SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for use of the Commission only (as permitted by Rule 14a-6(e)
(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
HEALTHSOUTH CORPORATION
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11: (Set forth the amount on which the filing fee is
calculated and state how it was determined
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed
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<PAGE>
PRELIMINARY COPY
PROXY HEALTHSOUTH Corporation
ANNUAL MEETING OF STOCKHOLDERS -- May 1, 1997
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS
The undersigned hereby appoints RICHARD M. SCRUSHY and AARON BEAM, JR.
or ____________________________________, and each of them, with several powers
of substitution, proxies to vote the shares of Common Stock, par value $.01 per
share, of HEALTHSOUTH Corporation which the undersigned could vote if personally
present at the Annual Meeting of Stockholders of HEALTHSOUTH Corporation to be
held at One HealthSouth Parkway, Birmingham, Alabama 35243, on Thursday, May 1,
1997, at 2:00 p.m., C.D.T., and any adjournment thereof:
1. ELECTION OF DIRECTORS
[ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY to vote
(except as marked to the contrary below) for all nominees listed below
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, MARK A
LINE THROUGH THE NOMINEE'S NAME IN THE LIST BELOW.
Richard M. Scrushy C. Sage Givens Anthony J. Tanner
Phillip C. Watkins Richard F. Celeste Larry R. House
George H. Strong Charles W. Newhall III James P. Bennett
John S. Chamberlin Aaron Beam, Jr. P. Daryl Brown
Joel C. Gordon
2. APPROVAL OF THE 1997 STOCK OPTION PLAN
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. In their discretion, to act upon any matters incidental to the
foregoing and such other business as may properly come before
the Annual Meeting or any adjournment thereof.
This Proxy, when properly executed, will be voted in the manner
directed herein by the undersigned stockholder. IF NO DIRECTION IS MADE, THIS
PROXY WILL BE VOTED FOR ITEMS 1 AND 2 ABOVE. Any stockholder who wishes to
withhold the discretionary authority referred to in Item 3 above should mark a
line through the entire Item.
DATED __________________, 1997 ______________________________________________
Signature(s)
______________________________________________
(Please sign exactly and as fully as your name
appears on your stock certificate. If shares
are held jointly, each stockholder should
sign.)
PLEASE MARK, SIGN, DATE AND RETURN PROMPTLY, USING THE ENCLOSED
ENVELOPE. NO POSTAGE IS REQUIRED.
<PAGE>
PRELIMINARY COPY
HEALTHSOUTH Corporation
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
April 1, 1997
The Annual Meeting of Stockholders of HEALTHSOUTH Corporation (the
"Company") will be held at One HealthSouth Parkway, Birmingham, Alabama, on
Thursday, May 1, 1997, at 2:00 p.m., C.D.T., for the following purposes:
1. To elect thirteen Directors to serve until the next Annual
Meeting of Stockholders and until their successors are duly elected and
qualified.
3. To approve the 1997 Stock Option Plan of the Company.
2. To transact such other business as may properly come
before the Annual Meeting or any adjournment thereof.
Stockholders of record at the close of business on March 27, 1997, are
entitled to notice of, and to vote at, the Annual Meeting or any adjournment
thereof.
IF YOU CANNOT ATTEND THE ANNUAL MEETING IN PERSON, PLEASE DATE AND
EXECUTE THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY TO THE COMPANY. IF YOU
ATTEND THE ANNUAL MEETING, YOU MAY REVOKE YOUR PROXY AND VOTE IN PERSON IF YOU
DESIRE TO DO SO, BUT ATTENDANCE AT THE ANNUAL MEETING DOES NOT OF ITSELF SERVE
TO REVOKE YOUR PROXY.
ANTHONY J. TANNER
Secretary
<PAGE>
PRELIMINARY COPY
HEALTHSOUTH Corporation
PROXY STATEMENT
INTRODUCTION
This Proxy Statement is furnished to the holders of Common Stock, par
value $.01 per share, of HEALTHSOUTH Corporation (the "Company") in connection
with the solicitation of Proxies by and on behalf of the Board of Directors of
the Company for use at the Annual Meeting of Stockholders to be held on May 1,
1997 or any adjournment thereof. A form of Proxy for use at the Annual Meeting
is also enclosed. Any such Proxy may be revoked by a stockholder at any time
before it is exercised by either giving written notice of such revocation to the
Secretary of the Company or submitting a later-dated Proxy to the Company prior
to the Annual Meeting. A stockholder attending the Annual Meeting may revoke his
Proxy and vote in person if he desires to do so, but attendance at the Annual
Meeting will not of itself revoke the Proxy.
The Company's principal executive offices are located at One
HealthSouth Parkway, Birmingham, Alabama 35243. The Company's telephone number
is (205) 967-7116.
Proxy materials will be mailed to stockholders by the Management of the
Company on or about April 1, 1997. The Company has retained Morrow & Co. to
solicit proxies on its behalf and will pay Morrow & Co. a fee of $4,000 for
those services. The Company will reimburse Morrow & Co. for out-of-pocket
expenses incurred in connection with such solicitation. Additional solicitation
may be made by mail, telephone or telegram by the officers or regular employees
of the Company, who will receive no additional compensation therefor.
Arrangements will also be made with brokerage houses, custodians, nominees and
fiduciaries for the forwarding of proxy materials to the beneficial owners of
Common Stock held of record by such persons, and the Company will reimburse such
brokerage houses, custodians, nominees and fiduciaries for reasonable
out-of-pocket expenses incurred by them in connection therewith. The entire
expense of solicitation, including the cost of preparing, assembling and mailing
the proxy materials, will be borne by the Company.
The purposes of the Annual Meeting of Stockholders are to (a) elect a
Board of Directors to serve until the next Annual Meeting of Stockholders and
(b) to approve the 1997 Stock Option Plan of the Company. The Company is not
aware at this time of any other matters that will come before the Annual
Meeting. If any other matters properly come before the Annual Meeting, it is the
intention of the persons designated as proxies to vote in accordance with their
judgment on such matters. Shares represented by executed and unrevoked Proxies
will be voted in accordance with instructions contained therein or, in the
absence of such instructions, in accordance with the recommendations of the
Board of Directors. Abstentions and broker non-votes will not be counted for
purposes of determining whether any given proposal has been approved by the
stockholders of the Company. Accordingly, abstentions and broker non-votes will
not affect the votes to be taken on the election of Directors or the approval of
the 1997 Stock Option Plan, which require for approval the affirmative vote of a
majority of the shares of Common Stock present or represented and entitled to
vote at the Annual Meeting.
As to all matters that may come before the Annual Meeting, each
stockholder will be entitled to one vote for each share of Common Stock of the
Company held by him at the close of business on March 27, 1997. The holders of a
majority of the shares of Common Stock of the Company present in person or by
proxy and entitled to vote will constitute a quorum at the Annual Meeting.
Abstentions and broker non-votes will be counted for
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purposes of determining the presence of a quorum. At March 27, 1997, the record
date for the Annual Meeting, there were ____________ shares of Common Stock
outstanding.
DISSENTERS' RIGHTS OF APPRAISAL
There are no dissenters' rights of appraisal in connection with any
vote of stockholders to be taken at the 1997 Annual Meeting of Stockholders.
PROPOSALS BY STOCKHOLDERS
Any proposals by stockholders of the Company intended to be presented
at the 1998 Annual Meeting of Stockholders must be received by the Company for
inclusion in the Company's Proxy Statement and form of Proxy by December 2,
1997.
ELECTION OF DIRECTORS
NOMINEES FOR DIRECTOR
At the Annual Meeting, thirteen Directors are to be elected. The Bylaws
of the Company permit the Board of Directors to determine the number of
Directors of the Company. Unless other instructions are specified, the enclosed
Proxy will be voted in favor of the persons named below to serve until the next
Annual Meeting of Stockholders and until their successors shall have been duly
elected and qualified. The affirmative vote of a majority of the shares of
Common Stock present or represented and entitled to vote at the Annual Meeting
is required for the election of each Director. In the event any of the nominees
shall be unable to serve as a Director, it is the intention of the persons
designated as proxies to vote for substitutes selected by the Board of
Directors. The Board of Directors of the Company has no reason to believe that
any of the nominees named below will be unable to serve if elected.
The following table sets forth certain information concerning the
thirteen nominees for Director of the Company:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
AND ALL POSITIONS A DIRECTOR
NAME AGE WITH THE COMPANY SINCE
---- --- ---------------- -----
<S> <C> <C> <C>
Richard M. Scrushy 44 Chairman of the Board and 1984
Chief Executive Officer and
Director
Phillip C. Watkins, M.D. 55 Physician, Birmingham, Alabama, 1984
and Director
George H. Strong 70 Private Investor, Locust, New Jersey, 1984
and Director
C. Sage Givens 40 General Partner, 1985
Acacia Venture Partners, and Director
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Charles W. Newhall III 52 Partner, New Enterprise 1985
Associates Limited Partnerships,
and Director
Aaron Beam, Jr. 53 Executive Vice President and 1993
Chief Financial Officer
and Director
James P. Bennett 39 President and Chief Operating 1993
Officer and Director
Larry R. House 53 Chairman of the Board, President 1993
and Chief Executive Officer,
MedPartners, Inc., and Director
Anthony J. Tanner 48 Executive Vice President-- 1993
Administration and Secretary
and Director
John S. Chamberlin 69 Private Investor, 1993
Princeton, New Jersey,
and Director
Richard F. Celeste 59 Managing Partner, Celeste and Sabaty, Ltd. 1991
and Director
P. Daryl Brown 42 President-- HEALTHSOUTH 1995
Outpatient Centers and Director
Joel C. Gordon 68 Private Investor, Nashville, 1996
Tennessee, Consultant to the
Company and Director
</TABLE>
Richard M. Scrushy, one of the Company's management founders, has
served as Chairman of the Board and Chief Executive Officer of the Company since
1984, and also served as President of the Company from 1984 until March 1995.
From 1979 to 1984, Mr. Scrushy was with Lifemark Corporation, a publicly-owned
healthcare corporation, serving in various operational and management positions.
Mr. Scrushy is also a Director of MedPartners, Inc., a publicly-traded physician
practice management company, and Chairman of the Board of Capstone Capital,
Inc., a publicly-traded real estate investment trust. He also serves on the
Boards of Directors of several privately-held healthcare corporations.
Phillip C. Watkins, M.D., FACC, is and has been for more than five
years in the private practice of medicine in Birmingham, Alabama. A graduate of
The Medical College of Alabama, Dr. Watkins is a Diplomate of the American Board
of Internal Medicine. He is also a Fellow of the American College of Cardiology
and the Subspecialty Board of Cardiovascular Disease.
George H. Strong retired as Senior Vice President and Chief Financial
Officer of Universal Health Services, Inc. in December 1984, a position he held
for more than six years. Mr. Strong is a private investor and continued to act
as a Director of Universal Health Services, Inc., a publicly-traded hospital
management corporation, until 1993. Mr. Strong is also a Director of Core Funds,
a public mutual fund group, Integrated Health Services, Inc., a publicly-traded
healthcare corporation, and AmeriSource, Inc., a large drug wholesaler.
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C. Sage Givens is a general partner of Acacia Venture Partners, a
private venture capital fund capitalized at $66,000,000. From 1983 to June 30,
1995, Ms. Givens was a general partner of First Century Partners, a private
venture capital fund capitalized to $100,000,000. Ms. Givens managed the fund's
healthcare investments. Ms. Givens serves on the Boards of Directors of PhyCor,
Inc. and UroHealth Systems, Inc., both publicly-traded healthcare corporations,
and several privately-held healthcare companies.
Charles W. Newhall III is a general partner and founder of New
Enterprise Associates Limited Partnerships, Baltimore, Maryland, where he has
been engaged in the venture capital business since 1978. Mr. Newhall is also a
Director of Integrated Health Services, Inc., MedPartners, Inc. and Opta Food
Ingredients, Inc., all of which are publicly-traded corporations.
Aaron Beam, Jr., C.P.A., a management founder, serves as Executive Vice
President and Chief Financial Officer of the Company and was elected a Director
in February 1993. From 1980 to 1984, Mr. Beam was employed by Lifemark
Corporation in several financial and operational management positions for the
Shared Services Division, including division controller. Mr. Beam is a director
of Ramsey Healthcare, Inc., a publicly-traded healthcare corporation.
James P. Bennett joined the Company in May 1991 as Director of
Inpatient Operations, was promoted to Group Vice President -- Inpatient
Rehabilitation Operations in September 1991, again to President and Chief
Operating Officer -- HEALTHSOUTH Rehabilitation Hospitals in June 1992, to
President -- HEALTHSOUTH Inpatient Operations in February 1993, and to President
and Chief Operating Officer of the Company in March 1995. Mr. Bennett was
elected a Director in February 1993. From August 1987 to May 1991, Mr. Bennett
was employed by Russ Pharmaceuticals, Inc., Birmingham, Alabama, as Vice
President -- Operations, Chief Financial Officer, Secretary and Director. Mr.
Bennett served as certified public accountant on the audit staff of the
Birmingham, Alabama office of Ernst & Whinney (now Ernst & Young LLP) from
October 1980 to August 1987.
Larry R. House is Chairman of the Board, President and Chief Executive
officer of MedPartners, Inc. a publicly-traded physician practice management
firm, a position he assumed as his principal occupation in August 1993. Mr.
House was elected a Director of the Company in February 1993. At the same time
he became President -- HEALTHSOUTH International, Inc. and New Business
Ventures, a position which he held until August 31, 1994, when he terminated his
employment with the Company to concentrate on his duties at MedPartners. Mr.
House joined the Company in September 1985 as Director of Marketing,
subsequently served as Senior Vice President and Chief Operating Officer of the
Company, and in June 1992 became President and Chief Operating Officer --
HEALTHSOUTH Medical Centers. Prior to joining the Company, Mr. House was
President and Chief Executive Officer of a provider of clinical contract
management services for more than ten years.
