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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K/A
AMENDMENT NO. 2
(Mark One)
[x] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1996; or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______ to ______
Commission File Number 1-10315
HEALTHSOUTH CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
DELAWARE 63-0860407
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(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
ONE HEALTHSOUTH PARKWAY
BIRMINGHAM, ALABAMA 35243
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (205) 967-7116
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Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
- ---------------------------- -----------------------------
COMMON STOCK, PAR VALUE NEW YORK STOCK EXCHANGE
$.01 PER SHARE
9.5% SENIOR SUBORDINATED NEW YORK STOCK EXCHANGE
NOTES DUE 2001
5% CONVERTIBLE SUBORDINATED NEW YORK STOCK EXCHANGE
DEBENTURES DUE 2001
Securities Registered Pursuant to Section 12(g) of the Act: NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such Reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 18, 1997:
Common Stock, par value $.01 per share -- $6,940,206,270
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at March 18, 1997
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COMMON STOCK, PAR VALUE 328,838,938 SHARES
$.01 PER SHARE
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into this Annual Report on Form 10-K.
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PART I
INTRODUCTORY NOTE: HEALTHSOUTH Corporation has declared a two-for-one stock
split to be effected in the form of a 100% stock dividend to be paid as of March
17, 1997 to holders of record as of March 13, 1997. All share and per-share
amounts described in this Annual Report on Form 10-K (including the financial
statements included herein) have been restated to reflect such stock split.
ITEM 1. BUSINESS
GENERAL
HEALTHSOUTH Corporation ("HEALTHSOUTH" or the "Company") is the nation's
largest provider of outpatient surgery 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 December 31, 1996, the
Company had over 1,000 patient care locations in 50 states.
In its outpatient and inpatient rehabilitation facilities, the Company
provides interdisciplinary programs for the rehabilitation of patients
experiencing disability due to a wide variety of physical conditions, such as
stroke, head injury, orthopaedic problems, neuromuscular disease and
sports-related injuries. The Company's rehabilitation services include physical
therapy, sports medicine, work hardening, neurorehabilitation, occupational
therapy, respiratory therapy, speech-language pathology and rehabilitation
nursing. Independent studies have shown that rehabilitation services like those
provided by the Company can save money for payors and employers.
In addition to its rehabilitation facilities, the Company operates one of
the largest networks of free-standing outpatient surgery centers in the United
States. The Company's outpatient surgery centers provide the facilities and
medical support staff necessary for physicians to perform non-emergency surgical
procedures. While outpatient surgery is widely recognized as generally less
expensive than surgery performed in a hospital, the Company believes that
outpatient surgery performed at a free-standing outpatient surgery center is
generally less expensive than hospital-based outpatient surgery. Approximately
80% of the Company's surgery center facilities are located in markets served by
its rehabilitative service facilities, enabling the Company to pursue
opportunities for cross- referrals.
Over the last two years, the Company has completed several significant
acquisitions in the rehabilitation business and has expanded into the surgery
center, diagnostic and occupational medicine businesses. The Company believes
that these acquisitions complement its historical operations and enhance its
market position. The Company further believes that its expansion into the
outpatient surgery, diagnostic and occupational medicine businesses provides it
with platforms for future growth. The Company is continually evaluating
potential acquisitions in the outpatient and rehabilitative healthcare services
industry.
The Company was organized as a Delaware corporation in February 1984. The
Company's principal executive offices are located at One HealthSouth Parkway,
Birmingham, Alabama 35243, and its telephone number is (205) 967-7116.
COMPANY STRATEGY
The Company's principal objective is to be the provider of choice for
patients, physicians and payors alike for outpatient surgery and rehabilitative
healthcare services throughout the United States. The Company's growth strategy
is based upon four primary elements: (i) the implementation of the Company's
integrated service model in appropriate markets, (ii) successful marketing to
managed care organizations and other payors, (iii) the provision of
high-quality, cost-effective healthcare services, and (iv) the expansion of its
national network.
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o Integrated Service Model. The Company seeks, where appropriate, to provide
an integrated system of healthcare services, including outpatient
rehabilitation services, inpatient rehabilitation services, ambulatory
surgery services and outpatient diagnostic services. The Company believes
that its integrated system offers payors the convenience of dealing with a
single provider for multiple services. Additionally, it believes that its
facilities can provide extensive cross-referral opportunities. For example,
the Company estimates that approximately one-third of its outpatient
rehabilitation patients have had outpatient surgery, virtually all
inpatient rehabilitation patients will require some form of outpatient
rehabilitation, and virtually all inpatient rehabilitation patients have
had some type of diagnostic procedure. The Company has implemented its
Integrated Service Model in certain of its markets, and intends to expand
the model into other appropriate markets.
o Marketing to Managed Care Organizations and Other Payors. Since the late
1980s, the Company has focused on the development of contractual
relationships with managed care organizations, major insurance companies,
large regional and national employer groups and provider alliances and
networks. The Company's documented outcomes and experience with several
hundred thousand patients in delivering quality healthcare services at
reasonable prices has enhanced its attractiveness to such entities and has
given the Company a competitive advantage over smaller and regional
competitors. These relationships have increased patient flow to the
Company's facilities and contributed to the Company's same-store growth.
o Cost-Effective Services. The Company's goal is to provide high-quality
healthcare services in cost-effective settings. To that end, the Company
has developed standardized clinical protocols for the treatment of its
patients. This results in "best practices" techniques being utilized at all
of the Company's facilities, allowing the consistent achievement of
demonstrable, cost-effective clinical outcomes. The Company's reputation
for its clinical programs is enhanced through its relationships with major
universities throughout the nation, and its support of clinical research in
its facilities. Further, independent studies estimate that, for every
dollar spent on rehabilitation, $11 to $35 is saved. Finally, surgical
procedures typically are less expensive in outpatient surgery centers than
in hospital settings. The Company believes that outpatient and
rehabilitative healthcare services will assume increasing importance in the
healthcare environment as payors continue to seek to reduce overall costs
by shifting patients to more cost-effective treatment settings.
o Expansion of National Network. As the largest provider of outpatient
surgery and rehabilitative healthcare services in the United States, the
Company is able to realize economies of scale and compete successfully for
national contracts with large payors and employers while retaining the
flexibility to respond to particular needs of local markets. The national
network affords the Company the opportunity to offer large national and
regional employers and payors the convenience of dealing with a single
provider, to utilize greater buying power through centralized purchasing,
to achieve more efficient costs of capital and labor and to more
effectively recruit and retain clinicians. The Company believes that its
recent acquisitions in the outpatient surgery, diagnostic imaging and
occupational medicine fields will further enhance its national presence by
broadening the scope of its existing services and providing new
opportunities for growth. These national benefits are realized without
sacrificing local market responsiveness. The Company's objective is to
provide those outpatient and rehabilitative healthcare services needed
within each local market by tailoring its services and facilities to that
market's needs, thus bringing the benefits of nationally recognized
expertise and quality into the local setting.
RECENT AND PENDING ACQUISITIONS
Beginning in 1994, the Company has consummated a series of significant
acquisitions. During 1995, the Company consummated pooling-of-interests mergers
with Surgical Health Corporation ("SHC"; 36 outpatient surgery centers in 11
states) and Sutter Surgery Centers, Inc. ("SSCI"; 12 outpatient surgery centers
in three states), as well as stock purchase acquisitions of the rehabilitation
hospitals division of NovaCare, Inc. ("NovaCare"; 11 inpatient rehabilitation
facilities, 12 other healthcare facilities and two
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Certificates of Need in eight states) and Caremark Orthopedic Services Inc.
("Caremark"; 120 outpatient rehabilitation facilities in 13 states). During
1996, the Company acquired Surgical Care Affiliates, Inc. ("SCA"; 67 outpatient
surgery centers in 24 states), Advantage Health Corporation ("Advantage Health";
approximately 136 inpatient and outpatient rehabilitation facilities in 11
states), Professional Sports Care Management, Inc. ("PSCM"; 36 outpatient
rehabilitation facilities in New York, New Jersey and Connecticut) and
ReadiCare, Inc. ("ReadiCare"; 37 occupational medicine centers in California and
Washington) in pooling-of-interests transactions. In addition, the Company
entered into an agreement to acquire Health Images, Inc. ("Health Images"; 55
diagnostic imaging centers in 13 states and the United Kingdom) in a
pooling-of-interests transaction, which transaction was consummated in March
1997. Information on the Company's facilities included herein includes all of
the acquired facilities other than the Health Images facilities. The NovaCare,
Caremark, Advantage Health and PSCM transactions have further enhanced the
Company's position as the nation's largest provider of inpatient and outpatient
rehabilitative services, while the SHC, SSCI and SCA transactions have made the
Company one of the largest providers of outpatient surgery services in the
nation and the ReadiCare and Health Images transactions have broadened the
Company's services in occupational medicine and diagnostic imaging. The Company
believes that the geographic dispersion of the more than 1,000 locations now
operated by the Company makes it more attractive to managed care networks, major
insurance companies, regional and national employers and regional provider
alliances and enhances the Company's ability to implement its Integrated Service
Model in additional markets. See Item 7, "Management's Discussion and Analysis
of Financial Conditions and Results of Operations".
On February 17, 1997, the Company and Horizon/CMS Healthcare Corporation
("Horizon/CMS") signed a definitive agreement pursuant to which HEALTHSOUTH will
acquire Horizon/CMS in a stock-for-stock merger in which the stockholders of
Horizon/CMS will receive 0.84338 of a share of HEALTHSOUTH Common Stock per
share of Horizon/CMS Common Stock. Horizon/CMS operates the nation's
second-largest network of rehabilitation facilities. The proposed transaction is
valued at approximately $1,600,000,000 (including the assumption of
approximately $700,000,000 in debt). Horizon/ CMS operates 33 inpatient
rehabilitation hospitals, 58 specialty hospitals and subacute units and 282
outpatient rehabilitation locations. Horizon/CMS also owns, leases or manages
267 long-term care facilities, a contract therapy business holding 1,400
contracts, an institutional pharmacy business serving 38,500 beds and other
healthcare services. The transaction is subject to the approval of Horizon/CMS's
stockholders and to various regulatory approvals, including clearance under the
Hart-Scott- Rodino Antitrust Improvements Act of 1976, as amended, as well as to
the satisfaction of certain other conditions. The Company and Horizon/CMS
currently anticipate that the transaction will be consummated in mid-1997.
INDUSTRY BACKGROUND
In 1991 (the most recent year for which data are available), approximately
4,000,000 people in the United States received rehabilitative healthcare
services. "Rehabilitative healthcare services" refers to the range of skilled
services provided to individuals in order to minimize physical and cognitive
impairments, maximize functional ability and restore lost functional capacity.
The focus of rehabilitative healthcare is to ameliorate physical and cognitive
impairments resulting from illness or injury, and to restore or improve
functional ability so that individuals can return to work and lead independent
and fulfilling lives. Typically, rehabilitative healthcare services are provided
by a variety of healthcare professionals including physiatrists, rehabilitation
nurses, physical therapists, occupational therapists, speech-language
pathologists, respiratory therapists, recreation therapists, social workers,
psychologists, rehabilitation counselors and others. Over 80% of those receiving
rehabilitative healthcare services return to their homes, work, schools or
active retirement.
Demand for rehabilitative healthcare services continues to be driven by
advances in medical technologies, an aging population and the recognition on the
part of the payor community (insurers, self-insured companies, managed care
organizations and federal, state and local governments) that appropriately
administered rehabilitative services can improve quality of life as well as
lower overall healthcare costs. Studies conducted by insurance companies
demonstrate the ability of rehabilitation to
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significantly reduce the cost of future care. Estimates of the savings range
from $11 to $35 per dollar spent on rehabilitation. Further, reimbursement
changes have encouraged the rapid discharge of patients from acute-care
hospitals while they remain in need of rehabilitative healthcare services.
PATIENT CARE SERVICES
The Company began its operations in 1984 with a focus on providing
comprehensive orthopaedic and musculoskeletal rehabilitation services on an
outpatient basis. Over the succeeding 13 years, the Company has consistently
sought and implemented opportunities to expand its services through acquisitions
and de novo development activities that complement its historic focus on
orthopaedic, sports medicine and occupational medicine services and that provide
independent platforms for growth. The Company's acquisitions and internal growth
have enabled it to become the largest provider of rehabilitative healthcare
services, both inpatient and outpatient, in the United States. In addition, the
Company has added outpatient surgery services, diagnostic imaging services and
other outpatient services which provide natural enhancements to its
rehabilitative healthcare locations and facilitate the implementation of its
Integrated Service Model. The Company believes that these additional businesses
also provide opportunities for growth in other areas not directly related to the
rehabilitative business, and the Company intends to pursue further expansion in
those businesses.
Rehabilitative Services: General
When a patient is referred to one of the Company's rehabilitation
facilities, the patient undergoes an initial evaluation and assessment process
that results in the development of a rehabilitation care plan designed
specifically for that patient. Depending upon the patient's disability, this
evaluation process may involve the services of a single discipline, such as
physical therapy for a knee injury, or of multiple disciplines, as in the case
of a complicated stroke patient. HEALTHSOUTH has developed numerous
rehabilitation programs, which include stroke, head injury, spinal cord injury,
neuromuscular and work injury, that combine certain services to address the
needs of patients with similar disabilities. In this way, all of the facilities'
patients, regardless of the severity and complexity of their disabilities, can
receive the level and intensity of those services necessary for them to be
restored to as productive, active and independent a lifestyle as possible.
Outpatient Rehabilitation Services
The Company operates the largest group of affiliated proprietary outpatient
rehabilitation facilities in the United States. The Company's outpatient
rehabilitation centers offer a comprehensive range of rehabilitative healthcare
services, including physical therapy and occupational therapy, that are tailored
to the individual patient's needs, focusing predominantly on orthopaedic
injuries, sports injuries, work injuries, hand and upper extremity injuries,
back injuries, and various neurological neuromuscular conditions. As of December
31, 1996, the Company provided outpatient rehabilitative healthcare services
through 739 outpatient locations, including freestanding outpatient centers and
their satellites and outpatient satellites of inpatient facilities.
The continuing emphasis on containing the increases in healthcare costs, as
evidenced by Medicare's prospective payment system, the growth in managed care
and the various alternative healthcare reform proposals, results in the early
discharge of patients from acute-care facilities. As a result, many hospital
patients do not receive the intensity of services that may be necessary for them
to achieve a full recovery from their diseases, disorders or traumatic
conditions. The Company's outpatient rehabilitation services play a significant
role in the continuum of care because they provide hospital-level services, in
terms of intensity, quality and frequency, in a more cost-efficient setting.
Patients treated at the Company's outpatient centers will undergo varying
courses of therapy depending upon their needs. Some patients may only require a
few hours of therapy per week for a few weeks, while others may spend up to five
hours per day in therapy for six months or more, depending on the nature,
severity and complexity of their injuries.
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In general, the Company initially establishes an outpatient center in a
given market, either by acquiring an existing private therapy practice or
through de novo development, and institutes its clinical protocols and programs
in response to the community's general need for services. The Company will then
establish satellite clinics that are dependent upon the main facility for
management and administrative services. These satellite clinics generally
provide a specific evaluative or specialty service/program, such as hand therapy
or foot and ankle therapy, in response to specific market demands. The Company's
outpatient rehabilitation facilities range in size from 1,200 square feet for
specialty clinics to 20,000 square feet for large, full-service facilities.
Currently, the typical outpatient facility configuration ranges in size from
2,000 to 5,000 square feet and costs less than $500,000 to build and equip.
Patient utilization of the Company's outpatient rehabilitation facilities
cannot be measured in the conventional manner applied to acute-care hospitals,
nursing homes and other healthcare providers which have a fixed number of
licensed beds and serve patients on a 24-hour basis. Utilization patterns in
outpatient rehabilitation facilities will be affected by the market to be
served, the types of injuries treated, the patient mix and the number of
available therapists, among other factors. Moreover, because of variations in
size, location, hours of operation, referring physician base and services
provided and other differences among each of the Company's outpatient
facilities, it is not possible to accurately assess patient utilization against
a norm.
Inpatient Services
INPATIENT REHABILITATION FACILITIES. At December 31, 1996, the Company
operated 96 inpatient rehabilitation facilities with 5,749 beds, representing
the largest group of affiliated proprietary inpatient rehabilitation facilities
in the United States. The Company's inpatient rehabilitation facilities provide
high-quality comprehensive services to patients who require intensive
institutional rehabilitation care.
Inpatient rehabilitation patients are typically those who are experiencing
significant physical disabilities due to various conditions, such as head
injury, spinal cord injury, stroke, certain orthopaedic problems and
neuromuscular disease. The Company's inpatient rehabilitation facilities provide
the medical, nursing, therapy and ancillary services required to comply with
local, state and federal regulations as well as accreditation standards of the
Joint Commission on Accreditation of Healthcare Organizations (the "JCAHO") and
the Commission on Accreditation of Rehabilitation Facilities ("CARF").
All of the Company's inpatient rehabilitation facilities utilize an
interdisciplinary team approach to the rehabilitation process and involve the
patient and family, as well as the payor, in the determination of the goals for
the patient. Internal case managers monitor each patient's progress and provide
documentation of patient status, achievement of goals, functional outcomes and
efficiency.
The Company acquires or develops inpatient rehabilitation facilities in
those communities where it believes there is a demonstrated need for
comprehensive inpatient rehabilitation services. Depending upon the specific
market opportunity, these facilities may be licensed as rehabilitation hospitals
or skilled nursing facilities. The Company believes that it can provide
high-quality rehabilitation services in either type of facility, but prefers to
utilize the rehabilitation hospital form.
In certain markets where it does not provide free-standing outpatient
facilities, the Company's rehabilitation hospitals may provide outpatient
rehabilitation services as a complement to their inpatient services. Typically,
this opportunity arises when patients complete their inpatient course of
treatment but remain in need of additional therapy that can be accomplished on
an outpatient basis. Depending upon the demand for outpatient services and
physical space constraints, the rehabilitation hospital may establish the
services either within its building or in a satellite location. In either case,
the clinical protocols and programs developed for use in the free-standing
outpatient centers will be utilized by these facilities.
The Company's Nashville, Tennessee (Vanderbilt University), Memphis,
Tennessee (Methodist Hospitals), Dothan, Alabama (Southeast Alabama Medical
Center) and Charleston, South Carolina (North Trident Regional Medical Center)
hospital facilities have been developed in conjunction with local tertiary-care
facilities. This strategy of developing effective referral and service networks
prior to
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opening results in improved operating efficiencies for the new facilities. The
Company is utilizing this same concept in rehabilitation hospitals under
development with the University of Missouri and the University of Virginia and
is pursuing similar affiliations with a number of its existing rehabilitation
hospitals.
MEDICAL CENTERS. At December 31, 1996, the Company operated five medical
centers with 912 licensed beds in four distinct markets. These facilities
provide general and specialty medical and surgical healthcare services,
emphasizing orthopaedics, sports medicine and rehabilitation. One of these
facilities, the 112-bed HEALTHSOUTH Larkin Hospital in South Miami, Florida, was
sold in February 1997.
The Company acquired its medical centers as outgrowths of its
rehabilitative healthcare services. Often, patients require medical and surgical
interventions prior to the initiation of their rehabilitative care. In each of
the markets in which the Company has acquired a medical center, the Company had
well-established relationships with the medical communities serving each
facility. In addition, each of the facilities enjoyed well-established
reputations in orthopaedics and/or sports medicine prior to their acquisition by
the Company. Following the acquisition of each of its medical centers, the
Company has provided the resources to improve upon the physical plant and expand
services through the introduction of new technology. The Company has also
developed additional relationships between these facilities and certain
university facilities, including the University of Miami, Auburn University and
the University of Alabama at Birmingham. Through these relationships, the influx
of celebrity athletes and personalities and the acquisition of new technology,
all of the Company's medical centers have improved their operating efficiencies
and enhanced census.
Each of the Company's medical center facilities is licensed as an
acute-care hospital, is accredited by the JCAHO and participates in the Medicare
prospective payment system. See this Item, "Business -- Regulation".
INPATIENT FACILITY UTILIZATION. In measuring patient utilization of the
Company's inpatient facilities, various factors must be considered. Due to
market demand, demographics, start-up status, renovation, patient mix and other
factors, the Company may not treat all licensed beds in a particular facility as
available beds, which sometimes results in a material variance between licensed
beds and beds actually available for utilization at any specific time. The
Company is in a position to increase the number of available beds at such
facilities as market conditions dictate. During the year ended December 31,
1996, the Company's inpatient facilities achieved an overall utilization, based
on patient days and available beds, of 72.56%.
Surgery Centers
As a result of the acquisitions of SHC, SSCI and SCA in 1995 and early
1996, the Company became one of the largest operators of outpatient surgery
centers in the United States. At December 31, 1996, it operated 135
free-standing surgery centers, including five mobile lithotripsy units, in 35
states, and had an additional ten free-standing surgery centers under
development. Approximately 80% of these facilities are located in markets served
by the Company's outpatient and rehabilitative service facilities, enabling the
Company to pursue opportunities for cross-referrals between surgery and
rehabilitative facilities as well as to centralize administrative functions. The
Company's surgery centers provide the facilities and medical support staff
necessary for physicians to perform non-emergency surgical procedures. Its
typical surgery center is a free-standing facility with three to six fully
equipped operating and procedure rooms and ancillary areas for reception,
preparation, recovery and administration. Each of the Company's surgery centers
is available for use only by licensed physicians, oral surgeons and podiatrists,
and the centers do not perform surgery on an emergency basis.
Outpatient surgery centers, unlike hospitals, have not historically
provided overnight accommodations, food services or other ancillary services.
Over the past several years, states have increasingly permitted the use of
extended-stay recovery facilities by outpatient surgery centers. As a result,
many outpatient surgery centers are adding extended recovery care capabilities
where permitted. Fifty-two of the Company's surgery centers currently provide
for extended recovery stays. The Company's ability to develop such recovery care
facilities is dependent upon state regulatory environments in the particular
states where its centers are located.
