health as a result of the Merger,
(ii) no gain or loss will be recognized by the stockholders of Advantage Health
upon the exchange of their Advan-
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tage Health Shares solely for shares of HEALTHSOUTH Common Stock pursuant to the
Merger, except that an Advantage Health stockholder who receives cash proceeds
in lieu of a fractional share of HEALTHSOUTH Common Stock will recognize gain or
loss equal to the difference, if any, between such stockholder's tax basis
allocated to such fractional share (as described in clause (iii) below) and the
amount of cash received, and such gain or loss will constitute capital gain or
loss if such stockholder's Advantage Health Shares with respect to which gain or
loss is recognized are held as a capital asset at the Effective Time, (iii) the
aggregate tax basis of the shares of the HEALTHSOUTH Common Stock received
solely in exchange for Advantage Health Shares pursuant to the Merger (including
fractional shares of HEALTHSOUTH Common Stock for which cash is received) will
be the same as the aggregate tax basis of the Advantage Health Shares exchanged
therefor, and (iv) the holding period for HEALTHSOUTH Common Stock received in
exchange for Advantage Health Shares pursuant to the Merger will include the
holding period of the Advantage Health Shares exchanged therefor, provided such
Advantage Health Shares were held as a capital asset at the Effective Time.
Neither HEALTHSOUTH nor Advantage Health has requested or will receive an
advance ruling from the Internal Revenue Service (the "Service") as to the
federal income tax consequences of the Merger. In rendering their opinions, Tax
Counsel may receive and will rely upon representations contained in certificates
of HEALTHSOUTH, the Subsidiary, Advantage Health and others. Tax Counsel's
opinions will be subject to certain limitations and qualifications and will be
based upon the truth and accuracy of these representations and upon certain
factual assumptions and represent Tax Counsel's best legal judgment. The tax
opinions are not binding on the Service or the courts and do not preclude the
Service from adopting a contrary position.
In addition to the foregoing discussion relating to the tax consequences of
the Merger to holders of Advantage Health Shares, holders of Advantage Health
Stock Options should take into account that they will recognize ordinary income
in an amount equal to the fair market value of the HEALTHSOUTH Common Stock
provided to offset the cancellation of such Advantage Health Stock Options.
EACH HOLDER OF ADVANTAGE HEALTH SHARES AND ADVANTAGE HEALTH STOCK OPTIONS IS
URGED TO CONSULT SUCH HOLDER'S TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES
TO SUCH HOLDER OF THE MERGER, INCLUDING THE APPLICATION OF STATE, LOCAL AND
FOREIGN TAX LAWS.
Resale of HEALTHSOUTH Common Stock by Affiliates
The shares of HEALTHSOUTH Common Stock to be issued to holders of Advantage
Health Shares and Advantage Health Stock Options in connection with the Merger
have been registered under the Securities Act. HEALTHSOUTH Common Stock received
by the securityholders of Advantage Health upon consummation of the Merger will
be freely transferable under the Securities Act, except for shares issued to any
person who may be deemed an "Affiliate" (as defined below) of Advantage Health
or HEALTHSOUTH within the meaning of Rule 145 under the Securities Act.
"Affiliates" are generally defined as persons who control, are controlled by, or
are under common control with Advantage Health or HEALTHSOUTH at the time of the
Special Meeting (generally, directors, certain executive officers and major
stockholders). Affiliates of Advantage Health or HEALTHSOUTH may not sell their
shares of HEALTHSOUTH Common Stock acquired in connection with the Merger,
except pursuant to an effective registration statement under the Securities Act
covering such shares or in compliance with Rule 145 or another applicable
exemption from the registration requirements of the Securities Act. In general,
under Rule 145, for two years following the Effective Time, an Affiliate
(together with certain related persons) would be entitled to sell shares of
HEALTHSOUTH Common Stock acquired in connection with the Merger only through
unsolicited "broker transactions" or in transactions directly with a "market
maker," as such terms are defined in Rule 144 under the Securities Act.
Additionally, the number of shares to be sold by an Affiliate (together with
certain related persons and certain persons acting in concert) during such
two-year period within any three-month period for purposes of Rule 145 may not
exceed the greater of (i) 1% of the outstanding shares of HEALTHSOUTH Common
Stock or (ii) the average weekly trading volume of such stock during the four
calendar weeks preceding such sale. Rule 145 would remain available to
Affiliates only if HEALTHSOUTH remained current with its information filings
with the SEC under the Exchange Act. Two
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years after the Effective Time, an Affiliate would be able to sell such
HEALTHSOUTH Common Stock without such manner of sale or volume limitations,
provided that HEALTHSOUTH were current with its Exchange Act information filings
and such Affiliate were not then an Affiliate of HEALTHSOUTH. Three years after
the Effective Time, an Affiliate would be able to sell such shares of
HEALTHSOUTH Common Stock without any restrictions so long as such Affiliate had
not been an Affiliate of HEALTHSOUTH for at least three months prior thereto.
Advantage Health has agreed to use its reasonable, good faith efforts to
cause each holder of Advantage Health Shares deemed to be an Affiliate of
Advantage Health to enter into an agreement providing that such Affiliate will
not sell, pledge, transfer or otherwise dispose of shares of HEALTHSOUTH Common
Stock to be received by such person in the Merger, (i) except in compliance with
the applicable provisions of the Securities Act and the rules and regulations
thereunder and (ii) until after such time as results covering at least thirty
days of post-Merger combined operations of HEALTHSOUTH and Advantage Health have
been published. HEALTHSOUTH has agreed that within 20 days after the end of the
first calendar month following at least 30 days after the Effective Time,
HEALTHSOUTH shall cause the publication of such results.
No Appraisal Rights
Under the DGCL, holders of Advantage Health Common Stock will not be entitled
to dissenters' rights of appraisal in connection with the Merger.
No Solicitation of Transactions
Advantage Health has agreed that it will not, and will direct each officer,
director, employee, representative and agent of Advantage Health not to,
directly or indirectly, encourage, solicit, participate in or initiate
discussions or negotiations with or provide any information to any corporation,
partnership, person or other entity or group (other than HEALTHSOUTH or an
affiliate, associate or agent of HEALTHSOUTH) concerning any merger, sale of
assets, sale of or tender offer for Advantage Health Shares or similar
transactions involving Advantage Health. Under the Plan, Advantage Health may
furnish information concerning Advantage Health to other corporations,
partnerships, persons or other entities or groups, and may participate in
discussions and negotiate with such entities concerning any proposal to acquire
Advantage Health upon a merger, purchase of assets, purchase of or tender offer
for Advantage Health Shares or similar transaction (an "Acquisition
Transaction"), in response to unsolicited requests therefor, if the Board of
Directors of Advantage Health determines in its good faith judgment in the
exercise of its fiduciary duties or its duties under Rule 14e-2 under the
Exchange Act that such action is appropriate in furtherance of the best interest
of its stockholders. Advantage Health has further agreed that it will notify
HEALTHSOUTH if it enters into a confidentiality agreement with any third party
in response to any unsolicited request for information and access in connection
with a possible Acquisition Transaction, including providing HEALTHSOUTH with
the identity of the third party.
Expenses
The Plan provides that all costs and expenses incurred in connection with the
Plan and the transactions contemplated thereby shall be paid by the party
incurring such expense, except that expenses of printing and mailing this
Prospectus-Proxy Statement shall be shared equally by HEALTHSOUTH and Advantage
Health.
NYSE Listing
A listing application will be filed with the NYSE to list the shares of
HEALTHSOUTH Common Stock to be issued to Advantage Health stockholders and
option holders in connection with the Merger. Although no assurance can be given
that the shares of HEALTHSOUTH Common Stock so issued will be accepted for
listing, HEALTHSOUTH and Advantage Health anticipate that these shares will
qualify for listing on the NYSE upon official notice of issuance thereof. It is
a condition to the Merger that such shares of HEALTHSOUTH Common Stock be
approved for listing on the NYSE upon official notice of issuance at the
Effective Time.
38
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA -- HEALTHSOUTH
The consolidated income statement data set forth below for the years ended
December 31, 1990, 1991, 1992, 1993 and 1994 and the consolidated balance sheet
data at December 31, 1990, 1991, 1992, 1993 and 1994 are derived from the
audited consolidated financial statements of HEALTHSOUTH. The data for the nine
months ended September 30, 1994 and 1995 and at September 30, 1995 are derived
from the unaudited consolidated financial statements of HEALTHSOUTH. In the
opinion of HEALTHSOUTH, the consolidated income statement data for the nine
months ended September 30, 1994 and 1995, and the consolidated balance sheet
data at September 30, 1995, reflect all adjustments (which consist of only
normal recurring adjustments) necessary for a fair presentation of results of
interim periods. Operating results for the nine months ended September 30, 1995,
are not necessarily indicative of results for the full fiscal year or for any
future interim period. The data set forth below should be read in conjunction
with the consolidated financial statements, related notes and other information
incorporated by reference herein. The financial information for all periods
set forth below has been restated to reflect the acquisition of ReLife, Inc.
("ReLife") in December 1994 and the acquisition of Surgical Health Corporation
("SHC") in June 1995, each of which has been accounted for as a pooling of
interests.
<TABLE>
<CAPTION>
Year Ended December 31,
1990 1991 1992 1993 1994
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues ................................. $207,390 $277,655 $501,046 $656,329 $1,236,190
Operating expenses:
Operating units ......................... 151,970 200,350 372,169 471,778 906,712
Corporate general and administrative .... 7,025 10,901 16,878 24,329 45,895
Provision for doubtful accounts........... 5,608 6,092 13,254 16,181 23,739
Depreciation and amortization ............ 11,388 15,115 29,834 46,224 86,678
Interest expense.......................... 12,058 10,507 12,623 18,495 65,286
Interest income........................... (4,166) (5,835) (5,415) (3,924) (4,308)
Merger expenses (1) ...................... -- -- -- 333 6,520
Loss on impairment of assets (2) ......... -- -- -- -- 10,500
Loss on abandonment of computer project
(2)...................................... -- -- -- -- 4,500
NME Selected Hospitals Acquisition related
expense (2) ............................. -- -- -- 49,742 --
Terminated merger expense (2) ............ -- -- 3,665 -- --
Gain on sale of partnership interest ..... -- -- -- (1,400) --
----------- ----------- ----------- ----------- -------------
183,883 237,130 443,008 621,758 1,145,522
----------- ----------- ----------- ----------- -------------
Income before income taxes and minority
interests................................ 23,507 40,525 58,038 34,571 90,668
Provision for income taxes ............... 8,153 13,582 18,864 11,930 34,305
----------- ----------- ----------- ----------- -------------
Income before minority interests.......... 15,354 26,943 39,174 22,641 56,363
Minority interests........................ 929 1,272 4,245 5,444 6,402
----------- ----------- ----------- ----------- -------------
Net income .............................. $ 14,425 $ 25,671 $ 34,929 $ 17,197 $ 49,961
=========== =========== =========== =========== =============
Weighted average common and common
equivalent shares outstanding............ 41,337 57,390 74,214 77,709 84,687
=========== =========== =========== =========== =============
Net income per common and common
equivalent share (3) .................... $ 0.35 $ 0.45 $ 0.47 $ 0.22 $ 0.59
=========== =========== =========== =========== =============
Net income per common share-assuming full
dilution (3)(4) ......................... $ 0.32 $ 0.43 N/A N/A $ 0.59
=========== =========== =========== =========== =============
</TABLE>
Nine Months Ended
September 30,
1994 1995
(Unaudited)
INCOME STATEMENT DATA:
Revenues $902,268 $1,109,689
Operating Expenses:
Operating units ......................... 670,607 788,593
Corporate general and administrative .... 29,831 28,463
Provision for doubtful accounts........... 16,691 20,520
Depreciation and amortization ............ 59,142 86,767
Interest expense.......................... 45,632 68,697
Interest income........................... (3,256) (4,529)
Merger expenses (1) ...................... 3,571 29,194
Loss on impairment of assets (2) ......... -- 11,192
Loss on abandonment of computer project
(2)...................................... -- --
NME Selected Hospitals Acquisition related
expense (2) ............................. -- --
Terminated merger expense (2) ............ -- --
Gain on sale of partnership interest ..... -- --
---------- ------------
822,218 1,028,897
---------- ------------
Income before income taxes and minority
interests................................ 80,050 80,792
Provision for income taxes ............... 30,418 27,525
---------- ------------
Income before minority interests.......... 49,632 53,267
Minority interests........................ 4,276 8,357
---------- ------------
Net income .............................. $ 45,356 $ 44,910
========== ============
Weighted average common and common
equivalent shares outstanding............ 84,509 87,773
========== ============
Net income per common and common
equivalent share (3) .................... $ 0.54 $ 0.51
========== ============
Net income per common share--assuming full
dilution (3)(4) ......................... N/A $ 0.51
========== ============
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1990 1991 1992 1993 1994
---- ---- ---- ---- ----
BALANCE SHEET DATA: (In Thousands)
<S> <C> <C> <C> <C> <C>
Cash and marketable securities $ 74,774 $126,508 $111,524 $ 89,999 $ 85,363
Working capital............... 114,761 184,729 204,065 211,063 231,327
Total assets.................. 321,383 503,797 795,367 1,444,418 1,736,336
Long-term debt (5)............ 157,585 171,275 338,000 888,181 1,034,394
Stockholders' equity.......... 132,009 302,176 389,425 418,298 489,920
September 30,
1995
----
BALANCE SHEET DATA: (Unaudited)
Cash and marketable securities $93,169
Working capital.............. 299,157
Total assets................... 2,150,680
Long-term debt (5)............. 1,404,170
Stockholders' equity........... 547,547
<FN>
(1) Expenses related to SHC's Ballas merger in 1993, the ReLife and Heritage
Acquisitions in 1994 and the SHC Acquisition and NovaCare Rehabilitation
Hospitals Acquisition in 1995.
(2) See "Notes to Consolidated Financial Statements".
(3) Adjusted to reflect a three-for-two stock split effected in the form of a
50% stock dividend paid on December 31, 1991 and a two-for-one stock split
effected in the form of a 100% stock dividend paid on April 17, 1995.
(4) Fully-diluted earnings per share in 1990 and 1991 reflect shares reserved
for issuance upon exercise of dilutive stock options and shares reserved
for issuance upon conversion of HEALTHSOUTH's 7 3/4 % Convertible
Subordinated Debentures due 2014, all of which were converted into Common
Stock prior to June 3, 1991. Fully-diluted earnings per share in 1994 and
the nine months ended September 30, 1995 reflect shares reserved for
issuance upon conversion of HEALTHSOUTH's 5% Convertible Subordinated
Debentures due 2001.
(5) Includes current portion of long-term debt.
</FN>
</TABLE>
39
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA -- ADVANTAGE HEALTH
The following selected consolidated financial data for each of the five years
in the period ended August 31, 1995 are derived from the audited consolidated
financial statements of Advantage Health. The financial data for the three-month
periods ended November 30, 1994 and 1995 are derived from unaudited consolidated
financial statements of Advantage Health. The unaudited financial statements
include all adjustments, consisting of normal recurring accruals, which
Advantage Health considers necessary for a fair presentation of the financial
position and results of operations for these periods. Operating results for the
three months ended November 30, 1995 are not necessarily indicative of results
that may be expected for the entire fiscal year ending August 31, 1996. The data
should be read in conjunction with the consolidated financial statements,
related notes and other financial information incorporated by reference herein.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------------------------------
1991 1992 1993 1994 1995
------------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues............................... $ 69,969 (1)$ 80,760 $ 97,245 $ 122,828 $ 171,841
Expenses:
Operating and administrative......... 56,429 67,043 81,787 103,828 147,155
Depreciation and amortization ....... 2,186 2,337 2,792 3,696 4,478
Interest............................. 5,185 2,829 1,477 1,541 2,154
------------- ----------- ----------- ----------- -----------
Income from operations................. 6,169 8,551 11,189 13,763 18,054
Nonoperating gains and (losses)(2) ... (7,817) 137 375 219 (393)
------------- ----------- ----------- ----------- -----------
Income (loss) before income taxes and
extraordinary item.................... (1,648) 8,688 11,564 13,982 17,661
Income taxes (benefit) ................ (464) 3,854 5,110 6,285 7,861
------------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary
item.................................. (1,184) 4,834 6,454 7,697 9,800
Extraordinary item, net of tax benefit
of $356............................... -- 527 -- -- --
------------- ----------- ----------- ----------- -----------
Net income (loss) ..................... $ (1,184) $ 4,307 $ 6,454 $ 7,697 $ 9,800
============= =========== =========== =========== ===========
Net income (loss) applicable to
common stock.......................... $ (1,399) $ 4,227 $ 6,454 $ 7,697 $ 9,800
============= =========== =========== =========== ===========
Net income (loss) per share before
extraordinary item.................... $ (0.51) $ 0.97 $ 1.07 $ 1.28 $ 1.60
============= =========== =========== =========== ===========
Net income (loss) per share ........... $ (0.51) $ 0.86 $ 1.07 $ 1.28 $ 1.60
============= =========== =========== =========== ===========
Weighted average common shares
and common share equivalents
outstanding........................... 2,759,364 4,897,011 6,035,038 6,026,727 6,112,079
Three Months Ended
November 30,
-----------------------
1994 1995
(Unaudited)
Statement of Operations Data:
Revenues............................... $38,958 $49,156
Expenses:
Operating and administrative......... 33,384 42,283
Depreciation and amortization ....... 1,037 1,284
Interest............................. 487 864
----------- -----------
Income from operations................. 4,050 4,725
Nonoperating gains and (losses)(2) ... 55 26
----------- -----------
Income (loss) before income taxes and
extraordinary item.................... 4,105 4,751
Income taxes (benefit) ................ 1,847 2,043
----------- -----------
Income (loss) before extraordinary
item.................................. 2,258 2,708
Extraordinary item, net of tax benefit
of $356............................... -- --
----------- -----------
Net income (loss) ..................... $ 2,258 $ 2,708
=========== ===========
Net income (loss) applicable to
common stock.......................... $ 2,258 $ 2,708
=========== ===========
Net income (loss) per share before
extraordinary item.................... $ 0.37 $ 0.46
=========== ===========
Net income (loss) per share ........... $ 0.37 $ 0.46
=========== ===========
Weighted average common shares
and common share equivalents
outstanding........................... 6,166,770 5,950,053
</TABLE>
<TABLE>
<CAPTION>
August 31,
------------------------------------------------
1991 1992 1993 1994 1995
-------- --------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data (3):
Working capital..................... $ 2,582 $17,753 $19,129 $ 16,882 $ 24,427
Goodwill............................ 30,115 29,305 30,859 33,755 40,771
Total assets ....................... 78,203 88,045 96,548 116,626 134,335
Long-term debt, less current
portion............................. 47,274 23,383 22,975 21,635 39,802
Stockholders' equity ............... (59) 41,731 47,217 54,243 57,254
November 30,
-----------
1995
----
(Unaudited)
---------
Balance Sheet Data (3):
Working capital..................... $ 26,681
Goodwill............................ 40,372
Total assets ....................... 137,318
Long-term debt, less current
portion............................. 38,796
Stockholders' equity ............... 60,060
<FN>
(1) Revenues for the year ended August 31, 1991 include $2,443,000
attributable to prior year settlements with third-party payors.
(2) The year ended August 31, 1991 includes a $5,400,000 non-recurring charge
incurred to account for the obligation under a contingent payment
agreement with Advantage Health's prior lender and a $2,000,000 charge for
an operating deficit guarantee which expired in October 1992.
(3) Certain amounts in the year ended August 31, 1992 "Balance Sheet Data"
have been reclassified to conform to the 1993 presentation.
</FN>
</TABLE>
40
<PAGE>
PRO FORMA CONDENSED FINANCIAL INFORMATION
The following pro forma condensed financial information and explanatory notes
are presented to reflect the effect of the following transactions for all
periods presented:
(i) the merger of a wholly-owned subsidiary of HEALTHSOUTH with Sutter
Surgery Centers, Inc. ("SSCI") in a transaction to be accounted for as a
pooling of interests, which merger was consummated in October 1995;
(ii) the merger of a wholly-owned subsidiary of HEALTHSOUTH with Surgical
Care Affiliates ("SCA") in a transaction to be accounted for as a pooling of
interests, which merger was consummated in January 1996; and
(iii) the merger of a wholly-owned subsidiary of HEALTHSOUTH with
Advantage Health in a transaction to be accounted for as a pooling of
interests, which merger is expected to be consummated in the first quarter of
1996 (collectively, the "Mergers").
The HEALTHSOUTH historical amounts reflect the combination of HEALTHSOUTH,
ReLife, Inc. ("ReLife") and Surgical Health Corporation ("SHC") for all periods
presented, as HEALTHSOUTH acquired Relife in December 1994 and SHC in June 1995
in transactions accounted for as poolings of interests.
The pro forma condensed balance sheet assumes that each of the Mergers was
consummated on September 30, 1995, and the pro forma condensed income statements
assume that each of the Mergers was consummated on January 1, 1992. The
assumptions are described in the accompanying Notes to Pro Forma Condensed
Financial Information.
In addition, the pro forma condensed financial information reflects the
impact of HEALTHSOUTH's acquisition, effective April 1, 1995, from NovaCare,
Inc. ("NovaCare") of 11 rehabilitation hospitals, 12 other facilities and two
Certificates of Need (the "NovaCare Rehabilitation Hospitals Acquisition") on
the results of operations for the year ended December 31, 1994 and the nine
months ended September 30, 1995.
All HEALTHSOUTH shares outstanding and per share amounts have been adjusted
to reflect a two-for-one stock split effected in the form of a 100 percent stock
dividend on April 17, 1995.
The pro forma information should be read in conjunction with the historical
financial statements of HEALTHSOUTH and each of the other combining companies.
Certain balance sheet and income statement amounts from the SSCI, SCA and
Advantage Health historical financial statements have been reclassified in order
to conform to the HEALTHSOUTH method of presentation. The pro forma financial
information is presented for informational purposes only and is not necessarily
indicative of the results of operations or combined financial position that
would have resulted had the Mergers been consummated at the date indicated, nor
is it necessarily indicative of the results of operations of future periods or
future combined financial position.
41
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
PRO FORMA
HEALTHSOUTH SSCI ADJUSTMENTS SCA
----------- ---- ----------- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................ $ 86,952 $ 5,024 $ 0 $ 39,047
Other marketable securities ............. 6,217 0 0 295
Accounts receivable...................... 298,178 4,047 0 30,764
Inventories, prepaid expenses and
other current assets.................... 102,906 2,714 0 16,283
------------- ---------- ------------- -----------
Total current assets...................... 494,253 11,785 0 86,389
Other assets.............................. 58,127 0 0 2,262
Deferred income taxes .................... 7,559 0 0 0
Property, plant and equipment, net ....... 1,049,375 14,630 0 158,501
Intangible assets, net.................... 541,366 15,230 0 124,270
------------- ---------- ------------- -----------
Total assets.............................. $2,150,680 $41,645 $ 0 $371,422
============= ========== ============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................... $ 83,246 $ 1,391 $ 3,000 (1) $ 4,441
Salaries and wages payable............... 44,668 947 0 963
Accrued interest payable and other
liabilities............................. 49,462 361 (1,170)(1) 30,690
Current portion of long-term debt........ 17,720 2,799 0 729
------------- ---------- ------------- -----------
Total current liabilities................. 195,096 5,498 1,830 36,823
Long-term debt............................ 1,386,450 14,955 0 65,119
Deferred income taxes..................... 0 509 0 3,846
Other long-term liabilities............... 5,470 0 0 0
Deferred revenue.......................... 7,137 0 0 0
Minority interests........................ 8,980 5,375 0 36,404
Stockholders' equity:
Preferred Stock, $.10 par value.......... 0 0 0 0
Common Stock, $.01 par value ............ 954 196 (178)(2) 9,867
Additional paid-in capital............... 719,296 18,905 178 (2) 96,126
Retained earnings........................ 178,929 1,481 (1,830)(1) 129,288
Common stock subscription receivable..... (335,423) 0 0 0
Treasury stock........................... (323) 0 0 (6,051)
Receivable from Employee Stock
Ownership Plan.......................... (15,886) 0 0 0
Notes receivable from stockholders....... 0 (5,274) 0 0
------------- ---------- ------------- -----------
Total stockholders' equity................ 547,547 15,308 (1,830) 229,230
------------- ---------- ------------- -----------
Total liabilities and stockholders'
equity................................... $2,150,680 $41,645 $ 0 $371,422
============= ========== ============= ===========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA ADVANTAGE PRO FORMA PRO FORMA
ADJUSTMENTS HEALTH ADJUSTMENTS COMBINED
----------- ------ ------------ --------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................ $0 $ 7,668 $0 $138,691
Other marketable securities ............. 0 0 0 6,512
Accounts receivable...................... 0 33,621 0 366,610
Inventories, prepaid expenses and
other current assets.................... 0 7,005 0 128,908
-------------- ----------- ------------- -------------
Total current assets...................... 0 48,294 0 640,721
Other assets.............................. 0 8,510 0 68,899
Deferred income taxes .................... 0 0 (7,559)(3) 0
Property, plant and equipment, net ....... 0 32,449 0 1,254,955
Intangible assets, net.................... 0 42,401 0 723,267
-------------- ----------- ------------- -------------
Total assets.............................. $ 0 $131,654 $(7,559) $2,687,842
============== =========== ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................... $15,000 (1) $ 10,036 $10,000 (1) $ 127,114
Salaries and wages payable............... 0 7,615 0 54,193
Accrued interest payable and other
liabilities............................. (5,850)(1) 419 (3,900)(1) 70,012
Current portion of long-term debt........ 0 5,797 0 27,045
-------------- ----------- ------------- -------------
Total current liabilities................. 9,150 23,867 6,100 278,364
Long-term debt............................ 0 39,802 0 1,506,326
Deferred income taxes..................... 0 8,018 (7,559)(3) 4,814
Other long-term liabilities............... 0 2,713 0 8,183
Deferred revenue.......................... 0 0 0 7,137
Minority interests........................ 0 0 0 50,759
Stockholders' equity:
Preferred Stock, $.10 par value.......... 0 0 0 0
Common Stock, $.01 par value ............ (9,385)(2) 61 31 (2) 1,546
Additional paid-in capital............... 9,385 (2) 41,296 (31)(2) 885,155
Retained earnings........................ (9,150)(1) 25,524 (6,100)(1) 318,142
Common stock subscription receivable..... 0 0 0 (335,423)
Treasury stock........................... 0 (9,627) 0 (16,001)
Receivable from Employee Stock
Ownership Plan.......................... 0 0 0 (15,886)
Notes receivable from stockholders....... 0 0 0 (5,274)
-------------- ----------- ------------- -------------
Total stockholders' equity................ (9,150) 57,254 (6,100) 832,259
-------------- ----------- ------------- -------------
Total liabilities and stockholders'
equity................................... $ 0 $131,654 $(7,559) $2,687,842
============== =========== ============= =============
</TABLE>
See accompanying notes.
42
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED INCOME STATEMENT (UNAUDITED)
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
ACQUISITION
------------------------------------------
PRO FORMA PRO FORMA
HEALTHSOUTH NOVACARE ADJUSTMENTS COMBINED
----------- --------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues........................ $1,236,190 $142,548 $ 8,058 (5) $1,386,796
Operating expenses:
Operating units................ 906,712 128,233 (12,406)(2) 1,022,539
Corporate general and
administrative................ 45,895 0 0 45,895
Provision for doubtful
accounts....................... 23,739 1,269 0 25,008
Depreciation and amortization .. 86,678 7,041 (1,918)(1) 99,327
7,526 (3)
Interest expense................ 65,286 11,096 10,100 (4) 86,482
Interest income................. (4,308) 0 0 (4,308)
Merger expenses................. 6,520 0 0 6,520
Gain on sale of MCA Stock ...... 0 0 0 0
Loss on impairment of assets ... 10,500 0 0 10,500
Loss on abandonment of computer
project........................ 4,500 0 0 4,500
Loss on disposal of Surgery
Centers........................ 0 0 0 0
----------- --------- ------------ ----------
1,145,522 147,639 3,302 1,296,463
----------- --------- ------------ ----------
Income before income taxes and
minority interests............. 90,668 (5,091) 4,756 90,333
Provision for income taxes ..... 34,305 (1,084) 780 (6) 34,001
----------- --------- ------------ ----------
56,363 (4,007) 3,976 56,332
Minority interests.............. 6,402 445 0 6,847
----------- --------- ------------ ----------
Net income...................... $ 49,961 $ (4,452) $ 3,976 $ 49,485
=========== ========= ============ ==========
Weighted average common and
common equivalent shares
outstanding.................... 84,687 N/A N/A 84,687
=========== ========= ============ ==========
Net income per common and
common equivalent share........ $ 0.59 N/A N/A $ 0.58
=========== ========= ============ ==========
Net income per common share--
assuming full dilution......... $ 0.59 N/A N/A $ 0.58
========== ========== ============ ==========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA ADVANTAGE PRO FORMA PRO FORMA
SSCI ADJUSTMENTS SCA ADJUSTMENTS HEALTH ADJUSTMENTS COMBINED
-------- ----------- -------- ------------ --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues........................ $38,175 $0 $239,272 $0 $135,562 $0 $1,799,805
Operating expenses:
Operating units................ 24,133 0 129,037 0 105,384 0 1,281,093
Corporate general and
administrative................ 2,711 0 5,464 0 7,570 0 61,640
Provision for doubtful
accounts....................... 3,907 0 3,061 0 2,197 0 34,173
Depreciation and amortization .. 2,627 0 17,392 0 3,772 0 123,118
Interest expense................ 1,588 0 5,144 0 1,626 0 94,840
Interest income................. (258) 0 (1,632) 0 (189) 0 (6,387)
Merger expenses................. 0 0 0 0 0 0 6,520
Gain on sale of MCA Stock ...... 0 0 (7,727) 0 0 0 (7,727)
Loss on impairment of assets ... 0 0 0 0 0 0 10,500
Loss on abandonment of computer
project........................ 0 0 0 0 0 0 4,500
Loss on disposal of Surgery
Centers........................ 0 0 13,197 0 0 0 13,197
-------- ----------- -------- ------------ --------- ----------- ----------
34,708 0 163,936 0 120,360 0 1,615,467
-------- ----------- -------- ------------ --------- ----------- ----------
Income before income taxes and
minority interests............. 3,467 0 75,336 0 15,202 0 184,338
Provision for income taxes ..... 473 0 23,636 0 6,707 0 64,817
-------- ----------- -------- ------------ --------- ----------- ----------
2,994 0 51,700 0 8,495 0 119,521
Minority interests.............. 2,462 0 22,420 0 185 0 31,914
-------- ----------- -------- ------------ --------- ----------- ----------
Net income...................... $ 532 $ 0 $ 29,280 $ 0 $ 8,310 $ 0 $ 87,607
======== =========== ======== ============ ========= =========== ==========
Weighted average common and
common equivalent shares
outstanding.................... 19,612 (17,837)(2) 38,892 8,556 (2) 6,073 3,084 (2) 143,067
======== =========== ======== ============ ========= =========== ==========
Net income per common and
common equivalent share........ $ 0.03 N/A $ 0.75 N/A $ 1.37 N/A $ 0.61
======== =========== ======== ============ ========= =========== ==========
Net income per common share --
assuming full dilution......... N/A N/A N/A N/A N/A N/A $ 0.61
======== =========== ======== ============ ========= =========== ==========
</TABLE>
See accompanying notes.
43
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED INCOME STATEMENT (UNAUDITED)
YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
PRO FORMA
HEALTHSOUTH SSCI ADJUSTMENTS SCA
------------- ---------- ------------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues................................ $656,329 $22,096 $ 0 $199,270
Operating expenses:
Operating units........................ 471,778 14,768 0 103,825
Corporate general and administrative... 24,329 2,264 0 3,880
Provision for doubtful accounts......... 16,181 1,766 0 1,068
Depreciation and amortization........... 46,224 1,603 0 12,626
Interest expense........................ 18,495 612 0 3,600
Interest income......................... (3,924) (428) 0 (1,219)
Merger expenses......................... 333 0 0 0
NME Selected Hospitals Acquisition
related expense........................ 49,742 0 0 0
Gain on sale of partnership interest ... (1,400) 0 0 0
------------- ---------- ------------- ----------
621,758 20,585 0 123,780
------------- ---------- ------------- ----------
Income before income taxes and minority
interests.............................. 34,571 1,511 0 75,490
Provision for income taxes.............. 11,930 132 0 20,650
------------- ---------- ------------- ----------
22,641 1,379 0 54,840
Minority interests...................... 5,444 1,240 0 22,624
------------- ---------- ------------- ----------
Income from continuing operations ...... 17,197 139 0 32,216
Income from discontinued operations .... 0 0 0 4,452
------------- ---------- ------------- ----------
Net income.............................. $ 17,197 $ 139 $ 0 $ 36,668
============= ========== ============= ==========
Weighted average common and common
equivalent shares outstanding.......... 77,709 19,608 (17,833)(2) 38,117
============= ========== ============= ==========
Net income per common and common
equivalent share....................... $ 0.22 $ 0.01 N/A $ 0.96
============= ========== ============= ==========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA ADVANTAGE PRO FORMA PRO FORMA
ADJUSTMENTS HEALTH ADJUSTMENTS COMBINED
------------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues................................ $0 $101,511 $0 $979,206
Operating expenses:
Operating units........................ 0 77,830 0 668,201
Corporate general and administrative... 0 6,570 - 37,043
Provision for doubtful accounts......... 0 1,011 0 20,026
Depreciation and amortization........... 0 3,119 0 63,572
Interest expense........................ 0 1,493 0 24,200
Interest income......................... 0 (332) 0 (5,903)
Merger expenses......................... 0 0 0 333
NME Selected Hospitals Acquisition
related expense........................ 0 0 0 49,742
Gain on sale of partnership interest ... 0 0 0 (1,400)
------------- ----------- ------------- ------------
0 89,691 0 855,814
------------- ----------- ------------- ------------
Income before income taxes and minority
interests.............................. 0 11,820 0 123,392
Provision for income taxes.............. 0 5,281 0 37,993
------------- ----------- ------------- ------------
0 6,539 0 85,399
Minority interests...................... 0 69 0 29,377
------------- ----------- ------------- ------------
Income from continuing operations ...... 0 6,470 0 56,022
Income from discontinued operations .... 0 0 0 4,452
------------- ----------- ------------- ------------
Net income.............................. $ 0 $6,470 0 $ 60,474
============= =========== ============= ============
Weighted average common and common
equivalent shares outstanding.......... 8,386 (2) 6,028 3,062 (2) 135,077
============= =========== ============= ============
Net income per common and common
equivalent share....................... N/A $ 1.07 N/A $ 0.45
============= =========== ============= ============
</TABLE>
See accompanying notes.
44
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED INCOME STATEMENT (UNAUDITED)
YEAR ENDED DECEMBER 31, 1992
<TABLE>
<CAPTION>
PRO FORMA
HEALTHSOUTH SSCI ADJUSTMENTS SCA
-------------- ---------- ---------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues ............................ $501,046 $ 2,611 $ 0 $162,179
Operating expenses:
Operating units .................... 372,169 1,815 0 83,871
Corporate general and administrative 16,878 476 0 3,804
Provision for doubtful accounts .... 13,254 177 0 1,442
Depreciation and amortization ...... 29,834 185 0 9,695
Interest expense .................... 12,623 44 0 3,410
Interest income ..................... (5,415) (19) 0 (2,743)
Terminated merger expense ........... 3,665 0 0 0
Loss on extinguishment of debt ..... 0 0 0 0
-------------- ---------- ---------------- -----------
443,008 2,678 0 99,479
-------------- ---------- ---------------- -----------
Income before income taxes and
minority interests ................. 58,038 (67) 0 62,700
Provision for income taxes .......... 18,864 (22) 0 15,663
-------------- ---------- ---------------- -----------
39,174 (45) 0 47,037
Minority interests .................. 4,245 185 0 21,481
-------------- ---------- ---------------- -----------
Income from continuing operations .. 34,929 (230) 0 25,556
Income from discontinued operations 0 0 0 3,283
-------------- ---------- ---------------- -----------
Net income .......................... $ 34,929 $ (230) $ 0 $ 28,839
============== ========== ================ ===========
Weighted average common and common
equivalent shares outstanding ...... 74,214 19,608 (17,833) (2) 37,191
============== ========== ================ ===========
Net income per common and common
equivalent share ................... $ 0.47 $ (0.01) N/A $ 0.78
============== ========== ================ ===========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA ADVANTAGE PRO FORMA PRO FORMA
ADJUSTMENTS HEALTH ADJUSTMENTS COMBINED
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Revenues ............................ $ 0 $84,298 $ 0 $750,134
Operating expenses:
Operating units .................... 0 63,764 0 521,619
Corporate general and administrative 0 4,509 0 25,667
Provision for doubtful accounts .... 0 1,680 0 16,553
Depreciation and amortization ...... 0 2,393 0 42,107
Interest expense .................... 0 2,160 0 18,237
Interest income ..................... 0 (418) 0 (8,595)
Terminated merger expense ........... 0 0 0 3,665
Loss on extinguishment of debt ..... 0 883 0 883
-------------- ------------ -------------- ------------
0 74,971 0 620,136
-------------- ------------ -------------- ------------
Income before income taxes and
minority interests ................. 0 9,327 0 129,998
Provision for income taxes .......... 0 4,045 0 38,550
-------------- ------------ -------------- ------------
0 5,282 0 91,448
Minority interests .................. 0 32 0 25,943
-------------- ------------ -------------- ------------
Income from continuing operations .. 0 5,250 0 65,505
Income from discontinued operations 0 0 0 3,283
-------------- ------------ -------------- ------------
Net income .......................... $ 0 $5,250 $ 0 $ 68,788
============== ============ ============== ============
Weighted average common and common
equivalent shares outstanding ...... 8,182 (2) 5,483 2,785 (2) 129,630
============== ============ ============== ============
Net income per common and common
equivalent share ................... N/A $ 0.96 N/A $ 0.53
============== ============ ============== ============
</TABLE>
See accompanying notes.
45
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED INCOME STATEMENT (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
ACQUISITION
----------------------------------
PRO FORMA PRO FORMA
HEALTHSOUTH NOVACARE ADJUSTMENTS COMBINED
----------- -------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues....................... $1,109,689 $37,942 $1,860 (5) $1,149,491
Operating expenses:
Operating units............... 788,593 33,065 (910)(2) 820,748
Corporate general
and administrative........... 28,463 0 0 28,463
Provision for doubtful
accounts...................... 20,520 322 0 20,842
Depreciation and amortization . 86,767 1,996 (999)(1) 89,646
1,882 (3)
Interest expense............... 68,697 2,595 2,684 (4) 73,976
Interest income................ (4,529) 0 0 (4,529)
Merger expenses................ 29,194 0 0 29,194
Loss on impairment of assets .. 11,192 0 0 11,192
----------- -------- ----------- -----------
1,028,897 37,978 2,657 1,069,532
----------- -------- ----------- -----------
Income before income taxes and
minority interests............ 80,792 (36) (797) 79,959
Provision for income taxes .... 27,525 (101) (259)(6) 27,165
----------- -------- ----------- -----------
53,267 65 (538) 52,794
Minority interests............. 8,357 89 0 8,446
----------- -------- ----------- -----------
Net income..................... $ 44,910 $ (24) $ (538) $ 44,348
=========== ======== =========== ===========
Weighted average common and
common equivalent shares
outstanding................... 87,773 N/A N/A 87,773
=========== ======== =========== ===========
Net income per common and
common equivalent share....... $ 0.51 N/A N/A $ 0.51
=========== ======== =========== ===========
Net income per common share --
assuming full dilution........ $ 0.51 N/A N/A $ 0.51
=========== ======== =========== ===========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
Pro Forma Pro Forma Advantage Pro Forma Pro Forma
SSCI Adjustments SCA Adjustments Health Adjustments Combined
----- ------------ --- ----------- ------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues....................... $29,868 $ 0 $197,413 $ 0 $133,079 $ 0 $1,509,851
Operating expenses:
Operating units............... 17,661 0 102,383 0 105,665 0 1,046,457
Corporate general
and administrative........... 1,820 0 4,236 0 5,960 0 40,479
Provision for doubtful
accounts...................... 3,125 0 2,381 0 2,146 0 28,494
Depreciation and amortization . 2,026 0 12,640 0 3,441 0 107,753
Interest expense............... 1,258 0 3,413 0 1,667 0 80,314
Interest income................ (274) 0 (1,257) 0 (184) 0 (6,244)
Merger expenses................ 0 0 0 0 0 0 29,194
Loss on impairment of assets .. 0 0 0 0 0 0 11,192
-------- ------------ --------- ----------- --------- ----------- ----------
25,616 0 123,796 0 118,695 0 1,337,639
-------- ------------ --------- ----------- --------- ----------- ----------
Income before income taxes and
minority interests............ 4,252 0 73,617 0 14,384 0 172,212
Provision for income taxes .... 848 0 21,397 0 6,014 0 55,424
-------- ------------ --------- ----------- --------- ----------- ----------
3,404 0 52,220 0 8,370 0 116,788
Minority interests............. 2,364 0 19,217 0 828 0 30,855
-------- ------------ --------- ----------- --------- ----------- ----------
Net income..................... $ 1,040 $ 0 $33,003 $ 0 $7,542 $ 0 $ 85,933
======== ============ ========= =========== ========= =========== ==========
Weighted average common and
common equivalent shares
outstanding................... 19,615 (17,840)(2) 39,189 8,622 (2) 6,108 3,102 (2) 146,569
======== ============ ========= =========== ========= =========== ==========
Net income per common and
common equivalent share....... $ 0.05 N/A $ 0.84 N/A $ 1.23 N/A $ 0.59
======== ============ ========= =========== ========= =========== ==========
Net income per common share --
assuming full dilution........ N/A N/A N/A N/A N/A N/A $ 0.59
======== ============ ========= =========== ========= =========== ==========
</TABLE>
See accompanying notes.
46
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED INCOME STATEMENT (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
PRO FORMA
HEALTHSOUTH SSCI ADJUSTMENTS SCA
------------- ---------- -------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues................................ $902,268 $28,357 $0 $171,441
Operating expenses:
Operating units........................ 670,607 17,637 0 94,452
Corporate general and administrative... 29,831 2,132 0 4,061
Provision for doubtful accounts......... 16,691 2,950 0 2,079
Depreciation and amortization........... 59,142 1,911 0 12,506
Interest expense........................ 45,632 1,146 0 3,875
Interest income......................... (3,256) (359) 0 (1,231)
Merger expenses......................... 3,571 0 0 0
Gain on sale of MCA stock............... 0 0 0 (6,882)
------------- ---------- -------------- -----------
822,218 25,417 0 108,860
------------- ---------- -------------- -----------
Income before income taxes and minority
interests.............................. 80,050 2,940 0 62,581
Provision for income taxes.............. 30,418 540 0 20,681
------------- ---------- -------------- -----------
49,632 2,400 0 41,900
Minority interests...................... 4,276 1,887 0 15,144
------------- ---------- -------------- -----------
Net income.............................. $ 45,356 $ 513 $0 $ 26,756
============= ========== ============== ===========
Weighted average common and common
equivalent shares outstanding.......... 84,509 19,610 (17,835)(2) 38,859
============= ========== ============== ===========
Net income per common and common
equivalent share....................... $ 0.54 $ 0.03 N/A $ 0.69
============= ========== ============== ===========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA ADVANTAGE PRO FORMA PRO FORMA
ADJUSTMENTS HEALTH ADJUSTMENTS COMBINED
------------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues................................ $0 $96,436 $ 0 $1,198,502
Operating expenses:
Operating units........................ 0 74,525 0 857,221
Corporate general and administrative... 0 5,673 0 41,697
Provision for doubtful accounts......... 0 1,569 0 23,289
Depreciation and amortization........... 0 2,735 0 76,294
Interest expense........................ 0 1,139 0 51,792
Interest income......................... 0 (190) 0 (5,036)
Merger expenses......................... 0 0 0 3,571
Gain on sale of MCA stock............... 0 0 0 (6,882)
------------- ----------- ------------- ------------
0 85,451 0 1,041,946
------------- ----------- ------------- ------------
Income before income taxes and minority
interests.............................. 0 10,985 0 156,556
Provision for income taxes.............. 0 4,860 0 56,499
------------- ----------- ------------- ------------
0 6,125 0 100,057
Minority interests...................... 0 73 0 21,380
------------- ----------- ------------- ------------
Net income.............................. $0 $ 6,052 $ 0 $ 78,677
============= =========== ============= ============
Weighted average common and common
equivalent shares outstanding.......... 8,549 (2) 6,042 3,069 (2) 142,803
============= =========== ============= ============
Net income per common and common
equivalent share....................... N/A $1.00 N/A $0.55
============= =========== ============= ============
</TABLE>
See accompanying notes.
