AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 8, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
HEALTHSOUTH CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 8062 63-0860407
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
Incorporation or Organization) Classification Code Number) Number)
</TABLE>
----------------------
Two Perimeter Park South, Birmingham, Alabama 35243
(205) 967-7116
(Address, including Zip Code, and Telephone Number, including Area Code, of
Registrant's Principal Executive Offices)
RICHARD M. SCRUSHY
Chairman of the Board
and Chief Executive Officer
HEALTHSOUTH Corporation
Two Perimeter Park South
Birmingham, Alabama 35243
(205) 967-7116
(Name, Address, including Zip Code, and Telephone Number, including Area
Code, of Agent for Service)
----------------------
Copies to:
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<CAPTION>
<S> <C> <C>
MARK EZELL, ESQ. WILLIAM W. HORTON, ESQ. THOMAS R. MCNEILL, ESQ.
Haskell Slaughter & Young, L.L.C. BEALL D. GARY, JR., ESQ. GABRIEL DUMITRESCU, ESQ.
1200 AmSouth/Harbert Plaza HEALTHSOUTH Corporation Powell, Goldstein, Frazer & Murphy LLP
1901 Sixth Avenue North Two Perimeter Park South 16th Floor, 191 Peachtree Street
Birmingham, Alabama 35203 Birmingham, Alabama 35243 Atlanta, Georgia 30303
(205) 251-1000 (205) 967-7116 (404) 572-6700
</TABLE>
----------------------
Approximate date of commencement of proposed sale to the public:
At the effective time of the merger of Health Images, Inc. with a
wholly-owned subsidiary of the Registrant, as described in the
Prospectus-Proxy Statement included herein.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===================================================================================================================
<S> <C> <C> <C> <C>
Title of Each Proposed Maximum Proposed Maximum
Class of Securities Amount Offering Price Aggregate Offering Amount of
to be Registered to be Registered(1) Per Unit Price(2) Registration Fee(3)
- -------------------------------------------------------------------------------------------------------------------
Common Stock, par value
$.01 per share......... 5,675,761 shares Inapplicable $ 205,205,492.30 $ 62,183.48
===================================================================================================================
</TABLE>
(1) The amount of common stock, par value $.01 per share (the "HEALTHSOUTH
Common Stock"), of the Registrant to be registered has been determined
based upon 11,532,269 shares of common stock, par value $.01 per share (the
"Health Images Common Stock"), of Health Images, Inc. outstanding as of
December 31, 1996, plus 1,193,653 shares of Health Images Common Stock
obtainable upon the exercise of currently exercisable options, and an
Exchange Ratio of 0.446 of a share of HEALTHSOUTH Common Stock per share of
Health Images Common Stock, the Exchange Ratio provided for in the Plan and
Agreement of Merger among HEALTHSOUTH Corporation, Hammer Acquisition
Corporation and Health Images, Inc., dated as of December 2, 1996 (the
"Plan").
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(f)(1) of the Securities Act of 1933, as amended (the
"Securities Act"). Pursuant to Rule 457(f)(1), the maximum aggregate
offering price is the product of (a) $16.125 , representing the average of
the high and low sales prices of Health Images Common Stock as reported on
the New York Stock Exchange on January 2, 1997, and (b)12,725,922, the
maximum number of shares of Health Images Common Stock to be acquired by
the Registrant in connection with the acquisition of Health Images pursuant
to the Plan.
(3) The registration fee for the securities registered hereby, $62,183.48, has
been calculated pursuant to Section 6(b) of the Securities Act and Rule
457(f) promulgated thereunder.
----------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further Amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
HEALTHSOUTH CORPORATION
CROSS-REFERENCE SHEET
(PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING THE LOCATION IN THE
PROSPECTUS-PROXY
STATEMENT OF THE RESPONSES TO THE ITEMS OF PART I OF FORM S-4)
<TABLE>
<CAPTION>
ITEM LOCATION IN PROSPECTUS-PROXY STATEMENT
---- --------------------------------------
<S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus ..................... Facing Page; Cross Reference Sheet; Outside Front Cover Page
of Prospectus-Proxy Statement
2. Inside Front and Outside Back Cover Pages of
Prospectus ......................................... Table of Contents; Available Information; Incorporation of
Certain Information by Reference
3. Risk Factors, Ratio of Earnings to Fixed Charges
and Other Information .............................. Summary of Prospectus-Proxy Statement; Risk Factors; The
Special Meeting
4. Terms of the Transaction ........................... Summary of Prospectus-Proxy Statement; The Special Meeting;
The Merger; Description of Capital Stock of HEALTHSOUTH;
Comparison of Rights of Health Images and HEALTHSOUTH
Stockholders; Operations and Management of HEALTHSOUTH after
the Merger
5. Pro Forma Financial Information .................... Pro Forma Condensed Financial Information
6. Material Contacts with the Company Being Acquired . Not Applicable
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters ..... Not Applicable
8. Interests of Named Experts and Counsel ............. Experts
9. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities ...... Comparison of Rights of Health Images and HEALTHSOUTH
Stockholders
10. Information with Respect to S-3 Registrants ....... Incorporation of Certain Documents by Reference
11. Incorporation of Certain Information by Reference . Incorporation of Certain Documents by Reference
12. Information with Respect to S-2 or S-3 Registrants Not Applicable
13. Incorporation of Certain Information by Reference . Not Applicable
14. Information with Respect to Registrants Other than
S-2 or S-3 Registrants.............................. Not Applicable
15. Information with Respect to S-3 Companies ......... Incorporation of Certain Documents by Reference
16. Information with Respect to S-2 or S-3 Companies .. Not Applicable
17. Information with Respect to Companies Other than
S-2 or S-3 Companies ............................... Not Applicable
18. Information if Proxies, Consents or Authorizations
are to be Solicited................................. Incorporation of Certain Documents by Reference; Summary of
Prospectus-Proxy Statement; The Special Meeting; The Merger
19. Information if Proxies, Consents or Authorizations
are not to be Solicited or in an Exchange Offer ... Not Applicable
</TABLE>
<PAGE>
PRELIMINARY COPY
HEALTH IMAGES, INC.
5905 Windward Parkway
Alpharetta, Georgia 30202
, 1997
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
Health Images, Inc. ("Health Images") on , 1997. Details as to the time and
place of the meeting are set forth in the accompanying Notice of Special Meeting
of Stockholders.
The purpose of the meeting is to consider and vote upon the approval of a
Plan and Agreement of Merger (the "Plan") providing for the merger (the
"Merger") of a wholly-owned subsidiary of HEALTHSOUTH Corporation
("HEALTHSOUTH") with and into Health Images. If the Merger is consummated,
Health Images will become a wholly-owned subsidiary of HEALTHSOUTH, and
stockholders of Health Images will be entitled to receive 0.446 of a share of
HEALTHSOUTH Common Stock (subject to adjustment as set forth in the attached
Prospectus-Proxy Statement) per share of Health Images Common Stock. The Board
of Directors believes that HEALTHSOUTH and Health Images are strategically
complementary and that the combined companies will be able to compete more
effectively in the changing healthcare marketplace.
After careful consideration, your Board of Directors has concluded that the
proposed Merger is in the best interests of Health Images stockholders and
recommends that you vote FOR the approval of the Plan.
The attached Prospectus-Proxy Statement describes the Plan and the proposed
Merger more fully and includes other information about HEALTHSOUTH and Health
Images. Please give this information your thoughtful attention.
Approval of the Plan by the stockholders of Health Images requires the
affirmative vote of the holders of a majority of the outstanding shares of
Health Images Common Stock. Therefore, you are urged to mark, sign, date and
return promptly the accompanying proxy card for the meeting even if you plan to
attend. You may vote in person at that time if you so desire.
Sincerely,
ROBERT D. CARL, III
Chairman of the Board, President
and Chief Executive Officer
<PAGE>
PRELIMINARY COPY
HEALTH IMAGES, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1997
------------------------
To the Stockholders of Health Images, Inc.
Notice is hereby given that a Special Meeting of Stockholders (the "Special
Meeting") of Health Images, Inc, a Delaware corporation ("Health Images"), will
be held at on , 1997 at a.m. Eastern Time, for the following purposes:
1. To consider and vote upon a proposal to approve the Plan and
Agreement of Merger, dated as of December 2, 1996, among Health Images,
Hammer Acquisition Corporation, a Delaware corporation (the "Subsidiary")
wholly owned by HEALTHSOUTH Corporation, a Delaware corporation
("HEALTHSOUTH"), and HEALTHSOUTH (as it may be amended, supplemented or
otherwise modified from time to time, the "Plan"), pursuant to which, among
other things, the Subsidiary will be merged with and into Health Images upon
the terms and subject to the conditions contained in the Plan (the
"Merger"), and Health Images will become a wholly-owned subsidiary of
HEALTHSOUTH, as described in the accompanying Prospectus-Proxy Statement.
2. To consider and act upon such other matters as may properly come
before the Special Meeting, including any adjournments or postponements
thereof.
The Board of Directors of Health Images has fixed the close of business on ,
1997 as the record date for the determination of stockholders entitled to notice
of and to vote at the Special Meeting, and only stockholders of record at such
time will be entitled to notice of and to vote at the Special Meeting.