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The Company's outpatient surgery centers implement quality control
procedures to evaluate the level of care provided the centers. Each center has a
medical advisory committee of three to ten physicians which reviews the
professional credentials of physicians applying for medical staff privileges at
the center.
Diagnostic Centers
At December 31, 1996, the Company operated 14 diagnostic centers in eight
states. These centers provide outpatient diagnostic imaging services, including
magnetic resonance imaging ("MRI"), computerized tomography ("CT") services,
X-ray services, ultrasound services, mammography services, nuclear medicine
services and fluoroscopy. Not all services are provided at all sites; however,
most of the Company's diagnostic centers are multi-modality centers.
On March 3, 1997, the Company completed the acquisition of Health Images,
which operated a total of 55 diagnostic imaging centers, including six centers
in the United Kingdom. The Health Images centers are located in 13 states,
including seven states where the Company did not previously operate freestanding
diagnostic imaging centers. In addition, the Health Images acquisition provides
the Company with its first sites in the United Kingdom.
Occupational Medicine Services
The Company's December 1996 acquisition of ReadiCare brought it 37
freestanding occupational medicine centers in California and Washington. These
centers provide cost-effective, outpatient primary medical care and
rehabilitation services to individuals for the treatment of work-related medical
problems. While the Company has historically provided occupational medicine
services through certain of its outpatient rehabilitation centers and associated
physicians, the Company believes that the ReadiCare acquisition provides it with
an additional platform for growth, and the Company intends to pursue additional
expansion in that arena.
Other Patient Care Services
In certain of its markets, the Company provides other patient care
services, including home healthcare, physician services and contract management
of hospital-based rehabilitative healthcare services. The Company evaluates
market opportunities on a case-by-case basis in determining whether to provide
additional services of these types, which may be complementary to facility-based
services provided by the Company or stand-alone businesses.
MARKETING OF FACILITIES AND SERVICES
THE COMPANY MARKETS ITS FACILITIES, AND THEIR SERVICES AND PROGRAMS, ON
LOCAL, REGIONAL AND national levels. Local and regional marketing activities are
typically coordinated by facility-based marketing personnel, whereas large-scale
regional and national efforts are coordinated by corporate-based personnel.
In general, the Company develops a marketing plan for each facility based
on a variety of factors, including population characteristics, physician
characteristics and incidence of disability statistics, in order to identify
specific service opportunities. Facility-oriented marketing programs are focused
on increasing the volume of patient referrals to the specific facility and
involve the development of ongoing relationships with area schools, businesses
and industries as well as physicians, health maintenance organizations and
preferred provider organizations.
The Company's larger-scale marketing activities are focused more broadly on
efforts to generate patient referrals to multiple facilities and the creation of
new business opportunities. Such activities include the development and
maintenance of contractual relationships or national pricing agreements with
large third-party payors, such as CIGNA, Metrahealth or other national insurance
companies, with national HMO/PPO companies, such as
Healthcare-COMPARE/AFFORDABLE, Hospital Network of America and Multiplan, with
national case management companies, such as INTRACORP and Crawford
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& Co., and with national employers, such as Wal-Mart, Georgia-Pacific
Corporation, Dillard Department Stores, Goodyear Tire & Rubber and Winn-Dixie.
In addition, since many of the facilities acquired by the Company during the
past two years had very limited contractual relationships with payors, managed
care providers, employers and others, the Company is expanding its existing
payor relationships to include these facilities.
The Company carries out broader programs designed to further enhance its
public image. Among these is the HEALTHSOUTH Sports Medicine Council, headed by
Bo Jackson, which is dedicated to developing educational programs focused on
athletics for use in high schools. The Company has ongoing relationships with
the Ladies Professional Golf Association, the Southeastern Conference and more
than 125 universities and colleges and 700 high schools to provide sports
medicine coverage of events and rehabilitative healthcare services for injured
athletes. In addition, the Company has established relationships with or
provided treatment services for athletes from some 40-50 professional sports
teams, as well as providing sports medicine services for Olympic and amateur
athletes. In 1996, the Company and the United States Olympic Committee
established the Richard M. Scrushy/HEALTHSOUTH Sports Medicine and Sport Science
Center at the USOC's Colorado Springs campus.
The Company is a national sponsor of the United Cerebral Palsy Association
and the National Arthritis Foundation and supports many other charitable
organizations on national and local levels. Through these endeavors, the Company
provides its employees with opportunities to support their communities.
SOURCE OF REVENUES
Private pay revenue sources represent the majority of the Company's
revenues. The following table sets forth the percentages of the Company's
revenues from various sources for the periods indicated:
YEAR ENDED YEAR ENDED
SOURCE DECEMBER 31, 1995 DECEMBER 31, 1996
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Medicare .................. 40.0% 37.8%
Commercial(1) ............... 34.8 34.9
Workers' Compensation ...... 10.3 11.3
All Other Payors(2) ......... 14.9 16.0
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100.0% 100.0%
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(1) Includes commercial insurance, HMOs, PPOs and other managed care plans.
(2) Medicaid is included in this category, but is insignificant in amount.
The above table does not reflect the SHC, SSCI, SCA, Advantage Health, PSCM
or ReadiCare facilities for periods or portions thereof prior to the effective
date of the acquisitions. Comparable information for those facilities is not
available and is not reflected in 1995 for the SHC or SSCI facilities or in
either year for the SCA, Advantage Health, PSCM or ReadiCare facilities.
See this Item "Business -- Regulation -- Medicare Participation and
Reimbursement" for a description of the reimbursement regulations applicable to
the Company's facilities.
COMPETITION
The Company competes in the geographic markets in which its facilities are
located. In addition, the Company's rehabilitation facilities compete on a
regional and national basis with other providers of specialized services such as
sports medicine and work hardening, and specific concentrations such as head
injury rehabilitation and orthopaedic surgery. The competition faced in each of
these markets is similar, with variations arising from the number of healthcare
providers in the given metropolitan area. The primary competitive factors in the
rehabilitation services business are quality of services, projected patient
outcomes, charges for services, responsiveness to the needs of the patients,
community and physicians, and ability to tailor programs and services to meet
specific needs of the patients. Competitors and potential competitors include
hospitals, private practice therapists, rehabilitation agencies and oth-
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ers. Some of these competitors may have greater patient referral support and
financial and personnel resources in particular markets than the Company.
Management believes that the Company competes successfully within the
marketplace based upon its reputation for quality, competitive prices, positive
rehabilitation outcomes, innovative programs, clean and bright facilities and
responsiveness to needs.
The Company's surgery centers compete primarily with hospitals and other
operators of freestanding surgery centers in attracting physicians and patients,
and in developing new centers and in acquiring existing centers. The primary
competitive factors in the outpatient surgery business are convenience, cost,
quality of service, physician loyalty and reputation. Hospitals have many
competitive advantages in attracting physicians and patients, including
established standing in a community, historical physician loyalty and
convenience for physicians making rounds or performing inpatient surgery in the
hospital. However, the Company believes that its national market system and its
historical presence in certain of the markets where its surgery centers are
located will enhance the Company's ability to operate these facilities
successfully.
The Company's diagnostic centers compete with local hospitals, other
multi-center imaging companies, local independent diagnostic centers and imaging
centers owned by local physician groups. The Company believes that the principal
competitive factors in the diagnostic services are price, quality of service,
ability to establish and maintain relationships with managed care payors and
referring physicians, reputation of interpreting physicians, facility location
and convenience of scheduling. Management believes that the Company's diagnostic
facilities compete successfully within their respective markets taking into
account these factors.
The Company's medical centers are located in four urban areas of the
country, all with well established healthcare services provided by a number of
proprietary, not-for-profit, and municipal hospital facilities. The Company's
facilities compete directly with these local hospitals as well as various
nationally recognized centers of excellence in orthopaedics, sports medicine and
other specialties. Because the Company's facilities enjoy a national and
international reputation for orthopaedic surgery and sports medicine, the
Company believes that its medical centers' level of service and continuum of
care enable them to compete successfully, both locally and nationally.
The Company potentially faces competition any time it initiates a
Certificate of Need ("CON") project or seeks to acquire an existing facility or
CON. See this Item, "Business -- Regulation". This competition may arise either
from competing companies, national or regional, or from local hospitals which
file competing applications or oppose the proposed CON project. The necessity
for these approvals serves as a barrier to entry and has the potential to limit
competition by creating a franchise to provide services to a given area. To date
the Company has been successful in obtaining each of the CONs or similar
approvals which it has sought, although there can be no assurance that it will
achieve similar success in the future.
REGULATION
The healthcare industry is subject to regulation by federal, state and
local governments. The various levels of regulatory activity affect the
Company's business activities by controlling its growth, requiring licensure or
certification of its facilities, regulating the use of its properties and
controlling the reimbursement to the Company for services provided.
Licensure, Certification and Certificate of Need Regulations
Capital expenditures for the construction of new facilities, the addition
of beds or the acquisition of existing facilities may be reviewable by state
regulators under a statutory scheme which is sometimes referred to as a CON
program. States with CON programs place limits on the construction and
acquisition of healthcare facilities and the expansion of existing facilities
and services. In such states, approvals are required for capital expenditures
exceeding certain amounts which involve inpatient rehabilitation facilities or
services. Outpatient rehabilitation facilities and services do not require such
approvals in a majority of states.
9
<PAGE>
State CON statutes generally provide that, prior to the addition of new
beds, the construction of new facilities or the introduction of new services, a
state health planning designated agency (a "SHPDA") must determine that a need
exists for those beds, facilities or services. The CON process is intended to
promote comprehensive healthcare planning, assist in providing high quality
healthcare at the lowest possible cost and avoid unnecessary duplication by
ensuring that only those healthcare facilities that are needed will be built.
Typically, the provider of services submits an application to the
appropriate SHPDA with information concerning the area and population to be
served, the anticipated demand for the facility or service to be provided, the
amount of capital expenditure, the estimated annual operating costs, the
relationship of the proposed facility or service to the overall state health
plan and the cost per patient day for the type of care contemplated. Whether the
CON is granted is based upon a finding of need by the SHPDA in accordance with
criteria set forth in CON statutes and state and regional health facilities
plans. If the proposed facility or service is found to be necessary and the
applicant to be the appropriate provider, the SHPDA will issue a CON containing
a maximum amount of expenditure and a specific time period for the holder of the
CON to implement the approved project.
Licensure and certification are separate, but related, regulatory
activities. The former is usually a state or local requirement and the latter is
a federal requirement. In almost all instances, licensure and certification will
follow specific standards and requirements that are set forth in readily
available public documents. Compliance with the requirements is monitored by
annual on-site inspections by representatives of various government agencies.
All of the Company's inpatient rehabilitation facilities and medical centers and
substantially all of the Company's surgery centers are currently required to be
licensed, but only the outpatient rehabilitation facilities located in Alabama,
Arizona, Connecticut, Maryland, Massachusetts, New Hampshire, New Mexico and
Rhode Island currently must satisfy such a licensing requirement.
Medicare Participation and Reimbursement
In order to participate in the Medicare program and receive Medicare
reimbursement, each facility must comply with the applicable regulations of the
United States Department of Health and Human Services relating to, among other
things, the type of facility, its equipment, its personnel and its standards of
medical care, as well as compliance with all state and local laws and
regulations. All of the Company's inpatient facilities, except for the St. Louis
head injury center, participate in the Medicare program. Approximately 304 of
the Company's outpatient rehabilitation facilities currently participate in, or
are awaiting the assignment of a provider number to participate in, the Medicare
program. All of the Company's surgery centers and diagnostic centers are
certified (or awaiting certification) under the Medicare program. Its
Medicare-certified facilities, inpatient and outpatient, undergo annual on-site
Medicare certification surveys in order to maintain their certification status.
Failure to comply with the program's conditions of participation may result in
loss of program reimbursement or other governmental sanctions. All such
facilities have been deemed to be in satisfactory compliance on all applicable
surveys. The Company has developed its operational systems to assure compliance
with the various standards and requirements of the Medicare program and has
established ongoing quality assurance activities to monitor compliance. The
Company believes that all of such facilities currently meet all applicable
Medicare requirements.
As a result of the Social Security Act Amendments of 1983, Congress adopted
a prospective payment system ("PPS") to cover the routine and ancillary
operating costs of most Medicare inpatient hospital services. Under this system,
the Secretary of Health and Human Services has established fixed payment amounts
per discharge based on diagnosis-related groups ("DRGs"). With limited
exceptions, a hospital's payment for Medicare inpatients is limited to the DRG
rate, regardless of the number of services provided to the patient or the length
of the patient's hospital stay. Under PPS, a hospital may retain the difference,
if any, between its DRG rate and its operating costs incurred in furnishing
inpatient services, and is at risk for any operating costs that exceed its DRG
rate. The Company's medical center facilities are generally subject to PPS with
respect to Medicare inpatient services.
10
<PAGE>
The PPS program has been beneficial for the rehabilitation segment of the
healthcare industry because of the economic pressure on acute-care hospitals to
discharge patients as soon as possible. The result has been increased demand for
rehabilitation services for those patients discharged early from acute-care
hospitals. Outpatient rehabilitation services and free-standing inpatient
rehabilitation facilities are currently exempt from PPS, and inpatient
rehabilitation units within acute-care hospitals are eligible to obtain an
exemption from PPS upon satisfaction of certain federal criteria.
Currently, seven of the Company's outpatient centers are Medicare-certified
Comprehensive Outpatient Rehabilitation Facilities ("CORFs") and 222 are
Medicare-certified rehabilitation agencies. CORFs have been designated
cost-reimbursed Medicare providers since 1982. Under the regulations, CORFs are
reimbursed reasonable costs (subject to certain limits) for services provided to
Medicare beneficiaries. Outpatient rehabilitation facilities certified by
Medicare as rehabilitation agencies are reimbursed on the basis of the lower of
reasonable costs for services provided to Medicare beneficiaries or charges for
such services. Outpatient rehabilitation facilities which are physician-directed
clinics, as well as outpatient surgery centers, are reimbursed by Medicare on a
fee screen basis; that is, they receive a fixed fee, which is determined by the
geographical area in which the facility is located, for each procedure
performed. The Company's outpatient rehabilitation facilities submit monthly
bills to their fiscal intermediaries for services provided to Medicare
beneficiaries, and the Company files annual cost reports with the intermediaries
for each such facility. Adjustments are then made if costs have exceeded
payments from the fiscal intermediary or vice versa.
The Company's inpatient facilities (other than the medical center
facilities) either are not currently covered by PPS or are exempt from PPS, and
are also cost-reimbursed, receiving the lower of reasonable costs or charges.
Typically, the fiscal intermediary pays a set rate based on the prior year's
costs for each facility. As with outpatient facilities subject to cost-based
reimbursement, annual cost reports are filed with the Company's fiscal
intermediary and payment adjustments are made, if necessary.
Congress has directed the United States Department of Health and Human
Services to develop regulations, which could subject inpatient rehabilitation
hospitals to PPS in place of the current "reasonable cost within limits" system
of reimbursement. In addition, informal proposals have been made for a
prospective payment system for Medicare outpatient care. Other proposals for a
prospective payment system for rehabilitation hospitals are also being
considered by the federal government. Therefore, the Company cannot predict at
this time the effect that any such changes may have on its operations.
Regulations relating to prospective payment or other aspects of reimbursement
may be developed in the future which could adversely affect reimbursement for
services provided by the Company.
Over the past several years an increasing number of healthcare providers
have been accused of violating the federal False Claims Act. That Act prohibits
the knowing presentation of a false claim to the United States government.
Because the Company performs thousands of similar procedures a year for which it
is reimbursed by Medicare and there is a relatively long statute of limitations,
a billing error could result in significant civil penalties. The Company does
not believe that it is or has been in violation of the False Claims Act.
Relationships with Physicians and Other Providers
Various state and federal laws regulate relationships among providers of
healthcare services, including employment or service contracts and investment
relationships. These restrictions include a federal criminal law prohibiting (i)
the offer, payment, solicitation or receipt of remuneration by individuals or
entities, to induce referrals of patients for services reimbursed under the
Medicare or Medicaid programs or (ii) the leasing, purchasing, ordering,
arranging for or recommending the lease, purchase or order of any item, good,
facility or service covered by such programs (the "Fraud and Abuse Law"). In
addition to federal criminal sanctions, violators of the Fraud and Abuse Law may
be subject to significant civil sanctions, including fines and/or exclusion from
the Medicare and/or Medicaid programs.
In 1991, the Office of the Inspector General ("OIG") of the United States
Department of Health and Human Services promulgated regulations describing
compensation arrangements which are not viewed as illegal remuneration under
the Fraud and Abuse Law (the "Safe Harbor Rules"). The Safe
11
<PAGE>
Harbor Rules create certain standards ("Safe Harbors") for identified types of
compensation arrangements which, if fully complied with, assure participants in
the particular arrangement that the OIG will not treat such participation as a
criminal offense under the Fraud and Abuse Law or as the basis for an exclusion
from the Medicare and Medicaid programs or an imposition of civil sanctions. The
OIG closely scrutinizes health care joint ventures involving physicians and
other referral sources. In 1989, the OIG published a Fraud Alert that outlined
questionable features of "suspect" joint ventures.
In 1992, regulations were published in the Federal Register implementing
the OIG sanction and civil money penalty provisions established in the Fraud and
Abuse Law. The regulations (the "Exclusion Regulations") provide that the OIG
may exclude a Medicare provider from participation in the Medicare Program for a
five-year period upon a finding that the Fraud and Abuse Law has been violated.
The regulations expressly incorporate a test adopted by three federal circuit
courts providing that if one purpose of remuneration that is offered, paid,
solicited or received is to induce referrals, then the statute is violated. The
regulations also provide that after the OIG establishes a factual basis for
excluding a provider from the program, the burden of proof shifts to the
provider to prove that the Fraud and Abuse Law has not been violated.
The Company currently operates four of its rehabilitation hospitals and
many of its outpatient rehabilitation facilities as limited partnerships with
third-party investors. Two of the rehabilitation hospital partnerships involve
physician investors, and two of the rehabilitation hospital partnerships involve
other institutional healthcare providers. Eight of the outpatient partnerships
currently have a total of 21 physician limited partners, some of whom refer
patients to the partnerships. Those partnerships which are providers of services
under the Medicare program, and their limited partners, are subject to the Fraud
and Abuse Law. A number of the relationships established by the Company with
physicians and other healthcare providers do not fit within any of the Safe
Harbors. The Safe Harbor Rules do not expand the scope of activities that the
Fraud and Abuse Law prohibits, nor do they provide that failure to fall within a
Safe Harbor constitutes a violation of the Fraud and Abuse Law; however, the OIG
has informally indicated that failure to fall within a Safe Harbor may subject
an arrangement to increased scrutiny.
Most of the Company's surgery centers are owned by limited partnerships,
which include as limited partners physicians who perform surgical procedures at
such centers. Subsequent to the promulgation of the Safe Harbor Rules in 1991,
the Department of Health and Human Services issued for public comment additional
proposed Safe Harbors, one of which specifically addresses surgeon ownership
interests in ambulatory surgery centers (the "Proposed ASC Safe Harbor"). As
proposed, the Proposed ASC Safe Harbor would protect payments to be made to
surgeons as a return on investment interest in a surgery center if, among other
conditions, all the investors are surgeons who are in a position to refer
patients directly to the center and perform surgery on such referred patients.
Since a subsidiary of the Company is an investor in each limited partnership
which owns a surgery center, the Company's arrangements with physician investors
do not fit within the Proposed ASC Safe Harbor as currently proposed. The
Company is unable at this time to predict whether the Proposed ASC Safe Harbor
will become final, and if so, whether the language and requirements will remain
as currently proposed, or whether changes will be made prior to becoming final.
There can be no assurance that the Company will ever meet the criteria under the
Proposed ASC Safe Harbor as proposed or as it may be adopted in final form. The
Company believes, however, that its arrangements with physicians with respect to
its surgery center facilities should not fall within the activities prohibited
by the Fraud and Abuse Law.
While several federal court decisions have aggressively applied the
restrictions of the Fraud and Abuse Law, they provide little guidance as to the
application of the Fraud and Abuse Law to the Company's limited partnerships.
The Company believes that it is in compliance with the current requirements of
applicable federal and state law, but no assurances can be given that a federal
or state agency charged with enforcement of the Fraud and Abuse Law and similar
laws might not assert a contrary position or that new federal or state laws, or
new interpretations of existing laws, might not adversely affect relationships
established by the Company with physicians or other healthcare providers or
result in the imposition of penalties on the Company or certain of its
facilities. Even the assertion of a violation could have a material adverse
effect upon the Company.
12
<PAGE>
The so-called "Stark II" provisions of the Omnibus Budget Reconciliation
Act of 1993 amend the federal Medicare statute to prohibit the making by a
physician of referrals for "designated health services" (including physical
therapy, occupational therapy, radiology services or radiation therapy) to an
entity in which the physician has an investment interest or other financial
relationship, subject to certain exceptions. Such prohibition took effect on
January 1, 1995 and applies to all of the Company's outpatient rehabilitation
facility partnerships with physician limited partners. In addition, a number of
states have passed or are considering statutes which prohibit or limit physician
referrals of patients to facilities in which they have an investment interest.
In response to these regulatory activities, the Company has restructured most of
its rehabilitation facility partnerships which involve physician investors, in
order to eliminate physician ownership interests not permitted by applicable
law. The Company intends to take such actions as may be required to cause the
remaining partnerships to be in compliance with applicable laws and regulations,
including, if necessary, the prohibition of physician partners from referring
patients. The Company believes that this restructuring has not adversely
affected and will not adversely affect the operations of its facilities.