Anthony J. Tanner, Sc.D., a management founder, serves as Executive
Vice President -- Administration and Secretary of the Company and was elected a
Director in February 1993. From 1980 to 1984, Mr. Tanner was with Lifemark
Corporation in the Shared Services Division as Director, Clinical and
Professional Programs (1982-1984) and Director, Quality Assurance and Education
(1980-1982), where he was responsible for the development of clinical programs
and marketing programs.
P. Daryl Brown joined the Company in April 1986 and served until June
1992 as Group Vice President -- Outpatient Operations. He became President --
HEALTHSOUTH Outpatient Centers in June 1992, and was elected as a Director in
March 1995. From 1977 to 1986, Mr. Brown served with the American Red Cross,
Alabama Region, in several positions, including Chief Operating Officer,
Administrative Director for Financing and Administration and Controller.
John S. Chamberlin retired in 1988 as President and Chief Operating
Officer of Avon Products, Inc., a position he had held since 1985. From 1976
until 1985, he served as Chairman and Chief Executive Officer of Lenox,
Incorporated, after 22 years in various assignments for General Electric. From
1990 to 1991, he served as Chairman and Chief Executive Officer of New Jersey
Publishing Co. Mr. Chamberlin is Chairman of the Board
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<PAGE>
of Life Fitness Company and WNS, Inc., and is a Director of The Scotts Company
and UroHealth Systems, Inc. He is a member of the Board of Trustees of the
Medical Center at Princeton and the Board of Overseers of Parsons School of
Design and is a trustee of the Woodrow Wilson National Fellowship Foundation.
Richard F. Celeste originally joined the Board of Directors in 1991,
took a leave of absence from the Board of Directors in August 1993 to head the
Democratic National Committee's healthcare reform campaign, and rejoined the
Board in May 1994. He is Managing Partner of Celeste and Sabaty, Ltd., a
business advisory firm located in Columbus, Ohio, which assists United States
companies to build strategic business alliances in Europe, Africa, South Asia
and the Pacific Rim. He served as Governor of Ohio from 1983 to 1991, during
which time he chaired the National Governors' Association Committee on Science
and Technology, and directed the United States Peace Corps from 1979 to 1981. He
is a member of the Advisory Council of the Carnegie Commission on Science,
Technology and Government, and chairs Carnegie's Task Force on Science,
Technology and the States. He is a director of Navistar International, Inc. and
Republic Engineered Steels, Inc., both of which are publicly-traded companies.
Joel C. Gordon served as Chairman of the Board of Directors of Surgical
Care Affiliates, Inc. ("SCA") from its founding in 1982 until January 17, 1996,
when SCA was acquired by the Company. Mr. Gordon also served as Chief Executive
Officer of SCA from 1987 until January 17, 1996. Mr. Gordon serves on the Boards
of Directors of Genesco, Inc., an apparel manufacturer, and SunTrust Bank of
Nashville, N.A.
Directors hold office until the next Annual Meeting of Stockholders of
the Company and until their successors are elected and qualified. Officers are
elected annually by the Board of Directors and serve at the discretion of the
Board of Directors.
MANAGEMENT MATTERS
There are no arrangements or understandings known to the Company
between any of the Directors, nominees for Director or executive officers of the
Company and any other person pursuant to which any such person was elected as a
Director or an executive officer, except the Employment Agreement between the
Company and Richard M. Scrushy described under "Executive Compensation and Other
Information -- Audit and Compensation Committee Report on Executive Compensation
- -- Chief Executive Officer Compensation" in this Proxy Statement and except that
Mr. Gordon and Raymond J. Dunn, III, a retiring Director, were initially named
to the Board of Directors under the terms of the merger agreements pursuant to
which the Company acquired SCA and Advantage Health Corporation, respectively.
There are no family relationships between any Directors, nominees for Director
or executive officers of the Company. The Board of Directors of the Corporation
held a total of eight meetings during 1996.
There are no employment contracts between the Company and any executive
officer named in the Summary Compensation Table under "Executive Compensation
and Other Information -- Executive Compensation -- General", other than the
Employment Agreement with Richard M. Scrushy described under "Executive
Compensation and Other Information -- Audit and Compensation Committee Report on
Executive Compensation -- Chief Executive Officer Compensation" in this Proxy
Statement. Except for such Employment Agreement and except for the broad-based
retirement plans of the Company described under "Executive Compensation and
Other Information -- Retirement Investment Plan" and "Executive Compensation and
Other Information -- Employee Stock Benefit Plan", there are no compensatory
plans or arrangements with respect to any such executive officer which result or
will result from the resignation, retirement or any other termination of such
executive officer's employment with the Company and its subsidiaries or from a
change in control of the Company or from a change in such executive officer's
responsibilities following a change in control of the Company.
The Audit and Compensation Committee of the Board is responsible for
reviewing all reports from the Company's auditors, monitoring internal controls
and reviewing the Company's compensation program, as well as administering the
Company's stock option plans. On May 2, 1996, C. Sage Givens, George H. Strong
and Phillip
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C. Watkins, all of whom are outside Directors, were appointed to serve on this
committee for a period of one year or until their successors are appointed. They
continue to serve in such capacity. This committee held two meetings and acted
seven times by unanimous written consent during 1996.
The Company has no other standing audit, nominating or compensation
committees of the Board of Directors.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and Directors, and persons who beneficially own more than 10%
of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the New York Stock Exchange. Officers, Directors and beneficial owners of
more than 10% of the Company's Common Stock are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms that they file. Based
solely on review of the copies of such forms furnished to the Company, or
written representations that no reports on Form 5 were required, the Company
believes that for the period from January 1, 1996 through December 31, 1996, all
of its officers, Directors and greater-than-10% beneficial owners complied with
Section 16(a) filing requirements applicable to them, except as set forth below.
Raymond J. Dunn, III, a retiring Director of the Company, did not
timely report sales aggregating 393,330 shares of the Company's Common Stock in
four transactions in September 1996 and "private collar" derivative security
transactions in June 1996. All such transactions were reported on Form 5 in
February 1997.
1997 STOCK OPTION PLAN
GENERAL
The Company's Board of Directors has adopted the 1997 Stock Option Plan
(the "1997 Plan") for the Company's Directors, executives and other key
employees of the Company and its subsidiaries. The 1997 Plan is intended to
advance the Company's interests by providing such persons with additional
incentives to promote the success of the Company's business, to increase their
proprietary interest in the success of the Company and to encourage them to
remain in the Company's employ. Management believes that the 1997 Plan is a
necessary tool to help the Company compete effectively with other enterprises
for the services of new employees and to retain key employees and Directors, all
as may be required for the future development of the Company's business.
Management intends for the 1997 Plan to complement the other stock option plans
of the Company described herein by making additional shares available for
issuance pursuant to options granted under the 1997 Plan. See "Executive
Compensation - Stock Option Plans".
It should be noted that each Director, each nominee for Director and
each officer and employee of the Company has, by reason of being eligible to
receive options under the 1997 Plan, an interest in seeing that the 1997 Plan is
adopted by the stockholders.
Set forth below is a summary of the major features of the 1997 Plan.
This summary does not purport to be a complete statement of all the provisions
of the 1997 Plan, and is qualified in its entirety by the text of the composite
copy of the 1997 Plan attached to this Proxy Statement as Appendix A. See
"Executive Compensation Stock Option Plans" in this Proxy Statement for
information with respect to stock options granted to certain Directors and
executives of the Company under the other stock option plans of the Company
described herein.
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<PAGE>
NATURE OF OPTIONS TO BE GRANTED PURSUANT TO THE 1997 PLAN
The 1997 Plan provides for the grant of both non-qualified stock
options ("NQSOs") and options intended to qualify as "incentive stock options"
("ISOs") under Section 422(b) of the Internal Revenue Code of 1986 (the "Code").
Options designated as ISOs by the Audit and Compensation Committee of the Board
of Directors (the "Committee") will contain terms designed to comply with the
provisions of Section 422(b). All options issued pursuant to the 1997 Plan and
not expressly designated as ISOs shall be conclusively deemed to be NQSOs.
COMMON STOCK SUBJECT TO THE 1997 PLAN
The aggregate number of shares of Common Stock covered by the 1997 Plan
is 5,000,000 shares. Shares issued upon exercise of options under the 1997 Plan
may be either authorized but unissued shares or shares reacquired by the
Company. If, on or prior to the termination of the 1997 Plan, an option granted
thereunder expires or is terminated for any reason without having been exercised
in full, the unpurchased shares covered thereby will again become available for
the grant of options under the 1997 Plan. Shares of stock covered by options
surrendered in connection with the exercise of other options shall be deemed to
have been exercised and shall not again become available for the grant of
options under the 1997 Plan. The maximum number of shares of Common Stock for
which any individual may be granted options under the 1997 Plan during any
calendar year is 1,000,000.
The purchase price of the shares of Common Stock covered by each option
granted under the 1997 Plan will be at least 100% of the fair market value, but
in no event less than the par value, of the Common Stock at the time the option
is granted. No option granted to any person who, at the time of such grant,
owns, taking into account the attribution rules of Section 425(d) of the Code,
stock possessing more than 10% of the total combined voting power of all classes
of the Company's stock or of the stock of any of its corporate subsidiaries, may
be designated as an ISO unless at the time of such grant the purchase price of
the shares of Common Stock covered by such option is at least 110% of the fair
market value, but in no event less than the par value, of such shares.
Notwithstanding any contrary provision contained in the 1997 Plan, the aggregate
fair market value (determined as of the time each ISO is granted) of the shares
of Common Stock with respect to which ISOs issued to any one person thereunder
are exercisable for the first time during any calendar year shall not exceed
$100,000.
The 1997 Plan prohibits any reduction of the exercise price of
outstanding options granted under the plan except by reason of an adjustment
pursuant to a stock split, merger, business combination, recapitalization or
similar change in the capitalization of the Company. The 1997 Plan likewise
prohibits the cancellation of outstanding options accompanied by the reissuance
of substitute options at a lower exercise price.
The 1997 Plan provides that if the Common Stock is listed upon a
national securities exchange or exchanges, such fair market value shall be
deemed to be the last reported sale price at which the shares of Common Stock
were traded on such securities exchange or exchanges immediately prior to the
commencement of the meeting of the Committee at which the option is granted, or
if no sale of the Common Stock was made on any national securities exchange on
such date, then on the next preceding day on which there was a sale of the
Common Stock. The 1997 Plan prescribes other methodologies for determining fair
market value if the Common Stock is not listed upon a national securities
exchange or exchanges. Since September 13, 1989, the Common Stock has been
listed on the New York Stock Exchange.
ADMINISTRATION OF THE 1997 PLAN
The 1997 Plan is administered by the Audit and Compensation Committee
of the Board of Directors (the "Committee", as defined above), each member of
which is an outside director. The Committee has full and exclusive authority to
determine the grant of options under the 1997 Plan. Under the terms of the 1997
Plan, each outside Director, including the members of the Committee, is to
receive an annual grant of options covering 25,000
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shares of Common Stock under the 1997 Plan or another stock option plan of the
Company, such grant to be made on the first business day in January in each
calendar year commencing with January 1998. Currently, Phillip C. Watkins, M.D.,
C. Sage Givens and George H. Strong serve as the Committee.
PURCHASE OF COMMON STOCK UNDER THE 1997 PLAN
Each option granted under the 1995 Plan shall be granted pursuant to
and subject to the terms and conditions of a stock option agreement (a "Stock
Option Agreement") to be entered into between the Company and the optionholder
at the time of such grant. Any such Stock Option Agreement shall incorporate by
reference all of the terms and provisions of the 1997 Plan as in effect at the
time of grant and may contain such other terms and provisions as shall be
approved and adopted by the Committee.
The expiration date of an option granted under the 1997 Plan shall be
as determined by the Committee at the time of grant, provided that each such
option shall expire not more than ten years after the date such option is
granted. Notwithstanding the preceding sentence, no option granted to any person
who, at the time of such grant, owns, taking into account the attribution rules
of Section 425(d) of the Code, stock possessing more than 10% of the total
combined voting power of all classes of Common Stock or the stock of any of the
Company's corporate subsidiaries, may be designated as an ISO unless by its
terms each such option shall expire not more than five years after the date such
option was granted. Each option shall become exercisable in whole, in part or in
installments at such time or times as the Committee may prescribe and specify in
the Stock Option Agreement at the time the option is granted.
In the event of a "Change in Control" (as defined), of the Company,
options granted under the 1997 Plan which are, by their terms, exercisable in
installments, will become immediately exercisable in full. A "Change in Control"
is defined to include the acquisition of more than 25% of the outstanding voting
securities of the Company by a single person or group, the election to the Board
of Directors of persons constituting a majority of the Board of Directors who
are not "Incumbent Directors" (as defined), or the approval by the stockholders
of the Company of (i) a merger, reorganization or similar transaction which
results in the then-current stockholders of the Company owning less than 75% of
the combined voting power of the reorganized or merged entity, (ii) the
liquidation or dissolution of the Company, or (iii) the sale of all or
substantially all of the assets of the Company. These provisions of the 1997
Plan may have some deterrent effect on certain mergers, tender offers or other
takeover attempts, thereby having some potential adverse effect on the market
price of the Company's Common Stock.
The exercise price for options granted under the 1997 Plan may be paid
in any of the following ways, which may be combined for any given exercise: (a)
the exercise price may be paid in cash; (b) the exercise price may be paid by
tendering outstanding shares of Common Stock having a fair market value equal to
the aggregate exercise price for the options being exercised; or (c) subject to
applicable requirements of the Exchange Act, the optionholder may deliver with
his exercise notice irrevocable instructions to a broker to promptly deliver to
the Company an amount of sale or loan proceeds sufficient to pay the exercise
price. In addition, with respect to optionholders who are subject to reporting
requirements under Section 16(a) of the Exchange Act, the optionholder may
surrender unexercised options having a "Spread" equal to the exercise price of
the options sought to be exercised. For purposes of the 1997 Plan, "Spread"
means, with respect to a surrendered option, (i) the average price per share of
Common Stock on the date of exercise, less (ii) the exercise price of the
surrendered option.
Options granted under the 1997 Plan shall be assignable or transferable
only by will or pursuant to the laws of descent and distribution, and shall be
exercisable during the optionholder's lifetime only by the optionholder himself
or herself. No holder of any option shall have any rights to dividends or other
rights of a stockholder with respect to shares subject to an option prior to the
purchase of such shares upon exercise of the option.