A form of Proxy and a Prospectus-Proxy Statement containing more detailed
information with respect to the matters to be considered at the Special Meeting
accompany this notice and form a part hereof.
You are cordially invited and urged to attend the Special Meeting in person.
Whether or not you intend to attend the Special Meeting, please complete, sign,
date and promptly return the enclosed Proxy in the enclosed self-addressed,
postage pre-paid envelope. If you attend the Special Meeting and desire to
revoke your Proxy and vote in person, you may do so. In any event, your Proxy
may be revoked at any time before it is voted.
By Order of the Board of Directors,
ROBIN EUBANKS MURRAY
Secretary
IMPORTANT NOTICES
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY, WHETHER OR NOT YOU PLAN
TO ATTEND THE SPECIAL MEETING. YOUR PROXY WILL BE REVOCABLE, EITHER IN WRITING
OR BY VOTING IN PERSON AT THE SPECIAL MEETING, AT ANY TIME PRIOR TO ITS
EXERCISE. PLEASE DO NOT SEND IN STOCK CERTIFICATES AT THIS TIME.
THE BOARD OF DIRECTORS OF HEALTH IMAGES, INC. UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE FOR THE APPROVAL OF THE PLAN.
<PAGE>
PRELIMINARY COPY
PROSPECTUS-PROXY STATEMENT
PROXY STATEMENT
OF
HEALTH IMAGES, INC.
FOR THE SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1997
-----------------
PROSPECTUS
OF
HEALTHSOUTH CORPORATION
This Prospectus relates to up to 5,675,761 shares of the Common Stock, par
value $.01 per share (the "HEALTHSOUTH Common Stock"), of HEALTHSOUTH
Corporation (together with its subsidiaries, as applicable, "HEALTHSOUTH")
issuable to the stockholders of Health Images, Inc. (together with its
subsidiaries, as applicable, "Health Images") upon consummation of the Merger
(as defined below). Such number of shares represents the maximum number of
shares that may be issued to Health Images stockholders. This Prospectus also
serves as the Proxy Statement of Health Images for its special meeting of
stockholders to be held on , 1997, and any adjournments and postponements
thereof (the "Special Meeting"). See "THE SPECIAL MEETING".
-------------------
This Prospectus-Proxy Statement describes the terms of a proposed business
combination between HEALTHSOUTH and Health Images, pursuant to which HEALTHSOUTH
will acquire Health Images by means of the merger (the "Merger") of Hammer
Acquisition Corporation, a wholly-owned subsidiary of HEALTHSOUTH (the
"Subsidiary"), with and into Health Images, with Health Images being the
surviving corporation (the "Surviving Corporation"). After the Merger, the
combined operations of HEALTHSOUTH and Health Images are expected to be
conducted with Health Images as a wholly-owned subsidiary of HEALTHSOUTH and the
present subsidiaries of Health Images continuing as subsidiaries of Health
Images and thus indirect subsidiaries of HEALTHSOUTH. The Merger will be
effective pursuant to the terms and subject to the conditions of the Plan and
Agreement of Merger, dated as of December 2, 1996, among HEALTHSOUTH, the
Subsidiary and Health Images (as it may be amended, supplemented or otherwise
modified from time to time, the "Plan"). The Plan is attached to this
Prospectus-Proxy Statement as Annex A and is incorporated herein by reference.
HEALTHSOUTH and Health Images are hereinafter sometimes referred to as the
"Companies" and individually as a "Company".
Upon consummation of the Merger, except as described herein, each outstanding
share of Common Stock, par value $.01 per share, of Health Images, other than
shares owned by Health Images or any subsidiary of Health Images (the "Health
Images Common Stock" or the "Health Images Shares"), will be cancelled, and the
holders of such Health Images Shares will be entitled to receive 0.446 of a
share of HEALTHSOUTH Common Stock (the "Exchange Ratio") for each Health Images
Share so held. Health Images stockholders will receive cash (without interest)
in lieu of fractional shares of HEALTHSOUTH Common Stock. For a more complete
description of the terms of the Merger, see "THE MERGER".
This Prospectus-Proxy Statement and the form of Proxy are first being mailed
to stockholders of Health Images on or about , 1997.
See "Risk Factors" at page 18 for a discussion of certain factors that should
be considered by Health Images stockholders.
-------------------
THE SECURITIES TO BE ISSUED HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION (THE "SEC") OR BY ANY STATE SECURITIES
COMMISSION NOR HAS THE SEC OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS-PROXY STATEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
The date of this Prospectus-Proxy Statement is , 1997.
<PAGE>
AVAILABLE INFORMATION
HEALTHSOUTH has filed a Registration Statement on Form S-4 under the
Securities Act of 1933, as amended (the "Securities Act"), with the Securities
and Exchange Commission (the "SEC") covering the shares of HEALTHSOUTH Common
Stock to be issued in connection with the Merger (including exhibits and
amendments thereto, the "Registration Statement"). As permitted by the rules and
regulations of the SEC, this Prospectus-Proxy Statement omits certain
information contained in the Registration Statement. For further information
pertaining to the securities offered hereby, reference is made to the
Registration Statement.
HEALTHSOUTH and Health Images are subject to the information requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file periodic reports, proxy statements and other
information with the SEC relating to their respective businesses, financial
statements and other matters. The Registration Statement, as well as such
reports, proxy statements and other information, may be inspected at the public
reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549 and should be available for inspection
and copying at the regional offices of the SEC located at Seven World Trade
Center, Suite 1300, New York, New York, 10048; 5670 Wilshire Boulevard, 11th
Floor, Los Angeles, California 90036-3648; and Citicorp Center, 500 West Madison
Street, Room 1400, Chicago, Illinois 60661-2511. Copies of such material can be
obtained at prescribed rates by writing to the SEC, Public Reference Section,
450 Fifth Street, N.W., Washington, D.C. 20549. The SEC also maintains a web
site that contains reports, proxy and information statements and other
information regarding HEALTHSOUTH, Health Images and the Registration Statement.
The address of that web site is http://www.sec.gov. Both the HEALTHSOUTH Common
Stock and the Health Images Common Stock are listed on the New York Stock
Exchange (the "NYSE"), and the Registration Statement and other information with
respect to HEALTHSOUTH and Health Images should be available for inspection at
the library of the New York Stock Exchange, Inc., 20 Broad Street, 7th Floor,
New York, New York 10005.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
This Prospectus-Proxy Statement incorporates documents by reference which are
not presented herein or delivered herewith. Copies of such reports, proxy
statements and other information filed by HEALTHSOUTH, other than exhibits to
such documents unless such exhibits are specifically incorporated herein by
reference, are available without charge, upon written or oral request, from the
Secretary of HEALTHSOUTH Corporation, Two Perimeter Park South, Birmingham,
Alabama 35243, telephone (205) 967-7116. Copies of such reports, proxy
statements and other information filed by Health Images, other than exhibits to
such documents unless such exhibits are specifically incorporated herein by
reference, are available, without charge, upon written or oral request, from the
Director of Stockholder Relations of Health Images, Inc., 5905 Windward Parkway
Alpharetta, Georgia 30202 , telephone (770) 625-2067. In order to ensure timely
delivery of the documents, any request should be made by five days prior to the
Special Meeting.
There are hereby incorporated by reference into this Prospectus-Proxy
Statement and made a part hereof the following documents filed by HEALTHSOUTH:
1. HEALTHSOUTH's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, as amended.
2. HEALTHSOUTH's Quarterly Reports on Form 10-Q for the quarters ended March
31, June 30 and September 30, 1996.
3. HEALTHSOUTH's Current Report on Form 8-K dated December 16, 1995, as
amended (relating to the acquisition of Advantage Health Corporation ("Advantage
Health")).
4. HEALTHSOUTH's Current Report on Form 8-K dated January 17, 1996 (relating
to the consummation of the acquisition of Surgical Care Affiliates, Inc.
("SCA")).
5. HEALTHSOUTH'S Current Report on Form 8-K dated March 14, 1996 (relating to
the consummation of the acquisition of Advantage Health).
2
<PAGE>
6. HEALTHSOUTH'S Current Report on Form 8-K dated March 20, 1996 (reporting
combined earnings of HEALTHSOUTH and SCA for February 1996).
7. HEALTHSOUTH'S Current Report on Form 8-K dated May 20, 1996 (reporting
combined earnings of HEALTHSOUTH and Advantage Health for April 1996).
8. The description of HEALTHSOUTH's capital stock contained in HEALTHSOUTH's
Registration Statement on Form 8-A filed August 26, 1989.
There are also hereby incorporated by reference into this Prospectus-Proxy
Statement and made a part hereof the following documents filed by Health Images:
1. Health Images' Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.
2. Health Images' Quarterly Reports on Form 10-Q for the quarters ended March
31, June 30 and September 30, 1996.
3. Health Images' Current Report on Form 8-K filed December 5, 1996
(reporting the signing of the Plan).
4. The financial statements of MedAlliance Imaging Centers (a division of
MedAlliance, Inc.) contained in Amendment No. 1 on Form 8-K/A dated June 30,
1995 to Health Images' Current Report on Form 8-K dated April 28, 1995.