Ambulatory surgery is not identified as a "designated health service", and
the Company does not believe that ambulatory surgery is subject to the
restrictions set forth in Stark II. However, lithotripsy facilities operated by
the Company frequently operate on hospital campuses, and it is possible to
conclude that such services are "inpatient and outpatient hospital services" --
a category of proscribed services within the meaning of Stark II. Similarly,
physicians frequently perform endoscopic procedures in the procedure rooms of
the Company's surgery centers, and it is also possible to construe these
services to be "designated health services". While the Company does not believe
that Stark II was intended to apply to such services, if that were determined to
be the case, the Company intends to take steps necessary to cause the operation
of its facilities to comply with the law.
The Company cannot predict whether other regulatory or statutory provisions
will be enacted by federal or state authorities which would prohibit or
otherwise regulate relationships which the Company has established or may
establish with other healthcare providers or the possibility of materially
adverse effects on its business or revenues arising from such future actions.
Management of the Company believes, however, that the Company will be able to
adjust its operations so as to be in compliance with any regulatory or statutory
provision as may be applicable. See this Item, "Business -- Patient Care
Services" and "Business -- Sources of Revenues".
INSURANCE
Beginning December 1, 1993, the Company became self-insured for
professional liability and comprehensive general liability. The Company
purchased coverage for all claims incurred prior to December 1, 1993. In
addition, the Company purchased underlying insurance which would cover all
claims once established limits have been exceeded. It is the opinion of
management that as of December 31, 1996, the Company had adequate reserves to
cover losses on asserted and unasserted claims.
EMPLOYEES
As of December 31, 1996, the Company employed 36,410 persons, of whom
20,930 were full-time employees and 15,480 were part-time employees. Of the
above employees, 595 were employed at the Company's headquarters in Birmingham,
Alabama. Except for approximately 80 employees at one rehabilitation hospital
(about 18% of that facility's workforce), none of the Company's employees are
represented by a labor union. The Company is not aware of any current activities
to organize its employees at other facilities. Management of the Company
considers the relationship between the Company and its employees to be good.
13
<PAGE>
ITEM 2. PROPERTIES
The Company's executive offices currently occupy approximately 200,000
square feet in a newly-constructed headquarters building in Birmingham, Alabama.
The headquarters building, which was occupied by the Company in February 1997,
was constructed on a 73-acre parcel of land owned by the Company pursuant to a
tax retention operating lease structured through NationsBanc Leasing
Corporation. Substantially all of the Company's outpatient rehabilitation
operations are carried out in leased facilities. The Company owns 33 of its
inpatient rehabilitation facilities and leases or operates under management
contracts the remainder of its inpatient rehabilitation facilities. The Company
also owns 40 of its surgery centers and leases the remainder. Prior to the
acquisition of Health Images, substantially all of the Company's diagnostic
centers operated in leased facilities. The Company constructed its
rehabilitation hospitals in Florence and Columbia, South Carolina, Kingsport and
Nashville, Tennessee, Concord, New Hampshire, and Dothan, Alabama, and is
constructing its Columbia, Missouri and Charlottesville, Virginia rehabilitation
hospitals, on property leased under long-term ground leases. The property on
which the Company's Memphis, Tennessee rehabilitation hospital is located is
owned in partnership by the Company and Methodist Hospitals of Memphis. The
Company owns its four medical center facilities. The Company currently owns, and
from time to time may acquire, certain other improved and unimproved real
properties in connection with its business. See Notes 5 and 7 of "Notes to
Consolidated Financial Statements" for information with respect to the
properties owned by the Company and certain indebtedness related thereto.
In management's opinion, the Company's physical properties are adequate for
the Company's needs for the foreseeable future, and are consistent with its
expansion plans described elsewhere in this Annual Report on Form 10-K.
14
<PAGE>
The following table sets forth a listing of the Company's patient care
services locations at December 31, 1996 (without giving effect to the Health
Images acquisition):
<TABLE>
<CAPTION>
OUTPATIENT INPATIENT
REHABILITATION REHABILITATION MEDICAL SURGERY DIAGNOSTIC OTHER
STATE CENTERS(1) FACILITIES (BEDS)(2) CENTERS (BEDS)(2) CENTERS CENTERS SERVICES
- ---------------------- ---------------- ---------------------- ------------------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Alabama 16 9(389) 1(219) 5 3 10
Alaska 1
Arizona 26 3(183) 2
Arkansas 1 1(80) 2
California 48 1(60) 21 31
Colorado 28 5 12
Connecticut 18 2(40) 1
Delaware 7 2
District of Columbia 1 1
Florida 46 8(613) 2(397) 18 11
Georgia 13 1(75) 3 1
Hawaii 5 1
Idaho 1
Illinois 50 2
Indiana 13 1(80) 2
Iowa 3 1
Kansas 5 1
Kentucky 3 1(40) 2
Louisiana 2 1(43) 1 1
Maine 9 4(155) 1
Maryland 14 1(44) 6 3
Massachusetts 37 10(639) 1 10
Michigan 3 1
Minnesota 11
Mississippi 2
Missouri 34 4(107) 6 6
Montana 1
Nebraska 2
Nevada 4
New Hampshire 13 3(148)
New Jersey 52 2(170) 2 1 3
New Mexico 3 1(60) 1
New York 39 1(27)
North Carolina 12 3
North Dakota 1
Ohio 27 1(24) 4 3
Oklahoma 11 1(111) 2 1
Oregon 1
Pennsylvania 31 12(1,041) 6
Rhode Island 3
South Carolina 9 4(235) 2
South Dakota 1
Tennessee 13 5(330) 6 1
Texas 72 10(633) 1(96) 16 2 14
Utah 1 1(86) 1
Vermont 2(52)
Virginia 11 2(84) 1(200) 1 2 10
Washington 36 2 17
West Virginia 4(200) 1
Wisconsin 1 4
Wyoming 1
</TABLE>
- ----------
(1) Includes freestanding outpatient centers and their satellites and outpatient
satellites of inpatient rehabilitation facilities.
(2) "Beds" refers to the number of beds for which a license or certificate of
need has been granted, which may vary materially from beds available for
use.
15
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its business, the Company may be subject, from
time to time, to claims and legal actions by patients and others. The Company
does not believe that any such pending actions, if adversely decided, would have
a material adverse effect on its financial condition. See Item 1, "Business --
Insurance" and Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a description of the Company's
insurance coverage arrangements.
From time to time, the Company appeals decisions of various rate-making
authorities with respect to Medicare rates established for the Company's
facilities. These appeals are initiated in the ordinary course of business.
Management believes that adequate reserves have been established for possible
adverse decisions on any pending appeals and that the outcomes of currently
pending appeals, either individually or in the aggregate, will have no material
adverse effect on the Company's operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 12, 1997, a Special Meeting of Stockholders of the Company was
held, at which shares of Common Stock represented at the Special Meeting were
voted for the approval of an Amendment to the Restated Certificate of
Incorporation of the Company to increase the authorized shares of Common Stock
to 500,000,000 shares as follows:
NUMBER
VOTING FOR AGAINST ABSTAIN
------------- ------------- --------- --------
138,533,768 137,975,826 339,699 218,243
16
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER 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 25, 1997, was $20.875.
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 period covered by this Annual Report on Form 10-K, 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.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is a summary of selected consolidated financial data for
the Company for the years indicated. All amounts have been restated to reflect
the effects of the 1994 acquisition of ReLife, Inc. ("ReLife"), the 1995 SHC and
SSCI acquisitions and the 1996 SCA and Advantage Health acquisitions, each of
which was accounted for as a pooling of interests.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ------------- ------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues ..........................................$ 750,134 $ 979,206 $ 1,649,199 $ 2,003,146 $ 2,436,537
Operating unit expenses ........................... 521,619 668,201 1,161,758 1,371,740 1,586,003
Corporate general and administrative expenses ...... 25,667 37,043 61,640 56,920 66,807
Provision for doubtful accounts .................. 16,553 20,026 32,904 37,659 54,112
Depreciation and amortization ..................... 42,107 63,572 113,977 143,322 188,966
Merger and acquisition related expenses(1) ......... -- 333 6,520 19,553 41,515
Loss on impairment of assets(2) .................. -- -- 10,500 53,549 --
Loss on abandonment of computer project(2) ......... -- -- 4,500 -- --
Loss on disposal of surgery centers(2) ............ -- -- 13,197 -- --
NME Selected Hospitals Acquisition related
expense(2) ....................................... -- 49,742 -- -- --
Terminated merger expense ........................ 3,665 -- -- -- --
Loss on extinguishment of debt ..................... 883 -- -- -- --
Interest expense ................................. 18,237 24,200 73,644 101,790 94,553
Interest income .................................... (8,595) (5,903) (6,387) (7,882) (5,912)
Gain on sale of partnership interest ............... -- (1,400) -- -- --
Gain on sale of equity securities(2) ............... -- -- (7,727) -- --
--------- --------- ----------- ----------- -----------
620,136 855,814 1,464,526 1,776,651 2,026,044
--------- --------- ----------- ----------- -----------
Income before income taxes and minority interests 129,998 123,392 184,673 226,495 410,493
Provision for income taxes ........................ 38,550 37,993 65,121 81,771 140,238
--------- --------- ----------- ----------- -----------
91,448 85,399 119,552 144,724 270,255
Minority interests ................................. 25,943 29,377 31,469 43,147 49,437
--------- --------- ----------- ----------- -----------
Income from continuing operations .................. 65,505 56,022 88,083 101,577 220,818
Income from discontinued operations ............... 3,283 4,452 -- -- --
Extraordinary item(2) .............................. -- -- -- (9,056) --
--------- --------- ----------- ----------- -----------
Net income ....................................... $ 68,788 $ 60,474 $ 88,083 $ 92,521 $ 220,818
========= ========= =========== =========== ===========
Weighted average common and common equivalent
shares outstanding(3) ........................... 254,296 264,958 280,854 297,460 326,290
========= ========= =========== =========== ===========
Net income per common and common equivalent
share(3)
Continuing operations ........................... $ 0.26 $ 0.21 $ 0.31 $ 0.34 $ 0.68
Discontinued operations ........................ 0.01 0.02 -- -- --
Extraordinary item .............................. -- -- -- (0.03) --
--------- --------- ----------- ----------- -----------
$ 0.27 $ 0.23 $ 0.31 $ 0.31 $ 0.68
========= ========= =========== =========== ===========
Net income per common share -- assuming full
dilution(3)(4) ................................. N/A N/A $ 0.31 $ 0.31 $ 0.66
========= ========= =========== =========== ===========
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1992 1993 1994 1995 1996
------------ ------------ ------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and marketable securities ...... $ 179,725 $ 148,308 $ 129,971 $ 156,321 $ 151,788
Working capital ..................... 269,120 284,691 282,667 406,125 543,975
Total assets ........................ 1,143,235 1,881,211 2,230,093 2,931,495 3,371,952
Long-term debt(5) .................. 413,656 1,008,429 1,139,087 1,391,664 1,486,029
Stockholders' equity ............... 581,954 646,397 757,583 1,185,898 1,515,924
</TABLE>
- ----------
(1) Expenses related to SHC's Ballas Merger in 1993, the ReLife and Heritage
Acquisitions in 1994, the SHC, SSCI and NovaCare Rehabilitation Hospitals
Acquisitions in 1995 and the SCA, Advantage Health, PSCM and ReadiCare
mergers in 1996.
(2) See "Notes to Consolidated Financial Statements".
(3) Adjusted to reflect 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.
(4) Fully-diluted earnings per share in 1994, 1995 and 1996 reflect shares
reserved for issuance upon conversion of HEALTHSOUTH's 5% Convertible
Subordinated Debentures due 2001.
(5) Includes current portion of long-term debt.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion is intended to facilitate the understanding and
assessment of significant changes and trends related to the results of
operations and financial condition of the Company, including certain factors
related to recent acquisitions by the Company, the timing and nature of which
have significantly affected the Company's results of operations. This discussion
and analysis should be read in conjunction with the Company's consolidated
financial statements and notes thereto included elsewhere in this Annual Report
on Form 10-K.
The Company completed the following acquisitions over the last three years
(common share amounts have been adjusted to reflect a two-for-one stock split
effected in the form of a 100% stock dividend paid on March 17, 1997):
o On December 29, 1994, the Company acquired ReLife, Inc. (the "ReLife
Acquisition"). A total of 22,050,580 shares of the Company's Common Stock
were issued in the transaction, representing a value of $180,000,000 at the
time of the acquisition. At that time, ReLife operated 31 inpatient
facilities with an aggregate of 1,102 licensed beds, including nine
free-standing rehabilitation hospitals, nine acute rehabilitation units,
five sub-acute rehabilitation units, seven transitional living units and
one residential facility, and also provided outpatient rehabilitation
services at 12 centers.
o On April 1, 1995, the Company purchased the operations of the
rehabilitation hospital division of NovaCare, Inc. (the "NovaCare
Rehabilitation Hospitals Acquisition"). The purchase price was
approximately $235,000,000. The NovaCare Rehabilitation Hospitals consisted
of 11 rehabilitation hospitals in seven states, 12 other facilities and two
Certificates of Need.
o On June 13, 1995, the Company acquired Surgical Health Corporation (the
"SHC Acquisition"). A total of 17,062,960 shares of the Company's Common
Stock were issued in the transaction, representing a value of $155,000,000
at the time of the acquisition. The Company also purchased SHC's
$75,000,000 aggregate principal amount of 11.5% Senior Subordinated Notes
due 2004 for an aggregate consideration of approximately $86,000,000. At
that time, SHC operated a network of 36 free-standing surgery centers in 11
states, and five mobile lithotripsy units.
19
<PAGE>
o On October 26, 1995, the Company acquired Sutter Surgery Centers, Inc. (the
"SSCI Acquisition"). A total of 3,552,002 shares of the Company's Common
Stock were issued in the transaction, representing a value of $44,444,000
at the time of the acquisition. At that time, SSCI operated a network of 12
freestanding surgery centers in three states.
o On December 1, 1995, the Company acquired Caremark Orthopedic Services
Inc. (the "Caremark Acquisition"). The purchase price was approximately
$127,500,000. At that time Caremark owned and operated approximately 120
outpatient rehabilitation centers in 13 states.
o On January 17, 1996, the Company acquired Surgical Care Affiliates, Inc.
(the "SCA Acquisition"). A total of 91,856,678 shares of the Company's
Common Stock were issued in the transaction, representing a value of
approximately $1,400,000,000 at the time of the acquisition. At that time,
SCA operated a network of 67 freestanding surgery centers in 24 states.
o On March 14, 1996, the Company acquired Advantage Health Corporation (the
"Advantage Health Acquisition"). A total of 18,203,978 shares of the
Company's Common Stock were issued in the transaction, representing a value
of approximately $315,000,000 at the time of the acquisition. At that time,
Advantage Health operated a network of 136 sites of service, including four
freestanding rehabilitation hospitals, one freestanding multi-use hospital,
one nursing home, 68 outpatient rehabilitation facilities, 14 inpatient
managed rehabilitation units, 24 rehabilitation services management
contracts and six managed sub-acute rehabilitation units, primarily located
in the northeastern United States.
o On August 20, 1996, the Company acquired Professional Sports Care
Management, Inc. (the "PSCM Acquisition"). A total of 3,622,888 shares of
the Company's Common Stock were issued in the transaction, representing a
value of approximately $59,000,000 at the time of the acquisition. At that
time, PSCM operated a network of 36 outpatient rehabilitation centers in
three states.
o On December 2, 1996, the Company acquired ReadiCare, Inc. (the "ReadiCare
Acquisition"). A total of 4,007,954 shares of the Company's Common Stock
were issued in the transaction, representing a value of approximately
$76,000,000 at the time of the acquisition. At that time, ReadiCare
operated a network of 37 outpatient medical and rehabilitation centers in
two states.
The NovaCare Rehabilitation Hospitals Acquisition and the Caremark
Acquisition each were accounted for under the purchase method of accounting and,
accordingly, the acquired operations are included in the Company's consolidated
financial information from their respective dates of acquisition. Each of the
ReLife Acquisition, the SHC Acquisition, the SSCI Acquisition, the SCA
Acquisition and the Advantage Health Acquisition was accounted for as a pooling
of interests and, with the exception of data set forth relating to revenues
derived from Medicare and Medicaid, all amounts shown in the following
discussion have been restated to reflect such acquisitions. ReLife, SHC, SSCI,
SCA and Advantage Health did not separately track such revenues. The PSCM
Acquisition and the ReadiCare Acquisition were also accounted for as poolings of
interests. However, due to the immateriality of PSCM and ReadiCare, the
Company's historical financial statements for all periods prior to the quarters
in which the respective mergers took place have not been restated. Instead,
stockholders' equity has been increased during 1996 to reflect the effects of
the PSCM Acquisition and the ReadiCare Acquisition. The results of operations of
PSCM and ReadiCare are included in the accompanying financial statements and the
following discussion from the date of acquisition forward (see Note 2 of "Notes
to Consolidated Financial Statements" for further discussion).
The Company determines the amortization period of the cost in excess of net
asset value of purchased facilities based on an evaluation of the facts and
circumstances of each individual purchase transaction. The evaluation includes
an analysis of historic and projected financial performance, an evaluation of
the estimated useful life of the buildings and fixed assets acquired, the
indefinite useful life of certificates of need and licenses acquired, the
competition within local markets, lease terms where applicable, and the legal
terms of partnerships where applicable. The Company utilizes independent
appraisers and relies on its own management expertise in evaluating each of the
factors noted above.
20
<PAGE>
With respect to the carrying value of the excess of cost over net asset value of
purchased facilities and other intangible assets, the Company determines on a
quarterly basis whether an impairment event has occurred by considering factors
such as the market value of the asset, a significant adverse change in legal
factors or in the business climate, adverse action by regulators, history of
operating losses or cash flow losses, or a projection of continuing losses
associated with an operating entity. The carrying value of excess cost over net
asset value of purchased facilities and other intangible assets will be
evaluated if the facts and circumstances suggest that it has been impaired. If
this evaluation indicates that the value of the asset will not be recoverable,
as determined based on the undiscounted cash flows of the entity acquired over
the remaining amortization period, the Company's carrying value of the asset
will be reduced by the estimated shortfall of cash flows.
Governmental, commercial and private payors have increasingly recognized
the need to contain their costs for healthcare services. These payors,
accordingly, are turning to closer monitoring of services, prior authorization
requirements, utilization review and increased utilization of outpatient
services. During the periods discussed below, the Company has experienced an
increased effort by these payors to contain costs through negotiated discount
pricing. The Company views these efforts as an opportunity to demonstrate the
effectiveness of its clinical programs and its ability to provide its
rehabilitative healthcare services efficiently. The Company has entered into a
number of contracts with payors to provide services and has realized an
increased volume of patients as a result.
The Company's revenues include net patient service revenues and other
operating revenues. Net patient service revenues are reported at estimated net
realizable amounts from patients, insurance companies, third-party payors
(primarily Medicare and Medicaid) and others for services rendered. Revenues
from third-party payors also include estimated retroactive adjustments under
reimbursement agreements which are subject to final review and settlement by
appropriate authorities. Management determines allowances for doubtful accounts
and contractual adjustments based on historical experience and the terms of
payor contracts. Net accounts receivable include only those amounts estimated by
management to be collectible.
The Company, in many cases, operates more than one site within a market. In
such markets, there is customarily an outpatient center or inpatient facility
with associated satellite outpatient locations. For purposes of the following
discussion and analysis, same store operations are measured on locations within
markets in which similar operations existed at the end of the period and include
the operations of additional locations opened within the same market. New store
operations are measured on locations within new markets.
RESULTS OF OPERATIONS OF THE COMPANY
Twelve-Month Periods Ended December 31, 1994 and 1995
The Company operated 537 outpatient rehabilitation locations at December
31, 1995, compared to 283 outpatient rehabilitation locations at December 31,
1994. In addition, the Company operated 95 inpatient rehabilitation facilities,
122 surgery centers and five medical centers at December 31, 1995, compared to
82 inpatient rehabilitation facilities, 112 surgery centers and five medical
centers at December 31, 1994.
The Company's operations generated revenues of $2,003,146,000 in 1995, an
increase of $353,947,000, or 21.5%, as compared to 1994 revenues. Same store
revenues for the twelve months ended December 31, 1995 were $1,817,359,000, an
increase of $168,160,000, or 10.2%, as compared to the same period in 1994. New
store revenues for 1995 were $185,787,000. New store revenues reflect (1) the 11
rehabilitation hospitals and 12 other facilities associated with the NovaCare
Rehabilitation Hospitals Acquisition, (2) the 120 outpatient rehabilitation
centers associated with the Caremark Acquisition, (3) the acquisition of five
surgery centers and one outpatient diagnostic imaging operation, and (4) the
acquisition of outpatient rehabilitation operations in 34 new markets. See Note
9 of "Notes to Consolidated Financial Statements". The increase in revenues is
primarily attributable to the addition of these operations and increases in
patient volume. Revenues generated from patients under the Medicare and Medicaid
programs respectively accounted for 40.0% and 2.5% of total revenues for 1995,
compared to 41.0% and
21
<PAGE>
3.2% of total revenues for 1994. Revenues from any other single third-party
payor were not significant in relation to the Company's total revenues. During
1995, same store outpatient visits, inpatient days and surgery center cases
increased 21.7%, 10.8% and 4.8%, respectively. Revenue per outpatient visit,
inpatient day and surgery case for same store operations increased (decreased)
by 0.8%, 2.5% and (0.9%), respectively.
Operating expenses, at the operating unit level, were $1,371,740,000, or
68.5% of revenues, for 1995, compared to 70.4% of revenues for 1994. Same store
operating expenses for 1995 were $1,243,508,000, or 68.4% of related revenues.
New store operating expenses were $128,232,000, or 69.0% of related revenues.
Corporate general and administrative expenses decreased from $61,640,000 in 1994
to $56,920,000 in 1995. As a percentage of revenues, corporate general and
administrative expenses decreased from 3.7% in 1994 to 2.8% in 1995. Total
operating expenses were $1,428,660,000, or 71.3% of revenues, for 1995, compared
to $1,223,398,000, or 74.2% of revenues, for 1994. The provision for doubtful
accounts was $37,659,000, or 1.9% of revenues, for 1995, compared to
$32,904,000, or 2.0% of revenues, for 1994.