47
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
Notes to Pro Forma Condensed Financial Information
A. THE NOVACARE REHABILITATION HOSPITALS ACQUISITION
Effective April 1, 1995 HEALTHSOUTH completed the acquisition of the
rehabilitation hospitals division of NovaCare, Inc. ("NovaCare"), consisting of
11 rehabilitation hospitals, 12 other facilities, and certificates of need to
build two additional facilities (the "NovaCare Rehabilitation Hospitals
Acquisition"). The purchase price was approximately $234,807,000. The
transaction was accounted for as a purchase and, accordingly, the results of the
acquired NovaCare facilities are included in HEALTHSOUTH's historical financial
statements from the effective date of the acquisition. HEALTHSOUTH financed the
cost of the NovaCare Rehabilitation Hospitals Acquisition through additional
borrowings under its existing credit facilities, as amended.
The accompanying pro forma income statements for the year ended December 31,
1994 and the nine months ended September 30, 1995 assume that the transaction
was consummated at the beginning of each of the periods presented.
Certain assets and liabilities of Rehab Systems Company (a wholly owned
subsidiary of NovaCare, Inc.) were excluded from the NovaCare Rehabilitation
Hospitals Acquisition. The excluded assets and liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Cash and cash equivalents............................ $ 4,973
Accounts receivable ................................. 259
Other current assets ................................ 42
Equipment, net ...................................... 4,719
Intangible assets, net .............................. 56,321
Other assets (primarily investments in subsidiaries) 40,637
Accounts payable .................................... (454)
Other current liabilities ........................... (275)
Current portion of long term debt ................... (146)
Long term debt....................................... (38,620)
Payable to affiliates................................ (92,377)
-----------
Net excluded asset (liability) .................... $(24,921)
===========
</TABLE>
The following pro forma adjustments are necessary for the NovaCare
Rehabilitation Hospitals Acquisition:
1. To exclude historical depreciation and amortization expense related to the
excluded assets described above. The total expense excluded amounts to
$1,918,000 for the year ended December 31, 1994 and $999,000 for the nine months
ended September 30, 1995.
2. To eliminate intercompany management fees and royalty fees totaling
$12,406,000 for the year ended December 31, 1994 and $910,000 for the nine
months ended September 30, 1995 of the acquired NovaCare facilities.
48
<PAGE>
3. To adjust depreciation and amortization expense to reflect the allocation
of the excess purchase price over the net tangible asset value as follows (in
thousands):
<TABLE>
<CAPTION>
PURCHASE PRICE
ALLOCATION USEFUL ANNUAL QUARTERLY
ADJUSTMENT LIFE AMORTIZATION AMORTIZATION
--------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
Leasehold value.......... $128,333 20 years $6,417 $1,605
Goodwill................. 44,365 40 years 1,109 277
------------ -------------
$7,526 $1,882
============ =============
</TABLE>
No additional adjustments to NovaCare's historical depreciation and
amortization are necessary. The remaining net assets acquired approximate their
fair value.
Because NovaCare's results of operations before intercompany items (described
in Note 2 above) are profitable, both on a historical and pro forma basis, the
40-year amortization period for goodwill is appropriate and consistent with
HEALTHSOUTH policy. Leasehold value is being amortized over the weighted average
remaining terms of the leases, which is 20 years.
4. To increase interest expense by $19,559,000 for the year ended December
31, 1994 and $4,889,000 for the nine months ended September 30, 1995 to reflect
pro forma borrowings of $234,807,000, described above, at a 8.33% variable
interest rate, which represents HEALTHSOUTH's weighted average cost of debt, as
if they were outstanding for the entire period, and to decrease interest expense
by $9,459,000 for the year ended December 31, 1994 and $2,205,000 for the nine
months ended September 30, 1995, which represents interest on NovaCare debt not
assumed by HEALTHSOUTH. A .125% variance in the assumed interest rate would
change annual pro forma interest expense by approximately $294,000.
5. To adjust estimated Medicare reimbursement for the changes in reimbursable
expenses described in items 1,2, 3 and 4 above. These changes are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS ENDED
1994 SEPTEMBER 30, 1995
------------- -------------------
<S> <C> <C>
Depreciation and amortization (Note 1).......... $(1,918) $ (999)
Intercompany management fees (Note 2)........... (4,196) (910)
Depreciation and amortization (Note 3).......... 7,526 1,882
Interest expense (Note 4)....................... 10,100 2,684
----------- --------------
11,512 2,657
Assumed Medicare utilization.................... 70% 70%
----------- --------------
Increased reimbursement ........................ $ 8,058 $1,860
=========== =============
</TABLE>
The Medicare utilization rate of 70% assumes a slight improvement in
NovaCare's historical Medicare percentage of 78% as a result of bringing these
facilities into the HEALTHSOUTH network.
6. To adjust the NovaCare provision for income taxes to an effective rate of
39% (net of minority interests).
B. THE SSCI MERGER
The SSCI Merger was completed in October 1995 and will be accounted for as a
pooling of interests. The pro forma condensed income statements assume that the
SSCI Merger was consummated on January 1, 1992. The pro forma condensed balance
sheet assumes that the SSCI Merger was consummated on September 30, 1995.
49
<PAGE>
The pro forma condensed financial information contains no adjustments to
conform the accounting policies of the two companies because any such
adjustments have been determined to be immaterial by the management of
HEALTHSOUTH.
The following pro forma adjustments are necessary for the SSCI Merger:
1. The pro forma condensed income statements do not reflect non-recurring
costs resulting directly from the SSCI Merger. The management of HEALTHSOUTH
estimates that these costs will approximate $3,000,000 and will be charged to
operations in the quarter the SSCI Merger is consummated. The amount includes
costs to merge the two companies and professional fees. However, this estimated
expense, net of taxes of $1,170,000, has been charged to retained earnings in
the accompanying pro forma balance sheet.
2. To adjust pro forma share amounts based on historical share amounts,
converting each outstanding SSCI Share into .0905 shares of HEALTHSOUTH Common
Stock.
C. THE SCA MERGER
The SCA Merger was completed in January 1996 and will be accounted for as a
pooling of interests. The pro forma condensed income statements assume that the
SCA Merger was consummated on January 1, 1992. The pro forma condensed balance
sheet assumes that the SCA Merger was consummated on September 30, 1995.
The pro forma condensed financial information contains no adjustments to
conform the accounting policies of the two companies because any such
adjustments have been determined to be immaterial by the management of
HEALTHSOUTH.
The following pro forma adjustments are necessary for the SCA Merger:
1. The pro forma income statements do not reflect non-recurring costs
resulting directly from the SCA Merger. The management of HEALTHSOUTH estimates
that these costs, which will be charged to operations in the first quarter of
1996, will approximate $15,000,000. The amount includes costs to merge the two
companies and professional fees. However, this estimated expense, net of taxes
of $5,850,000, has been charged to retained earnings in the accompanying pro
forma balance sheet.
2. To adjust pro forma share amounts based on historical share amounts,
converting each outstanding SCA Share, par value $.25 per share, into 1.22
shares of HEALTHSOUTH Common Stock, par value $.01 per share. The conversion
ratio is based upon an assumed Base Period Trading Price for HEALTHSOUTH's
Common Stock ranging from $22 to $28 per share.
D. THE ADVANTAGE HEALTH MERGER
The proposed Advantage Health Merger is intended to be accounted for as a
pooling of interests. The pro forma condensed income statements assume that the
Advantage Health Merger was consummated on January 1, 1992. The pro forma
condensed balance sheet assumes that the Advantage Health Merger was consummated
on September 30, 1995.
Advantage Health has historically reported on a fiscal year ending on August
31. The historical results of operations for Advantage Health have been recast
to a November 30 fiscal year end in the accompanying pro forma income statements
to more closely conform to HEALTHSOUTH's fiscal year, which ends on December 31.
Likewise, the accompanying September 30, 1995 pro forma balance sheet includes
Advantage Health's historical August 31, 1995 balance sheet.
The pro forma condensed financial information contains no adjustments to
conform the accounting policies of the two companies because any such
adjustments have been determined to be immaterial by the management of
HEALTHSOUTH.
50
<PAGE>
The following pro forma adjustments are necessary for the Advantage Health
Merger:
1. The pro forma income statements do not reflect non-recurring costs
resulting directly from the Advantage Health Merger. The management of
HEALTHSOUTH estimates that these costs will approximate $10,000,000 and will be
charged to operations in the quarter the Advantage Health Merger is consummated.
The amount includes costs to merge the two companies and professional fees.
However, this estimated expense, net of taxes of $3,900,000, has been charged to
retained earnings in the accompanying pro forma balance sheet.
2. To adjust pro forma share amounts based on historical share amounts,
converting each outstanding Advantage Health Share into 1.5079 shares of
HEALTHSOUTH Common Stock. The conversion ratio is based upon an assumed Base
Period Trading Price for HEALTHSOUTH's Common Stock of $31.50, the midpoint of
the range within which the exchange ratio floats.
3. To net HEALTHSOUTH's noncurrent deferred income tax asset against the
noncurrent deferred income tax liabilities of the acquired companies.
51
<PAGE>
BUSINESS OF HEALTHSOUTH
GENERAL
HEALTHSOUTH is the nation's largest provider of outpatient and rehabilitative
healthcare services. HEALTHSOUTH provides these services through its national
network of outpatient and inpatient rehabilitation facilities, outpatient
surgery centers, medical centers and other healthcare facilities. HEALTHSOUTH
believes that it provides patients, physicians and payors with high-quality
healthcare services at significantly lower costs than traditional inpatient
hospitals. Additionally, HEALTHSOUTH's national network, reputation for quality
and focus on outcomes has enabled it to secure contracts with national and
regional managed care payors. At January 31, 1996, HEALTHSOUTH had over 700
patient care locations in 42 states, the District of Columbia and Ontario,
Canada.
In its outpatient and inpatient rehabilitation facilities, HEALTHSOUTH
provides interdisciplinary programs for the rehabilitation of patients
experiencing disability due to a wide variety of physical conditions, such as
stroke, head injury, orthopaedic problems, neuromuscular disease and
sports-related injuries. HEALTHSOUTH's rehabilitation services include physical
therapy, sports medicine, work hardening, neurorehabilitation, occupational
therapy, respiratory therapy, speech-language pathology and rehabilitation
nursing. Independent studies have shown that rehabilitation services like those
provided by HEALTHSOUTH can save money for payors and employers.
HEALTHSOUTH operates the largest network of free-standing outpatient surgery
centers in the United States. HEALTHSOUTH's outpatient surgery centers provide
the facilities and medical support staff necessary for physicians to perform
non-emergency surgical procedures. While outpatient surgery is widely recognized
as generally less expensive than surgery performed in a hospital, HEALTHSOUTH
believes that outpatient surgery performed at a free-standing outpatient surgery
center is generally less expensive than hospital-based outpatient surgery.
Approximately 95% of HEALTHSOUTH's surgery center facilities are located in
markets served by its rehabilitative service facilities, enabling HEALTHSOUTH to
pursue opportunities for cross-referrals.
Over the last two years, HEALTHSOUTH has completed several significant
acquisitions in the rehabilitation business and has expanded into the surgery
center business. HEALTHSOUTH believes that these acquisitions complement its
historical operations and enhance its market position. HEALTHSOUTH further
believes that its expansion into the outpatient surgery business provides it
with a platform for future growth. HEALTHSOUTH is continually evaluating
potential acquisitions in the outpatient and rehabilitative healthcare services
industry.
COMPANY STRATEGY
HEALTHSOUTH's principal objective is to be the provider of choice for
patients, physicians and payors alike for outpatient and rehabilitative
healthcare services throughout the United States. HEALTHSOUTH's growth strategy
is based upon four primary elements: (i) the implementation of HEALTHSOUTH's
integrated service model in appropriate markets, (ii) successful marketing to
managed care organizations and other payors, (iii) the provision of
high-quality, cost-effective healthcare services, and (iv) the expansion of its
national network.
o Integrated Service Model. HEALTHSOUTH seeks, where appropriate, to provide
an integrated system of healthcare services, including outpatient
rehabilitation services, inpatient rehabilitation services, ambulatory
surgery services and outpatient diagnostic services. HEALTHSOUTH believes
that its integrated system offers payors the convenience of dealing with a
single provider for multiple services. Additionally, it believes that its
facilities can provide extensive referral opportunities. For example,
HEALTHSOUTH estimates that approximately one-third of its outpatient
rehabilitation patients have had outpatient surgery, virtually all
inpatient rehabilitation patients will require some form of outpatient
rehabilitation, and virtually all inpatient rehabilitation patients have
had some type of diagnostic procedure. HEALTHSOUTH has implemented its
integrated service model in certain of its markets, and intends to expand
the model into other appropriate markets.
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o Marketing to Managed Care Organizations and Other Payors. Since the late
1980s, HEALTHSOUTH has focused on the development of contractual
relationships with managed care organizations, major insurance companies,
large regional and national employer groups and provider alliances and
networks. HEALTHSOUTH's documented outcomes and experience with several
hundred thousand patients in delivering quality healthcare services at
reasonable prices has enhanced its attractiveness to such entities and has
given HEALTHSOUTH a competitive advantage over smaller and regional
competitors. These relationships have increased patient flow to
HEALTHSOUTH's facilities and contributed to HEALTHSOUTH's same-store
growth.
o Cost-Effective Services. HEALTHSOUTH's goal is to provide high-quality
healthcare services in cost-effective settings. To that end, HEALTHSOUTH
has developed standardized clinical protocols for the treatment of its
patients. This results in "best practices" techniques being utilized at
all of HEALTHSOUTH's facilities, allowing the consistent achievement of
demonstrable, cost-effective clinical outcomes. HEALTHSOUTH's reputation
for its clinical programs is enhanced through its relationships with major
universities throughout the nation, and its support of clinical research
in its facilities. Further, independent studies estimate that, for every
dollar spent on rehabilitation, $11 to $35 is saved. Finally, surgical
procedures typically are less expensive in outpatient surgery centers than
in hospital settings. HEALTHSOUTH believes that outpatient and
rehabilitative healthcare services will assume increasing importance in
the healthcare environment as payors continue to seek to reduce overall
costs by shifting patients to more cost-effective treatment settings.
o Expansion of National Network. As the largest provider of outpatient and
rehabilitative healthcare services in the United States, HEALTHSOUTH is
able to realize economies of scale and compete successfully for national
contracts with large payors and employers while retaining the flexibility
to respond to particular needs of local markets. The national network
affords HEALTHSOUTH the opportunity to offer large national and regional
employers and payors the convenience of dealing with a single provider, to
utilize greater buying power through centralized purchasing, to achieve
more efficient costs of capital and labor and to more effectively recruit
and retain clinicians. HEALTHSOUTH believes that its recent and pending
acquisitions in the outpatient surgery and diagnostic imaging fields will
further enhance its national presence by broadening the scope of its
existing services and providing new opportunities for growth. These
national benefits are realized without sacrificing local market
responsiveness. HEALTHSOUTH's objective is to provide those outpatient and
rehabilitative healthcare services needed within each local market by
tailoring its services and facilities to that market's needs, thus
bringing the benefits of nationally recognized expertise and quality into
the local setting.
PATIENT CARE SERVICES
HEALTHSOUTH began its operations in 1984 with a focus on providing
comprehensive orthopaedic and musculoskeletal rehabilitation services on an
outpatient basis. Over the succeeding 11 years, HEALTHSOUTH has consistently
sought and implemented opportunities to expand its services through acquisitions
and de novo development activities that complement its historic focus on
orthopaedic, sports medicine and occupational medicine services and that provide
independent platforms for growth. HEALTHSOUTH's acquisitions and internal growth
have enabled it to become the largest provider of rehabilitative healthcare
services, both inpatient and outpatient, in the United States. In addition,
HEALTHSOUTH has added outpatient surgery services, diagnostic imaging services
and other outpatient services which provide natural enhancements to its
rehabilitative healthcare locations and facilitate the implementation of its
integrated service model. HEALTHSOUTH believes that these additional businesses
also provide opportunities for growth in other areas not directly related to the
rehabilitative business, and HEALTHSOUTH intends to pursue further expansion in
those businesses.
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REHABILITATIVE SERVICES: GENERAL
When a patient is referred to one of HEALTHSOUTH's rehabilitation facilities,
he undergoes an initial evaluation and assessment process that results in the
development of a rehabilitation care plan designed specifically for that
patient. Depending upon the patient's disability, this evaluation process may
involve the services of a single discipline, such as physical therapy for a knee
injury, or of multiple disciplines, as in the case of a complicated stroke
patient. HEALTHSOUTH has developed numerous rehabilitation programs, which
include stroke, head injury, spinal cord injury, neuromuscular and work injury,
that combine certain services to address the needs of patients with similar
disabilities. In this way, all of the facilities' patients, regardless of the
severity and complexity of their disabilities, can receive the level and
intensity of those services necessary for them to be restored to as productive,
active and independent a lifestyle as possible.
OUTPATIENT REHABILITATION SERVICES
HEALTHSOUTH operates the largest group of affiliated proprietary outpatient
rehabilitation facilities in the United States. HEALTHSOUTH's outpatient
rehabilitation centers offer a comprehensive range of rehabilitative healthcare
services, including physical therapy and occupational therapy, that are tailored
to the individual patient's needs, focusing predominantly on orthopaedic
injuries, sports injuries, work injuries, hand and upper extremity injuries,
back injuries, and various neurological neuromuscular conditions. As of January
31, 1996, HEALTHSOUTH provided outpatient rehabilitative healthcare services
through approximately 500 outpatient locations, including freestanding
outpatient centers and their satellites and outpatient satellites of inpatient
facilities.
The continuing emphasis on containing the increases in healthcare costs, as
evidenced by Medicare's prospective payment system, the growth in managed care
and the various alternative healthcare reform proposals, results in the early
discharge of patients from acute-care facilities. As a result, many hospital
patients do not receive the intensity of services that may be necessary for them
to achieve a full recovery from their diseases, disorders or traumatic
conditions. HEALTHSOUTH's outpatient rehabilitation services play a significant
role in the continuum of care because they provide hospital-level services, in
terms of intensity, quality and frequency, in a more cost-efficient setting.
Patients treated at HEALTHSOUTH's outpatient centers will undergo varying
courses of therapy depending upon their needs. Some patients may only require a
few hours of therapy per week for a few weeks, while others may spend up to five
hours per day in therapy for six months or more, depending on the nature,
severity and complexity of their injuries.
In general, HEALTHSOUTH initially establishes an outpatient center in a given
market, either by acquiring an existing private therapy practice or through de
novo development, and institutes its clinical protocols and programs in response
to the community's general need for services. HEALTHSOUTH will then establish
satellite clinics that are dependent upon the main facility for management and
administrative services. These satellite clinics generally provide a specific
evaluative or specialty service/program, such as hand therapy or foot and ankle
therapy, in response to specific market demands. HEALTHSOUTH's outpatient
rehabilitation facilities range in size from 1,200 square feet for specialty
clinics to 20,000 square feet for large, full-service facilities. Currently, the
typical outpatient facility configuration ranges in size from 2,000 to 5,000
square feet and costs less than $500,000 to build and equip.
Patient utilization of HEALTHSOUTH's outpatient rehabilitation facilities
cannot be measured in the conventional manner applied to acute-care hospitals,
nursing homes and other healthcare providers which have a fixed number of
licensed beds and serve patients on a 24-hour basis. Utilization patterns in
outpatient rehabilitation facilities will be affected by the market to be
served, the types of injuries treated, the patient mix and the number of
available therapists, among other factors. Moreover, because of variations in
size, location, hours of operation, referring physician base and services
provided and other differences among each of HEALTHSOUTH's outpatient
facilities, it is not possible to accurately assess patient utilization against
a norm.
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INPATIENT SERVICES
Inpatient Rehabilitation Facilities. At January 31, 1996, HEALTHSOUTH
operated 77 inpatient rehabilitation facilities with 4,618 beds, representing
the largest group of affiliated proprietary inpatient rehabilitation facilities
in the United States. HEALTHSOUTH's inpatient rehabilitation facilities provide
high-quality comprehensive services to patients who require intensive
institutional rehabilitation care.
Inpatient rehabilitation patients are typically those who are experiencing
significant physical disabilities due to various conditions, such as head
injury, spinal cord injury, stroke, certain orthopaedic problems and
neuromuscular disease. HEALTHSOUTH's inpatient rehabilitation facilities provide
the medical, nursing, therapy and ancillary services required to comply with
local, state and federal regulations as well as accreditation standards of the
Joint Commission on Accreditation of Healthcare Organizations (the "JCAHO") and
the Commission on Accreditation of Rehabilitation Facilities ("CARF").
All of HEALTHSOUTH's inpatient rehabilitation facilities utilize an
interdisciplinary team approach to the rehabilitation process and involve the
patient and family, as well as the payor, in the determination of the goals for
the patient. Internal case managers monitor each patient's progress and provide
documentation of patient status, achievement of goals, functional outcomes and
efficiency.
HEALTHSOUTH acquires or develops inpatient rehabilitation facilities in those
communities where it believes there is a demonstrated need for comprehensive
inpatient rehabilitation services. Depending upon the specific market
opportunity, these facilities may be licensed as rehabilitation hospitals or
skilled nursing facilities. HEALTHSOUTH believes that it can provide
high-quality rehabilitation services in either type of facility, but prefers to
utilize the rehabilitation hospital form.
In certain markets where it does not provide free-standing outpatient
facilities, HEALTHSOUTH's rehabilitation hospitals may provide outpatient
rehabilitation services as a complement to their inpatient services. Typically,
this opportunity arises when patients complete their inpatient course of
treatment but remain in need of additional therapy that can be accomplished on
an outpatient basis. Depending upon the demand for outpatient services and
physical space constraints, the rehabilitation hospital may establish the
services either within its building or in a satellite location. In either case,
the clinical protocols and programs developed for use in the free-standing
outpatient centers will be utilized by these facilities.
HEALTHSOUTH's Nashville, Tennessee (Vanderbilt University), Memphis,
Tennessee (Methodist Hospitals), Dothan, Alabama (Southeast Alabama Medical
Center) and Charleston, South Carolina (North Trident Regional Medical Center)
hospital facilities have been developed in conjunction with local tertiary-care
facilities. This strategy of developing effective referral and service networks
prior to opening results in improved operating efficiencies for the new
facilities. HEALTHSOUTH is utilizing this same concept in rehabilitation
hospitals under development with the University of Missouri and the University
of Virginia.
Medical Centers. HEALTHSOUTH operates five medical centers with 912 licensed
beds in four distinct markets. These facilities provide general and specialty
medical and surgical healthcare services, emphasizing orthopaedics, sports
medicine and rehabilitation.
HEALTHSOUTH acquired its five medical centers as outgrowths of its
rehabilitative healthcare services. Often, patients require medical and surgical
interventions prior to the initiation of their rehabilitative care. In each of
the markets in which HEALTHSOUTH has acquired a medical center, HEALTHSOUTH had
well-established relationships with the medical communities serving each
facility. In addition, each of the facilities enjoyed well-established
reputations in orthopaedics and/or sports medicine prior to their acquisition by
HEALTHSOUTH. Following the acquisition of each of its medical centers,
HEALTHSOUTH has provided the resources to improve upon the physical plant and
expand services through the introduction of new technology. HEALTHSOUTH has also
developed additional relationships between these facilities and certain
university facilities, including the University of Miami, Auburn University and
the University of Alabama at Birmingham. Through these relationships, the influx
of celebrity athletes and personalities and the acquisition of new technology,
all five medical centers have improved their operating efficiencies and enhanced
census.
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Each of the five medical center facilities is licensed as an acute-care
hospital, is accredited by the JCAHO and participates in the Medicare
prospective payment system. See "Business -- Regulation".
Inpatient Facility Utilization. In measuring patient utilization of
HEALTHSOUTH's inpatient facilities, various factors must be considered. Due to
market demand, demographics, start-up status, renovation, patient mix and other
factors, HEALTHSOUTH may not treat all licensed beds in a particular facility as
available beds, which sometimes results in a material variance between licensed
beds and beds actually available for utilization at any specific time.
HEALTHSOUTH is in a position to increase the number of available beds at such
facilities as market conditions dictate. During the year ended December 31,
1994, HEALTHSOUTH's inpatient facilities achieved an overall utilization, based
on patient days and available beds, of 61.0%.
SURGERY CENTERS
As a result of the acquisitions of SHC, SSCI and SCA in 1995 and early 1996,
HEALTHSOUTH became the largest operator of outpatient surgery centers in the
United States. It currently operates 133 free-standing surgery centers,
including five mobile lithotripsy units, in 30 states, and has an additional ten
free-standing surgery centers under development. Approximately 80% of these
facilities are located in markets served by HEALTHSOUTH outpatient and
rehabilitative service facilities, enabling HEALTHSOUTH to pursue opportunities
for cross-referrals between surgery and rehabilitative facilities as well as to
centralize administrative functions. HEALTHSOUTH's surgery centers provide the
facilities and medical support staff necessary for physicians to perform
non-emergency surgical procedures that do not generally require overnight
hospitalization. Its typical surgery center is a free-standing facility with two
to six fully equipped operating and procedure rooms and ancillary areas for
reception, preparation, recovery and administration. Each of HEALTHSOUTH's
surgery centers is available for use only by licensed physicians, oral surgeons
and podiatrists, and the centers do not perform surgery on an emergency basis.
Outpatient surgery centers, unlike hospitals, have not historically provided
overnight accommodations, food services or other ancillary services. Over the
past several years, states have increasingly permitted the use of extended-stay
recovery facilities by outpatient surgery centers. As a result, many outpatient
surgery centers are adding extended recovery care capabilities where permitted.
Fifty-two of HEALTHSOUTH's surgery centers currently provide for extended
recovery stays. HEALTHSOUTH's ability to develop such recovery care facilities
is dependent upon state regulatory environments in the particular states where
its centers are located.
HEALTHSOUTH's outpatient surgery centers implement quality control procedures
to evaluate the level of care provided the centers. Each center has a medical
advisory committee of three to ten physicians which reviews the professional
credentials of physicians applying for medical staff privileges at the center.
OTHER PATIENT CARE SERVICES
In certain of its markets, HEALTHSOUTH provides other patient care services,
including home healthcare, diagnostic services, physician services and contract
management of hospital-based rehabilitative healthcare services. HEALTHSOUTH
evaluates market opportunities on a case-by-case basis in determining whether to
provide additional services of these types, which may be complementary to
facility-based services provided by HEALTHSOUTH or stand-alone businesses.
MARKETING OF FACILITIES AND SERVICES
HEALTHSOUTH markets its facilities, and their services and programs, on
local, regional and national levels. Local and regional marketing activities are
typically coordinated by facility-based marketing personnel, whereas large-scale
regional and national efforts are coordinated by corporate-based personnel.
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In general, HEALTHSOUTH develops a marketing plan for each facility based on
a variety of factors, including population characteristics, physician
characteristics and incidence of disability statistics, in order to identify
specific service opportunities. Facility-oriented marketing programs are focused
on increasing the volume of patient referrals to the specific facility and
involve the development of ongoing relationships with area schools, businesses
and industries as well as physicians, health maintenance organizations and
preferred provider organizations.
HEALTHSOUTH's larger-scale marketing activities are focused more broadly on
efforts to generate patient referrals to multiple facilities and the creation of
new business opportunities. Such activities include the development and
maintenance of contractual relationships or national pricing agreements with
large third-party payors, such as CIGNA, Metrahealth or other national insurance
companies, with national HMO/PPO companies, such as
Healthcare-COMPARE/AFFORDABLE, Hospital Network of America and Multiplan, with
national case management companies, such as INTRACORP and Crawford & Co., and
with national employers, such as Wal-Mart, Georgia-Pacific Corporation, Dillard
Department Stores, Goodyear Tire & Rubber and Winn-Dixie. In addition, since the
facilities acquired by HEALTHSOUTH during the past two years had very limited
contractual relationships with payors, managed care providers, employers and
others, HEALTHSOUTH is expanding its existing payor relationships to include
these facilities.
HEALTHSOUTH carries out broader programs designed to further enhance its
public image. Among these is the HEALTHSOUTH Sports Medicine Council, headed by
Bo Jackson, which is dedicated to developing educational programs focused on
athletics for use in high schools. HEALTHSOUTH has ongoing relationships with
the Ladies Professional Golf Association, the Southeastern Conference and more
than 400 universities, colleges and high schools to provide sports medicine
coverage of events and rehabilitative healthcare services for injured athletes.
In addition, HEALTHSOUTH has established relationships with or provided
treatment services for athletes from some 35 to 40 major professional sports
teams, as well as providing sports medicine services for Olympic and amateur
athletes.
HEALTHSOUTH is a national sponsor of the United Cerebral Palsy Association
and the National Arthritis Foundation and supports many other charitable
organizations on national and local levels. Through these endeavors, HEALTHSOUTH
provides its employees with opportunities to support their communities.
SOURCES OF REVENUES
Private pay revenue sources represent the majority of HEALTHSOUTH's revenues.
The following table sets forth the percentages of HEALTHSOUTH's revenues from
various sources for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
SOURCE DECEMBER 31, 1993 DECEMBER 31, 1994
------- ----------------- ------------------
<S> <C> <C>
Medicare...................... 30.6% 41.0%
Commercial (1)................ 36.3 34.1
Workers' Compensation......... 16.4 10.9
All Other Payors (2).......... 16.7 14.0
------ --------
100.0% 100.0%
====== ========
</TABLE>
(1) Includes commercial insurance, HMOs, PPOs and other managed care plans.
(2) Medicaid is included in this category, but is insignificant in amount.
The above table does not reflect the ReLife facilities, the SHC facilities,
the SSCI facilities or the SCA facilities for either period. The NME Selected
Hospitals are included in the 1994 figures only. Comparable information for the
ReLife, SHC, SSCI and SCA facilities is not available and is not reflected in
either year in the table. The percentage of revenues derived from Medicare
increased in 1994 as a result of the NME Selected Hospitals Acquisition.
HEALTHSOUTH has expanded its existing payor relationships to include the former
NME and ReLife facilities.
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See "-- Regulation -- Medicare Participation and Reimbursement" for a
description of the reimbursement regulations applicable to the Company's
facilities.
COMPETITION
HEALTHSOUTH competes in the geographic markets in which its facilities are
located. In addition, HEALTHSOUTH's rehabilitation facilities compete on a
regional and national basis with other providers of specialized services such as
sports medicine and work hardening, and specific concentrations such as head
injury rehabilitation and orthopaedic surgery. The competition faced in each of
these markets is similar, with variations arising from the number of healthcare
providers in the given metropolitan area. The primary competitive factors in the
rehabilitation services business are quality of services, projected patient
outcomes, charges for services, responsiveness to the needs of the patients,
community and physicians, and ability to tailor programs and services to meet
specific needs of the patients. Competitors and potential competitors include
hospitals, private practice therapists, rehabilitation agencies and others. Some
of these competitors may have greater patient referral support and financial and
personnel resources in particular markets than HEALTHSOUTH. Management believes
that HEALTHSOUTH competes successfully within the marketplace based upon its
reputation for quality, competitive prices, positive rehabilitation outcomes,
innovative programs, clean and bright facilities and responsiveness to needs.
HEALTHSOUTH's medical centers are located in four urban areas of the country,
all with well-established healthcare services provided by a number of
proprietary, not-for-profit, and municipal hospital facilities. HEALTHSOUTH's
facilities compete directly with these local hospitals as well as various
nationally recognized centers of excellence in orthopaedics, sports medicine and
other specialties. Because HEALTHSOUTH's facilities enjoy a national and
international reputation for orthopaedic surgery and sports medicine,
HEALTHSOUTH believes that its medical centers' level of service and continuum of
care enable them to compete successfully, both locally and nationally.
HEALTHSOUTH's surgery centers compete primarily with hospitals and other
operators of freestanding surgery centers in attracting physicians and patients,
and in developing new centers and in acquiring existing centers. The primary
competitive factors in the outpatient surgery business are convenience, cost,
quality of service, physician loyalty and reputation. Hospitals have many
competitive advantages in attracting physicians and patients, including
established standing in a community, historical physician loyalty and
convenience for physicians making rounds or performing inpatient surgery in the
hospital. However, HEALTHSOUTH believes that its national market system and its
historical presence in certain of the markets where the Advantage Health
facilities are located will enhance HEALTHSOUTH's ability to operate these
facilities successfully.
HEALTHSOUTH potentially faces competition any time it initiates a Certificate
of Need ("CON") project or seeks to acquire an existing facility or CON. See "--
Regulation". This competition may arise either from competing companies,
national or regional, or from local hospitals which file competing applications
or oppose the proposed CON project. The necessity for these approvals serves as
a barrier to entry and has the potential to limit competition by creating a
franchise to provide services to a given area. To date HEALTHSOUTH has been
successful in obtaining each of the CONs or similar approvals which it has
sought, although there can be no assurance that it will achieve similar success
in the future.
REGULATION
The healthcare industry is subject to regulation by federal, state and local
governments. The various levels of regulatory activity affect HEALTHSOUTH's
business activities by controlling its growth, requiring licensure or
certification of its facilities, regulating the use of its properties and
controlling the reimbursement to HEALTHSOUTH for services provided.
LICENSURE, CERTIFICATION AND CERTIFICATE OF NEED REGULATIONS
Capital expenditures for the construction of new facilities, the addition of
beds or the acquisition of existing facilities may be reviewable by state
regulators under a statutory scheme which is sometimes referred to as a CON
program. States with CON programs place limits on the construction and acquisi-
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tion of healthcare facilities and the expansion of existing facilities and
services. In such states, approvals are required for capital expenditures
exceeding certain amounts which involve inpatient rehabilitation facilities or
services. Outpatient rehabilitation facilities and services do not require such
approvals in a majority of states.
State CON statutes generally provide that, prior to the addition of new beds,
the construction of new facilities or the introduction of new services, a state
health planning designated agency (a "SHPDA") must determine that a need exists
for those beds, facilities or services. The CON process is intended to promote
comprehensive healthcare planning, assist in providing high quality healthcare
at the lowest possible cost and avoid unnecessary duplication by ensuring that
only those healthcare facilities that are needed will be built.
Typically, the provider of services submits an application to the appropriate
SHPDA with information concerning the area and population to be served, the
anticipated demand for the facility or service to be provided, the amount of
capital expenditure, the estimated annual operating costs, the relationship of
the proposed facility or service to the overall state health plan and the cost
per patient day for the type of care contemplated. Whether the CON is granted is
based upon a finding of need by the SHPDA in accordance with criteria set forth
in CON statutes and state and regional health facilities plans. If the proposed
facility or service is found to be necessary and the applicant to be the
appropriate provider, the SHPDA will issue a CON containing a maximum amount of
expenditure and a specific time period for the holder of the CON to implement
the approved project.
Licensure and certification are separate, but related, regulatory activities.
The former is usually a state or local requirement and the latter is a federal
requirement. In almost all instances, licensure and certification will follow
specific standards and requirements that are set forth in readily available
public documents. Compliance with the requirements is monitored by annual
on-site inspections by representatives of various government agencies. All of
HEALTHSOUTH's inpatient rehabilitation facilities and medical centers and
substantially all of HEALTHSOUTH's surgery centers are currently required to be
licensed, but only the outpatient rehabilitation facilities located in Alabama,
Arizona, Connecticut, Maryland, Massachusetts and New Hampshire currently must
satisfy such a licensing requirement.
MEDICARE PARTICIPATION AND REIMBURSEMENT
In order to participate in the Medicare program and receive Medicare
reimbursement, each facility must comply with the applicable regulations of the
United States Department of Health and Human Services relating to, among other
things, the type of facility, its equipment, its personnel and its standards of
medical care, as well as compliance with all state and local laws and
regulations. All of HEALTHSOUTH's inpatient facilities, except for the St. Louis
head injury center, participate in the Medicare program. Approximately 165 of
HEALTHSOUTH's outpatient rehabilitation facilities currently participate in, or
are awaiting the assignment of a provider number to participate in, the Medicare
program. All of HEALTHSOUTH's surgery centers are certified (or awaiting
certification) under the Medicare program. Its Medicare-certified facilities,
inpatient and outpatient, undergo annual on-site Medicare certification surveys
in order to maintain their certification status. Failure to comply with the
program's conditions of participation may result in loss of program
reimbursement or other governmental sanctions. All such facilities have been
deemed to be in satisfactory compliance on all applicable surveys. HEALTHSOUTH
has developed its operational systems to assure compliance with the various
standards and requirements of the Medicare program and has established ongoing
quality assurance activities to monitor compliance. HEALTHSOUTH believes that
all of such facilities currently meet all applicable Medicare requirements.
As a result of the Social Security Act Amendments of 1983, Congress adopted a
prospective payment system ("PPS") to cover the routine and ancillary operating
costs of most Medicare inpatient hospital services. Under this system, the
Secretary of Health and Human Services has established fixed payment amounts per
discharge based on diagnosis-related groups ("DRGs"). With limited exceptions, a
hospital's payment for Medicare inpatients is limited to the DRG rate,
regardless of the number of services provided to the patient or the length of
the patient's hospital stay. Under PPS, a hospital may
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retain the difference, if any, between its DRG rate and its operating costs
incurred in furnishing inpatient services, and is at risk for any operating
costs that exceed its DRG rate. HEALTHSOUTH's medical center facilities are
generally subject to PPS with respect to Medicare inpatient services.
The PPS program has been beneficial for the rehabilitation segment of the
healthcare industry because of the economic pressure on acute-care hospitals to
discharge patients as soon as possible. The result has been increased demand for
rehabilitation services for those patients discharged early from acute-care
hospitals. Outpatient rehabilitation services and free-standing inpatient
rehabilitation facilities are currently exempt from PPS, and inpatient
rehabilitation units within acute-care hospitals are eligible to obtain an
exemption from PPS upon satisfaction of certain federal criteria.
Currently, five of HEALTHSOUTH's outpatient centers are Medicare-certified
Comprehensive Outpatient Rehabilitation Facilities ("CORFs") and 143 are
Medicare-certified rehabilitation agencies. CORFs have been designated
cost-reimbursed Medicare providers since 1982. Under the regulations, CORFs are
reimbursed reasonable costs (subject to certain limits) for services provided to
Medicare beneficiaries. Outpatient rehabilitation facilities certified by
Medicare as rehabilitation agencies are reimbursed on the basis of the lower of
reasonable costs for services provided to Medicare beneficiaries or charges for
such services. Outpatient rehabilitation facilities which are physician-directed
clinics, as well as outpatient surgery centers, are reimbursed by Medicare on a
fee screen basis; that is, they receive a fixed fee, which is determined by the
geographical area in which the facility is located, for each procedure
performed. HEALTHSOUTH's outpatient rehabilitation facilities submit monthly
bills to their fiscal intermediaries for services provided to Medicare
beneficiaries, and HEALTHSOUTH files annual cost reports with the intermediaries
for each such facility. Adjustments are then made if costs have exceeded
payments from the fiscal intermediary or vice versa.
HEALTHSOUTH's inpatient facilities (other than the medical center facilities)
either are not currently covered by PPS or are exempt from PPS, and are also
cost-reimbursed, receiving the lower of reasonable costs or charges. Typically,
the fiscal intermediary pays a set rate based on the prior year's costs for each
facility. As with outpatient facilities subject to cost-based reimbursement,
annual cost reports are filed with HEALTHSOUTH's fiscal intermediary and payment
adjustments are made, if necessary.
Congress has directed the United States Department of Health and Human
Services to develop regulations, which could subject inpatient rehabilitation
hospitals to PPS in place of the current "reasonable cost within limits" system
of reimbursement. In addition, informal proposals have been made for a
prospective payment system for Medicare outpatient care. Other proposals for a
prospective payment system for rehabilitation hospitals are also being
considered by the federal government. Therefore, HEALTHSOUTH cannot predict at
this time the effect that any such changes may have on its operations.
Regulations relating to prospective payment or other aspects of reimbursement
may be developed in the future which could adversely affect reimbursement for
services provided by HEALTHSOUTH.
Over the past several years an increasing number of healthcare providers have
been accused of violating the federal False Claims Act. That Act prohibits the
knowing presentation of a false claim to the United States government. Because
HEALTHSOUTH performs thousands of similar procedures a year for which it is
reimbursed by Medicare and there is a relatively long statute of limitations, a
billing error could result in significant civil penalties. HEALTHSOUTH does not
believe that it is or has been in violation of the False Claims Act.
RELATIONSHIPS WITH PHYSICIANS AND OTHER PROVIDERS
Various state and federal laws regulate relationships among providers of
healthcare services, including employment or service contracts and investment
relationships. These restrictions include a federal criminal law prohibiting (i)
the offer, payment, solicitation or receipt of remuneration by individuals or
entities, to induce referrals of patients for services reimbursed under the
Medicare or Medicaid programs or (ii) the leasing, purchasing, ordering,
arranging for or recommending the lease, purchase or order of any item, good,
facility or service covered by such programs (the "Fraud and Abuse Law"). In
addition to federal criminal sanctions, violators of the Fraud and Abuse Law may
be subject to significant civil sanctions, including fines and/or exclusion from
the Medicare and/or Medicaid programs.
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In 1991, the Office of the Inspector General ("OIG") of the United States
Department of Health and Human Services promulgated regulations describing
compensation arrangements which are not viewed as illegal remuneration under the
Fraud and Abuse Law (the "Safe Harbor Rules"). The Safe Harbor Rules create
certain standards ("Safe Harbors") for identified types of compensation
arrangements which, if fully complied with, assure participants in the
particular arrangement that the OIG will not treat such participation as a
criminal offense under the Fraud and Abuse Law or as the basis for an exclusion
from the Medicare and Medicaid programs or an imposition of civil sanctions. The
OIG closely scrutinizes health care joint ventures involving physicians and
other referral sources. In 1989, the OIG published a Fraud Alert that outlined
questionable features of "suspect" joint ventures.
In 1992, regulations were published in the Federal Register implementing the
OIG sanction and civil money penalty provisions established in the Fraud and
Abuse Law. The regulations (the "Exclusion Regulations") provide that the OIG
may exclude a Medicare provider from participation in the Medicare Program for a
five-year period upon a finding that the Fraud and Abuse Law has been violated.
The regulations expressly incorporate a test adopted by three federal circuit
courts providing that if one purpose of remuneration that is offered, paid,
solicited or received is to induce referrals, then the statute is violated. The
regulations also provide that after the OIG establishes a factual basis for
excluding a provider from the program, the burden of proof shifts to the
provider to prove that the Fraud and Abuse Law has not been violated.
HEALTHSOUTH operates five of its rehabilitation hospitals and almost all of
its outpatient rehabilitation facilities as limited partnerships. Three of the
rehabilitation hospital partnerships involve physician investors, and two of the
rehabilitation hospital partnerships involve other institutional healthcare
providers. Seven of the outpatient partnerships currently have a total of 21
physician limited partners, some of whom refer patients to the partnerships.
Those partnerships which are providers of services under the Medicare program,
and their limited partners, are subject to the Fraud and Abuse Law. A number of
the relationships established by HEALTHSOUTH with physicians and other
healthcare providers do not fit within any of the Safe Harbors. The Safe Harbor
Rules do not expand the scope of activities that the Fraud and Abuse Law
prohibits, nor do they provide that failure to fall within a Safe Harbor
constitutes a violation of the Fraud and Abuse Law; however, the OIG has
informally indicated that failure to fall within a Safe Harbor may subject an
arrangement to increased scrutiny.
Most of HEALTHSOUTH's surgery centers are owned by limited partnerships,
which include as limited partners physicians who perform surgical procedures at
such centers. Subsequent to the promulgation of the Safe Harbor Rules in 1991,
the Department of Health and Human Services issued for public comment additional
proposed Safe Harbors, one of which specifically addresses surgeon ownership
interests in ambulatory surgery centers (the "Proposed ASC Safe Harbor"). As
proposed, the Proposed ASC Safe Harbor would protect payments to be made to
surgeons as a return on investment interest in a surgery center if, among other
conditions, all the investors are surgeons who are in a position to refer
patients directly to the center and perform surgery on such referred patients.
Since a subsidiary of HEALTHSOUTH is an investor in each limited partnership
which owns a surgery center, HEALTHSOUTH's arrangements with physician investors
do not fit within the Proposed ASC Safe Harbor as currently proposed.
HEALTHSOUTH is unable at this time to predict whether the Proposed ASC Safe
Harbor will become final, and if so, whether the language and requirements will
remain as currently proposed, or whether changes will be made prior to becoming
final. There can be no assurance that HEALTHSOUTH will ever meet the criteria
under the Proposed ASC Safe Harbor as proposed or as it may be adopted in final
form. HEALTHSOUTH believes, however, that its arrangements with physicians with
respect to its surgery center facilities should not fall within the activities
prohibited by the Fraud and Abuse Law.