- 8 -
<PAGE>
TERMINATION OF EMPLOYMENT, DEATH OR DISABILITY OF OPTIONHOLDER
With respect to an option which, by its terms, is not exercisable for
one year from the date on which it is granted, if an optionholder's employment
by, or other relationship with, the Company or any of its subsidiaries
terminates for any reason other than death within one year after the date an
unexercised option is granted under the 1997 Plan, the option shall terminate on
the date of termination of such employment or other relationship. With respect
to all options granted under the 1997 Plan, if an optionholder's employment by,
or other relationship with, the Company is terminated by reason of his death,
the option shall terminate one year after the date of death, unless the option
otherwise expires. If an optionholder's employment by, or other relationship
with, the Company terminates for any other reason, or at any other time, other
than as set forth above, the option shall terminate three months after the date
of termination of such employment or other relationship, unless the option
earlier expires, provided that: (a) if the optionholder dies within such
three-month period, the option shall terminate one year after the date of his
death, unless the option earlier expires; (b) the Board of Directors may, at any
time prior to any termination of such employment or other relationship under the
circumstances covered herein, determine in its discretion that the option shall
terminate on the date of termination of such employment or other relationship;
and (c) the exercise of any option after termination of such employment or other
relationship shall be subject to satisfaction of the conditions precedent that
the optionholder refrain from engaging, directly or indirectly, in any activity
which is competitive with any activity of the Company or any subsidiary and from
otherwise acting, either prior to or after termination of such employment or
other relationship, in any manner inimical or in any way contrary to the best
interests of the Company and that the optionholder furnish to the Company such
information with respect to the satisfaction of the foregoing conditions
precedent as the Board of Directors shall reasonably request.
EXPIRATION, TERMINATION AND AMENDMENT OF THE 1995 PLAN
The 1997 Plan will terminate on the earliest of (a) April 30,2007, (b)
the date on which all shares of Common Stock reserved for issuance under the
1997 Plan shall have been acquired through exercise of options granted
thereunder, or (c) such earlier time as the Board of Directors may determine.
Any option outstanding under the 1997 Plan at the time of its termination shall
remain in effect in accordance with its terms and conditions and those of the
1997 Plan.
The 1997 Plan may, at any time or from time to time, be terminated,
modified or amended by the stockholders of the Company by the affirmative vote
of the holders of a majority of the outstanding shares of Common Stock entitled
to vote. The Board of Directors may, insofar as permitted by law, from time to
time with respect to any shares of Common Stock at the time not subject to
options, suspend or discontinue the 1997 Plan or revise or amend it in any
respect whatsoever, except that, without approval of the stockholders of the
Company, no such revision or amendment shall increase the number of shares
subject to the 1997 Plan, decrease the price at which the options may be
granted, permit exercise of options unless full payment is made at the time of
exercise (except as provided in the 1997 Plan), extend the period during which
options may be exercised, or change the provisions relating to adjustment to be
made upon changes in capitalization. Subject to the provisions described above,
the Board of Directors has the power to amend the 1997 Plan and any outstanding
options granted thereunder in such respects as the Board of Directors shall, in
its sole discretion, deem advisable in order to incorporate in the 1997 Plan or
any such option any new provision or change designed to comply with or take
advantage of requirements or provisions of the Code or other statute, or rules
or regulations of the Internal Revenue Service or other federal or state
governmental agency enacted or promulgated after the adoption of the 1997 Plan.
- 9 -
<PAGE>
FEDERAL TAX CONSEQUENCES
Pursuant to the Code, upon the exercise of an NQSO under the 1997 Plan,
the Company is generally entitled to a tax deduction in an amount equal to the
difference between the option price and the fair market value of the Common
Stock on the date the NQSO is exercised. For federal tax purposes, the person
exercising the option must pay personal income taxes on an amount equal to the
difference between the option price and the fair market value of the Common
Stock on the date the NQSO is exercised. The basis of the Common Stock obtained
by exercising the NQSO will be the option price paid plus the amount equal to
the difference between the option price and the fair market value of the Common
Stock on the date the NQSO is exercised, which amount was subject to federal
income tax. A subsequent sale of the Common Stock by the person exercising the
NQSO will result in a long- or short-term capital gain or loss depending on the
total period of time that the shares of Common Stock are held. Generally, no
taxable event occurs under the Code upon the grant of an NQSO under the 1997
Plan.
Pursuant to the Code, the holder of an ISO will recognize no taxable
income (or loss) upon the grant or exercise of an ISO. Upon the sale of the
underlying shares of Common Stock, the optionholder will incur a long-term
capital gain or loss if the provisions of Section 422(b) of the Code are
complied with. In such case, there is no taxable event for the Company. The
principal requirement of Section 422(b), other than the limitations on option
price, duration of option period, time of exercise and volume exercisable in one
year described above, is that, in order for an option to qualify for ISO
treatment, shares received pursuant to exercise of the option may not be
disposed of within two years from the date of grant and one year from the date
of exercise of the option. If an option designated as an ISO ceases to qualify
as an ISO, the tax effects for the optionholder and the Company will be
identical to those described above for NQSOs.
NEW PLAN BENEFITS
No options have been granted under the 1997 Plan. The number of shares
covered by particular options to be granted under the 1997 Plan is not
determinable at this time.
VOTE REQUIRED; RECOMMENDATION OF THE BOARD OF DIRECTORS
Management recommends a vote FOR the adoption of the 1997 Stock Option
Plan. The affirmative vote of the holders of a majority of the outstanding
shares of the Common Stock present or represented and entitled to vote at the
Annual Meeting will be necessary for stockholder approval of the 1997 Stock
Option Plan.
- 10 -
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
EXECUTIVE COMPENSATION -- GENERAL
The following table sets forth compensation paid or awarded to the
Chief Executive Officer and each of the other four most highly compensated
executive officers of the Company (the "Named Executive Officers") for all
services rendered to the Company and its subsidiaries in 1994, 1995 and 1996.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------- -----------------------------------------
BONUS/ANNUAL STOCK LONG-TERM ALL
INCENTIVE OPTION INCENTIVE OTHER COM-
NAME AND PRINCIPAL POSITION YEAR SALARY AWARD AWARDS PAYOUTS PENSATION (1)
- --------------------------- ---- ------ ----- ------ ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard M. Scrushy 1994 $1,207,228 $ 2,000,000 -- -- $ 12,991
Chairman of the Board 1995 1,737,526 5,000,000 2,000,000 -- 650,108 (2)
and Chief Executive Officer 1996 3,380,295 8,000,000 1,500,000 -- 34,280 (2)
James P. Bennett 1994 357,740 250,000 -- -- 10,760
President and Chief 1995 371,558 600,000 300,000 -- 7,835
Operating Officer 1996 485,110 800,000 200,000 -- 32,106 (2)
Michael D. Martin 1994 189,013 250,000 -- -- 7,311
Executive Vice President 1995 165,626 500,000 170,000 -- 7,919
and Treasurer 1996 270,164 750,000 120,000 -- 31,587 (2)
P. Daryl Brown 1994 272,573 200,000 -- -- 10,226
President-- HEALTHSOUTH 1995 263,462 300,000 260,000 -- 8,580
Outpatient Centers 1996 324,345 400,000 100,000 -- 11,181
Aaron Beam, Jr. 1994 298,223 175,000 -- -- 11,272
Executive Vice President 1995 247,903 300,000 200,000 -- 8,695
and Chief Financial Officer 1996 287,417 350,000 30,000 -- 33,314 (2)
</TABLE>
- --------------------
(1) Includes car allowances of $500 per month for Mr. Scrushy and $350 per
month for the other Named Executive Officers. Also includes (a)
matching contributions under the Company's Retirement Investment Plan
for 1994, 1995 and 1996, respectively, of: $318, $292 and $708 to Mr.
Scrushy; $355, $900 and $1,289 to Mr. Beam; $625, $900 and $1,425 to
Mr. Bennett; $526, $900 and $1,371 to Mr. Martin; and $274, $900 and
$1,897 to Mr. Brown; (b) awards under the Company's Employee Stock
Benefit Plan for 1994, 1995 and 1996, respectively, of $4,910, $1,626
and $3,389 to Mr. Scrushy; $4,910, $1,626 and $3,389 to Mr. Beam;
$4,910, $1,626 and $3,387 to Mr. Bennett; $1,345, $1,626 and $3,386 to
Mr. Martin; and $4,910, $1,626 and $3,389 to Mr. Brown; and (c)
split-dollar life insurance premiums paid in 1994 and 1995 of $1,723,
$2,190 and $2,312 with respect to Mr. Scrushy; $1,807, $1,969 and
$2,559 with respect to Mr. Beam; $1,025, $1,109 and $1,217 with respect
to Mr. Bennett; $1,240, $1,193 and $752 with respect to Mr. Martin; and
$842, $1,854 and $1,695 with respect to Mr. Brown. See "Executive
Compensation -- Retirement Investment Plan" and "Executive Compensation
-- Employee Stock Benefit Plan".
(2) In addition to the amounts described in the preceding footnote,
includes the conveyance of real property valued at $640,000 to Mr.
Scrushy in 1995, and the forgiveness of loans in the amount of $21,877
each owed by Messrs. Scrushy, Beam, Bennett and Martin in 1996.
- 11 -
<PAGE>
<TABLE>
<CAPTION>
STOCK OPTION GRANTS IN 1996
INDIVIDUAL GRANTS
---------------------------------------------------------
% OF TOTAL
OPTIONS
NUMBER OF GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE EXPIRATION GRANT DATE
NAME GRANTED FISCAL YEAR PER SHARE DATE PRESENT VALUE (1)
- ----- --------- ------------- ------------- -------- -------------------
<S> <C> <C> <C> <C> <C>
Richard M. Scrushy 1,500,000 36.9% $ 16.25 1/17/06 $ 10,982,625
James P. Bennett 200,000 4.9% 16.25 1/17/06 1,464,350
Michael D. Martin 100,000 2.5% 16.25 1/17/06 732,175
20,000 0.5% 16.44 8/14/06 146,435
P. Daryl Brown 100,000 2.5% 16.25 1/17/06 732,175
Aaron Beam, Jr. 60,000 1.5% 16.25 1/17/06 439,305
</TABLE>
- --------------------
(1) Based on the Black-Scholes option pricing model adapted for use in
valuating executive stock options. The actual value, if any, an
executive may realize will depend upon the excess of the stock price
over the exercise price on the date the option is exercised, so that
there is no assurance that the value realized by an executive will be
at or near the value estimated by the Black-Scholes model. The
estimated values under that model are based on arbitrary assumptions as
to certain variables, including the following: (i) stock price
volatility is assumed to be 37.5%; (ii) the risk-free rate of return is
assumed to be 6.21%; (iii) dividend yield is assumed to be 0; and (iv)
the time of exercise is assumed to be 5.5 years from the date of grant.
STOCK OPTION EXERCISES IN 1996 AND OPTION VALUES AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
NUMBER VALUE OF UNEXERCISED
OF SHARES NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED AT DECEMBER 31, 1996 AT DECEMBER 31, 1996
ON VALUE --------------------------- ------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard M. Scrushy.... 1,000,000 $16,168,845 13,869,892 2,632 $188,007,958 $ 35,836
James P. Bennett...... 90,000 1,183,950 860,000 --- 9,353,300 ---
Michael D. Martin..... 83,500 1,291,461 200,000 105,000 888,750 1,200,381
P. Daryl Brown........ 77,000 1,218,986 935,000 --- 12,048,828 ---
Aaron Beam, Jr........ 152,500 2,053,794 260,000 --- 2,371,250 ---
</TABLE>
- ---------------------
(1) Does not reflect any options granted and/or exercised after December 31,
1996. The net effect of any such grants and exercises is reflected in the
table appearing under "Principal Stockholders".
(2) Represents the difference between market price of the Company's Common
Stock and the respective exercise prices of the options at December 31,
1996. Such amounts may not necessarily be realized. Actual values which may
be realized, if any, upon any exercise of such options will be based on the
market price of the Common Stock at the time of any such exercise and thus
are dependent upon future performance of the Common Stock.
- 12 -
<PAGE>
STOCKHOLDER RETURN COMPARISON (1)
Set forth below is a line graph comparing the total returns of the
Company's Common Stock, the Standard & Poor's 500 (S&P 500) Index and a peer
group index ("Rehab Index") compiled by the Company, consisting of Tenet
Healthcare Corporation and NovaCare, Inc., publicly-traded healthcare companies
whose businesses are similar in some respects to that of the Company. The graph
assumes $100 invested on December 31, 1991, in HEALTHSOUTH Common Stock and each
of the indices. The Rehab Index has been weighted for market capitalization, and
the Company assumes reinvestment of dividends for purposes of the graph.
[Graph]
DECEMBER 31 HEALTHSOUTH S&P 500 REHAB INDEX
----------- ----------- ------- -----------
1991 100 100 100
1992 75 107 77
1993 72 119 75
1994 104 120 111
1995 166 165 111
1996 220 203 130
- --------------------
(1) In previous proxy statements of the Company, the Rehab Index included
Continental Medical Systems, Inc. ("CMS"). In May 1995, CMS was
acquired by Horizon Healthcare Corp., which was the surviving
corporation in the merger. Because CMS was not publicly traded during
all of 1995, data relating to CMS has been deleted from the Rehab Index
for all periods.
STOCK OPTION PLANS
Set forth below is information concerning the various stock option
plans of the Company at December 31, 1996. All share numbers and exercise prices
have been adjusted to reflect the Company's March 1997 two-for-one stock split.
1984 Incentive Stock Option Plan
The Company had a 1984 Incentive Stock Option Plan (the "ISO Plan"),
intended to qualify under Section 422(b) of the Internal Revenue Code of 1986,
as amended (the "Code"), covering an aggregate of 4,800,000 shares of Common
Stock. The ISO Plan expired on February 28, 1994, in accordance with its terms.