Depreciation and amortization expense was $143,322,000 for 1995, compared
to $113,977,000 for 1994. The increase represents the investment in additional
assets by the Company. Interest expense increased to $101,790,000 in 1995,
compared to $73,644,000 for 1994, primarily because of the increased average
borrowings during 1995 under the Company's revolving line of credit. For 1995,
interest income was $7,882,000, compared to $6,387,000 for 1994.
Merger expenses in 1994 of $6,520,000 represent costs incurred or accrued
in connection with completing the ReLife Acquisition ($2,949,000) and SHC's
acquisition of Heritage Surgical Corporation ($3,571,000). For further
discussion, see Note 2 of "Notes to Consolidated Financial Statements".
During 1994, the Company recognized a $10,500,000 loss on impairment of
assets. This amount relates to the termination of a ReLife management contract
and a permanently damaged ReLife facility. The Company determined not to attempt
to reopen such damaged facility because, under its existing licensure, the
facility was not consistent with the Company's plans. Also during 1994, the
Company recognized a $4,500,000 loss on abandonment of a ReLife computer
project. For further discussion, see Note 14 of "Notes to Consolidated Financial
Statements".
During the fourth quarter of 1994, the Company adopted a formal plan to
dispose of three surgery centers and certain other properties during fiscal
1995. Accordingly, a charge of $13,197,000 was made to reflect the expected
losses resulting from the disposal of these centers. The closings of the three
surgery centers were completed by December 31, 1995. For further discussion, see
Note 13 of "Notes to Consolidated Financial Statements".
As a result of the NovaCare and SHC acquisitions, the Company recognized
$14,588,000 in merger and acquisition related expenses during the second quarter
of 1995. Fees related to legal, accounting and financial advisory services
accounted for $3,400,000 of the expense. Accruals for employee separations were
approximately $1,188,000. In addition, the Company provided approximately
$10,000,000 for the write-down of certain assets to net realizable value as the
result of a facility consolidation in a market where the Company's existing
services overlapped with those of an acquired facility. The employee separations
and facility consolidation were completed by the end of 1995.
In the fourth quarter of 1995, the Company incurred direct costs and
expenses of $4,965,000 in connection with the SSCI Acquisition. These expenses
consist primarily of fees related to legal, accounting and financial advisory
services and are included in merger and acquisition related acquisition expenses
for the year ended December 31, 1995.
In connection with the SHC Acquisition, the Company recognized a $9,056,000
extraordinary loss (net of income tax benefit of $5,550,000) on the early
extinguishment of the SHC Notes during 1995 (see Notes 2 and 7 of "Notes to
Consolidated Financial Statements").
Also during 1995, the Company recognized a $53,549,000 loss on impairment
of assets. The impaired assets relate to six SHC facilities and eight SCA
facilities in which the projected undiscounted cash flows did not support the
book value of the long-lived assets of such facilities. See Note 14 of "Notes to
Consolidated Financial Statements".
22
<PAGE>
Income before income taxes, minority interests and extraordinary item for
1995 was $226,495,000, compared to $184,673,000 for 1994. Minority interests
reduced income before income taxes by $43,147,000, compared to $31,469,000 for
1994. The provision for income taxes for 1995 was $81,771,000, compared to
$65,121,000 for 1994, resulting in effective tax rates of 44.6% for 1995 and
42.5% for 1994. Net income for 1995 was $92,521,000.
Twelve-Month Periods Ended December 31, 1995 and 1996
The Company operated 739 outpatient rehabilitation locations at December
31, 1996, compared to 537 outpatient rehabilitation locations at December 31,
1995. In addition, the Company operated 96 inpatient rehabilitation facilities,
135 surgery centers and five medical centers at December 31, 1996, compared to
95 inpatient rehabilitation facilities, 122 surgery centers and five medical
centers at December 31, 1995.
The Company's operations generated revenues of $2,436,537,000 in 1996, an
increase of $433,391,000, or 21.6%, as compared to 1995 revenues. Same store
revenues for the twelve months ended December 31, 1996 were $2,276,676,000, an
increase of $273,530,000, or 13.7%, as compared to the same period in 1995. New
store revenues for 1996 were $159,861,000. New store revenues reflect the
acquisition of one inpatient rehabilitation hospital, the addition of eight new
outpatient surgery centers, and the acquisition of outpatient rehabilitation
operations in 57 new markets. See Note 9 of "Notes to Consolidated Financial
Statements". The increase in revenues is primarily attributable to the addition
of these operations and increases in patient volume. Revenues generated from
patients under the Medicare and Medicaid programs respectively accounted for
37.8% and 2.9% of total revenues for 1996, compared to 40.0% and 2.5% of total
revenues for 1995. Revenues from any other single third-party payor were not
significant in relation to the Company's total revenues. During 1996, same store
outpatient visits, inpatient days and surgery center cases increased 19.9%,
10.8% and 7.3%, respectively. Revenue per outpatient visit, inpatient day and
surgery case for same store operations increased (decreased) by (0.8)%, 3.8% and
1.1%, respectively.
Operating expenses, at the operating unit level, were $1,586,003,000, or
65.1% of revenues, for 1996, compared to 68.5% of revenues for 1995. The
decrease in operating expenses as a percentage of revenues is primarily
attributable to the 13.7% increase in same store revenues noted above. In same
store operations, the incremental costs associated with increased revenues are
significantly lower as a percentage of those increased revenues. Same store
operating expenses for 1996 were $1,486,575,000, or 65.3% of related revenues.
New store operating expenses were $99,428,000, or 62.2% of related revenues.
Corporate general and administrative expenses increased from $56,920,000 in 1995
to $66,807,000 in 1996. As a percentage of revenues, corporate general and
administrative expenses decreased from 2.8% in 1995 to 2.7% in 1996. Total
operating expenses were $1,652,810,000, or 67.8% of revenues, for 1996, compared
to $1,428,660,000, or 71.3% of revenues, for 1995. The provision for doubtful
accounts was $54,112,000, or 2.2% of revenues, for 1996, compared to
$37,659,000, or 1.9% of revenues, for 1995.
Depreciation and amortization expense was $188,966,000 for 1996, compared
to $143,322,000 for 1995. The increase resulted from the investment in
additional assets by the Company. Interest expense decreased to $94,553,000 in
1996, compared to $101,790,000 for 1995, primarily because of the favorable
interest rates on the Company's revolving credit facility (see "Liquidity and
Capital Resources"). For 1996, interest income was $5,912,000 compared to
$7,882,000 for 1995. The decrease in interest income resulted primarily from a
decrease in the average amount outstanding in interest-bearing investments.
Merger expenses in 1996 of $41,515,000 represent costs incurred or accrued
in connection with completing the SCA Acquisition ($19,727,000), the Advantage
Health Acquisition ($9,212,000), the PSCM Acquisition ($5,513,000) and the
ReadiCare Acquisition ($7,063,000). For further discussion, see Note 2 of "Notes
to Consolidated Financial Statements".
Income before income taxes, minority interests and extraordinary item for
1996 was $410,493,000, compared to $226,495,000 for 1995. Minority interests
reduced income before income taxes by $49,437,000, compared to $43,147,000 for
1995. The provision for income taxes for 1996 was $140,238,000, compared to
$81,771,000 for 1995, resulting in effective tax rates of 38.8% for 1996 and
44.6% for 1995. Net income for 1996 was $220,818,000.
23
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had working capital of $543,975,000,
including cash and marketable securities of $151,788,000. Working capital at
December 31, 1995 was $406,125,000, including cash and marketable securities of
$156,321,000. For 1996, cash provided by operations was $367,656,000, compared
to $306,157,000 for 1995. The Company used $451,343,000 for investing activities
during 1996, compared to $764,825,000 for 1995. Additions to property, plant and
equipment and acquisitions accounted for $172,962,000 and $91,391,000,
respectively, during 1996. Those same investing activities accounted for
$172,172,000 and $493,914,000, respectively, in 1995. Financing activities
provided $83,108,000 and $494,100,000 during 1996 and 1995, respectively. Net
borrowing proceeds (borrowings less principal reductions) for 1996 and 1995 were
$88,851,000 and $213,155,000, respectively.
Net accounts receivable were $510,567,000 at December 31, 1996, compared to
$409,150,000 at December 31, 1995. The number of days of average revenues in
average receivables was 66.7 at December 31, 1996, compared to 63.2 at December
31, 1995. The concentration of net accounts receivable from patients,
third-party payors, insurance companies and others at December 31, 1996 was
consistent with the related concentration of revenues for the period then ended.
The Company has a $1,250,000,000 revolving credit facility with
NationsBank, N.A. ("NationsBank") and other participating banks (the "1996
Credit Agreement"). The 1996 Credit Agreement replaced a previous $1,000,000,000
revolving credit agreement, also with NationsBank. Interest is paid based on
LIBOR plus a predetermined margin, a base rate or competitively bid rates from
the participating banks. This credit facility has a maturity date of March 31,
2001. The Company provided a negative pledge on all assets for the 1996 Credit
Agreement. The effective interest rate on the average outstanding balance under
the revolving credit facility was 5.98% for the twelve months ended December 31,
1996, compared to the average prime rate of 8.29% during the same period. At
December 31, 1996, the Company had drawn $995,000,000 under the 1996 Credit
Agreement. For further discussion, see Note 7 of "Notes to Consolidated
Financial Statements".
In 1994, the Company issued $115,000,000 principal amount of 5% Convertible
Subordinated Debentures due 2001 (the "Debentures"). The Company has called the
Debentures for redemption on April 1, 1997. Because the recent market price of
the Company's Common Stock substantially exceeds the conversion price of the
Debentures, the Company expects that substantially all of the
Debentures will be converted into Common Stock.
On February 17, 1997, the Company entered into a definitive agreement to
acquire Horizon/CMS Healthcare Corporation ("Horizon/CMS") in a stock-for-stock
merger in which the stockholders of Horizon/CMS will receive 0.84338 of a share
of the Company's common stock per share of Horizon/ CMS common stock. The
transaction is valued at approximately $1,600,000,000, including the assumption
by the Company of approximately $700,000,000 in Horizon/CMS debt. It is expected
that the transaction will be accounted for as a purchase. Horizon/CMS operates
33 inpatient rehabilitation hospitals, 58 specialty hospitals and subacute units
and 282 outpatient rehabilitation centers. Horizon/CMS also owns, leases or
manages 267 long-term care facilities, a contract therapy business, an
institutional pharmacy business and other healthcare services. Consummation of
the transaction is subject to various regulatory approvals, including clearance
under the Hart-Scott-Rodino Antitrust Improvements Act, and to the satisfaction
of certain other conditions. The Company currently anticipates that the
transaction will be consummated by October 1997.
On March 3, 1997, the Company consummated the acquisition of Health Images,
Inc. ("Health Images") in a transaction accounted for as a pooling of interests.
In the transaction, Health Images stockholders received approximately 10,400,000
shares of the Company's common stock. Health Images operates 49 freestanding
diagnostic imaging centers in 13 states and six in England. The effects of
conforming the accounting policies of the Company and Health Images are not
expected to be material. For further discussion, see Note 2 of "Notes to
Consolidated Financial Statements".
The Company intends to pursue the acquisition or development of additional
healthcare operations, including comprehensive outpatient rehabilitation
facilities, inpatient rehabilitation facilities, ambulatory surgery centers,
outpatient diagnostic centers and companies engaged in the provision of
rehabilitation--
24
<PAGE>
related services, and to expand certain of its existing facilities. While it is
not possible to estimate precisely the amounts which will actually be expended
in the foregoing areas, the Company anticipates that over the next twelve
months, it will spend approximately $50,000,000 on maintenance and expansion of
its existing facilities and approximately $300,000,000 on development of the
Integrated Service Model. See Item 1, "Business -- Company Strategy".
Although the Company is continually considering and evaluating acquisitions
and opportunities for future growth, the Company has not entered into any
agreements with respect to material future acquisitions other than the
transactions with Horizon/CMS and Health Images. In connection with the pending
acquisition of Horizon/CMS, the Company has obtained a fully-underwritten
commitment from NationsBank, N.A. for a $1,000,000,000 Senior Bridge Loan
Facility on substantially the same terms as the 1996 Credit Agreement. The
Company believes that existing cash, cash flow from operations, and borrowings
under the revolving line of credit and the bridge loan facility will be
sufficient to satisfy the Company's estimated cash requirements for the next
twelve months, and for the reasonably foreseeable future.
Inflation in recent years has not had a significant effect on the Company's
business, and is not expected to adversely affect the Company in the future
unless it increases significantly.
Statements contained in this Annual Report on Form 10-K which are not
historical facts are forward-looking statements. In addition, the Company,
through its senior management, from time to time makes forward-looking public
statements concerning its expected future operations and performance and other
developments. Such forward-looking statements are necessarily estimates
reflecting the Company's best judgment based upon current information and
involve a number of risks and uncertainties, and there can be no assurance that
other factors will not affect the accuracy of such forward-looking statements.
While is impossible to identify all such factors, factors which could cause
actual results to differ materially from those estimated by the Company include,
but are not limited to, changes in the regulation of the healthcare industry at
either or both of the federal and state levels, changes in reimbursement for the
Company's services by governmental or private payors, competitive pressures in
the healthcare industry and the Company's response thereto, the Company's
ability to obtain and retain favorable arrangements with third-party payors,
unanticipated delays in the Company's implementation of its Integrated Service
Model, general conditions in the economy and capital markets, and other factors
which may be identified from time to time in the Company's Securities and
Exchange Commission filings and other public announcements.
25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements of the Company meeting the requirements
of Regulation S-X are filed on the succeeding pages of this Item 8 of this
Annual Report on Form 10-K, as listed below:
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Auditors ...................................................... 27
Consolidated Balance Sheets as of December 31, 1995 and 1996 ........................ 28
Consolidated Statements of Income for the Years Ended December 31, 1994, 1995 and 1996 29
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1994,
1995 and 1996 ..................................................................... 30
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and
1996 .............................................................................. 31
Notes to Consolidated Financial Statements .......................................... 33
</TABLE>
Other financial statements and schedules required under Regulation S-X are
listed in Item 14(a)2, and filed under Item 14(d), of this Annual Report on Form
10-K.
QUARTERLY RESULTS (UNAUDITED)
Set forth below is certain summary information with respect to the
Company's operations for the last eight fiscal quarters. All amounts have been
restated to reflect the effects of the 1995 acquisitions of SHC and SSCI and the
1996 acquisitions of SCA and Advantage Health, all of which were accounted for
as poolings of interests. All per share amounts have been adjusted to reflect 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.
<TABLE>
<CAPTION>
1995
----------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues ............................................. $ 451,844 $ 499,668 $ 518,537 $ 533,097
Net income .......................................... 32,922 11,926 41,647 6,026
Net income per common and common equivalent share . 0.12 0.04 0.14 0.02
Net income per common share -- assuming full dilution . 0.11 0.04 0.14 0.02
</TABLE>
<TABLE>
<CAPTION>
1996
----------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues ............................................. $ 581,234 $ 595,589 $ 616,943 $ 642,771
Net income .......................................... 37,851 59,555 61,044 62,368
Net income per common and common equivalent share . 0.12 0.18 0.18 0.19
Net income per common share -- assuming full dilution . 0.11 0.18 0.18 0.18
</TABLE>
26
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
HEALTHSOUTH Corporation
We have audited the accompanying consolidated balance sheets of HEALTHSOUTH
Corporation and Subsidiaries as of December 31, 1995 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
HEALTHSOUTH Corporation and Subsidiaries at December 31, 1995 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Birmingham, Alabama
February 24, 1997
Except for the first paragraph of Note 15, as to
which the date is March 12, 1997
27
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1995 1996
------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 3) ................................................ $ 152,244 $ 148,028
Other marketable securities (Note 3) ............................................. 4,077 3,760
Accounts receivable, net of allowances for doubtful accounts of $51,143,000 in 1995
and $65,507,000 in 1996 ......................................................... 409,150 510,567
Inventories ..................................................................... 39,239 47,107
Prepaid expenses and other current assets ....................................... 76,844 126,197
Deferred income taxes (Note 10) ................................................... 21,977 11,852
----------- -----------
Total current assets ............................................................... 703,531 847,511
Other assets:
Loans to officers ............................................................... 1,625 1,396
Other (Note 4) .................................................................. 68,868 82,514
----------- -----------
70,493 83,910
Property, plant and equipment, net (Note 5) ....................................... 1,283,560 1,390,873
Intangible assets, net (Note 6) ................................................... 873,911 1,049,658
----------- -----------
Total assets ..................................................................... $ 2,931,495 $ 3,371,952
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................................. $ 107,018 $ 110,265
Salaries and wages payable ...................................................... 67,905 66,455
Accrued interest payable and other liabilities .................................... 87,308 91,407
Current portion of long-term debt (Note 7) ....................................... 35,175 35,409
----------- -----------
Total current liabilities ......................................................... 297,406 303,536
Long-term debt (Note 7) ............................................................ 1,356,489 1,450,620
Deferred income taxes (Note 10) ................................................... 23,733 28,797
Other long-term liabilities (Note 14) ............................................. 8,459 3,558
Deferred revenue .................................................................. 1,525 255
Minority interests - limited partnerships (Note 1) ................................. 57,985 69,262
Commitments and contingencies (Note 11) Stockholders' equity (Notes 8, 12 and
15):
Preferred stock, $.10 par value-1,500,000 shares authorized; issued and outstanding-
none ........................................................................... -- --
Common stock, $.01 par value-500,000,000 shares authorized; issued-152,193,000 in
1995 and 316,148,000 in 1996 ................................................... 1,522 3,161
Additional paid-in capital ...................................................... 888,216 996,234
Retained earnings ............................................................... 334,582 536,423
Treasury stock, at cost (1,324,000 shares in 1995 and 91,000 shares in 1996) ...... (16,065) (323)
Receivable from Employee Stock Ownership Plan .................................... (15,886) (14,148)
Notes receivable from stockholders ................................................ (6,471) (5,423)
----------- -----------
Total stockholders' equity ......................................................... 1,185,898 1,515,924
----------- -----------
Total liabilities and stockholders' equity ....................................... $ 2,931,495 $ 3,371,952
=========== ===========
</TABLE>
See accompanying notes.
28
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1994 1995 1996
------------- ------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues ................................................ $ 1,649,199 $ 2,003,146 $ 2,436,537
Operating unit expenses ................................. 1,161,758 1,371,740 1,586,003
Corporate general and administrative expenses ............ 61,640 56,920 66,807
Provision for doubtful accounts ........................ 32,904 37,659 54,112
Depreciation and amortization ........................... 113,977 143,322 188,966
Merger and acquisition related expenses (Notes 2 and 9) . 6,520 19,553 41,515
Loss on impairment of assets (Note 14) .................. 10,500 53,549 --
Loss on abandonment of computer project (Note 14) ...... 4,500 -- --
Loss on disposal of surgery centers (Note 13) ............ 13,197 -- --
Interest expense ....................................... 73,644 101,790 94,553
Interest income .......................................... (6,387) (7,882) (5,912)
Gain on sale of equity securities (Note 1) ............... (7,727) -- --
----------- ----------- -----------
1,464,526 1,776,651 2,026,044
----------- ----------- -----------
Income before income taxes, minority interests and ex-
traordinary item 184,673 226,495 410,493
Provision for income taxes .............................. 65,121 81,771 140,238
----------- ----------- -----------
Income before minority interests and extraordinary item. 119,552 144,724 270,255
Minority interests ....................................... 31,469 43,147 49,437
----------- ----------- -----------
Income before extraordinary item ........................ 88,083 101,577 220,818
Extraordinary loss from early extinguishment of debt, net
of income tax benefit of $5,550,000 (Notes 2 and 7) ...... -- 9,056 --
----------- ----------- -----------
Net income ............................................. $ 88,083 $ 92,521 $ 220,818
=========== =========== ===========
Weighted average common and common equivalent
shares outstanding .................................... 280,854 297,460 326,290
=========== =========== ===========
Income per common and common equivalent share:
Income before extraordinary item ........................ $ 0.31 $ 0.34 $ 0.68
Extraordinary loss ....................................... -- 0.03 --
----------- ----------- -----------
Net income ............................................. $ 0.31 $ 0.31 $ 0.68
=========== =========== ===========
Income per common share -- assuming full dilution:
Income before extraordinary item ........................ $ 0.31 $ 0.34 $ 0.66
Extraordinary loss .................................... -- 0.03 --
----------- ----------- -----------
Net income ............................................. $ 0.31 $ 0.31 $ 0.66
=========== =========== ===========
</TABLE>
See accompanying notes.