While several federal court decisions have aggressively applied the
restrictions of the Fraud and Abuse Law, they provide little guidance as to the
application of the Fraud and Abuse Law to HEALTHSOUTH's limited partnerships.
HEALTHSOUTH believes that it is in compliance with the current requirements of
applicable federal and state law, but no assurances can be given that a federal
or state agency charged with enforcement of the Fraud and Abuse Law and similar
laws might not assert a contrary position or that new federal or state laws, or
new interpretations of existing laws, might not
61
<PAGE>
adversely affect relationships established by HEALTHSOUTH with physicians or
other healthcare providers or result in the imposition of penalties on
HEALTHSOUTH or certain of its facilities. Even the assertion of a violation
could have a material adverse effect upon HEALTHSOUTH.
The so-called "Stark II" provisions of the Omnibus Budget Reconciliation Act
of 1993 amend the federal Medicare statute to prohibit the making by a physician
of referrals for "designated health services" (including physical therapy and
occupational therapy) to an entity in which the physician has an investment
interest or other financial relationship, subject to certain exceptions. Such
prohibition took effect on January 1, 1995 and applies to all of HEALTHSOUTH's
outpatient rehabilitation facility partnerships with physician limited partners.
In addition, a number of states have passed or are considering statutes which
prohibit or limit physician referrals of patients to facilities in which they
have an investment interest. In response to these regulatory activities,
HEALTHSOUTH has restructured most of its rehabilitation facility partnerships
which involve physician investors, in order to eliminate physician ownership
interests not permitted by applicable law. HEALTHSOUTH intends to take such
actions as may be required to cause the remaining partnerships to be in
compliance with applicable laws and regulations, including, if necessary, the
prohibition of physician partners from referring patients. HEALTHSOUTH believes
that this restructuring has not adversely affected and will not adversely affect
the operations of its facilities.
Ambulatory surgery is not identified as a "designated health service", and
HEALTHSOUTH does not believe that ambulatory surgery is subject to the
restrictions set forth in Stark II. However, lithotripsy facilities operated by
HEALTHSOUTH frequently operate on hospital campuses, and it is possible to
conclude that such services are "inpatient and outpatient hospital services" --
a category of proscribed services within the meaning of Stark II. Similarly,
physicians frequently perform endoscopic procedures in the procedure rooms of
HEALTHSOUTH's surgery centers, and it is also possible to construe these
services to be "designated health services". While HEALTHSOUTH does not believe
that Stark II was intended to apply to such services, if that were determined to
be the case, HEALTHSOUTH intends to take steps necessary to cause the operation
of its facilities to comply with the law.
HEALTHSOUTH cannot predict whether other regulatory or statutory provisions
will be enacted by federal or state authorities which would prohibit or
otherwise regulate relationships which HEALTHSOUTH has established or may
establish with other healthcare providers or the possibility of materially
adverse effects on its business or revenues arising from such future actions.
Management of HEALTHSOUTH believes, however, that HEALTHSOUTH will be able to
adjust its operations so as to be in compliance with any regulatory or statutory
provision as may be applicable. See "-- Patient Care Services" and "-- Sources
of Revenues".
INSURANCE
Beginning December 1, 1993, HEALTHSOUTH became self-insured for professional
liability and comprehensive general liability. HEALTHSOUTH purchased coverage
for all claims incurred prior to December 1, 1993. In addition, HEALTHSOUTH
purchased underlying insurance which would cover all claims once established
limits have been exceeded. It is the opinion of management that as of September
30, 1995, HEALTHSOUTH had adequate reserves to cover losses on asserted and
unasserted claims.
EMPLOYEES
As of January 31, 1996, HEALTHSOUTH employed 26,427 persons, of whom 17,016
were full-time employees and 9,411 were part-time employees. Of the above
employees, 417 were employed at HEALTHSOUTH's headquarters in Birmingham,
Alabama. Except for approximately 100 employees at one rehabilitation hospital
(about 20% of that facility's workforce), none of HEALTHSOUTH's employees are
represented by a labor union, and HEALTHSOUTH is not aware of any current
activities to organize its employees at other facilities. Management of
HEALTHSOUTH considers the relationship between HEALTHSOUTH and its employees to
be good.
62
<PAGE>
LEGAL PROCEEDINGS
In the ordinary course of its business, HEALTHSOUTH may be subject, from time
to time, to claims and legal actions by patients and others. HEALTHSOUTH does
not believe that any such pending actions, if adversely decided, would have a
material adverse effect on its financial condition. See " -- Insurance" for a
description of HEALTHSOUTH's insurance coverage arrangements.
From time to time, HEALTHSOUTH appeals decisions of various rate-making
authorities with respect to Medicare rates established for HEALTHSOUTH's
facilities. These appeals are initiated in the ordinary course of business.
Management believes that adequate reserves have been established for possible
adverse decisions on any pending appeals and that the outcomes of currently
pending appeals, either individually or in the aggregate, will have no material
adverse effect on HEALTHSOUTH's operations.
PROPERTIES
HEALTHSOUTH's executive offices currently occupy approximately 120,000 square
feet of leased space in Birmingham, Alabama. In August 1995, HEALTHSOUTH
announced plans to construct new executive offices on property acquired by it
earlier in the year. The expanded executive offices are expected to be fully
available by December 1996. All of HEALTHSOUTH's outpatient operations are
carried out in leased facilities, except for its outpatient rehabilitation
facilities located in Birmingham and Montgomery, Alabama, Orlando, Florida and
one of its facilities in Baltimore, Maryland. HEALTHSOUTH owns 33 of its
inpatient rehabilitation facilities and leases or operates under management
contracts 44 of its inpatient rehabilitation facilities. HEALTHSOUTH also owns
27 of its surgery centers and leases the remainder. HEALTHSOUTH constructed its
rehabilitation hospitals in Florence and Columbia, South Carolina, Kingsport and
Nashville, Tennessee, Concord, New Hampshire, and Dothan, Alabama on property
leased under long-term ground leases. The property on which HEALTHSOUTH's
Memphis, Tennessee rehabilitation hospital is located is owned in partnership by
HEALTHSOUTH and Methodist Hospitals of Memphis. HEALTHSOUTH owns its four
medical center facilities in Birmingham, Alabama, Richmond, Virginia and Miami,
Florida and leases its medical center facility in Dallas, Texas. HEALTHSOUTH
currently owns, and from time to time may acquire, certain other improved and
unimproved real properties in connection with its business. See Notes 4 and 6 of
"Notes to Consolidated Financial Statements" for information with respect to the
properties owned by HEALTHSOUTH and certain indebtedness related thereto.
In management's opinion, HEALTHSOUTH's physical properties are adequate for
HEALTHSOUTH's needs for the foreseeable future, and are consistent with its
expansion plans described elsewhere in this Prospectus-Proxy Statement.
63
<PAGE>
The following table sets forth a listing of HEALTHSOUTH's patient care
services locations at January 31, 1996:
<TABLE>
<CAPTION>
OUTPATIENT INPATIENT MEDICAL
REHABILITATION REHABILITATION CENTERS SURGERY DIAGNOSTIC OTHER
STATE MARKET CENTERS(1) FACILITIES (BEDS)(2) (BEDS)(2) CENTERS CENTERS SERVICES
- ---------------- ---------------- ---------------- ---------------- -------------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Alabama......... Auburn 1
Birmingham 6 6(225) 1(219) 1 3
Dothan 1(34) 1
Florence 2 1
Gadsden 1 1 2
Huntsville 3 1(50)
Mobile 2 1
Montgomery 1 1(80)
Muscle Shoals 1
Opelika 1
Tuscaloosa 1 1
Valley 1
Alaska.......... Anchorage 1
Arizona......... Mesa 3
Phoenix 7 1(60) 1
Prescott 2
Scottsdale 3 1(43)
Tucson 2 1(80) 1
Arkansas........ Fort Smith 1(80) 1
Little Rock 1 1
Van Buren 1
California...... Anaheim 1
Bakersfield 1 1(60) 1
Canoga Park 1
Carmichael 1
Cerritos 1
Elk Grove 1
Folsom 1
Foster City 1
Fresno 2
Huntington 2 1
Inglewood 1
Marina Del Rey 1 2
Murrieta 1
Newport Beach 1 1
Oakland 1 1
Oceanside 1
Palo Alto 1
Rancho Cordova 1
Redding 1
Redlands 1
Riverside 1
Sacramento 2 2
San Carlos 1
San Diego 12 3
San Francisco 2 1 1
San Jose 1
San Leandro 1
San Luis Obispo 1
Santa Monica 1
Santa Rosa 2 1
Torrance 2
Vacaville 1
Van Nuys 2
Whittier 1
Woodland Hills 1
Colorado
Colorado........ Springs 8 1 1
Denver 3 1 2
Englewood 2
Fort Collins 2 1
Longmont 1
Pueblo 1
64
<PAGE>
OUTPATIENT INPATIENT MEDICAL
REHABILITATION REHABILITATION CENTERS SURGERY DIAGNOSTIC OTHER
STATE MARKET CENTERS(1) FACILITIES (BEDS)(2) (BEDS)(2) CENTERS CENTERS SERVICES
- ---------------- ---------------- ---------------- ---------------- -------------- --------- ------------ -----------
Vail 1
Wheat Ridge 4
Connecticut..... Fairfield 1
District of
Columbia....... Washington 1 1
Florida......... Boca Raton 2 2
Coral Gables 2
Fort Lauderdale 1 1(108) 1
Fort Myers 1 1
Fort Pierce 1
Fort Walton
Beach 1
Jacksonville 2
Lake Worth 1
Largo 1(40)
Lecanto 1
Melbourne 3 1(80) 1
Merritt Island 3
Miami 2 2(165) 2(397) 1 1 1
Naples 1
Ocala 2
Ocoee 2 1
Orlando 6 3
Palm Bay 2
Panama City 3
Port St. Lucie 3 1
St. Petersburg 1
Sarasota 2 1(60) 2
Tallahassee 2 1(70)
Tampa 4 1
Tarpon Springs 1
Vero Beach 1 1(70) 1
West Palm Beach 2 1
Georgia......... Atlanta 6 1(14) 3 1
Columbus 1
Gainesville 1
Macon 1 2(75)
Hawaii.......... Honolulu 1
Kahului 1
Kihei 1
Lahaina 1
Idaho........... Boise 1(3)
Illinois........ Barrington 2
Carol Stream 2
Chicago 27 2
Elgin 2
Gurnee 2
Joliet 2
Lake Zurich 2
Naperville 2
Rockford 3
Woodstock 2
Indiana......... Evansville 1(80) 1
Fort Wayne 4
Indianapolis 1 1
Jeffersonville 1
La Porte 1
Muncie 3
New Albany 1
South Bend 1
Warsaw 1
Iowa............ Des Moines 3
65
<PAGE>
OUTPATIENT INPATIENT MEDICAL
REHABILITATION REHABILITATION CENTERS SURGERY DIAGNOSTIC OTHER
STATE MARKET CENTERS(1) FACILITIES (BEDS)(2) (BEDS)(2) CENTERS CENTERS SERVICES
- ---------------- ---------------- ---------------- ---------------- -------------- --------- ------------ -----------
Kansas.......... Kansas City 2
Great Bend 1
Kentucky........ Edgewood 1(40)
Lexington 1
Louisville 2 1
Louisiana....... Baton Rouge 1 1(43)
Metairie 1
New Orleans 1
Shreveport 1
Maine........... Bangor 2
Maryland........ Annapolis 2
Baltimore 8 4
Chevy Chase 1 1
Hagerstown 1
Rockville 1 1 1
Salisbury 1 1(44)
Severna Park 1
Wheaton 1
Massachusetts .. Abington 1
Springfield 1
Michigan........ Marquette 1
Mississippi..... Jackson 1
Pascagoula 1
Meridian 1
Missouri........ Blue Springs 1
Brentwood 1
Bridgeton 1
Cape Girardeau 3
Chesterfield 1
Columbia 2
Kansas City 2 2(21) 1
Lake Ozark 1
Springfield 3
St. Joseph 1
St. Louis 16 1(26) 4 2
Nebraska........ Omaha 2
Nevada.......... Las Vegas 3
New Hampshire .. Bedford 3
Concord 1(100)
Dover 2
Manchester 1
Somersworth 1
New Jersey...... Atlantic City 1
Bridgewater 1 1
Brunswick 1 1(15)
Edison 2
Emerson 2
Haddonfield 1
Linden 2
Madison 1
Monahawkin 1
Mt. Laurel 1
Newton 1
North Bergen 1
Paramus 2
Roseland 1
Sparta 1
Succasunna 1
Tinton Falls 1
Toms River 1 1(155)
66
<PAGE>
OUTPATIENT INPATIENT MEDICAL
REHABILITATION REHABILITATION CENTERS SURGERY DIAGNOSTIC OTHER
STATE MARKET CENTERS(1) FACILITIES (BEDS)(2) (BEDS)(2) CENTERS CENTERS SERVICES
- ---------------- ---------------- ---------------- ---------------- -------------- --------- ------------ -----------
Upper Saddle
River 2
Washington 1
New Mexico...... Albuquerque 3 1(60) 1
New York........ Albany 1
Great Neck 2
Huntington 1
Liverpool 1
Monsey 2
New York 2
Orangeburg 1
Pulaski 1
Syracuse 1
North Carolina . Asheville 1
Chapel Hill 1
Charlotte 1 1
Concord 1
Durham 1
Greensboro 1
Kinston 1(17)
Marion 1
Monroe 1
Raleigh 2 1
Shelby 1
Statesville 1
Wilmington 1
Wilson 1
Ohio............ Ashtabula 1
Centerville 2
Cincinnati 1
Columbus 5
Cuyahoga Falls 1
Dayton 2
Dublin 1
Fairlawn 1
Independence 1
Lorain 5
Oregon 2
Toledo 2
Westerville 1
Oklahoma........ Ada 2
Oklahoma City 4 1(111) 2 1
Tulsa 2 1
Weatherford 1
Ontario,Canada . Etabicoke 1
Pennsylvania ... Altoona 2 1(66)
Camp Hill 1
Erie 1 2(207)
Harrisburg 3
Lancaster 1
Mechanicsburg 2 2(201)
Mt. Pleasant 1
Paoli 1
Pittsburgh 6 1(89)
Pleasant Gap 4 1(88)
Scranton 1
Springfield 1
York 3 1(88)
South Carolina . Charleston 1 1 (36) 1
Columbia 3 1(89)
Florence 1 1(88)
Greenville 1
Goose Creek 1
Lancaster 2(54)
67
<PAGE>
OUTPATIENT INPATIENT MEDICAL
REHABILITATION REHABILITATION CENTERS SURGERY DIAGNOSTIC OTHER
STATE MARKET CENTERS(1) FACILITIES (BEDS)(2) (BEDS)(2) CENTERS CENTERS SERVICES
- ---------------- ---------------- ---------------- ---------------- -------------- --------- ------------ -----------
Tennessee....... Chattanooga 2 1(80) 2
Clarksville 1
Kingsport 1(50)
Knoxville 2 1
Dyersburg 1
Collierville 1
Union City 1
Martin 1(40)
Memphis 4 1(80) 1
Nashville 2 1(80) 1 1
Texas........... Allen 1
Amarillo 1
Arlington 2 1(60) 1
Austin 7 1(80) 1
Beaumont 1
Dallas 9 3(175) 1(96) 1 1 1
El Paso 1 1
Fort Worth 5 1(60) 1 1
Houston 11 2(186) 4 1 1
Midland 1(60)
San Antonio 2 3(127) 2 5
Stafford 1
Texarkana 1 1(60)
Victoria 1
Waco 2
Wylie 1 1
Utah............ Salt Lake City 1
Sandy 1 1(86)
Virginia........ Alexandria 1
Arlington 1
Falls Church 1
Norfolk 1
Richmond 2 3(84) 1(200) 1 1
Roanoke 1
Virginia Beach 3
Warrenton 1
Washington...... Seattle 20 1
Tacoma 3
West Virginia .. Beckley 1
Huntington 1(40)
Morgantown 1(80)
Parkersburg 1(40)
Princeton 1(40)
Wisconsin....... Eau Claire 1
Green Bay 1
Oshkosh 1
Wausau 1
Wauwatosa 1
</TABLE>
(1) Includes freestanding outpatient centers and their satellites and outpatient
satellites of inpatient rehabilitation facilities.
(2) "Beds" refers to the number of beds for which a license or certificate of
need has been granted, which may vary materially from beds available for
use.
(3) Under construction.
68
<PAGE>
BUSINESS OF ADVANTAGE HEALTH
GENERAL
Advantage Health operates the largest network (based on the number of
inpatient beds and sites of service) of comprehensive medical rehabilitation
facilities, and is a leading provider of the continuum of post-acute care
services, in New England. At January 31, 1996, Advantage Health's network of a
total of 136 sites of service included four freestanding rehabilitation
hospitals, one freestanding multi-use hospital, one nursing home, 68 outpatient
rehabilitation facilities, 14 inpatient managed rehabilitation units, 24
rehabilitation services management contracts and six managed sub-acute
rehabilitation units also located in general acute care hospitals. As part of
its continuum of post-acute care services, Advantage Health delivers a full
array of home healthcare services (including comprehensive rehabilitation
services) to individuals through its 12 home health care locations and six
senior living facilities in four states.
Advantage Health has established comprehensive multi-disciplinary
rehabilitation programs for its inpatient and outpatient lines of business for
head trauma, cancer, chronic pain, young stroke, amputation, spinal cord injury,
orthopedic problems, neurological disorders, arthritis, pulmonary, ventilation
and other disabling conditions. Advantage Health is committed to medical
leadership and its clinical programs are distinguished by intensive physician
involvement. Advantage Health believes that its 50 physiatrists, as of August
31, 1995, constitute one of the largest single groups of physicians specializing
in rehabilitation medicine in the United States.
Advantage Health affiliates with premier local healthcare providers to
enhance the delivery of its services. To date, Advantage Health has established
relationships with 26 major tertiary and community hospitals in the Northeast.
In 1995, Advantage Health worked with The Lahey/Hitchcock Clinic Hospital, Inc.
located in Burlington, Massachusetts, Geisinger Medical Center located in
Danville, Pennsylvania and Fletcher Allen Healthcare Systems (formerly The
Medical Center Hospital of Vermont and Fletcher Allen Hospital) located in
Burlington and Colchester, Vermont to incorporate its post-acute care continuum
of services into their integrated health delivery systems.
Advantage Health's operations are predominantly centered around its
freestanding rehabilitation hospitals and inpatient rehabilitation units located
in acute-care hospitals, which function as Advantage Health's "hub" in such
market areas. Advantage Health's presence in each market has been expanded by
establishing outpatient satellite clinics, sub-acute services and home health
services which complement and are supported by the hospitals' services and thus
function as Advantage Health's "spokes", further penetrating the market area.
This "hub and spoke" concept enhances Advantage Health's relations with local
providers who can conveniently access Advantage Health's facilities at one or
more inpatient, outpatient or home health locations.
The following table sets forth certain data pertaining to Advantage Health's
existing inpatient facilities, nursing home, inpatient managed rehabilitation
contracts, inpatient managed sub-acute contracts, outpatient rehabilitation
centers, home health branch offices and managed senior living facilities at
January 31, 1996:
<TABLE>
<CAPTION>
DATE FACILITY ADVANTAGE
REHABILITATION LICENSED OPENED OR PERCENTAGE
HOSPITALS LOCATION BEDS ACQUIRED OWNERSHIP
- ------------------------------- --------------- ---------------- ---------------- -------------
<S> <C> <C> <C> <C>
New England Rehabilitation
Hospital....................... Woburn, MA 198 Acute 9/69 100%
75 Sub-acute 8/95
New England Rehabilitation
Hospital of Portland........... Portland, ME 80 Acute 12/86 100%
The Fairlawn Rehabilitation
Hospital....................... Worcester, MA 110 Acute 10/87 33%
35 Ventilator 5/94 Managed
69
<PAGE>
DATE FACILITY ADVANTAGE
REHABILITATION LICENSED OPENED OR PERCENTAGE
HOSPITALS LOCATION BEDS ACQUIRED OWNERSHIP
- ------------------------------- --------------- ---------------- ---------------- -------------
The Rehabilitation Institute of
Western Massachusetts.......... Ludlow, MA 50 Acute 1/96 100%
</TABLE>
<TABLE>
<CAPTION>
MULTIPURPOSE MEDICAL
CENTER (ACUTE CARE,
SUB-ACUTE CARE, OUTPATIENT DATE FACILITY ADVANTAGE
SPECIALITY CLINICS, LICENSED OPENED OR PERCENTAGE
PRIMARY CARE PHYSICIANS) LOCATION BEDS ACQUIRED OWNERSHIP
- ---------------------------- -------------- --------------- ---------------- -------------
<S> <C> <C> <C> <C>
The Medical Center at 74 Acute
Symmes...................... Arlington, MA 39 Sub-acute 8/94 60%
</TABLE>
<TABLE>
<CAPTION>
DATE FACILITY ADVANTAGE
LICENSED OPENED OR PERCENTAGE
NURSING HOMES LOCATION BEDS ACQUIRED OWNERSHIP
- ----------------------------- ----------- ----------- ---------------- -------------
<S> <C> <C> <C> <C>
Wentworth Nursing Care
Center....................... Lowell, MA 103 5/95 100%
</TABLE>
<TABLE>
<CAPTION>
LICENSED DATE
INPATIENT MANAGED REHABILITATION CONTRACT
REHABILITATION CONTRACTS (ACUTE) LOCATION BEDS COMMENCED
- ---------------------------------------------- --------------- --------------- -----------
<S> <C> <C> <C>
St. Joseph Hospital........................... Nashua, NH 24 2/86
Cheshire Medical Center....................... Keene, NH 24 8/86
Charlton Memorial Hospital, Southeast
Rehabilitation Center....................... Fall River, MA 32 6/90
Berkshire Medical Center...................... Pittsfield, MA 35 3/91
Rehabilitation Institute at Mid-Maine Medical
Center...................................... Waterville, ME 25 4/91
Horton Medical Center......................... Middletown, NY 27 10/91
Rehabilitation Unit at Hartford Hospital ..... Hartford, CT 10 10/92
Rutland Regional Medical Center............... Rutland, VT 12 1/93
Maine Medical Center.......................... Portland, ME 20 4/93
Cranberry Specialty Hospital.................. Middleboro, MA 34 8/93
The Medical Center Hospital of Vermont and
Fanny Allen Hospital -- Fletcher Allen Burlington and
Healthcare System............................ Colchester, VT 40 7/94
Geisinger Medical Center...................... Danville, PA 40 8/94
St. Joseph's Medical Center................... Stamford, CT 30 2/95
Noble Hospital................................ Westfield, MA 15 1/96
</TABLE>
<TABLE>
<CAPTION>
LICENSED
REHABILITATION/ DATE
INPATIENT MANAGED SUB-ACUTE LONG TERM CONTRACT
CONTRACTS LOCATION CARE BEDS COMMENCED
- ------------------------------------- -------------------- --------------- -----------
<S> <C> <C> <C>
Malden Hospital...................... Malden, MA 23 6/94
Berkshire Medical Center............. Pittsfield, MA 20 1/95
South Shore Hospital................. S. Weymouth, MA 25 1/95
Great Barrington,
Fairview Hospital.................... MA 21 8/95
North Shore Rehabilitation Center ... Danvers, MA 60 1/96
University Commons................... Worcester, MA 164 1/96
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
OUTPATIENT COMPANY
REHABILITATION DATE OPENED PERCENTAGE
CENTERS LOCATION OR ACQUIRED OWNERSHIP
- ------------------------------------------------ --------------------- -------------- -------------
<S> <C> <C> <C>
Keleher Ambulatory Care Center.................. Woburn, MA 4/80 100%
New England Rehabilitation Center of Billerica . Billerica, MA 4/82 100%
New England Rehabilitation Center of Southern
New Hampshire.................................. Nashua, NH 6/85 92%
Fairlawn Rehabilitation Center.................. Worcester, MA 3/88 33%
New England Rehabilitation Center of Brookline . Brookline, MA 7/91 100%
New England Rehabilitation Center of
Framingham..................................... Framingham, MA 2/92 100%
New England Rehabilitation Hospital of
Portland, Inc. -- Outpatient Center............ Portland, ME 7/92 100%
New England Spine Care Center................... Brookline, MA 8/92 100%
AdvantageHEALTH Physical Therapy and
Rehabilitation Center.......................... Salem, NH 8/92 100%
AdvantageHEALTH Physical Therapy and
Rehabilitation Center.......................... Plaistow, NH 8/92 100%
AdvantageHEALTH Sports Therapy North............ Lynnfield, MA 3/93 100%
New England Rehabilitation Center at the Hunt .. Danvers, MA 3/93 100%
New England Rehabilitation Center at Melrose ... Melrose, MA 5/93 100%
PRISM Sports Medicine and Physical Therapy ..... Merrimack, NH 5/93 100%
AdvantageHEALTH Hand Therapy and Arthritis
Center......................................... Norwalk, CT 5/93 100%
- New London, CT 8/93 100%
- Norwich, CT 8/93 100%
- Old Lyme, CT 8/93 100%
Physical Therapy Services (4)................... - Old Saybrook, CT 8/93 100%
- W. Springfield, MA 9/93 100%
- Holyoke, MA 9/93 100%
Challenge Physical Therapy and Rehabilitation - Belchertown, MA 9/93 100%
(4)............................................. - W. Springfield, MA 9/93 100%
Fairlawn Rehabilitation Outpatient Center ...... Westborough, MA 9/93 33%
- Yarmouth, ME
AdvantageHEALTH Rehabilitation Clinics (2) ..... - So. Portland, ME 11/93 100%
New England Rehabilitation Children's Center ... Waltham, MA 1/94 100%
New England Rehabilitation Center at Lowell .... Lowell, MA 9/95 100%
- S. Portland, ME 11/95 100%
- Salem, MA 11/95 100%
- Peabody, MA 11/95 100%
Advantage Health Rehabilitation Clinics (4) .... - Revere, MA 11/95 100%
Advantage Beverly Physical Therapy Services .... Hamilton, MA 4/94 51%
Longwood Brace and Orthotics.................... Chestnut Hill, MA 4/94 100%
71
<PAGE>
OUTPATIENT COMPANY
REHABILITATION DATE OPENED PERCENTAGE
CENTERS LOCATION OR ACQUIRED OWNERSHIP
- ------------------------------------------------ --------------------- -------------- -------------
Advantage Health Physical Therapy of New - S. Plainfield, NJ 5/94 100%
Jersey, Inc. (5).............................. - New Brunswick, NJ 5/94 100%
- East Brunswick, NJ 5/94 100%
- Matawan, NJ 5/94 100%
- Secaucus, NJ 5/94 100%
Charlton Wellness Center........................ North Dartmouth, MA 5/94 100%
Advantage Health Physical Therapy of Quincy .... Quincy, MA 10/94 100%
New England Rehabilitation Center at Symmes .... Arlington, MA 11/94 100%
Advantage Health Physical Therapy of New - Cherry Hill, NJ 4/95 100%
Jersey, Inc. (12).............................. - Pennsauken, NJ 4/95 100%
- Mount Holly, NJ 4/95 100%
- Medford, NJ 4/95 100%
- New Castle, NJ 4/95 100%
- Newark, DE 4/95 100%
- Bricktown, NJ 4/95 100%
- Neptune, NJ 4/95 100%
- Wall, NJ 4/95 100%
- Freehold, NJ 4/95 100%
- Trumbull, CT 4/95 100%
- Fairfield, CT 4/95 100%
Eastern Rehabilitation Network (Partnership - Wethersfield, CT 7/95 51%
with Hartford Hospital)(7)..................... - East Hartford, CT 7/95 51%
- Elmwood, CT 7/95 51%
- Avon, CT 7/95 51%
- Glastonbury, CT 7/95 51%
- Hartford, CT 7/95 51%
- Granby, CT 1/96 51%
Beverly Orthopedics............................. Beverly, MA 8/95 100%
Advantage Health Physical Therapy of Rhode
Island.......................................... Portsmouth, RI 8/95 100%
Rehab West Sports Medicine...................... East Longmeadow, MA 1/96 100%
Rehabilitation Associates....................... West Springfield, MA 1/96 100%
The Rehabilitation Institute of Western
Massachusetts Carr Outpatient Center............ Ludlow, MA 1/96 100%
Advanced Physical Therapy Services.............. Keene, NH 1/96 100%
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
DATE OPENED,
REHABILITATION SERVICES ACQUIRED OR
MANAGEMENT CONTRACTS LOCATION MANAGED
- ------------------------------------------------------- -------------------- ---------------
<S> <C> <C>
The Center for Rehabilitation at Berkshire Medical
Center................................................ Pittsfield, MA 3/91
The Rehabilitation Center at Horton Medical Center .... Middletown, NY 10/91
Farnum Rehabilitation Center at Cheshire Medical
Center................................................ Keene, NH 5/92
Boston Area Day Program -- Commonwealth of
Massachusetts......................................... Quincy, MA 8/92
St. Mary's Regional Medical Center..................... Lewiston, ME 4/93
New England Rehabilitation Center of Portland at Maine
Medical Center........................................ Portland, ME 4/93
AdvantageHEALTH Rehabilitation at Fairview Hospital ... Great Barrington, MA 5/93
- East Hartford, CT 5/93
Eastern Rehabilitation Network (c/o Pratt & - Middletown, CT 5/93
Whitney)(3)........................................... - North Haven, CT 5/93
Acquired Brain Dysfunction Program - Commonwealth of
Massachusetts......................................... Woburn, MA 7/93
The Outpatient Rehabilitation Center at South Shore
Hospital.............................................. S. Weymouth, MA 7/93
Boston Bruins Professional Hockey Club................. Boston, MA 8/93
Cranberry Specialty Hospital........................... Middleboro, MA 8/93
The Rehabilitation Institute at Mid-Maine Medical
Center................................................ Waterville, ME 8/93
Advantage Health Rehabilitation at Hubbard Regional
Hospital.............................................. Webster, MA 9/93
Rutland Rehabilitation Center at Rutland Regional
Medical Center....................................... Rutland, VT 12/93
Fairview Physical & Sports Therapy Center.............. Stockbridge, MA 4/94
Geisinger Medical Center............................... Danville, PA 8/94
Champlain Valley Physicians' Hospital.................. Plattsburg, NY 10/94
Cary Medical Center.................................... Caribou, ME 2/95
St. Joseph's Medical Center............................ Stamford, CT 2/95
Sebasticook Valley Hospital............................ Pittsfield, ME 5/95
Southern Maine Medical Center.......................... Biddeford, ME 11/95
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
DATE OPENED
HOME HEALTH CARE BRANCH OFFICES LOCATION OR ACQUIRED
- ------------------------------------- ---------------------- --------------
<S> <C> <C>
Special Care Home Health Services - WOBURN, MA 7/85
(11)................................. - PLYMOUTH, MA 7/85
- OSTERVILLE, MA 7/85
- QUINCY, MA 7/85
- NORTH DARTMOUTH, MA 7/85
- ORLEANS, MA 7/85
- LOWELL, MA 1/94
- WEST HARTFORD, CT 1/94
- BURLINGTON, MA 9/94
- Portland, ME 4/95
- Hartford, CT 5/95
A.B.L. Visiting Nurses............... - Beverly, MA 5/95
</TABLE>
<TABLE>
<CAPTION>
MANAGED SENIOR LIVING FACILITIES LOCATION DATE OPENED
- --------------------------------- ---------------- -------------
<S> <C> <C>
Country Club Heights............. Woburn, MA 5/79
Lake Howard Heights.............. Winter Haven, FL 9/79
The Gables at Farmington......... Farmington, CT 11/84
The Gables at Brighton........... Rochester, NY 9/88
Bayshore Heights................. Tampa, FL 10/90
The Gables at Winchester......... Winchester, MA 5/91
</TABLE>
REHABILITATION/MULTI-USE HOSPITALS
Advantage Health operates three freestanding rehabilitation hospitals which
provide comprehensive treatment to individuals who require intensive physical
rehabilitation. Physiatrist-led teams treat individuals through specialized
programs in head trauma, cancer, chronic pain, young stroke, amputation, spinal
cord injuries, orthopedic problems, neurological disorders, arthritis and other
disabling conditions. The services and programs provided by Advantage Health's
hospitals are administered by professional staffs that include physiatrists and
physical, occupational and speech therapists. The hospitals are accredited by
both CARF and the JCAHO.
On August 3, 1994, Advantage Health and Lahey Clinic Hospital, Inc.
(currently known as Lahey/Hitchcock Clinic Hospital, Inc.) jointly acquired The
Medical Center at Symmes, Inc. ("The Medical Center"), formerly The Symmes
Hospital, Inc., as well as an interest in the Lahey/Advantage General
Partnership, the entity which owns the real estate of The Medical Center.
Advantage Health also has a management agreement with The Medical Center. The
Medical Center is a multi-faceted medical campus focused on outpatient primary
and rehabilitation care, emergency services, ambulatory and short-term surgery
with 74 acute inpatient beds, 39 sub-acute rehabilitation beds, and an
outpatient rehabilitation center. The Medical Center's acute, emergency,
ambulatory and short-term surgery services received a three-year maximum
accreditation from JCAHO in December of 1994, which expires in December of 1997.
MANAGED REHABILITATION AND SUB-ACUTE CONTRACTS
Advantage Health has 20 management contracts, with 19 general acute-care
hospitals and one specialty hospital in seven states to operate dedicated
rehabilitation or sub-acute units within such hospitals. The services provided
through these management contracts range from administrative management of the
unit to administrative, medical management as well as therapy services,
depending on the needs of the host hospitals.
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<PAGE>
Advantage Health's rehabilitation and sub-acute management contracts are
typically five years in length, with the host hospital having the option at the
end of the term to renew for an additional five years. All of Advantage Health's
management contracts are with tax-exempt hospitals and certain regulations
promulgated by the U.S. Internal Revenue Service limit the terms of management
contracts between tax-exempt hospitals and proprietary management companies
where the managed facility is financed with tax-exempt bonds. These tax
regulations may cause some tax-exempt hospitals to seek management contracts
that are terminable after three years.
Under the terms of the typical rehabilitation management contract, Advantage
Health is hired to oversee the operations of a distinct unit in an acute-care
hospital dedicated to providing rehabilitation services similar to those which
Advantage Health provides in its own rehabilitation hospitals. Advantage Health
usually provides its own physiatrist medical director for the unit, a
non-physician manager and a patient evaluator who evaluates potential patients
for the unit. Advantage Health also provides training to the hospital's clinical
staff and advice to the hospital administration, as well as other consulting and
advisory services through the expertise of its corporate office personnel.
The management agreements include a variety of compensation arrangements,
such as payments per patient day, payments per discharge or a flat fee with
performance incentives. Advantage Health is paid on a monthly basis by each
hospital. Typically, the acute-care hospital agrees to provide the facilities
with equipment, support services, utilities, nursing staff and diagnostic
facilities necessary for the operation of the dedicated rehabilitation unit. The
unit is included in the acute-care hospital's license as a service of the
hospital, and patients receiving services in the unit are billed by the
hospital.
In addition, the typical rehabilitation management contract appoints
Advantage Health as the exclusive provider of services for the acute-care
hospital's rehabilitation unit and in furtherance of such exclusivity the
contract specifically prohibits such hospital from entering into any agreement
or arrangement with any other person or entity that provides the same or
substantially similar services as Advantage Health. Similarly, as an assurance
of Advantage Health's commitment to serve the acute-care hospital, Advantage
Health has agreed and may in the future agree not to provide services similar to
those being provided under the contract to any other person or entity within a
defined geographical radius. The scope of such radius is typically a function of
many factors, including the density of the surrounding population, the rural or
urban composition of the acute-care hospital's service area and the general
availability of rehabilitation services within such service area. Advantage
Health does not believe that these prohibitions upon its activities have had a
material adverse impact on Advantage Health's growth and expansion plans.
OUTPATIENT REHABILITATION CENTERS
Advantage Health offers outpatient services in a variety of settings.
Specifically, Advantage Health has 68 outpatient rehabilitation centers located
in seven states: Massachusetts, New Hampshire, Maine, Connecticut, New Jersey,
Delaware and Rhode Island. Advantage Health also manages rehabilitation services
at 24 locations. Most of these locations are at acute-care hospitals where
Advantage Health provides inpatient management of rehabilitation services or
therapy contract services. The 68 outpatient rehabilitation centers provide
cost-effective rehabilitation services to individuals not requiring more
intensive inpatient or home healthcare. Specialty programs, diagnostic testing
and evaluations and occupational medicine are all administered on an outpatient
basis, utilizing the same comprehensive multidisciplinary approach as Advantage
Health's inpatient programs. Outpatient centers are staffed by physiatrists,
where appropriate, as well as by therapists practicing in a broad range of
therapies and modalities. Patients treated at Advantage Health's outpatient
rehabilitation centers may have been discharged from one of Advantage Health's
inpatient facilities or may come directly from the community being served by the
outpatient center. The disabilities treated on an outpatient basis include
orthopedic problems, chronic pain, head injury, limb amputation, cardiac
conditions, hand injury, stuttering, stroke and young stroke, spinal cord
injury, progressive neuromuscular disorders, pediatric disorders and other
disabling conditions.
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<PAGE>
HOME HEALTHCARE
Advantage Health delivers home healthcare to individuals through its 12 home
health locations as an extension of its other rehabilitation services. Home
healthcare services include physical, occupational and speech-language
therapies, nursing, homemaking services, home health aides and medical social
services. Measured in terms of revenue, Advantage Health is the largest home
healthcare provider in Massachusetts and has focused its activities in the
eastern Massachusetts and Cape Cod markets, which have large elderly
populations, the primary users of home healthcare services.
Advantage Health's home health services have experienced substantial growth.
Many market factors have influenced the growth of this business, including aging
of the population, general acute-care hospital discharges, prospective
reimbursement, insufficient supply of nursing home beds and consumer demand for
alternatives to institutional care.
SENIOR LIVING FACILITIES
Advantage Health manages six facilities, which include senior living
facilities, containing an aggregate of 801 rental apartments located in
Massachusetts, Connecticut, New York and Florida. A specially designed service
package is included in the monthly rent for the facilities, which consists of
restaurant-style dining, organized recreational activities, transportation and
24-hour emergency assistance. Generally, each facility is staffed by an
executive director and marketing, maintenance, food service, housekeeping and
security personnel.
Advantage Health holds minority partnership interests in five of the six
senior living facilities that it manages. These investments have no carrying
value for financial reporting purposes.
SOURCES OF REVENUE AND REIMBURSEMENT
Advantage Health realizes revenues from the delivery of inpatient, outpatient
and home health services as well as through its management of non-owned
inpatient, outpatient and senior living facilities. Revenues derived from senior
living facility management contracts described above are included in the "Other"
line item below. The following table sets forth the combined revenue and
percentage of patient service and other healthcare related revenues contributed
by each type of service provided by Advantage Health for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
-----------------------------------------------------------
1993 1994 1995
------------------- ------------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues
Inpatient Rehabilitation... $52,745 54.2% $ 57,012 46.4% $ 85,889 50.0%
Outpatient Rehabilitation.. 17,552 18.1 27,156 22.1 30,925 18.0
Home Health................ 15,629 16.1 23,708 19.3 37,058 21.6
Managed Rehabilitation
Units..................... 5,581 5.7 10,019 8.2 13,188 7.7
Other...................... 5,738 5.9 4,933 4.0 4,781 2.7
--------- --------- ---------- -------- ---------- --------
Total.................... $97,245 100.0% $122,828 100.0% $171,841 100.0%
========= ========= ========== ======== ========== ========
</TABLE>
Advantage Health's revenues are affected by occupancy rates, the nature and
extent of services provided in the outpatient and home care settings and the
payor class mix of patients treated in the various settings. Charge-based
revenues are generated from services provided to patients covered by commercial
insurance carriers, health maintenance organizations ("HMOs"), other managed
care organizations, workers' compensation programs and patients who pay their
own claims. Within the charge- based category, actual amounts received by
Advantage Health may be less than Advantage Health's published charges because
of negotiated discounts and fee schedules. Cost-based revenues primarily result
from charges to Medicare patients at facilities where cost reports are filed.
The payments for Medicare and Blue Cross acute-care inpatient services at The
Medical Center are reimbursed under the prospective payment system under which
hospitals are paid a standard amount for inpatients based on the patients'
diagnoses and, as such, are not deemed cost-based.
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<PAGE>
MEDICARE
Medicare utilizes a retrospective, reasonable cost methodology to pay for
inpatient rehabilitation hospital services, sub-acute services, outpatient
rehabilitation hospital services, CORF services and home health agency and
skilled nursing services. Advantage Health's hospital Medicare-certified and
licensed outpatient rehabilitation facilities are paid on a reasonable cost
basis, either as hospital departments or as freestanding CORFs. In either event,
Medicare reimbursement is subject to limitations that could result in Advantage
Health's receiving less than its full cost of treating Medicare patients. The
non-hospital licensed facilities receive reimbursement based on a standard fee
for service schedule of payments. The amendments to the Medicare statute under
the Social Security Act Amendments of 1983 and related regulations provided for
implementation of "prospective payment" reimbursement formulas for acute-care
rehabilitation hospitals in place of the historical cost system of
reimbursement. These methodologies do not currently apply to any rehabilitation
facility operated by Advantage Health; however, Congress has taken steps which
may lead to the inclusion of rehabilitation hospitals in the prospective payment
system at some point in the future.
BLUE CROSS AND MANAGED CARE PLANS
Blue Cross plans provide their subscribers with hospital benefits, including
rehabilitation care, through numerous independent plans that vary from state to
state. Blue Cross payments are made on the basis of established charges or rates
negotiated by each hospital with Blue Cross, or on a formula based on the
hospital's costs. Such payments are made directly to the hospital by the local
Blue Cross plan. In Massachusetts, contracts between hospitals and Blue Cross of
Massachusetts are subject to the advance approval of the Massachusetts Rate
Setting Commission (the "Rate Setting Commission").
Advantage Health's Massachusetts hospital facilities and freestanding
outpatient clinics contract with a large number of HMO's, preferred provider
organizations and other managed care plans. These contracts contain a variety of
payment arrangements for hospital services, including negotiated discounts from
charges and negotiated per diem rates for inpatient services, and negotiated
discounts from charges and per treatment/visit rates for outpatient services.
CHARGE CONTROL
Advantage Health's Massachusetts acute rehabilitation hospital facilities
also are subject to charge control by the Rate Setting Commission. Under charge
control, all non-acute Massachusetts hospitals must submit a schedule of charges
to the Rate Setting Commission for prior approval. Upon reviewing a hospital's
proposed submission, charges and cost reports, the Rate Setting Commission
prospectively sets a cap on total gross patient service revenues the hospital
can charge.
COMPETITION
Advantage Health operates in competition with other comprehensive medical
rehabilitation providers, as well as local general acute-care hospitals and
outpatient facilities, and nursing homes and sub-acute-care companies for less
intense sub-acute care services. Many of these competing institutions are larger
than Advantage Health and have greater financial resources than Advantage
Health. There is competition to obtain CONs for rehabilitation care beds;
however, CONs are usually granted according to formulas based upon population
projections or discharge statistics and only a finite number of beds are
available for approval in any given geographic area. Advantage Health may also
face opposition from other hospitals or hospital companies when it files a CON
application or seeks to acquire a facility covered by an existing CON. CON
programs affect the opportunity to develop new hospitals by creating a
regulatory system that requires time, minimizes confidentiality and allows
competing applicants to exercise procedural rights which can include
time-consuming appeals. CON approvals serve as a barrier to entry and have the
potential to limit competition in a local market.
The competitive position of a hospital is dependent upon a variety of
factors, including the physicians who either practice at the hospital or refer
their patients to such hospital for rehabilitation, its clinical reputation, its
geographic location and the range of specialty programs offered.
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<PAGE>
The outpatient care facilities operated by Advantage Health compete on a
local and regional basis with both independent operators of such types of
facilities and companies managing multiple facilities, some of which have
substantially greater financial resources than Advantage Health.
Historically, home healthcare services have been provided by small,
independent non-profit agencies with limited resources providing a limited range
of services to local markets. In addition, the home healthcare industry is
characterized by fragmented and complex sources of revenue which include public
and private reimbursement and a significant private pay market.
REGULATION
Rehabilitation hospitals, rehabilitation clinics and home health agencies are
subject to substantial federal, state and local government regulation and to
standards set by private accrediting bodies. Health- care facilities are subject
to periodic review by federal, state, local and accrediting bodies, compliance
inspections, and inspections relating to equipment and standards of medical
care, the adequacy of life safety measures and compliance with other standards.