All documents filed by HEALTHSOUTH and Health Images, respectively, pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus-Proxy Statement and prior to the Closing Date of the Merger shall be
deemed to be incorporated by reference into this Prospectus-Proxy Statement and
to be made a part hereof from the date of the filing of such documents. Any
statement contained in a document incorporated by reference herein shall be
deemed to be modified or superseded for the purpose hereof to the extent that a
statement contained herein (or in any other subsequently filed document which
also is incorporated by reference herein) modifies or supersedes such statement.
Any statement so modified or superseded shall not be deemed to constitute a part
hereof, except as so modified or superseded.
All information contained in this Prospectus-Proxy Statement or incorporated
herein by reference with respect to HEALTHSOUTH was supplied by HEALTHSOUTH, and
all information contained in this Prospectus-Proxy Statement or incorporated
herein by reference with respect to Health Images was supplied by Health Images.
Although neither HEALTHSOUTH nor Health Images has actual knowledge that would
indicate that any statements or information (including financial statements)
relating to the other party contained or incorporated by reference herein are
inaccurate or incomplete, neither HEALTHSOUTH nor Health Images warrants the
accuracy or completeness of such statements or information as they relate to the
other party.
Statements relating to HEALTHSOUTH contained in this Prospectus-Proxy
Statement which are not historical facts are forward-looking statements. In
addition, HEALTHSOUTH, 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 HEALTHSOUTH'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 it is impossible to identify all such factors,
factors which could cause actual results to differ materially from those
estimated by HEALTHSOUTH 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 HEALTHSOUTH's services by government or
private payors, competitive pressures in the healthcare industry and
HEALTHSOUTH's response thereto, HEALTHSOUTH's ability to obtain and retain
favorable arrangements with third-party payors, unanticipated delays in
HEALTHSOUTH'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 HEALTHSOUTH's SEC filings and other public announcements.
3
<PAGE>
Statements relating to Health Images contained in this Prospectus-Proxy
Statement which are not historical facts are forward-looking statements. Such
forward-looking statements are estimates reflecting management's best judgment
based on information currently available and involve a number of risks and
uncertainties. Additionally, there can be no assurance that other factors will
not affect the accuracy of such forward-looking statements. While it is
impossible to identify all such factors, factors which could cause actual
results to vary materially from those estimated by Health Images include, but
are not limited to, changes in federal and state regulation of the healthcare
industry, changes in reimbursements by governmental and private payors, changes
in medical device regulation, technological innovation in the diagnostic imaging
industry and Health Images' ability to respond to such innovation, Health
Images' ability to obtain acceptable arrangements with third-party payors,
changes in competitive pressures in the healthcare industry, general conditions
in the economy and the capital markets, and other factors which may be
identified from time to time in Health Images' SEC filings and other public
announcements.
No person is authorized to give any information or to make any representation
not contained in this Prospectus-Proxy Statement, and, if given or made, such
information or representation should not be relied upon as having been
authorized. Neither the delivery of this Prospectus-Proxy Statement nor any
distribution of the securities to which this Prospectus-Proxy Statement relates
shall, under any circumstances, create any implication that there has been no
change in the information concerning HEALTHSOUTH or Health Images contained in
this Prospectus-Proxy Statement since the date of such information. This
Prospectus-Proxy Statement does not constitute an offer to sell, or a
solicitation of an offer to purchase, any securities other than the securities
to which it relates, or an offer to sell, or a solicitation of an offer to
purchase, the securities offered by this Prospectus-Proxy Statement in any
jurisdiction in which such an offer or solicitation is not lawful.
4
<PAGE>
TABLE OF CONTENTS
PAGE
AVAILABLE INFORMATION ..................................................... 2
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE ......................... 2
SUMMARY OF PROSPECTUS-PROXY STATEMENT...................................... 7
RISK FACTORS............................................................... 18
THE SPECIAL MEETING ....................................................... 18
General .................................................................. 18
Date, Place and Time ..................................................... 18
Record Date; Quorum ...................................................... 18
Vote Required ............................................................ 18
Voting and Revocation of Proxies ......................................... 19
Solicitation of Proxies .................................................. 19
THE MERGER................................................................. 20
Terms of the Merger ...................................................... 20
Background of the Merger ................................................. 20
Reasons for the Merger; Recommendation of Health Images' Board of
Directors ............................................................... 23
Opinion of Financial Advisor to Health Images............................. 24
Effective Time of the Merger ............................................. 28
Exchange of Certificates.................................................. 29
Representations and Warranties............................................ 29
Conditions to the Merger ................................................. 30
Regulatory Approvals ..................................................... 31
Business Pending the Merger .............................................. 32
Waiver and Amendment ..................................................... 32
Termination .............................................................. 33
Break-up Fee; Third Party Bids............................................ 33
Interests of Certain Persons in the Merger ............................... 33
Indemnification........................................................... 34
Accounting Treatment ..................................................... 34
Certain Federal Income Tax Consequences .................................. 34
Resale of HEALTHSOUTH Common Stock by Affiliates ......................... 35
No Appraisal Rights ...................................................... 36
No Solicitation of Transactions........................................... 36
Expenses.................................................................. 36
NYSE Listing.............................................................. 36
SELECTED CONSOLIDATED FINANCIAL DATA -- HEALTHSOUTH........................ 37
SELECTED CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA -- HEALTH
IMAGES.................................................................... 38
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION ........................ 41
BUSINESS OF HEALTHSOUTH ................................................... 51
General................................................................... 51
Company Strategy.......................................................... 51
Patient Care Services: General............................................ 52
Outpatient Rehabilitation Services........................................ 53
Inpatient Rehabilitation Services......................................... 53
Medical Centers........................................................... 53
Surgery Centers........................................................... 53
Other Patient Care Services............................................... 53
Locations................................................................. 54
6
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PAGE
BUSINESS OF HEALTH IMAGES.................................................. 55
General .................................................................. 55
Overview of Diagnostic Imaging Industry .................................. 55
Imaging Modalities ....................................................... 57
Health Images' Position in the Industry .................................. 59
Operations ............................................................... 61
Properties ............................................................... 63
Marketing ................................................................ 65
Information Systems ...................................................... 65
Reimbursement ............................................................ 66
Competition .............................................................. 67
Government Regulation .................................................... 68
Quality Assurance ........................................................ 73
Insurance ................................................................ 73
Employees ................................................................ 73
Legal Proceedings ........................................................ 74
PRINCIPAL STOCKHOLDERS OF HEALTH IMAGES.................................... 75
DESCRIPTION OF CAPITAL STOCK OF HEALTHSOUTH ............................... 76
Common Stock ............................................................. 76
Fair Price Provision ..................................................... 76
Section 203 of the DGCL................................................... 77
Preferred Stock .......................................................... 77
Transfer Agent............................................................ 77
COMPARISON OF RIGHTS OF HEALTH IMAGES AND HEALTHSOUTH
STOCKHOLDERS ............................................................. 78
Classes and Series of Capital Stock....................................... 78
Size and Election of the Board of Directors .............................. 78
Removal of Directors ..................................................... 79
Other Voting Rights....................................................... 79
Conversion and Dissolution................................................ 79
Business Combinations..................................................... 79
Amendment or Repeal of the Certificate of Incorporation .................. 80
Special Meeting of Stockholders........................................... 80
Liability of Directors.................................................... 80
Indemnification of Directors and Officers................................. 81
Stockholder Rights Plan................................................... 81
OPERATIONS AND MANAGEMENT OF HEALTHSOUTH AFTER THE MERGER.................. 83
Operations ............................................................... 83
Management ............................................................... 83
EXPERTS ................................................................... 83
LEGAL MATTERS.............................................................. 84
ADDITIONAL INFORMATION..................................................... 84
Other Business............................................................ 84
Stockholder Proposals..................................................... 84
ANNEXES:
A. Plan and Agreement of Merger .......................................... A-1
B. Opinion of Smith Barney Inc. .......................................... B-1
6
<PAGE>
SUMMARY OF PROSPECTUS-PROXY STATEMENT
The following is a summary of certain information contained elsewhere in
this Prospectus-Proxy Statement. Certain capitalized terms used in this Summary
are defined elsewhere in this Prospectus-Proxy Statement. Reference is made to,
and this Summary is qualified in its entirety by, the more detailed information
contained in this Prospectus-Proxy Statement, the Annexes hereto and the
documents incorporated by reference herein.
THE COMPANIES
HEALTHSOUTH. HEALTHSOUTH is the nation's largest provider of outpatient
surgery and rehabilitative healthcare services. It provides these services
through its national network of outpatient and inpatient rehabilitation
facilities, outpatient surgery centers, medical centers and other healthcare
facilities. HEALTHSOUTH believes that it provides patients, physicians and
payors with high-quality health care services at significantly lower costs than
traditional inpatient hospitals. Additionally, HEALTHSOUTH's national network,
reputation for quality and focus on outcomes has enabled it to secure contracts
with national and regional managed care payors. At December 31, 1996,
HEALTHSOUTH had over 1,000 patient care locations in 50 states. See "BUSINESS OF
HEALTHSOUTH".
At September 30, 1996, HEALTHSOUTH had consolidated assets of approximately
$3,182,772,000 and consolidated stockholders' equity of approximately
$1,397,231,000 and employed approximately 35,000 persons.