29
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
---------- -------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at December 31, 1993 .......................................... 129,946 $1,300 $ 493,663 $ 177,979
Proceeds from exercise of options (Note 8) ........................... 2,296 23 16,341 --
Common shares exchanged in the exercise of options .................. (22) -- (321) --
Proceeds from issuance of common shares .............................. 908 9 13,543 --
Income tax benefits related to incentive stock options (Note 8) ...... -- -- 6,470 --
Reduction in receivable from ESOP .................................... -- -- -- --
Payments received on stockholders' notes receivable .................. -- -- -- --
Purchase of limited partnership units ................................. -- -- ---- (1,838)
Purchase of treasury stock .......................................... -- -- -- --
Net income ............................................................ -- -- -- 88,083
Dividends paid ...................................................... -- -- -- (6,237)
------- ------- --------- ---------
Balance at December 31, 1994 .......................................... 133,128 1,332 529,696 257,987
Adjustment for ReLife Merger (Note 2) ................................. 2,732 27 7,114 (3,734)
Proceeds from exercise of options (Note 8) ........................... 1,101 11 9,857 --
Proceeds from issuance of common shares .............................. 15,232 152 334,896 --
Income tax benefits related to incentive stock options (Note 8) ...... -- -- 6,653 --
Reduction in receivable from ESOP .................................... -- -- -- --
Loans made to stockholders .......................................... -- -- -- --
Purchase of limited partnership units ................................. -- -- -- (4,767)
Purchases of treasury stock .......................................... -- -- -- --
Net income ............................................................ -- -- -- 92,521
Dividends paid ...................................................... -- -- -- (7,425)
------- ------- --------- ---------
Balance at December 31, 1995 .......................................... 152,193 1,522 888,216 334,582
Adjustment for Advantage Merger ....................................... -- -- -- (17,638)
Adjustment for 1996 mergers (Note 2) ................................. 4,047 40 68,785 (1,256)
Proceeds from exercise of options (Note 8) ........................... 3,270 33 32,774 --
Income tax benefits related to incentive stock options (Note 8) ...... -- -- 23,767 --
Reduction in receivable from ESOP .................................... -- -- -- --
Loans made to stockholders .......................................... -- -- -- --
Purchase of limited partnership units ................................. -- -- -- (83)
Retirement of treasury stock .......................................... -- -- (15,742) --
Net income ............................................................ -- -- -- 220,818
Stock split (Note 15) ................................................ 156,638 1,566 (1,566) --
------- ------- --------- ---------
Balance at December 31, 1996 .......................................... 316,148 $3,161 $ 996,234 $ 536,423
======= ======= ========= =========
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(Continued)
<CAPTION>
NOTES
RECEIVABLE
TREASURY STOCK RECEIVABLES FROM
SHARES AMOUNT FROM ESOP STOCKHOLDERS
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 .......................................... 318 $ (2,123) $ (18,932) $ (5,490)
Proceeds from exercise of options (Note 8) ........................... -- -- -- --
Common shares exchanged in the exercise of options .................. -- -- -- --
Proceeds from issuance of common shares .............................. -- -- -- --
Income tax benefits related to incentive stock options (Note 8) ...... -- -- -- --
Reduction in receivable from ESOP .................................... -- -- 1,455 --
Payments received on stockholders' notes receivable .................. -- -- -- 250
Purchase of limited partnership units ................................. -- -- -- --
Purchase of treasury stock .......................................... 601 (6,592) -- --
Net income ............................................................ -- -- -- --
Dividends paid ...................................................... -- -- -- --
------- --------- ---------- ---------
Balance at December 31, 1994 .......................................... 919 (8,715) (17,477) (5,240)
Adjustment for ReLife Merger (Note 2) ................................. -- -- -- --
Proceeds from exercise of options (Note 8) ........................... -- -- -- --
Proceeds from issuance of common shares .............................. -- -- -- --
Income tax benefits related to incentive stock options (Note 8) ...... -- -- -- --
Reduction in receivable from ESOP .................................... -- -- 1,591 --
Loans made to stockholders .......................................... -- -- -- (1,231)
Purchase of limited partnership units ................................. -- -- -- --
Purchases of treasury stock .......................................... 405 (7,350) -- --
Net income ............................................................ -- -- -- --
Dividends paid ...................................................... -- -- -- --
------- --------- ---------- ---------
Balance at December 31, 1995 .......................................... 1,324 (16,065) (15,886) (6,471)
Adjustment for Advantage Merger ....................................... -- -- -- --
Adjustment for 1996 mergers (Note 2) ................................. -- -- -- --
Proceeds from exercise of options (Note 8) ........................... -- -- -- --
Income tax benefits related to incentive stock options (Note 8) ...... -- -- -- --
Reduction in receivable from ESOP .................................... -- -- 1,738 --
Loans made to stockholders .......................................... -- -- -- 1,048
Purchase of limited partnership units ................................. -- -- -- --
Retirement of treasury stock .......................................... (1,233) 15,742 -- --
Net income ............................................................ -- -- -- --
Stock split (Note 15) ................................................ -- -- -- --
------- --------- ---------- ---------
Balance at December 31, 1996 .......................................... 91 $ (323) $ (14,148) $ (5,423)
======= ========= ========== =========
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(Continued)
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
--------------
<S> <C>
Balance at December 31, 1993 .......................................... $ 646,397
Proceeds from exercise of options (Note 8) ........................... 16,364
Common shares exchanged in the exercise of options .................. (321)
Proceeds from issuance of common shares .............................. 13,552
Income tax benefits related to incentive stock options (Note 8) ...... 6,470
Reduction in receivable from ESOP .................................... 1,455
Payments received on stockholders' notes receivable .................. 250
Purchase of limited partnership units ................................. (1,838)
Purchase of treasury stock .......................................... (6,592)
Net income ............................................................ 88,083
Dividends paid ...................................................... (6,237)
----------
Balance at December 31, 1994 .......................................... 757,583
Adjustment for ReLife Merger (Note 2) ................................. 3,407
Proceeds from exercise of options (Note 8) ........................... 9,868
Proceeds from issuance of common shares .............................. 335,048
Income tax benefits related to incentive stock options (Note 8) ...... 6,653
Reduction in receivable from ESOP .................................... 1,591
Loans made to stockholders .......................................... (1,231)
Purchase of limited partnership units ................................. (4,767)
Purchases of treasury stock .......................................... (7,350)
Net income ............................................................ 92,521
Dividends paid ...................................................... (7,425)
----------
Balance at December 31, 1995 .......................................... 1,185,898
Adjustment for Advantage Merger ....................................... (17,638)
Adjustment for 1996 mergers (Note 2) ................................. 67,569
Proceeds from exercise of options (Note 8) ........................... 32,807
Income tax benefits related to incentive stock options (Note 8) ...... 23,767
Reduction in receivable from ESOP .................................... 1,738
Loans made to stockholders .......................................... 1,048
Purchase of limited partnership units ................................. (83)
Retirement of treasury stock .......................................... --
Net income ............................................................ 220,818
Stock split (Note 15) ................................................ --
----------
Balance at December 31, 1996 .......................................... $1,515,924
==========
</TABLE>
See accompanying notes.
30
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1994 1995 1996
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ................................................ $ 88,083 $ 92,521 $ 220,818
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ........................ 113,977 143,322 188,966
Provision for doubtful accounts ........................ 32,904 37,659 54,112
Provision for losses on impairment of assets ......... 10,500 53,549 --
Provision for losses on abandonment of computer
project ............................................. 4,500 -- --
Merger and acquisition related expenses ............... 6,520 19,553 41,515
Loss on disposal of surgery center ..................... 13,197 -- --
Loss on extinguishment of debt ........................ -- 14,606 --
Income applicable to minority interests of limited
partnerships .......................................... 31,469 43,147 49,437
(Benefit) provision for deferred income taxes ......... (15,882) 380 13,525
Provision for deferred revenue ........................ (164) (1,990) (1,270)
Changes in operating assets and liabilities, net of ef-
fects of acquisitions:
Accounts receivable ................................. (97,167) (65,382) (131,514)
Inventories, prepaid expenses and other current
assets ............................................. (15,251) 732 (36,751)
Accounts payable and accrued expenses ............... 86,209 (17,334) (31,182)
---------- ---------- ----------
Net cash provided by operating activities ............... 258,895 320,763 367,656
INVESTING ACTIVITIES
Purchases of property, plant and equipment ............... (195,920) (172,172) (172,962)
Proceeds from sale of property, plant and equipment ...... 68,330 14,541 --
Additions to intangible assets, net of effects of acquisi-
tions (69,119) (117,552) (174,446)
Assets obtained through acquisitions, net of liabilities as-
sumed (116,650) (493,914) (91,391)
Changes in other assets ................................. (21,962) (6,963) (12,861)
Proceeds received on sale of other marketable securities . 18,948 22,161 317
Investments in other marketable securities ............... (9,126) (10,926) --
---------- ---------- ----------
Net cash used in investing activities ..................... (325,499) (764,825) (451,343)
</TABLE>
31
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1994 1995 1996
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from borrowings .............................. $1,058,479 $ 685,816 $ 193,113
Principal payments on long-term debt .................. (970,462) (472,661) (104,262)
Early retirement of debt ................................. -- (14,606) --
Proceeds from exercise of options ..................... 14,727 9,868 32,807
Proceeds from issuance of common stock .................. 1,136 330,954 --
Purchase of treasury stock .............................. (6,592) (7,350) --
Reduction in receivable from ESOP ..................... 1,455 1,591 1,738
Payments received on (loans made to) stockholders ...... 250 (1,231) 1,048
Dividends paid .......................................... (6,237) (7,425) --
Proceeds from investment by minority interests ......... 2,268 1,103 510
Purchase of limited partnership interests ............... (1,698) (10,076) (3,064)
Payment of cash distributions to limited partners ...... (34,351) (36,489) (38,782)
---------- ---------- ----------
Net cash provided by financing activities ............... 58,975 479,494 83,108
---------- ---------- ----------
(Decrease) increase in cash and cash equivalents ...... (7,629) 35,432 (579)
Cash and cash equivalents at beginning of year (Note 2) . 119,946 112,317 152,244
Cash flows related to mergers (Note 2) .................. -- 4,495 (3,637)
---------- ---------- ----------
Cash and cash equivalents at end of year ............... $ 112,317 $ 152,244 $ 148,028
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest ............................................. $ 59,833 $ 100,189 $ 91,560
Income taxes .......................................... 60,166 83,059 62,515
</TABLE>
NON-CASH INVESTING ACTIVITIES:
The Company assumed liabilities of $32,027,000, $55,828,000 and $19,197,000
during the years ended December 31, 1994, 1995 and 1996, respectively, in
conjunction with its acquisitions.
During the year ended December 31, 1994, the Company issued 1,248,000
common shares with a market value of $9,923,000 as consideration for
acquisitions accounted for as purchases (see Note 9).
During the year ended December 31, 1996, the Company issued 8,095,000
common shares as consideration for mergers (see Note 2).
NON-CASH FINANCING ACTIVITIES:
During 1995 and 1997, the Company had a two-for-one stock split on its
common stock, which was effected in the form of a one hundred percent stock
dividend.
The Company received a tax benefit from the disqualifying disposition of
incentive stock options of $6,470,000, $6,653,000 and $23,767,000 for the years
ended December 31, 1994, 1995 and 1996, respectively.
During the year ended December 31, 1994, 22,000 common shares were
exchanged in the exercise of options. The shares exchanged had a market value on
the date of exchange of $321,000.
See accompanying notes.
32
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by HEALTHSOUTH Corporation and
its subsidiaries ("the Company") are presented as an integral part of the
consolidated financial statements.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of HEALTHSOUTH
Corporation ("HEALTHSOUTH") and its wholly-owned subsidiaries, as well as its
majority ownership or controlling interest in limited partnerships and limited
liability companies. All significant intercompany accounts and transactions have
been eliminated in consolidation.
HEALTHSOUTH Corporation is engaged in the business of providing
comprehensive rehabilitative, clinical, diagnostic and surgical healthcare
services on an inpatient and outpatient basis.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the accompanying consolidated
financial statements and notes. Actual results could differ from those
estimates.
MARKETABLE SECURITIES
Marketable equity securities and debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, if material, reported as a separate
component of stockholders' equity, net of tax. During 1994, marketable
securities consisting of $13,360,507 of common stock were sold and the resulting
gain was recognized in the consolidated statement of income. The adjusted cost
of the specific security sold method is used to compute gain or loss on the sale
of securities. Interest and dividends on securities classified as
available-for-sale are included in investment income. Marketable equity
securities and debt securities of the Company have maturities of less than one
year.
ACCOUNTS RECEIVABLE AND THIRD-PARTY REIMBURSEMENT ACTIVITIES
Receivables from patients, insurance companies and third-party contractual
insured accounts (Medicare and Medicaid) are based on payment agreements which
generally result in the Company collecting an amount different from the
established rates. Net third party settlement receivables included in accounts
receivable were $21,494,000 and $21,138,000 at December 31, 1995 and 1996,
respectively. Final determination of the settlements is subject to review by
appropriate authorities. The differences between original estimates made by the
Company and subsequent revisions (including final settlements) were not material
to the operations of the Company. Adequate allowances are provided for doubtful
accounts and contractual adjustments. Uncollectible accounts are written off
against the allowance for doubtful accounts after adequate collection efforts
are made. Net accounts receivable include only those amounts estimated by
management to be collectible.
The concentration of net accounts receivable from third-party contractual
payors and others, as a percentage of total net accounts receivable, was as
follows:
DECEMBER 31
-----------------
1995 1996
------ --------
Medicare ............................. 24% 26%
Medicaid ............................. 6 5
Other ................................ 70 69
---- ----
100% 100%
==== ====
33
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. Significant Accounting Policies - (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market using the specific
identification method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Upon sale or retirement
of property, plant or equipment, the cost and related accumulated depreciation
are eliminated from the respective account and the resulting gain or loss is
included in the results of operations.
Interest cost incurred during the construction of a facility is
capitalized. The Company incurred interest of $76,038,000, $103,731,000 and
$97,375,000, of which $2,394,000, $1,941,000 and $2,822,000 was capitalized
during 1994, 1995 and 1996, respectively.
Depreciation and amortization is computed using the straight-line method
over the estimated useful lives of the assets or the term of the lease, as
appropriate. The estimated useful life of buildings is 30-40 years and the
general range of useful lives for leasehold improvements, furniture, fixtures
and equipment is 10-15 years.
INTANGIBLE ASSETS
Cost in excess of net asset value of purchased facilities is amortized over
20 to 40 years using the straight-line method. Organization and partnership
formation costs are deferred and amortized on a straight-line basis over a
period of 36 months. Costs incurred in connection with implementing the
Company's clinical and administrative programs and protocols at a
newly-developed or acquired facility are deferred and amortized on a straight
line basis over a period of 36 months. Organization, partnership formation and
start-up costs and other capitalized costs for a project that is subsequently
abandoned are charged to operations in that period. Debt issue costs are
amortized over the term of the debt. Noncompete agreements are amortized using
the straight-line method over the term of the agreements.
MINORITY INTERESTS
The equity of minority investors in limited partnerships and limited
liability companies of the Company is reported on the balance sheet as minority
interests. Minority interests reported in the consolidated income statement
reflect the respective interests in the income or loss of the limited
partnerships or limited liability companies attributable to the minority
investors (ranging from 1% to 50% at December 31, 1996), the effect of which is
removed from the results of operations of the Company.
REVENUES
Revenues include net patient service revenues and other operating revenues.
Other operating revenues include cafeteria revenue, gift shop revenue, rental
income, trainer/contract revenue, management and administrative fee revenue
(related to non-consolidated subsidiaries and affiliates) and transcriptionist
fees which are insignificant to total revenues. Net patient service revenues are
reported at the estimated net realizable amounts from patients, third-party
payors and others for services rendered, including estimated retroactive
adjustments under reimbursement agreements with third-party payors.
INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Income per common and common equivalent share is computed based on the
weighted average number of common shares and common equivalent shares
outstanding during the periods, as adjusted for the two-for-one stock split
declared in April 1995 and the two-for-one stock split declared in March 1997
(see Note 15). Common equivalent shares include dilutive employees' stock
options, less the num-
34
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. Significant Accounting Policies - (CONTINUED)
ber of treasury shares assumed to be purchased from the proceeds using the
average market price of the Company's shares in the calculation of primary
earnings per share and the year-end market price of the Company's shares in
calculating fully diluted earnings per share if such market price is higher than
the average price used in computing primary earnings per share. Fully diluted
earnings per share (based on 290,298,000, 309,686,000 and 338,516,000 shares in
1994, 1995 and 1996, respectively) assumes conversion of the 5% Convertible
Subordinated Debentures due 2001 (see Note 7).
IMPAIRMENT OF ASSETS
In accordance with FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of, the Company records
impairment losses on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted
cash flows estimated to be generated by those assets are less than the carrying
amounts of those assets. Effective January 1, 1995, the Company adopted FASB 121
to account for long-lived assets.
With respect to the carrying value of the excess of cost over net asset
value of purchased facilities and other intangible assets, the Company
determines on a quarterly basis whether an impairment event has occurred by
considering factors such as: the market value of the asset; a significant
adverse change in legal factors or in the business climate; adverse action by a
regulator; a history of operating or cash flow losses or a projection of
continuing losses associated with an operating entity. The carrying value of
excess cost over net asset value of purchased facilities and other intangible
assets will be evaluated if the facts and circumstances suggest that it has been
impaired. If this evaluation indicates that the value of the asset will not be
recoverable, as determined based on the undiscounted cash flows of the entity
acquired over the remaining amortization period, an impairment loss is
calculated based on the excess of the carrying amount of the asset over the
asset's fair value.
SELF-INSURANCE
The Company is self-insured for professional liability and comprehensive
general liability. Liabilities for asserted and unasserted claims are accrued
based upon specific claims and incidents and the claims history of the Company.
The reserves for estimated liabilities for asserted and unasserted claims, which
are not material in relation to the Company's consolidated financial position at
December 31, 1995 and 1996, are included with accrued interest and other
liabilities in the accompanying consolidated balance sheets.
RECLASSIFICATIONS
Certain amounts in the 1994 and 1995 financial statements have been
reclassified to conform with the 1996 presentation. Also in 1995, the Company
included the loss on extinguishment of debt with merger and acquisition related
expenses. Such amount has been reclassified as an extraordinary item in the
accompanying 1995 income statement. Such reclassifications had no effect on
previously reported consolidated financial position and consolidated net income.
2. MERGERS
Effective December 29, 1994, a wholly-owned subsidiary of the Company
merged with ReLife, Inc. ("ReLife"), and in connection therewith the Company
issued 22,050,580 shares of its common stock in exchange for all of ReLife's
outstanding common stock. Prior to the merger, ReLife provided a system of
rehabilitation services and operated 31 inpatient facilities with an aggregate
of approximately 1,100 licensed beds, including nine freestanding rehabilitation
hospitals, nine acute rehabilitation units, five sub-acute rehabilitation units,
seven transitional living units and one residential facility, and provided
35
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. Mergers - (CONTINUED)
outpatient rehabilitation services at twelve outpatient centers. Costs and
expenses of $2,949,000, primarily legal, accounting and financial advisory fees,
incurred by HEALTHSOUTH in connection with the ReLife merger have been recorded
in operations in 1994 and reported as merger expenses in the accompanying
consolidated statements of income.
Effective June 13, 1995, a wholly-owned subsidiary of the Company merged
with Surgical Health Corporation ("SHC"), and in connection therewith the
Company issued 17,062,960 shares of its common stock in exchange for all of
SHC's common and preferred stock. Prior to the merger, SHC operated a network of
36 freestanding surgery centers and five mobile lithotripters in eleven states,
with an aggregate of 156 operating and procedure rooms. Costs and expenses of
approximately $4,588,000 incurred by the Company in connection with the SHC
merger have been recorded in operations during 1995 and reported as merger
expenses in the accompanying consolidated statements of income. Fees related to
legal, accounting and financial advisory services accounted for $3,400,000 of
the expense. Costs related to employee separations were approximately
$1,188,000. Also in connection with the SHC merger, the Company recognized a
$14,606,000 extraordinary loss as a result of the retirement of the SHC Notes
(see Note 7). The extraordinary loss consisted primarily of the associated debt
discount plus premiums and costs associated with the retirement, net of income
tax benefits of $5,550,000. SHC merged with Heritage Surgical Corporation on
January 18, 1994 in a transaction accounted for as a pooling of interests. SHC
recorded merger costs of $3,571,000 in connection with this transaction in 1994.
Effective October 26, 1995, a wholly-owned subsidiary of the Company merged
with Sutter Surgery Centers, Inc. ("SSCI"), and in connection therewith the
Company issued 3,552,002 shares of its common stock in exchange for all of
SSCI's outstanding common stock. Prior to the merger, SSCI operated a network of
12 freestanding surgery centers in three states, with an aggregate of 54
operating and procedure rooms. Costs and expenses of approximately $4,965,000,
primarily legal, accounting and financial advisory fees, incurred by the Company
in connection with the SSCI merger have been recorded in operations during 1995
and reported as merger expenses in the accompanying consolidated statements of
income.
Effective January 17, 1996, a wholly-owned subsidiary of the Company merged
with Surgical Care Affiliates, Inc. ("SCA"), and in connection therewith the
Company issued 91,856,678 shares of its common stock in exchange for all of
SCA's outstanding common stock. Prior to the merger, SCA operated 67 surgery
centers in 24 states. Costs and expenses of approximately $19,727,000, primarily
legal, accounting and financial advisory fees, incurred by the Company in
connection with the SCA merger have been recorded in operations during 1996 and
reported as merger expenses in the accompanying consolidated statements of
income.
Effective March 14, 1996, a wholly-owned subsidiary of the Company merged
with Advantage Health Corporation ("Advantage Health"), and in connection
therewith the Company issued 18,203,978 shares of its common stock in exchange
for all of Advantage Health's outstanding common stock. Prior to the merger,
Advantage Health operated a network of 136 sites of service, including four
freestanding rehabilitation hospitals, one freestanding multi-use hospital, one
nursing home, 68 outpatient rehabilitation facilities, 14 inpatient managed
rehabilitation units, 24 rehabilitation services management contracts and six
managed sub-acute rehabilitation units. Costs and expenses of approximately
$9,212,000, primarily legal, accounting and financial advisory fees, incurred by
the Company in connection with the Advantage Health merger have been recorded in
operations during 1996 and reported as merger expenses in the accompanying
consolidated statements of income.
The mergers of the Company with ReLife, SHC, SSCI, SCA and Advantage Health
were accounted for as poolings of interests and, accordingly, the Company's
consolidated financial statements have been restated to include the results of
the acquired companies for all periods presented.
36
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. Mergers - (CONTINUED)
Combined and separate results of the Company and its material 1996 mergers,
SCA and Advantage Health, are as follows (in thousands):
<TABLE>
<CAPTION>
ADVANTAGE
HEALTHSOUTH SCA HEALTH COMBINED
------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Year ended
December 31, 1994
Revenues ......... $1,274,365 $239,272 $135,562 $1,649,199
Net income ...... 50,493 29,280 8,310 88,083
Year ended
December 31, 1995
Revenues ......... 1,556,687 263,866 182,593 2,003,146
Net income ...... 78,949 3,322 10,250 92,521
Year ended
December 31, 1996
Revenues ......... 2,380,587 11,028 44,922 2,436,537
Net income ...... 216,654 1,746 2,418 220,818
</TABLE>
There were no material transactions among the Company, ReLife, SHC, SSCI,
SCA and Advantage Health prior to the mergers. The effects of conforming the
accounting policies of the combined companies are not material.