Advantage Health believes that its hospitals, outpatient clinics and home health
agencies are in substantial compliance with all such applicable laws,
regulations and standards such that the failure to be in compliance with the
same would not have a material adverse effect on Advantage Health and its
operations, taken as a whole. Such laws, regulations and standards are subject
to change and Advantage Health may need to take steps to assure its continued
substantial compliance with the same. Thus, although Advantage Health will
endeavor to maintain such compliance, there can be no assurance that Advantage
Health will be able to do so or that Advantage Health will not be required to
expend significant sums in order to maintain such compliance.
The development, expansion and construction of rehabilitation hospitals and
other types of healthcare facilities, including home health providers, are
subject to extensive government regulation. Many states, including all states
where Advantage Health operates rehabilitation hospitals and outpatient
facilities, continue to have CON laws. In addition, Maine requires that
Advantage Health must obtain a CON prior to commencing home health operations in
such state. State CON statutes generally provide that, prior to the addition of
new beds, the construction of new facilities or the introduction of new
services, a state agency must determine that a need exists for those beds,
facilities or services. The CON process is intended to promote comprehensive
healthcare planning, assist in providing high quality health care at the lowest
possible cost and avoid unnecessary duplication by ensuring that only those
health care facilities that are needed will be built. While these CON laws vary,
they generally require state approval for (i) capital expenditures in excess of
certain threshold amounts, (ii) expansion of bed capacity or facilities, (iii)
the acquisition of medical equipment and (iv) the institution of new services.
CONs usually are issued for a specified maximum expenditure and require
implementation of the proposed improvement within a specified period of time.
Some states also require obtaining an exemption from CON review for acquisitions
of existing health care facilities.
In order to receive Medicare reimbursement, each facility must meet the
applicable conditions of participation set forth by the United States Department
of Health and Human Services relating to the type of facility, its equipment,
its personnel and its standards of medical care, as well as compliance with all
state and local laws and regulations. In addition, Medicare regulations
generally require that entry into such facilities be through physician referral.
Advantage Health must offer services to Medicaid and Medicare recipients on a
nondiscriminatory basis and may not preferentially accept private pay or
commercially insured patients. All of Advantage Health's hospitals and the
hospital-licensed outpatient facilities, as well as a division of Advantage
Health's home health operation, are Medicare certified. Substantially all of the
newly acquired private therapy practices are not Medicare certified. Advantage
Health intends to seek Medicare certification for several of the non-certified
sites as soon as practicable.
To date, all of Advantage Health's facilities have been found to be in
satisfactory compliance with applicable Medicare requirements. Advantage Health
has developed its operational systems to maintain compliance with the various
standards and requirements and has established ongoing quality assurance
activities to monitor compliance.
Various state and federal laws regulate the relationship between providers of
health care services and physicians, including employment or service contracts,
and investment relationships. These laws include the fraud and abuse provisions
of the Medicare, Medicaid and similar state statutes (the "Fraud
78
<PAGE>
and Abuse Laws"), which prohibit the payment, receipt, solicitation or offering
of any direct or indirect remuneration in exchange for, or to induce the
referral of, Medicare or Medicaid patients or for the ordering or providing of
Medicare or Medicaid covered services, items or equipment. Violations of these
provisions may result in civil and criminal penalties and/or exclusion from
participation in the Medicare, Medicaid and state programs containing similar
provisions relating to referrals of privately insured patients. The Department
of Health and Human Services has issued regulations which set forth certain
so-called "safe harbors," representing business relationships and payments that
can safely be undertaken without violation of the Fraud and Abuse Laws. While
not all of Advantage Health's contracts and business arrangements fall within
the safe harbors, Advantage Health believes that it has arranged and will
continue to arrange its business relationships so as to comply with the Fraud
and Abuse Laws.
Effective on January 1, 1995, the provisions of the Ethics in Patient
Referral Act, sometimes called the "Stark Bill," became applicable to the
healthcare industry in general. Under the Stark Bill, physicians who have an
ownership interest or compensation arrangement with a provider of designated
health services, a term that includes the healthcare services provided by
Advantage Health, may not make Medicare referrals to that provider unless the
ownership or compensation arrangement is expressly permitted under the terms of
the statute. The effect of the Stark Bill is to limit the financial
relationships between referring physicians and Advantage Health to those
expressly permitted under the Stark Bill. Advantage Health believes its
financial relationships with referring physicians are in substantial compliance
with the Stark Bill.
In certain states, senior living facilities are regulated by various state
agencies. The Florida senior living facilities managed by Advantage Health
operate under state regulations, and each is licensed as an Adult Senior Living
Facility Level I (apartments) and Level II (assisted living units). Advantage
Health believes that no state in which it currently operates requires a CON for
the construction or operation of a senior living facility.
INSURANCE
Advantage Health maintains professional liability insurance, comprehensive
general liability insurance and other insurance coverage on all of its
healthcare facilities. Physicians practicing at Advantage Health's facilities
are responsible for their own professional liability insurance coverage, and are
required to carry insurance of at least $1,000,000 per claim with an annual
aggregate of $3,000,000 except for those practicing at New England
Rehabilitation Hospital of Portland ("NERH-Portland"), who carry insurance of at
least $500,000 per claim with an annual aggregate of $1,000,000. While Advantage
Health believes that its insurance is adequate in amount and coverage for its
current operations, there can be no assurance that coverage will continue to be
available in adequate amounts or at a reasonable cost, or that a claim would not
be entered in excess of provided coverage or that an insurer would not dispute
coverage for a particular claim.
EMPLOYEES AND MEDICAL STAFF
Advantage Health employs in excess of 6,500 full-time and part-time
employees. In certain cases, under the terms of its management contracts,
Advantage Health employs the personnel at the facilities which it manages.
Advantage Health's employees are not represented by any labor union. Management
of Advantage Health considers the relationship between Advantage Health and its
employees to be good.
Advantage Health competes with general acute-care hospitals, nursing homes,
other ambulatory care facilities and other home health agencies for the services
of physicians, registered nurses, therapists, and other professional personnel.
From time to time, there have been shortages in the supply of available
physicians, registered nurses, various types of therapists and various types of
home health personnel. Although Advantage Health believes that it will be able
to attract and retain sufficient physicians, nursing personnel and therapists to
meet its needs, there can be no assurance that it will be able to do so.
Generally, Advantage Health's physicians, registered nurses, speech and
language therapists, pharmacists, physical and occupational therapists, and
audiologists and psychologists are subject to registration or licensure with the
appropriate state health regulatory agency.
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<PAGE>
PROPERTIES
Advantage Health's executive offices are located in facilities totalling
approximately 10,100 square feet and rented by Advantage Health in Woburn,
Massachusetts. Advantage Health believes that its Woburn facilities are adequate
for its present needs and contain suitable additional space to accommodate
future expansion. Advantage Health owns the real estate upon which New England
Rehabilitation Hospital ("NERH") and NERH-Portland are built and Advantage
Health holds a one-third interest in the real estate upon which The Fairlawn
Rehabilitation Hospital is built. Advantage Health also holds a one-half
interest in certain real estate located in North Dartmouth, Massachusetts upon
which it operates an NERH satellite outpatient clinic. In addition, Advantage
Health currently leases various facilities used for executive offices in its
home healthcare business and for outpatient clinics and centers (except for
Keleher Ambulatory Care Center, which is owned by Advantage Health and located
on the NERH campus and those facilities it manages, all of which are owned by
others), none of which individually is materially important to Advantage
Health's business as a whole.
Advantage Health's general partnership with Lahey/Hitchcock Clinic Hospital,
Inc. owns approximately 18 1/2 acres of land with buildings containing
approximately 194,000 square feet located in Arlington, Massachusetts and upon
which the former general acute-care hospital known as "Symmes Hospital" was
operated. Advantage Health holds a 50% interest in this property, as does an
affiliate of the Lahey/Hitchcock Clinic Hospital, Inc.
Advantage Health owns the former campus of St. Joseph's Hospital located in
Lowell, Massachusetts consisting of approximately 5 1/2 acres of land and
buildings containing approximately 290,000 square feet. Advantage Health also
owns another facility in Lowell, Massachusetts which has a license for 75
skilled nursing beds. The facility consists of approximately three acres of land
and buildings containing approximately 30,000 square feet.
LEGAL PROCEEDINGS
In the ordinary course of its business, Advantage Health may be subject, from
time to time, to claims and legal actions by patients and others. Advantage
Health does not believe that any such pending actions, if adversely decided,
would have a material adverse effect on its financial conditions. See "--
Insurance" for a description of Advantage Health's insurance coverage
arrangements.
From time to time, Advantage Health appeals decisions of various rate-making
authorities with respect to Medicare rates established for Advantage Health's
facilities. These appeals are initiated in the ordinary course of business.
Management believes that adequate reserves have been established for possible
adverse decisions on any pending appeals and that the outcome of currently
pending appeals, either individually or in the aggregate, will have no material
adverse effect on Advantage Health's operations.
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ACQUISITION OF ASSETS BY ADVANTAGE HEALTH
On December 14, 1995, Advantage Health executed an Asset Purchase Agreement
(the "Agreement") with The Federation of Independent School Alumnae (the
"Federation"), Harmarville Rehabilitation Center, Inc. ("HRC") (the Federation
and HRC being referred to collectively herein as "Harmarville") and Advantage
Health Harmarville Rehabilitation Corporation ("AHHRC") pursuant to which AHHRC
will acquire certain assets and assume certain liabilities of Harmarville (the
"Harmarville Acquisition"). In connection with the proposed Harmarville
Acquisition, several conditions to closing exist which must be satisfied,
including, but not limited to, the approval of both a merger of the Federation
and HRC immediately prior to the closing of the Harmarville Acquisition and the
Harmarville Acquisition by the members of the Federation, the expiration of the
HSR Act waiting period and related approvals and approval of the transaction by
the Court of Common Pleas of Allegheny County (Pennsylvania), Orphans Court
Division.
Subject to the terms and conditions of the Agreement, the purchase price for
the assets is $20,858,000 plus the assumption of certain liabilities.
At September 30, 1995, Harmarville's total assets were $45,219,000 and net
assets were $30,542,000. The net assets of $30,542,000 included approximately
$10,540,000 of net assets relating primarily to investments and trust funds and
their associated liabilities that will be excluded from the Harmarville
Acquisition.
The assets of Harmarville are used to operate a comprehensive rehabilitation
facility and several outpatient rehabilitation satellite clinics.
ADVANTAGE HEALTH AND HARMARVILLE
UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION
The following Unaudited Pro Forma Combined Balance Sheet as of November 30,
1995 and the Unaudited Pro Forma Combined Statements of Income for the fiscal
year ended August 31, 1995 and the three months ended November 30, 1995 give
effect to the Harmarville Acquisition accounted for under the purchase method of
accounting. The consolidated financial information for the fiscal year ended
August 31, 1995 for Advantage Health and the consolidated financial information
for the fiscal year ended June 30, 1995 for Harmarville has been obtained from
their respective consolidated financial statements which have been audited by
Ernst & Young LLP, independent auditors. The financial data for Advantage Health
for the three-month period ended November 30, 1995 and for Harmarville for the
three-month period ended September 30, 1995 have been obtained from Advantage
Health and Harmarville's unaudited financial statements and include all
adjustments necessary to present fairly the data for such periods.
The Unaudited Pro Forma Combined Financial Statements are based on the
historical Consolidated Financial Statements of Advantage Health and Harmarville
under the assumptions and adjustments set forth in the accompanying Notes to the
Unaudited Pro Forma Combined Financial Statements. The Unaudited Pro Forma
Combined Balance Sheet assumes that the Harmarville Acquisition was consummated
on November 30, 1995 and the Unaudited Pro Forma Combined Statements of Income
assume that the Harmarville Acquisition was consummated at the beginning of the
periods presented.
The Pro Forma adjustments are based on the Agreement relating to the
Harmarville Acquisition. For purposes of developing the Unaudited Pro Forma
Combined Balance Sheet, the book value of Harmarville's assets and liabilities
(excluding property, plant and equipment) are assumed to approximate fair value,
and the excess purchase price has been assigned to property, plant and
equipment. The determination of the final assignment to property, plant and
equipment and the related depreciation periods are subject to final
determination of the purchase price and appraisals, evaluations and other
studies of the fair value of Harmarville's assets which will be completed
following the Harmarville Acquisition.
81
<PAGE>
The Unaudited Pro Forma Combined Financial Statements may not be indicative
of the results that actually would have occurred if the Harmarville Acquisition
had been in effect on the dates indicated or which may be obtained in the
future. The Unaudited Pro Forma Combined Financial Statements should be read in
conjunction with the historical Consolidated Financial Statements and
accompanying Notes of Advantage Health and Harmarville. A copy of the
Harmarville Rehabilitation Center, Inc. and Subsidiaries Audited Consolidated
Financial Statements is attached as Annex C to this Prospectus-Proxy Statement
and incorporated herein by reference.
82
<PAGE>
ADVANTAGE HEALTH AND HARMARVILLE
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADVANTAGE
HEALTH HARMARVILLE PRO FORMA
11/30/95 9/30/95 TOTAL ADJUSTMENTS TOTAL
------------ ------------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Assets .................................
Current assets:
Cash and cash equivalents.............. $ 6,815 $ 2,715 $ 9,530 $ (2,715)(1) $ 5,314
(1,501)(2)
Accounts receivable.................... 40,231 6,775 47,006 47,006
Prepaid expenses ...................... 1,431 528 1,959 (67)(1) 1,892
Deferred income taxes.................. 2,488 2,488 2,488
Other.................................. 3,060 1,491 4,551 (488)(1) 4,063
------------ ------------- ---------- ------------- ----------
Total current assets.................... 54,025 11,509 65,534 (4,771) 60,763
Property, plant and equipment, net ..... 32,884 14,566 47,450 2,357 (3) 49,807
Other assets:
Goodwill............................... 40,372 40,372 40,372
Deferred financing costs............... 944 191 1,135 (191)(1) 944
Investments in limited partnerships and
other affiliates...................... 7,040 765 7,805 7,805
Board designated funds................. 2,205 2,205 (2,205)(1)
Self insurance trust funds............. 1,504 1,504 (1,504)(1)
Fixed interest and money market
investments........................... 8,083 8,083 (8,083)(1)
Preferred and common stock investments 6,392 6,392 (6,392)(1)
Pledges receivable..................... 4 4 (4)(1)
Other.................................. 2,053 2,053 2,053
------------ ------------- ---------- ------------- ----------
50,409 19,144 69,553 (18,379) 51,174
------------ ------------- ---------- ------------- ----------
Total assets............................ $137,318 $45,219 $182,537 $ (20,793) $161,744
============ ============= ========== ============= ==========
Liabilities and stockholders' equity
Current liabilities
Accounts payable and accrued expenses.. $ 10,679 $ 1,689 $ 12,368 $ (238)(1) $ 12,130
Accrued compensation................... 6,390 1,684 8,074 8,074
Income taxes payable................... 254 254 254
Amounts payable to third party payors.. 3,300 420 3,720 3,720
Current portion of long-term debt...... 6,019 627 6,646 (620)(1) 6,026
Due to affiliates...................... 702 702 702
------------ ------------- ---------- ------------- ----------
Total current liabilities............... 27,344 4,420 31,764 (858) 30,906
------------ ------------- ---------- ------------- ----------
Other liabilities
Long-term debt, less current portion... 38,796 9,228 48,024 (9,222)(1) 59,660
20,858 (4)
Deferred income taxes.................. 8,034 8,034 8,034
Other.................................. 3,084 1,029 4,113 (1,029)(1) 3,084
Stockholders' equity
Preferred stock, $.01 par value........
Common stock, $.01 par value........... 61 61 61
Class B common stock, $.01 par value...
Additional paid in capital............. 41,394 41,394 41,394
Retained earnings...................... 28,232 28,232 28,232
Less treasury stock.................... (9,627) (9,627) (9,627)
Fund balance-general................... 29,068 29,068 (29,068)(1)
Fund balance-restricted................ 1,474 1,474 (1,474)(1)
------------- ---------- ------------- ----------
Total stockholders' equity.............. 60,060 30,542 90,602 (30,542) 60,060
------------ ------------- ---------- ------------- ----------
$137,318 $45,219 $182,537 $ (20,793) $161,744
============ ============= ========== ============= ==========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Balance Sheet.
83
<PAGE>
ADVANTAGE HEALTH AND HARMARVILLE
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
The Unaudited Pro Forma Combined Balance Sheet has been prepared to reflect
the Harmarville Acquisition as if the Harmarville Acquisition occurred on
November 30, 1995. The Harmarville Acquisition has been accounted for under the
purchase method of accounting.
The following is a summary of adjustments reflected in the Unaudited Pro
Forma Combined Balance Sheet.
1. Represents the elimination of assets and liabilities which were not
acquired by Advantage Health.
2 Represents the part of the purchase price paid from operating cash of
Advantage Health.
3. Represents the preliminary estimate of the increase in value to be
assigned to property, plant and equipment as part of the acquisition.
As noted previously, the final determination of the assigned value to
property, plant and equipment is subject to final determination of the
purchase price and appraisals, evaluations and other studies of the
fair value of Harmarville's assets.
4. Represents the increase in Advantage Health's line of credit to finance
the acquisition of $20,858,000.
84
<PAGE>
ADVANTAGE HEALTH AND HARMARVILLE UNAUDITED
PRO FORMA COMBINED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1995
---------------------------------------------------------------
ADVANTAGE
HEALTH HARMARVILLE PRO FORMA
8/31/95 6/30/95 TOTAL ADJUSTMENTS TOTAL
------------ ------------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Revenues
Net patient service revenue.................... $ 150,979 $40,006 $190,985 $ 190,985
Management service revenue..................... 13,926 327 14,253 14,253
Other operating revenue........................ 6,936 1,744 8,680 $(1,494)(1) 7,186
------------ ------------- ---------- ------------- -----------
171,841 42,077 213,918 (1,494) 212,424
Expenses
Operating and administrative................... 147,155 37,690 184,845 (1,519)(2) 183,326
Depreciation and amortization.................. 4,478 2,126 6,604 (1,399)(3) 5,205
Interest....................................... 2,154 612 2,766 788 (4) 3,554
------------ ------------- ---------- ------------- -----------
153,787 40,428 194,215 (2,130) 192,085
------------ ------------- ---------- ------------- -----------
Income from operations.......................... 18,054 1,649 19,703 636 20,339
Nonoperating gains (losses)
Income on investments in limited partnerships
and other affiliates.......................... 547 (132) 415 415
Minority interest in net income of consolidated
subsidiary.................................... (940) (940) (940)
------------ ------------- ---------- ------------- -----------
(393) (132) (525) (525)
------------ ------------- ---------- ------------- -----------
Income before income taxes...................... 17,661 1,517 19,178 636 19,814
Income taxes.................................... 7,861 7,861 868 (5) 8,729
------------ ------------- ---------- ------------- -----------
Net income...................................... $ 9,800 $ 1,517 $ 11,317 $ (232) $ 11,085
============ ============= ========== ============= ===========
Net income per share............................ $ 1.60 $ 1.81
============ ===========
Weighted average common shares and common share
equivalents outstanding ....................... 6,112,079 6,112,079
============ ===========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NOVEMBER 30, 1995
--------------------------------------------------------------
ADVANTAGE
HEALTH HARMARVILLE PRO FORMA
11/30/95 9/30/95 TOTAL ADJUSTMENTS TOTAL
------------ ------------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Revenues
Net patient service revenue.................... $43,403 $10,067 $53,470 $53,470
Management service revenue..................... 3,746 113 3,859 3,859
Other operating revenue........................ 2,007 659 2,666 $(586)(1) 2,080
------------ ------------- --------- ------------- -----------
49,156 10,839 59,995 (586) 59,409
Expenses
Operating and administrative................... 42,283 9,806 52,089 (374)(2) 51,715
Depreciation and amortization.................. 1,284 482 1,766 (300)(3) 1,466
Interest....................................... 864 120 984 230 (4) 1,214
------------ ------------- --------- ------------- -----------
44,431 10,408 54,839 (444) 54,395
------------ ------------- --------- ------------- -----------
Income from operations.......................... 4,725 431 5,156 (142) 5,014
Nonoperating gains (losses)
Income on investments in limited partnerships
and other affiliates.......................... 383 (80) 303 303
Minority interest in net income of consolidated
subsidiary.................................... (357) (357) (357)
------------ ------------- --------- ------------- -----------
26 (80) (54) 0 (54)
------------ ------------- --------- ------------- ----------
Income before income taxes...................... 4,751 351 5,102 (142) 4,960
Income taxes.................................... 2,043 2,043 84 (5) 2,127
------------ ------------- --------- ------------- -----------
Net income...................................... $ 2,708 $ 351 $3,059 $(226) $ 2,833
============ ============= ========= ============= ===========
Net income per share............................ $ 0.46 $ 0.48
============ ===========
Weighted average common shares and common share
equivalents outstanding ....................... 5,950,053 5,950,053
============ ===========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Statements of Income.
85
<PAGE>
ADVANTAGE HEALTH AND HARMARVILLE
NOTES TO UNAUDITED PRO FORMA
COMBINED STATEMENTS OF INCOME
The Unaudited Pro Forma Combined Statements of Income have been prepared to
reflect the Harmarville Acquisition as if the Harmarville Acquisition occurred
at the beginning of the periods presented. The Harmarville Acquisition has been
accounted for under the purchase method of accounting. The determination of the
final assignment to property, plant, equipment and the related depreciation
periods are subject to final determination of the purchase price and appraisals,
evaluations and other studies of the fair value of Harmarville's assets.
The Unaudited Pro Forma Combined Financial Information excludes any
additional benefits from synergies that may result from the Harmarville
Acquisition.
Following is a summary of preliminary adjustments reflected in the Unaudited
Pro Forma Combined Statements of Income for the fiscal year ended August 31,
1995 and the three months ended November 30, 1995:
1. Represents the elimination of contributions, investment income and
grants due to change in ownership.
2. Represents estimates of elimination of operating and administrative
expenses which would not have been incurred if the results of
operations were combined for Harmarville's entire fiscal year and
three-month period, respectively. The components of this amount include
reduced rates for general liability insurance, miscellaneous insurance
benefits and coverages, pension costs, and certain professional fees.
3. Represents the elimination of Harmarville historical depreciation and
amortization offset by depreciation associated with the acquired
property, plant and equipment ($2,126,000 and $727,000, respectively,
for the year ended August 31, 1995, and $482,000 and $182,000,
respectively, for the three months ended November 30, 1995).
4. Represents the elimination of Harmarville's financing costs offset by
the increase in the combined company's financing costs ($612,000 and
$1,400,000, respectively, for the year ended August 31, 1995, and
$120,000 and $350,000, respectively, for the three months ended
November 30, 1995).
5. Represents the tax effect of the additional income provided by
Harmarville's operations and the Unaudited Pro Forma Combined
Statements of Income adjustments. An effective tax rate of 40.3%,
representing Advantage Health's incremental effective rate, is used to
calculate the incremental federal and state taxes.
86
<PAGE>
PRINCIPAL STOCKHOLDERS OF ADVANTAGE HEALTH
The following table sets forth certain information with respect to the
beneficial ownership of Advantage Health Common Stock as of January 30, 1996, by
(i) each person who is known by Advantage Health to beneficially own more than
five percent of Advantage Health Common Stock, (ii) certain executive officers
of Advantage Health as required by SEC regulations, (iii) each director of
Advantage Health and (iv) all of Advantage Health's executive officers and
directors as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(1)
---------------------------
NAME AND ADDRESS NUMBER PERCENT(2)
- ----------------------------------------------------------- --------------- -----------
<S> <C> <C>
Raymond J. Dunn, III....................................... 1,176,460 (3) 20.8%
Advantage Health Corporation
304 Cambridge Road
Woburn, MA 01801
The Kaufmann Fund, Inc.(4)................................. 667,500 11.8%
17 Battery Place
Suite 2624
New York, NY 10004
Michael F. Curran, Ph.D.................................... 328,460 5.8%
Advantage Health Corporation
304 Cambridge Road
Woburn, MA 01801
Robert E. Spencer.......................................... 328,460 5.8%
Advantage Health Corporation
304 Cambridge Road
Woburn, MA 01801
David F. O'Donnell(5)...................................... 20,005 *
Arthur M. Pappas, M.D.(5).................................. 11,000 *
William W. Southmayd, M.D.(5).............................. 8,500 *
Alan M. Stoll(5)........................................... 12,400 *
Edmond E. Charrette, M.D.(5)............................... 36,112 *
Gerald E. Borgal(5)........................................ 32,046 *
Anna Pomfret, M.D.(5)...................................... 8,080 *
Carolyn Markey(5).......................................... 5,980 *
All current directors and executive officers as a group
(15 persons)(6)........................................... 1,988,553 34.6%
</TABLE>
* Represents beneficial ownership of less than 1% of Advantage Health's Common
Stock outstanding.
(1) The persons and entities named in the table have sole voting and investment
power with respect to all shares shown as beneficially owned by them,
except as noted below.
(2) Computation based upon 5,653,114 shares outstanding as of January 30, 1996.
(3) Includes 23,000 shares held by a charitable foundation of which Mr. Dunn is
a trustee.
(4) As reported in Schedule 13G dated July 10, 1995, The Kaufmann Fund, Inc.,
an investment company registered under the Investment Company Act of 1940,
has sole voting and dispositive power over 667,500 shares of Advantage
Health Common Stock.
(5) Includes the following shares subject to currently exercisable options and
options exercisable within 60 days of January 30, 1995: Mr. O'Donnell --
11,000; Dr. Pappas -- 11,000; Dr. Southmayd -- 8,500; Mr. Stoll -- 11,000;
Dr. Charrette - 10,000; Mr. Borgal -- 11,640; Dr. Pomfret -- 6,580; and Ms.
Markey -- 4,480.
(6) Includes 29,130 shares subject to currently exercisable options and options
exercisable within 60 days of January 30, 1996 held by five executive
officers not specifically named above. Dr. Pomfret retired from her
position with Advantage Health during the fiscal year ended August 31,
1995.
87
<PAGE>
DESCRIPTION OF CAPITAL STOCK OF HEALTHSOUTH
COMMON STOCK
HEALTHSOUTH is authorized by the HEALTHSOUTH Restated Certificate of
Incorporation (the "HEALTHSOUTH Certificate") to issue up to 251,500,000 shares
of capital stock, of which 250,000,000 shares are designated Common Stock, par
value $.01 per share, and 1,500,000 shares are designated Preferred Stock, par
value $.10 per share. As of January 31, 1996, there were 143,444,419 shares of
HEALTHSOUTH Common Stock outstanding (including 46,097,987 shares reserved for
issuance in connection with HEALTHSOUTH's 1995 and 1996 mergers which had not
yet been claimed by holders of the stock of the acquired companies). In
addition, there were outstanding options under HEALTHSOUTH's stock option plans
to purchase an additional 15,348,606 shares of HEALTHSOUTH Common Stock. An
additional 1,682,277 shares of HEALTHSOUTH Common Stock were reserved for future
option grants under such plans. Additionally, 6,112,956 shares are currently
reserved for issuance upon conversion of the Debentures, and 76,639 shares were
reserved for issuance upon the exercise of outstanding warrants.
Holders of HEALTHSOUTH Common Stock are entitled to participate equally in
dividends when and as declared by the Board of Directors out of funds legally
available therefor and, in the event of liquidation or distribution of assets of
HEALTHSOUTH, are entitled to share ratably in such assets remaining after
payment of liabilities. Stockholders are entitled to one vote per share. Holders
of HEALTHSOUTH Common Stock have no conversion, preemptive or other subscription
rights, and there are no redemption or sinking fund provisions with respect to
such stock. The outstanding shares of HEALTHSOUTH Common Stock are fully paid
and nonassessable.
FAIR PRICE PROVISION
The HEALTHSOUTH Certificate contains certain provisions requiring
supermajority stockholder approval to effect specified extraordinary corporate
transactions unless certain conditions are met. The HEALTHSOUTH Certificate
requires the affirmative vote of 66 2/3 % of all shares of HEALTHSOUTH entitled
to vote in the election of Directors to approve a "business combination" with
any "other entity" that is the beneficial owner, directly or indirectly, of more
than 20% of the outstanding shares of HEALTHSOUTH entitled to vote in the
election of Directors. For purposes of this restriction, a "business
combination" includes: (a) the sale, exchange, lease, transfer or other
disposition by HEALTHSOUTH of all, or substantially all, of its assets or
business; (b) any merger or consolidation of HEALTHSOUTH; and (c) certain sales
of HEALTHSOUTH's Common Stock in exchange for cash, assets, securities or any
combination thereof. An "other entity" is defined to include, generally, any
corporation, person or entity, and any affiliate or associate of such
corporation, person or entity.
The foregoing supermajority vote shall not be required where, in the business
combination, (i) HEALTHSOUTH's stockholders receive consideration per share not
less than the highest per share price paid by the other entity in acquiring any
of its holdings of HEALTHSOUTH's Common Stock (subject to certain adjustments
upward) and (ii) certain other requirements, designed to prevent the other
entity from receiving disproportionate gains in connection with the business
combination, are satisfied.
The provisions of the HEALTHSOUTH Certificate described in the preceding
paragraphs, and its Bylaws, may be amended or repealed only by the affirmative
vote of 66 2/3 % of the shares entitled to vote thereon.
The effect of the foregoing provisions is to make it more difficult for a
person, entity or group to effect a change in control of HEALTHSOUTH through the
acquisition of a large block of HEALTHSOUTH's voting stock, or to effect a
merger or other acquisition that is not approved by a majority of HEALTHSOUTH's
Directors serving in office prior to the acquisition by the other entity of 5%
or more of HEALTHSOUTH's stock. In addition, holders of the Debentures have the
right to require HEALTHSOUTH to redeem the Debentures at 100% of the principal
amount thereof, plus accrued interest, upon the occurrence of certain events
involving a sale or merger of HEALTHSOUTH,
88
<PAGE>
unless holders of HEALTHSOUTH's Common Stock shall receive an amount per share
at least equal to the conversion price of the Debentures in effect on the date
such sale or merger is consummated. Such holders' redemption option may impede
certain forms of takeovers if the potential acquiror is unable to finance the
redemption of the Debentures.
SECTION 203 OF THE DGCL
HEALTHSOUTH is subject to the provisions of Section 203 of the DGCL. That
section provides, with certain exceptions, that a Delaware corporation may not
engage in any of a broad range of business combinations with a person or
affiliate or associate of such person who is an "interested stockholder" for a
period of three years from the date that such person became an interested
stockholder unless: (i) the transaction resulting in a person's becoming an
interested stockholder, or the business combination, is approved by the board of
directors of the corporation before the person becomes an interested
stockholder, (ii) the interested stockholder acquires 85% or more of the
outstanding voting stock of the corporation in the same transaction that makes
it an interested stockholder (excluding shares held by directors, officers and
certain employee stock ownership plans); or (iii) on or after the date the
person becomes an interested stockholder, the business combination is approved
by the corporation's board of directors and by the holders of at least 66 2/3 %
of the corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. An "interested
stockholder" is defined to include any person, and the affiliates and associates
of such person that (i) is the owner of 15% or more of the outstanding voting
stock of the corporation or (ii) is an affiliate or associate of the corporation
and was the owner of 15% or more of the outstanding voting stock of the
corporation at any time within the three-year period immediately prior to the
date on which it is sought to be determined whether such person is an interested
stockholder. It is anticipated that the provisions of Section 203 of the DGCL
may encourage companies or others interested in acquiring HEALTHSOUTH to
negotiate in advance with the HEALTHSOUTH Board of Directors, since the
stockholder approval requirement would be avoided if a majority of the directors
then in office approve either the business combination or the transaction which
results in the acquiror becoming an interested stockholder.
PREFERRED STOCK
The HEALTHSOUTH Certificate authorizes the issuance of up to 1,500,000 shares
of Preferred Stock, par value $.10 per share (the "HEALTHSOUTH Preferred
Stock"). The Board of Directors has the authority to issue the HEALTHSOUTH
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions, including the dividend rights, dividend rate,
conversion rights, voting rights, terms of redemption, redemption price or
prices, liquidation preferences and the number of shares constituting any series
or the designations of such series, without any further vote or action by the
stockholders. Issuance of shares of HEALTHSOUTH Preferred Stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from acquiring, a majority of the
outstanding voting stock of HEALTHSOUTH. Any such issuance could also adversely
affect the voting power of the holders of the HEALTHSOUTH Common Stock. The
Board of Directors of HEALTHSOUTH has no current intention of issuing any shares
of HEALTHSOUTH Preferred Stock.
TRANSFER AGENT
The transfer agent and registrar for the HEALTHSOUTH Common Stock is Chemical
Bank, New York, New York.
89
<PAGE>
COMPARISON OF RIGHTS OF ADVANTAGE HEALTH
AND HEALTHSOUTH STOCKHOLDERS
Both Advantage Health and HEALTHSOUTH are incorporated in Delaware. Holders
of the Advantage Health Shares will continue to have their rights and
obligations as stockholders of HEALTHSOUTH after the Merger governed by Delaware
law. Set forth below is a summary comparison of the rights of a HEALTHSOUTH
stockholder under the HEALTHSOUTH Certificate and HEALTHSOUTH's Bylaws (the
"HEALTHSOUTH Bylaws"), on the one hand, and the rights of an Advantage Health
stockholder under the Advantage Health Restated Certificate of Incorporation, as
amended (the "Advantage Health Certificate"), and Advantage Health's Restated
Bylaws (the "Advantage Health Bylaws"), on the other hand. The information set
forth below is qualified in its entirety by reference to the HEALTHSOUTH
Certificate, the HEALTHSOUTH Bylaws, the Advantage Health Certificate and the
Advantage Health Bylaws.
CLASSES AND SERIES OF CAPITAL STOCK
Advantage Health. Advantage Health is authorized by the Advantage Health
Certificate to issue up to 21,440,000 shares of capital stock, of which
15,000,000 shares are designated Common Stock, par value $.01 per share,
1,440,000 shares are designated Class B Non-Voting Common Stock, par value $.01
per share, and 5,000,000 shares are designated Preferred Stock, par value $.01
per share. As of February 7, 1996, there were 5,653,114 shares of Advantage
Health Common Stock issued and outstanding, and 493,010 shares of Advantage
Health Common Stock issued and held as treasury shares. In addition, there were
outstanding options under Advantage Health stock option plans to purchase an
additional 685,660 shares of Advantage Health Common Stock. No shares of
Advantage Health Common Stock were reserved for future option grants under such
plans. The Board of Directors of Advantage Health has the authority to issue the
Advantage Health Preferred Stock in one or more series, and to fix the
designation, powers, preferences, rights, qualifications, limitations or
restrictions of each such series, without any further vote or action by its
stockholders. As of February 7, 1996, there were no shares of Advantage Health
Class B Non-Voting Common Stock or Advantage Health Preferred Stock issued and
outstanding. The Board of Directors of Advantage Health has no present intention
of issuing shares of Advantage Health Class B Non-Voting Common Stock or
Advantage Health Preferred Stock.
HEALTHSOUTH. HEALTHSOUTH is authorized by the HEALTHSOUTH Certificate to
issue up to 251,500,000 shares of capital stock, of which 250,000,000 shares are
designated Common Stock, par value $.01 per share, and 1,500,000 shares are
designated Preferred Stock, par value $.10 per share. See "DESCRIPTION OF
CAPITAL STOCK OF HEALTHSOUTH". The Board of Directors of HEALTHSOUTH has the
authority to issue the HEALTHSOUTH Preferred Stock in one or more series and to
fix the rights, preferences, privileges and restrictions for each such series,
without any further vote or action by the stockholders. As of January 31, 1996,
there were no shares of HEALTHSOUTH Preferred Stock issued and outstanding, and
the Board of Directors of HEALTHSOUTH has no present intention of issuing shares
of HEALTHSOUTH Preferred Stock.
SIZE AND ELECTION OF THE BOARD OF DIRECTORS
Advantage Health. The Advantage Health Certificate and Bylaws provide that
the size of the Advantage Health Board of Directors shall be fixed from time to
time by the directors then in office. Directors of Advantage Health are elected
by a plurality of votes cast at the annual meeting of stockholders. Vacancies on
the Board of Directors and newly created directorships resulting from any
increase in the authorized number of directors are filled by a majority vote of
the directors then in office.
HEALTHSOUTH. The HEALTHSOUTH Bylaws provide that the HEALTHSOUTH Board of
Directors shall consist of at least one director and that the size of the
HEALTHSOUTH Board of Directors may be fixed by the directors then in office.
Directors of HEALTHSOUTH are elected by a plurality of votes cast at the annual
meeting of stockholders. Vacancies in the Board of Directors and newly created
directorships resulting from any increase in the authorized number of directors
are filled by a majority of directors then in office.
90
<PAGE>
REMOVAL OF DIRECTORS
Advantage Health. The Advantage Health Certificate provides that directors
may only be removed, with or without cause, by the vote of the holders of at
least 80% of the voting power of the outstanding shares of the capital stock of
Advantage Health, voting together as a single class.
HEALTHSOUTH. The HEALTHSOUTH Bylaws provide that a director may be removed
with or without cause by the vote of the holders of a majority of the shares
of capital stock entitled to vote thereon.
OTHER VOTING RIGHTS
Advantage Health. The Advantage Health Certificate authorizes Advantage
Health to issue both Common Stock and Class B Non-Voting Common Stock, and
Advantage Health has no classes or series of capital stock issued or outstanding
other than the Advantage Health Common Stock. Each Advantage Health stockholder
holding shares of Advantage Health Common Stock entitled to be voted on any
matter, including the election of directors, shall have one vote on each matter
submitted to a vote at a meeting of stockholders for each share of Advantage
Health Common Stock held by such stockholder as of the record date for such
meeting. Except as specifically provided otherwise by law or by the Advantage
Health Certificate or the Advantage Health Bylaws, the vote of the holders of a
majority of the shares of capital stock present or represented and entitled to
vote is required for the approval of any matter at a meeting of Advantage Health
stockholders. The affirmative vote of the holders of at least 80% of the
outstanding voting stock of Advantage Health is required to amend or repeal the
Advantage Health Bylaws, certain provisions of the Advantage Health Certificate,
and to reduce the number of authorized shares of Advantage Health Common Stock
and Advantage Health Preferred Stock. Except as otherwise required by law, the
holders of Advantage Health Class B Non-Voting Common Stock have no right to
vote their shares of Advantage Health Class B Non-Voting Common Stock on any
matters to be voted on by the Advantage Health stockholders.
HEALTHSOUTH. The HEALTHSOUTH Common Stock is not divided into classes, and
HEALTHSOUTH has no classes or series of capital stock issued or outstanding
other than the HEALTHSOUTH Common Stock. Each HEALTHSOUTH stockholder holding
shares of HEALTHSOUTH Common Stock entitled to be voted on any matter, including
the election of directors, shall have one vote on each such matter submitted to
vote at a meeting of stockholders for each such share of HEALTHSOUTH Common
Stock held by such stockholder as of the record date for such meeting. Except as
specifically provided otherwise by law or by the HEALTHSOUTH Certificate or the
HEALTHSOUTH Bylaws, the vote of the holders of a majority of the shares of
capital stock present or represented and entitled to vote is required for the
approval of any matter at a meeting of HEALTHSOUTH stockholders.
DIVIDENDS
Advantage Health. The Advantage Health Certificate and Bylaws grants the
Board of Directors the power to distribute to the stockholders, without a vote
of the stockholders, dividends, whether payable in cash, property or securities
of Advantage Health, out of the capital surplus of Advantage Health. The holders
of Advantage Health Common Stock and Advantage Health Class B Non-Voting Common
Stock are entitled to share in such dividends ratably according to the number of
shares of Advantage Health Common Stock or Advantage Health Class B Non-Voting
Common Stock held by each; provided, that if dividends are declared which are
payable in Advantage Health Common Stock or Advantage Health Class B Non-Voting
Common Stock, dividends will be declared which are payable at the same rate on
both the Advantage Health Common Stock and the Advantage Health Class B
Non-Voting Common Stock, and the dividends payable in Advantage Health Common
Stock will be payable to holders of Advantage Health Common Stock and the
dividends payable in Advantage Health Class B Non-Voting Common Stock will be
payable to holders of Advantage Health Class B Non-Voting Common Stock. If the
Board of Directors were to designate a series of Advantage Health Preferred
Stock, the holders of such Advantage Health Preferred Stock could be entitled to
dividend payments preferential to those of holders of the Advantage Health
Common Stock and the Advantage Health Class B Non-Voting Common Stock.
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HEALTHSOUTH. The HEALTHSOUTH Certificate contains no provisions similar to
the dividend provisions of the Advantage Health Certificate set forth above.
CONVERSION AND DISSOLUTION
Advantage Health. The Advantage Health Common Stock has no conversion
features. The Advantage Health Certificate authorizes 1,440,000 shares of Class
B Non-Voting Common Stock, par value $.01 per share, no shares of which are
issued or outstanding. Each record holder of Advantage Health Class B Non-Voting
Common Stock is entitled to elect at any time to convert any and all of the
shares of such holder's Advantage Health Class B Non-Voting Common Stock into
the same number of shares of Advantage Health Common Stock, provided that such
shares may only be converted to the extent the holder does not own, control or
have power to vote a greater quantity of securities than permitted by law or any
regulation, rule or other requirement of any governmental authority applicable
to such holder. Shares of Advantage Health Class B Non-Voting Common Stock
converted into shares of Advantage Health Common Stock may not be reissued by
Advantage Health. Upon the liquidation, dissolution or winding up of Advantage
Health, the holders of Advantage Health Common Stock are entitled to receive
ratably with the holders of Advantage Health Class B Non-Voting Common Stock, if
any, the net assets of Advantage Health available after the payment of all debts
and other liabilities and subject to the prior rights of any outstanding
Advantage Health Preferred Stock.
The Advantage Health Certificate authorizes 5,000,000 shares of Preferred
Stock, par value $.01 per share, and provides that such shares of Advantage
Health Preferred Stock may have such voting powers, preferences and other
special rights (including, without limitation, the right to convert the shares
of such Advantage Health Preferred Stock into shares of Advantage Health Common
Stock) as shall be stated in the Advantage Health Certificate or resolutions
providing for the issuance of Advantage Health Preferred Stock. If the Board of
Directors were to designate such a series of Advantage Health Preferred Stock,
such Advantage Health Preferred Stock could be entitled to preferential payments
in the event of a liquidation, dissolution or winding up of Advantage Health.
HEALTHSOUTH. The HEALTHSOUTH Common Stock has no conversion features. The
HEALTHSOUTH Certificate authorizes 1,500,000 shares of Preferred Stock, par
value $.10 per share, and provides that such shares of HEALTHSOUTH Preferred
Stock may have such voting powers, preferences and other special rights
(including, without limitation, the right to convert the shares of such
HEALTHSOUTH Preferred Stock into shares of HEALTHSOUTH Common Stock) as shall be
stated in the HEALTHSOUTH Certificate or resolutions providing for the issuance
of HEALTHSOUTH Preferred Stock. If the Board of Directors were to designate such
a series of HEALTHSOUTH Preferred Stock, such HEALTHSOUTH Preferred Stock could
be entitled to preferential payments in the event of dissolution of HEALTHSOUTH.
FAIR PRICE PROVISION
Advantage Health. The Advantage Health Certificate restricts "business
combinations" with "interested stockholders," as such terms are defined in the
Advantage Health Certificate (the "Business Combination Provision"). The
Business Combination Provision provides that business combinations with
interested stockholders (without regard to the length of time a stockholder has
been an interested stockholder) may not be consummated without the vote of the
holders of 80% of all outstanding shares of Advantage Health stock entitled to
vote in the election of directors. A business combination for purposes of the
application of the Business Combination Provision includes (i) a merger or
consolidation, (ii) the sale or other disposition of 10% or more of the fair
market value of Advantage Health's assets, (iii) the issuance of stock having a
value in excess of 10% of the fair market value of the Advantage Health Common
Stock and Advantage Health Class B Non-Voting Common Stock, (iv) the adoption of
a plan of liquidation or dissolution proposed by or on behalf of the interested
stockholder, and (v) any reclassification or recapitalization which increases
the proportionate shareholdings of an interested stockholder (except certain
immaterial changes). An "interested stockholder" for purposes of the application
of the Business Combination Provision includes any person or entity who is (or
who is an affiliate of Advantage Health and during the prior two years was) the
beneficial owner of more than 15% of the voting stock of Advantage Health.