HEALTHSOUTH was incorporated under the laws of Delaware in 1984. Its
principal executive offices are located at Two Perimeter Park South, Birmingham,
Alabama 35243, and its telephone number is (205) 967-7116.
Health Images. Health Images is a leading provider of diagnostic imaging
services and one of the largest independent operators of magnetic resonance
imaging ("MRI") centers in the United States. MRI is considered the premier
diagnostic modality for cross-sectional imaging of human tissue. Health Images
operates 49 freestanding diagnostic imaging centers in 13 states in the United
States and six in England. Health Images offers MRI services at all of its
imaging centers. In addition, Health Images provides computerized tomagraphy
("CT") services at 18 of its centers, x-ray services at 19 centers, ultrasound
services at 15 centers, mammography services at 13 centers, nuclear medicine at
seven centers and fluoroscopy at eight centers.
At September 30, 1996, Health Images had consolidated assets of approximately
$185,242,000 and consolidated stockholders' equity of approximately $89,439,000
and employed approximately 1,000 persons.
Health Images was incorporated under the laws of Florida in 1982 and
reincorporated in Delaware in 1989. Its principal executive offices are located
at 5905 Windward Parkway, Alpharetta, Georgia 30202, and its telephone number is
(770) 625-2000.
Hammer Acquisition Corporation. The Subsidiary is a direct, wholly-owned
subsidiary of HEALTHSOUTH and has not engaged in any business activity unrelated
to the Merger. The principal executive offices of the Subsidiary are located at
Two Perimeter Park South, Birmingham, Alabama 35243, and its telephone number is
(205) 967-7116.
THE SPECIAL MEETING
The Special Meeting of Health Images' stockholders (the "Special Meeting") to
consider and vote on a proposal to approve the Plan will be held on , 1997, at
a.m., Eastern Time, at . Only holders of record of Health Images Shares at the
close of business on , 1997 (the "Health Images Record Date"), will be entitled
to notice of and to vote at the Special Meeting. At such date, there were
outstanding and entitled to
7
<PAGE>
vote shares of Health Images Common Stock. Each issued and outstanding Health
Images Share is entitled to one vote on each matter to be presented at the
Special Meeting. For additional information relating to the Special Meeting, see
"THE SPECIAL MEETING".
VOTE REQUIRED
Approval of the Plan by the stockholders of Health Images requires the
affirmative vote of the holders of a majority of the outstanding shares of
Health Images Common Stock entitled to vote thereon. Accordingly, approval of
the Plan at the Special Meeting will require the affirmative vote of the holders
of at least shares of Health Images Common Stock.
As of the Health Images Record Date, directors and executive officers of
Health Images and their affiliates beneficially owned an aggregate of shares of
Health Images Common Stock (excluding shares issuable upon exercise of options),
or approximately % of the Health Images Shares outstanding on such date.
In the event that the Plan is not approved by Health Images stockholders, the
Plan may be terminated by HEALTHSOUTH or Health Images in accordance with its
terms. Such approval is also a condition to HEALTHSOUTH's and Health Images'
obligations to consummate the Merger. See "THE SPECIAL MEETING -- Vote
Required", "THE MERGER -- Conditions to the Merger" and "-- Termination".
THE MERGER
Terms of the Merger. Health Images will be acquired by HEALTHSOUTH pursuant
to and subject to the terms and conditions of the Plan, which provides that at
the effective time of the Merger (the "Effective Time"), the Subsidiary will
merge with and into Health Images with Health Images being the Surviving
Corporation. The Certificate of Incorporation of Health Images and the Bylaws of
the Subsidiary in effect at the Effective Time will govern the Surviving
Corporation until amended or repealed in accordance with applicable law. At the
Effective Time, each outstanding Health Images Share (excluding shares held by
Health Images and any of its subsidiaries) will be converted into the right to
receive 0.446 (the "Exchange Ratio") of a share of HEALTHSOUTH Common Stock (the
"Merger Consideration"). Fractional shares of HEALTHSOUTH Common Stock will not
be issuable in connection with the Merger. Health Images stockholders will
receive cash (without interest) in lieu of fractional shares of HEALTHSOUTH
Common Stock. See "THE MERGER" and "DESCRIPTION OF CAPITAL STOCK OF
HEALTHSOUTH".
Recommendation of the Board of Directors. The Board of Directors of Health
Images has adopted and approved the Plan and has recommended a vote FOR approval
of the Plan. The Board of Directors believes the Plan is fair to and in the best
interests of the stockholders of Health Images.
In reaching its conclusions to approve the Plan and the Merger and to
recommend that the Health Images stockholders vote for the approval and adoption
of the Plan, the Board of Directors of Health Images considered a number of
factors including, without limitation and without assigning relative weights
thereto, the following:
(i) The value of the consideration to be received by Health Images
stockholders in the Merger which, based on the closing price of the
HEALTHSOUTH Common Stock on November 27, 1996 (the last full trading day
prior to the announcement of the Merger) represented a 22% premium over the
closing price of the Health Images Common Stock on November 27, 1996, 32%
over the closing price of Health Images Common Stock four weeks prior to
such date and 44% and 69% over the average price of the Health Images Common
Stock during the previous six and 12 months, respectively;
8
<PAGE>
(ii) The Health Images Board of Directors' belief that the increasing
role of managed care in the healthcare industry threatened the ability of
single services providers (i.e., radiology services in Health Images' case)
to increase market share and unit volumes, particularly in an environment of
declining reimbursements, and in light of the fact that managed care plans
are more likely to contract with entities that can provide a broader range
of healthcare services. Accordingly, the Health Images Board of Directors
believed that the more successful companies in the industry would be
companies that offer a broader range of healthcare services and have strong
nationwide presence and reputations;
(iii) The Health Images Board of Directors' belief that the potential
for increased clinic volumes through the HEALTHSOUTH affiliation, in the
context of the capital intensive nature of the Health Images business,
results in increased economies of scale, lower per unit costs and increased
pricing flexibility;
(iv) The Health Images Board of Directors' belief that there were
significant other synergies available to the combined business, particularly
in reducing general and administrative expenses incurred in operating as two
separate public companies;
(v) The Health Images Board of Directors' belief that companies
operating substantially or exclusively in the diagnostic imaging industry
were not favored by the investment community and, therefore, were not, and
would not be expected in the foreseeable future to be, valued at the same
multiples as companies in the healthcare industry that provided a broader
range of services;
(vi) The fact that the Merger offered an opportunity for Health Images
stockholders to continue, if they so desire, to share in the potential for
long-term growth in the healthcare industry;
(vii) The business reputation and capabilities of HEALTHSOUTH and its
management, HEALTHSOUTH's financial strength, business prospects, market
position and strategic objectives, and the liquidity and historical
performance of HEALTHSOUTH Common Stock;
(viii) The financial presentation of Smith Barney Inc. ("Smith Barney")
delivered to the Board of Directors of Health Images at its special meeting
held on December 1, 1996 and Smith Barney's oral opinion (subsequently
confirmed by delivery of a written opinion dated December 2, 1996) to the
effect that, as of the date of such opinion and based upon and subject to
certain matters set forth in the written opinion, the Exchange Ratio was
fair to the holders of Health Images Common Stock from a financial point of
view (see "THE MERGER -- Opinion of Financial Advisor to Health Images");
(ix) The Health Images Board of Directors' familiarity with Health
Images' business, prospects, financial conditions, results of operations,
assets and trends in the healthcare industry;
(x) The Health Images Board of Directors' belief that, at the time the
Merger was under consideration, the strength of Health Images' business and
market prices of its stock coupled with the uncertainties facing the
healthcare industry made the price that could be obtained by the Health
Images stockholders more favorable than what the stockholders may obtain by
continuing to operate the business as a stand-alone entity; and
(xi) The terms and conditions of the proposed Merger, including the
nature and extent of Health Images' representations, warranties and
covenants, the conditions to the parties' respective obligations and the
circumstances under which Health Images may terminate the Plan if it
receives a higher offer.
9
<PAGE>
See "THE MERGER -- Reasons for the Merger; Recommendation of Health Images'
Board of Directors".
Opinion of Financial Advisor to Health Images. Smith Barney has acted as
financial advisor to Health Images in connection with the Merger and has
delivered to the Board of Directors of Health Images a written opinion dated
December 2, 1996 to the effect that, as of the date of such opinion and based
upon and subject to certain matters stated therein, the Exchange Ratio was fair,
from a financial point of view, to the holders of Health Images Common Stock.
The full text of the written opinion of Smith Barney dated December 2, 1996,
which sets forth the assumptions made, matters considered and limitations on the
review undertaken, is attached as Annex B to this Prospectus-Proxy Statement and
should be read carefully in its entirety. The opinion of Smith Barney is
directed only to the fairness of the Exchange Ratio from a financial point of
view, does not address any other aspect of the Merger or related transactions
and does not constitute a recommendation to any stockholder as to how such
stockholder should vote at the Special Meeting. See "THE MERGER -- Opinion of
Financial Advisor to Health Images".