Prior to its merger with the Company, ReLife reported on a fiscal year
ending on September 30. The restated financial statements for all periods prior
to and including December 31, 1994, are based on a combination of the Company's
results for its December 31 fiscal year and ReLife's results for its September
30 fiscal year. Beginning January 1, 1995, all facilities acquired in the ReLife
merger adopted a December 31 fiscal year end; accordingly, all consolidated
financial statements for periods after December 31, 1994 are based on a
consolidation of the Company and the former ReLife subsidiaries on a December 31
year-end. ReLife's historical results of operations for the three months ended
December 31, 1994 are not included in the Company's consolidated statements of
income or cash flows. An adjustment has been made to stockholders' equity as of
January 1, 1995 to adjust for the effect of excluding ReLife's results of
operations for the three months ended December 31, 1994. The following is a
summary of ReLife's results of operations and cash flows for the three months
ended December 31, 1994 (in thousands):
<TABLE>
<S> <C>
Statement of Income Data:
Revenues ....................................... $ 38,174
Operating expenses:
Operating units .............................. 31,797
Corporate general and administrative ......... 2,395
Provision for doubtful accounts ............... 541
Depreciation and amortization .................. 1,385
Interest expense .............................. 858
Interest income ................................. (91)
HEALTHSOUTH merger expense ..................... 3,050
Loss on disposal of fixed assets ............... 1,000
Loss on abandonment of computer project ......... 973
---------
41,908
---------
Net loss ....................................... $ (3,734)
=========
Statement of Cash Flow Data:
Net cash provided by operating activities ...... $ 38,077
Net cash used in investing activities ......... (9,632)
Net cash used in financing activities ......... (23,950)
---------
Net increase in cash ........................... $ 4,495
=========
</TABLE>
37
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. Mergers - (CONTINUED)
During the three months ended December 31, 1994, ReLife received $7,141,000
in proceeds from the exercise of stock options.
Prior to its merger with the Company, Advantage Health reported on a fiscal
year ending on August 31. Accordingly, the historical financial statements of
Advantage Health have been recast to a November 30 fiscal year-end to more
closely conform to the Company's calendar fiscal year-end. The restated
financial statements for all periods prior to and including December 31, 1995
are based on a combination of the Company's results for their December 31 fiscal
year and Advantage Health's results for its recast November 30 fiscal year.
Beginning January 1, 1996, all facilities acquired in the Advantage Health
merger adopted a December 31 fiscal year-end; accordingly, all consolidated
financial statements for periods after December 31, 1995 are based on a
consolidation of all of the Company's subsidiaries on a December 31 year-end.
Advantage Health's historical results of operations for the one month ended
December 31, 1995 are not included in the Company's consolidated statements of
income or cash flows. An adjustment has been made to stockholders' equity as of
January 1, 1996 to adjust for the effect of excluding Advantage Health's results
of operations for the one month ended December 31, 1995. The following is a
summary of Advantage Health's results of operations and cash flows for the one
month ended December 31, 1995 (in thousands):
<TABLE>
<S> <C>
Statement of Income Data:
Revenues ............................................. $ 16,111
Operating expenses:
Operating units .................................... 14,394
Corporate general and administrative ............... 1,499
Provision for doubtful accounts ..................... 1,013
Depreciation and amortization ........................ 283
Interest expense .................................... 288
Interest income ....................................... (16)
Loss on impairment of assets ........................ 21,111
---------
38,572
---------
Loss before income taxes and minority interests ...... (22,461)
Benefit for income taxes .............................. 4,959
Minority interest .................................... (136)
---------
Net loss ............................................. $(17,638)
=========
Statement of Cash Flow Data:
Net cash used in operating activities ............... $ (2,971)
Net cash provided by investing activities ............ 105
Net cash used in financing activities ............... (771)
---------
Net decrease in cash ................................. $ (3,637)
=========
</TABLE>
In December 1995, Advantage Health recorded an asset impairment charge of
approximately $21,111,000 relating to goodwill and tangible assets identifiable
with one inpatient rehabilitation hospital, one subacute facility and 32
outpatient rehabilitation centers, all acquired by the Company in the Advantage
Health merger. The Company intends to operate these facilities on an ongoing
basis.
The Company has historically assessed recoverability of goodwill and other
long-lived assets using undiscounted cash flows estimated to be received over
the useful lives of the related assets. In December 1995, certain events
occurred which significantly impacted the Company's estimates of future cash
flows to
38
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. Mergers - (CONTINUED)
be received from the facilities described above. Those events primarily related
to a decline in operating results combined with a deterioration in the
reimbursement environment at these facilities. As a result of these events, the
Company revised its estimates of undiscounted cash flows to be received over the
remaining estimated useful lives of these facilities and determined that
goodwill and other long-lived assets (primarily property and equipment) had been
impaired. The Company developed its best estimates of future operating cash
flows at these locations considering future requirements for capital
expenditures as well as the impact of inflation. The projections of cash flows
also took into account estimates of significant one-time expenses as well as
estimates of additional revenues and resulting income from future marketing
efforts in the respective locations. The amount of the impairment charge was
determined by discounting the estimates of future cash flows, using an estimated
8.5% incremental borrowing rate, which management believes is commensurate with
the risks involved. The resulting net present value of future cash flows was
then compared to the historical net book value of goodwill and other long-lived
assets at each operating location which resulted in an impairment loss relative
to these centers of $21,111,000.
During 1996, wholly-owned subsidiaries of the Company merged with
Professional Sports Care Management, Inc. ("PSCM"), Fort Sutter Surgery Center,
Inc. ("FSSCI") and ReadiCare, Inc. ("ReadiCare"). In connection with these
mergers the Company issued an aggregate of 8,094,598 shares of its common stock.
Costs and expenses of approximately $12,576,000, primarily legal, accounting and
financial advisory fees, incurred by the Company in connection with the mergers
have been recorded in operations during 1996 and reported as merger expenses in
the accompanying consolidated statements of income.
The PSCM and ReadiCare mergers were accounted for as poolings of interests.
However, due to the immateriality of these mergers, the Company's historical
financial statements for all periods prior to the quarters in which the
respective mergers were completed have not been restated. Instead, stockholders'
equity has been increased by $43,230,000 to reflect the effects of the PSCM
merger and $15,431,000 to reflect the effects of the ReadiCare merger. The
results of operations of PSCM and ReadiCare are included in the accompanying
financial statements from the date of acquisition forward. In addition, the
FSSCI merger was a stock-for-stock acquisition. Stockholders' equity has been
increased by $8,908,000 to reflect the effects of the merger.
On December 2, 1996, the Company entered into an agreement to acquire
Health Images, Inc. ("Health Images") in a transaction to be accounted for as a
pooling-of-interests. In the proposed transaction, Health Images stockholders
will receive approximately 10,400,000 shares of the Company's common stock.
Health Images operates 49 freestanding diagnostic imaging centers in 13 states
and six in England. The effects of conforming the accounting policies of the
Company and Health Images are not expected to be material. This transaction is
expected to be consummated in March 1997.
The following table summarizes the unaudited consolidated pro forma results
of operations, assuming the Health Images acquisition described above had
occurred at the beginning of each of the following periods. This pro forma
summary does not necessarily reflect the results of operations as they would
have been had the Company and Health Images constituted a single entity during
such periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1994 1995 1996
------------ ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
--------------------------------------
<S> <C> <C> <C>
Revenues ..................... $1,726,321 $2,118,681 $2,568,155
Net income .................. 86,948 98,250 189,864
Net income per common share-
assuming full dilution ...... 0.30 0.32 0.55
</TABLE>
39
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
3. CASH, CASH EQUIVALENTS AND OTHER MARKETABLE SECURITIES
Cash, cash equivalents and other marketable securities consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1995 1996
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash ............................................................ $140,476 $138,235
Cash equivalents ................................................ 11,768 9,793
--------- ---------
Total cash and cash equivalents .............................. 152,244 148,028
Certificates of deposit ....................................... 1,962 1,765
Municipal put bonds ............................................. 615 495
Municipal put bond mutual funds ................................. 500 500
Collateralized mortgage obligations ........................... 1,000 1,000
--------- ---------
Total other marketable securities .............................. 4,077 3,760
--------- ---------
Total cash, cash equivalents and other marketable securities (ap-
proximates market value) $156,321 $151,788
========= =========
</TABLE>
For purposes of the consolidated balance sheets and statements of cash
flows, marketable securities purchased with an original maturity of ninety days
or less are considered cash equivalents.
4. OTHER ASSETS
Other assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1995 1996
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Notes and accounts receivable ........................ $24,628 $38,359
Investment in Caretenders Health Corp. ............... 7,417 7,370
Prepaid long-term lease .............................. 8,888 8,397
Investments in other unconsolidated subsidiaries ...... 6,754 15,362
Real estate investments .............................. 14,324 10,020
Trusteed funds ....................................... 1,879 1,879
Other ................................................ 4,978 1,127
-------- --------
$68,868 $82,514
======== ========
</TABLE>
The Company has a 19% ownership interest in Caretenders Health Corp.
("Caretenders"); accordingly, the Company's investment is being accounted for
using the equity method of accounting. The investment was initially valued at
$7,250,000. The Company's equity in earnings of Caretenders for the years ended
December 31, 1994, 1995 and 1996 was not material to the Company's results of
operations.
It was not practicable to estimate the fair value of the Company's various
investments in other unconsolidated subsidiaries (involved in operations similar
to those of the Company) because of the lack of a quoted market price and the
inability to estimate fair value without incurring excessive costs. The carrying
amount at December 31, 1996 represents the original cost of the investments,
which management believes is not impaired.
40
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1995 1996
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
Land ................................................ $ 76,686 $ 81,089
Buildings .......................................... 767,038 802,040
Leasehold improvements .............................. 87,216 112,149
Furniture, fixtures and equipment .................. 603,985 722,095
Construction-in-progress ........................... 33,407 64,417
----------- -----------
1,568,332 1,781,790
Less accumulated depreciation and amortization ...... 284,772 390,917
----------- -----------
$1,283,560 $1,390,873
=========== ===========
</TABLE>
6. INTANGIBLE ASSETS
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1995 1996
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
Organizational, partnership formation and start-up costs ...... $ 163,820 $ 230,298
Debt issue costs ................................................ 34,973 34,389
Noncompete agreements .......................................... 70,636 85,894
Cost in excess of net asset value of purchased facilities ...... 736,195 899,788
----------- -----------
1,005,624 1,250,369
Less accumulated amortization ................................. 131,713 200,711
----------- -----------
$ 873,911 $1,049,658
=========== ===========
</TABLE>
7. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1995 1996
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
Notes and bonds payable:
Advances under a $1,000,000,000 credit agreement with banks . $ 790,000 $ --
Advances under a $1,250,000,000 credit agreement with banks . -- 995,000
9.5% Senior Subordinated Notes due 2001 ........................ 250,000 250,000
5.0% Convertible Subordinated Debentures due 2001 ............... 115,000 115,000
Notes payable to banks and various other notes payable, at in-
terest rates from 5.5% to 9.75% 180,166 77,270
Hospital revenue bonds payable ................................. 32,337 22,503
Noncompete agreements payable with payments due at intervals
ranging through December 2004 .................................... 24,161 26,256
----------- -----------
1,391,664 1,486,029
Less amounts due within one year ................................. 35,175 35,409
----------- -----------
$1,356,489 $1,450,620
=========== ===========
</TABLE>
41
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. LONG-TERM DEBT - (CONTINUED)
The fair value of total long-term debt approximates book value at December
31, 1995 and 1996. The fair values of the Company's long-term debt are estimated
using discounted cash flow analysis, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
During 1995, the Company entered into a Credit Agreement with NationsBank,
N.A. ("NationsBank") and other participating banks (the "1995 Credit Agreement")
which consisted of a $1,000,000,000 revolving credit facility. On April 18,
1996, the Company amended and restated the 1995 Credit Agreement to increase the
size of the revolving credit facility to $1,250,000,000 (the "1996 Credit
Agreement"). Interest is paid based on LIBOR plus a predetermined margin, a base
rate, or competitively bid rates from the participating banks. The Company is
required to pay a fee on the unused portion of the revolving credit facility
ranging from 0.08% to 0.25%, depending on certain defined ratios. The principal
amount is payable in full on March 31, 2001. The Company provided a negative
pledge on all assets under the 1996 Credit Agreement, and the lenders released
the first priority security interest in all shares of stock of the Company's
subsidiaries and rights and interests in the Company's controlled partnerships
which had been granted under the 1995 Credit Agreement. At December 31, 1996,
the effective interest rate associated with the 1996 Credit Agreement was
approximately 5.87%.
On March 24, 1994, the Company issued $250,000,000 principal amount of 9.5%
Senior Subordinated Notes due 2001 (the "Notes"). Interest is payable on April 1
and October 1. The Notes are senior subordinated obligations of the Company and
as such are subordinated to all existing and future senior indebtedness of the
Company, and also are effectively subordinated to all existing and future
liabilities of the Company's subsidiaries and partnerships. The Notes rank
senior to all subordinated indebtedness of the Company, including the 5%
Convertible Subordinated Debentures due 2001 described below.
The Notes mature on April 1, 2001.
Also on March 24, 1994, the Company issued $100,000,000 principal amount of
5% Convertible Subordinated Debentures due 2001 (the "Convertible Debentures").
An additional $15,000,000 of Convertible Debentures was issued in April 1994 to
cover underwriters' overallotments. Interest is payable on April 1 and October
1. The Convertible Debentures are convertible into common stock of the Company
at the option of the holder at a conversion price of $9.406 per share, subject
to adjustment upon the occurrence of certain events.
In June 1994, SHC (see Note 2) issued $75,000,000 principal amount of 11.5%
Senior Subordinated Notes due July 15, 2004 (the "SHC Notes"). The proceeds of
the SHC Notes were used to pay down indebtedness outstanding under other
existing credit facilities. During 1995, the Company purchased $67,500,000 of
the $75,000,000 outstanding principal amount of the SHC Notes in a tender offer
at 115% of the face value of the Notes, and the remaining $7,500,000 balance was
purchased on the open market, using proceeds from the Company's other long-term
credit facilities. The loss on retirement of the SHC Notes totaled approximately
$14,606,000. The loss consists of the premium, write-off of unamortized bond
issue costs and other fees and is reported as an extraordinary loss on early
extinguishment of debt in the accompanying 1995 consolidated statement of income
(see Note 2).
Principal maturities of long-term debt are as follows:
YEAR ENDING DECEMBER 31 (IN THOUSANDS)
------------------------- ---------------
1997 .................. $ 35,409
1998 .................. 25,932
1999 .................. 16,715
2000 .................. 11,117
2001 .................. 1,367,788
After 2001 ............ 29,068
------------
$ 1,486,029
============
42
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
8. STOCK OPTIONS
The company has various stockholder-approved stock option plans which
provide for the grant of options to directors, officers and other key employees
to purchase common stock at 100% of the fair market value as of the date of
grant. The Audit and Compensation Committee of the Board of Directors
administers the stock option plans. Options may be granted as incentive stock
options or as non-qualified stock options. Incentive stock options vest 25%
annually, commencing upon completion of one year of employment subsequent to the
date of grant. Non-qualified stock options generally are not subject to any
vesting provisions. The options expire at dates ranging from five to ten years
from the date of grant.
In October, 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 is effective for fiscal years beginning
after December 15, 1995 and allows for the option of continuing to account for
stock-based compensation under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations, or selecting the fair value method of expense recognition as
described in SFAS 123. The Company has elected to follow APB 25 in accounting
for its employee stock options. The Company follows SFAS 123 in accounting for
its non-employee stock options. The total compensation expense associated with
non-employee stock options granted in 1996 was not material.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1995 and 1996, respectively: risk-free interest rates of 5.87%
and 6.01%; dividend yield of 0%; volatility factors of the expected market price
of the Company's common stock of .36 and .37; and a weighted-average expected
life of the options of 4.3 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands, except for per share amounts):
1995 1996
--------- ---------
Pro forma net income ...... $74,330 $193,417
Pro forma earnings per share:
Primary .................. $ 0.25 $ 0.59
Fully diluted ............ $ 0.25 $ 0.58
The effect of compensation expense from stock options on 1995 pro forma net
income reflects only the vesting of 1995 awards. However, 1996 pro forma net
income reflects the second year of vesting of the 1995 awards and the first year
of vesting of 1996 awards. Not until 1998 is the full effect of recognizing
compensation expense for stock options representative of the possible effects on
pro forma net income for future years.
43
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. STOCK OPTIONS - (CONTINUED)
A summary of the Company's stock option activity and related information
for the years ended December 31 follows:
<TABLE>
<CAPTION>
1994 1995 1996
------------------- --------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTIONS PRICE OPTIONS EXERCISE OPTIONS EXERCISE
(000) RANGE (000) PRICE (000) PRICE
--------- --------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding January 1: ............... 30,452 29,216 $4 33,988 $ 5
Granted ....................................... 3,188 $5 - $9 7,310 9 4,557 17
Exercised .................................... (3,856) $1 - $4 (2,202) 4 (6,540) 5
Canceled .................................... (568) (336) 5 (255) 6
------- -------- --------
Options outstanding at December 31 ............ 29,216 33,988 $5 31,750 $ 7
Options exercisable at December 31 ............ 22,466 26,003 $5 26,992 $ 6
Weighted average fair value of options granted
during the year .............................. N/A $ 3.81 $ 7.13
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ---------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
EXERCISE OPTIONS REMAINING AVERAGE OPTIONS AVERAGE
PRICE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE AT 12/31/96 LIFE PRICE AT 12/31/96 PRICE
- ----------------------- ---------------- ------------- ---------- --------------- ---------
(IN THOUSANDS) (YEARS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Under $8.40............ 20,324 5.50 $ 4.12 19,328 $ 4.08
$8.40 - $16.40......... 9,305 8.55 10.94 7,172 11.59
$16.41 and above ...... 2,121 9.14 18.20 492 19.02
</TABLE>
9. ACQUISITIONS
1994 Acquisitions
At various dates during 1994, the Company acquired 53 separate outpatient
operations and a majority equity interest in five outpatient surgery centers
located throughout the United States. The combined purchase price of these
acquired outpatient operations was approximately $80,456,000. The Company also
acquired a specialty medical center in Dallas, Texas, a therapy staffing
service, a diagnostic imaging company, four physical therapy practices and two
home health agencies. The combined purchase price of these operations was
approximately $32,044,000. The form of consideration constituting the total
purchase prices of $112,500,000 was approximately $88,455,000 in cash,
$14,122,000 in notes payable and approximately 624,000 shares of common stock
valued at $9,923,000.
In connection with these transactions, the Company entered into noncompete
agreements with former owners totaling $10,814,000. In general, these noncompete
agreements are payable in monthly or quarterly installments over periods ranging
from five to ten years.
The fair value of the total net assets relating to the 1994 acquisitions
described above was approximately $17,958,000. The total cost for 1994
acquisitions exceeded the fair value of the net assets acquired by approximately
$94,542,000. The Company evaluated each acquisition independently to determine
the appropriate amortization period for the cost in excess of net asset value of
purchased facilities. Each evaluation included an analysis of historic and
projected financial performance, evaluation of the estimated useful lives of
buildings and fixed assets acquired, the indefinite lives of certificates
44
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. ACQUISITIONS - (CONTINUED)
of need and licenses acquired, the competition within local markets, lease terms
where applicable, and the legal term of partnerships where applicable. Based on
these evaluations, the Company determined that the cost in excess of net asset
value of purchased facilities relating to the 1994 acquisitions should be
amortized over periods ranging from 25 to 40 years on a straight-line basis. No
other identifiable intangible assets were recorded in the acquisitions described
above.
All of the 1994 acquisitions described above were accounted for as
purchases and, accordingly, the results of operations of the acquired businesses
(not material individually or in the aggregate) are included in the accompanying
consolidated financial statements from their respective dates of acquisition.
1995 Acquisitions
Effective April 1, 1995, the Company acquired the rehabilitation hospitals
division of NovaCare, Inc. ("NovaCare"), consisting of 11 rehabilitation
hospitals, 12 other facilities, and certificates of need to build two other
facilities. The total purchase price for the NovaCare facilities was
approximately $235,000,000 in cash. The cost in excess of net asset value was
approximately $173,000,000. Of this excess, approximately $129,000,000 was
allocated to leasehold value and the remaining $44,000,000 to cost in excess of
net asset value of purchased facilities. As part of the acquisition, the Company
acquired approximately $4,790,000 in deferred tax assets. The Company also
provided approximately $10,000,000 for the write-down of certain assets to net
realizable value as the result of a planned facility consolidation in a market
where the Company's existing services overlapped with those of an acquired
facility. The planned employee separations and facility consolidation were
completed by the end of 1995.
Effective December 1, 1995, the Company acquired Caremark Orthopedic
Services Inc. ("Caremark"). At the time of the acquisition, Caremark owned and
operated approximately 120 outpatient rehabilitation centers in 13 states. The
total purchase price was approximately $127,500,000 in cash.
Also at various dates during 1995, the Company acquired 70 separate
outpatient rehabilitation operations located throughout the United States, three
physical therapy practices, one home health agency, one nursing home, 75
licensed subacute beds, five outpatient surgery centers and one outpatient
diagnostic imaging operation. The combined purchase prices of these acquisitions
was approximately $136,724,000. The form of consideration constituting the
combined purchase prices was approximately $117,405,000 in cash and $19,319,000
in notes payable.
In connection with these transactions, the Company entered into noncompete
agreements with former owners totaling $16,222,000. In general, these noncompete
agreements are payable in monthly or quarterly installments over periods ranging
from five to ten years.