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HEALTHSOUTH. The HEALTHSOUTH Certificate provides that the vote of the
holders of 66-2/3% of all shares of HEALTHSOUTH entitled to vote in the election
of directors is required for the approval and adoption of a business combination
(as defined in the HEALTHSOUTH Certificate) with any entity (as defined in the
HEALTHSOUTH Certificate) if, on the record date for the determination of
stockholders entitled to vote thereon, the other entity is the beneficial owner,
directly or indirectly, of more than 20% of the outstanding shares of
HEALTHSOUTH entitled to vote in the election of directors. The voting
requirements of the "fair price" provision are not applicable to a business
combination involving a holder of 20% or more of HEALTHSOUTH's voting stock in
the business combination, if: (i) HEALTHSOUTH's stockholders receive
consideration per share not less than the highest per share price paid by the
other entity in acquiring any of its holdings of the HEALTHSOUTH Common Stock
(subject to certain upward adjustments); and (ii) certain other requirements,
designed to prevent the other entity from receiving disproportionate gains in
connection with the business combination, are satisfied. See "DESCRIPTION OF
CAPITAL STOCK OF HEALTHSOUTH -- Fair Price Provision".
AMENDMENT OR REPEAL OF THE CERTIFICATE OF INCORPORATION
Under Delaware law, unless its certificate of incorporation or by-laws
otherwise provide, amendments of a corporation's certificate of incorporation
generally require the approval of the holders of a majority of the outstanding
stock entitled to vote thereon, and if such amendment would increase or decrease
the number of authorized shares of any class or series or the par value of such
shares or would adversely affect the shares of such class or series, the
approval of a majority of the outstanding stock of such class or series.
Advantage Health. The Advantage Health Certificate requires approval by
holders of at least 80% of the outstanding shares entitled to vote generally in
the election of directors, voting together as a single class, to: (i) reduce or
eliminate the number of authorized shares of Advantage Health Common Stock or
the number of authorized shares of Advantage Health Preferred Stock and (ii) to
amend or repeal, or adopt any provision inconsistent with, Section 2 of B of
Article FOURTH of the Advantage Health Certificate (regarding the Advantage
Health Preferred Stock), Article FIFTH of the Advantage Health Certificate
(regarding the management of the business and the conduct of the affairs of
Advantage Health, including the calling of special meetings by the
stockholders), Article SIXTH of the Advantage Health Certificate (regarding the
election and removal of directors), Article SEVENTH of the Advantage Health
Certificate (regarding the adoption, amendment or repeal of the Advantage Health
Bylaws), Article EIGHTH of the Advantage Health Certificate (regarding the "fair
price" provision), Article NINTH of the Advantage Health Certificate (regarding
indemnification of directors) and Article TENTH of the Advantage Health
Certificate (regarding the amendment or repeal of the Advantage Health
Certificate).
HEALTHSOUTH. The HEALTHSOUTH Certificate requires approval by holders of at
least 662/3% of the outstanding shares entitled to vote thereon to repeal or
amend Article SIXTH of the HEALTHSOUTH Certificate (regarding the calling of
special meetings by the stockholders), Article SEVENTH of the HEALTHSOUTH
Certificate (regarding the "fair price" provision) and Article EIGHTH of the
HEALTHSOUTH Certificate (regarding the amendment of the HEALTHSOUTH
Certificate). The HEALTHSOUTH Certificate also provides that a majority of the
HEALTHSOUTH Board of Directors may make, alter or repeal the HEALTHSOUTH Bylaws.
SPECIAL MEETING OF STOCKHOLDERS
Advantage Health. The Advantage Health Certificate and Advantage Health
Bylaws provide that a special meeting of the Advantage Health stockholders may
be called only by a majority of the Board of Directors or the Chief Executive
Officer of Advantage Health.
HEALTHSOUTH. The HEALTHSOUTH Bylaws provide that a special meeting of the
HEALTHSOUTH stockholders may be called by a majority of the Board of Directors
or by the holders of at least 20% of the outstanding shares of capital stock of
HEALTHSOUTH entitled to vote in the election of directors.
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LIABILITY OF DIRECTORS
The DGCL permits a corporation to include a provision in its certificate of
incorporation eliminating or limiting the personal liability of a director or
officer to the corporation or its stockholders for monetary damages for breach
of the director's fiduciary duty, subject to certain limitations. Each of the
HEALTHSOUTH Certificate and the Advantage Health Certificate includes such a
provision, as set forth below, to the maximum effect permitted by law.
Each of the HEALTHSOUTH Certificate and the Advantage Health Certificate
provides that a director will not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL, which concerns unlawful payments of dividends, stock
purchases or redemptions or (iv) for any transaction from which the director
derived an improper personal benefit.
While these provisions provide directors with protection from awards of
monetary damages for breaches of their duty of care, they do not eliminate such
duty. Accordingly, these provisions will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's
breach of his or her duty of care. The provisions described above apply to an
officer of the corporation only if he or she is a director of the corporation
and is acting in his or her capacity as director, and do not apply to officers
of the corporation who are not directors.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The DGCL permits a corporation to indemnify officers, directors, employees
and agents for actions taken in good faith and in a manner they reasonably
believed to be in, or not opposed to, the best interests of the corporation, and
with respect to any criminal action, which they had no reasonable cause to
believe was unlawful. The DGCL provides that a corporation may advance expenses
of defense (upon receipt of a written undertaking to reimburse the corporation
if indemnification is not appropriate) and must reimburse a successful defendant
for expenses, including attorneys' fees, actually and reasonably incurred, and
permits a corporation to purchase and maintain liability insurance for its
directors and officers. The DGCL provides that indemnification may not be made
for any claim, issue or matter as to which a person has been adjudged by a court
of competent jurisdiction, after exhaustion of all appeals therefrom, to be
liable to the corporation, unless and only to the extent a court determines that
the person is entitled to indemnity for such expenses as the court deems proper.
The HEALTHSOUTH Bylaws provide that each person who is involved in any actual
or threatened action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he or she is or was
a director, officer, employee or agent of HEALTHSOUTH, or is or was serving at
the request of HEALTHSOUTH as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to an employee benefit plan, will be indemnified
by HEALTHSOUTH to the full extent permitted by the DGCL, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits HEALTHSOUTH to provide broader
indemnification rights than said law permitted prior to such amendment) or by
other applicable laws then in effect. The Advantage Health Bylaws also provide
for indemnification to the full extent permitted by the DGCL for officers and
directors.
The Plan provides that all rights to indemnification for acts or omissions
occurring prior to the Effective Time of the Merger now existing in favor of the
current or former directors or officers of Advantage Health as provided in the
Advantage Health Certificate or the Advantage Health Bylaws shall survive the
Merger and shall continue in full force and effect in accordance with their
terms.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling HEALTHSOUTH
pursuant to the foregoing provisions, HEALTHSOUTH has been informed that in the
opinion of the SEC such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.
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OPERATIONS AND MANAGEMENT
OF HEALTHSOUTH AFTER THE MERGER
OPERATIONS
After the consummation of the Merger, Advantage Health will be a wholly-owned
subsidiary of HEALTHSOUTH, and all of Advantage Health's subsidiaries will be
indirect wholly-owned subsidiaries of HEALTHSOUTH. Advantage Health will operate
under the name Advantage Health Corporation. HEALTHSOUTH will continue to engage
in the business of providing rehabilitative healthcare services as prior to the
Merger, working with the management of Advantage Health to operate and continue
to expand Advantage Health's business. No material disposition or restructuring
of either of HEALTHSOUTH or Advantage Health or any material part thereof is
contemplated as a result of the Merger. See the information set forth herein and
in the documents incorporated herein by reference as set forth under
"INCORPORATION OF CERTAIN INFORMATION BY REFERENCE", "BUSINESS OF HEALTHSOUTH"
and "BUSINESS OF ADVANTAGE HEALTH".
MANAGEMENT
After the consummation of the Merger, HEALTHSOUTH will be managed by the same
Board of Directors and executive officers as existed prior to the Merger, except
that HEALTHSOUTH shall cause Raymond J. Dunn, III to be appointed to the
HEALTHSOUTH Board of Directors.
Mr. Dunn has been Chief Executive Officer of Advantage Health since 1986 and
has served as Chairman of the Board of Directors since 1990 and as its President
since 1994. From 1987 to 1990, he served as Vice Chairman of the Board of
Advantage Health. From 1979 to 1986, Mr. Dunn was Chief Executive Officer of a
former subsidiary of Advantage Health responsible for management of Advantage
Health's operations. From 1970 to 1978, he was Administrator of New England
Rehabilitation Hospital, Inc.
EXPERTS
The consolidated financial statements and schedule of HEALTHSOUTH
Corporation, the consolidated financial statements of Surgical Health
Corporation, the consolidated financial statements of Rehab Systems Company, the
consolidated financial statements of ReLife, Inc., the consolidated financial
statements of Sutter Surgery Centers, Inc., the consolidated financial
statements of Advantage Health Corporation and the consolidated financial
statements of Harmarville Rehabilitation Center, Inc. appearing or incorporated
by reference in this Prospectus-Proxy Statement and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, to the extent indicated
in their reports thereon also appearing elsewhere herein and in the Registration
Statement or incorporated by reference. Such consolidated financial statements
have been included herein or incorporated by reference in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
LEGAL MATTERS
The validity of the shares of HEALTHSOUTH Common Stock to be issued to the
securityholders of Advantage Health pursuant to the Merger will be passed upon
by Haskell Slaughter Young & Johnston, Professional Association. As of the date
of this Prospectus-Proxy Statement, attorneys in that firm owned a total of
9,100 shares of HEALTHSOUTH Common Stock, and held currently exercisable options
to acquire an additional 15,000 shares of HEALTHSOUTH Common Stock.
ADDITIONAL INFORMATION
OTHER BUSINESS
The Board of Directors of Advantage Health does not know of any matter to be
brought before its Special Meeting other than described in the Notice of Special
Meeting accompanying this Prospectus-Proxy Statement mailed to the stockholders
of Advantage Health. If any other matter comes before the Special Meeting, it is
the intention of the persons named in the accompanying proxy to vote the proxy
in accordance with their best judgment with respect to such other matter.
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STOCKHOLDER PROPOSALS
If the Plan is not approved by the Advantage Health stockholders at the
Special Meeting or any adjournments or postponements thereof, Advantage Health
intends to hold its next Annual Meeting of Stockholders in August 1996.
Stockholders' proposals intended to be presented at the 1996 Annual Meeting must
be received by Advantage Health no later than April 1, 1996, for inclusion in
Advantage Health's proxy statement and form of proxy relating to that meeting.
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ANNEX A
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (the or this "Plan of Merger"), made and entered
into as of the 16th day of December, 1995, by and among HEALTHSOUTH CORPORATION,
a Delaware corporation ("HEALTHSOUTH"), ALADDIN ACQUISITION CORPORATION a
Delaware corporation (the "Subsidiary"), and ADVANTAGE HEALTH CORPORATION, a
Delaware corporation ("Advantage Health") (the Subsidiary and Advantage Health
being sometimes collectively referred to herein as the "Constituent
Corporations").
W I T N E S S E T H:
WHEREAS, the respective Boards of Directors of HEALTHSOUTH, and Advantage
Health have approved the merger of the Subsidiary with and into Advantage Health
(the "Merger"), upon the terms and conditions set forth in this Plan of Merger,
whereby each issued and outstanding share (an "Advantage Health Share") of
Common Stock, par value $.01 per share, of Advantage Health ("Advantage Health
Common Stock"), not owned directly or indirectly by Advantage Health, except
Dissenting Shares (as hereinafter defined), will be converted into the right to
receive the Merger Consideration (as hereinafter defined);
WHEREAS, the Board of Directors of Advantage Health, subject to the further
exercise of fiduciary or statutory duties (as hereinafter provided), has also
unanimously determined that the Merger presents an opportunity for Advantage
Health to achieve long-term strategic and financial benefits and is fair to, and
in the best interests of, Advantage Health's stockholders, and has recommended
approval of this Plan of Merger by the stockholders of Advantage Health;
WHEREAS, each of HEALTHSOUTH, the Subsidiary and Advantage Health desires to
make certain representations, warranties, covenants and agreements in connection
with the Merger and also to prescribe various conditions to the Merger;
WHEREAS, for federal income tax purposes, it is intended that the Merger will
qualify as a reorganization under the provisions of Section 368 of the Internal
Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, for accounting purposes, it is intended that the Merger will be
accounted for as a "pooling of interests".
NOW, THEREFORE, in consideration of the premises, and the mutual covenants
and agreements contained herein, the parties hereto do hereby agree as follows:
SECTION 1. THE MERGER.
1.1 The Merger. Upon the terms and conditions set forth in this Plan of
Merger, and in accordance with the Delaware General Corporation Law (the
"DGCL"), the Subsidiary shall be merged with and into Advantage Health at the
Effective Time (as defined in Section 1.3). Following the Effective Time, the
separate corporate existence of the Subsidiary shall cease and Advantage Health
shall continue as the surviving corporation (the "Surviving Corporation") under
the name "Advantage Health Corporation" and shall succeed to and assume all the
rights and obligations of the Subsidiary and Advantage Health in accordance with
the DGCL.
1.2 The Closing. The closing of the Merger (the "Closing") will take place at
10:00 a.m. Eastern Time on a date to be specified by the parties (the "Closing
Date"), which (subject to satisfaction or waiver of the conditions set forth in
Sections 9.2 and 9.3) shall be no later than the second business day after
satisfaction of the conditions set forth in Section 9.1 (other than Section
9.1(a)), at the offices of Haskell Slaughter Young & Johnston, Professional
Association, Birmingham, Alabama unless another date or place is agreed to in
writing by the parties hereto.
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1.3 Effective Time. Subject to the provisions of this Plan of Merger, the
parties shall file a certificate of merger (the "Certificate of Merger")
executed in accordance with the relevant provisions of the DGCL and shall make
all other filings or recordings required under the DGCL as soon as practicable
on or after the Closing Date. The Merger shall become effective at such time as
the Certificate of Merger is duly filed with the Delaware Secretary of State, or
at such other time as the Subsidiary and Advantage Health shall agree should be
specified in the Certificate of Merger (the "Effective Time").
1.4 Effect of the Merger. From and after the Effective Time, the Surviving
Corporation shall possess all the rights, privileges, powers and franchises and
be subject to all of the restrictions, disabilities and duties of Advantage
Health and the Subsidiary and the Merger shall otherwise have the effects set
forth in Section 259 of the DGCL.
SECTION 2. EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
CORPORATIONS; EXCHANGE OF CERTIFICATES.
2.1 Effect on Capital Stock. As of the Effective Time, by virtue of the
Merger and without any action on the part of any holder of Advantage Health
Shares or any shares of capital stock of the Subsidiary:
(a) The Subsidiary Common Stock. Each share of Common Stock, $.01 par value
per share, of the Subsidiary ("Subsidiary Common Stock") issued and outstanding
immediately prior to the Effective Time shall be converted into one fully paid
and nonassessable share of Advantage Health Common Stock.
(b) Cancellation of Treasury Stock. Each share of Advantage Health Common
Stock that is owned by Advantage Health or by any subsidiary of Advantage Health
shall automatically be canceled and retired and shall cease to exist, and none
of the Common Stock, par value $.01 per share, of HEALTHSOUTH ("HEALTHSOUTH
Common Stock"), cash or other consideration shall be delivered in exchange
therefor.
(c) Conversion of Advantage Health Shares. Subject to Section 2.2(d) and in
addition to the provision for Advantage Health stock options in Section 2.2(e),
each issued and outstanding Advantage Health Share (other than shares to be
canceled in accordance with Section 2.1(b) and Dissenting Shares) shall be
converted into the right to receive the right to receive that number of shares
of HEALTHSOUTH Common Stock determined by dividing $47.50 by the Base Period
Trading Price (as defined below), as may be adjusted as provided below, computed
to four decimal places (the "Exchange Ratio"); provided, however, that if the
Base Period Trading Price shall be greater than $34.50, the Exchange Ratio shall
be 1.3768; and provided further, however, that if the Base Period Trading Price
shall be less than $28.50, the Exchange Ratio shall be 1.6667. The number of
shares of HEALTHSOUTH Common Stock issuable with respect to each Advantage
Health Share, as determined as set forth herein, is herein called the "Merger
Consideration". For purposes of this Plan of Merger, the term "Base Period
Trading Price" shall mean the average of the daily closing prices per share for
HEALTHSOUTH Common Stock for the 20 consecutive trading days on which shares of
HEALTHSOUTH Common Stock are actually traded (as reported on the New York Stock
Exchange Composite Transactions Tape as reported in The Wall Street Journal,
Eastern Edition, or if not reported thereby, any other authoritative source)
ending at the close of trading on the second New York Stock Exchange trading day
immediately preceding the date of the Special Meeting (as defined in Section
7.3) (such period being herein called the "Base Period"). Promptly after the
close of trading on the New York Stock Exchange on such second trading day, the
parties shall issue a joint press release publicly announcing the Exchange
Ratio. As of the Effective Time, all such Advantage Health Shares shall no
longer be outstanding and shall automatically be canceled and retired and shall
cease to exist, and each holder of a certificate representing any Advantage
Health Shares shall cease to have any rights with respect thereto, except the
right to receive the Merger Consideration and any cash in lieu of fractional
shares of HEALTHSOUTH Common Stock to be issued or paid in consideration
therefor upon surrender of such certificate in accordance with Section 2.2,
without interest.
(d) Dissenting Shares. Notwithstanding anything in this Plan of Merger to the
contrary, Advantage Health Shares outstanding immediately prior to the Effective
Time held by a holder (if any) who is entitled to demand, and who properly
demands, appraisal for such shares in accordance with Section 262
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of the DGCL ("Dissenting Shares") shall not be converted into a right to receive
the Merger Consideration and any cash in lieu of fractional shares of
HEALTHSOUTH Common Stock unless such holder fails to perfect or otherwise loses
such holder's right to appraisal, if any. If, after the Effective Time, such
holder fails to perfect or loses any such right to appraisal, such shares shall
be treated as if they had been converted as of the Effective Time into the right
to receive the Merger Consideration pursuant to Section 2.1(c) and the cash in
lieu of fractional shares of HEALTHSOUTH Common Stock specified in Section 2.2.
(e) Stock Options. At the Effective Time, the holders of each Advantage
Health stock option which are outstanding at the Effective Time, whether or not
then exercisable, shall receive at or as promptly as practicable after the
Closing a number of shares of HEALTHSOUTH Common Stock determined as follows:
(i) if the Base Trading Price is neither greater than $34.50 nor less than
$28.50, that number of shares which is equal to $47.50 minus the exercise
price of such option (the "spread"), divided by the Base Trading Price and
then multiplied by the number of shares of Advantage Health Common Stock
which are subject to such option; or
(ii) if the Base Trading Price is greater than $34.50 or less than $28.50,
that number of shares calculated as provided in the preceding clause (i)
except that the spread shall be divided by $34.50 or $28.50, as the case may
be (rather than the Base Trading Price) prior to being multiplied by the
number of shares of Advantage Health Common Stock subject to such option.
(f) Anti-Dilution Provisions. If, after the date hereof and prior to the
Effective Time, HEALTHSOUTH shall have declared a stock split (including a
reverse split) of HEALTHSOUTH Common Stock or a dividend payable in HEALTHSOUTH
Common Stock, or any other distribution of securities or dividend (in cash or
otherwise) to holders of HEALTHSOUTH Common Stock with respect to their
HEALTHSOUTH Common Stock (including, without limitation, such a distribution or
dividend made in connection with a recapitalization, reclassification, merger,
consolidation, reorganization, reclassification, merger, consolidation,
reorganization or similar transaction), then the number of shares of HEALTHSOUTH
Common Stock to be issued upon conversion of a share of Advantage Health Common
Stock pursuant to Section 2.1(c) shall be appropriately adjusted to reflect such
stock split, dividend or other distribution of securities.
2.2 Exchange of Certificates.
(a) Exchange Agent. Prior to the Effective Time, HEALTHSOUTH shall enter into
an agreement with such bank or trust company as may be designated by HEALTHSOUTH
(the "Exchange Agent") which provides that HEALTHSOUTH shall deposit with the
Exchange Agent as of the Effective Time, for the benefit of the holders of
Advantage Health Shares, for exchange in accordance with this Section 2, through
the Exchange Agent, certificates representing the shares of HEALTHSOUTH Common
Stock (such shares of HEALTHSOUTH Common Stock, together with any dividends or
distributions with respect thereto with a record date after the Effective Time,
being hereinafter referred to as the "Exchange Fund") issuable pursuant to
Section 2.1 in exchange for outstanding Advantage Health Shares.
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented Advantage Health Shares (the "Certificates") whose shares were
converted into the right to receive the Merger Consideration pursuant to Section
2.1, (i) a letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
delivery of the Certificates to the Exchange Agent and shall be in such form and
have such other provisions as HEALTHSOUTH may reasonably specify) and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for certificates representing shares of HEALTHSOUTH Common Stock. Upon surrender
of a Certificate for cancellation to the Exchange Agent or to such other agent
or agents as may be appointed by HEALTHSOUTH, together with such letter of
transmittal, duly executed, and such other documents as may reasonably be
required by the Exchange Agent, the holder
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of such Certificate shall be entitled to receive in exchange therefor a
certificate representing that number of whole shares of HEALTHSOUTH Common Stock
which such holder has the right to receive pursuant to the provisions of this
Section 2, and the Certificate so surrendered shall forthwith be canceled. In
the event of a transfer of ownership of Advantage Health Shares which is not
registered in the transfer records of Advantage Health, a certificate
representing the proper number of shares of HEALTHSOUTH Common Stock may be
issued to a person other than the person in whose name the Certificate so
surrendered is registered, if such Certificate shall be properly endorsed or
otherwise be in proper form for transfer and the person requesting such payment
shall pay any transfer or other taxes required by reason of the issuance of
shares of HEALTHSOUTH Common Stock to a person other than the registered holder
of such Certificate or establish to the satisfaction of HEALTHSOUTH that such
tax has been paid or is not applicable. Until surrendered as contemplated by
this Section 2.2, each Certificate shall be deemed at any time after the
Effective Time to represent only the right to receive upon such surrender the
certificate representing shares of HEALTHSOUTH Common Stock and cash in lieu of
any fractional shares of HEALTHSOUTH Common Stock as contemplated by this
Section 2.2. No interest will be paid or will accrue on any cash payable in lieu
of any fractional shares of HEALTHSOUTH Common Stock. To the extent permitted by
law, former stockholders of record of Advantage Health shall be entitled to vote
after the Effective Time at any meeting of HEALTHSOUTH stockholders the number
of whole shares of HEALTHSOUTH Common Stock into which their respective
Advantage Health Shares are converted, regardless of whether such holders have
exchanged their Certificates for certificates representing HEALTHSOUTH Common
Stock in accordance with this Section 2.2.
(c) Distributions with Respect to Unexchanged Shares. No dividends or other
distributions with respect to HEALTHSOUTH Common Stock with a record date after
the Effective Time shall be paid to the holder of any unsurrendered Certificate
with respect to the shares of HEALTHSOUTH Common Stock represented thereby and
no cash payment in lieu of fractional shares shall be paid to any such holder
pursuant to Section 2.2(e) until the surrender of such Certificate in accordance
with this Section 2. Subject to the effect of applicable laws, following
surrender of any such Certificate, there shall be paid to the holder of the
certificate representing whole shares of HEALTHSOUTH Common Stock issued in
exchange therefor, without interest, (i) at the time of such surrender, the
amount of any cash payable in lieu of a fractional share of HEALTHSOUTH Common
Stock to which such holder is entitled pursuant to Section 2.2(e) and the amount
of dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of HEALTHSOUTH Common Stock,
and (ii) at the appropriate payment date, the amount of dividends or other
distributions with a record date after the Effective Time but prior to such
surrender and with a payment date subsequent to such surrender payable with
respect to such whole shares of HEALTHSOUTH Common Stock.
(d) No Further Ownership Rights in Advantage Health Shares. All shares of
HEALTHSOUTH Common Stock issued upon the surrender for exchange of Certificates
in accordance with the terms of this Section 2 (including any cash paid pursuant
to Section 2.2(c) or 2.2(e)) shall be deemed to have been issued (and paid) in
full satisfaction of all rights pertaining to the Advantage Health Shares
theretofore represented by such Certificates. If, after the Effective Time,
Certificates are presented to the Surviving Corporation or the Exchange Agent
for any reason, they shall be canceled and exchanged as provided in this Section
2, except as otherwise provided by law.
(e) No Fractional Shares. No certificates or scrip representing fractional
shares of HEALTHSOUTH Common Stock shall be issued upon the surrender for
exchange of Certificates, and such fractional share interests will not entitle
the owner thereof to vote or to any rights of a stockholder of HEALTHSOUTH.
Notwithstanding any other provision of this Plan of Merger, each holder of
Advantage Health Shares exchanged pursuant to the Merger who would otherwise
have been entitled to receive a fraction of a share of HEALTHSOUTH Common Stock
(after taking into account all Certificates delivered by such holder) shall
receive, in lieu thereof, cash (without interest) in an amount equal to such
fractional part of a share of HEALTHSOUTH Common Stock.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the holders of the Certificates for six months after
the Effective Time shall be delivered to HEALTHSOUTH, upon demand, and any
holders of the Certificates who have not theretofore com-
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plied with this Section 2 shall thereafter look only to HEALTHSOUTH for payment
of HEALTHSOUTH Common Stock, any cash in lieu of fractional shares of
HEALTHSOUTH Common Stock, and any dividends or distributions with respect to
HEALTHSOUTH Common Stock.
(g) No Liability. None of HEALTHSOUTH, Aladdin Acquisition Corporation,
Advantage Health or the Exchange Agent shall be liable to any person in respect
of any shares of HEALTHSOUTH Common Stock (or dividends or distributions with
respect thereto) or cash from the Exchange Fund delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law. If any
Certificates shall not have been surrendered prior to seven years after the
Effective Time (or immediately prior to such earlier date on which any shares of
HEALTHSOUTH Common Stock, any cash in lieu of fractional shares of HEALTHSOUTH
Common Stock or any dividends or distributions with respect to HEALTHSOUTH
Common Stock in respect of such Certificates would otherwise escheat to or
become the property of any governmental entity), any such shares, cash,
dividends or distributions in respect of such Certificates shall, to the extent
permitted by applicable law, become the property of the Surviving Corporation,
free and clear of all claims or interest of any person previously entitled
thereto.
(h) Investment of Exchange Fund. The Exchange Agent shall invest any cash
included in the Exchange Fund in deposit accounts or short-term money market
instruments, as directed by HEALTHSOUTH, on a daily basis. Any interest and
other income resulting from such investments shall be paid to HEALTHSOUTH.
(i) Lost Certificates. In the event any Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and subject to such
other conditions as the Board of Directors of the Surviving Corporation may
impose, the Surviving Corporation shall issue in exchange for such lost, stolen
or destroyed Certificate the Merger Consideration deliverable in respect thereof
as determined in accordance with Section 2.1(c). When authorizing such issue of
Merger Consideration in exchange therefor, the Board of Directors of the
Surviving Corporation may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
Certificate to provide a bond or other surety to the Surviving Corporation in
such sum as it may reasonably direct as indemnity against any claim that may be
made against the Surviving Corporation with respect to the Certificate alleged
to have been lost, stolen or destroyed.
(j) Withholding Rights. The Surviving Corporation or the Exchange Agent shall
be entitled to deduct and withhold from the consideration otherwise payable
pursuant to this Plan of Merger to any holder of Advantage Health Shares such
amounts as the Surviving Corporation or the Exchange Agent is required to deduct
and withhold with respect to the making of such payment under the Code or any
provision of state, local or foreign tax law. To the extent that amounts are so
withheld by the Surviving Corporation or the Exchange Agent, such withheld
amounts shall be treated for all purposes of this Plan of Merger as having been
paid to the holder of the Advantage Health Shares in respect of which such
deduction and withholding was made by the Surviving Corporation or the Exchange
Agent.
2.3 Certificate of Incorporation of Surviving Corporation. The Certificate of
Incorporation of Advantage Health shall become the Certificate of Incorporation
of the Surviving Corporation from and after the Effective Time and until
thereafter amended as provided by law.
2.4 Bylaws of the Surviving Corporation. The Bylaws of the Subsidiary shall
be the Bylaws of the Surviving Corporation from and after the Effective Time and
until thereafter altered, amended or repealed in accordance with the laws of the
State of Delaware, the Certificate of Incorporation of Advantage Health and such
Bylaws.
2.5 Directors and Officers of the Surviving Corporation. The Directors and
officers of the Subsidiary immediately prior to the Effective Time shall be the
Directors and officers of the Surviving Corporation, each to hold office in
accordance with the Certificate of Incorporation and Bylaws of the Surviving
Corporation.
2.6 Assets, Liabilities, Reserves and Accounts. At the Effective Time, the
assets, liabilities, reserves and accounts of each of Aladdin Acquisition
Corporation and Advantage Health shall be taken up on the books of the Surviving
Corporation at the amounts at which they respectively shall be carried on the
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books of said corporations immediately prior to the Effective Time, except as
otherwise set forth in the Plan of Merger and subject to such adjustments, or
elimination of intercompany items, as may be appropriate in giving effect to the
Merger in accordance with generally accepted accounting principles.
2.7 Corporate Acts of the Subsidiary. All corporate acts, plans, policies,
approvals and authorizations of the Subsidiary, its sole stockholder, its Board
of Directors, committees elected or appointed by the Board of Directors, and all
officers and agents, valid immediately prior to the Effective Time, shall be
those of the Surviving Corporation and shall be as effective and binding thereon
as they were with respect to the Subsidiary. The employees and agents of the
Subsidiary shall become the employees and agents of the Surviving Corporation
and continue to be entitled to the same rights and benefits which they enjoyed
as employees and agents of the Subsidiary.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF ADVANTAGE HEALTH.
Advantage Health hereby represents and warrants to HEALTHSOUTH and the
Subsidiary as follows:
3.1 Organization, Existence and Good Standing. Advantage Health is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. Advantage Health and has all necessary corporate power
to own its properties and assets and to carry on its business as presently
conducted. Advantage Health is not, and has not been within the two years
immediately preceding the date of this Plan of Merger, a subsidiary or division
of another corporation, nor has Advantage Health within such time owned,
directly or indirectly, any shares of HEALTHSOUTH Common Stock or Subsidiary
Common Stock.
3.2 Advantage Health Capital Stock. The authorized capital stock of Advantage
Health consists of (i) 15,000,000 shares of Advantage Health Common Stock, of
which 5,649,804 shares were issued and outstanding as of November 10, 1995, and
493,010 shares are issued and held as treasury shares, (ii) 1,440,000 shares of
Class B Non-Voting Common Stock, par value $.01 per share, none of which shares
are issued and outstanding as of the date of this Plan of Merger and none of
which are issued and held as treasury shares; and (iii) 5,000,000 shares of
undesignated Preferred Stock, par value $.01 per share, none of which shares are
issued and outstanding as of the date of this Plan of Merger and none of which
are issued and held as treasury shares. All of the issued and outstanding
Advantage Health Shares are duly and validly issued, fully paid and
nonassessable. Except as set forth on Exhibit 3.2 or otherwise disclosed in the
1995 Advantage Health 10-K (as hereinafter defined), there are no options,
warrants, or similar rights granted by Advantage Health or any other agreements
to which Advantage Health is a party providing for the issuance or sale by it of
any additional securities which would remain in effect after the Effective Time.
There is no liability for dividends declared or accumulated but unpaid with
respect to any of the Advantage Health Shares. Advantage Health has not made any
distributions to any holders of Advantage Health Shares or participated in or
effected any issuance, exchange or retirement of Advantage Health Shares, or
otherwise changed the equity interests of holders of Advantage Health Shares, in
contemplation of effecting the Merger, within the two years immediately
preceding the date of this Plan of Merger. Any Advantage Health Shares that
Advantage Health has re-acquired during the two years immediately preceding the
date of this Plan of Merger have been so re-acquired only for purposes other
than "business combinations", as such term is defined in Accounting Principles
Board Opinion No. 16, as amended ("Business Combinations").
3.3 Subsidiaries and Affiliated Partnerships. (a) Attached hereto as Exhibit
3.3 is a list of all subsidiaries of Advantage Health (individually, an
"Advantage Health Subsidiary" and, collectively, the "Advantage Health
Subsidiaries") and their states of incorporation. Except as set forth on Exhibit
3.3, Advantage Health does not own stock in and does not control, directly or
indirectly, any other corporation, association or business organization other
than the Advantage Health Partnerships (as defined below).
(b) Also disclosed on Exhibit 3.3 is a list of all general or limited
partnerships or joint ventures in which the general partner or a co-venturer is
Advantage Health or an Advantage Health Subsidiary (individually, an "Advantage
Health Partnership" and, collectively, the "Advantage Health Partner-
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ships") and their states of organization. Except as set forth on Exhibit 3.3,
neither Advantage Health nor any Advantage Health Subsidiary owns an equity
interest in, nor does such entity control, directly or indirectly, any other
joint venture or partnership.
3.4 Organization, Existence and Good Standing of Advantage Health
Subsidiaries and Advantage Health Partnerships. (a) Except as set forth on
Exhibit 3.4, each Advantage Health Subsidiary is a corporation duly organized,
validly existing and in good standing under the laws of its respective state of
incorporation, and has all necessary corporate power to own its properties and
assets and to carry on its business as presently conducted, except where the
failure to be so organized, existing or in good standing, or to have such power,
would not have, individually or in the aggregate, a material adverse effect (as
hereinafter defined) on Advantage Health.
(b) Except as set forth on Exhibit 3.4, each Advantage Health Partnership is
a general partnership, a limited partnership or a joint venture validly formed
and (to the extent such concept is applicable under the laws of such
jurisdiction) in good standing under the laws of its respective state of
organization and has all necessary power to own its property and assets and to
carry on its business as presently conducted, except where the failure to be so
formed or in good standing, or to have such power, would not have, individually
or in the aggregate, a material adverse effect on Advantage Health.
3.5 Foreign Qualifications. Except as set forth on Exhibit 3.5, Advantage
Health, each Advantage Health Subsidiary and each Advantage Health Partnership
that is a limited partnership is qualified or licensed to do business as a
foreign corporation or foreign limited partnership, as the case may be, and is
in good standing in each jurisdiction where the nature or character of the
property owned, leased or operated by it or the nature of the business
transacted by it makes such qualification or licensing necessary, except for
such failures to be so qualified or licensed and in good standing that would
not, individually or in the aggregate, have a material adverse effect on
Advantage Health.
3.6 Power and Authority. Subject to the satisfaction of the conditions
precedent set forth herein, Advantage Health has the corporate power to execute,
deliver and perform the Plan of Merger and all agreements and other documents
executed and delivered, or to be executed and delivered, by it pursuant to the
Plan of Merger, and, subject to the satisfaction of the conditions precedent set
forth herein, has taken all action required by its Certificate of Incorporation,
Bylaws or otherwise, to authorize the execution, delivery and performance of the
Plan of Merger and such related documents. Except as set forth on Exhibit 3.6,
the execution and delivery of the Plan of Merger does not and, subject to the
receipt of required stockholder and regulatory approvals and any other required
third-party consents or approvals, the consummation of the Merger will not
conflict with or violate any provisions of the Certificate of Incorporation of
Advantage Health or any provisions of, or result in the acceleration of any
obligation under, any mortgage, lien, lease, agreement, instrument, order,
arbitration award, judgment or decree, applicable to Advantage Health, any
Advantage Health Subsidiary or any Advantage Health Partnership, or to which
Advantage Health, any Advantage Health Subsidiary or any Advantage Health
Partnership is a party or by which Advantage Health, any Advantage Health
Subsidiary or any Advantage Health Partnership is bound, or conflict with or
violate any restrictions of any kind to which it is subject which, if violated
or accelerated, would have, individually or in the aggregate, a material adverse
effect on Advantage Health, or which would prevent or delay consummation of the
Merger in any material respect or otherwise prevent Advantage Health from
performing its obligations hereunder in any material respect. The execution and
delivery of this Plan of Merger has been approved by the Board of Directors of
Advantage Health. This Plan of Merger has been duly executed and delivered by
Advantage Health and, assuming this Plan of Merger constitutes a valid and
binding obligation of HEALTHSOUTH and Aladdin Acquisition Corporation,
enforceable against HEALTHSOUTH and Aladdin Acquisition Corporation in
accordance with its terms, constitutes a valid and binding obligation of
Advantage Health, enforceable against Advantage Health in accordance with its
terms.
3.7 Advantage Health Financial Information. Advantage Health has heretofore
furnished HEALTHSOUTH with its Annual Report on Form 10-K for its fiscal year
ended August 31, 1995 (the "Advantage Health 1995 10-K"). As of its date, the
Advantage Health 1995 10-K did not contain any untrue statements of material
facts or omit to state material facts required to be stated therein or
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necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading (except any such misstatement or omission
which was expressly corrected in a subsequent filing). As of its date, the
descriptions of the business, operations and financial condition of Advantage
Health contained in the Advantage Health 1995 10-K complied in all material
respects with the applicable requirements of the Securities Act of 1933, as
amended (the "Securities Act"), and the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the rules and regulations promulgated under
such statutes. Advantage Health has not filed any reports on Form 10-Q or 8-K
since the filing of the Advantage Health 1995 10-K. The financial statements
contained in the Advantage Health 1995 10-K, together with the notes thereto,
have been prepared in accordance with generally accepted accounting principles
consistently followed throughout the periods indicated (except as may be
indicated in the notes thereto), reflect all known liabilities of Advantage
Health, including all known contingent liabilities as at August 31, 1995, and
present fairly the financial condition of Advantage Health at such date and the
consolidated results of operations and cash flows of Advantage Health for its
fiscal year ended August 31, 1995. The consolidated balance sheet of Advantage
Health at August 31, 1995 included in the Advantage Health 1995 10-K is herein
referred to as the "Advantage Health 1995 Balance Sheet".
3.8 Subsequent Events. Except as set forth on Exhibit 3.8 or disclosed in the
Advantage Health 1995 10-K or as otherwise permitted hereunder, Advantage Health
has not, since the date of the Advantage Health 1995 Balance Sheet:
(a) Incurred any material adverse change;
(b) Discharged or satisfied any material lien or encumbrance, or paid or
satisfied any material obligation or liability (absolute, accrued, contingent
or otherwise) other than (i) liabilities shown or reflected on the Advantage
Health 1995 Balance Sheet or (ii) liabilities incurred since the date of the
Advantage Health 1995 Balance Sheet in the ordinary course of business, which
discharge or satisfaction would, individually or in the aggregate, have a
material adverse effect on Advantage Health;
(c) Increased or established any reserve for taxes or any other liability
on its books or otherwise provided therefor which would, individually or in
the aggregate, have a material adverse effect on Advantage Health, except as
may have been required due to income or operations of Advantage Health since
the date of the Advantage Health 1995 Balance Sheet;
(d) Mortgaged, pledged or subjected to any lien, charge or other
encumbrance any of the assets, tangible or intangible, which assets are
material to the consolidated business or financial condition of Advantage
Health;
(e) Sold or transferred any of the assets material to the consolidated
business of Advantage Health, cancelled any material debts or claims or
waived any material rights, except in the ordinary course of business;
(f) Granted any general or uniform increase in the rates of pay of
employees or any material increase in salary payable or to become payable by
Advantage Health to any officer or employee, consultant or agent (other than
normal merit increases or consistent with past practice), or by means of any
bonus or pension plan, contract or other commitment, increased in a material
respect the compensation of any officer, employee, consultant or agent;
(g) Except for this Plan of Merger and any other agreement executed and
delivered pursuant to this Plan of Merger, entered into any material
transaction other than in the ordinary course of business or permitted under
other Sections hereof; or
(h) Issued any stock, bonds or other securities, other than stock options
granted to employees or consultants of Advantage Health or warrants granted
to third parties, and other than shares issued upon the exercise of stock
options granted to employees or consultants or upon the exercise of warrants
granted to third parties, all of which are disclosed on Exhibit 3.2
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3.9 Legal Proceedings. Except as listed on Exhibit 3.9 or described in the
Advantage Health 1995 10-K, Advantage Health has no knowledge of any pending or
threatened litigation, governmental investigation, condemnation or other
proceeding against or relating to or affecting Advantage Health or the
transactions contemplated by this Plan of Merger for which Advantage Health is
uninsured or which, if resolved adversely to Advantage Health, would,
individually or in the aggregate, have a material adverse effect on Advantage
Health. To the best knowledge of Advantage Health, no valid basis for recovery
or other relief in any such action exists.
3.10 Contracts, etc. (a) Advantage Health has made available to HEALTHSOUTH
true copies of those outstanding contracts, leases, agreements and arrangements
filed as Item 10 exhibits to the Advantage Health 1995 10-K (including those of
such Item 10 exhibits as are incorporated by reference) as are listed on Exhibit
3.10. Except as otherwise indicated on Exhibit 3.10, all of such contracts,
leases, agreements and arrangements are legally valid and binding in accordance
with their terms (assuming the other parties thereto are bound) and in full
force and effect, except for any such invalidity or failure to be binding or in
full force and effect which would not have, individually or in the aggregate, a
material adverse effect on Advantage Health. Except as otherwise indicated on
Exhibit 3.10, to Advantage Health's best knowledge, all parties to such
contracts, leases, agreements and arrangements have complied with the provisions
of such contracts, leases, agreements and arrangements in all material respects
and, to the best knowledge of Advantage Health, no party thereto is in material
default thereunder and no event has occurred which, but for the lapse of time or
the giving of notice or both, would constitute a material default thereunder,
except, in any such case, where such noncompliance with or default under the
contract, lease, agreement or arrangement would not, individually or in the
aggregate, have a material adverse effect on Advantage Health.
3.11 Accounts Receivable. (a) Since the date of the Advantage Health Balance
Sheet, Advantage Health has not changed any principle or practice with respect
to the recordation of accounts receivable or the calculation of reserves
therefor, or any material collection, discount or write-off policy or procedure.
Advantage Health (including the Advantage Health Subsidiaries and Advantage
Health Partnerships) is in compliance with the terms and conditions of all
third-party payor arrangements relating to its accounts receivable, except to
the extent that such noncompliance would not, individually or in the aggregate,
have a material adverse effect on Advantage Health.
(b) Except as set forth on Exhibit 3.11, without limiting the generality of
the foregoing, Advantage Health and each Advantage Health Subsidiary or
Advantage Health Partnership is in compliance with all Medicare and Medicaid
provider agreements to which it is a party, except to the extent that such
noncompliance would not, individually or in the aggregate, have a material
adverse effect on Advantage Health.
3.12 Tax Returns. Advantage Health has filed all tax returns and reports
required to be filed by it or requests for extensions to file such returns or
reports have been timely filed and granted and have not expired, except to the
extent that such failures to file, taken together, do not, individually or in
the aggregate, have a material adverse effect on Advantage Health. Except as
disclosed on Exhibit 3.12, Advantage Health has made all material payments shown
as due on such returns. Except as disclosed on Exhibit 3.12, Advantage Health
has not been notified that any tax returns of Advantage Health are currently
under audit by the Internal Revenue Service or any state or local tax agency.
Except as set forth on Exhibit 3.12, no agreements have been made by Advantage
Health for the extension of time or the waiver of the statute of limitations for
the assessment or payment of any federal, state or local taxes.
3.13 Employee Benefit Plans; Employment Matters. (a) Except as set forth on
Exhibit 3.13(a), Advantage Health has neither established nor maintains nor is
obligated to make contributions to or under or otherwise participate in (i) any
bonus or other type of incentive compensation plan, program, agreement, policy,
commitment, contract or arrangement (whether or not set forth in a written
document), (ii) any pension, profit-sharing, retirement or other plan, program
or arrangement, or (iii) any other employee benefit plan, fund or program,
including, but not limited to, those described in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). Except as
disclosed on Exhibit 3.13(a), all such plans listed on Exhibit 3.13(a)
(individually, a "Plan" and collec-
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tively, the "Plans") have been operated and administered in all material
respects in accordance with, as applicable, ERISA, the Code, Title VII of the
Civil Rights Act of 1964, as amended, the Equal Pay Act of 1967, as amended, the
Age Discrimination in Employment Act of 1967, as amended, and the related rules
and regulations adopted by those federal agencies responsible for the
administration of such laws. Except as disclosed on Exhibit 3.13(a), no act or
failure to act by Advantage Health has resulted in a "prohibited transaction"
(as defined in ERISA) with respect to the Plans that is not subject to a
statutory or regulatory exception. No "reportable event" (as defined in ERISA)
has occurred with respect to any of the Plans which is subject to Title IV of
ERISA. Advantage Health has not previously made, is not currently making, and is
not obligated in any way to make, any contributions to any multi-employer plan
within the meaning of the Multi-Employer Pension Plan Amendments Act of 1980, as
amended.