Effective Time of the Merger. The Merger will become effective upon the
filing of a Certificate of Merger by the Subsidiary and Health Images under the
General Corporation Law of the State of Delaware (the "DGCL"), or at such later
time as may be specified in such Certificate of Merger. The Plan requires that
this filing be made, subject to satisfaction of the conditions to the respective
obligations of each party to consummate the Merger, no later than two business
days after satisfaction or waiver of the various conditions to the Merger set
forth in the Plan, or at such other time as may be agreed by HEALTHSOUTH and
Health Images. See "THE MERGER -- Effective Time of the Merger" and "--
Conditions to the Merger".
Exchange of Certificates. As soon as reasonably practicable after the
Effective Time, transmittal materials will be mailed to each holder of record of
Health Images Shares for use in exchanging such holder's stock certificates for
certificates evidencing shares of HEALTHSOUTH Common Stock and for receiving
cash in lieu of fractional shares and any dividends or other distributions to
which such holder is entitled as a result of the Merger. STOCKHOLDERS SHOULD NOT
SEND ANY STOCK CERTIFICATES WITH THEIR PROXY CARDS. See "THE MERGER -- Exchange
of Certificates".
Representations and Warranties. The Plan contains certain representations and
warranties made by each of the parties thereto. See "THE MERGER --
Representations and Warranties".
Conditions to the Merger. The obligation of each of HEALTHSOUTH, the
Subsidiary and Health Images to consummate the Merger is subject to certain
conditions, including approval of the Plan by the Health Images stockholders.
See "THE MERGER -- Conditions to the Merger".
Regulatory Approvals. The Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"), provides that certain business mergers
(including the Merger) may not be consummated until certain information has been
furnished to the Department of Justice (the "DOJ") and the Federal Trade
Commission (the "FTC") and certain waiting period requirements have been
satisfied. On January 7, 1997, HEALTHSOUTH and Health Images made their
respective filings with the DOJ and the FTC with respect to the Plan. Under the
HSR Act, the filings commenced a waiting period of up to 30 days during which
the Merger cannot be consummated, which waiting period will expire on February
6, 1997, unless extended by a request for additional information.
Notwithstanding the termination of the HSR Act waiting period, at any time
before or after the Effective Time, the FTC, the DOJ or others could take action
under the antitrust laws, including seeking to enjoin the consummation of the
Merger or seeking the divestiture by HEALTHSOUTH of all or any part of the stock
or assets of Health Images. There can be no assurance that a challenge to the
Merger on antitrust grounds will not be made or, if such a challenge were made,
that it would not be successful. The operations of each Company also are
10
<PAGE>
subject to a substantial body of federal, state, local and accrediting body
laws, rules and regulations relating to the conduct, licensing and development
of healthcare businesses and facilities. See "THE MERGER -- Regulatory
Approvals".
Business Pending the Merger. The Plan provides that, until the Effective
Time, except as provided in the Plan, Health Images will use its reasonable best
efforts to preserve intact its present business organizations, to keep available
to HEALTHSOUTH and the Surviving Corporation the services of its present
employees and to preserve the goodwill of customers, suppliers and others having
business dealings with it. See "THE MERGER -- Business Pending the Merger".
Amendment. The Plan provides that, at any time prior to the Effective Time,
the parties may, under certain circumstances, amend or otherwise change the
Plan. See "THE MERGER -- Waiver and Amendment".
Termination. The Plan may be terminated at any time prior to the Effective
Time, whether before or after approval of the Plan by the stockholders of Health
Images, under certain circumstances which are set forth in the Plan.
See "THE MERGER -- Termination".
Break-up Fee; Third Party Bids. If the Plan is terminated by Health Images
pursuant to a determination by Health Images' Board of Directors, in the
exercise of its fiduciary duties under applicable law, not to recommend the
Merger to the holders of Health Images Shares, or the Health Images Board of
Directors shall have withdrawn such recommendation, or shall have approved,
recommended or endorsed any Acquisition Transaction (as defined in the Plan)
other than the Plan, and within one year after the effective date of such
termination Health Images is the subject of a Third Party Acquisition Event (as
defined in the Plan), then at the time of consummation of such a Third Party
Acquisition Event Health Images shall pay to HEALTHSOUTH a break-up fee of
$10,000,000. See "THE MERGER -- Break-up Fee; Third Party Bids".
Interests of Certain Persons in the Merger. In considering the recommendation
of the Board of Directors of Health Images with respect to the Plan and the
transactions contemplated thereby, stockholders of Health Images should be aware
that certain members of the management of Health Images and its Board of
Directors have certain interests in the Merger in addition to the interests of
stockholders generally.
At the Closing, HEALTHSOUTH has agreed to enter into a Consulting and
Non-Competition Agreement with Robert D. Carl, III, Chairman of the Board,
President and Chief Executive Officer of Health Images, pursuant to which Mr.
Carl will agree to provide certain consulting services to HEALTHSOUTH and will
agree not to compete with the diagnostic imaging business of HEALTHSOUTH for a
period of three years. Under such agreement, HEALTHSOUTH will pay Mr. Carl a fee
of $350,000 a year for the three-year period. The fees payable to Mr. Carl will
be in lieu of any payments Mr. Carl would be entitled to receive as a result of
the Merger pursuant to his current employment and non-competition agreement with
Health Images.
In addition, pursuant to the terms of Health Images' stock option plans,
Health Images stock options which are not fully vested prior to the Effective
Time will accelerate and vest in full as a result of the Merger at the Effective
Time. Certain directors and members of Health Images management hold such
options.
See "THE MERGER -- Interests of Certain Persons in the Merger".
Accounting Treatment. It is intended that the Merger will be accounted for as
a pooling of interests. It is a condition to the consummation of the Merger that
each of HEALTHSOUTH and Health Images receive a letter from Ernst & Young LLP
regarding that firm's concurrence with the conclusions of the managements of
HEALTHSOUTH and Health Images, respectively, as to the appropriateness of
pooling-of-interests accounting for the Merger under Accounting Principles Board
Opinion No. 16 ("APB 16") if closed and consummated in accordance with the Plan.
See "THE MERGER -- Accounting Treatment" and "PRO FORMA CONDENSED FINANCIAL
INFORMATION".
11
<PAGE>
Certain Federal Income Tax Consequences. The Merger is intended to qualify as
a reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"). If the Merger so qualifies, no gain or
loss will be recognized by holders of Health Images Shares who hold such shares
as capital assets, upon their receipt of HEALTHSOUTH Common Stock in exchange
for their Health Images Shares, except with respect to cash received in lieu of
fractional shares. The obligation of Health Images and HEALTHSOUTH to consummate
the Merger is conditioned upon their receipt of opinions from their respective
counsel to the effect that the Merger will qualify as a reorganization within
the meaning of Section 368(a) of the Code. Each holder of Health Images Shares
is urged to consult his or her personal tax and financial advisors concerning
the federal income tax consequences of the Merger, as well as any state, local,
foreign or other tax consequences of the Merger, based upon such holder's own
particular facts and circumstances. See "THE MERGER -- Certain Federal Income
Tax Consequences".
Resale Restrictions. All shares of HEALTHSOUTH Common Stock received by
Health Images stockholders in the Merger will be freely transferable, except
that shares of HEALTHSOUTH Common Stock received by persons who are deemed to be
"affiliates" (as such term is defined under the Securities Act) of Health Images
at the time of the Special Meeting may be resold by them only in certain
permitted circumstances. See "THE MERGER -- Resale of HEALTHSOUTH Common Stock
by Affiliates".
Appraisal Rights. Holders of Health Images Common Stock are not entitled to
appraisal rights under the DGCL with respect to the Merger. See "THE MERGER --
No Appraisal Rights".
NYSE Listing. A listing application will be filed with the NYSE to list the
shares of HEALTHSOUTH Common Stock to be issued to the Health Images
stockholders in the Merger. Although no assurance can be given that the NYSE
will accept such shares of HEALTHSOUTH Common Stock for listing, HEALTHSOUTH and
Health Images anticipate that these shares will qualify for listing. It is a
condition to the obligation of HEALTHSOUTH, the Subsidiary and Health Images to
consummate the Merger that such shares of HEALTHSOUTH Common Stock be approved
for listing on the NYSE upon official notice of issuance at the Effective Time.
See "THE MERGER -- NYSE Listing".
MARKET AND MARKET PRICE
The HEALTHSOUTH Common Stock is listed under the symbol HRC on the NYSE. Set
forth below are the closing prices per share of HEALTHSOUTH Common Stock on the
NYSE on (i) November 29, 1996, the last business day preceding public
announcement of the Merger, and (ii) January , 1997:
MARKET PRICE
PER SHARE OF
HEALTHSOUTH
DATE COMMON STOCK
- ---------------------- -----------------
November 29, 1996 ... $37.63
January , 1997 ...... $
Health Images Common Stock is listed under the symbol HII on the NYSE. Set
forth below are the closing prices per share of Health Images Common Stock on
the NYSE on (i) November 29, 1996, the last business day preceding public
announcement of the Merger, and (ii) January , 1997.