The fair value of the total net assets relating to the 1995 acquisitions
described above, excluding the NovaCare acquisition, was approximately
$72,844,000. The total cost of these acquisitions exceeded the fair value of the
net assets acquired by approximately $191,380,000. Based on the evaluation of
each acquisition utilizing the criteria described above, the Company determined
that the cost in excess of net asset value of purchased facilities relating to
the 1995 acquisitions should be amortized over periods ranging from 25 to 40
years on a straight-line basis. No other identifiable intangible assets were
recorded in the acquisitions described above.
All of the 1995 acquisitions described above were accounted for as
purchases and, accordingly, the results of operations of the acquired businesses
are included in the accompanying consolidated financial statements from their
respective dates of acquisition. With the exception of NovaCare, none of the
above acquisitions were material individually or in the aggregate.
1996 Acquisitions
At various dates during 1996, the Company acquired 80 outpatient
rehabilitation facilities, three outpatient surgery centers, one inpatient
rehabilitation hospital, and one diagnostic imaging center. The
45
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. ACQUISITIONS - (CONTINUED)
acquired operations are located throughout the United States. The total purchase
price of the acquired operations was approximately $104,321,000. The form of
consideration constituting the total purchase prices was approximately
$92,319,000 in cash and $12,002,000 in notes payable.
In connection with these transactions, the Company entered into noncompete
agreements with former owners totaling $11,900,000. In general, these noncompete
agreements are payable in monthly or quarterly installments over periods ranging
from five to ten years.
The fair value of the total net assets relating to the 1996 acquisitions
described above was approximately $40,259,000. The total cost of the 1996
acquisitions exceeded the fair value of the net assets acquired by approximately
$64,062,000. Based on the evaluation of each acquisition utilizing the criteria
described above, the Company determined that the cost in excess of net asset
value of purchased facilities relating to the 1996 acquisitions should be
amortized over periods ranging from 25 to 40 years on a straight-line basis. No
other identifiable intangible assets were recorded in the acquisitions described
above.
All of the 1996 acquisitions described above were accounted for as
purchases and, accordingly, the results of operations of the acquired businesses
(not material individually or in the aggregate) are included in the accompanying
consolidated financial statements from their respective dates of acquisition.
10. INCOME TAXES
HEALTHSOUTH and its subsidiaries file a consolidated federal income tax
return. The limited partnerships and limited liability companies file separate
income tax returns. HEALTHSOUTH's allocable portion of each partnership's income
or loss is included in the taxable income of the Company. The remaining income
or loss of each partnership is allocated to the limited partners.
The Company utilizes the liability method of accounting for income taxes,
as required by Financial Accounting Standards Board (FASB) Statement No. 109,
"Accounting for Income Taxes".
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
CURRENT NONCURRENT TOTAL
---------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Accruals ................................. $ 8,016 $ -- $ 8,016
Disposal of surgery centers ............... 2,675 -- 2,675
Impairment of assets ..................... 1,309 5,434 6,743
Development costs ........................ -- 849 849
Acquired net operating loss ............... -- 16,277 16,277
Allowance for bad debts .................. 29,089 -- 29,089
Other .................................... 1,818 5,549 7,367
--------- --------- --------
Total deferred tax assets .................. 42,907 28,109 71,016
Deferred tax liabilities:
Depreciation and amortization ............... -- 30,960 30,960
Non-accrual experience method ............ 14,559 -- 14,559
Purchase price accounting .................. -- 4,802 4,802
Contracts ................................. 3,849 -- 3,849
Capitalized costs ........................ -- 12,916 12,916
Other .................................... 2,522 3,164 5,686
--------- --------- --------
Total deferred tax liabilities ............ 20,930 51,842 72,772
--------- --------- --------
Net deferred tax assets (liabilities) ...... $ 21,977 $ (23,733) $ (1,756)
========= ========= ========
</TABLE>
46
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. INCOME TAXES - (CONTINUED)
At December 31, 1996, the Company has net operating loss carryforwards of
approximately $13,546,000 for income tax purposes expiring through the year
2009. Those carryforwards resulted from the Company's acquisitions of Diagnostic
Health Corporation, Renaissance Rehabilitation Center, Inc. and
Rebound, Inc.
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
CURRENT NONCURRENT TOTAL
--------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Acquired net operating loss ............... $ -- $ 5,283 $ 5,283
Development costs ........................ -- 849 849
Accruals ................................. 6,626 -- 6,626
Allowance for bad debts .................. 31,704 -- 31,704
Other .................................... 1,915 2,597 4,512
-------- --------- ---------
Total deferred tax assets .................. 40,245 8,729 48,974
Deferred tax liabilities:
Depreciation and amortization ............ -- 14,361 14,361
Purchase price accounting .................. -- 4,802 4,802
Non-accrual experience method ............ 17,694 -- 17,694
Contracts ................................. 3,849 -- 3,849
Capitalized costs ........................ 5,013 17,436 22,449
Other .................................... 1,837 927 2,764
-------- --------- ---------
Total deferred tax liabilities ............ 28,393 37,526 65,919
-------- --------- ---------
Net deferred tax assets (liabilities) ...... $11,852 $ (28,797) $ (16,945)
======== ========= =========
</TABLE>
The provision for income taxes was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
------------ --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Currently payable:
Federal .................. $ 70,641 $66,927 $113,262
State .................. 10,362 8,914 13,451
--------- -------- ---------
81,003 75,841 126,713
Deferred (benefit) expense:
Federal .................. (14,046) 342 12,138
State .................. (1,836) 38 1,387
--------- -------- ---------
(15,882) 380 13,525
--------- -------- ---------
Total provision ......... $ 65,121 $76,221 $140,238
========= ======== =========
</TABLE>
As part of the acquisitions of PSCM, Readicare and FSSCI, the Company
acquired approximately $1,664,000 in deferred tax liabilities.
47
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. INCOME TAXES - (CONTINUED)
The difference between the provision for income taxes and the amount
computed by applying the statutory federal income tax rate to income before
taxes was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1994 1995 1996
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal taxes at statutory rates ........................ $ 64,636 $ 74,161 $ 143,673
Add (deduct):
State income taxes, net of federal tax benefit ...... 4,899 5,832 9,645
Minority interests ................................. (11,014) (15,102) (17,303)
Disposal/impairment/merger charges .................. 668 9,955 6,563
Other ................................................ 5,932 1,375 (2,340)
--------- --------- ---------
$ 65,121 $ 76,221 $ 140,238
========= ========= =========
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
The Company is a party to legal proceedings incidental to its business. In
the opinion of management, any ultimate liability with respect to these actions
will not materially affect the consolidated financial position or results of
operations of the Company.
At December 31, 1996, anticipated capital expenditures for the next twelve
months are $350,000,000. This amount includes expenditures for maintenance and
expansion of the Company's existing facilities as well as development and
integration of the Company's services in selected metropolitan markets.
Beginning December 1, 1993, the Company became self-insured for
professional liability and comprehensive general liability. The Company
purchased coverage for all claims incurred prior to December 1, 1993. In
addition, the Company purchased underlying insurance which would cover all
claims once established limits have been exceeded. It is the opinion of
management that at December 31, 1996, the Company has adequate reserves to cover
losses on asserted and unasserted claims.
Prior to consummation of the SCA and Advantage Health mergers (see Note 2),
these companies carried professional malpractice and general liability
insurance. The policies were carried on a claims made basis. The companies had
policies in place to track and monitor incidents of significance. Management is
unaware of any claims that may result in a loss in excess of amounts covered by
existing insurance.
Operating leases generally consist of short-term lease agreements for
buildings where facilities are located. These leases generally have 5-year
terms, with one or more renewal options, with terms to be negotiated at the time
of renewal. Total rental expense for all operating leases was $75,355,000,
$100,183,000 and $127,741,000 for the years ended December 31, 1994, 1995 and
1996, respectively.
The following is a schedule of future minimum lease payments under all
operating leases having initial or remaining non-cancelable lease terms in
excess of one year:
YEAR ENDING DECEMBER 31 (IN THOUSANDS)
------------------------- ---------------
1997 .................. $108,187
1998 .................. 99,079
1999 .................. 86,178
2000 .................. 71,485
2001 .................. 55,862
After 2001 ............ 249,566
---------
$670,357
=========
48
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) savings plan which matches 15% of the first 4% of
earnings that an employee contributes. All contributions are in the form of
cash. All employees who have completed one year of service with a minimum of
1,000 hours worked are eligible to participate in the plan. Company
contributions are gradually vested over a seven-year service period.
Contributions to the plan by the Company were approximately $1,168,000,
$1,287,000 and $2,087,000 in 1994, 1995 and 1996, respectively.
In 1991, the Company established an Employee Stock Ownership Plan ("ESOP")
for the purpose of providing substantially all employees of the Company the
opportunity to save for their retirement and acquire a proprietary interest in
the Company. The ESOP currently owns approximately 3,320,000 shares of the
Company's common stock, which were purchased with funds borrowed from the
Company, $10,000,000 in 1991 (the "1991 ESOP Loan") and $10,000,000 in 1992 (the
"1992 ESOP Loan"). At December 31, 1996, the combined ESOP Loans had a balance
of $14,148,000. The 1991 ESOP Loan, which bears an interest rate of 10%, is
payable in annual installments covering interest and principal over a ten-year
period beginning in 1992. The 1992 ESOP Loan, which bears an interest rate of
8.5%, is payable in annual installments covering interest and principal over a
ten-year period beginning in 1993. Company contributions to the ESOP began in
1992 and shall at least equal the amount required to make all ESOP loan
amortization payments for each plan year. The Company recognizes compensation
expense based on the shares allocated method. Compensation expense related to
the ESOP recognized by the Company was $3,673,000, $3,524,000 and $3,198,000 in
1994, 1995 and 1996, respectively. Interest incurred on the ESOP Loans was
approximately $1,608,000, $1,460,000 and $1,298,000 in 1994, 1995 and 1996,
respectively. Approximately 1,212,000 shares owned by the ESOP have been
allocated to participants at December 31, 1996.
During 1993, the American Institute of Certified Public Accountants issued
Statement of Position 93-6, "Employers Accounting for Employee Stock Ownership
Plans" ("SOP 93-6"). Among other provisions, SOP 93-6 requires that compensation
expense relating to employee stock ownership plans be measured based on the fair
market value of the shares when allocated to the employees. The provisions of
SOP 93-6 apply only to leveraged ESOPs formed after December 31, 1992, or shares
newly acquired by an existing leveraged ESOP after December 31, 1992. Because
all shares owned by the Company's ESOP were acquired prior to December 31, 1992,
the Company's accounting policies for the shares currently owned by the ESOP are
not affected by SOP 93-6.
13. LOSS ON DISPOSAL OF SURGERY CENTERS
During the fourth quarter of 1994, the Company adopted a formal plan to
dispose of three surgery centers and certain other properties during 1995.
Accordingly, a loss of $13,197,000 was made to reflect the expected losses
resulting from the disposal of these centers. The loss is comprised primarily of
losses on the sale of owned facilities and equipment, write-off of intangible
and other assets, and accrual of future operating lease obligations and
estimated operating losses through the anticipated date of disposal.
49
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
13. LOSS ON DISPOSAL OF SURGERY CENTERS - (CONTINUED)
The following are the major components of the loss (in thousands):
<TABLE>
<S> <C>
Write-down of land, buildings and equipment ....................................... $ 4,806
Write-off of excess of cost over fair value of net assets acquired and other assets 2,762
Estimated operating losses through anticipated date of disposal ..................... 1,750
Accrual of future lease commitments and other obligations resulting from disposal ... 3,879
--------
$13,197
========
</TABLE>
The closings of the three surgery centers were completed by December 31,
1995. An accrual of $929,000 is included in accrued liabilities on the
accompanying December 31, 1995 consolidated balance sheet for the remaining
costs to be incurred relative to the disposal of these surgery centers and the
other properties. The remaining accrual was used in 1996.
14. IMPAIRMENT OF LONG-TERM ASSETS
During 1994, certain events occurred which impaired the value of specific
long-term assets of ReLife (see Note 2). A hospital in Missouri with a distinct
part unit which ReLife was managing was purchased in 1994 by an acute care
provider which terminated the contract with ReLife. Remaining goodwill of
$1,700,000 and costs allocated to the management contract of $1,300,000 were
written off as there is no value remaining for the terminated contract.
A ReLife facility in central Florida incurred tornado damage and has not
operated since September 1993. During 1994, management of ReLife determined that
it was probable that this facility would not reopen. Start-up costs of
$1,600,000 were written off. This facility is leased under an operating lease as
described in Note 11 through the year 2001. An impairment accrual has been
established based on the projected undiscounted net cash flows related to this
non-operating facility for the remainder of the lease term. The accrual totaled
$5,900,000 and consists of $4,700,000 in lease payments and $1,200,000 in fixed
costs and operating expenses, including property taxes, maintenance, security
and other related costs.
During 1994, ReLife entered into a contract for a new information system.
Payments under the contract and related costs were capitalized during the year.
After the agreement to merge with HEALTHSOUTH was entered into, the computer
project was abandoned, resulting in a write-off of capitalized cost of
$4,500,000.
In 1995, the Company recorded an asset impairment charge of approximately
$53,549,000 relating to goodwill and tangible assets identifiable with fourteen
surgery centers. Approximately $47,984,000 of this charge related to ten surgery
centers which the Company intends to operate on an ongoing basis, while the
remaining loss of $5,565,000 is identifiable with four surgery centers which the
Company decided during the fourth quarter of 1995 to close.
With respect to the ten surgery centers the Company intends to continue
operating, certain events occurred in the fourth quarter of 1995 which
significantly impacted the Company's estimates of future cash flows to be
received from these centers. Those events primarily related to a decline in
operating results combined with a deterioration in relationships with key
physicians at certain of those locations. As a result of these events, the
Company revised its estimates of undiscounted cash flows to be received over the
remaining estimated useful lives of these centers and determined that goodwill
and other long-lived assets (primarily property and equipment) had been
impaired. The Company developed its best estimates of future operating cash
flows at these locations considering future requirements for capital
expenditures as well as the impact of inflation. The projections of cash flows
also took into account estimates of significant one-time expenses as well as
estimates of additional revenues and result-
50
<PAGE>
HEALTHSOUTH Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
14. IMPAIRMENT OF LONG-TERM ASSETS - (CONTINUED)
ing income from future marketing efforts in the respective locations. The amount
of the impairment charge was determined by discounting the estimates of future
cash flows, using an estimated 8.5% incremental borrowing rate which management
believes is commensurate with the risks involved. The resulting net present
value of future cash flows was then compared to the historical net book value of
goodwill and other long-lived assets at each operating location which resulted
in an impairment loss relative to these centers of $47,984,000.
The remaining impairment charge of $5,565,000 relating to the centers to be
closed was based on the fair value of the related assets less estimated costs to
sell. One of these facilities is expected to be sold by the middle of 1997. The
Company continues to operate the remaining three facilities and is evaluating
its alternatives for their disposition. Assets held for sale having a remaining
net book value of $2,839,000 and $2,309,000 are included in property and
equipment on the accompanying December 31, 1995 and 1996 balance sheets,
respectively.
The above amounts are included in operations for 1995 in the accompanying
consolidated statement of income.
15. SUBSEQUENT EVENTS
On January 18, 1997, the Company's Board of Directors authorized a
two-for-one stock split to be effected in the form of a 100% stock dividend,
subject to the approval by the Company's stockholders of an amendment to its
Certificate of Incorporation increasing the number of authorized shares of
common stock from 250,000,000 to 500,000,000. The Company's stockholders
approved the amendment on March 12, 1997. The stock dividend is payable on March
17, 1997 to holders of record on March 13, 1997. Accordingly, all share and per
share amounts included in the accompanying financial statements have been
restated to give effect to the stock split. The stock dividend is reflected in
the accompanying statement of stockholders' equity as a 1996 transaction.
On February 17, 1997, the Company entered into a definitive agreement to
acquire Horizon/CMS Healthcare Corporation ("Horizon/CMS") in a stock-for-stock
merger in which the stockholders of Horizon/CMS will receive .84338 (after
adjustment for the two-for-one stock split) of a share of the Company's common
stock per share of Horizon/CMS common stock. The transaction is valued at
approximately $1,600,000,000, including the assumption by the Company of
approximately $700,000,000 in Horizon/CMS debt. It is expected that the
acquisition will be accounted for as a purchase. Horizon/CMS operates 33
inpatient rehabilitation hospitals, 58 specialty hospitals and subacute units
and 282 outpatient rehabilitation centers. Horizon/CMS also owns, leases or
manages 267 long-term care facilities, a contract therapy business, an
institutional pharmacy business and other healthcare services. Consummation of
the transaction is subject to various regulatory approvals, including clearance
under the Hart-Scott-Rodino Antitrust Improvements Act, and to the satisfaction
of certain other conditions. The Company currently anticipates that the
transaction will be consummated in mid-1997.
51
<PAGE>
ITEM 9. 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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Directors
The following table sets forth certain information with respect to the
Company's Directors.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
AND ALL POSITIONS A DIRECTOR
NAME AGE WITH THE COMPANY SINCE
- -------------------------------- ----- ------------------------------------------------------- -----------
<S> <C> <C> <C>
Richard M. Scrushy ............ 44 Chairman of the Board and Chief Executive Officer 1984
and Director
James P. Bennett ............... 39 President and Chief Operating Officer and Director 1993
Phillip C. Watkins, M.D. ...... 55 Physician, Birmingham, Alabama, and Director 1984
George H. Strong ............... 70 Private Investor, Locust, New Jersey, and Director 1984
C. Sage Givens ............... 40 General Partner, Acacia Venture Partners and 1985
Director
Charles W. Newhall III ......... 52 Partner, New Enterprise Associates Limited Partner- 1985
ships, and Director
Aaron Beam, Jr. ............... 53 Executive Vice President and Chief Financial Officer 1993
and Director
Larry R. House ............... 53 Chairman of the Board, President and Chief Executive 1993
Officer, MedPartners, Inc., and Director
Anthony J. Tanner ............ 48 Executive Vice President-- Administration and 1993
Secretary and Director
P. Daryl Brown ............... 42 President--HEALTHSOUTH Outpatient Centers and 1995
Director
John S. Chamberlin ............ 68 Private Investor, Princeton, New Jersey, and Director 1993
Richard F. Celeste ............ 59 Managing Partner, Celeste and Sabaty, Ltd. and 1991
Director
Joel C. Gordon ............... 68 Private Investor, Nashville, Tennessee, Consultant to 1996
the Company and Director
Raymond J. Dunn III ............ 54 Private Investor, Woburn, Massachusetts, Consultant 1996
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.
52
<PAGE>
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.
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 at $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
53
<PAGE>
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 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 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.
Raymond J. Dunn, III served as Chief Executive Officer of Advantage Health
from 1986 until March 14, 1996, when Advantage Health was acquired by the
Company. In addition, he served as Chairman of its Board of Directors from 1990
to March 14, 1996 and as its President from 1994 to March 14, 1996. From 1987 to
1990, he served as Vice Chairman of the Board of Advantage Health. From 1979 to
1986, Mr. Dunn was Chief Executive Officer of a former subsidiary of Advantage
Health responsible for management of Advantage Health's operations. From 1970 to
1978, he was Administrator of New England Rehabilitation Hospital, Inc. Mr. Dunn
has elected to retire from the Board of Directors at the 1997 Annual Meeting of
Stockholders to pursue other interests.
54
<PAGE>
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
Company's executive officers.
<TABLE>
<CAPTION>
ALL POSITIONS OFFICER
NAME AGE WITH COMPANY SINCE
- -------------------------- ----- ------------------------------------------------------ --------
<S> <C> <C> <C>
Richard M. Scrushy ...... 44 Chairman of the Board and Chief Executive Officer 1984
and Director
James P. Bennett ......... 39 President and Chief Operating Officer and Director 1991
Aaron Beam, Jr. ......... 53 Executive Vice President and Chief Financial Officer 1984
and Director
Anthony J. Tanner ...... 48 Executive Vice President-- Administration and 1984
Secretary and Director
Michael D. Martin ...... 36 Executive Vice President-- Finance and Treasurer 1989
Thomas W. Carman ......... 45 Executive Vice President-- Corporate Development 1985
P. Daryl Brown ......... 42 President--HEALTHSOUTH Outpatient Centers and 1986
Director
Robert E. Thomson ...... 49 President--HEALTHSOUTH Inpatient Operations 1987
Russell H. Maddox ...... 56 President--HEALTHSOUTH Imaging Centers 1995
William T. Owens ......... 38 Senior Vice President-- Finance and Controller 1986
William W. Horton ...... 37 Senior Vice President and Corporate Counsel and 1994
Assistant Secretary
</TABLE>
Biographical information for Messrs. Scrushy, Bennett, Beam, Tanner and
Brown is set forth above under this Item, "Directors and Executive Officers --
Directors"
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 is 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.
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
55
<PAGE>
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 & Johnston, Professional Association, where he served
as Chairman of the Healthcare Practice Group.
GENERAL
Directors of the Company hold office until the next Annual Meeting of
Stockholders of the Company and until their successors are elected and
qualified. Executive officers of the Company are elected annually by, and serve
at the discretion of the Board of Directors. There are no arrangements or
understandings known to the Company between any of the Directors, nominees for
Director or executive officers of the Company and any other person pursuant to
which any of such persons was elected as a Director or an executive officer,
except the Employment Agreement between the Company and Richard M. Scrushy (see
Item 11, "Executive Compensation -- Chief Executive Officer Employment
Agreement") and except that the Company agreed to appoint Mr. Gordon and Mr.