As of December 31, 1996, there were outstanding under the ISO Plan options to
purchase 31,702 shares of the Company's Common Stock at prices ranging from
$2.52 to $3.78 per share. All such options remain in full force and effect in
accordance with their terms and the ISO Plan. Under the ISO Plan, which was
administered by the Board of Directors, key employees could be granted options
to purchase shares of Common Stock at 100% of fair market value on the date of
grant (or 110% of fair market value in the case of a 10% stockholder/grantee).
The outstanding options granted under the ISO Plan must be exercised within ten
years from the date of grant, are cumulatively exercisable with respect to 25%
of the shares covered thereby after the expiration of each of the first through
the fourth years following the date of grant, are nontransferable except by will
or pursuant to the laws of descent and distribution, are protected against
dilution and expire within three months after termination of employment, unless
such termination is by reason of death.
- 13 -
<PAGE>
1988 Non-Qualified Stock Option Plan
The Company also has a 1988 Non-Qualified Stock Option Plan (the "NQSO
Plan") covering a maximum of 4,800,000 shares of Common Stock. As of December
31, 1996, there were outstanding under the NQSO Plan options to purchase 57,300
shares of the Company's Common Stock at prices ranging from $8.37 to $16.25 per
share. The NQSO Plan, which is administered by the Board of Directors (except
with respect to options granted to Directors, as to which it is administered by
an Independent Stock Option Committee), provides that Directors, executive
officers and other key employees may be granted options to purchase shares of
Common Stock at 100% of fair market value on the date of grant. The NQSO Plan
terminates on the earliest of (a) February 28, 1998, (b) such time as all shares
of Common Stock reserved for issuance under the NQSO Plan have been acquired
through the exercise of options granted thereunder or (c) such earlier time as
the Board of Directors of the Company may determine. Options granted pursuant to
the NQSO Plan have a ten-year term are exercisable at any time during such
period, are nontransferable except by will or pursuant to the laws of descent
and distribution, are protected against dilution and expire within three months
of termination of association with the Company as a Director or termination of
employment, unless such termination is by reason of death.
1989, 1990, 1991, 1992, 1993 and 1995 Stock Option Plans
The Company also has a 1989 Stock Option Plan (the "1989 Plan"), a 1990
Stock Option Plan (the "1990 Plan"), a 1991 Stock Option Plan (the "1991 Plan"),
a 1992 Stock Option Plan (the "1992 Plan"), a 1993 Stock Option Plan (the "1993
Plan") and a 1995 Stock Option Plan (the "1995 Plan"), under each of which
incentive stock options ("ISOs") and non-qualified stock options ("NQSOs") may
be granted. The 1989, 1990, 1991, 1992, 1993 and 1995 Plans cover a maximum of
2,400,000 shares, 3,600,000 shares, 11,200,000 shares, 5,600,000 shares,
5,600,000 shares and 11,563,548 (to be increased by 0.9% of the outstanding
Common Stock of the Company on each January 1, beginning January 1, 1996)
shares, respectively, of the Company's Common Stock. As of December 31, 1996,
there were outstanding options to purchase an aggregate of 28,188,880 shares of
the Company's Common Stock under such Plans at exercise prices ranging from
$2.52 to $19.12 per share. An additional 2,778,356 shares were reserved for
grants under such Plans. Each of the 1989, 1990, 1991, 1992, 1993 and 1995 Plans
is administered in the same manner as the NQSO Plan and provides that Directors,
executive officers and other key employees may be granted options to purchase
shares of Common Stock at 100% of fair market value on the date of grant. The
1989, 1990, 1991, 1992, 1993 and 1995 Plans terminate on the earliest of (a)
October 25, 1999, October 15, 2000, June 19, 2001, June 16, 2002, April 19, 2003
and June 5, 2005, respectively, (b) such time as all shares of Common Stock
reserved for issuance under the respective Plan have been acquired through the
exercise of options granted thereunder, or (c) such earlier times as the Board
of Directors of the Company may determine. Options granted under these Plans
which are designated as ISOs contain vesting provisions similar to those
contained in options granted under the ISO Plan and have a ten-year term. NQSOs
granted under these Plans have a ten-year term. Options granted under these
Plans are nontransferable except by will or pursuant to the laws of descent and
distribution, are protected against dilution and will expire within three months
of termination of association with the Company as a Director or termination of
employment, unless such termination is by reason of death.
1993 Consultants' Stock Option Plan
The Company also has a 1993 Consultants' Stock Option Plan (the "1993
Consultants' Plan"), under which NQSOs may be granted, covering a maximum of
3,000,000 shares of Common Stock. As of December 31, 1995, there were
outstanding under the 1993 Consultants' Plan options to purchase 1,636,000
shares of Common Stock at prices ranging from $3.37 to $17.75 per share. An
additional 40,000 shares were reserved for grants under such Plans. The 1993
Consultants' Plan, which is administered in the same manner as the NQSO Plan,
provides that certain non-employee consultants who provide significant services
to the Company may be granted options to purchase shares of Common Stock at such
prices as are determined by the Board of Directors or the appropriate committee.
The 1993 Consultants' Plan terminates on the earliest of (a) February 25, 2003,
(b) such time as all shares of Common Stock reserved for issuance under the 1993
Consultants' Plan have been acquired through the
- 14 -
<PAGE>
exercise of options granted thereunder, or (c) such earlier time as the Board of
Directors of the Company may determine. Options granted under the 1993
Consultants' Plan have a ten-year term. Options granted under the 1993
Consultants' Plan are nontransferable except by will or pursuant to the laws of
descent and distribution, are protected against dilution and expire within three
months of termination of association with the Company as a consultant, unless
such termination is by reason of death.
Other Stock Option Plans
In connection with the acquisitions of Surgical Health Corporation,
Sutter Surgery Centers, Inc., Surgical Care Affiliates, Inc., Professional
Sports Care Management, Inc. and ReadiCare, Inc., the Company assumed certain
existing stock option plans of the acquired companies, and outstanding options
to purchase stock of the acquired companies under such plans were converted into
options to acquire Common Stock of the Company in accordance with the exchange
ratios applicable to such mergers. At December 31, 1996, there were outstanding
under these assumed plans options to purchase 1,906,200 shares of the Company's
Common Stock at exercise prices ranging from $2.14 to $25.75 per share. No
additional options are being granted under any such assumed plans.
EXECUTIVE LOANS
In order to enhance equity ownership by senior management, in 1989 the
Company adopted a program of making loans to officers holding the position of
Group Vice President and above to facilitate the exercise of stock options held
by such persons. Each loan bears interest at the prime rate announced from time
to time by AmSouth Bank of Alabama, Birmingham, Alabama and is secured by a
first lien on the shares of Common Stock acquired with the proceeds of the loan.
Each loan has a ten-year term, and the Company's lien on the shares of Common
Stock is released as the indebtedness is repaid at the rate of one share per the
weighted average option exercise price repaid. The only loan currently
outstanding under such program is a loan made on May 7, 1992 to P. Daryl Brown,
President -- HEALTHSOUTH Outpatient Centers, which had an original principal
balance of $213,613 and of which $190,000 remained outstanding at December 31,
1996.
RETIREMENT INVESTMENT PLAN
Effective January 1, 1990, the Company adopted the HEALTHSOUTH
Retirement Investment Plan (the "401(k) Plan"), a retirement plan intended to
qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended.
The 401(k) Plan is open to all full-time and part-time employees of the Company
who are over the age of 21, have one full year of service with the Company and
have at least 1,000 hours of service in the year in which they enter the 401(k)
Plan. Eligible employees may elect to participate in the Plan on January 1 and
July 1 in each year.
Under the 401(k) Plan, participants may elect to defer up to 20% of
their annual compensation (subject to nondiscrimination rules under the Internal
Revenue Code). The deferred amounts may be invested among four options, at the
participant's direction: a money market fund, a bond fund, a guaranteed
insurance contract or an equity fund. The Company will match a minimum of 10% of
the amount deferred by each participant, up to 4% of such participant's total
compensation, with the matched amount also directed by the participant.
Aaron Beam, Jr., Executive Vice President and Chief Financial Officer
of the Company, and Anthony J. Tanner, Executive Vice President --
Administration and Secretary of the Company, serve as Trustees of the 401(k)
Plan, which is administered by the Company.
- 15 -
<PAGE>
EMPLOYEE STOCK BENEFIT PLAN
Effective January 1, 1991, the Company adopted the HEALTHSOUTH
Rehabilitation Corporation and Subsidiaries Employee Stock Benefit Plan (the
"ESOP"), a retirement plan intended to qualify under sections 401(a) and
4975(e)(7) of the Internal Revenue Code of 1986, as amended. The ESOP is open to
all full-time and part-time employees of the Company who are over the age of 21,
have one full year of service with the Company and have at least 1,000 hours of
service in the year in which they begin participation in the ESOP on the next
January 1 or July 1 after the date on which such employee satisfies the
aforementioned conditions.
The ESOP was established with a $10,000,000 loan from the Company, the
proceeds of which were used to purchase 827,586 shares of the Company's Common
Stock. In 1992, an additional $10,000,000 loan was made to the ESOP, which was
used to purchase an additional 833,332 shares of Common Stock. Under the ESOP, a
Company Common Stock account (a "company stock account") is established and
maintained for each eligible employee who participates in the ESOP. In each plan
year, such account is credited with such employee's allocable share of the
Common Stock held by the ESOP and allocated with respect to such plan year. Each
employee's allocable share for any given plan year is determined according to
the ratio which such employee's compensation for such plan year bears to the
compensation of all eligible participating employees for the same plan year.
Under the ESOP, eligible employees who participate in the ESOP and who
have attained age 55 and have completed 10 years of participation in the ESOP
may elect to diversify the assets in their company stock account by directing
the plan administrator to transfer to the 401(k) Plan a portion of their company
stock account to be invested, as the eligible employee directs, in one or more
of the investment options available under the 401(k) Plan.
Richard M. Scrushy, Chairman of the Board and Chief Executive Officer
of the Company, Aaron Beam, Jr., Executive Vice President and Chief Financial
Officer of the Company, and Anthony J. Tanner, Executive Vice President --
Administration and Secretary of the Company, serve as Trustees of the ESOP,
which is administered by the Company.
STOCK PURCHASE PLAN
In order to further encourage employees to obtain equity ownership in
the Company, the Company's Board of Directors adopted an Employee Stock Purchase
Plan (the "Stock Purchase Plan") effective January 1, 1994. Under the Stock
Purchase Plan, participating employees may contribute $10 to $200 per pay period
toward the purchase of the Company's Common Stock in open-market transactions.
The Stock Purchase Plan is open to regular full-time or part-time employees who
have been employed for six months and are at least 21 years old. After six
months of participation in the Stock Purchase Plan, the Company will provide a
10% matching contribution to be applied to purchases under the Stock Purchase
Plan. The Company also pays all fees and brokerage commissions associated with
the purchase of the stock. The Stock Purchase Plan is administered by a
broker-dealer firm not affiliated with the Company.
BOARD COMPENSATION
Directors who are not also employed by the Company are paid Directors'
fees of $10,000 per annum, plus $3,000 for each meeting of the Board of
Directors and $1,000 for each Committee meeting attended. In addition, Directors
are reimbursed for all out-of-pocket expenses incurred in connection with their
duties as Directors. The Directors of the Company, including Mr. Scrushy, have
been granted non-qualified stock options to purchase shares of the Company's
Common Stock. See this Item, "Executive Compensation -- Stock Option Plans"
above.
- 16 -
<PAGE>
AUDIT AND COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
General
The Board of Directors of the Company has an Audit and Compensation
Committee (the "Committee"), consisting of Ms. Givens, Mr. Strong and Dr.
Watkins. The Committee is charged by the Board of Directors with establishing a
compensation plan which will enable the Company to compete effectively for the
services of qualified officers and key employees, to give such employees
appropriate incentive to pursue the maximization of long-term stockholder value,
and to recognize such employees' success in achieving both qualitative and
quantitative goals for the benefit of the Company. The Committee makes
recommendations to the full Board of Directors as to appropriate levels of
compensation for specific individuals, as well as compensation and benefit
programs for the Company as a whole.
Compensation Philosophy and Policies for Executive Officers
As its first principle, the Committee believes that executives of the
Company should be rewarded based upon their success in meeting the Company's
operational goals, improving its earnings, maintaining its leadership role in
the outpatient and rehabilitative healthcare services fields, and generating
returns for its stockholders, and the Committee strives to establish levels of
compensation that take such factors into account and provide appropriate
recognition for past achievement and incentive for future success. The Committee
recognizes that the demand for executives with expertise and experience in the
outpatient and rehabilitative healthcare services fields is intense. In order to
attract and retain qualified persons, the Committee believes that the Company
must offer current compensation at levels consistent with those of other
publicly-traded healthcare companies. In addition, the Committee believes that
it is in the best interests of the Company's stockholders to offer its
executives meaningful equity participation in the Company, in order that those
executives' interests will be aligned with those of the Company's stockholders.
The Committee feels that the historic mix of cash compensation and equity
participation has proven to be effective in stimulating the Company's executives
to meet both long-term and short-term goals and has been a major factor in
limiting turnover among senior executives.
The Company's compensation program has three distinct elements: base
salary; incentive compensation, including both cash incentive compensation and
equity-based compensation; and retirement compensation. These elements are
discussed below.
Base Salary: While the demand for experienced managers in the
healthcare industry continues to grow, the Company has been very successful in
attracting and retaining key executives, many of whom have been with the Company
since its early days. The Company believes that its compensation package is
instrumental in such success. The Committee endeavors to establish base salary
levels for those key executives which are consistent with those provided for
similarly situated executives of other publicly-traded healthcare companies,
taking into account each executive's areas and level of responsibility,
historical performance and tenure with the Company. In establishing such levels,
the Company considers compensation for executives of other publicly-traded
providers of healthcare services, such as Columbia/HCA, Horizon/CMS Healthcare
and Tenet Healthcare Corporation, as well as other publicly-traded companies of
similar size and with a similar growth rate. Compensation decisions are not
targeted to specific levels in the range of compensation paid by such companies,
nor does the Company maintain a record of where its compensation stands with
respect to such other companies. However, the Committee and the Board of
Directors take such levels of compensation into account in determining
appropriate levels of compensation for the Company's executives.