MARKET PRICE
PER SHARE OF
HEALTH IMAGES
DATE COMMON STOCK
- ---------------------- ------------------
November 29, 1996 ... $15.63
January , 1997 ...... $
12
<PAGE>
The following table sets forth certain information as to the high and low
reported sale prices per share of HEALTHSOUTH Common Stock for the periods
indicated. The prices for HEALTHSOUTH Common Stock are as reported on the NYSE
Composite Transactions Tape. HEALTHSOUTH has never paid dividends on its capital
stock (although a company acquired by HEALTHSOUTH in a pooling-of-interests
merger has paid cash dividends in the past) . All prices shown have been
adjusted for a two-for-one stock split effected in the form of a 100% stock
dividend paid on April 17, 1995.
HEALTHSOUTH
COMMON STOCK
------------------
HIGH LOW
---- ---
1995
First Quarter ........................ $20.44 $18.06
Second Quarter ....................... 21.63 16.32
Third Quarter ........................ 25.75 17.25
Fourth Quarter ....................... 32.38 22.50
1996
First Quarter ........................ $38.13 $27.00
Second Quarter ....................... 38.63 32.32
Third Quarter ........................ 38.63 28.50
Fourth Quarter........................ 39.75 35.13
1997
First Quarter (through January ,
1997)................................ $ $
13
<PAGE>
The following table sets forth certain information as to the high and low
reported sale prices per share of Health Images Common Stock for the periods
indicated and the dividends per share declared on the Health Images Common Stock
for such periods. The prices for Health Images Common Stock are as reported on
the NYSE Composite Transactions Tape.
HEALTH IMAGES
COMMON STOCK
----------------------------
DIVIDENDS
HIGH LOW PER SHARE
------- -------- -----------
1995
First Quarter...................... $ 6.13 $ 4.88 $.020
Second Quarter..................... 6.25 4.75 .020
Third Quarter...................... 7.63 5.50 .020
Fourth Quarter..................... 8.00 6.75 .025
1996
First Quarter...................... $ 9.13 $ 6.88 $.025
Second Quarter..................... 11.63 7.25 .025
Third Quarter...................... 13.63 9.25 .025
Fourth Quarter..................... 16.75 11.75 .030
1997
First Quarter (through January
,1997............................ $ $ --
As of ______, 1997, there were approximately _____ record holders of
HEALTHSOUTH Common Stock. As of the Health Images Record Date, there were
approximately record holders of Health Images Common Stock.
Holders of Health Images Shares are advised to obtain current market
quotations for HEALTHSOUTH Common Stock and Health Images Common Stock. No
assurance can be given as to the market price of HEALTHSOUTH Common Stock at the
Effective Time or at any other time.
OPERATIONS AND MANAGEMENT OF HEALTHSOUTH AFTER THE MERGER
Pursuant to the Plan, following the Effective Time, Health Images will be a
wholly-owned subsidiary of HEALTHSOUTH, and all of Health Images' subsidiaries
and affiliates will be indirect subsidiaries and affiliates of HEALTHSOUTH.
HEALTHSOUTH will continue its operations as prior to the Merger and will
continue to be managed by the same Board of Directors and executive officers.
See "OPERATIONS AND MANAGEMENT OF HEALTHSOUTH AFTER THE MERGER".
14
<PAGE>
COMPARATIVE PER SHARE INFORMATION
The following summary presents selected comparative per share information (i)
for HEALTHSOUTH on a historical basis in comparison with pro forma equivalent
information giving effect to the Merger on a pooling-of-interests basis, and
(ii) for Health Images on a historical basis in comparison with its pro forma
equivalent information after giving effect to the Merger, including receipt of
shares of HEALTHSOUTH Common Stock to be issued in exchange for Health Images
Shares in accordance with the Exchange Ratio. This financial information should
be read in conjunction with the historical consolidated financial statements of
HEALTHSOUTH and Health Images and the related notes thereto contained elsewhere
herein or in documents incorporated herein by reference, and in conjunction with
the unaudited pro forma financial information appearing elsewhere in this
Prospectus-Proxy Statement. See "INCORPORATION OF CERTAIN INFORMATION BY
REFERENCE" and "PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION".
HEALTHSOUTH has not paid cash dividends since inception (although a company
acquired by HEALTHSOUTH in a pooling-of-interests merger has paid cash dividends
in the past). It is anticipated that HEALTHSOUTH will retain all earnings for
use in the expansion of the business and therefore does not anticipate paying
any cash dividends in the foreseeable future. The payment of future dividends
will be at the discretion of the Board of Directors of HEALTHSOUTH and will
depend, among other things, upon HEALTHSOUTH's earnings, capital requirements,
financial condition and debt covenants.
The following information is not necessarily indicative of the combined
results of operations or combined financial position that would have resulted
had the Merger been consummated at the beginning of the periods indicated, nor
is it necessarily indicative of the combined results of operations in future
periods or future combined financial position.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ----------------
1993 1994 1995 1995 1996
-------- --------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income per common share:
HEALTHSOUTH (1)
Historical (primary) ................. $0.46 $ 0.63 $0.62 $0.60 $0.96
Historical (fully diluted)(2) ........ N/A 0.63 0.62 0.60 0.94
Pro forma combined (primary) ......... 0.40 0.59 0.63 0.60 0.96
Pro forma combined (fully diluted)(2) N/A 0.59 0.63 0.59 0.94
Health Images
Historical (primary).................. $0.32 $(0.10) $0.49 $0.32 $0.57
Pro forma equivalent (primary)(3)..... 0.18 0.26 0.28 0.27 0.43
Pro forma equivalent (fully
diluted)(3).......................... N/A 0.26 0.28 0.26 0.42
</TABLE>
AT SEPTEMBER 30,
1996
-----
(UNAUDITED)
Stockholders' equity per weighted average common
and common equivalent share outstanding:
HEALTHSOUTH - historical........................... $8.43
HEALTHSOUTH - pro forma combined................... 8.61
Health Images - historical ........................ 7.65
Health Images - pro forma equivalent (3)........... 3.84
- ------------
(1) Adjusted to reflect a two-for-one stock split effected in the form of a 100%
stock dividend paid on April 17, 1995.
(2) Fully-diluted earnings per share in 1994 and 1995 and for the nine months
ended September 30, 1995 and 1996 reflect shares reserved for issuance upon
exercise of dilutive stock options and shares reserved for issuance upon
conversion of HEALTHSOUTH's 5% Convertible Subordinated Debentures Due 2001.
(3) Health Images pro forma equivalent per share data have been calculated by
multiplying the pro forma HEALTHSOUTH amounts by 0.446.
15
<PAGE>
HEALTHSOUTH'S AND HEALTH IMAGES'
SELECTED PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following selected pro forma financial information for the combined
Companies gives effect to the Merger as a pooling of interests. All of the
following selected pro forma financial information should be read in conjunction
with the pro forma financial information, including the notes thereto, appearing
elsewhere in this Prospectus-Proxy Statement. See "PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION". The pro forma financial information set forth in this
Prospectus-Proxy Statement is not necessarily indicative of the results that
actually would have occurred had the Merger been consummated on the dates
indicated or that may be obtained in the future.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------------- -------------------------
1993 1994 (5) 1995 (5) 1995 (5) 1996
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Income Statement Data (1): .......................
Revenues ........................................ $1,092,721 $1,913,212 $2,195,444 $1,621,024 $1,921,688
Operating expenses: .............................
Operating units ................................ 746,046 1,352,817 1,501,944 1,118,297 1,256,503
Corporate general and administrative ........... 47,345 72,217 70,111 49,612 59,994
Provision for doubtful accounts ................. 23,470 37,779 43,387 32,345 44,000
Depreciation and amortization ................... 77,261 140,166 165,162 121,658 151,808
Interest expense ................................ 26,058 96,185 110,811 83,062 72,848
Interest income ................................. (6,199) (6,660) (8,013) (6,347) (4,556)
Merger and acquisition related expenses ......... 333 6,520 34,159 29,194 34,515
NME Selected Hospitals Acquisition related
expense ........................................ 49,742 0 0 0 0
Gain on sale of partnership interest............. (1,400) 0 0 0 0
Gain on sale of MCA Stock ....................... 0 (7,727) 0 0 0
Loss on impairment of assets .................... 6,675 10,500 53,549 11,192 0
Loss on abandonment of computer project ......... 0 4,500 0 0 0
Loss on disposal of surgery centers ............. 0 13,197 0 0 0
------------ ------------ ------------ ------------ ------------
969,331 1,719,494 1,971,110 1,439,013 1,615,112
------------ ------------ ------------ ------------ ------------
Income before income taxes and minority
interests ...................................... 123,390 193,718 224,334 182,011 306,576
Provision for income taxes ...................... 40,955 68,308 80,418 58,691 101,646
------------ ------------ ------------ ------------ ------------
82,435 125,410 143,916 123,320 204,930
Minority interests .............................. 29,549 32,110 43,842 31,350 38,608
------------ ------------ ------------ ------------ ------------
Income from continuing operations ............... 52,886 93,300 100,074 91,970 166,322
Income (loss) from discontinued operations ...... 2,218 (6,443) (1,162) (1,163) 0
------------ ------------ ------------ ------------ ------------
Net income ...................................... $ 55,104 $ 86,857 $ 98,912 $ 90,807 $ 166,322
============ ============ ============ ============ ============
Weighted average common and common equivalent
shares outstanding (2) ......................... 139,645 147,640 155,913 151,068 173,105
============ ============ ============ ============ ============
Net income per common and common
equivalent share: (2) ..........................