(b) Except as disclosed in the Advantage Health 1995 10-K or on Exhibit
3.13(b), Advantage Health is not a party to any oral or written (i) union, guild
or collective bargaining agreement which agreement covers employees in the
United States (nor is it aware of any union organizing activity currently being
conducted in respect to any of its employees), (ii) agreement with any executive
officer or other key employee the benefits of which are contingent, or the terms
of which are materially altered, upon the occurrence of a transaction of the
nature contemplated by this Plan of Merger and which provides for the payment of
in excess of $100,000, or (iii) agreement or plan, including any stock option
plan, stock appreciation rights plan, restricted stock plan or stock purchase
plan, any of the benefits of which will be increased, or the vesting, the
benefits of which will be accelerated, by the occurrence of any of the
transactions contemplated by this Plan of Merger or the value of any of the
benefits of which will be calculated on the basis of any of the transactions
contemplated by this Plan of Merger.
3.14 Compliance with Laws in General. Except as disclosed in the Advantage
Health 1995 10-K or on Exhibit 3.14, Advantage Health has not received any
notices of material violations of any federal, state and local laws, regulations
and ordinances relating to its business and operations, including, without
limitation, the Occupational Safety and Health Act, the Americans with
Disabilities Act, the Medicare or applicable Medicaid statutes and regulations
and any Environmental Laws (as hereinafter defined), and no notice of any
pending inspection or material violation of any such law, regulation or
ordinance has been received by Advantage Health which, if it were determined
that a violation had occurred, would, individually or in the aggregate, have a
material adverse effect on Advantage Health.
3.15 Licenses, Accreditation and Regulatory Approvals. Advantage Health, the
Advantage Health Subsidiaries and the Advantage Health Partnerships, as
applicable, to Advantage Health's best knowledge, hold all licenses, permits,
certificates of need and other regulatory approvals required by law with respect
to their respective businesses, operations and facilities as they are currently
or presently conducted (collectively, "Licenses"), except where the failure to
hold any such License or Licenses does not have, individually or in the
aggregate, a material adverse effect on Advantage Health. To Advantage Health's
best knowledge, all such Licenses are in full force and effect and Advantage
Health is in compliance in all material respects with all conditions and
requirements of such Licenses and with all rules and regulations relating
thereto, except where the absence of any such License or Licenses or the failure
of any such License or Licenses to be in full force and effect or any such
noncompliance does not have, individually or in the aggregate, a material
adverse effect on Advantage Health. Except as disclosed in the Advantage Health
1995 10-K or on Exhibit 3.15, any and all past litigation concerning any such
License, together with all claims and causes of action raised therein, has been
finally adjudicated. To Advantage Health's best knowledge, no such License has
been revoked, conditioned (except as may be customary) or restricted, and,
except as disclosed in the Advantage Health 1995 10-K, no action (equitable,
legal or administrative), arbitration or other process is pending, or to the
best knowledge of Advantage Health, threatened, which in any way challenges the
validity of, or seeks to revoke, condition or restrict any such License, except
where the invalidity or revocation, conditioning or restriction thereof would
not have a material adverse effect on Advantage Health. Subject to compliance
with applicable securities laws and the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended ("HSR Act"), the consummation of the Merger will not
violate any law or restriction to which Advantage Health is subject which, if
violated, would, individually or in the aggregate, have a material adverse
effect on Advantage Health.
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3.16 Commissions and Fees. Except for fees payable to Alex. Brown & Sons
Incorporated ("Alex. Brown"), there are no valid claims for brokerage
commissions or finder's or similar fees in connection with the transactions
contemplated by this Plan of Merger which may be now or hereafter asserted
against HEALTHSOUTH resulting from any action taken by Advantage Health or its
stockholders, officers, directors or agents.
3.17 Retirement or Re-Acquisition of HEALTHSOUTH Common Stock. Advantage
Health is not a party to any agreement the effect of which would be to require
HEALTHSOUTH, directly or indirectly, to retire or re-acquire all or part of the
shares of HEALTHSOUTH Common Stock to be issued pursuant to Section 2.1 hereof.
3.18 Disposition of Assets of Surviving Corporation. Except as provided in
Exhibit 3.18 with the consent of HEALTHSOUTH, Advantage Health is not a party to
any plan to dispose of a significant part of the assets of the Surviving
Corporation within two years after the Closing Date, other than dispositions in
the ordinary course of business of the Surviving Corporation and dispositions
intended to eliminate duplicate facilities or excess capacity.
3.19 Vote Required. The affirmative vote of a majority of the outstanding
Advantage Health Shares entitled to vote thereon is the only vote of the holders
of any class or series of Advantage Health capital stock necessary to approve
this Plan of Merger, the Merger and any other of the transactions contemplated
hereby.
3.20 Opinion of Financial Advisor. Advantage Health has received the oral
opinion of Alex. Brown to the effect that, as of the date hereof, the Merger
Consideration is fair to the holders of Advantage Health Shares from a financial
point of view, a written copy of which opinion will be delivered by Advantage
Health to HEALTHSOUTH prior to the date on which the definitive proxy materials
for the Proxy Statement (as defined in Section 7.4(a)) are filed with the
Securities and Exchange Commission (the "SEC").
3.21 No Untrue Representations. No representation or warranty by Advantage
Health in this Plan of Merger, and no exhibit to this Plan or Merger or
certificate issued by Advantage Health and furnished or to be furnished to
HEALTHSOUTH pursuant hereto, contains any untrue statement of a material fact,
or omits to state a material fact necessary to make the statements made therein,
in the light of the circumstances under which they were made, not misleading.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF HEALTHSOUTH AND THE SUBSIDIARY.
The Subsidiary and HEALTHSOUTH, jointly and severally, hereby represent and
warrant to Advantage Health as follows:
4.1 Organization, Existence, Good Standing and Capital Stock. The Subsidiary
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has all necessary corporate power to own its
properties and assets and to carry on its business as presently conducted. The
Subsidiary's authorized capital consists of 1,000 shares of Subsidiary Common
Stock, of which 1,000 shares have been duly authorized and validly issued and
registered in the name of HEALTHSOUTH and are fully paid and nonassessable. The
Subsidiary has not, within the two years immediately preceding the date of this
Plan of Merger, owned, directly or indirectly, any shares of Advantage Health
Common Stock.
4.2 Power and Authority. The Subsidiary has corporate power to execute,
deliver and perform the Plan of Merger and all agreements and other documents
executed and delivered, or to be executed and delivered, by it pursuant to the
Plan of Merger, and, subject to the satisfaction of the conditions precedent set
forth herein, has taken all actions required by law, its Certificate of
Incorporation, its Bylaws or otherwise, to duly and validly authorize the
execution and delivery of the Plan of Merger and such related documents. The
execution and delivery of the Plan of Merger does not and, subject to the
receipt of required regulatory approvals and any other required third-party
consents or approvals, the consummation of the Merger contemplated hereby will
not conflict with or violate any provisions of the Certificate of Incorporation
or Bylaws of the Subsidiary, or the provisions of, or result in the acceleration
of
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any obligation under, any mortgage, lien, lease agreement, instrument, order,
arbitration award, judgment or decree applicable to the Subsidiary, or to which
the Subsidiary is a party or by which it is bound, or conflict with or violate
any restrictions of any kind to which it is subject which, if violated or
accelerated, would have, individually or in the aggregate, a material adverse
effect on the Subsidiary or which would prevent of delay consummation of the
Merger in any material respect or otherwise prevent the Subsidiary from
performing its obligations hereunder in any material respect. The execution and
delivery of this Plan of Merger has been approved by the Board of Directors of
the Subsidiary and by HEALTHSOUTH as the sole stockholder of Aladdin Acquisition
Corporation. This Plan of Merger has been duly and validly executed and
delivered by the Subsidiary and, assuming this Plan of Merger constitutes a
valid and binding obligation of Advantage Health, enforceable against Advantage
Health in accordance with its terms, constitutes the legal, valid and binding
obligation of Aladdin Acquisition Corporation, enforceable against the
Subsidiary in accordance with its terms.
4.3 Legal Proceedings. There are no actions, suits or proceedings pending or
threatened against or relating to or affecting the Subsidiary or the
transactions relating to this Plan of Merger. To the best knowledge of Aladdin
Acquisition Corporation, no valid basis for recovery or other relief in such
action, suit or proceeding exists.
4.4 No Contracts or Liabilities. Other than the obligations created under the
Plan of Merger, the Subsidiary has not engaged in any business activities of any
type or kind whatsoever, and is not obligated under any contracts, claims,
leases, liabilities (contingent or otherwise), loans or otherwise.
4.5 Commissions and Fees. Except for fees owed to Smith Barney Inc. ("Smith
Barney"), there are no claims for brokerage commissions, investment bankers'
fees or finder's fees in connection with the transaction contemplated by the
Plan of Merger resulting from any action taken by the Subsidiary, HEALTHSOUTH as
its sole stockholder or any of its officers, directors or agents.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF HEALTHSOUTH.
HEALTHSOUTH hereby represents and warrants to Advantage Health as follows:
5.1 Organization, Existence and Good Standing. HEALTHSOUTH is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware. HEALTHSOUTH has all necessary corporate power to own its
properties and assets and to carry on its business as presently conducted. Each
subsidiary of HEALTHSOUTH (a "HEALTHSOUTH Subsidiary"), each general
partnership, limited partnership and joint venture in which HEALTHSOUTH or any
HEALTHSOUTH Subsidiary is a general partner or a co-venturer (a "HEALTHSOUTH
Partnership"), and each limited liability company in which HEALTHSOUTH, any
HEALTHSOUTH Subsidiary or HEALTHSOUTH Partnership is a member (a "HEALTHSOUTH
LLC") is duly organized, validly existing, and (to the extent such concept is
applicable under the laws of such jurisdiction) in good standing in its
respective jurisdiction of organization, and has all necessary corporate power
to own its properties and assets and to carry on its business as presently
conducted. HEALTHSOUTH, all HEALTHSOUTH Subsidiaries, all HEALTHSOUTH
Partnerships and all HEALTHSOUTH LLCs are duly qualified to do business and are
in good standing as foreign corporations, foreign limited partnerships or
foreign limited liability companies, as the case may be, in all jurisdictions in
which the character of the property owned, leased or operated or the nature of
the business transacted by them makes qualification necessary, except where the
failure to be so qualified or in good standing would not have a material adverse
effect on HEALTHSOUTH. HEALTHSOUTH is not, and has not been within the two years
immediately preceding the date of this Plan of Merger, a subsidiary or division
of another corporation, nor has HEALTHSOUTH within such time owned, directly or
indirectly, any shares of Advantage Health Common Stock.
5.2 HEALTHSOUTH Capital Stock. HEALTHSOUTH has an authorized capitalization
of 1,500,000 shares of Preferred Stock, par value $.10 per share, none of which
shares are issued and outstanding, and none of which shares are held in
treasury, and 150,000,000 shares of Common Stock, par value $0.01 per share, of
which 97,217,000 shares are issued and outstanding, and 182,000 shares are held
in treasury. All of the issued and outstanding shares of HEALTHSOUTH Common
Stock have
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been duly and validly issued and are fully paid and nonassessable. Except as
disclosed in the HEALTHSOUTH Documents (as hereinafter defined), there are no
options, warrants or similar rights granted by HEALTHSOUTH or any other
agreements to which HEALTHSOUTH is a party providing for the issuance or sale by
it of any additional securities. There is no liability for dividends declared or
accumulated but unpaid with respect to any shares of HEALTHSOUTH Common Stock.
HEALTHSOUTH has not made any distributions to any holder of HEALTHSOUTH Common
Stock or participated in or effected any issuance, exchange or retirement of
HEALTHSOUTH Common Stock, or otherwise changed the equity interests of holders
of HEALTHSOUTH Common Stock, in contemplation of effecting the Merger, within
the two years immediately preceding the date of this Plan of Merger. Any shares
of HEALTHSOUTH Common Stock that HEALTHSOUTH has re-acquired during the two
years immediately preceding the date of this Plan of Merger have been so
re-acquired only for purposes other than Business Combinations.
5.3 Subsidiary Common Stock. HEALTHSOUTH owns, beneficially and of record,
all of the issued and outstanding shares of Subsidiary Common Stock, which are
validly issued and outstanding, fully paid and nonassessable, free and clear of
all liens and encumbrances. HEALTHSOUTH has the corporate power to endorse and
surrender such shares of Subsidiary Common Stock for cancellation pursuant to
the Plan of Merger. HEALTHSOUTH has taken all such actions as may be required in
its capacity as the sole stockholder of Aladdin Acquisition Corporation to
approve the Merger.
5.4 Power and Authority. HEALTHSOUTH has corporate power to execute, deliver
and perform the Plan of Merger and all agreements and other documents executed
and delivered, or to be executed and delivered, by it pursuant to the Plan of
Merger, and, subject to the satisfaction of the conditions precedent set forth
herein, has taken all actions required by law, its Certificate of Incorporation,
its Bylaws or otherwise, to authorize the execution and delivery of the Plan of
Merger and such related documents. The execution and delivery of the Plan of
Merger does not and, subject to the receipt of required regulatory approvals and
any other required third-party consents or approvals, the consummation of the
Merger contemplated hereby will not, violate any provisions of the Certificate
of Incorporation or Bylaws of HEALTHSOUTH, or any provision of, or result in the
acceleration of any obligation under, any mortgage, lien, lease, agreement,
instrument, order, arbitration award, judgment or decree to which HEALTHSOUTH,
any HEALTHSOUTH Subsidiary, any HEALTHSOUTH Partnership or any HEALTHSOUTH LLC
is a party or by which HEALTHSOUTH, any HEALTHSOUTH Subsidiary, any HEALTHSOUTH
Partnership or any HEALTHSOUTH LLC is bound, or conflict with or violate any
restrictions of any kind to which HEALTHSOUTH, any HEALTHSOUTH Subsidiary, any
HEALTHSOUTH Partnership or any HEALTHSOUTH LLC is subject which, if violated or
accelerated, would have, individually or in the aggregate, a material adverse
effect on HEALTHSOUTH or which would prevent or delay consummation of the Merger
in any material respect or otherwise prevent HEALTHSOUTH from performing its
obligations hereunder in any material respect. The execution and delivery of
this Agreement has been approved by the Board of Directors of HEALTHSOUTH. The
Plan of Merger has been duly and validly executed and delivered by HEALTHSOUTH
and, assuming that the Plan of Merger constitutes a valid and binding obligation
of Advantage Health, enforceable against it in accordance with its terms,
constitutes the legal, valid and binding obligation of HEALTHSOUTH, enforceable
against HEALTHSOUTH in accordance with its terms.
5.5 HEALTHSOUTH Financial Information. HEALTHSOUTH has heretofore
furnished Advantage Health with the following documents:
(i) its Annual Report on Form 10-K for the fiscal year ended December 31,
1994;
(ii) its Quarterly Reports on Form 10-Q for all completed fiscal quarters
following HEALTHSOUTH's last completed fiscal year and all reports on Form
8-K filed since the end of such fiscal year; and
(iii) Its Registration Statement on Form S-4 (Registration No. 33-64935)
relating to its pending acquisition of Surgical Care Affiliates, Inc.
(documents included in (i) - (iii) above being collectively referred to herein
as the "HEALTHSOUTH Documents"). As of their respective dates, the HEALTHSOUTH
Documents did not contain any untrue statements of material facts or omit to
state material facts required to be stated therein or necessary
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to make the statements therein, in light of the circumstances under which they
were made, not misleading. As of their respective dates, the descriptions of the
business, operations and financial condition of HEALTHSOUTH contained in the
HEALTHSOUTH Documents complied in all material respects with the applicable
requirements of the Securities Act, and the Exchange Act, and the rules and
regulations promulgated under such statutes. The financial statements contained
in the HEALTHSOUTH Documents, together with the notes thereto, have been
prepared in accordance with generally accepted accounting principles
consistently followed throughout the periods indicated, reflect all known
liabilities of HEALTHSOUTH, including all known contingent liabilities as of the
end of each period reflected therein, and present fairly the financial condition
of HEALTHSOUTH at such dates and the consolidated results of operations and cash
flows of HEALTHSOUTH for the periods then ended.
5.6 Subsequent Events. Except as set forth on Exhibit 5.6 or disclosed in
the HEALTHSOUTH Documents or as otherwise permitted hereunder, HEALTHSOUTH
has not, since December 31, 1994:
(a) Incurred any material adverse change;
(b) Discharged or satisfied any material lien or encumbrance, or paid or
satisfied any material obligation or liability (absolute, accrued, contingent or
otherwise) other than (i) liabilities shown or reflected on the December 31,
1994 Balance Sheet contained in the HEALTHSOUTH Documents or (ii) liabilities
incurred since December 31, 1994 which discharge or satisfaction would not have
a material adverse effect on HEALTHSOUTH;
(c) Increased or established any reserve for taxes or any other liability on
its books or otherwise provided therefor which would have a material adverse
effect on HEALTHSOUTH, except as may have been required due to income or
operations of HEALTHSOUTH since December 31, 1994;
(d) Mortgaged, pledged or subjected to any lien, charge or other encumbrance
any of the assets, tangible or intangible, which assets are material to the
consolidated business or financial condition of HEALTHSOUTH;
(e) Sold or transferred any of the assets material to the consolidated
business of HEALTHSOUTH, cancelled any material debts or claims or waived any
material rights, except in the ordinary course of business;
(f) Granted any general or uniform increase in the rates of pay of employees
or any material increase in salary payable or to become payable by HEALTHSOUTH
to any officer or employee, consultant or agent (other than normal merit
increases or consistent with its past practice), or by means of any bonus or
pension plan, contract or other commitment, increased in a material respect the
compensation of any officer, employee, consultant or agent;
(g) Except for this Plan or Merger and any other agreement executed and
delivered pursuant to this Plan of Merger and except as disclosed in the
HEALTHSOUTH Documents, entered into any material transaction other than in the
ordinary course of business or permitted under other Sections hereof; or
(h) Issued any stock, bonds or other securities, other than stock options
granted to employees or consultants of HEALTHSOUTH or warrants granted to third
parties, and other than shares issued upon the exercise of stock options granted
to employees or consultants or upon the exercise of warrants granted to third
parties or upon the conversion of convertible debentures, all of which are
described or in the HEALTHSOUTH Documents.
5.7 Legal Proceedings. Except as described in the HEALTHSOUTH Documents,
HEALTHSOUTH has no knowledge of any pending or threatened litigation,
governmental investigation, condemnation or other proceeding against or relating
to or affecting HEALTHSOUTH or the transactions contemplated by this Plan of
Merger for which HEALTHSOUTH is uninsured or which, if resolved adversely to
HEALTHSOUTH, would have, individually or in the aggregate, a material adverse
effect on HEALTHSOUTH. To the best knowledge of HEALTHSOUTH, no valid basis for
recovery or other relief in any such action exists.
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5.8 Contracts, etc. HEALTHSOUTH has made available to Advantage Health true
copies of those contracts, leases, agreements and arrangements filed as Item 10
exhibits to HEALTHSOUTH's Report on Form 10-K included in the HEALTHSOUTH
Documents (including such of those Item 10 exhibits as are incorporated by
reference) as are listed on Exhibit 5.8. Except as otherwise indicated on
Exhibit 5.8, to HEALTHSOUTH's best knowledge, all of such contracts, leases,
agreements and arrangements are legally valid and binding in accordance with
their terms (assuming the other parties thereto are bound) and in full force and
effect, except for any such invalidity or failure to be binding or in full force
and effect which would not have, individually or in the aggregate, a material
adverse effect on HEALTHSOUTH. Except as otherwise indicated on Exhibit 5.8, all
parties to such contracts, leases, agreements and arrangements have complied
with the provisions of such contracts, leases, agreements and arrangements in
all material respects and, to the best knowledge of HEALTHSOUTH, no party
thereto is in material default thereunder and no event has occurred which, but
for the lapse of time or the giving of notice or both, would constitute a
material default hereunder, except, in any such case, where such noncompliance
with or default under the contract, lease, agreement or arrangement or the
default or breach thereunder or thereof would not have, individually or in the
aggregate, a material adverse effect on HEALTHSOUTH.
5.9 Accounts Receivable. (a) Since December 31, 1994, HEALTHSOUTH has not
changed any material principle or practice with respect to the recordation of
accounts receivable or the calculation or reserves therefor, or any material
collection, discount or write-off policy or procedure. HEALTHSOUTH (including
the HEALTHSOUTH Subsidiaries, HEALTHSOUTH Partnerships and HEALTHSOUTH LLCs) is
in compliance with the terms and conditions of all third-party payor
arrangements relating to its accounts receivable, except to the extent that such
noncompliance would not have a material adverse effect on HEALTHSOUTH.
(b) Without limiting the generality of the foregoing, HEALTHSOUTH and each
HEALTHSOUTH Subsidiary, HEALTHSOUTH Partnership and HEALTHSOUTH LLC is in
compliance with all Medicare and Medicaid provider agreements to which it is a
party, except to the extent that such noncompliance would not, individually or
in the aggregate, have a material adverse effect on HEALTHSOUTH.
5.10 Tax Returns. HEALTHSOUTH has filed all tax returns required to be filed
by it or requests for extensions to file such returns or reports have been
timely filed and granted and have not expired, except to the extent that such
failures to file, taken together, do not have a material adverse effect on
HEALTHSOUTH. HEALTHSOUTH has made all material payments shown as due on such
returns. Except as disclosed on Exhibit 5.10, HEALTHSOUTH has not been notified
that any tax returns of HEALTHSOUTH are currently under audit by the Internal
Revenue Service or any state or local tax agency. Except as disclosed on Exhibit
5.10, no agreements have been made by HEALTHSOUTH for the extension of time or
the waiver of the statute of limitations for the assessment or payment of any
federal, state or local taxes.
5.11 Employee Benefit Plans; Employment Matters. (a) Except as disclosed in
the HEALTHSOUTH Documents, HEALTHSOUTH has neither established nor maintains nor
is obligated to make contributions to or under or otherwise participate in (i)
any bonus or other type of incentive compensation plan, program, agreement,
policy, commitment, contract or arrangement (whether or not set forth in a
written document), (ii) any pension, profit-sharing, retirement or other plan,
program or arrangement, or (iii) any other employee benefit plan, fund or
program, including, but not limited to, those described in Section 3(3) of
ERISA. All such plans have been operated and administered in all material
respects in accordance with, as applicable, ERISA, the Code, Title VII of the
Civil Rights Act of 1964, as amended, the Equal Pay Act of 1967, as amended, the
Age Discrimination in Employment Act of 1967, as amended, and the related rules
and regulations adopted by those federal agencies responsible for the
administration of such laws. No act or failure to act by HEALTHSOUTH has
resulted in a "prohibited transaction" (as defined in ERISA) with respect to the
Plans that is not subject to a statutory or regulatory exception. No "reportable
event" (as defined in ERISA) has occurred with respect to any of the Plans which
is subject to Title IV of ERISA. Except as disclosed in the HEALTHSOUTH
Documents, HEALTHSOUTH has not previously made, is not currently making, and is
not obligated in any way to
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make, any contributions to any multi-employer plan within the meaning of the
Multi-Employer Pension Plan Amendments Act of 1980, as amended.
(b) Except as disclosed in the HEALTHSOUTH Documents, HEALTHSOUTH is not a
party to any oral or written (i) union, guild or collective bargaining agreement
which agreement covers employees in the United States (nor is it aware of any
union organizing activity currently being conducted in respect to any of its
employees), (ii) agreement with any executive officer or other key employee the
benefits of which are contingent, or the terms of which are materially altered,
upon the occurrence of a transaction of the nature contemplated by this Plan of
Merger and which provides for the payment of in excess of $100,000, or (iii)
agreement or plan, including any stock option plan, stock appreciation rights
plan, restricted stock plan or stock purchase plan, any of the benefits of which
will be increased, or the vesting the benefits of which will be accelerated, by
the occurrence of any of the transactions contemplated by this Plan of Merger or
the value of any of the benefits of which will be calculated on the basis of any
of the transactions contemplated by this Plan of Merger.
5.12 Compliance with Laws in General. Except as disclosed in the HEALTHSOUTH
Documents, HEALTHSOUTH has not received any notices of material violations of
any federal, state and local laws, regulations and ordinances relating to its
business and operations, including, without limitation, the Occupational Safety
and Health Act, the Americans with Disabilities Act, the Medicare or applicable
Medicaid statutes and regulations and any Environmental Laws, and no notice of
any pending inspection or material violation of any such law, regulation or
ordinance has been received by HEALTHSOUTH with respect to any alleged violation
which, if it were determined that a violation occurred, would have a material
adverse effect on HEALTHSOUTH.
5.13 Licenses, Accreditation and Regulatory Approvals. HEALTHSOUTH, the
HEALTHSOUTH Subsidiaries, the HEALTHSOUTH Partnerships and the HEALTHSOUTH LLCs
hold all Licenses which are needed or required by law with respect to their
respective businesses, operations and facilities as they are currently or
presently conducted, except where the failure to hold any such License or
Licenses does not have a material adverse effect on HEALTHSOUTH. To
HEALTHSOUTH's best knowledge, all such Licenses are in full force and effect and
HEALTHSOUTH is in compliance in all material respects with all conditions and
requirements of such Licenses and with all rules and regulations relating
thereto, except where the absence of any such License or Licenses or the failure
of any such License or Licenses to be in full force and effect or any such
noncompliance does not have, individually or in the aggregate, a material
adverse effect on HEALTHSOUTH. Except as disclosed in the HEALTHSOUTH Documents,
any and all past litigation concerning any such License, together with all
claims and causes of action raised therein, has been finally adjudicated. To
HEALTHSOUTH's best knowledge, no such License has been revoked, conditioned
(except as may be customary) or restricted, and, except as disclosed in the
HEALTHSOUTH Documents, no action (equitable, legal or administrative),
arbitration or other process is pending, or to the best knowledge of
HEALTHSOUTH, threatened, which in any way challenges the validity of, or seeks
to revoke, condition or restrict any such License, except where the invalidity
or revocation, conditioning or restriction thereof would not have a material
adverse effect on HEALTHSOUTH. Subject to compliance with applicable securities
laws, the HSR Act and other or local rules or regulations requiring notice,
approval, or other action upon the occurrence of a change in control of
Advantage Health, any of the Advantage Health Subsidiaries or any of the
Advantage Health Partnerships, the consummation of the Merger will not violate
any law or restriction to which HEALTHSOUTH is subject.
5.14 Commissions and Fees. Except for fees owed to Smith Barney, there are no
claims for brokerage commissions, investment bankers' fees or finder's fees in
connection with the transactions contemplated by the Plan of Merger resulting
from any action taken by HEALTHSOUTH or any of its stockholders, officers,
directors or agents.
5.15 Retirement or Re-Acquisition of HEALTHSOUTH Common Stock. HEALTHSOUTH
has not agreed directly or indirectly to retire or re-acquire all or part of the
shares of HEALTHSOUTH Common Stock to be issued pursuant to Section 2.1 hereof.
5.16 Disposition of Assets of Surviving Corporation. HEALTHSOUTH does not
intend or plan to dispose of, or to cause the Surviving Corporation to dispose
of, a significant part of the assets of the
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Surviving Corporation within two years after the Effective Time, other than
dispositions in the ordinary course of business of the Surviving Corporation and
dispositions intended to eliminate duplicative facilities or excess capacity.
5.17 No Vote Required. No vote of the holders of outstanding shares of any
class or series of HEALTHSOUTH capital stock is necessary to approve this Plan
of Merger, the Merger and the transactions contemplated hereby and no such vote
will be sought by HEALTHSOUTH.
5.18 Opinion of Financial Advisor. HEALTHSOUTH has received the oral opinion
of Smith Barney to the effect that, as of the date of this Plan of Merger, the
Exchange Ratio is fair to HEALTHSOUTH from a financial point of view, a written
copy of which opinion will be delivered by HEALTHSOUTH to Advantage Health prior
to the date on which the definitive proxy materials for the Proxy Statement (as
defined in Section 7.4(a)) are filed with the Securities and Exchange
Commission.
5.19 HEALTHSOUTH Common Stock. HEALTHSOUTH will have a sufficient number of
authorized but unissued and/or treasury shares of its Common Stock available for
issuance to the holders of Advantage Health Shares in accordance with the
provisions of the Plan of Merger. The HEALTHSOUTH Common Stock to be issued
pursuant to the Plan of Merger will, when so delivered, be (i) duly and validly
issued, fully paid and nonassessable, (ii) issued pursuant to an effective
registration statement under the Securities Act, and (iii) authorized for
listing on the New York Stock Exchange (the "NYSE") upon official notice of
issuance.
5.20 Investment Intent. HEALTHSOUTH is acquiring the Advantage Health Shares
hereunder for investment, for its own account and not with a view to the
distribution or sale thereof, and HEALTHSOUTH has no understanding, agreement or
arrangement to sell, distribute, partition or otherwise transfer or assign all
or any part of the Advantage Health Shares to any other person, firm or
corporation.
5.21 No Untrue Representation. No representation or warranty by HEALTHSOUTH
in this Plan of Merger, and no exhibit to this Plan of Merger or certificate
issued by HEALTHSOUTH and furnished or to be furnished to Advantage Health
pursuant hereto, contains any untrue statement of a material fact or omits to
state a material fact necessary to make the statements made therein, in the
light of the circumstances under which they were made, not misleading.
SECTION 6. ACCESS TO INFORMATION AND DOCUMENTS.
6.1 Access to Information. Between the date hereof and the Closing Date, each
of Advantage Health and HEALTHSOUTH shall give to the other party and its
counsel, accountants and other representatives full access to all the
properties, documents, contracts, personnel files and other records of such
party and shall furnish the other party with copies of such documents and with
such information with respect to the affairs of such party as the other party
may from time to time reasonably request. Each party will disclose and make
available to the other party and its representatives all books, contracts,
accounts, personnel records, letters of intent, papers, records, communications
with regulatory authorities and other documents relating to the business and
operations of such party. In addition, Advantage Health shall make available to
HEALTHSOUTH all such banking, investment and financial information as shall be
necessary to allow for the efficient integration of Advantage Health's banking,
investment and financial arrangements with those of HEALTHSOUTH at the Effective
Time.
6.2 Return of Records. If the transactions contemplated hereby are not
consummated and this Plan of Merger terminates, each party agrees to promptly
return all documents, contracts, records or properties of the other party and
all copies thereof furnished pursuant to this Section 6 or otherwise. All
information disclosed by any party or any affiliate of such party shall be
deemed to be "confidential information" under the terms of the confidentiality
agreements, heretofore executed and delivered by and between Advantage Health
and HEALTHSOUTH (the "Confidentiality Agreements").
6.3 Effect of Access. (a) Nothing contained in this Section 6 shall be deemed
to create any duty or responsibility on the part of either party to investigate
or evaluate the value, validity or enforceability of any contract, lease or
other asset included in the assets of the other party.
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(b) With respect to matters as to which any party has made express
representations or warranties herein, the parties shall be entitled to rely upon
such express representations and warranties irrespective of any investigations
made by such parties, except to the extent that such investigations result in
actual knowledge of the inaccuracy or falsehood of particular representations
and warranties.
SECTION 7. COVENANTS.
7.1 Preservation of Business. Advantage Health will use its best efforts to
preserve the business organization of Advantage Health intact, to keep available
to HEALTHSOUTH and the Surviving Corporation the services of the present
employees of Advantage Health, and to preserve for HEALTHSOUTH and the Surviving
Corporation the goodwill of the suppliers, customers and others having business
relations with Advantage Health.
7.2 Material Transactions. Prior to the Effective Time and except as set
forth on Exhibit 7.2, Advantage Health will not (other than as required pursuant
to the terms of the Plan of Merger and the related documents and other than with
respect to transactions for which binding commitments have been entered into
prior to the date hereof and transactions described in Exhibit 7.2 which do not
vary materially from the terms set forth on Exhibit 7.2), without first
obtaining the written consent of HEALTHSOUTH (such consent not to be
unreasonably withheld:
(a) Encumber any asset or enter into any transaction or make any contract
or commitment relating to the properties, assets and business of Advantage
Health, other than in the ordinary course of business;
(b) Enter into any employment contract which is not terminable upon notice
of 30 days or less, at will, and without penalty to Advantage Health, except
as provided herein;
(c) In addition to any existing or prospective contract or agreement
disclosed on Exhibit 7.2 and other than acquisitions or other commitments not
exceeding $15,000,000 in the aggregate, enter into any contract or agreement
(i) which cannot be performed within three months or less, or (ii) which
involves the expenditure of over $100,000;
(d) Issue or sell, or agree to issue or sell, any shares of capital stock
or other securities of Advantage Health (other than options to purchase
shares of Advantage Health Common Stock issued after the date hereof in the
ordinary course of Advantage Health's business or consistent with its past
practice), except upon exercise of currently outstanding stock options (or
upon exercise of such permitted subsequently granted options);
(e) Except for contributions to Advantage Health's existing retirement
plans, make any payment or distribution to the trustee under any bonus,
pension, profit-sharing or retirement plan or incur any obligation to make
any such payment or contribution which is not in accordance with Advantage
Health's usual past practice, or make any payment or contributions or incur
any obligation pursuant to or in respect of any other plan or contract or
arrangement providing for bonuses, executive incentive compensation,
pensions, deferred compensation, retirement payments, profit-sharing or the
like, establish or enter into any such plan, contract or arrangement, or
terminate any Plan;
(f) Extend credit to anyone, except in the ordinary course of business or
consistent with its past practice;
(g) Guarantee the obligation of any person, firm or corporation, except in
the ordinary course of business or consistent with its past practice; or
(h) Amend its Certificate of Incorporation or Bylaws.
(i) Take any action of a kind described in Section 3.8(b) - (h).
7.3 Meeting of Stockholders. (a) Subject to the further exercise of its Board
of Directors' fiduciary duties (either prior to or after the taking of any of
the following steps), Advantage Health will take all steps necessary in
accordance with its Certificate of Incorporation and Bylaws to call, give notice
of,
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convene and hold a special meeting of its stockholders as soon as practicable
after the effectiveness of the Registration Statement (as defined in Section 7.4
hereof), for the purpose of approving this Plan of Merger and for such other
purposes as may be necessary (the "Special Meeting"). Unless this Plan of Merger
shall have been validly terminated as provided herein, the Board of Directors of
Advantage Health (subject to the provisions of Section 8.1(c) hereof) will (i)
recommend to its stockholders the approval of this Plan of Merger, the
transactions contemplated hereby and any other matters to be submitted to its
stockholders in connection therewith, to the extent that such approval is
required by applicable law in order to consummate the Merger, and (ii) use
reasonable best efforts to obtain the approval by its stockholders of this Plan
of Merger, the Merger and any other of the transactions contemplated hereby
requiring such stockholder approval.
(b) Nothing contained herein shall affect the right of Advantage Health to
take action by written consent in lieu of a meeting to the extent permitted by
applicable law and its Certificate of Incorporation and Bylaws.
7.4 Registration Statement. (a) HEALTHSOUTH shall prepare and file with the
SEC and any other applicable regulatory bodies, as soon as practicable, a
Registration Statement on Form S-4 with respect to the shares of HEALTHSOUTH
Common Stock to be issued in the Merger (the "Registration Statement"), and will
otherwise proceed promptly to satisfy the requirements of the Securities Act,
including Rule 145 thereunder. The Registration Statement shall contain a proxy
statement of Advantage Health for the Special Meeting containing the information
required by the Exchange Act (the "Proxy Statement"). HEALTHSOUTH shall take all
reasonable steps to cause the Registration Statement to be declared effective
and to maintain such effectiveness until all of the shares covered thereby have
been distributed. HEALTHSOUTH shall promptly amend or supplement the
Registration Statement to the extent necessary in order to make the statements
therein not misleading or to correct any misstatements which have become false
or misleading. HEALTHSOUTH shall use its reasonable best efforts to have the
Proxy Statement approved by the SEC under the provisions of the Exchange Act as
soon as practicable. HEALTHSOUTH shall provide Advantage Health with copies of
all filings made pursuant to this Section 7.4 reasonably in advance of their
filing and shall consult with Advantage Health on responses to any comments made
by the staff of the SEC with respect thereto.
(b) The information specifically designated as being supplied by Advantage
Health for inclusion in the Registration Statement shall not, at the time the
Registration Statement is declared effective, at the time the Proxy Statement is
first mailed to holders of Advantage Health Common Stock, at the time of the
Special Meeting and at the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not misleading. The
information specifically designated as being supplied by Advantage Health for
inclusion in the Proxy Statement shall not, at the date the Proxy Statement (or
any amendment thereof or supplement thereto) is first mailed to holders of
Advantage Health Common Stock at the time of the Special Meetings and at the
Effective Time, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in the light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event or
circumstance relating to Advantage Health, or its officers or directors, is
discovered by Advantage Health which should be set forth in an amendment to the
Registration Statement or a supplement to the Proxy Statement, Advantage Health
shall promptly inform HEALTHSOUTH and HEALTHSOUTH shall thereupon file such
amendment to the Registration Statement. All documents, if any, that Advantage
Health is responsible for filing with the SEC in connection with the
transactions contemplated hereby shall comply as to form in all material
respects with the applicable requirements of the Securities Act and the rules
and regulations thereunder and the Exchange Act and the rules and regulations
thereunder.
(c) The information specifically designated as being supplied by HEALTHSOUTH
for inclusion in the Registration Statement shall not, at the time the
Registration Statement is declared effective, at the time the Proxy Statement
(or any amendment thereof or supplement thereto) is first mailed to holders of
Advantage Health Common Stock, at the time of the Special Meeting and at the
Effective Time, contain any untrue statement of a material fact or omit to state
any material fact required to be stated
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therein or necessary in order to make the statements therein not misleading. The
information specifically designated as being supplied by HEALTHSOUTH for
inclusion in the Proxy Statement to be sent to the holders of Advantage Health
Common Stock in connection with the Special Meeting shall not, at the date the
Proxy Statement (or any amendment thereof or supplement thereto) is first mailed
to holders of Advantage Health Common Stock, at the time of the Special Meeting
or at the Effective Time, contain any untrue statement or a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they are made, not misleading. If at any time prior to the Effective Time
any event or circumstance relating to HEALTHSOUTH or its officers or directors,
is discovered by HEALTHSOUTH which should be set forth in an amendment to the
Registration Statement or a supplement to the Proxy Statement, HEALTHSOUTH shall
promptly inform Advantage Health and shall promptly file such amendment to the
Registration Statement. All documents that HEALTHSOUTH is responsible for filing
with the SEC in connection with the transactions contemplated hereby shall
comply as to form in all material respects with the applicable requirements of
the Securities Act and the rules and regulations thereunder and the Exchange Act
and the rules and regulations thereunder.
(d) Prior to the Closing Date, HEALTHSOUTH shall use its reasonable best
efforts to cause the shares of HEALTHSOUTH Common Stock to be issued pursuant to
the Merger to be registered or qualified under all applicable securities or Blue
Sky laws of each of the states and territories of the United States, and to take
any other actions which may be necessary to enable the HEALTHSOUTH Common Stock
to be issued pursuant to the Merger to be distributed in each such jurisdiction.
(e) Prior to the Closing Date, HEALTHSOUTH shall file an additional listing
application (the "Listing Application") with the NYSE relating to the shares of
HEALTHSOUTH Common Stock to be issued in connection with the Merger, and shall
use its reasonable best efforts to cause such shares of HEALTHSOUTH Common Stock
to be approved for listing on the NYSE, upon official notice of issuance, prior
to the Closing Date.
(f) Advantage Health shall furnish all information to HEALTHSOUTH with
respect to Advantage Health, the Advantage Health Subsidiaries and the Advantage
Health Partnerships as HEALTHSOUTH may reasonably request for inclusion in the
Registration Statement, the Proxy Statement and the Listing Application, and
shall otherwise cooperate with HEALTHSOUTH in the preparation and filing of such
documents.
7.5 Exemption from State Takeover Laws. Advantage Health shall take all
reasonable steps necessary to exempt Advantage Health and the Merger from the
requirements of any state takeover statute or other similar state law which
would prevent or impede the consummation of the transactions contemplated
hereby, by action of Advantage Health's Board of Directors or otherwise.
7.6 HSR Act Compliance. HEALTHSOUTH and Advantage Health shall promptly make
their respective filings, and shall thereafter use their reasonable best efforts
to promptly make any required submissions, under the HSR Act with respect to the
Merger and the transactions contemplated hereby. HEALTHSOUTH and Advantage
Health shall use their respective reasonable best efforts to obtain all other
permits, authorizations, consents and approvals from third parties and
governmental authorities necessary to consummate the Merger and the transactions
contemplated hereby.
7.7 Public Disclosures. HEALTHSOUTH and Advantage Health shall consult with
each other before issuing any press release or otherwise making any public
statement with respect to the transactions contemplated by this Plan of Merger,
and shall not issue any such press release or make any such public statement
prior to such consultation except as may be required by applicable law or
requirements of the Exchange. The parties shall issue a joint press release,
mutually acceptable to HEALTHSOUTH and Advantage Health, promptly upon execution
and delivery of this Plan of Merger.
7.8 Resignation of Advantage Health Directors. On or prior to the Closing
Date, Advantage Health shall deliver to HEALTHSOUTH evidence satisfactory to
HEALTHSOUTH of the resignation of the Directors of Advantage Health, such
resignations to be effective on the Closing Date.
7.9 Notice of Subsequent Events. Each party hereto shall notify the other
parties of any changes, additions or events which would cause any material
change in or material addition to any Exhibit delivered by the notifying party
under this Plan of Merger, promptly after the occurrence of the same.
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7.10 No Solicitations. Advantage Health may, directly or indirectly, furnish
information and access, in response to unsolicited requests therefor, to the
same extent permitted by Section 6.1, to any corporation, partnership, person or
other entity or group, pursuant to appropriate confidentiality agreements, and
may participate in discussions and negotiate with such corporation, partnership,
person or other entity or group concerning any proposal to acquire Advantage
Health upon a merger, purchase of assets, purchase of or tender offer for
Advantage Health Shares or similar transaction (an "Alternative Transaction"),
if the Board of Directors of Advantage Health determines in its good faith
judgment in the exercise of its fiduciary duties or the exercise of its duties
under Rule 14e-2 under the Exchange Act, after consultation with legal counsel
and its financial advisors, that such action is appropriate in furtherance of
the best interest of its stockholders. Except as set forth above, Advantage
Health shall not, and shall direct each officer, director, employee,
representative and agent of Advantage Health not to, directly or indirectly,
encourage, solicit, participate in or initiate discussions or negotiations with
or provide any information to any corporation, partnership, person or other
entity or group (other than HEALTHSOUTH or an affiliate or associate or agent of
HEALTHSOUTH) concerning any merger, sale of assets, sale of or tender offer for
Advantage Health Shares or similar transactions involving Advantage Health.
Advantage Health shall promptly notify HEALTHSOUTH if it shall have, on or after
the date hereof, entered into a confidentiality agreement with any third party
in response to any unsolicited request for information and access in connection
with a possible Alternative Transaction involving such party, such notification
to include the identity of such third party.
7.11 Other Actions. Subject to the provisions of Section 7.10 hereof, neither
Advantage Health, nor the Subsidiary, nor HEALTHSOUTH shall knowingly or
intentionally take any action or omit to take any action, if such action or
omission would, or reasonably might be expected to, result in any of its
representations and warranties set forth herein being or becoming untrue in any
material respect or in any of the conditions to the Merger set forth in this
Plan of Merger not being satisfied, or (unless such action or omission is
required by applicable law) would adversely affect the ability of Advantage
Health or HEALTHSOUTH to obtain any consents or approvals required of it for the
consummation of the Merger without imposition of a condition or restriction
which would have a material adverse effect on the Surviving Corporation, would,
or might reasonably be expected to, delay the holding of the Special Meeting,
the taking of a vote thereat, the filing of the Registration Statement or the
declaration of the effectiveness thereof by the SEC, or would otherwise
materially impair the ability of Advantage Health, the Subsidiary or HEALTHSOUTH
to consummate the Merger in accordance with the terms of this Plan of Merger or
materially delay such consummation.
7.12 Accounting Methods. Neither HEALTHSOUTH nor Advantage Health shall
change its methods of accounting in effect at its most recent fiscal year end,
except as required by changes in generally accepted accounting principles as
concurred by such parties' independent accountants.
7.13 Pooling and Tax-Free Reorganization Treatment. Neither HEALTHSOUTH nor
Advantage Health shall intentionally take or cause to be taken any action,
whether on or before the Effective Time, which would disqualify the Merger as a
"pooling of interests" for accounting purposes or as a "reorganization" within
the meaning of Section 368(a) of the Code.
7.14 Affiliate and Pooling Agreements. HEALTHSOUTH and Advantage Health will
each use their respective reasonable best efforts to cause each of their
respective Directors and executive officers and each of their respective
"affiliates" (within the meaning of Rule 145 under the Securities Act) to
execute and deliver to HEALTHSOUTH as soon as practicable an agreement
substantially in the form attached hereto as Exhibit 7.14 relating to the
disposition of the Advantage Health Shares and shares of HEALTHSOUTH Common
Stock held by such person and the shares of HEALTHSOUTH Common Stock issuable
pursuant to this Plan of Merger.