Incentive Compensation: In addition to base salary, the Committee
recommends to the Board of Directors cash incentive compensation for executives
of the Company, based upon each such executive's success in meeting qualitative
and quantitative performance goals on an annual basis. The total incentive bonus
pool available for the Company's executives is capped at the lesser of (a) the
amount by which the Company's annual net income exceeds
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<PAGE>
the budgeted annual net income established by the Board of Directors and (b) 10%
of the Company's annual net income. No bonuses are payable unless annual net
income exceeds budgeted net income. Individual incentive bonuses within such
bonus pool are not determined in a formulary manner, but are determined on a
basis that takes into account each executive's success in achieving standards of
performance, which may or may not be quantitative, established by the Board of
Directors and such executive's superiors. Bonus determinations are made on a
case-by-case basis, taking into account appropriate quantitative and qualitative
factors, and there is no fixed relationship between any particular performance
factor and the amount of a given executive's bonus. Historically, incentive
compensation has been a major component of the Company's executive compensation,
and the Committee believes that placing executives at risk for such a component
has been effective in motivating such executives to achieve such goals.
In 1994, the Committee engaged William M. Mercer, Inc. as a consultant
to perform a study of the Company's executive compensation programs. The Mercer
report concluded that the Company's compensation mix was significantly more
highly-leveraged, at risk and performance-focused than other companies selected
by Mercer for comparison, with 41% of the Company's cash compensation for
executive officers being at-risk, performance-based compensation, compared to
29% for the other companies reviewed by Mercer.
In addition to cash incentive compensation, as a growth company, the
Company has always utilized equity- based compensation, in the form of stock
options, as a tool to encourage its executives to work to meet its operational
goals and maximize long-term stockholder value. Because the value of stock
options granted to an executive is directly related to the Company's success in
enhancing its market value over time, the Committee feels that its stock option
programs have been very effective in aligning the interests of management and
stockholders.
The Committee determines stock option grants under the Company's
various stock option plans, all of which are described above under "Executive
Compensation and Other Information -- Stock Option Plans". Specific grants are
determined taking into account an executive's current responsibilities and
historical performance, as well as the executive's perceived contribution to the
Company's results of operations. Options are also used to give incentive to
newly-promoted officers at the time that they are asked to assume greater
responsibilities, and, in some cases, to executives who have joined the Company
through acquisitions and have assumed significant leadership roles within the
Company. In evaluating option grants, the Board of Directors considers prior
grants and shares currently held, as well as the recipient's success in meeting
operational goals and the recipient's level of responsibility. However, no fixed
formula is utilized to determine particular grants. The Committee believes that
the opportunity to acquire a significant equity interest in the Company has been
a strong motivation for the Company's executives to pursue the long-term
interests of the Company and its stockholders, and has promoted longevity and
retention of key executives. Information relating to stock options granted to
the five most highly-compensated executive officers of the Company is set forth
elsewhere in this Proxy Statement.
In connection with the Company's use of stock options as a significant
component of compensation, the Mercer study referred to above indicated that
most companies in Mercer's long-term incentive survey utilized two long-term
incentive plans, while the Company used stock options as its only long-term
incentive plan. The Mercer study noted that the Company's use of stock options
was very consistent with the practices of high-growth companies that wished to
increase the ownership stake of executives in the company and to conserve cash
by using stock rather than cash in long-term plans.
Retirement Compensation: As described under "Executive Compensation and
Other Information -- Retirement Investment Plan", in 1991 the Company adopted a
401(k) retirement plan in order to give all full-time employees an opportunity
to provide for their retirement on a tax-advantaged basis. In order to further
tie employees' interests to the long-term market value of the Company, the
Company adopted an Employee Stock Benefit Plan (the "ESOP") in 1991, which gives
all full-time employees an opportunity to invest a portion of their retirement
funds in Common Stock of the Company on a tax-advantaged basis. See "Executive
Compensation and Other Information -- Employee Stock Benefit Plan". While these
plans provide benefits to all full-time employees,
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<PAGE>
the Committee believes that the ESOP provides additional incentive to executives
to maximize stockholder value over the long term.
Chief Executive Officer Compensation
The Company is a party to an Employment Agreement with Richard M.
Scrushy, pursuant to which Mr. Scrushy, a management founder of the Company. is
employed as Chairman of the Board and Chief Executive Officer of the Company for
a five-year term which ends December 31, 2000. Such term is automatically
extended for an additional year on December 31 of each year. In addition, the
Company has agreed to use its best efforts to cause Mr. Scrushy to be elected as
a Director of the Company during the term of the Agreement. Under the Agreement,
Mr. Scrushy received a base salary of $999,000, excluding incentive compensation
of up to $2,400,000, in 1996 and is to receive the same base salary in 1997 and
each year thereafter, with incentive compensation of up to $2,400,000, subject
to annual review by the Board of Directors, and is entitled to participate in
any bonus plan approved by the Board of Directors for the Company's management.
The incentive compensation is earned at $200,000 per month in 1997, contingent
upon the Company's success in meeting certain monthly budgeted earnings per
share targets. Mr. Scrushy earned the entire $2,400,000 incentive component of
his compensation in 1996, as all such targets were met. In addition, Mr. Scrushy
was awarded $8,000,000 under the management bonus plan. Such additional bonus
was based on the Committee's assessment of Mr. Scrushy's contribution to the
establishment of the Company as the industry leader in outpatient surgery and
rehabilitative healthcare services, including his role in the negotiation and
consummation of the acquisitions of Surgical Care Affiliates, Advantage Health
Corporation, Professional Sports Care Management, Inc. and ReadiCare, Inc. and
the negotiation of the acquisitions of Health Images, Inc. and Horizon/CMS
Healthcare Corporation, as well as the Company's success in achieving annual
budgeted net income targets and other factors described below. Mr. Scrushy is
also provided with a car allowance in the amount of $500 per month and with
disability insurance. Under the Agreement, Mr. Scrushy's employment may be
terminated for cause or if he should become disabled. Termination of Mr.
Scrushy's employment under the Agreement will result in certain severance pay
arrangements. In the event that the Company were to be acquired, merged or
reorganized in such a manner as to result in a change of control of the Company,
Mr. Scrushy has the right to terminate his employment under the Agreement, in
which case he will receive a lump sum payment equal to three years' annual base
salary (including the gross incentive portion thereof) under the Agreement. Mr.
Scrushy has agreed not to compete with the Company during any period to which
any such severance pay relates. Mr. Scrushy may terminate the Agreement at any
time upon 180 days' notice, in which case he will receive one year's base salary
as severance pay.
The Committee reports to the Board of Directors on compensation
arrangements with Mr. Scrushy, and recommends to the Board of Directors the
level of incentive compensation, both cash and equity-based, which is
appropriate for Mr. Scrushy with respect to each fiscal year of the Company. In
making such recommendation, the Committee takes into account the Company's
performance in the marketplace, its success in meeting strategic goals and its
success in meeting monthly and annual budgets established by the Board of
Directors. Again, ultimate compensation decisions are not made in a formulary
manner, but in a manner which takes into account the Company's competitive
position, its position in the financial markets, and the significant
contributions made by Mr. Scrushy to the success of the Company. In making its
decisions with respect to Mr. Scrushy's compensation, the Committee believes
that it is appropriate to recognize that, as a management founder of the
Company, Mr. Scrushy has played an instrumental role in establishing the Company
as the industry leader in outpatient and rehabilitative healthcare services and
that, under his leadership, the Company has significantly enhanced stockholder
value over a period of years and continues to grow in assets, net revenues, net
income and market value.
Mr. Scrushy's stewardship of the Company has led it to 42 consecutive
profitable quarters since the second quarter of 1986, with steadily increasing
earnings per share. The Company's assets increased by 15.0% from December 31,
1995, to December 31, 1996; its net revenues and income (excluding the effect of
one-time charges in 1996 and 1996) rose 21.6% and 52.9%, respectively, in the
same period; and its stock price increased by 32.6% over the same period.
According to a study by an independent analyst, the Company's market
capitalization grew by 112.8% over that period, placing it in the 97th
percentile among 173 public companies with market capitalizations
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<PAGE>
between $5,000,000,000 and $10,000,000,000. Further, in the period since
December 31, 1993, the Company, under Mr. Scrushy's leadership, has grown from
the fourth-largest provider of rehabilitative healthcare services to the largest
provider, and during 1995 and 1996 established itself as one of the largest
providers of outpatient surgery services through a series of strategic
acquisitions. During that same period, the Company has become the second-largest
publicly-traded healthcare provider (by market capitalization) in the nation,
has expanded its operations to 50 states, has been named to the S&P 500 and,
most recently, was named by Business Week as the best-performing healthcare
provider in the S&P 500. The Committee believes that Mr. Scrushy's leadership
has been essential to the Company's success and growth. In view of these
accomplishments, the Committee believes that it is important to ensure that, if
Mr. Scrushy is successful in leading the Company to achieve the goals set by the
Board of Directors, his compensation will be at a level commensurate with that
of chief executive officers of similarly-situated public companies and that he
will continue to have the opportunity to obtain a significant equity interest in
the Company.
Section 162(m) of the Internal Revenue Code
The Omnibus Budget Reconciliation Act of 1993 contains a provision
under which a publicly-traded corporation is sometimes precluded from taking a
federal income tax deduction for compensation in excess of $1,000,000 that is
paid to the chief executive officer and the four other most highly-compensated
executives of the corporation during a corporation's tax year. Compensation in
excess of $1,000,000 continues to be deductible if that compensation is
"performance based" within the meaning of that term under Section 162(m) of the
Internal Revenue Code. Certain transition rules apply with respect to stock
option plans which were approved prior to December 20, 1993, pursuant to Rule
16b-3(b) under the Exchange Act.
The Company believes that its employee stock option plans meet the
requirements of Section 162(m) as performance-based plans. The Committee and the
Board of Directors have currently made a decision not to amend the Company's
cash compensation programs to meet all requirements of Section 162(m) because
such a decision would not be in the best interests of the Company's
stockholders. The Committee believes that, in establishing bonus and incentive
awards, certain subjective factors must be taken into account in particular
cases, based upon the experienced judgment of the Committee members as well as
on factors which may be objectively quantified. The preservation of tax
deductibility of all compensation is an important consideration. However, the
Committee believes that it is important that the Company retain the flexibility
to reward superior effort and accomplishment even where all cash compensation
may not be fully deductible. The Committee will continue to review the
requirements for deductibility under Section 162(m) and will take such
requirements into account in the future as it deems appropriate and in the best
interests of the Company's stockholders. Approximately $10,410,484 of Mr.
Scrushy's compensation paid with respect to 1996, as well as approximately
$312,404 and $46,994 paid to James P. Bennett, President and Chief Operating
Officer of the Company, and Michael D. Martin, Executive Vice President and
Chief Operating Officer of the Company, respectively, will not be deductible;
however, the Company believes that all other compensation paid to executive
officers will be fully deductible.
Conclusion
The Committee believes that the levels and mix of compensation provided
to the Company's executives during 1996 were appropriate and were instrumental
in the achievement of the Company's goals for 1996. It is the intent of the
Committee to ensure that the Company's compensation programs continue to
motivate its executives and reward them for being responsive to the long-term
interests of the Company and its stockholders.
The foregoing report is submitted by the following Directors of the
Company, constituting all of the members of the Committee of the Board of
Directors:
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<PAGE>
C. Sage Givens
George H. Strong
Phillip C. Watkins, Chairman
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 17, 1997, (a) by each person
who is known by the Company to own beneficially more than 5% of the Company's
Common Stock, (b) by each of the Company's Directors and (c) by the Company's
five most highly compensated executive officers and all executive officers and
Directors as a group.
<TABLE>
<CAPTION>
PERCENTAGE
NAME AND NUMBER OF SHARES OF
ADDRESS OF OWNER BENEFICIALLY OWNED (1) COMMON STOCK
---------------- ---------------------- ------------
<S> <C> <C>
Richard M. Scrushy 15,076,658 (2) 4.51%
John S. Chamberlin 222,000 (3) *
C. Sage Givens 392,100 (4) *
Charles W. Newhall III 711,920 (5) *
George H. Strong 577,882 (6) *
Phillip C. Watkins, M.D. 797,854 (7) *
Aaron Beam, Jr. 323,620 (8) *
James P. Bennett 1,250,000 (9) *
Larry R. House 459,600 (10) *
Anthony J. Tanner 1,043,808 (11) *
Richard F. Celeste 260,000 (12) *
P. Daryl Brown 1,093,000 (13) *
Joel C. Gordon 3,660,668 (14) 1.14%
Raymond J. Dunn, III 3,226,166 (15) 1.01%
Michael D. Martin 457,008 (16) *
FMR Corp. 38,509,640 (17) 12.03%
82 Devonshire Street
Boston, Massachusetts 02109
Putnam Investments, Inc. 22,880,090 (18) 7.15%
One Post Office Square
Boston, Massachusetts 02109
All Executive Officers and Directors as a Group 32,119,688 (19) 9.33%
(20 persons)
</TABLE>
- -------------------------
(1) The persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by
them, except as otherwise indicated.
(2) Includes 14,472,524 shares subject to currently exercisable stock
options.
(3) Includes 150,000 shares subject to currently exercisable stock options.
(4) Includes 2,100 shares owned by Ms. Givens's spouse and 390,000 shares
subject to currently exercisable stock options.
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<PAGE>
(5) Includes 790 shares owned by members of Mr. Newhall's immediate family
and 710,000 shares subject to currently exercisable stock options. Mr.
Newhall disclaims beneficial ownership of the shares owned by his
family members except to the extent of his pecuniary interest therein.
(6) Includes 103,662 shares owned by a trust of which Mr. Strong is a trustee
and claims shared voting and investment power and 300,000 shares subject
to currently exercisable stock options.
(7) Includes 600,000 shares subject to currently exercisable stock options.
(8) Includes 320,000 shares subject to currently exercisable stock options.
(9) Includes 1,160,000 shares subject to currently exercisable stock options.
(10) Includes 457,996 shares subject to currently exercisable stock options.