Dunn to the Board of Directors in connection with the SCA and Advantage Health
mergers. There are no family relationships between any Directors, nominees for
Director or executive officers of the Company.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and Directors, and persons who beneficially own more than 10% of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the New York Stock Exchange. Officers, Directors and beneficial owners of
more than 10% of the Company's Common Stock are required by Securities and
Exchange Commission regulations to furnish the Company with copies of all
Section 16(a) forms that they file. Based solely on review of the copies of such
forms furnished to the Company, or written representations that no reports on
Form 5 were required, the Company believes that for the period from January 1,
1996, through December 31, 1996, all of its officers, Directors and
greater-than-10% beneficial owners complied with all 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 covering an aggregate of 2,162,478 shares of the Company's Common
Stock in June 1996. All such transactions were reported on Form 5 in February
1997.
56
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION -- GENERAL
The following table sets forth compensation paid or awarded to the Chief
Executive Officer and each of the other four most highly compensated executive
officers of the Company (the "Named Executive Officers") for all services
rendered to the Company and its subsidiaries in 1994, 1995 and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
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 this Item,
"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.
57
<PAGE>
STOCK OPTION GRANTS IN 1996
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
# OF TOTAL
OPTIONS
NUMBER OF GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE EXPIRATION GRANT
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(1) AT DECEMBER 31, 1996(2)
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 Item 12, "Security Ownership of Certain Beneficial
Owners and Management".
(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.
58
<PAGE>
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.
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 Audit and Compensation
Committee of the Board of Directors 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)
59
<PAGE>
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 (except for certain permitted transfers to family members or
charities), 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 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 SHC, SSCI, SCA, PSCM and ReadiCare,
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
60
<PAGE>
the Company who are over the age of 21, have one full year of service with the
Company and have at least 1,000 hours of service in the year in which they enter
the 401(k) Plan. Eligible employees may elect to participate in the Plan on
January 1 and July 1 in each year.
Under the 401(k) Plan, participants may elect to defer up to 20% of their
annual compensation (subject to nondiscrimination rules under the Internal
Revenue Code). The deferred amounts may be invested among four options, at the
participant's direction: a money market fund, a bond fund, a guaranteed
insurance contract or an equity fund. The Company will match a minimum of 10% of
the amount deferred by each participant, up to 4% of such participant's total
compensation, with the matched amount also directed by the participant. See Note
12 of "Notes to Consolidated Financial Statements".
Aaron Beam, Jr., Executive Vice President and Chief Financial Officer of
the Company, and Anthony J. Tanner, Executive Vice President -- Administration
and Secretary of the Company, serve as Trustees of the 401(k) Plan, which is
administered by the Company.
EMPLOYEE STOCK BENEFIT PLAN
Effective January 1, 1991, the Company adopted the HEALTHSOUTH
Rehabilitation Corporation and Subsidiaries Employee Stock Benefit Plan (the
"ESOP"), a retirement plan intended to qualify under sections 401(a) and
4975(e)(7) of the Internal Revenue Code of 1986, as amended. The ESOP is open to
all full-time and part-time employees of the Company who are over the age of 21,
have one full year of service with the Company and have at least 1,000 hours of
service in the year in which they begin participation in the ESOP on the next
January 1 or July 1 after the date on which such employee satisfies the
aforementioned conditions.
The ESOP was established with a $10,000,000 loan from the Company, the
proceeds of which were used to purchase 1,655,172 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 1,666,664 shares of Common Stock. Under the ESOP,
a Company Common Stock account (a "company stock account") is established and
maintained for each eligible employee who participates in the ESOP. In each plan
year, such account is credited with such employee's allocable share of the
Common Stock held by the ESOP and allocated with respect to such plan year. Each
employee's allocable share for any given plan year is determined according to
the ratio which such employee's compensation for such plan year bears to the
compensation of all eligible participating employees for the same plan year.
Under the ESOP, eligible employees who participate in the ESOP and who have
attained age 55 and have completed 10 years of participation in the ESOP may
elect to diversify the assets in their company stock account by directing the
plan administrator to transfer to the 401(k) Plan a portion of their company
stock account to be invested, as the eligible employee directs, in one or more
of the investment options available under the 401(k) Plan. See Note 12 of "Notes
to Consolidated Financial Statements".
Richard M. Scrushy, Chairman of the Board 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.
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<PAGE>
BOARD COMPENSATION
Directors who are not also employed by the Company are paid Directors' fees
of $10,000 per annum, plus $3,000 for each meeting of the Board of Directors and
$1,000 for each Committee meeting attended. In addition, Directors are
reimbursed for all out-of-pocket expenses incurred in connection with their
duties as Directors. The Directors of the Company, including Mr. Scrushy, have
been granted non-qualified stock options to purchase shares of the Company's
Common Stock. See this Item, "Executive Compensation -- Stock Option Plans"
above.
CHIEF EXECUTIVE OFFICER EMPLOYMENT AGREEMENT
The Company is a party to an Employment Agreement with Richard M. Scrushy,
pursuant to which Mr. Scrushy, 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 1996 and 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 and rehabilitative healthcare services, including his role in the
negotiation and consummation of the SCA, Advantage Health, PSCM and ReadiCare
acquisitions and the negotiation of the Health Images and Horizon/CMS
acquisitions, as well as the Company's success in achieving annual budgeted net
income targets and certain other factors reflecting the Company's growth and
performance. Mr. Scrushy is also provided with a car allowance in the amount of
$500 per month and 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 shall be
acquired, merged or reorganized in such a manner as to result in a change of
control of the Company, Mr. Scrushy has the right to terminate his employment
under the Agreement, in which case he will receive a lump sum payment equal to
three years' annual base salary (including the gross incentive portion thereof)
under the Agreement. Mr. Scrushy has agreed not to compete with the Company
during any period to which any such severance pay relates. Mr. Scrushy may
terminate the Agreement at any time upon 180 days' notice, in which case he will
receive one year's base salary as severance pay.
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<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 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>
NAME AND NUMBER OF SHARES PERCENTAGE 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.
82 Devonshire Street
Boston, Massachusetts 02109 ............... 38,509,640(17) 12.03%
Putnam Investments, Inc.
One Post Office Square
Boston, Massachusetts 02109 ............... 22,880,090(18) 7.15%
All Executive Officers and Directors as a Group
(20 persons) .............................. 32,119,688(19) 9.33%
</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.
(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 trusts 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.
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<PAGE>
(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%
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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 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 had
been leased by 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
64
<PAGE>
2.4% of the issued and outstanding capital stock of Capstone, and Mr. Martin
owned approximately 0.9% of the issued and outstanding capital stock of
Capstone. In addition, the Company owned approximately 0.5% 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 Item 11, "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 11/4% per annum below the prime rate of AmSouth Bank of Alabama,
Birmingham, Alabama, and are payable on demand.
65
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits.
1. Financial Statements.
The consolidated financial statements of the Company and its subsidiaries
filed as a part of this Annual Report on Form 10-K are listed in Item 8 of
this Annual Report on Form 10-K, which listing is hereby incorporated herein
by reference.
2. Financial Statement Schedules.
The financial statement schedules required by Regulation S-X are filed
under Item 14(d) of this Annual Report on Form 10-K, as listed below:
Schedules Supporting the Financial Statements
Schedule II Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission have been
omitted because they are not required under the related instructions or are
inapplicable, or because the information has been provided in the
Consolidated Financial Statements or the Notes thereto.
3. Exhibits.
The Exhibits filed as a part of this Annual Report are listed in Item
14(c) of this Annual Report on Form 10-K, which listing is hereby
incorporated herein by reference.
(b) Reports on Form 8-K.
During the last quarter of the period covered by this Annual Report on
Form 10-K, the Company filed no Current Reports on Form 8-K.
(c) Exhibits.
The Exhibits required by Regulation S-K are set forth in the following
list and are filed either by incorporation by reference from previous filings
with the Securities and Exchange Commission or by attachment to this Annual
Report on Form 10-K as so indicated in such list.
EXHIBIT
NO. DESCRIPTION
- --------- --------------------------------------------------------------------
(2)-1 Amended and Restated Plan and Agreement of Merger, dated as of
September 18, 1994, among HEALTHSOUTH Rehabilitation Corporation,
RRS Acquisitions Company, Inc. and ReLife, Inc., filed as Exhibit
(2)-1 to the Company's Registration Statement on Form S-4
(Registration No. 33- 55929), is hereby incorporated by reference.
(2)-2 Amended and Restated Plan and Agreement of Merger, dated as of
January 22, 1995, among HEALTHSOUTH Corporation, ASC Atlanta
Acquisition Company, Inc. and Surgical Health Corporation, filed as
Exhibit (2)-4 to the Company's Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 1994, is hereby incorporated by
reference.
(2)-3 Stock Purchase Agreement, dated February 3, 1995, among HEALTHSOUTH
Corporation, NovaCare, Inc. and NC Resources, Inc., filed as Exhibit
(2)-3 to the Company's Annual Report on Form 10-K for the Fiscal
Year Ended December 31, 1994, is hereby incorporated by reference.
(2)-4 Plan and Agreement of Merger, dated August 23, 1995, among
HEALTHSOUTH Corporation, SSCI Acquisition Corporation and Sutter
Surgery Centers, Inc., filed as Exhibit (2) to the Company's
Registration Statement on Form S-4 (Registration No. 33-63-055) is
hereby incorporated by reference.
66
<PAGE>
EXHIBIT
NO. DESCRIPTION
- --------- --------------------------------------------------------------------
(2)-5 Amendment to Plan and Agreement of Merger, dated October 26, 1995,
among HEALTHSOUTH Corporation, SSCI Acquisition Corporation and
Sutter Surgery Centers, Inc., filed as Exhibit (2)-5 to the
Company's Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1995, is hereby incorporated by reference.
(2)-6 Amended and Restated Plan and Agreement of Merger, dated as of
October 9, 1995, among HEALTHSOUTH Corporation, SCA Acquisition
Corporation and Surgical Care Affiliates, Inc., filed as Exhibit
(2)-1 to Amendment No. 1 to the Company's Registration Statement on
Form S-4 (Registration No. 33-64935), is hereby incorporated by
reference.
(2)-7 Agreement and Plan of Merger, dated December 16, 1995, among
HEALTHSOUTH Corporation, Aladdin Acquisition Corporation and
Advantage Health Corporation, filed as Exhibit (2)-1 to the
Company's Registration Statement on Form S-4 (Registration No.
333-825), is hereby incorporated by reference.
(2)-8 Plan and Agreement of Merger, dated May 16, 1996, among HEALTHSOUTH
Corporation, Empire Acquisition Corporation and Professional Sports
Care Management, Inc., filed as Exhibit (2)-1 to the Company's
Registration Statement on Form S-4 (Registration No. 333-08449), is
hereby incorporated by reference.
(2)-9 Plan and Agreement of Merger, dated September 11, 1996, among
HEALTHSOUTH Corporation, Warwick Acquisition Corporation and
ReadiCare, Inc., filed as Exhibit (2)-1 to the Company's
Registration Statement on Form S-4 (Registration No. 333-14697), is
hereby incorporated by reference.
(2)-10 Plan and Agreement of Merger, dated December 2, 1996, among
HEALTHSOUTH Corporation, Hammer Acquisition Corporation and Health
Images, Inc., filed as Exhibit (2)-1 to the Company's Registration
Statement on Form S-4 (Registration No. 333-19439), is hereby
incorporated by reference.
(2)-11 Plan and Agreement of Merger, dated February 17, 1997, among
HEALTHSOUTH Corporation, Reid Acquisition Corporation and
Horizon/CMS Healthcare Corporation.
(3)-1 Restated Certificate of Incorporation of HEALTHSOUTH Corporation, as
filed in the Office of the Secretary of State of the State of
Delaware on March 13, 1997.
(3)-2 Bylaws of HEALTHSOUTH Rehabilitation Corporation, filed as Exhibit
(3)-2 to the Company's Annual Report on Form 10-K for the Fiscal
Year Ended December 31, 1991, are hereby incorporated by reference.
(4)-1 Indenture, dated March 24, 1994, between HEALTHSOUTH Rehabilitation
Corporation and NationsBank of Georgia, National Association,
relating to the Company's 9.5% Senior Subordinated Notes due 2001,
filed as Exhibit (4)-1 to the Company's Annual Report on Form 10-K
for the Fiscal Year Ended December 31, 1994, is hereby incorporated
by reference.
(4)-2 Indenture, dated March 24, 1994, between HEALTHSOUTH Rehabilitation
Corporation and PNC Bank of Kentucky, Inc., relating to the
Company's 5% Convertible Subordinated Debentures due 2001, filed as
Exhibit (4)-2 to the Company's Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 1994, is hereby incorporated by
reference.
(10)-1 1984 Incentive Stock Option Plan, as amended, filed as Exhibit
(10)-1 to the Company's Annual Report on Form 10-K for the Fiscal
Year Ended December 31, 1987, is hereby incorporated herein by
reference.
(10)-2 1988 Non-Qualified Stock Option Plan, filed as Exhibit 4(a) to the
Company's Registration Statement on Form S-8 (Registration No.
33-23642), is hereby incorporated herein by reference.
(10)-3 1989 Stock Option Plan, filed as Exhibit (10)-6 to the Company's
Annual Report on Form 10-K for the Fiscal Year Ended December 31,
1989, is hereby incorporated by reference.
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<PAGE>
EXHIBIT
NO. DESCRIPTION
- --------- --------------------------------------------------------------------
(10)-4 1990 Stock Option Plan, filed as Exhibit (10)-13 to the Company's
Annual Report on Form 10-K for the Fiscal Year ended December 31,
1990, is hereby incorporated by reference.
(10)-5 Forms of Stock Option Agreements utilized under 1984 Incentive Stock
Option Plan, 1988 Non-Qualified Stock Option Plan, 1989 Stock
Option Plan and 1990 Stock Option Plan, filed as Exhibit (10)-14 to
the Company's Annual Report on Form 10-K for the Fiscal Year ended
December 31, 1990, are hereby incorporated herein by reference.
(10)-6 1991 Stock Option Plan, as amended, filed as Exhibit (10)-15 to the
Company's Annual Report on Form 10-K for the Fiscal Year ended
December 31, 1991, is hereby incorporated herein by reference.
(10)-7 Forms of Stock Option Agreements utilized under 1991 Stock Option
Plan, filed as Exhibit (10)-16 to the Company's Annual Report on
Form 10-K for the Fiscal Year Ended December 31, 1991, are hereby
incorporated by reference.
(10)-8 1992 Stock Option Plan, filed as Exhibit (10)-8 to the Company's
Annual Report on Form 10-K for the Fiscal Year Ended December 31,
1992, is hereby incorporated by reference.
(10)-9 Forms of Stock Option Agreements utilized under 1992 Stock Option
Plan, filed as Exhibit (10)-9 to the Company's Annual Report on Form
10-K for the Fiscal Year Ended December 31, 1992, are hereby
incorporated by reference.
(10)-10 1993 Stock Option Plan, filed as Exhibit (10)-10 to the Company's
Annual Report on Form 10-K for the Fiscal Year Ended December 31,
1993, is hereby incorporated by reference.
(10)-11 Forms of Stock Option Agreements utilized under 1993 Stock Option
Plan, filed as Exhibit (10)-11 to the Company's Annual Report on
Form 10-K for the Fiscal Year Ended De- cember 31, 1993, are hereby
incorporated by reference.
(10)-12 1993 Consultants Stock Option Plan, filed as Exhibit 4(a) to the
Company's Registration Statement on Form S-8 (Commission File No.
33-64316), is hereby incorporated by reference.
(10)-13 Form of Stock Option Agreement utilized under the 1993 Consultants
Stock Option Plan, filed as Exhibit 4(b) to the Company's
Registration Statement on Form S-8 (Commission File No. 33-64316),
is hereby incorporated by reference.
(10)-14 1995 Stock Option Plan, filed as Exhibit (10)-14 to the Company's
Annual Report on Form 10-K for the Fiscal Year Ended December 31,
1995, is hereby incorporated by ref- erence.
(10)-15 Form of Stock Option Agreement utilized under the 1995 Stock Option
Plan, filed as Exhibit (10)-15 to the Company's Annual Report on
Form 10-K for the Fiscal Year Ended December 31, 1995, is hereby
incorporated by reference.
(10)-16 Employment Agreement, dated July 23, 1986, between HEALTHSOUTH
Rehabilitation Corporation and Richard M. Scrushy, as amended, filed
as Exhibit (10)-16 to the Compa- ny's Annual Report on Form 10-K for
the Fiscal Year Ended December 31, 1995, is hereby incorporated by
reference.
(10)-17 Third Amended and Restated Credit Agreement, dated as of April 11,
1996, between HEALTHSOUTH Corporation and NationsBank, N.A.
(10)-18 Form of Indemnity Agreement entered into between HEALTHSOUTH
Rehabilitation Corporation and each of its Directors, filed as
Exhibit (10)-13 to the Company's Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 1991, is hereby incorporated by
reference.
(10)-19 Surgical Health Corporation 1992 Stock Option Plan, filed as Exhibit
10(aa) to Surgical Health Corporation's Registration Statement on
Form S-4 (Commission File No. 33- 70582), is hereby incorporated by
reference.
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<PAGE>
EXHIBIT
NO. DESCRIPTION
- --------- --------------------------------------------------------------------
(10)-20 Surgical Health Corporation 1993 Stock Option Plan, filed as Exhibit
10(bb) to Surgical Health Corporation's Registration Statement on
Form S-4 (Commission File No. 33- 70582), is hereby incorporated by
reference.
(10)-21 Surgical Health Corporation 1994 Stock Option Plan, filed as Exhibit
10(pp) to Surgical Health Corporation's Quarterly Report on Form
10-Q for the Quarter Ended September 30, 1994, is hereby
incorporated by reference.
(10)-22 Heritage Surgical Corporation 1992 Stock Option Plan, filed as
Exhibit 4(d) to the Com- pany's Registration Statement on Form S-8
(Commission File No. 33-60231), is hereby incorporated by reference.
(10)-23 Heritage Surgical Corporation 1993 Stock Option Plan, filed as
Exhibit 4(e) to the Com- pany's Registration Statement on Form S-8
(Commission File No. 33-60231), is hereby incorporated by reference.
(10)-24 Sutter Surgery Centers, Inc. 1993 Stock Option Plan, Non-Qualified
Stock Option Plan and Agreement (Saibeni), Non-Qualified Stock
Option Plan and Agreement (Shah), Non- Qualified Stock Option Plan
and Agreement (Akella), Non-Qualified Stock Option Plan and
Agreement (Kelly) and Non-Qualified Stock Option Plan and Agreement
(May), filed as Exhibits 4(a) - 4(f) to the Company's Registration
Statement on Form S-8 (Commission File No.
33-64615), are hereby incorporated by reference.
(10)-25 Surgical Care Affiliates Incentive Stock Plan of 1986, filed as
Exhibit 10(g) to Surgical Care Affiliates Inc.'s Annual Report on
Form 10-K for the Fiscal Year Ended December 31, 1993, is hereby
incorporated by reference.
(10)-26 Surgical Care Affiliates 1990 Non-Qualified Stock Option Plan for
Non-Employee Directors, filed as Exhibit 10(i) to Surgical Care
Affiliates, Inc.'s Annual Report on Form 10-K for the Fiscal Year
Ended December 31, 1990, is hereby incorporated by reference.
(10)-27 Professional Sports Care Management, Inc. 1992 Stock Option Plan, as
amended, filed as Exhibits 10.1 - 10.3 to Professional Sports Care
Management, Inc.'s Registration Statement on Form S-1 (Commission
File No. 33-81654), is hereby incorporated by reference.
(10)-28 Professional Sports Care Management, Inc. 1994 Stock Incentive Plan,
filed as Exhibit 10.4 to Professional Sports Care Management, Inc.'s
Registration Statement on Form S-1 (Commission File No. 33-81654),
is hereby incorporated by reference.
(10)-29 Professional Sports Care Management, Inc. 1994 Directors' Stock
Option Plan, filed as Exhibit 10.5 to Professional Sports Care
Management, Inc.'s Registration Statement on Form S-1 (Commission
File No. 33-81654), is hereby incorporated by reference.
(10)-30 ReadiCare, Inc. 1991 Stock Option Plan, filed as an exhibit to
ReadiCare, Inc.'s Annual Report on Form 10-K for the Fiscal Year
Ended February 29, 1992, is hereby incorporated by reference.
(10)-31 ReadiCare, Inc. Stock Option Plan for Non-Employee Directors, as
amended, filed as an exhibit to ReadiCare, Inc's Annual Report on
Form 10-K for the Fiscal Year Ended February 29, 1992 and as an
exhibit to ReadiCare, Inc.'s Annual Report on Form 10-K for the
Fiscal Year Ended February 28, 1994, is hereby incorporated by
reference.
(11) HEALTHSOUTH Corporation and Subsidiaries, Computation of Income Per
Share.
(21) Subsidiaries of HEALTHSOUTH Corporation.
(23) Consent of Ernst & Young LLP.
(d) Financial Statement Schedules.
Schedule II: Valuation and Qualifying Accounts
69
<PAGE>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------ -------------- -------------------------------- ------------- --------------
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER ACCOUNTS DEDUCTIONS BALANCE AT
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD
- ------------------------------------ -------------- --------------- ---------------- ------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Allowance for doubtful accounts $30,511 $32,904 $ 7,041 (1) $31,038 (2) $ 39,418
--------- -------- ----------- ------------ ---------
Year ended December 31, 1995:
Allowance for doubtful accounts $ 39,418 $37,659 $ 18,750 (1) $44,684 (2) $51,143
--------- -------- ----------- ------------ ---------
Year ended December 31, 1996:
Allowance for doubtful accounts $51,143 $54,112 $ 13,643 (1) $53,391 (2) $65,507
--------- -------- ----------- ------------ ---------
</TABLE>
- ----------
(1) Allowances of acquisitions in years 1994, 1995 and 1996, respectively.
(2) Write-offs of uncollectible patient accounts receivable.
70
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 2 to
this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HEALTHSOUTH CORPORATION
By: /s/ RICHARD M. SCRUSHY
--------------------------------
Richard M. Scrushy,
Chairman of the Board
and Chief Executive Officer
Date: August 26, 1997
71