7.15 Cooperation. (a) HEALTHSOUTH and Advantage Health shall together, or
pursuant to an allocation of responsibility agreed to between them, (i)
cooperate with one another in determining whether any filings required to be
made or consents required to be obtained in any jurisdiction prior to the
Effective Time in connection with the consummation of the transactions
contemplated hereby and cooperate in making any such filings promptly and in
seeking to obtain timely any such consents, (ii) use
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their respective reasonable best efforts to cause to be lifted any injunction
prohibiting the Merger, or any part thereof, or the other transactions
contemplated hereby, and (iii) furnish to one another and to one another's
counsel all such information as may be required to effect the foregoing actions.
(b) Subject to the terms and conditions herein provided, and unless this Plan
of Merger shall have been validly terminated as provided herein, each of
HEALTHSOUTH and Advantage Health shall use all reasonable efforts (i) to take,
or cause to be taken, all actions necessary to comply promptly with all legal
requirements which may be imposed on such party (or any subsidiaries or
affiliates of such party) with respect to the Plan of Merger and to consummate
the transactions contemplated hereby, subject to the votes of its stockholders
described above, and (ii) to obtain (and to cooperate with the other party to
obtain) any consent, authorization, order or approval of, or any exemption by,
any governmental entity and/or any other public or private third party which is
required to be obtained or made by such party or any of its subsidiaries or
affiliates in connection with this Plan of Merger and the transactions
contemplated hereby. Each of HEALTHSOUTH and Advantage Health shall promptly
cooperate with and furnish information to the other in connection with any such
burden suffered by, or requirement imposed upon, either of them or any of their
subsidiaries or affiliates in connection with the foregoing.
7.16 Advantage Health Stock Options. As soon as reasonably practicable after
the Effective Time of the Merger, HEALTHSOUTH shall deliver to the holders of
Advantage Health stock options and appropriate notices setting forth such
holders' rights hereunder.
7.17 Publication of Combined Results. HEALTHSOUTH agrees that within 20 days
after the end of the first calendar month following at least 30 days after the
Closing Date, HEALTHSOUTH shall cause publication of the combined results of
operations of HEALTHSOUTH and Advantage Health. For purposes of this Section
7.17, the term "publication" shall have the meaning provided in SEC Accounting
Series Release No. 135.
7.18 Advantage Health Employees. HEALTHSOUTH shall retain all employees of
Advantage Health who are employed at the Effective Time as employees-at-will
(except to the extent that such employees are parties to contracts providing for
other employment terms, in which case such employees shall be retained in
accordance with the terms of such contracts) HEALTHSOUTH shall cause the
Surviving Corporation to maintain following the Closing Date employee
compensation and benefit plans, programs, policies and fringe benefits
(including post- employment benefits) that, in the aggregate are substantially
equivalent to those provided to such employees of Advantage Health and Advantage
Health Subsidiaries, as applicable, as in effect on the date hereof (the
"Existing Plans"), subject to the right to amend or terminate such Existing
Plans in accordance with their terms, provided that after any such amendment or
termination such programs, policies and fringe benefits continue to be, in the
aggregate, substantially equivalent to the Existing Plans. HEALTHSOUTH will
cause the Surviving Corporation to provide to all employees of Advantage Health
and Advantage Health Subsidiaries severance pay and benefits which are
substantially equivalent to the applicable severance plans, programs and
policies of Advantage Health and the Advantage Health Subsidiaries, as
applicable, as in effect on the date hereof (the "Existing Benefits"), subject
to the right to amend or terminate such Existing Benefits in accordance with
their terms, provided that after any such amendment or termination such
severance pay and benefits continue to be, in the aggregate, substantially
equivalent to the Existing Benefits. Further, HEALTHSOUTH shall credit the prior
service of all employees of Advantage Health and Advantage Health Subsidiaries
to Advantage Health and the Advantage Health Subsidiaries, as applicable, for
purposes of determining the vesting or qualification of such employees of
Advantage Health and Advantage Health Subsidiaries under Existing Plans,
Existing Benefits and any successor plans and benefit programs.
7.19 HEALTHSOUTH Board of Directors. Immediately after the Effective Time,
HEALTHSOUTH shall cause Raymond J. Dunn, III to be appointed to the HEALTHSOUTH
Board of Directors.
7.20 Employment Agreements. Employment agreements between Raymond J. Dunn and
Robert E. Spencer and HEALTHSOUTH in form and substance satisfactory to the
respective parties thereto shall be executed and delivered at the Closing.
Further, HEALTHSOUTH shall cause Advantage, at or as
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promptly as practicable after the Closing, to offer to enter into employment
agreements substantially in the form of Exhibit 7.20 hereto, with appropriate
Schedules A attached thereto (which are also part of Exhibit 7.20), with the
persons named on such Schedules A.
SECTION 8. TERMINATION, AMENDMENT AND WAIVER.
8.1 Termination. This Plan of Merger may be terminated at any time prior to
the Effective Time of the Merger, whether before or after approval of matters
presented in connection with the Merger by the holders of Advantage Health
Common Stock:
(a) by mutual written consent of HEALTHSOUTH, the Subsidiary and Advantage
Health;
(b) by either HEALTHSOUTH or Advantage Health:
(i) if, upon a vote at a duly held meeting of stockholders or any
adjournment thereof, any required approval of the holders of Advantage
Health Common Stock shall not have been obtained;
(ii) if the Merger shall not have been consummated on or before July 31,
1996, unless the failure to consummate the Merger is the result of a
willful and material breach of this Plan of Merger by the party seeking to
terminate this Plan of Merger; provided, however, that the passage of such
period shall be tolled for any part thereof (but not exceeding 60 days in
the aggregate) during which any party shall be subject to a non-final
order, decree, ruling or action restraining, enjoining or otherwise
prohibiting the consummation of the Merger or the calling or holding of a
meeting of stockholders;
(iii) if any court of competent jurisdiction or other governmental
entity shall have issued an order, decree or ruling or taken any other
action permanently enjoining, restraining or otherwise prohibiting the
Merger and such order, decree, ruling or other action shall have become
final and nonappealable;
(iv) in the event of a breach by the other party of any representation,
warranty, covenant or other agreement contained in this Plan of Merger
which (A) results in the failure of a condition set forth in Section 9.2(a)
or (b) or Section 9.3(a) or (b), as applicable, and (B) cannot be or has
not been cured within 30 days after the giving of written notice to the
breaching party of such breach (a "Material Breach") (provided that the
terminating party is not then in Material Breach of any representation,
warranty, covenant or other agreement contained in this Plan of Merger);
(c) by Advantage Health, if Advantage Health's Board of Directors shall
have (i) determined, in the exercise of its fiduciary duties under applicable
law, not to recommend the Merger to the holders of Advantage Health Shares or
shall have withdrawn such recommendation or (ii) approved, recommended or
endorsed any Alternative Transaction (as defined in Section 7.10) other than
this Plan of Merger or (iii) resolved to do any of the foregoing; or
(d) by either HEALTHSOUTH or Advantage Health, if the condition set forth
in Section 9.1(g)(i) is not satisfied by January 12, 1996.
8.2 Effect of Termination. In the event of termination of this Plan of Merger
as provided in Section 8.1, this Plan of Merger shall forthwith become void and
have no effect, without any liability or obligation on the part of any party,
other than the provisions of Sections 6.2, 8.2 and 8.6, and except to the extent
that such termination results from the willful and material breach by a party of
any of its representations, warranties, covenants or other agreements set forth
in this Plan of Merger.
8.3 Amendment. This Plan of Merger may be amended by the parties at any time
before or after any required approval of matters presented in connection with
the Merger by the holders of Advantage Health Shares; provided, however, that
after any such approval, there shall be made no amendment that pursuant to
Section 251(d) of the DGCL requires further approval by such stockholders
without the further approval of such stockholders. This Plan of Merger may not
be amended except by an instrument in writing signed on behalf of each of the
parties.
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8.4 Extension; Waiver. At any time prior to the Effective Time, the parties
may extend the time for the performance of any of the obligations or other acts
of the other parties. Any party hereto may (a) waive any inaccuracies in the
representations and warranties of the other parties hereto contained in this
Plan of Merger or in any document delivered pursuant to this Plan of Merger or
(b) subject to the proviso of Section 8.3, waive compliance by the other parties
hereto with any of the agreements or conditions contained in this Plan of Merger
or waive or modify any provision hereof for its benefit or for the benefit of
any of its stockholders, optionholders or employees, provided that such waiver
or modification does not adversely affect the rights of the other parties
hereto. Any agreement on the part of a party to any such extension or waiver
shall be valid only if set forth in an instrument in writing signed on behalf of
such party. The failure of any party to this Plan of Merger to assert any of its
rights under this Plan of Merger or otherwise shall not constitute a waiver of
such rights.
8.5 Procedure for Termination, Amendment, Extension or Waiver. A termination
of this Plan of Merger pursuant to Section 8.1, an amendment of this Plan of
Merger pursuant to Section 8.3, or an extension or waiver pursuant to Section
8.4 shall, in order to be effective, require in the case of HEALTHSOUTH, Aladdin
Acquisition Corporation or Advantage Health, action by its Board of Directors or
the duly authorized designee of the Board of Directors.
8.6 Expenses. All costs and expenses incurred in connection with this Plan of
Merger and the transactions contemplated hereby shall be paid by the party
incurring such expense, except that expenses incurred in connection with
printing and mailing the Proxy Statement and the Registration Statement shall be
shared equally by Advantage Health and HEALTHSOUTH. HEALTHSOUTH acknowledges and
agrees that Advantage Health has disclosed that it is obligated and will become
further obligated for fees and expenses incurred by it in connection with the
Merger and the transactions contemplated hereby. It is understood and agreed
that certain of such fees and expenses may be paid by Advantage Health prior to
the execution of this Plan of Merger and prior to or at or following the
Closing, and HEALTHSOUTH agrees to refrain from taking any action which would
prevent or delay the payment of reasonable fees and expenses by Advantage
Health, whether prior to or following the Closing.
8.7 Break-up Fee. (a) If this Plan of Merger is terminated by Advantage
Health pursuant to Section 8.1(c), and within one year after the effective date
of such termination Advantage Health is the subject of a Third Party Acquisition
Event with any Person (as defined in Sections 3(a)(9) and 13(d)(3) of the
Exchange Act) other than HEALTHSOUTH, then at the time of consummation of such a
Third Party Acquisition Event, Advantage Health shall pay to HEALTHSOUTH a
break-up fee of $10,000,000 in immediately available funds, which fee represents
the parties' best estimates of the out-of-pocket costs incurred by HEALTHSOUTH
and the value of management time, overhead, opportunity costs and other
unallocated costs of HEALTHSOUTH incurred by or on behalf of HEALTHSOUTH in
connection with this Plan of Merger. Advantage Health shall not enter into any
agreement with respect to any Third Party Acquisition Event which does not, as a
condition precedent to the consummation of such Third Party Acquisition Event,
require such break-up fee to be paid to HEALTHSOUTH upon such consummation.
(b) As used herein, the term "Third Party Acquisition Event" shall mean
either of the following:
(i) Advantage Health shall enter into a definitive agreement with
respect to any Alternative Transaction (as defined in Section 7.10); or
(ii) Any Person (other than HEALTHSOUTH or a Person who, as of the date
of this Plan of Merger, currently has such beneficial ownership) shall have
acquired beneficial ownership (as such term is defined in Rule 13d-3 under
the Exchange Act) or the right to acquire beneficial ownership of, or a new
group has been formed which beneficially owns or has the right to acquire
beneficial ownership of, 30% of the outstanding Advantage Health Common
Stock.
(c) Advantage Health acknowledges that the provisions for the payment of a
break-up fee and allocation of expenses contained in this Section 8.7 are an
integral part of the transactions contemplated by this Plan of Merger and
that, without these provisions, HEALTHSOUTH would not have entered
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into this Plan of Merger. Accordingly, if a break-up fee shall become due and
payable by Advantage Health, and Advantage Health shall fail to pay such fee
when due pursuant to this Section, and, in order to obtain such payment, suit is
commenced which results in a judgment against Advantage Health therefor,
Advantage Health shall pay HEALTHSOUTH reasonable costs and expenses (including
reasonable attorneys' fees) in connection with such suit, together with interest
computed on any such amounts determined to be due pursuant to this Section
(computed from the date upon which such amounts were due and payable pursuant to
this Section) and such costs (computed from the date incurred) at the prime rate
of interest announced from time to time by NationsBank, N.A. (Carolinas). The
obligations of Advantage Health under this Section 8.7 shall survive any
termination of this Plan of Merger.
SECTION 9. CONDITIONS TO CLOSING.
9.1 Mutual Conditions. The respective obligations of each party to effect the
Merger shall be subject to the satisfaction, at or prior to the Closing Date, of
the following conditions (any of which may be waived in writing by HEALTHSOUTH,
and Advantage Health):
(a) None of HEALTHSOUTH, the Subsidiary or Advantage Health shall be
subject to any order, decree or injunction by a court of competent
jurisdiction which (i) prevents or materially delays the consummation of the
Merger or (ii) would impose any material limitation on the ability of
HEALTHSOUTH effectively to exercise full rights of ownership of the Common
Stock of the Surviving Corporation or any material portion of the assets or
business of Advantage Health, the Advantage Health Subsidiaries and the
Advantage Health Partnerships taken as a whole.
(b) No statute, rule or regulation shall have been enacted by the
government (or any governmental agency) of the United States or any state,
municipality or other political subdivision thereof that makes the
consummation of the Merger and any other transaction contemplated hereby
illegal.
(c) Any waiting period (and any extension thereof) applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated; provided that each party hereto shall take, and be permitted to
take, any action necessary for clearance of the Merger under the HSR Act,
which action shall not constitute a breach of any of the provisions hereof or
the failure of any condition hereunder so long as it does not result in a
material adverse effect on such party.
(d) The Registration Statement shall have been declared effective and no
stop order with respect to the Registration Statement shall be in effect.
(e) The holders of Advantage Health Common Stock shall have approved the
adoption of this Plan of Merger and any other matters submitted to them in
accordance with the provisions of Section 7.3 hereof.
(f) The shares of HEALTHSOUTH Common Stock to be issued in connection with
the Merger shall have been approved for listing on the NYSE and shall have
been issued pursuant to an effective registration statement (which is subject
to no stop order).
(g) The Merger shall qualify for "pooling of interests" accounting
treatment, and HEALTHSOUTH and Advantage Health shall have received letters
to that effect from Ernst & Young, LLP as independent accountants for
HEALTHSOUTH and Advantage Health, respectively, dated (i) not later than
January 12, 1996, (ii) the date of the mailing of the Proxy Statement and
(iii) the Closing Date.
9.2 Conditions to Obligations of HEALTHSOUTH and Aladdin Acquisition
Corporation. The obligations of HEALTHSOUTH and the Subsidiary to consummate the
Merger and the other transactions contemplated hereby shall be subject to the
satisfaction, at or prior to the Closing Date, of the following conditions (any
of which may be waived by HEALTHSOUTH and the Subsidiary):
(a) Each of the agreements of Advantage Health to be performed at or prior
to the Closing Date pursuant to the terms hereof shall have been duly
performed in all material respects, Advantage Health shall have performed, in
all material respects, all of the acts required to be performed by it at or
prior to the Closing Date by the terms hereof.
A-25
<PAGE>
(b) Subject to Section 10.1, the representations and warranties of
Advantage Health set forth in this Plan of Merger that are qualified as to
materiality shall be true and correct, and those that are not so qualified
shall be true and correct in all material respects, as of the date of this
Plan of Merger and as of the Closing Date as though made on and as of the
Closing Date, except to the extent that such representations and warranties
expressly relate to an earlier date (in which case such representations and
warranties that are qualified as to materiality shall be true and correct,
and those that are not so qualified shall be true and correct in all material
respects, on and as of such earlier date).
(c) HEALTHSOUTH and the Subsidiary shall have been furnished with a
certificate, executed by a duly authorized officer of Advantage Health, dated
the Closing Date, certifying in such detail as HEALTHSOUTH and the Subsidiary
may reasonably request as to the fulfillment of the conditions set forth in
the immediately preceding clauses (a) and (b).
(d) HEALTHSOUTH and the Subsidiary shall have obtained, or obtained the
transfer of, any licenses, certificates of need and other regulatory
approvals necessary to allow the Surviving Corporation to operate the
Advantage Health facilities, unless the failure to obtain such transfer or
approval would not have a material adverse effect on Advantage Health.
(e) HEALTHSOUTH shall have received an opinion from Haskell Slaughter Young
& Johnston, Professional Association, to the effect that the merger will
constitute a reorganization within the meaning of Section 368(a) of the Code,
which opinion may be based upon reasonable representations of fact provided
by officers of HEALTHSOUTH, the Subsidiary and Advantage Health.
(f) HEALTHSOUTH shall have received an opinion from Mintz, Levin, Cohn,
Ferris, Glovsky and Popeo, P.C., in form and substance reasonably acceptable
to HEALTHSOUTH as to the due organization, valid existence and good standing
of Advantage Health, its corporate authority, the due authorization of the
execution and delivery of this Plan of Merger, and the valid and binding
nature of this Plan of Merger and the enforceability of this Plan of Merger
in accordance with its terms.
(g) The Employment Agreements between Raymond J. Dunn, III, and Robert E.
Spencer and Advantage Health entered into contemporaneously with the
execution and delivery hereof shall have become effective as of the time of
the Closing.
(h) The Proxy Agreement executed by Raymond J. Dunn, III, in connection
herewith in favor of HEALTHSOUTH shall remain in full force and effect.
9.3 Conditions to Obligations of Advantage Health. The obligations of
Advantage Health to consummate the Merger and the other transactions
contemplated hereby shall be subject to the satisfaction, at or prior to the
Closing Date, of the following conditions (any of which may be waived by
Advantage Health):
(a) Each of the agreements of HEALTHSOUTH and the Subsidiary to be
performed at or prior to the Closing Date pursuant to the terms hereof shall
have been duly performed, in all material respects, and HEALTHSOUTH and the
Subsidiary shall have performed, in all material respects, all of the acts
required to be performed by them at or prior to the Closing Date by the terms
hereof.
(b) Subject to Section 10.1, the representations and warranties of
HEALTHSOUTH and the Subsidiary set forth in this plan of merger that are
qualified as to materiality shall be true and correct, and those that are not
so qualified shall be true and correct in all material respects, as of the
date of this Plan of Merger and as of the Closing Date as though made on and
as of the Closing Date, except to the extent that such representations and
warranties expressly relate to an earlier date (in which case such
representations and warranties that are qualified as to materiality shall be
true and correct, and those that are not so qualified shall be true and
correct in all material respects,
A-26
<PAGE>
on and as of such earlier date); provided, however, that Advantage Health
shall not be deemed to be in breach of any such representations and
warranties by taking any action permitted (or approved by HEALTHSOUTH) under
Section 7.2.
(c) Advantage Health shall have been furnished with a certificate, executed
by duly authorized officers of HEALTHSOUTH and the Subsidiary, dated the
Closing Date, certifying in such detail as Advantage Health may reasonably
request as to the fulfillment of the conditions set forth in the immediately
preceding clauses (a) and (b).
(d) Advantage Health shall have received an opinion from Mintz, Levin,
Cohn, Ferris, Glovsky and Popeo, P.C. to the effect that the Merger will
constitute a reorganization with the meaning of Section 368(a) of the Code,
which opinion may be based upon reasonable representations of fact provided
by officers of HEALTHSOUTH, Advantage Health and the Subsidiary.
(e) Advantage Health shall have received an opinion from Haskell Slaughter
Young & Johnston, Professional Association, in form and substance reasonably
acceptable to Advantage Health, as to the due organization, valid existence
and good standing of HEALTHSOUTH, its corporate authority, the due
authorization of the execution and delivery of this Plan of Merger, and the
valid and binding nature of this Plan of Merger and the enforceability of
this Plan of Merger in accordance with its terms.
SECTION 10. MISCELLANEOUS.
10.1 Representations and Warranties; Nonsurvival. Representations and
warranties by a party hereto shall apply to all entities which such party has
agreed, as of the date hereof, to acquire or to acquire control of, from and
after the respective dates of consummation of such acquisitions occurring as of
or prior to the Effective Time and, further, shall apply to all other entities
which such party shall have acquired or acquired control of or organized after
the date hereof and as of or prior to the Effective Time, from and after the
respective dates of such acquisitions or organization. None of the
representations and warranties in this Plan of Merger or in any instrument
delivered pursuant to this Plan of Merger shall survive the Effective Time.
10.2 Notices. Any communications required or desired to be given hereunder
shall be deemed to have been properly given if sent by hand delivery or by
facsimile and overnight courier to the parties hereto at the following
addresses, or at such other address as either party may advise the other in
writing from time to time:
If to HEALTHSOUTH:
HEALTHSOUTH Corporation
Two Perimeter Park South
Birmingham, Alabama 35243
Attention: Michael D. Martin
Facsimile: (205) 969-4719
with copies to:
William W. Horton, Esq.
HEALTHSOUTH Corporation
Two Perimeter Park South
Birmingham, Alabama 35243
Facsimile: (205) 969-4732
A-27
<PAGE>
and to
J. Brooke Johnston, Jr., Esq.
Haskell Slaughter Young & Johnston,
Professional Association
1200 Amsouth/Harbert Plaza
1901 Sixth Avenue North
Birmingham, Alabama 35203
Facsimile (205) 324-1133
If to Advantage Health:
Advantage Health Corporation
304 Cambridge Road
Woburn, Massachusetts 01801
Attention: Raymond J. Dunn, III
Facsimile: (617) 935-7451
with a copy to:
Richard R. Kelly, Esq.
Douglas A. Zingale, Esq.
Mintz, Levin, Cohn, Ferris
Glovsky and Popeo, P.C.
One Financial Center
Boston, Massachusetts 02110
Facsimile: (617) 542-2241
All such communications shall be deemed to have been delivered on the date of
hand delivery or on the next business day following the deposit of such
communications with the overnight courier.
10.3 Further Assurances. Each party hereby agrees to perform any further acts
and to execute and deliver any documents which may be reasonably necessary to
carry out the provisions of this Plan of Merger.
10.4 Indemnification. Advantage Health, and from and after the Effective Time
HEALTHSOUTH and the Surviving Corporation, shall indemnify, defend and hold
harmless each person who is now, or has been at any time prior to the date of
this Plan of Merger or who becomes prior to the Effective Time, an officer,
director or employee of Advantage Health or any Advantage Health Subsidiary or
Advantage Health Partnership (the "Indemnified Parties") against (i) all losses,
claims, damages, costs, expenses, liabilities or judgments, or amounts that are
paid in settlement with the approval of the indemnifying party (which approval
shall not be unreasonably withheld) of, or in connection with, any claim,
action, suit, proceeding or investigation based in whole or in part on or
arising in whole or in part out of the fact that such person is or was a
director, officer or employee of Advantage Health or any Advantage Health
Subsidiary or Advantage Health Partnership, whether pertaining to any matter
existing or occurring at or prior to, or at or after, the Effective Time
("Indemnified Liabilities") and (ii) all Indemnified Liabilities based in whole
or in part on, or arising in whole or in part out of, or pertaining to this Plan
of Merger, the Merger or any other transactions contemplated hereby or thereby,
in each case to the full extent a corporation is permitted under the DGCL to
indemnify its own directors, officers and employees, as the case may be (and
HEALTHSOUTH and the Surviving Corporation, as the case may be, will pay expenses
in advance of the final disposition of any such action or proceeding to each
Indemnified Party to the full extend permitted by law upon receipt of any
undertaking contemplated by Section 145(e) of the DGCL). Without limiting the
foregoing, in the event any such claim, action, suit, proceeding or
investigation is brought against any Indemnified Party (whether arising before
or after the Effective Time), (i) the Indemnified Parties may retain counsel
satisfactory to them and Advantage Health (or them and HEALTHSOUTH and the
Surviving Corporation after the Effective Time), (ii) Advantage Health (or,
after the Effective Time, HEALTHSOUTH and the Surviving Corporation) shall pay
all reasonable fees and expenses of such counsel for the Indemnified Parties
promptly
A-28
<PAGE>
as statements therefor are received and (iii) Advantage Health (or, after the
Effective Time, HEALTHSOUTH and the Surviving Corporation) will use all
reasonable efforts to assist in the vigorous defense of any such matter,
provided that none of Advantage Health, HEALTHSOUTH or the Surviving Corporation
shall be liable for any settlement of any claim effected without its written
consent, which consent, however, shall not be unreasonably withheld. Any
Indemnified Party wishing to claim, action, suit, proceeding or investigation,
shall notify Advantage Health (or after the Effective Time, HEALTHSOUTH and the
Surviving Corporation) (but the failure so to notify an Indemnifying Party shall
not relieve it from any liability which it may have under this Section 10.4
except to the extent such failure prejudices such party), and shall deliver to
Advantage Health (or after the Effective Time, HEALTHSOUTH and the Surviving
Corporation) the undertaking contemplated by Section 145(e) of the DGCL. The
Indemnified Parties as a group may retain only one law firm to represent them
with respect to such matter unless there is, under applicable standards of
professional conduct, a conflict on any significant issue between the positions
of any two or more Indemnified Parties.
(b) For a period of three years after the Effective Time, HEALTHSOUTH shall
cause to be maintained in effect the current policies of directors' and
officers' liability insurance maintained by Advantage Health (provided that
HEALTHSOUTH may substitute therefor policies of at least the same coverage and
amounts containing terms and conditions which are no less advantageous) with
respect to claims arising from facts or events which occurred at or prior to the
Effective Time, to the extent such liability insurance can be maintained at an
annual cost not greater than 200% of Advantage Health's 1995 annual premium for
its directors' and officers' liability insurance; provided, however, if
HEALTHSOUTH is unable to maintain or obtain the insurance called for by this
Section 10.4(b) at such annual cost, then HEALTHSOUTH shall obtain as much
comparable insurance as is available at such annual cost.
(c) The provisions of this Section 10.4 are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party and his or her heirs and
representatives.
10.5 Governing Law. This Plan of Merger shall be interpreted, construed and
enforced in accordance with the laws of the State of Delaware, applied without
giving effect to any conflicts-of-law principles.
10.6 "Including". The word "including", when following any general statement,
term or matter, shall not be construed to limit such statement, term or matter
to the specific terms or matters as provided immediately following the word
"including" or to similar items or matters, whether or not non-limiting language
(such as "without limitation", "but not limited to", or words of similar import)
is used with reference to the word "including" or the similar items or matters,
but rather shall be deemed to refer to all other items or matters that could
reasonably fall within the broadest possible scope of the general statement,
term or matter.
10.7 "Knowledge". "To the knowledge", "to the best knowledge", or any similar
phrase shall be deemed to refer to the actual knowledge of the Chairman of the
Board, Chief Executive Officer or Chief Financial Officer of a party.
10.8 "Material adverse change" or "material adverse effect". "Material
adverse change" or "material adverse effect" means, when used in connection with
Advantage Health, HEALTHSOUTH, or the Surviving Corporation, any change, effect,
event or occurrence that has, individually or in the aggregate, a material
adverse impact on the business or financial position of such party and its
subsidiaries taken as a whole; provided, however, that "material adverse change"
and "material adverse effect" shall be deemed to exclude the impact of (i)
changes in generally accepted accounting principles, (ii) any changes resulting
from any restructuring or other similar charges or write-offs taken by Advantage
Health with the consent of HEALTHSOUTH, (iii) any continuation of any existing
unfavorable business or financial trend without a material worsening thereof and
(iv) the termination or failure to be consummated or completed of any
acquisition, joint venture, development project or other transaction which had
not been consummated or completed prior to the date of this Plan of Merger;
provided, however, that no such changes or write-offs will be taken if such
would adversely affect pooling-of-interests accounting treatment for the Merger.
Notwithstanding the foregoing, "material adverse change" or "material ad-
A-29
<PAGE>
verse effect" shall not mean, with respect to Advantage Health, any
reclassification of long-term indebtedness to short-term indebtedness solely by
reason of Advantage Health's execution, delivery and performance of its
obligations under this Plan of Merger.
10.9 "Hazardous Materials". The term "Hazardous Materials" means any material
which has been determined by any applicable governmental authority to be harmful
to the health or safety of human or animal life or vegetation, regardless of
whether such material is found on or below the surface of the ground, in any
surface or underground water, airborne in ambient air or in the air inside any
structure built or located upon or below the surface of the ground or in
building materials or in improvements of any structures, or in any personal
property located or used in any such structure, including, but not limited to,
all hazardous substances, imminently hazardous substances, hazardous wastes,
toxic substances, infectious wastes, pollutants and contaminants from time to
time defined, listed, identified, designated or classified as such under any
Environmental Laws (as defined in Section 10.10) regardless of the quantity of
any such material.
10.10 Environmental Laws. The term "Environmental Laws" means any federal,
state or local statute, regulation, rule or ordinance, and any judicial or
administrative interpretation thereof, regulating the use, generation, handling,
storage, transportation, discharge, emission, spillage or other release of
Hazardous Materials or relating to the protection of the environment.
10.11 Captions. The captions or headings in this Plan of Merger are made for
convenience and general reference only and shall not be construed to describe,
define or limit the scope or intent of the provisions of this Plan of Merger.
10.12 Integration of Exhibits. All Exhibits attached to this Plan of Merger
are integral parts of this Plan of Merger as if fully set forth herein, and all
statements appearing therein shall be deemed disclosed for all purposes and not
only in connection with the specific representation in which they are explicitly
referenced.
10.13 Entire Agreement. This instrument, including all Exhibits attached
hereto, and the Confidentiality Agreements contain the entire agreement of the
parties and supersede any and all prior or contemporaneous agreements between
the parties, written or oral, with respect to the transactions contemplated
hereby. This Plan of Merger may not be changed or terminated orally, but may
only be changed by an agreement in writing signed by the party or parties
against whom enforcement of any waiver, change, modification, extension,
discharge or termination is sought.
10.14 Counterparts. This Plan of Merger may be executed in several
counterparts, each of which, when so executed, shall be deemed to be an
original, and such counterparts shall, together, constitute and be one and the
same instrument.
10.15 Binding Effect. This Plan of Merger shall be binding on, and shall
inure to the benefit of, the parties hereto, and their respective successors and
assigns, and nothing in this Plan of Merger, express or implied (other than the
provisions of Sections 2.1(e), 7.16, 7.18, 8.6 and 10.4, which provisions are
intended to benefit and may be enforced by the beneficiaries thereof), is
intended to or shall confer upon any person any right, benefit or remedy of
nature whatsoever under or by virtue of this Plan of Merger. No party may assign
any right or obligation hereunder without the prior written consent of the other
parties.
10.16 No Rule of Construction. The parties acknowledge that this Plan of
Merger was initially prepared by Advantage Health, and that all parties have
read and negotiated the language used in this Plan of Merger. The parties agree
that, because all parties participated in negotiating and drafting this Plan of
Merger, no rule of construction shall apply to this Plan of Merger which
construes ambiguous language in favor of or against any party by reason of that
party's role in drafting this Plan of Merger.
A-30
<PAGE>
IN WITNESS WHEREOF, HEALTHSOUTH, the Subsidiary and Advantage Health have
caused this Agreement and Plan of Merger to be executed by their respective duly
authorized officers, and have caused their respective corporate seals to be
hereunto affixed, all as of the day and year first above written.
ADVANTAGE HEALTH CORPORATION
By: /s/ RAYMOND J. DUNN, III
---------------------------------------------
Raymond J. Dunn, III
Chariman of the Board, President
and Chief Executive Officer
ATTEST:
/s/ ROBERT E. SPENCER
- --------------------------------------------
Robert E. Spencer
Secretary
[CORPORATE SEAL]
HEALTHSOUTH CORPORATION
By: /s/ MICHAEL D. MARTIN
--------------------------------------------
Michael D. Martin
Senior Vice President
ATTEST:
/s/ ANTHONY J. TANNER
- --------------------------------------------
Anthony J. Tanner
Secretary
[CORPORATE SEAL]
ALADDIN ACQUISITION CORPORATION
By: /s/ WILLIAM W. HORTON
--------------------------------------------
William W. Horton
Vice President
ATTEST:
/s/ ANTHONY J. TANNER
- --------------------------------------------
Anthony J. Tanner
Secretary
[CORPORATE SEAL]
A-31
<PAGE>
ANNEX B
February 12, 1996
Board of Directors
Advantage Health Corporation
304 Cambridge Road
Woburn, MA 01801
Dear Sirs:
Advantage Health Corporation ("Advantage Health"), HEALTHSOUTH Corporation
("HEALTHSOUTH") and Aladdin Acquisition Corporation, a wholly owned subsidiary
of HEALTHSOUTH ("Subsidiary") have entered into a Plan and Agreement of Merger
dated as of December 16, 1995 (the "Agreement"). Pursuant to the Agreement,
Subsidiary shall be merged with and into Advantage Health in a transaction (the
"Merger") in which each outstanding share of common stock, par value $.01 per
share, of Advantage Health ("Advantage Health Common Stock") will be converted
into the right to receive shares of common stock, par value $.01 per share, of
HEALTHSOUTH ("HEALTHSOUTH Common Stock"). As set forth more fully in the
Agreement, each issued and outstanding share of Advantage Health Common Stock
shall be converted into the right to receive that number of shares of
HEALTHSOUTH Common Stock determined by dividing $47.50 by the average daily
closing price for the shares of HEALTHSOUTH Common Stock for the twenty
consecutive trading days on which the shares are actually traded ending at the
close of trading on the second trading day immediately preceding the Special
Meeting of Advantage Health Shareholders (the "Base Period Trading Price")
computed to four decimal places (the "Exchange Ratio"); provided, however, that
if the Base Period Trading Price shall be greater than $34.50, the Exchange
Ratio shall be 1.3768; and provided further however, that if the Base Period
Trading Price shall be less than $28.50, the Exchange Ratio shall be 1.6667. You
have requested our opinion regarding the fairness, from a financial point of
view, of the consideration to be received by the holders of Advantage Health
Common Stock pursuant to the Agreement.
Alex. Brown & Sons Incorporated, as a customary part of its investment
banking business, is engaged in the valuation of businesses and their securities
in connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of securities, private placements and valuations for corporate and
other purposes. We have served as financial advisor to Advantage Health
Corporation in connection with the Merger and will receive a fee for our
services, a significant portion of which is contingent upon consummation of the
Merger. We have served as financial advisor and have provided financing services
to Advantage Health, including lead-managing its initial public offering, and
received customary fees for such services. In the past, we have also provided
financing services to HEALTHSOUTH and received customary fees for such services.
We regularly publish research reports regarding the healthcare industry and the
business and securities of publicly traded companies in that industry, including
Advantage Health and HEALTHSOUTH. We also make a market in the Advantage Health
Common Stock and the HEALTHSOUTH Common Stock. In the ordinary course of our
trading and brokerage activities, we may from time to time, hold long or short
positions, may trade or may otherwise effect transactions, for our own account
or for the account of our customers, in securities of Advantage Health or
HEALTHSOUTH. We also have an indirect beneficial ownership interest in Advantage
Health Common Stock of less than 1% of the outstanding Advantage Health Common
Stock.
B-1
<PAGE>
In connection with this opinion, we have reviewed the Agreement and certain
publicly available financial information concerning Advantage Health and
HEALTHSOUTH. We have reviewed certain internal financial analyses of Advantage
Health and HEALTHSOUTH made available to us by their respective managements and
have held discussions with members of the senior management of Advantage Health
and HEALTHSOUTH regarding the business and prospects of their respective
companies as independent entities and the joint prospects for a combined
company. In addition, we have (i) reviewed the reported price and trading
activity for the Advantage Health Common Stock and the HEALTHSOUTH Common Stock,
(ii) compared certain financial and stock market information for Advantage
Health and HEALTHSOUTH with similar information for certain publicly traded
companies, (iii) reviewed the financial terms of certain recent business
combinations and (iv) performed such other studies and analyses and taken into
account such other matters as we deemed necessary.
We have assumed and relied upon, without independent verification, the
accuracy and completeness of the information reviewed by us for purposes of this
opinion. With respect to the financial projections used in our analyses, we have
assumed, with your consent, that they have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the senior
management of Advantage Health and HEALTHSOUTH as to the likely future
performance of their respective companies. We have also assumed, with your
consent, that the Merger will qualify for pooling-of-interests accounting
treatment and that the holders of Advantage Health Common Stock will not be
subject to U.S. federal income tax as a result of the Merger. In addition, we
have not made an independent valuation or appraisal of the assets of Advantage
Health or HEALTHSOUTH, nor have we been furnished with any such valuation or
appraisal. Our opinion is based on market, economic, financial and other
conditions as they exist and can be evaluated as of the date of this letter.
It is understood that this letter is for the benefit and use of the Board of
Directors of Advantage Health only and may not be used for any other purpose
without our prior written consent, provided, however, that we hereby consent to
the inclusion of this opinion as an exhibit to any proxy statement or
registration statement distributed in connection with the Merger.
Based on the analysis described above and subject to the foregoing
limitations and qualifications, it is our opinion that, as of the date of this
letter, the consideration to be received by the holders of Advantage Health
Common Stock pursuant to the Agreement is fair from a financial point of view to
such stockholders.
Very truly yours,
ALEX. BROWN & SONS INCORPORATED
B-2
<PAGE>
ANNEX C
HARMARVILLE REHABILITATION CENTER, INC. AND SUBSIDIARIES
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1995 AND 1994
CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Auditors......................... C-2
Audited Consolidated Financial Statements
Consolidated Balance Sheets........................... C-3
Consolidated Statements of Revenues and Expenses...... C-4
Consolidated Statements of Changes in Fund Balances... C-5
Consolidated Statements of Cash Flows--General Fund... C-6
Notes to Consolidated Financial Statements............ C-7
</TABLE>
C-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Trustees
Harmarville Rehabilitation Center, Inc.
and Subsidiaries
Pittsburgh, Pennsylvania
We have audited the accompanying consolidated balance sheets of Harmarville
Rehabilitation Center, Inc. (the Center) and subsidiaries as of June 30, 1995
and 1994, and the related consolidated statements of revenues and expenses,
changes in fund balances, and cash flows--general fund for the years then ended.
These financial statements are the responsibility of the Center's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Harmarville Rehabilitation Center, Inc. and subsidiaries as of June 30, 1995 and
1994, and the consolidated results of their operations and their cash
flows--general fund for the years then ended in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
August 25, 1995
C-2
<PAGE>
HARMARVILLE REHABILITATION CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30 SEPTEMBER 30
------------------------
1995 1994 1995
----- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Assets
Current assets:
Cash and short-term investments.............................................. $ 1,245,069 $ 2,156,882 $ 2,715,487
Patient accounts receivable, less allowance for doubtful accounts (September
30, 1995--$321,000; June 30, 1995 and 1994--$325,000 and $265,000
respectively)............................................................... 7,310,348 4,979,911 6,774,820
Other receivables............................................................ 1,069,061 1,157,063 1,152,554
Prepaid insurance............................................................ 130,268 178,524 74,894
Prepaid pension.............................................................. 144,015 186,131 67,340
Other prepaid expenses....................................................... 464,452 309,728 386,109
Inventories.................................................................. 359,489 299,735 338,052
Funds held by bond trustee to pay accrued interest and current portion of
debt obligations............................................................ -- 942,858 --
------------- ------------- ---------------
Total current assets.......................................................... 10,722,702 10,210,832 11,509,256
Other assets:
Funds held by bond trustee, less current portion............................. -- 2,040,620 --
Board-designated funds--marketable securities:
Depreciation reserve account................................................ 424,100 396,439 431,508
Hospital funded depreciation................................................ 1,155,730 1,828,055 1,773,074
Investments in joint ventures................................................ 845,501 702,016 765,505
Professional liability self-insurance trust fund............................. 1,337,134 1,234,885 1,334,744
Workers' compensation self-insurance trust fund.............................. 167,053 158,604 169,271
Deferred debt issuance cost.................................................. 195,588 304,839 191,362
Fixed interest and money market investments.................................. 8,699,644 6,928,885 8,082,705
Preferred and common stock investments....................................... 5,340,628 6,347,815 6,392,264
Pledges receivable--restricted by donors..................................... 6,019 27,091 3,917
------------- ------------- ---------------
Total other assets............................................................ 18,171,397 19,969,249 19,144,350
Properties:
Land and land improvements................................................... 1,528,953 1,438,297 1,415,870
Buildings and leasehold improvements......................................... 26,945,803 25,373,492 24,404,333
Equipment.................................................................... 14,243,027 13,695,392 14,230,058
Construction in progress..................................................... 44,851 268,832 47,086
------------- ------------- ---------------
42,762,634 40,776,013 40,097,347
Less allowance for depreciation.............................................. 26,422,909 24,558,283 25,531,691
------------- ------------- ---------------
Total properties.............................................................. 16,339,725 16,217,730 14,565,656
------------- ------------- ---------------
Total assets.................................................................. $45,233,824 $46,397,811 $45,219,262
============= ============= ===============
Liabilities and fund balances Current liabilities:
Trade accounts payable....................................................... $ 1,569,609 $ 1,465,424 $ 1,646,202
Accrued payroll.............................................................. 1,024,289 865,073 683,326
Accrued vacation and holiday benefits........................................ 983,270 889,862 1,000,427
Accrued interest payable..................................................... 32,389 502,858 43,249
Current financing arrangement with third party payor......................... 420,325 420,325 420,325
Deferred grant income........................................................ 9,550 11,561 --
Current portion of long-term debt............................................ 579,210 546,082 627,210
------------- ------------- ---------------
Total current liabilities..................................................... 4,618,642 4,701,185 4,420,739
Long-term liabilities:
Debt, excluding amounts due within one year:
1994 refunding bonds........................................................ 8,000,000 -- 8,000,000
Term loan................................................................... 1,380,000 -- 1,222,000
1986 Series A and B refunding bonds......................................... -- 9,430,000 --
1983 Series A refunding bonds............................................... -- 2,745,000 --
Equipment lease............................................................. 7,865 15,731 5,899
------------- ------------- ---------------
Total debt................................................................... 9,387,865 12,190,731 9,227,899
Other liabilities............................................................ 4,050 4,430 4,050
Deferred third party liability debt refinancing.............................. 700,000 1,097,532 684,523
Accrued self-insurance claims................................................ 340,000 310,000 340,000
------------- ------------- ---------------
Total liabilities............................................................. 15,050,557 18,303,878 14,677,211
Fund balances:
General...................................................................... 28,708,997 26,810,840 29,068,013
Restricted................................................................... 1,474,270 1,283,093 1,474,038
------------- ------------- ---------------
Total fund balances.......................................................... 30,183,267 28,093,933 30,542,051
------------- ------------- ---------------
Total liabilities and fund balances ......................................... $45,233,824 $46,397,811 $45,219,262
============= ============= ===============
</TABLE>
See accompanying consolidated notes.
C-3
<PAGE>
HARMARVILLE REHABILITATION CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REVENUES AND EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30 SEPTEMBER 30
------------------------- ----------------------
1995 1994 1995 1994
---- ----- ----- -----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues from patient services.......... $40,006,112 $36,785,829 $10,066,681 $9,528,750
Other operating revenues:
Contributions.............................. 315,994 88,063 7,315 49,734
Investment income.......................... 1,100,016 1,228,591 564,361 223,338
Grants..................................... 78,021 267,246 14,164 18,844
Contractual services....................... 327,372 403,388 113,244 75,500
Equity losses of joint ventures............ (364,536) (260,908) (79,996) (93,040)
Other...................................... 249,158 212,999 73,657 66,586
------------- ------------- ------------- -------------
Total revenues and contributions............ 41,712,137 38,725,208 10,759,426 9,869,712
Operating expenses:
Salaries and wages......................... 22,728,369 21,276,399 5,804,063 5,541,117
Fringe benefits............................ 4,812,768 4,202,130 1,229,491 1,091,761
Supplies and other......................... 4,122,800 3,694,960 1,021,279 923,923
Purchased services......................... 4,805,819 4,233,890 1,434,688 1,117,033
Utilities.................................. 776,341 854,015 211,179 203,699
Insurance.................................. 240,680 241,588 59,079 67,259
Interest................................... 612,135 1,054,271 120,262 222,134
Depreciation and amortization.............. 2,125,718 1,962,572 482,260 492,503
Provision for uncollectible accounts....... 202,955 312,967 45,812 49,236
------------- ------------- ------------- -------------
Total expenses.............................. 40,427,585 37,832,792 10,408,113 9,708,665
------------- ------------- ------------- -------------
Net operating income including
contributions.............................. 1,284,552 892,416 351,313 161,047
Nonoperating gains:
Gain on sale of WCS investment............. 232,626 -- -- --
Gain on sale of AHEL investment............ -- 499,995 -- --
------------- ------------- ------------- -------------
Excess of revenues and gains over expenses. $ 1,517,178 $ 1,392,411 $ 351,313 $ 161,047
============= ============= ============= =============
</TABLE>
See accompanying consolidated notes.