(11) Includes 72,000 shares held in trust by Mr. Tanner for his children and
910,000 shares subject to currently exercisable stock options.
(12) All of the shares are subject to currently exercisable stock options.
(13) Includes 1,035,000 shares subject to currently exercisable stock options.
(14) Includes 364,340 shares owned by his spouse, 144,988 shares owned by
trusts of which he is a trustee and 384,520 shares subject to currently
exercisable stock options.
(15) Includes 50,000 shares subject to currently exercisable stock options.
(16) Includes 455,000 shares subject to currently exercisable stock options.
(17) Shares held by various investment funds for which affiliates of FMR Corp.
act as investment advisor. FMR Corp. or its affiliates claim sole power
to vote 1,407,440 of the shares and sole power to dispose of all of the
shares.
(18) Shares held by various investment funds for which affiliates of Putnam
Investments, Inc. act as investment advisor. Putnam Investments, Inc. or
its affiliates claim sole power to vote 2,070,760 of the shares and sole
power to dispose of all of the shares.
(19) Includes 24,215,544 shares subject to currently exercisable stock options
held by executive officers and Directors.
* Less than 1%
CERTAIN TRANSACTIONS
During 1996, the Company paid $12,906,000 for the purchase of new NCR
computer equipment from GG Enterprises, a value-added reseller of computer
equipment which is owned by Grace Scrushy, the mother of Richard M. Scrushy,
Chairman of the Board and Chief Executive Officer of the Company, and Gerald P.
Scrushy, Senior Vice President -- Physical Resources of the Company. Such
purchases were made in the ordinary course
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<PAGE>
of the Company's business. The price paid for this equipment was more favorable
to the Company than that which could have been obtained from an independent
third party seller.
During 1996, the Company paid $429,247 to MedPartners, Inc., a
publicly-traded physician practice management company, for management services
rendered to certain physician practices owned by the Company. Richard M.
Scrushy, Chairman of the Board and Chief Executive Officer of the Company, and
Larry R. House, a Director of the Company, are directors of MedPartners, Inc.
Mr. House also serves as Chairman of the Board, President and Chief Executive
Officer of MedPartners, Inc., a position which has been his principal occupation
since August 1993. At March 1, 1997, Mr. Scrushy beneficially owns approximately
0.48%, Mr. House beneficially owns approximately 0.71%, and the Company owns
approximately 0.67% of the issued and outstanding Common Stock of MedPartners,
Inc. The Company believes that the price paid for such services was no less
favorable to the Company than that which could have been obtained from an
independent third-party provider.
In June 1994, the Company sold selected properties, including six
ancillary hospital facilities, three outpatient rehabilitation facilities, two
outpatient surgery centers, one uncompleted medical office building and one
research facility to Capstone Capital Corporation ("Capstone"), a
publicly-traded real estate investment trust. The net proceeds of the Company as
a result of the transaction were approximately $58,425,000. The net book value
of the properties was approximately $50,735,000. The Company leases back
substantially all these properties from Capstone and guarantees the associated
operating leases, payments under which aggregate approximately $6,900,000
annually. In addition, in 1995 Capstone acquired ownership of the Company's
Erie, Pennsylvania inpatient rehabilitation facility, which had been leased by
the Company from an unrelated lessor. The Company's annual lease payment under
that lease is $1,700,000. In 1996 Capstone also acquired ownership of the
Company's Altoona and Mechanicsburg, Pennsylvania inpatient rehabilitation
facilities, which ha been leased y the Company from unrelated lessors. The
Company's annual lease payments under such leases aggregate $2,818,000. Richard
M. Scrushy, Chairman of the Board and Chief Executive Officer of the Company,
and Michael D. Martin, Executive Vice President and Treasurer of the Company,
were among the founders of Capstone and serve on its Board of Directors. At
March 1, 1997, Mr. Scrushy owned approximately 2.9% of the issued and
outstanding capital stock of Capstone, and Mr. Martin owned approximately 0.8%
of the issued and outstanding capital stock of Capstone. In addition, the
Company owned approximately 0.8% of the issued and outstanding capital stock of
Capstone at March 1, 1997. The Company believes that all transactions involving
Capstone were effected on terms no less favorable than those which could have
been obtained in transactions with independent third parties.
In order to enhance equity ownership by senior management, the Company
has adopted a program of making loans to officers holding the position of Group
Vice President and above to facilitate the exercise of stock options held by
such persons. See "Executive Compensation -- Executive Loans".
At various times, the Company has made loans to executive officers to
assist them in meeting financial obligations at certain times when they were
requested by the Company to refrain from selling Common Stock in the open
market. At January 1, 1996, loans in the following original principal amounts
were outstanding: $460,000 to Larry R. House, a Director and a former executive
officer, and $140,000 to William T. Owens, Senior Vice President and Controller.
Outstanding principal balances at December 31, 1996 were $414,000 for Mr. House
and $126,000 for Mr. Owens. In addition, during 1995, the Company made an
additional loan of $350,000 to Mr. Owens and $500,000 to Aaron Beam, Jr.,
Executive Vice President and Chief Financial Officer of the Company, which loans
were outstanding in full at December 31, 1996. Such loans bear interest at the
rate of 1-1/4% per annum below the prime rate of AmSouth Bank of Alabama,
Birmingham, Alabama, and are payable on demand.
- 23 -
<PAGE>
RELATIONSHIP WITH
INDEPENDENT PUBLIC ACCOUNTANTS
Ernst & Young LLP, Birmingham, Alabama, has been engaged by the Board
of Directors of the Company as independent public accountants for the Company
and its subsidiaries for the fiscal year 1996 and it is expected that such firm
will serve in that capacity for the 1997 fiscal year. Management expects that a
representative of Ernst & Young LLP will be present at the Annual Meeting to
make a statement if he or she desires to do so and to be available to answer
appropriate questions posed by stockholders.
FINANCIAL STATEMENTS
The Company's audited financial statements for the fiscal year ended
December 31, 1996, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and other selected information are included in
Appendix B to this Proxy Statement.
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors of the
Company does not know of any business which will be presented for consideration
at the Annual Meeting other than that specified herein and in the Notice of
Annual Meeting of Stockholders, but if other matters are presented, it is the
intention of the persons designated as proxies to vote in accordance with their
judgment on such matters.
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1996, INCLUDING THE FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES THERETO, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, WILL BE
FURNISHED WITHOUT CHARGE TO ANY STOCKHOLDER OF THE COMPANY WHOSE PROXY IS
SOLICITED BY THE FOREGOING PROXY STATEMENT, UPON THE WRITTEN REQUEST OF ANY SUCH
PERSON ADDRESSED TO ANTHONY J. TANNER, SECRETARY, HEALTHSOUTH Corporation, ONE
HEALTHSOUTH PARKWAY, BIRMINGHAM, ALABAMA 35243. SUCH A REQUEST FROM A BENEFICIAL
OWNER OF THE COMPANY'S COMMON STOCK MUST CONTAIN A GOOD-FAITH REPRESENTATION BY
SUCH PERSON THAT, AS OF MARCH 27, 1997, HE WAS A BENEFICIAL OWNER OF THE
COMPANY'S COMMON STOCK.
Please SIGN and RETURN the enclosed Proxy promptly.
By Order of the Board of Directors:
ANTHONY J. TANNER
Secretary
April 1, 1997
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<PAGE>
APPENDIX A
HEALTHSOUTH CORPORATION
1997 STOCK OPTION PLAN
1. PURPOSE OF THE PLAN. The purpose of the 1997 Stock Option Plan
(hereinafter called the "Plan") of HEALTHSOUTH Corporation, a Delaware
corporation (hereinafter called the "Corporation"), is to provide incentive for
future endeavor and to advance the interests of the Corporation and its
stockholders by encouraging ownership of the Common Stock, par value $.01 per
share (hereinafter called the "Common Stock"), of the Corporation by its
Directors, executives and other key employees, upon whose judgment, interest and
continuing special efforts the Corporation is largely dependent for the
successful conduct of its operations, and to enable the Corporation to compete
effectively with other enterprises for the services of such new Directors,
executives and employees as may be needed for the continued improvement of the
Corporation's business, through the grant of options to purchase shares of the
Common Stock. It is intended that certain Options issued under the Plan and so
designated pursuant to Section 6(c) hereof by the Committee (as defined in
Section 5 hereof) shall qualify as "incentive stock options" (hereinafter called
"ISOs") under Section 422(b) of the Internal Revenue Code of 1986, as amended
from time to time (hereinafter called the "Code"), and, where applicable, the
terms of the Plan shall be interpreted in accordance with such intention. Other
Options may be issued under the Plan and designated by the Committee as
non-qualified stock options (hereinafter called "NQSOs"). Any Option issued
under the Plan and not expressly designated as an ISO shall be conclusively
deemed to be an NQSO.
2. PARTICIPANTS. Options may be granted under the Plan to Directors of
the Corporation and to such executives and key employees of the Corporation and
its subsidiaries as shall be determined by the Committee appointed by the Board
of Directors as set forth in Section 5 of the Plan; provided, however, that no
Option may be granted to any person if such grant would cause the Plan to cease
to be an "employee benefit plan" as defined in Rule 405 of Regulation C
promulgated under the Securities Act of 1933; and provided further that no ISO
may be granted to any person ineligible to be granted ISOs under Section 422(b)
of the Code.
3. TERM OF THE PLAN. The Plan shall become effective as of May 1, 1997,
subject to the approval by the holders of a majority of the shares of issued and
outstanding Common Stock of the Corporation at the 1997 Annual Meeting of
Stockholders of the Corporation. The Plan shall terminate on the earliest of (a)
April 30, 2007, (b) such time as all shares of Common Stock reserved for
issuance under the Plan have been acquired through the exercise of Options
granted under the Plan, or (c) such earlier time as the Board of Directors of
the Corporation may determine. Any Option outstanding under the Plan at the time
of its termination shall remain in effect in accordance with its terms and
conditions and those of the Plan. No Option shall be granted under the Plan
after April 30, 2007.
4. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 13,
the aggregate number of shares of Common Stock for which Options may be granted
under the Plan shall not exceed 5,000,000 shares, and the maximum number of
shares of Common Stock for which any individual may be granted Options under the
Plan during any calendar year is 1,000,000. If, on or prior to the termination
of the Plan as provided in Section 3, an Option granted under the Plan shall
have expired or terminated for any reason without having been exercised in full,
the unpurchased shares covered thereby shall again become available for the
grant of Options under the Plan. Shares covered by Options surrendered in
connection
<PAGE>
with the exercise of other Options pursuant to Section 9(e) shall be deemed, for
purposes of this Section 4, to have been exercised, and such shares shall not
again become available for the grant of Options under the Plan.
The shares to be delivered upon exercise of Options under the Plan
shall be made available, at the discretion of the Board of Directors, either
from authorized but previously unissued shares as permitted by the Certificate
of Incorporation of the Corporation or from shares re-acquired by the
Corporation, including shares of Common Stock purchased in the open market, and
shares held in the treasury of the Corporation.
5. ADMINISTRATION OF THE PLAN. With respect to the participation of
executives and key employees of the Corporation and its subsidiaries who are not
also Directors of the Corporation, the Plan shall be administered by the Audit
and Compensation Committee of the Board of Directors of the Corporation
(hereinafter called the "Committee"). The acts of a majority of the Committee,
at any meeting thereof at which a quorum is present, or acts reduced to or
approved in writing by a majority of the members of the Committee, shall be the
valid acts of the Committee. The Committee shall determine the executives and
key employees of the Corporation and its subsidiaries who shall be granted
Options and the number of shares of Common Stock to be subject to each Option.
With respect to the participation of non-employee Directors of the
Corporation, each non-employee Director shall receive, as an annual grant, an
NQSO to purchase 25,000 shares of Common Stock on the date of approval of the
Plan by the stockholders of the Corporation and in each year thereafter, such
Option to be granted as of the first business day in January of each calendar
year, commencing with January 1998. The purchase price of the shares of Common
Stock covered by each such NQSO granted to a non-employee Director shall be 100%
of the fair market value (but in no event less than the par value) of such
shares at the time the Option is granted, determined in accordance with Section
7(c) hereof. Grants to any non-employee Director shall be in lieu of any grants
under other stock option plans of the Corporation.
The interpretation and construction of any provision of the Plan or of
any Option granted under it by the Committee shall be final, conclusive and
binding upon all parties, including the Corporation, its stockholders and
Directors, and the executives and employees of the Corporation and its
subsidiaries. No member of the Board of Directors or the Committee shall be
liable to the Corporation, any stockholder, any optionholder or any employee of
the Corporation or its subsidiaries for any action or determination made in good
faith with respect to the Plan or any Option granted under it. No member of the
Board of Directors may vote on any Option to be granted to him.
The expenses of administering the Plan shall be borne by the
Corporation.
6. GRANT OF OPTIONS. (a) Options may be granted under the Plan by the
Committee in accordance with the provisions of Section 5 at any time prior to
the termination of the Plan. In making any determination as to Directors,
executives and key employees to whom Options shall be granted and as to the
number of shares to be covered by such Options, the Committee shall take into
account the duties of the respective Directors, executives and key employees,
their present and potential contribution to the success of the Corporation, and
such other factors as the Committee shall deem relevant in connection with the
accomplishment of the purposes of the Plan.
A-2
<PAGE>
(b) Each Option granted under the Plan shall be granted
pursuant to and subject to the terms and conditions of a stock option agreement
to be entered into between the Corporation and the optionholder at the time of
such grant. Each such stock option agreement shall be in a form from
time-to-time adopted for use under the Plan by the Committee (such form being
hereinafter called a "Stock Option Agreement"). Any such Stock Option Agreement
shall incorporate by reference all of the terms and provisions of the Plan as in
effect at the time of grant and may contain such other terms and provisions as
shall be approved and adopted by the Committee.
(c) At the time of the grant of each Option under this Plan,
the Committee shall determine whether such Option is to be designated as an ISO.
If an Option is to be designated as an ISO, then the provisions of Sections
6(d), 7(b) and 8(b) shall apply to such Options. The Stock Option Agreement
relating to the grant of any option designated as an ISO shall reflect such
designation.