Continuing operations ......................... $ 0.38 $ 0.63 $ 0.64 $ 0.61 $ 0.96
Discountinued operations ...................... 0.02 (0.04) (0.01) (0.01) 0
------------ ------------ ------------ ------------ ------------
$ 0.40 $ 0.59 $ 0.63 $ 0.60 $ 0.96
============ ============ ============ ============ ============
Net income per common share-- assuming full
dilution (2)(3) ................................ N/A $ 0.59 $ 0.63 $ 0.60 $ 0.94
============ ============ ============ ============ ============
</TABLE>
16
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<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------------- --------------
1993 1994 1995 1996
------------ ------------ ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance Sheet Data (1):
Cash and marketable
securities ................. $ 155,331 $ 134,466 $ 162,004 $ 131,211
Working capital ............. 305,006 313,149 412,989 467,583
Total assets ................ 2,020,096 2,372,780 3,128,466 3,386,022
Long-term debt (4) .......... 1,031,285 1,164,835 1,453,017 1,525,957
Stockholders' equity ........ 740,457 850,286 1,284,086 1,490,971
</TABLE>
- -----------
(1) In addition to Health Images, reflects combination of HEALTHSOUTH, ReLife,
Inc. ("ReLife"), Surgical Health Corporation (" SHC"), Sutter Surgery
Centers, Inc. ("SSCI"), Surgical Care Affiliates, Inc. ("SCA"), Advantage
Health Corporation ("Advantage Health") and ReadiCare, Inc. ("ReadiCare")
for all periods presented, as HEALTHSOUTH acquired ReLife in December 1994,
SHC in June 1995, SSCI in October 1995, SCA in January 1996, Advantage
Health in March 1996 and ReadiCare in December 1996 in transactions
accounted for as poolings of interests.
(2) Adjusted to reflect a two-for-one stock split effected in the form of a
100% stock dividend paid on April 17, 1995.
(3) Fully-diluted earnings per share reflects shares reserved for issuance upon
conversion of HEALTHSOUTH's 5% Convertible Subordinated Debentures Due
2001, where applicable.
(4) Includes current portion of long-term debt.
(5) Gives effect to the NovaCare Rehabilitation Hospitals Acquisition as if the
purchase had occurred on January 1, 1994. See "PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION".
17
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus-Proxy Statement, the
following should be considered carefully by holders of Health Images Shares.
Regulation. As a result of the continued escalation of healthcare costs and
the inability of many individuals to obtain health insurance, numerous proposals
have been or may be introduced in the United States Congress and state
legislatures relating to healthcare reform. There can be no assurance as to the
ultimate content, timing or effect of any healthcare reform legislation, nor is
it possible at this time to estimate the impact of potential legislation, which
may be material, on HEALTHSOUTH or on the combined Companies. HEALTHSOUTH is
also subject, and the combined Companies will be subject, to various other types
of regulation at the federal and state levels, including, but not limited to,
licensure and certification laws, Certificate of Need laws and laws relating to
financial relationships among providers of healthcare services, Medicare fraud
and abuse and physician self-referral. See "BUSINESS OF HEALTH IMAGES --
Government Regulation" and "INCORPORATION OF CERTAIN INFORMATION BY REFERENCE".
THE SPECIAL MEETING
GENERAL
This Prospectus-Proxy Statement is being furnished to holders of Health
Images Shares in connection with the solicitation of proxies by the Board of
Directors of Health Images for use at the Special Meeting to consider and vote
upon a proposal to approve the Plan and to transact such other business as may
properly come before the Special Meeting or any adjournments or postponements
thereof.
Each copy of this Prospectus-Proxy Statement mailed to holders of Health
Images Common Stock is accompanied by a form of Proxy for use at the Special
Meeting.
This Prospectus-Proxy Statement is also furnished to holders of Health Images
Shares as a Prospectus in connection with the issuance to them of the shares of
HEALTHSOUTH Common Stock upon consummation of the Merger.
DATE, PLACE AND TIME
The Special Meeting will be held at , on , 1997 at a.m., Eastern Time.
RECORD DATE; QUORUM
The Board of Directors of Health Images has fixed the close of business on ,
1997, as the Health Images Record Date for the determination of holders
of Health Images Shares entitled to receive notice of and to vote at the Special
Meeting. The presence, in person or by proxy, of the holders of Health Images
Shares entitled to cast a majority of the votes entitled to be cast at the
Special Meeting will constitute a quorum at the Special Meeting.
VOTE REQUIRED
As of the Health Images Record Date, there were outstanding and entitled to
vote shares of Health Images Common Stock. Each of such Health Images Shares is
entitled to one vote on each matter that comes before the Special Meeting.
Approval of the Plan will require the affirmative vote of the holders of a
majority of the outstanding shares of Health Images Common Stock entitled to
vote at the Special Meeting. Accordingly, approval of the Plan will require the
affirmative vote of the holders of at least shares of Health Images Common
Stock.
As of the Health Images Record Date, Health Images' directors and executive
officers and their affiliates beneficially owned an aggregate of
shares, or approximately % of the outstanding shares, of Health Images
Common Stock outstanding on such date (excluding shares issuable upon exercise
of options).
18
<PAGE>
By the vote of the members of the Health Images Board of Directors at a
special meeting held on December 1, 1996, the Health Images Board of Directors
determined that the proposed Merger, and the terms and conditions of the Plan,
were in the best interests of Health Images and its stockholders. The Plan and
the Merger were adopted and approved unanimously by the members of the Health
Images Board of Directors, who also unanimously resolved to recommend that the
stockholders of Health Images vote FOR approval of the Plan.
In the event that the Plan is not approved by Health Images stockholders, the
Plan may be terminated in accordance with its terms. See "THE MERGER --
Termination".
VOTING AND REVOCATION OF PROXIES
Health Images Shares represented by a Proxy properly signed and received at
or prior to the Special Meeting, unless subsequently revoked, will be voted in
accordance with the instructions thereon. If a Proxy for the Special Meeting is
properly executed and returned without indicating any voting instructions,
Health Images Shares represented by the Proxy will be voted FOR approval of the
Plan. Any Proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before the Proxy is voted by the filing of an instrument
revoking it or of a duly executed Proxy bearing a later date with the Secretary
of Health Images, prior to or at the Special Meeting, or by voting in person at
the Special Meeting. Attendance at the Special Meeting will not in and of itself
constitute a revocation of a Proxy. Only votes cast for approval of the Plan or
other matters constitute affirmative votes. Abstentions and broker non-votes
will, therefore, have the same effect as votes against approval of the Plan with
respect to the Special Meeting.
The Board of Directors of Health Images is not aware of any business to be
acted upon at the Special Meeting other than as described herein. If, however,
other matters are properly brought before the Special Meeting, or any
adjournments or postponements thereof, the persons appointed as proxies will
have discretion to vote or act thereon according to their best judgment and
subject to applicable rules of the SEC and the DGCL.
SOLICITATION OF PROXIES
In addition to solicitation by mail, directors, officers and employees of
Health Images, who will not be specifically compensated for such services, may
solicit proxies from the stockholders of Health Images, personally or by
telephone or telegram or other forms of communication. Brokerage houses,
nominees, fiduciaries and other custodians will be requested to forward
soliciting materials to beneficial owners and will be reimbursed for their
reasonable expenses incurred in doing so.
STOCKHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY CARDS. THE
PROCEDURE FOR THE EXCHANGE OF SHARES AFTER THE MERGER IS CONSUMMATED IS SET
FORTH ELSEWHERE IN THIS PROSPECTUS-PROXY STATEMENT. SEE "THE MERGER -- EXCHANGE
OF CERTIFICATES".
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<PAGE>
THE MERGER
The description of the Merger contained in this Prospectus-Proxy Statement
summarizes the principal provisions of the Plan; it is not complete and is
qualified in its entirety by reference to the Plan, the full text of which is
attached hereto as Annex A. All Health Images stockholders are urged to read
Annex A in its entirety.
TERMS OF THE MERGER
The acquisition of Health Images by HEALTHSOUTH will be effected by means of
the merger of the Subsidiary with and into Health Images, with Health Images
being the Surviving Corporation. The Certificate of Incorporation of Health
Images (the "Health Images Certificate") shall become the Certificate of
Incorporation of the Surviving Corporation from and after the Effective Time and
until thereafter amended in accordance with applicable law. The Bylaws of the
Subsidiary as in effect at the Effective Time will govern the Surviving
Corporation until amended or repealed in accordance with applicable law. At the
Effective Time, Health Images shall continue as the Surviving Corporation under
the name "Health Images, Inc.".
At the Effective Time, each outstanding Health Images Share (excluding shares
held by Health Images and any of its subsidiaries, which shall automatically be
cancelled and retired) will be converted into the right to receive 0.446 of a
share of HEALTHSOUTH Common Stock, as may be adjusted as provided below (the
"Exchange Ratio").