C-4
<PAGE>
HARMARVILLE REHABILITATION CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN FUND BALANCES
<TABLE>
<CAPTION>
GENERAL RESTRICTED
FUND FUND
------------- ------------
<S> <C> <C>
Fund balances at June 30, 1993.................... $24,503,520 $1,055,686
Add (deduct):
Excess of revenues and gains over expenses...... 1,392,411 --
Restricted contributions........................ -- 785,609
Investment income............................... -- 45,390
Restricted fund expenses........................ -- (54,176)
Grants for capital projects..................... 365,493 --
Transfer from restricted fund................... 549,416 (549,416)
------------- ------------
Fund balances at June 30, 1994.................... 26,810,840 1,283,093
Add (deduct):
Excess of revenues and gains over expenses...... 1,517,178 --
Restricted contributions........................ -- 499,810
Investment income............................... -- 60,185
Restricted fund expenses........................ -- (31,954)
Grants for capital projects..................... 44,115 --
Transfer from restricted fund................... 336,864 (336,864)
------------- ------------
Fund balances at June 30, 1995.................... 28,708,997 1,474,270
(Unaudited)
Add (deduct):
Excess of revenues and gains over expenses for
the three months ended September 30, 1995...... 351,313 --
Restricted contributions........................ -- 52,690
Investment income............................... -- 38,130
Restricted fund expenses........................ -- (85,540)
Grants for capital projects..................... 2,191 --
Transfer from restricted fund................... 5,512 (5,512)
------------- ------------
Fund balances at September 30, 1995............... $29,068,013 $1,474,038
============= ============
</TABLE>
See accompanying consolidated notes.
C-5
<PAGE>
HARMARVILLE REHABILITATION CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--GENERAL FUND
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------- --------------------------
1995 1994 1995 1994
---- ----- ----- -----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Operating activities and nonoperating gains
Excess of revenues and gains over expenses............ $ 1,517,178 $ 1,392,411 $ 351,313 $ 161,047
Adjustments to reconcile excess of revenues and gains
over expenses to net cash provided by operating
activities and nonoperating gains:
Depreciation and amortization....................... 2,125,718 1,962,572 482,260 492,503
Equity losses of joint ventures..................... 364,536 260,908 79,996 93,040
Loss (gain) on disposal of properties............... 501 (138) 95,395 --
Amortization of deferred third party liability...... (397,532) (86,299) (15,477) (316,034)
Change in patient accounts receivable............... (2,330,437) (80,682) 535,528 (303,076)
Change in other assets.............................. (36,104) (419,776) 150,438 558,573
Change in trade accounts payable.................... 104,185 (319,063) 76,593 258,576
Change in other liabilities......................... (190,236) 188,587 (322,496) (529,859)
-------------- ------------- ------------ --------------
Net cash provided by operating activities and
nonoperating gains................................... 1,157,809 2,898,520 1,433,550 414,770
Investing activities
Purchase of properties................................ (1,929,952) (1,754,293) (75,258) (931,692)
Proceeds from sale of properties...................... -- -- 1,275,898 --
Investment in joint venture........................... (508,021) (225,000) -- --
Net change in Board-designated and bond trustee
funds................................................ 3,628,142 (1,249,960) (624,752) 3,296,087
Net purchases of investments.......................... (551,323) (633,913) (434,929) (55,808)
-------------- ------------- ------------ --------------
Net cash provided (used) by investing activities ..... 638,846 (3,863,166) 140,959 2,308,587
Financing activities
Transfers from restricted funds....................... 336,864 549,416 5,512 3,415
Proceeds from 1994 refunding bonds and term loan ..... 10,295,000 -- -- 10,295,000
Principal payments on debt............................ (13,064,738) (551,881) (111,966) (12,654,295)
Increase in debt issuance costs....................... (209,011) -- -- (209,011)
(Increase) decrease in professional liability and
workers' compensation self-insurance trust funds..... (110,698) 15,336 172 (2,806)
Grants for capital projects........................... 44,115 365,493 2,191 54,540
-------------- ------------- ------------ --------------
Net cash (used) provided by financing activities .... (2,708,468) 378,364 (104,091) (2,513,157)
-------------- ------------- ------------ --------------
(Decrease) increase in cash and short-term
investments.......................................... (911,813) (586,282) 1,470,418 210,200
Cash and short-term investments at beginning of year . 2,156,882 2,743,164 1,245,069 2,156,882
-------------- ------------- ------------ --------------
Cash and short-term investments at end of year ....... $ 1,245,069 $ 2,156,882 $2,715,487 $ 2,367,082
============== ============= ============ ==============
</TABLE>
See accompanying consolidated notes.
C-6
<PAGE>
HARMARVILLE REHABILITATION CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1994, AUDITED
SEPTEMBER 30, 1995 AND 1994, UNAUDITED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The consolidated financial statements include the accounts of Harmarville
Rehabilitation Center, Inc. (the Center) and its subsidiaries: Harmarville
Foundation, Inc. and HRC Services, Inc. and its subsidiaries. The Center, which
operates a comprehensive rehabilitation facility, and Harmarville Foundation,
Inc., a fundraising support entity of the Center, are not-for-profit
Pennsylvania corporations as described in Section 501(c)(3) of the Internal
Revenue Code and are exempt from federal income taxes on related income pursuant
to Section 501(a) of the Code. HRC Services, Inc. is a for-profit corporation.
All material intercompany balances and transactions have been eliminated in
consolidation.
STATEMENTS OF REVENUES AND EXPENSES
Transactions deemed by management to be ongoing, major, or central to the
provision of health care services are reported as revenues and expenses.
Peripheral or incidental transactions are reported as gains and losses.
CHARITY CARE
The Center provides care to patients who meet certain criteria under its
charity care policy without charge or at amounts less than its established
rates. Because the Center does not pursue collection of amounts determined to
qualify as charity care, they are not reported as revenue.
NET REVENUE FROM PATIENT SERVICES
Net revenue from patient services is derived from patients who reside
primarily in the Center's geographical area. The majority, approximately 75% and
78% for the three months ended September 30, 1995 and 1994, and 77% and 78% for
the years ended June 30, 1995 and 1994, of the Center's services are rendered to
patients under Blue Cross, Medicare, and Medicaid programs. Reimbursement under
these programs is based on either allowable costs incurred, subject to certain
limitations imposed by the third party payors, or specific per diem rates
established by the third party payor. The final determination of amounts
reimbursed under these programs is subject to audit and retroactive adjustments
by the payors. Retroactive adjustments are accrued on an estimated basis in the
period related services are rendered and adjusted in future periods as
settlements are determined. These adjustments had the effect of increasing the
excess of revenues and gains over expenses by $300,000 for the year ended June
30, 1995 and were not significant for the three months ended September 30, 1995
and 1994 and for the year ended June 30, 1994.
At September 30, 1995, third party audits have not been finalized by Medicare
for the years 1994 through 1996, by Blue Cross for the years 1993 through 1994,
and by Medicaid for the years 1993 through 1996. The estimated amounts for
retroactive adjustments under the third party agreements aggregated $695,827,
$1,016,062, and $249,146 at September 30, 1995, June 30, 1995 and June 30, 1994,
respectively, and are included in patient accounts receivable.
Significant concentrations of net patient receivables at September 30, 1995,
June 30, 1995, and June 30, 1994, respectively, include the following: Medicare,
31%, 26%, and 28%; Medicaid, 9%, 10%, and 10%; and Blue Cross, excluding the
current financing advance, 13%, 17%, and 18%.
C-7
<PAGE>
HARMARVILLE REHABILITATION CENTER, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND SHORT-TERM INVESTMENTS
Cash and short-term investments consist of demand deposit accounts,
short-term investment fund and commercial paper instruments that are maintained
at the same financial institution.
MARKETABLE SECURITIES AND RELATED INVESTMENT INCOME
Marketable securities are carried at the lower of aggregate cost or market at
the balance sheet date. Marketable securities are adjusted for impairments in
value that are deemed to be other than temporary. Gains or losses on sales of
securities are computed on a specific security basis.
INVENTORIES
Inventory of food, supplies, drugs, publications, etc. is stated at the lower
of cost or market. Cost is determined by the first-in, first-out method.
BOARD-DESIGNATED FUNDED DEPRECIATION
The Board of Trustees has authorized the Center to fund depreciation. Funds
available in the funded depreciation account may be used to acquire capital
assets, to make mortgage or similar payments, including principal payments on
the long-term debt obligations, and for advances or loans for the general
operations of the Center.
DONOR-RESTRICTED FUNDS
Donor-restricted funds are used to differentiate resources, the use of which
is restricted by donors or grantors, from resources of general funds on which
donors or grantors place no restriction or that arise as a result of the
operations of the Center for its stated purposes. Restricted gifts and other
restricted resources are recorded in the restricted fund balance.
INVESTMENTS IN JOINT VENTURES
The Center's investments in 50% or less owned joint ventures are reported on
the equity method of accounting.
PROFESSIONAL LIABILITY SELF-INSURANCE
A trust was created for the purpose of paying medical malpractice claims up
to $200,000 per incident and $1,000,000 in aggregate. The Center has excess
coverage with the Medical Malpractice Liability Catastrophe Loss Fund of the
Commonwealth of Pennsylvania in the amount of $1,000,000 per incident and
$3,000,000 in aggregate. Additionally, the Center has umbrella coverage in the
amount of $5,000,000 per incident and $5,000,000 in aggregate. Provisions for
professional liability claims are provided based on the nature of the claims and
historical experience in settling such matters, and include an estimate for
incurred but not reported claims.
An irrevocable bank trusteed fund has been established and is being funded in
accordance with regulations of the Pennsylvania Insurance Department. The
self-insurance trust fund is used solely for the purpose of paying claims and
expenses which arise from the self-insured risk. If the self-insurance program
is terminated, funds on deposit in the self-insurance trust will be maintained
in the account as required by the Pennsylvania Insurance Department.
C-8
<PAGE>
HARMARVILLE REHABILITATION CENTER, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
HEALTH INSURANCE
The Center is self-insured for a portion of the health insurance coverage for
the majority of its employees. The Center has an excess coverage policy in the
amount of $150,000 per individual and $1,500,000 in the aggregate. The Center
makes monthly deposits to a claims administrator based upon prior months'
claims. Provisions are made based on the nature of the claim and historical
experience and include an estimate for incurred but not reported losses. As of
June 30, 1995 and 1994, the Center has a receivable (included in Other
Receivables) of approximately $208,000 and $576,000, respectively, relating to
excess net deposits. As of September 30, 1995, there was no receivable relating
to excess net deposits.
DEBT ISSUANCE COSTS
Debt issuance costs are being amortized over the life of the debt based on
the balance outstanding of the respective debt obligation.
PROPERTIES
Properties are stated at cost. Depreciation and amortization of properties
are provided for on the straight-line method over the estimated useful lives of
such properties.
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Center will adopt Statement 121
in its fiscal year ended June 30, 1997 and, based on current circumstances, does
not believe the effect of adoption will be material.
DEFERRED THIRD PARTY LIABILITY
Deferred third party liability arises from the timing difference in reporting
the net gain on debt refinancing for financial statement purposes and for third
party reimbursement purposes. For financial statement purposes, the gain on debt
refinancing was recognized when the refinancing occurred; for reimbursement
purposes, such gain is being amortized.
INTERIM FINANCIAL STATEMENTS
The consolidated balance sheet at September 30, 1995, the consolidated
statements of revenues and expenses and the consolidated statements of cash
flows--general fund for the three months ended September 30, 1995 and 1994 and
the consolidated statement of changes in fund balances for the three months
ended September 30, 1995 are unaudited, but in the opinion of Center management
include all adjustments (consisting of normal recurring adjustments) necessary
for a fair presentation of results for those interim periods. The results of
operations for the three months ended September 30, 1995 are not necessarily
indicative of results to be expected for the entire year.
C-9
<PAGE>
HARMARVILLE REHABILITATION CENTER, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
2. CHARITY CARE
The Center maintains records to identify and monitor the level of charity
care it provides. These records include the amount of charges foregone for
services furnished under its charity care policy because the Center recognizes
that some patients treated in its facilities will not be able to pay for the
services they receive. During the three months ended September 30, 1995 and 1994
and the years ended June 30, 1995 and 1994, the Center provided charity care,
measured at established rates, of approximately $24,000, $67,000, $216,000 and
$298,000, respectively.
In addition, management estimates that the reimbursement for the care it
provides for patients covered under governmental third party payor arrangements
(Medical Assistance) is less than its cost of providing these services. This
loss on the provision of services to these patients was approximately $115,000,
$86,000, $346,000 and $523,000 for the three months ended September 30, 1995 and
1994 and for the years ended June 30, 1995 and 1994, respectively.
3. INVESTMENTS
Marketable equity securities consist of the following:
<TABLE>
<CAPTION>
JUNE 30 SEPTEMBER 30
---------------------------------------------------- --------------------------
1995 1994 1995
----------------------------------------------------- -------------------------
COST MARKET COST MARKET COST MARKET
------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Preferred and common
stock investments ... $5,340,628 $5,966,045 $6,347,815 $6,793,293 $6,392,264 $7,055,261
</TABLE>
The funds held by bond trustee, Board-designated funds, fixed interest and
money market investments, professional liability self-insurance trust fund, and
workers' compensation self insurance trust fund consist of cash and cash
equivalents, U.S. Government bonds and notes, corporate obligations and a
short-term bond fund. These investments are carried at cost which approximates
market. Investment income includes net gains (losses) on sales of investments of
$356,929, $(4,785), $72,623, and $343,921 for the three months ended September
30, 1995 and 1994 and for the years ended June 30, 1995 and 1994, respectively.
The Foundation receives donor-restricted contributions for the purchase of
equipment and other specific purposes. The funds are invested until such time as
expenditures are incurred in compliance with the specific restrictions. At
September 30, 1995 and June 30, 1995 and 1994, investments carried in other
assets include $1,470,121, $1,468,251, and $1,256,002, respectively, of
donor-restricted contributions.
The gross unrealized gains and losses on marketable equity securities,
including restricted funds, amounted to approximately $878,000 and $98,000 at
September 30, 1995 and $708,000 and $82,000 at June 30, 1995.
During 1995, the Center received and recorded a gain of $232,626 on the sale
of its investment in Workcare Solutions (WCS). During 1994, the Center received
and recorded a gain of $499,995 for its remaining interest in American Health
Enterprises, Inc. (AHEL).
C-10
<PAGE>
HARMARVILLE REHABILITATION CENTER, INC. AND SUBSIDIARIES -
Notes to Consolidated Financial Statements (Continued)
4. LONG-TERM OBLIGATIONS
In fiscal 1995, the Center advance refunded its 1986 Series A and B Bonds and
the 1983 Series A Revenue Refunding Bonds in the amount of $12,175,000 plus
accrued interest. Funds for the advanced refunding were obtained through the
issuance of $8,000,000 of Variable Rate Hospital Revenue Refunding Bonds Series
1994 (1994 Bonds), the proceeds of a bank term loan and other available funds.
The 1994 Bonds mature periodically from July 1, 1998 to July 1, 2007 in
amounts ranging from $115,000 to $1,040,000 and bear interest at variable rates
of interest based on interest rate modes established by the Center and for which
the bonds were marketed or remarketed. The weighted average interest rate of the
1994 Bonds was 4.25% at June 30, 1995. The 1994 Bonds are subject to remarketing
agreements which provide that the bondholder may present the bonds, excluding
bonds in the flexible and fixed modes (as defined in the Indenture), to a
remarketing agent for redemption. Pursuant to the redemption requirements under
the 1994 Bonds, the Center is required to maintain an open letter of credit in
the amount of $8,131,507 to enable the Tender Agent to purchase the bonds placed
for redemption by the 1994 bondholder. The letter of credit's stated expiration
date is September 15, 1999. The commitment fee for the letter of credit is .625%
on the average daily letter of credit amount and is payable quarterly.
Loss on the defeasance of the bonds amounted to $297,000 and is recorded net
of third party reimbursement of an equal amount. The third party reimbursement
includes adjustment of prior deferred amounts resulting from changes in
reimbursement, which became effective for a third party payor on July 1, 1994.
To secure its obligations under the Loan Agreement (Agreement) with the
Authority that issued the 1994 Bonds, the Center has granted to the Authority a
lien and security interest in the Center's gross revenues, as defined in the
Agreement. The Agreement includes certain covenants as to the payment of taxes
and assessments, the maintenance of specified levels of insurance coverage, and
a debt service coverage ratio, and limits the ability of the Center to incur
additional indebtedness and sell Center assets, as defined in the Agreement.
Principal payments on the outstanding balance of the term loan payable to
bank are due in quarterly principal installments commencing July 1, 1995 in
amounts ranging from $110,000 to $166,000. The loan bears interest at a variable
rate of either the prime rate or LIBOR plus .625%, selected at the option of the
Center. The interest rate at September 30, 1995 and June 30, 1995 was 6.5% and
6.56% respectively.
The term loan is secured by a lien and security interest in the Center's
gross revenues on a parity basis to the lien granted to the bondholders through
the Authority.
The amount of 1973 Bonds outstanding that are considered extinguished for
financial reporting purposes from prior refunding bonds amounted to $5,785,000
at June 30, 1995.
C-11
<PAGE>
HARMARVILLE REHABILITATION CENTER, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
4. LONG-TERM OBLIGATIONS (CONTINUED)
Principal payments on all long-term obligations are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30
- --------------------
<S> <C>
1996................ $ 579,210
1997................ 649,865
1998................ 592,000
1999................ 261,000
2000................ 725,000
Thereafter.......... 7,160,000
------------
$9,967,075
============
</TABLE>
Interest paid on all long-term obligations was approximately $109,000,
$700,000, $1,083,000, and $1,023,000 for the three months ended September 30,
1995 and 1994 and for the years ended June 30, 1995 and 1994, respectively.
5. WORKERS' COMPENSATION
The Center elected to self insure for workers' compensation commencing
January 1, 1992. Pursuant to the election, a self-insurance trust was
established and funded with $150,000. The Center is the guarantor of all the
Center obligations under the self-insurance program. As security for the payment
of the workers' compensation liability, the Center has obtained a letter of
credit in the amount of $800,000 as required under regulations of the
Commonwealth of Pennsylvania Department of Labor.
6. PENSION PLANS
The Center has a defined benefit pension plan which covers all employees of
the Center who meet certain age and length of service requirements. The benefits
are based on years of service and the average monthly earnings of the employee
for the highest consecutive sixty months of the final ten years of employment.
The Center's funding policy is to contribute amounts to the plan sufficient to
meet the minimum funding requirements set forth in the Employee Retirement
Income Security Act of 1974, plus such amounts as the Center may determine to be
appropriate from time to time.
The following table sets forth the funded status and amount recognized for
the pension plan in the balance sheet:
<TABLE>
<CAPTION>
JUNE 30
--------------------------------
1995 1994
--------------- ----------------
<S> <C> <C>
Actuarial present value of accumulated benefit obligation,
including vested benefits of $9,524,719 in 1995 and $9,048,893 in
1994................................................................ $ 9,830,615 $ 9,351,274
=============== ================
Actuarial present value of projected benefit obligation for
services rendered to date......................................... $(12,772,979) $(12,055,644)
Less plan assets at fair value, primarily investments in insurance
group annuity contracts, units in stock trusts and insurance
company separate accounts......................................... 15,240,561 14,209,239
--------------- ----------------
Plan assets in excess of projected benefit obligation............... 2,467,582 2,153,595
Unrecognized prior service cost..................................... (494,994) (542,948)
Unrecognized net gain from past experience different from that
assumed........................................................... (1,838,898) (1,436,316)
Unrecognized net asset existing at transition....................... 10,325 11,800
--------------- ----------------
Prepaid pension cost................................................ $ 144,015 $ 186,131
=============== ================
</TABLE>
C-12
<PAGE>
HARMARVILLE REHABILITATION CENTER, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
6. PENSION PLANS (CONTINUED)
A summary of the net pension cost of the plan is as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
JUNE 30 SEPTEMBER 30
------------------------ -----------------------
1995 1994 1995 1994
----- ---- ---- -----
<S> <C> <C> <C> <C>
Service costs--benefits earned during the
year........................................ $ 597,146 $ 575,723 $ 149,287 $ 143,931
Interest cost on projected benefit
obligation.................................... 1,044,368 986,591 261,092 246,647
Actual return on plan assets.................. (1,268,660) (1,182,401) (317,165) (295,600)
Net amortization and deferred................. (66,157) (47,441) (16,539) (11,860)
------------- ------------- ----------- ------------
Net pension cost.............................. $ 306,697 $ 332,472 $ 76,675 $ 83,118
============= ============= =========== ============
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 8.0% in 1995 and 1994. The assumed
rates of increase in future years' compensation levels was 5.5% in 1995 and
1994. The expected long-term rate of return on plan assets was 8.5% in 1995 and
1994.
The Center also has a defined contribution plan known as the "Harvest Plan"
which covers all employees of the Center who meet certain age and length of
service requirements. Center contributions are based on the employees' years of
service, base earnings, and the amount contributed by the employee. Costs of the
plan were $69,325, $63,458, $243,049, and $208,020 for the three months ended
September 30, 1995 and 1994 and for the years ended June 30, 1995 and 1994,
respectively.
7. OPERATING LEASES
The Center leases land, principally the land on which its facility is
constructed, from the Federation of Independent School Alumnae, an entity that
raises funds for the Center. The lease requires monthly payments of $200 and
extends through July 1, 2015.
Certain facilities are leased under noncancelable operating leases expiring
periodically through 2000. Certain leases have renewal options ranging from 5 to
15 years and provide for periodic rental increases during their initial lease
term. Rental expense amounted to $94,771, $90,670, $370,376, and $359,846 for
the three months ended September 30, 1995 and 1994 and for the years ended June
30, 1995 and 1994, respectively.
Future annual minimum lease payments under noncancelable operating leases
at June 30, 1995 are as follows: 1996--$304,647; 1997--$164,722;
1998--$147,671; 1999--$127,574; and 2000--$53,266.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used in estimating the fair value
disclosures for financial instruments:
Cash and Short-Term Investments: The carrying amount reported in the balance
sheet approximates fair value.
Investments and Other Assets: The fair value of assets whose use is limited
is based on quoted market prices.
Long-Term Debt: The carrying amount reported in the balance sheet
approximates fair value.
C-13
<PAGE>
HARMARVILLE REHABILITATION CENTER, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
8. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts and estimated fair value of financial instruments are as
follows:
<TABLE>
<CAPTION>
JUNE 30, 1995 SEPTEMBER 30, 1995
---------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -------
<S> <C> <C> <C> <C>
Cash and short-term investments................. $1,245,069 $1,245,069 $2,715,487 $2,715,487
Depreciation reserve account.................... 424,100 424,100 431,508 431,508
Hospital funded depreciation.................... 1,155,730 1,155,730 1,773,074 1,773,074
Professional liability self-insurance trust
fund.......................................... 1,337,134 1,346,176 1,334,744 1,345,180
Workers' compensation self-insurance trust
fund.......................................... 167,053 167,053 169,271 169,271
Fixed interest and money market investments .... 8,699,644 8,864,682 8,082,705 8,395,364
Preferred and common stock investments ......... 5,340,628 5,966,045 6,392,264 7,055,261
1994 refunding bonds............................ 8,000,000 8,000,000 8,000,000 8,000,000
Term loan....................................... 1,952,000 1,952,000 1,222,000 1,222,000
</TABLE>
9. EQUITY INVESTMENTS IN JOINT VENTURES
The following is a summary of the Center's investments in joint ventures:
<TABLE>
<CAPTION>
JUNE 30 SEPTEMBER 30
--------------------- --------------
1995 1994 1995
---------- ---------- --------------
<S> <C> <C> <C>
Investment in Butler CORF ...... $167,511 $237,426 $140,531
Investment in Uniontown CORF ... -- 68,466 --
Investment in Ohio Valley CORF . 62,279 104,248 62,658
Investment in Latrobe CORF ..... 288,216 -- 287,802
Investment in WHRC.............. 300,000 -- 260,369
Investment in Workcare
Solutions..................... 8,635 291,876 --
Other........................... 18,860 -- 14,145
---------- ---------- --------------
Total........................... $845,501 $702,016 $765,505
========== ========== ==============
</TABLE>
In January 1995, the Center acquired in excess of 50% of the partnership
interests in the Harmarville Uniontown CORF (Uniontown). The Center's ownership
of the partnership increased periodically throughout the remainder of the year,
with the Center becoming the sole owner of Uniontown on June 30, 1995. The cost
of the partnership interest acquired during the year ended June 30, 1995
amounted to $225,000. The transaction was accounted for as a purchase with the
operations of Uniontown being included in the consolidated financial statements
for the six months ended June 30, 1995. The excess of the purchase price of the
partnership interests over the historical cost of the net assets of Uniontown
was not significant.
Unaudited pro forma operations, assuming the change in ownership had occurred
at the beginning of 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
----------------------------
1995 1994
------------- --------------
<S> <C> <C>
Net patient service revenues.............. $40,709,815 $37,855,011
Excess of revenues and gains over
expenses.................................. 1,646,883 1,430,203
</TABLE>
The above pro forma information is based upon certain assumptions and
estimates which management of the Center believes are reasonable. The pro forma
information does not purport to be indicative of the results that actually would
have been obtained during the periods presented and is not intended to be a
projection of future results.
C-14
<PAGE>
HARMARVILLE REHABILITATION CENTER, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
9. EQUITY INVESTMENTS IN JOINT VENTURES (CONTINUED)
In June 1995, the Center contributed assets of $300,000 and the operations of
its Greensburg satellite for a 50% joint venture interest in the Harmarville
Latrobe CORF. The following table summarizes the operations of the Greensburg
satellite included in the consolidated statements of revenues and expenses,
prior to the interest in this joint venture.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
--------------------------
1995 1994
------------ -------------
<S> <C> <C>
Net patient service revenues.............. $1,116,944 $1,107,047
Excess of revenues and gains over
expenses................................ 80,846 95,441
</TABLE>
C-15
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102(b)(7) of the Delaware General Corporation Law ("DGCL") grants
corporations the right to limit or eliminate the personal liability of their
directors in certain circumstances in accordance with provisions therein set
forth. Article Nine of the HEALTHSOUTH Certificate filed in the Office of the
Secretary of the State of Delaware on June 13, 1995, contains a provision
eliminating or limiting director liability to HEALTHSOUTH and its stockholders
for monetary damages arising from acts or omissions in the director's capacity
as a director. The provision does not, however, eliminate or limit the personal
liability of a director (i) for any breach of such director's duty of loyalty to
HEALTHSOUTH or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
the Delaware statutory provision making directors personally liable, under a
negligence standard, for unlawful dividends or unlawful stock purchases or
redemptions, or (iv) for any transaction from which the director derived an
improper personal benefit. This provision offers persons who serve on the Board
of Directors of HEALTHSOUTH protection against awards of monetary damages
resulting from breaches of their duty of care (except as indicated above). As a
result of this provision, the ability of HEALTHSOUTH or a stockholder thereof to
successfully prosecute an action against a director for a breach of his duty of
care is limited. However, the provision does not affect the availability of
equitable remedies such as an injunction or rescission based upon a director's
breach of his duty of care. The SEC has taken the position that the provision
will have no effect on claims arising under the Federal securities laws.
Section 145 of the DGCL grants corporations the right to indemnify their
directors, officers, employees and agents in accordance with the provisions
therein set forth. Article Nine of the HEALTHSOUTH Certificate and Article IX of
the HEALTHSOUTH Bylaws provide for mandatory indemnification rights, subject to
limited exceptions, to any director, officer, employee, or agent of HEALTHSOUTH
who, by reason of the fact that he or she is a director, officer, employee, or
agent of HEALTHSOUTH, is involved in a legal proceeding of any nature. Such
indemnification rights include reimbursement for expenses incurred by such
director, officer, employee, or agent in advance of the final disposition of
such proceeding in accordance with the applicable provisions of the DGCL.
HEALTHSOUTH has entered into agreements with all of its directors and its
executive officers pursuant to which HEALTHSOUTH has agreed to indemnify such
directors and executive officers against liability incurred by them by reason of
their services of a director or executive officer to the fullest extent
allowable under applicable law.
See Item 22 of this Registration Statement on Form S-4.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
---- ------------
<S> <C>
(2)......... Areement and Plan of Merger, dated December 16, 1995, among
HEALTHSOUTH Corporation, Aladdin Acquisition Corporation and
Advantage Health Corporation, attached to the Prospectus-Proxy
Statement as Annex A, is hereby incorporated herein by reference.
(5)......... Opinion of Haskell Slaughter Young & Johnston, Professional
Association, as to the legality of the shares of HEALTHSOUTH
Common Stock being registered.
(8)......... Form of opinion of Haskell Slaughter Young & Johnston,
Professional Association, as to certain federal income tax
consequences of the Merger.
(23)-1...... Consent of Ernst & Young LLP. See pages immediately following
signature pages to the Registration Statement.
(23)-2...... Consent of Haskell Slaughter Young & Johnston, Professional
Association (included in the opinion filed as Exhibit (5)).
(23)-3...... Consent of Alex. Brown & Sons Incorporated (included in Annex B to
the Prospectus-Proxy Statement).
(24)........ Powers of Attorney. See signature pages.
(99)........ Advantage Health Corporation Proxy.
</TABLE>
Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts
ITEM 22. UNDERTAKINGS.
(1) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(2) The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is part of this registration statement, by any person or party
who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other items of the applicable form.
(3) The Registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (2) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
II-2
<PAGE>
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(4) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not subject of and included in
the Registration Statement when it became effective.
(5) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Birmingham, State of
Alabama, on February 9, 1996.
HEALTHSOUTH Corporation
By /s/ RICHARD M. SCRUSHY
_____________________________________________
Richard M. Scrushy
Chairman of the Board and
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard M. Scrushy and Aaron Beam, Jr., and each
of them, his attorney-in-fact with powers of substitution for him in any and all
capacities, to sign any amendments, supplements, subsequent registration
statements relating to the offering to which this Registration Statement
relates, or other instruments he deems necessary or appropriate, and to file the
same, with exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact or his substitute may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
----------- ----- ------
<S> <C> <C>
/s/ RICHARD M. SCRUSHY Chairman of the board February 9, 1996
- ---------------------------- and Chief Executive Officer
Richard M. Scrushy and Director
/s/ AARON BEAM, JR. Executive Vice President and February 9, 1996
- ---------------------------- Chief Financial Officer
Aaron Beam, Jr
/s/ WILLIAM T. OWENS Senior Vice President
- --------------------------- and Controller (Principal
William T. Owens Accounting Officer) February 9, 1996
/s/ JAMES P. BENNETT
- ----------------------------
James P. Bennett Director February 9, 1996
/s/ ANTHONY J. TANNER
- ----------------------------
Anthony J. Tanner Director February 9, 1996
/s/ P. DARYL BROWN
- ----------------------------
P. Daryl Brown Director February 9, 1996
/s/ PHILLIP C. WATKINS, M.D.
- ----------------------------
Phillip C. Watkins, M.D. Director February 9, 1996
II-5
<PAGE>
SIGNATURE TITLE DATE
----------- ----- ------
/s/ GEORGE H. STRONG
- ------------------------------
George H. Strong Director February 9, 1996
/s/ C. SAGE GIVENS
- ------------------------------
C. Sage Givens Director February 9, 1996
/s/ CHARLES W. NEWHALL III
- ------------------------------
Charles W. Newhall III Director February 9, 1996
/s/ LARRY R. HOUSE
- ------------------------------
Larry R. House Director February 9, 1996
/s/ JOHN S. CHAMBERLIN
- ------------------------------
John S. Chamberlin Director February 9, 1996
/s/ RICHARD F. CELESTE
- ------------------------------
Richard F. Celeste Director February 9, 1996
</TABLE>
II-5
<PAGE>
EXHIBIT (23)-1
CONSENT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports on the entities and dated as listed below in the
Registration Statement (Form S-4 No. 33- ) and the related
Prospectus-Proxy Statement of HEALTHSOUTH Corporation and Advantage Health
Corporation:
<TABLE>
<CAPTION>
<S> <C>
HEALTHSOUTH Corporation and Subsidiaries . March 1, 1995 except for
Notes 2 and 17, as to
which the date is June 13, 1995
Surgical Health Corporation................ April 18, 1995
ReLife, Inc................................ February 17, 1995
Rehab Systems Company...................... September 8, 1995
Sutter Surgery Centers, Inc................ March 31, 1995
Advantage Health Corporation............... October 4, 1995
Harmarville Rehabilitation Center, Inc. ... August 25, 1995
</TABLE>
ERNST & YOUNG LLP
February 7, 1996
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------ -------------- ----------------------------------- --------------- ----------------
ADDITIONS
ADDITIONS CHARGED
BALANCE AT CHARGED TO OTHER
BEGINNING OF TO COSTS AND ACCOUNTS DEDUCTIONS BALANCE AT
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD
- ------------------------------------ -------------- ----------------- ----------------- --------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1992:
Allowance for doubtful accounts and $218,964 (1)
contractual adjustments .......... $ 27,037 $13,254 14,822 (2) $224,216 (3) $ 49,861
-------------- ----------------- ----------------- --------------- ----------------
Year ended December 31, 1993:
Allowance for doubtful accounts and $289,077 (1)
contractual adjustments .......... $ 49,861 $16,181 50,420 (2) $284,729 $120,810
-------------- ----------------- ----------------- --------------- ----------------
Year ended December 31, 1994:
Allowance for doubtful accounts and $644,658 (1)
contractual adjustments........... $120,810 $23,739 6,547 (2) $651,327 (3) $144,427
-------------- ----------------- ----------------- --------------- ----------------
</TABLE>
(1) Provisions for contractual adjustments which are netted against gross
revenues.
(2) Allowances of acquisitions in years 1992, 1993 and 1994, respectively.
(3) Write-offs of uncollectible patient accounts receivable and third party
contractual adjustments, net of third party retroactive settlements.
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------ ------------ -----
<S> <C>
(2)......... Areement and Plan of Merger, dated December 16, 1995, among
HEALTHSOUTH Corporation, Aladdin Acquisition Corporation and
Advantage Health Corporation, attached to the Prospectus-Proxy
Statement as Annex A, is hereby incorporated herein by reference.
(5)......... Opinion of Haskell Slaughter Young & Johnston, Professional
Association, as to the legality of the shares of HEALTHSOUTH
Common Stock being registered.
(8)......... Form of opinion of Haskell Slaughter Young & Johnston,
Professional Association, as to certain federal income tax
consequences of the Merger.
(23)-1...... Consent of Ernst & Young LLP. See pages immediately following
signature pages to the Registration Statement.
(23)-2...... Consent of Haskell Slaughter Young & Johnston, Professional
Association (included in the opinion filed as Exhibit (5)).
(23)-3...... Consent of Alex. Brown & Sons Incorporated (included in Annex B to
the Prospectus-Proxy Statement).
(24)........ Powers of Attorney. See signature pages.
(99)........ Advantage Health Corporation Proxy.
</TABLE>
EXHIBIT (5)
Haskell Slaughter Young & Johnston,
Professional Association
1200 AmSouth/Harbert Plaza
1901 Sixth Avenue North
Birmingham, Alabama 35203
February 9, 1996
HEALTHSOUTH Corporation
Two Perimeter Park South
Birmingham, Alabama 35243
Re: Registration Statement on Form S-4
Gentlemen:
We have served as counsel for HEALTHSOUTH Corporation, a corporation
organized and existing under the laws of the State of Delaware (the "Company"),
in connection with the registration under the Securities Act of 1933, as
amended, pursuant to the Company's Registration Statement on Form S-4 (the
"Registration Statement"), of 10,564,835 shares of Common Stock, par value $.01
per share, of the Company (the "Shares") to be issued pursuant to that certain
Agreement and Plan of Merger, dated as of December 16, 1995, among the Company,
Aladdin Acquisition Corporation and Advantage Health Corporation (the "Plan of
Merger"). This opinion is furnished to you pursuant to the requirements of Form
S-4.
In connection with this opinion, we have examined and are familiar with
originals or copies (certified or otherwise identified to our satisfaction) of
such documents, corporate records and other instruments relating to the
incorporation of the Company and to the authorization and issuance of the Shares
as we have deemed necessary and appropriate.
Based upon the foregoing, and having regard for such legal considerations as
we have deemed relevant, it is our opinion that:
1. The Shares have been duly authorized; and
2. Upon issuance and delivery of the Shares as contemplated in the
Registration Statement and the Plan of Merger, the Shares will be legally
issued, fully paid and nonassessable shares of Common Stock of the Company.
We do hereby consent to the reference to our Firm under the heading "Legal
Matters" in the Prospectus which forms a part of the Registration Statement, and
to the filing of this opinion as an Exhibit thereto.
Very truly yours,
HASKELL SLAUGHTER YOUNG & JOHNSTON
Professional Association
By /s/ J. BROOKE JOHNSTON, JR.
---------------------------------------------
J. Brooke Johnston, Jr.
<PAGE>
EXHIBIT (8)
Haskell Slaughter Young & Johnston,
Professional Association
1200 AmSouth/Harbert Plaza
1901 Sixth Avenue North
Birmingham, Alabama 35203
March , 1996
HEALTHSOUTH Corporation
Two Perimeter Park South
Birmingham, Alabama 35243
Re: Agreement and Plan of Merger by and among HEALTHSOUTH Corporation,
Aladdin Acquisition Corporation and Advantage Health Corporation
Gentlemen:
We have acted as counsel to HEALTHSOUTH Corporation, a Delaware corporation
("HEALTHSOUTH", in connection with the proposed merger (the "Merger") of
Aladdin Acquisition Corporation, a Delaware corporation ("Subsidiary"), with and
into Advantage Health Corporation, a Delaware corporation ("Advantage Health"),
pursuant to the terms of that certain Agreement and Plan of Merger, dated as of
December 16, 1995 (the "Merger Agreement"), by and among HEALTHSOUTH, Subsidiary
and Advantage Health, as described in more detail in the Merger Agreement and in
the Registration Statement on Form S-4 filed by HEALTHSOUTH with the Securities
and Exchange Commission on February 9, 1996 (the "Registration Statement"). This
opinion is being rendered pursuant to your request. All capitalized terms,
unless otherwise specified, have the meaning assigned to them in the
Registration Statement.
In connection with this opinion, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction, of
(i) the Merger Agreement, (ii) the Registration Statement, and (iii) such other
documents as we have deemed necessary or appropriate in order to enable us to
render the opinion below. In our examination, we have assumed the genuineness of
all signatures, the legal capacity of all natural persons, the authenticity of
all documents submitted to us as originals, the conformity to original documents
of all documents submitted to us as certified, conformed or photostatic copies
and the authenticity of the originals of such copies. In rendering the opinion
set forth below, we have relied upon certain written representations and
covenants of HEALTHSOUTH, Subsidiary and Advantage Health, which are annexed
hereto.
In rendering our opinion, we have considered the applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations,
pertinent judicial authorities, interpretive rulings of the Internal Revenue
Service and such other authorities as we have considered relevant.
Based upon and subject to the foregoing, we are of the opinion that:
(i) The Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code, and HEALTHSOUTH, Subsidiary and Advantage Health
will each be a party to the reorganization within the meaning of Section
368(b) of the Code;
<PAGE>
(ii) No gain or loss will be recognized by HEALTHSOUTH, Subsidiary or
Advantage Health as a result of the Merger;
(iii) No gain or loss will be recognized by a Advantage Health stockholder
who receives solely shares of HEALTHSOUTH Common Stock in exchange for
Advantage Health Common Stock;
(iv) The receipt of cash in lieu of fractional shares of HEALTHSOUTH Common
Stock will be treated as if the fractional shares were distributed as part of
the exchange and then were redeemed by HEALTHSOUTH. These payments will be
treated as having been received as distributions in full payment in exchange
for the stock redeemed as provided in Section 302(a) of the Code;
(v) The tax basis of the shares of HEALTHSOUTH Common Stock received by an
Advantage Health stockholder will be equal to the tax bases of the Advantage
Health Common Stock exchanged therefor, excluding any basis allocable to a
fractional share of HEALTHSOUTH Common Stock for which cash is received; and
(vi) The holding period of the shares of HEALTHSOUTH Common Stock received
by an Advantage Health stockholder will include the holding period or periods
of the Advantage Health Common Stock exchanged therefor, provided that the
Advantage Health Common Stock is held as a capital asset within the meaning
of Section 1221 of the Code at the effective time of the Merger.
Our opinion set forth above regarding the holders of Advantage Health Shares
is exclusive of the tax treatment to the holders of Advantage Health stock
options which are surrendered to HEALTHSOUTH in exchange for shares of
HEALTHSOUTH Common Stock pursuant to the Merger Agreement.
The Merger should have no immediate federal income tax consequences to
HEALTHSOUTH stockholders.
Except as set forth above, we express no opinion as to the tax consequences,
whether federal, state, local or foreign, to any party to the Merger or of any
transactions related to the Merger or contemplated by the Merger Agreement.
We hereby consent to the reference to our Firm under the heading "Legal
Matters" in the Prospectus-Proxy Statement which forms a part of the
Registration Statement, and to the filing of this opinion as an Exhibit thereto.
Very truly yours,
HASKELL SLAUGHTER YOUNG & JOHNSTON
Professional Association
By
---------------------------------------------
Ross N. Cohen
<PAGE>
EXHIBIT 99
PROXY ADVANTAGE HEALTH CORPORATION PROXY
SPECIAL MEETING OF STOCKHOLDERS -- MARCH 14, 1996
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS
The undersigned hereby appoints Raymond J. Dunn, III or Robert E. Spencer,
and each of them, with several powers of substitution, proxies to vote the
shares of Common Stock, par value $0.01 per share, of Advantage Health
Corporation ("Advantage Health") which the undersigned could vote if personally
present at the Special Meeting of Stockholders of Advantage Health to be held at
New England Rehabilitation Hospital's auditorium located on the Hospital's
second floor, Two Rehabilitation Way, Woburn, Massachusetts 01801, on March 14,
1996, at 9:30 a.m., E.S.T., and any adjournment thereof:
PLEASE VOTE AND SIGN ON OTHER SIDE AND RETURN PROMPTLY IN ENCLOSED ENVELOPE
Please sign this proxy exactly as your name appears on the books of the
Corporation. Joint owners should each sign personally. Trustees and other
fiduciaries should indicate the capacity in which they sign, and where more than
one name appears, a majority must sign. If a corporation, this signature should
be that of an authorized officer who should state his or her title.
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
- --------------------------- ------------------------------------
- --------------------------- ------------------------------------
- --------------------------- ------------------------------------
ADVANTAGE HEALTH CORPORATION -- RECORD DATE SHARES:
1. Approval and adoption of an Agreement and Plan of Merger, dated as of
December 16, 1995, attached as Annex A to the Prospectus-Proxy Statement that
has been transmitted in connection with the Special Meeting, pursuant to which
Aladdin Acquisition Corporation, a wholly-owned subsidiary of HEALTHSOUTH
Corporation ("HEALTHSOUTH"), will merge with and into Advantage Health, and
stockholders of Advantage Health will receive a specified number of shares of
HEALTHSOUTH Common Stock for each share of Advantage Health Common Stock
surrendered for exchange, all as described in said Prospectus-Proxy Statement.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. In their discretion to act upon any matters incidental to the foregoing
and such other business as may properly come before the Special Meeting or any
adjournment thereof.
This Proxy, when properly executed, will be voted in the manner directed
herein by the undersigned stockholder. If no direction is made, this Proxy will
be voted FOR Item 1. Any stockholder who wishes to withhold the discretionary
authority referred to in Item 2 above should mark a line through the entire
Item.
Mark box at right if comments or address change have been noted on the reverse
side of this card [ ]
Please be sure to sign and date this Proxy.
---------------------------------------
Date
---------------------------------------
Shareholder sign here
---------------------------------------
Co-owner sign here
Detach Card
<PAGE>
ADVANTAGE HEALTH CORPORATION
Dear Stockholder:
Please take note of the important information enclosed with this Proxy Ballot.
There are a number of issues related to the management and operation of
Advantage Health Corporation that require your immediate attention and approval.
These are discussed in detail in the enclosed proxy materials. Your vote counts,
and you are strongly encouraged to exercise your right to vote your shares.
Please mark the boxes on the proxy card to indicate how your shares shall be
voted. Then sign the card, detach it and return your proxy vote in the enclosed
postage paid envelope. Your vote must be received prior to the Special Meeting
of Stockholders, March 14, 1996. Thank you in advance for your prompt
consideration of these matters. Sincerely, Advantage Health Corporation
<PAGE>