(d) Notwithstanding any contrary provision contained in this
Agreement, the aggregate fair market value (determined as of the time each ISO
is granted) of the shares of Common Stock with respect to which ISOs issued to
any one person hereunder are exercisable for the first time during any calendar
year shall not exceed $100,000.
7. OPTION PRICE. (a) The purchase price of the shares of Common Stock
covered by each Option granted under the Plan shall be at least 100% of the fair
market value (but in no event less than the par value) of such shares at the
time the Option is granted, or such higher purchase price as shall be determined
by the Committee.
(b) Notwithstanding any contrary provision contained in
Section 7(a) hereof, no Option granted to any person who, at the time of such
grant, owns, taking into account the attribution rules of Section 424(d) of the
Code, stock possessing more than 10% of the total combined voting power of all
classes of the Corporation's stock or of the stock of any of its corporate
subsidiaries, may be designated as an ISO unless at the time of such grant the
purchase price of the shares of Common Stock covered by such Option is at least
110% of the fair market value (but in no event less than the par value) of such
shares.
(c) If the Common Stock is not listed upon a national
securities exchange or exchanges, such fair market value shall be as determined
by the Board of Directors of the Corporation (which determination shall be
conclusive and binding for all purposes) or, if applicable, shall be deemed to
be the last reported sale price for the Common Stock as quoted by brokers and
dealers trading in the Common Stock in the over-the-counter market (or if the
Common Stock shall be quoted by the National Association of Securities Dealers
Automated Quotation system, then such NASDAQ quote) immediately prior to the
commencement of the meeting of the Committee at which the Option is granted. If
the Common Stock is listed upon a national securities exchange or exchanges,
such fair market value shall be deemed to be the last reported sale price at
which the shares of Common Stock were traded on such securities exchange or
exchanges immediately prior to the commencement of the meeting of the Committee
at which the Option is granted, or if no sale of the Common Stock was made on
any national securities exchange on such date, then the closing price per share
of the Common Stock on such securities exchange or exchanges on the next
preceding day on which there was a sale of the Common Stock.
(d) The exercise price of any outstanding Options shall not be
reduced during the term of such Options except by reason of an adjustment
pursuant to Section 13 hereof, nor shall the
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<PAGE>
Committee or the Board of Directors cancel outstanding Options and reissue new
Options at a lower exercise price in substitution for the canceled Options.
8. TERM OF OPTIONS. (a) The expiration date of an Option granted under
the Plan shall be as determined by the Committee at the time of grant, provided
that each such Option shall expire not more than ten years after the date such
Option was granted.
(b) Notwithstanding any contrary provision contained in
Section 8(a) hereof, no Option granted to any person who, at the time of such
grant, owns, taking into account the attribution rules of Section 424(d) of the
Code, stock possessing more than 10% of the total combined voting power of all
classes of the Corporation's stock or of the stock of any of its corporate
subsidiaries, may be designated as an ISO unless by its terms each such Option
shall expire not more than five years after the date such Option was granted.
9. EXERCISE OF OPTIONS. (a) Each Option shall become exercisable in
whole or in part or in installments at such time or times as the Committee may
prescribe at the time the Option is granted and specify in the Stock Option
Agreement. No Option shall be exercisable after the expiration of ten years from
the date on which it was granted.
(b) Notwithstanding any contrary provision contained herein,
unless otherwise expressly provided in the Stock Option Agreement, any Option
granted hereunder which is, by its terms, exercisable in installments shall
become immediately exercisable in full upon the occurrence of a Change in
Control of the Corporation. For purposes of this Section 9(b), "Change in
Control" shall mean
(i) the acquisition (other than from the Company) by any
person, entity or "group" (within the meaning of Sections 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934, but excluding, for
this purpose, the Corporation or its subsidiaries, or any employee
benefit plan of the Company or its subsidiaries which acquires
beneficial ownership of voting securities of the Company) of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the
Securities Exchange Act of 1934) of 25% or more of either the
then-outstanding shares of Common Stock or the combined voting power of
the Company's then-outstanding voting securities entitled to vote
generally in the election of Directors; or
(ii) individuals who, as of May 1, 1997, constitute the Board
of Directors of the Corporation (as of such date, the "Incumbent
Board") cease for any reason to constitute at least a majority of the
Board of Directors; provided, however, that any person becoming a
Director subsequent to such date whose election, or nomination for
election, was approved by a vote of at least a majority of the
Directors then constituting the Incumbent Board (other than an election
or nomination of an individual whose initial assumption of office is in
connection with an actual or threatened election contest relating to
the election of Directors of the Company) shall be, for purposes of
this Section 9(b)(ii), considered as though such person were a member
of the Incumbent Board; or
(iii) approval by the stockholders of the Company of a
reorganization, merger, consolidation or share exchange, in each case
with respect to which persons who were the stockholders of the Company
immediately prior to such reorganization, merger, consolidation or
share exchange do not, immediately thereafter, own more than 75% of
A-4
<PAGE>
the combined voting power entitled to vote generally in the election of
directors of the reorganized, merged, consolidated or other surviving
entity's then-outstanding voting securities, or a liquidation or
dissolution of the Corporation or the sale of all or substantially all
of the assets of the Corporation.
(c) Options may be exercised by giving written notice to the
Corporation of intention to exercise, specifying the number of shares to be
purchased pursuant to such exercise in accordance with the procedures set forth
in the Stock Option Agreement. All shares purchased upon exercise of any Option
shall be paid for in full at the time of purchase in accordance with the
procedures set forth in the Stock Option Agreement. Except as provided in
Sections 9(d) and 9(e) hereof, such payment shall be made in cash or through
delivery of shares of Common Stock or a combination of cash and Common Stock as
provided in the Stock Option Agreement. Any shares so delivered shall be valued
at their fair market value determined as of the date of exercise of the Option
under the method set forth in Section 7(c) hereof.
(d) Payment for shares purchased upon exercise of any such
Option may be made by delivery to the Corporation of a properly executed
exercise notice together with irrevocable instructions to a broker to promptly
deliver to the Corporation an amount of sale or loan proceeds sufficient to pay
the exercise price. Additionally, the Corporation will accept, in payment for
shares purchased upon exercise of any such Option, proceeds of a margin loan
obtained by the exercising optionholder from a broker, provided that the
exercising optionholder has, at the same time as delivery to the Corporation of
a properly executed exercise notice, delivered to the Corporation irrevocable
instructions to the Corporation to deliver share certificates directly to such
broker upon payment for such shares.
(e) With respect to Directors and officers of the Corporation
who are subject to reporting requirements under Section 16(a) of the Securities
Exchange Act of 1934, payment for shares purchased upon exercise of any Option
granted hereunder may be made by surrender of outstanding Options issued under
this Plan or any other stock option plan of the Corporation having a Spread (as
defined below) equal to the exercise price of the Options sought to be
exercised. For purposes of this Section 9(e), the "Spread" with respect to any
unexercised Option shall be equal to (i) the average price per share of Common
Stock on the date of exercise, as determined by the Corporation from any
commercially available reporting service reflecting trading of the Common Stock
on a national securities exchange, on the National Association of Securities
Dealers Automated Quotation System, or in the over the counter market, as
applicable, less (ii) the exercise price of the surrender of the Option. All
Options so surrendered will be deemed to have been exercised by the
optionholder. Such surrender shall be evidenced in a form satisfactory to the
Secretary of the Corporation.
10. NONTRANSFERABILITY OF OPTIONS. (a) Options granted under the Plan
shall be assignable or transferable only by will or pursuant to the laws of
descent and distribution and shall be exercisable during the optionholder's
lifetime only by him, except to the extent set forth in the following
paragraphs.
(b) Upon written notice to the Secretary of the Corporation,
an optionholder may, except as otherwise prohibited by applicable law, transfer
options granted under the Plan to one or more members of such optionholder's
immediate family, to a partnership consisting only of members of such
optionholder's immediate family, or to a trust all of whose beneficiaries are
members of the optionholder's immediate family. For purposes of this section, an
optionholder's "immediate family" shall be deemed to include such optionholder's
spouse, children and grandchildren only.
A-5
<PAGE>
(c) Upon written notice to the Secretary of the Corporation,
an optionholder may transfer options to a charitable, educational or religious
entity which has been determined by the United States Internal Revenue Service
to be exempt from federal income taxation under the provisions of Section 501(c)
of the Internal Revenue Code of 1986, as amended, or any successor statutory
provision.
11. STOCKHOLDER RIGHTS OF OPTIONHOLDER. No holder of any Option shall
have any rights to dividends or other rights of a stockholder with respect to
shares subject to an Option prior to the purchase of such shares upon exercise
of the Option.
12. TERMINATION OF OPTION. With respect to any Option which, by its
terms, is not exercisable for one year from the date on which it is granted, if
an optionholder's employment by, or other relationship with, the Corporation or
any of its subsidiaries terminates within one year after the date an unexercised
Option containing such terms is granted under the Plan for any reason other than
death, the Option shall terminate on the date of termination of such employment
or other relationship. With respect to all Options granted under the Plan, if an
optionholder's employment by, or other relationship with, the Corporation is
terminated by reason of his death, the Option shall terminate one year after the
date of death, unless the Option otherwise expires. If an optionholder's
employment by, or other relationship with, the Corporation terminates for any
reason other than as set forth above in this Section 12, the Option shall
terminate three months after the date of termination of such employment or other
relationship unless the Option earlier expires, provided that (a) if the
optionholder dies within such three-month period, the Option shall terminate one
year after the date of his death unless the Option earlier expires; (b) the
Board of Directors may, at any time prior to any termination of such employment
or other relationship under the circumstances covered by this Section 12,
determine in its discretion that the Option shall terminate on the date of
termination of such employment or other relationship with the Corporation; and
(c) the exercise of any Option after termination of such employment or other
relationship with the Corporation shall be subject to satisfaction of the
conditions precedent that the optionholder refrain from engaging, directly or
indirectly, in any activity which is competitive with any activity of the
Corporation or any subsidiary thereof and from otherwise acting, either prior to
or after termination of such employment or other relationship, in any manner
inimical or in any way contrary to the best interests of the Corporation and
that the optionholder furnish to the Corporation such information with respect
to the satisfaction of the foregoing condition precedent as the Board of
Directors shall reasonably request. For purposes of this Section 12, a
"relationship with the Corporation" shall be limited to any relationship that
does not cause the Plan to cease to be an "employee benefit plan" as defined in
Rule 405 of Regulation C under the Securities Act of 1933. The mere ownership of
stock in the Corporation shall not be deemed to be a "relationship with the
Corporation".
Nothing in the Plan or in the Stock Option Agreement shall confer upon
any optionholder the right to continue in the employ of the Corporation or any
of its subsidiaries or in any other relationship thereto or interfere in any way
with the right of the Corporation to terminate such employment or other
relationship at any time.
A holder of an Option under the Plan may make written designation of a
beneficiary on forms prescribed by and filed with the Secretary of the
Corporation. Such beneficiary, or if no such designation of any beneficiary has
been made, the legal representative of such optionholder or such other person
entitled thereto as determined by a court of competent jurisdiction, may
exercise, in accordance with and subject to the provisions of this Section 12,
any unterminated and unexpired Option granted to such optionholder to the same
extent that the optionholder himself could have exercised such Option were he
A-6
<PAGE>
alive or able; provided, however, that no Option granted under the Plan shall be
exercisable for more shares than the optionholder could have purchased
thereunder on the date his employment by, or other relationship with, the
Corporation and its subsidiaries was terminated.
13. ADJUSTMENT OF AND CHANGES IN CAPITALIZATION. In the event that the
outstanding shares of Common Stock shall be changed in number or class by reason
of split-ups, combinations, mergers, consolidations or recapitalizations, or by
reason of stock dividends, the number or class of shares which thereafter may be
purchased through exercise of Options granted under the Plan, both in the
aggregate and as to any individual, and the number and class of shares then
subject to Options theretofore granted and the price per share payable upon
exercise of such Option shall be adjusted so as to reflect such change, all as
determined by the Board of Directors of the Corporation. In the event there
shall be any other change in the number or kind of the outstanding shares of
Common Stock, or of any stock or other securities into which such Common Stock
shall have been changed, or for which it shall have been exchanged, then if the
Board of Directors shall, in its sole discretion, determine that such change
equitably requires an adjustment in any Option theretofore granted or which may
be granted under the Plan, such adjustment shall be made in accordance with such
determination.
Notice of any adjustment shall be given by the Corporation to each
holder of an Option which shall have been so adjusted and such adjustment
(whether or not such notice is given) shall be effective and binding for all
purposes of the Plan.
Fractional shares resulting from any adjustment in Options pursuant to
this Section 13 may be settled in cash or otherwise as the Board of Directors
may determine.
14. SECURITIES ACTS REQUIREMENTS. No Option granted pursuant to the
Plan shall be exercisable in whole or in part, and the Corporation shall not be
obligated to sell any shares of Common Stock subject to any such Option, if such
exercise and sale would, in the opinion of counsel for the Corporation, violate
the Securities Act of 1933 or other Federal or state statutes having similar
requirements, as they may be in effect at that time. Each Option shall be
subject to the further requirement that, at any time that the Board of Directors
or the Committee, as the case may be, shall determine, in their respective
discretion, that the listing, registration or qualification of the shares of
Common Stock subject to such Option under any securities exchange requirements
or under any applicable law, or the consent or approval of any governmental
regulatory body, is necessary or desirable as a condition of, or in connection
with, the granting of such Option or the issuance of shares thereunder, such
Option may not be exercised in whole or in part unless such listing,
registration, qualification, consent or approval shall have been effected or
obtained free of any conditions not acceptable to the Board of Directors or the
Committee, as the case may be.
As a condition to the issuance of any shares upon exercise of an Option
under the Plan, the Board of Directors or the Committee, as the case may be, may
require the optionholder to furnish a written representation that he is
acquiring the shares for investment and not with a view to distribution of the
shares to the public and a written agreement restricting the transferability of
the shares solely to the Corporation, and may affix a restrictive legend or
legends on the face of the certificate representing such shares. Such
representation, agreement and/or legend shall be required only in cases where in
the opinion of the Board of Directors or the Committee, as the case may be, and
counsel for the Corporation, it is necessary to enable the Corporation to comply
with the provisions of the Securities Act of 1933 or other Federal or state
statutes having similar requirements, and any stockholder who gives such
representation and agreement shall be released from it and the legend removed at
such time as the shares to which they
A-7
<PAGE>
applied are registered or qualified pursuant to the Securities Act of 1933 or
other Federal or state statutes having similar requirements, or at such other
time as, in the opinion of the Board of Directors or the Committee, as the case
may be, and counsel for the Corporation, the representation and agreement and
legend cease to be necessary to enable the Corporation to comply with the
provisions of the Securities Act of 1933 or other Federal or state statutes
having similar requirements.
15. AMENDMENT OF THE PLAN. The Plan may, at any time or from time to
time, be terminated, modified or amended by the stockholders of the Corporation
by the affirmative vote of the holders of a majority of the outstanding shares
of the Corporation's Common Stock entitled to vote. The Board of Directors of
the Corporation may, insofar as permitted by law, from time to time with respect
to any shares of Common Stock at the time not subject to Options, suspend or
discontinue the Plan or revise or amend it in any respect whatsoever; provided,
however, that, without approval of the stockholders of the Corporation, no such
revision or amendment shall increase the number of shares subject to the Plan,
decrease the price at which the Options may be granted, permit exercise of
Options unless full payment is made at the time of exercise (except as so
provided in Section 9 hereof), extend the period during which Options may be
exercised, or change the provisions relating to adjustment to be made upon
changes in capitalization.
16. CHANGES IN LAW. Subject to the provisions of Section 15, the Board
of Directors shall have the power to amend the Plan and any outstanding Options
granted thereunder in such respects as the Board of Directors shall, in its sole
discretion, deem advisable in order to incorporate in the Plan or any such
Option any new provision or change designed to comply with or take advantage of
requirements or provisions of the Code or any other statute, or Rules or
Regulations of the Internal Revenue Service or any other Federal or state
governmental agency enacted or promulgated after the adoption of the Plan.
17. LEGAL MATTERS. Every right of action by or on behalf of the
Corporation or by any stockholder against any past, present or future member of
the Board of Directors, officer or employee of the Corporation arising out of or
in connection with this Plan shall, irrespective of the place where such action
may be brought and irrespective of the place of residence of any such Director,
officer or employee, cease and be barred by the expiration of three years from
whichever is the later of (a) the date of the act or omission in respect of
which such right of action arises, or (b) the first date upon which there has
been made generally available to stockholders an annual report of the
Corporation and a proxy statement for the Annual Meeting of Stockholders
following the issuance of such annual report, which annual report and proxy
statement alone or together set forth, for the related period, the aggregate
number of shares for which Options were granted; and any and all right of action
by any employee or executive of the Corporation (past, present or future)
against the Corporation arising out of or in connection with this Plan shall,
irrespective of the place where such action may be brought, cease and be barred
by the expiration of three years from the date of the act or omission in respect
of which such right of action arises.
This Plan and all determinations made and actions taken pursuant hereto
shall be governed by the law of Delaware, applied without giving effect to any
conflicts-of-law principles, and construed accordingly.
A-8
<PAGE>
APPENDIX B
NOTE: This Appendix A, together with the foregoing Proxy Statement,
contains the information required to be provided in the Company's annual report
to security holders pursuant to the Rules and Regulations of the Securities and
Exchange Commission. The Company's 1996 Annual Report to Stockholders, which
provides additional information concerning the Company and its performance in
1995, is also included in this mailing.
TABLE OF CONTENTS
Page
Number
------
Business.............................................................. B-2
Selected Financial Data............................................... B-2
Quarterly Results..................................................... B-2
Directors and Executive Officers...................................... B-4
Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... B-7
Audited Consolidated Financial Statements of
HEALTHSOUTH Corporation and Subsidiaries
Report of Independent Auditors.................................... B-15
Consolidated Balance Sheets....................................... B-
Consolidated Statements of Income................................. B-
Consolidated Statements of Stockholders' Equity................... B-
Consolidated Statements of Cash Flows............................. B-
Notes to Consolidated Financial Statements........................ B-
Market for the Company's Common Equity and Related Stockholders
Matters........................................................... B-
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................... B-
B - 1
<PAGE>
BUSINESS
HEALTHSOUTH Corporation ("HEALTHSOUTH" or the "Company) is the nation's
largest provider of outpatient and rehabilitative healthcare services. The
Company provides these services through its national network of outpatient and
inpatient rehabilitation facilities, outpatient surgery centers, diagnostic
centers, occupational medicine centers, medical centers and other healthcare
facilities. The Company believes that it provides patients, physicians and
payors with high-quality healthcare services at significantly lower costs than
traditional inpatient hospitals. Additionally, the Company's national network,
reputation for quality and focus on outcomes has enabled it to secure contracts
with national and regional managed care payors. At March 15, 1997, the Company
had over 1,100 patient care locations in 50 states and the United Kingdom.
SELECTED FINANCIAL DATA
[To be completed]
QUARTERLY RESULTS (UNAUDITED)
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
Company's executive officers:
<TABLE>
<CAPTION>
ALL POSITIONS AN OFFICER
NAME AGE WITH THE COMPANY SINCE
---- --- ---------------- -----
<S> <C> <C> <C>
Richard M. Scrushy 44 Chairman of the Board 1984
and Chief Executive Officer and
Director
James P. Bennett 39 President and Chief Operating Officer 1991
and Director
Aaron Beam, Jr. 51 Executive Vice President and Chief 1984
Financial Officer and Director
Anthony J. Tanner 38 Executive Vice President-- Administration 1984
and Secretary and Director
Michael D. Martin 36 Executive Vice President-- 1989
Finance and Treasurer
Thomas W. Carman 45 Executive Vice President-- 1985
Corporate Development
P. Daryl Brown 42 President-- HEALTHSOUTH 1986
Outpatient Centers and Director
Robert E. Thomson 49 President-- HEALTHSOUTH 1987
Inpatient Operations
B - 2
<PAGE>
Russell H. Maddox 56 President-- HEALTHSOUTH 1995
Imaging Centers
William T. Owens 38 Senior Vice President-- 1986
Finance and Controller
William W. Horton 37 Senior Vice President 1994
and Corporate Counsel
and Assistant Secretary
</TABLE>
Richard M. Scrushy, one of the Company's management founders, has
served as Chairman of the Board and Chief Executive Officer of the Company since
1984, and also served as President of the Company from 1984 until March 1995.
From 1979 to 1984, Mr. Scrushy was with Lifemark Corporation, a publicly-owned
healthcare corporation, serving in various operational and management positions.
Mr. Scrushy is also a Director of MedPartners, Inc., a publicly-traded physician
practice management company, and Chairman of the Board of Capstone Capital,
Inc., a publicly-traded real estate investment trust. He also serves on the
Boards of Directors of several privately-held healthcare corporations.
James P. Bennett joined the Company in May 1991 as Director of
Inpatient Operations, was promoted to Group Vice President -- Inpatient
Rehabilitation Operations in September 1991, again to President and Chief
Operating Officer -- HEALTHSOUTH Rehabilitation Hospitals in June 1992, to
President -- HEALTHSOUTH Inpatient Operations in February 1993, and to President
and Chief Operating Officer of the Company in March 1995. Mr. Bennett was
elected a Director in February 1993. From August 1987 to May 1991, Mr. Bennett
was employed by Russ Pharmaceuticals, Inc.,
Aaron Beam, Jr., C.P.A., a management founder, serves as Executive Vice
President and Chief Financial Officer of the Company and was elected a Director
in February 1993. From 1980 to 1984, Mr. Beam was employed by Lifemark
Corporation in several financial and operational management positions for the
Shared Services Division, including Division Controller. Mr. Beam is a Director
of Ramsey Healthcare, Inc., a publicly-traded healthcare corporation.
Birmingham, Alabama, as Vice President -- Operations, Chief Financial Officer,
Secretary and Director. Mr. Bennett served as Certified Public Accountant on the
audit staff of the Birmingham, Alabama office of Ernst & Whinney (now Ernst &
Young LLP) from October 1980 to August 1987.
Anthony J. Tanner, Sc.D., a management founder, serves as Executive
Vice President -- Administration and Secretary of the Company and was elected a
Director in February 1993. From 1980 to 1984, Mr. Tanner was with Lifemark
Corporation in the Shared Services Division as Director, Clinical and
Professional Programs (1982-1984) and Director, Quality Assurance and Education
(1980-1982), where he was responsible for the development of clinical programs
and marketing programs.
Michael D. Martin joined the Company in October 1989 as Vice President
and Treasurer, and was named Senior Vice President -- Finance and Treasurer in
February 1994 and Executive Vice President -- Finance and Treasurer in May 1996.
From 1983 through September 1989, Mr. Martin specialized in healthcare lending
with AmSouth Bank N.A., Birmingham, Alabama, where he was a Vice President
immediately prior to joining the Company. Mr. Martin serves as a Director of
Capstone Capital, Inc.
Thomas W. Carman joined the Company in 1985 as Regional Director --
Corporate Development, and now serves as Executive Vice President -- Corporate
Development. From 1983 to 1985, Mr. Carman was Director of development for
Medical Care International. From 1981 to 1983, Mr. Carman was Assistant
Administrator at the Children's Hospital of Birmingham, Alabama.
P. Daryl Brown joined the Company in April 1986 and served until June
1992 as Group Vice President -- Outpatient Operations. He became President --
HEALTHSOUTH Outpatient Centers in June 1992, and was elected as a Director in
March 1995. From 1977 to 1986, Mr. Brown served with the American Red Cross,
Alabama Region, in several positions, including Chief Operating Officer,
Administrative Director for Financing and Administration and Controller.
B - 3
<PAGE>
Robert E. Thomson joined the Company in August 1985 as Administrator of
its Florence, South Carolina inpatient rehabilitation facility, and subsequently
served as Regional Vice President -- Inpatient Operations, Vice President --
Inpatient Operations, Group Vice President -- Inpatient Operations, and Senior
Vice President -- Inpatient Operations. Mr. Thomson was named President --
HEALTHSOUTH Inpatient Operations in February 1996.
Russell H. Maddox became President -- HEALTHSOUTH Imaging Centers in
January 1996. He served as President -- HEALTHSOUTH Surgery & Imaging Centers
from June 1995 through January 1996. From January 1992 until May 1995, Mr.
Maddox served as Chairman of the Board, President and Chief Executive Officer of
Diagnostic Health Corporation, an outpatient diagnostic imaging company which
became a wholly-owned subsidiary of the Company in 1996. Mr. Maddox was founder
and President of Russ Pharmaceuticals, Inc., located in Birmingham, Alabama. In
March 1989 Russ Pharmaceuticals was acquired by Ethyl Corporation of Richmond,
Virginia.
William T. Owens, C.P.A., joined the Company in March 1986 as
Controller and was appointed Vice President and Controller in December 1986. He
was appointed Group Vice President -- Finance and Controller in June 1992 and
became Senior Vice President -- Finance and Controller in February 1994. Prior
to joining the Company, Mr. Owens served as a Certified Public Accountant on the
audit staff of the Birmingham, Alabama office of Ernst & Whinney (now Ernst &
Young LLP) from 1981 to 1986.
William W. Horton joined the Company in July 1994 as Group Vice
President -- Legal Services and was named Senior Vice President and Corporate
Counsel in May 1996. From August 1986 through June 1994, Mr. Horton practiced
corporate, securities and healthcare law with the Birmingham, Alabama-based firm
of Haskell Slaughter Young & Johnson, Professional Association, where he served
as Chairman of the Healthcare Practice Group.
See "Election of Directors" in the Proxy Statement to which this
Appendix A is attached for identification of the Directors of the Company.
B - 4
<PAGE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
[to be completed]
B - 5
<PAGE>
[AUDITED CONSOLIDATED STATEMENTS TO COME]
B - 6
<PAGE>
MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDERS MATTERS
The Company's Common Stock is listed for trading on the New York Stock
Exchange (Symbol: HRC). The following table sets forth for the fiscal periods
indicated the high and low reported sale prices for the Company's Common Stock
as reported on the NYSE Composite Transactions Tape. 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 and a two-for-one stock split effected in the
form of a 100% stock dividend paid on March 17, 1997.
REPORTED
SALE PRICE
------------------------
HIGH LOW
---- ---
1995
First Quarter..................................... $ 10.22 $ 9.03
Second Quarter.................................... 10.82 8.16
Third Quarter..................................... 12.88 8.63
Fourth Quarter.................................... 16.19 11.25
1996
First Quarter..................................... $ 19.07 $ 13.50
Second Quarter.................................... 19.32 16.16
Third Quarter..................................... 19.32 14.25
Fourth Quarter.................................... 19.88 17.57
-------------------------
The closing price for the Common Stock on the New York Stock Exchange
on March____, 1997, was $__________.
There were approximately 3,671 holders of record of the Common Stock as
of March 17, 1997, excluding those shares held by depository companies for
certain beneficial owners.
The Company has never paid cash dividends on its Common Stock (although
certain of the companies acquired by the Company in poolings-of-interests
transactions had paid dividends prior to such acquisitions) and does not
anticipate the payment of cash dividends in the foreseeable future. The Company
currently anticipates that any future earnings will be retained to finance the
Company's operations.
RECENT SALES OF UNREGISTERED SECURITIES
During the fourth quarter of 1996, the Company issued 52,584 shares of
its Common Stock in a transaction not registered under the Securities Act of
1933, as amended. Such shares were issued as of November 14, 1996, to five
individuals who were shareholders of a corporation acquired by the Company in a
merger transaction. Such shares were issued to such individuals in exchange for
all the issued and outstanding capital stock of the acquired company. The
Company issued such shares of its Common Stock in reliance upon the exemption
contained in Section 4(2) of the Securities Act of 1933, as amended, inasmuch as
the issuance of such shares did not involve any public offering.
B - 32
<PAGE>
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The Company has not changed independent accountants within the 24
months prior to December 31, 1996.
B - 33