As of the Effective Time, all outstanding Health Images Shares shall
automatically be cancelled and retired and shall cease to exist, and each holder
of a certificate representing such shares shall cease to have any rights with
respect thereto, except the right to receive shares of HEALTHSOUTH Common Stock,
cash (without interest) in lieu of fractional shares and any dividends or other
distributions to which such holder is entitled as a result of the Merger. Each
Health Images Share that is owned by Health Images or any subsidiary of Health
Images shall automatically be cancelled and retired and shall cease to exist,
and no consideration shall be delivered in exchange therefor.
Based upon the number of shares of HEALTHSOUTH Common Stock, excluding shares
obtainable upon exercise of options and convertible securities, outstanding as
of , 1996, the holders of Health Images Shares will receive in the
aggregate approximately % of the outstanding shares of HEALTHSOUTH Common Stock
anticipated to be outstanding immediately after the Effective Time.
BACKGROUND OF THE MERGER
Health Images historically grew its business primarily through development of
new magnetic resonance imaging centers, selected acquisitions of imaging
facilities and the generation of additional revenues from existing centers.
However, the management of Health Images has also considered from time to time
other opportunities to enhance stockholder value, including possible
acquisitions of other diagnostic imaging companies or groups of imaging centers
and business combinations with other companies in the healthcare industry. The
management of Health Images has reviewed such opportunities with the Health
Images Board of Directors from time to time but, prior to the decision to merge
with HEALTHSOUTH, only one significant combination had met Health Images'
criteria of providing solid operating assets complementary to Health Images'
current business at a commercially reasonable price. That combination was
effected in April 1995, when Health Images completed the purchase of the assets
and business of 15 multi-modality diagnostic imaging centers (the "MedAlliance
Centers Acquisition") from MedAlliance, Inc. ("MedAlliance"), the largest
acquisition in Health Images' history.
In late September and early October 1996, senior management began considering
the possibility of a business combination with a publicly held company ("Company
A") that owns and operates diagnostic imaging centers, after hearing Company A's
presentation at a healthcare conference in late September 1996. In addition, at
about the same time, Mr. Carl learned that HEALTHSOUTH might be interested in
acquiring Health Images. In this context, in early October 1996, Mr. Carl
authorized Smith Barney to contact HEALTHSOUTH to assess HEALTHSOUTH's level of
interest in Health Images. At a special
20
<PAGE>
meeting of the Health Images Board of Directors held on October 15, 1996 to
consider a secondary offering of Health Images Common Stock, Mr. Carl advised
the Board of Directors that Company A was interested in a business combination
with Health Images and that HEALTHSOUTH might be interested in acquiring Health
Images as well.
On October 25, 1996, Mr. Carl met with Company A's Chairman and Chief
Executive Officer and discussed, among other things, the possibility of a
transaction between the two companies. At such meeting, Mr. Carl stated that
Health Images might be interested in pursuing a transaction with Company A at a
price level of about $20.00 per share of Health Images Common Stock, at least
half of which would have to be in cash.
In the meantime, representatives of Smith Barney, as instructed by Health
Images, had contacted HEALTHSOUTH on behalf of Health Images to determine
whether HEALTHSOUTH would be interested in a transaction with Health Images. As
a result of such contacts, on October 31, 1996, senior executives of Health
Images and representatives of Smith Barney met with HEALTHSOUTH executives and
discussed the possibility of a transaction between HEALTHSOUTH and Health
Images. Following this meeting, Health Images entered into a confidentiality
agreement with HEALTHSOUTH pursuant to which the parties agreed, among other
things, to exchange non-public information for due diligence review purposes.
On November 1, 1996, Richard M. Scrushy, Chairman of the Board and Chief
Executive Officer of HEALTHSOUTH, and Michael D. Martin, Executive Vice
President and Treasurer of HEALTHSOUTH, telephoned Mr. Carl and informed him,
among other things, that management of HEALTHSOUTH believed that a transaction
with Health Images would be advisable and that HEALTHSOUTH management was
working on determining an appropriate purchase price to propose to Health
Images' stockholders in a transaction between the two companies.
On November 4, 1996, Company A submitted to Health Images a preliminary
proposal for the acquisition of Health Images in a tax-free pooling of interests
transaction pursuant to which Health Images' stockholders would receive Company
A stock representing $17.25 per share of Health Images Common Stock.
On November 6, 1996, Health Images received from HEALTHSOUTH a letter
expressing HEALTHSOUTH's interest in acquiring Health Images in a tax-free
pooling of interests transaction in which Health Images' stockholders would
receive HEALTHSOUTH Common Stock representing a value of between $16.00 to
$17.00 per share of Health Images Common Stock. During the following three days,
representatives of Health Images negotiated with HEALTHSOUTH the terms of a
preliminary term sheet for a possible transaction between the two companies to
be presented to the Health Images Board of Directors for consideration. This
preliminary term sheet, prepared on Saturday, November 9, 1996 based on these
discussions, contained a proposed exchange ratio of 0.446 of a share of
HEALTHSOUTH Common Stock for each share of Health Images Common Stock,
representing $17.50 per share in value based on the closing price of the
HEALTHSOUTH Common Stock on Friday, November 8, 1996.
On November 12, 1996, Health Images executives and representatives of Smith
Barney met with Company A executives and its financial advisor. In connection
with this meeting, Health Images entered into a confidentiality agreement with
Company A providing, among other things, for the exchange of non-public
information between the two companies for preliminary due diligence review
purposes.
On November 14, 1996, the Board of Directors of Health Images held a special
meeting during which Mr. Carl and Smith Barney representatives reported on their
discussions with HEALTHSOUTH and Company A representatives. At this meeting,
Smith Barney reviewed with the directors certain publicly available information
concerning HEALTHSOUTH and Company A and certain preliminary pro forma financial
information illustrating the potential financial effect on HEALTHSOUTH and
Company A, respectively, of a transaction upon the respective terms then under
discussion. The HEALTHSOUTH materials contained a preliminary term sheet
providing for the acquisition of Health Images by HEALTHSOUTH in a tax-free
pooling-of-interests transaction in which Health Images stockholders would
receive 0.446 of a share of HEALTHSOUTH Common Stock for
21
<PAGE>
each share of Health Images Common Stock, representing $17.39 in value based on
the closing price of the HEALTHSOUTH Common Stock on November 13, 1996. In
addition, Company A executives made a presentation to the Health Images Board of
Directors and Company A's financial advisor reviewed with the directors certain
publicly available information concerning Company A and certain preliminary pro
forma financial information illustrating the potential financial effect of a
transaction between the two companies on the terms of a revised proposal.
Pursuant to the revised proposal, Company A would acquire Health Images in a
tax-free pooling-of-interests transaction in which Health Images' stockholders
would receive Company A stock representing a value of $18.00 per share of Health
Images Common Stock. The revised proposal required Health Images to negotiate
exclusively with Company A for a period of 14 days and provided that, if due
diligence were satisfactorily completed and Health Images decided not to enter
into a definitive agreement with Company A, Health Images would pay Company A a
"break-up" fee of $3 million plus out-of-pocket expenses. Company A's
representatives informed the Health Images Board of Directors that Company A's
proposal would remain open until 5:00 p.m. the following day, November 15, 1996.
On November 15, 1996, the Health Images Board of Directors held a special
meeting to consider Company A's proposal and decide on a course of action given
the two acquisition proposals. The consensus among the directors was that it
would be premature to commit to a transaction with Company A as required by its
proposal regardless of any preference between a transaction with Company A or
one with HEALTHSOUTH. In addition, the directors' view was that if the exchange
ratios proposed by the two companies reflected relatively similar dollar amounts
payable in stock, HEALTHSOUTH's substantially larger size, the liquidity of its
stock and the fact that its business was diversified made a transaction with
HEALTHSOUTH more attractive than one with Company A. The directors were
especially concerned about the fact that Company A's proposal, if accepted,
would have precluded further discussions with HEALTHSOUTH and would have
provided for a penalty if Health Images did not enter into a definitive
agreement with Company A. Therefore, the Health Images Board of Directors
determined not to accept Company A's proposal. In addition, the Health Images
Board of Directors determined to continue discussions with HEALTHSOUTH and, to
the extent Company A was prepared to do so, with Company A as well. The
directors instructed representatives of Smith Barney, however, to attempt to
negotiate an increase in the proposed exchange ratio to raise the value of
HEALTHSOUTH's proposal by $0.50 per share.
Health Images and HEALTHSOUTH executives met again on November 19, 1996. At
this meeting, HEALTHSOUTH executives were provided information concerning Health
Images and its business and held due diligence discussions with Health Images
executives. A draft of a proposed merger agreement was circulated by HEALTHSOUTH
on November 20, 1996.
On November 25, 1996, the Health Images Board of Directors held a special
meeting to receive a status report from management and representatives of Smith
Barney with respect to discussions with HEALTHSOUTH and Company A. Among other
things, the directors were informed that HEALTHSOUTH had indicated that it was
not willing to modify the proposed exchange ratio. In addition, executives of
HEALTHSOUTH made a presentation about HEALTHSOUTH to the Health Images Board of
Directors and answered various due diligence questions from directors. Following
this presentation, the Health Images Board of Directors discussed the
HEALTHSOUTH proposal and authorized management to pursue a transaction with
HEALTHSOUTH and to negotiate the terms of a merger agreement to be presented to
and acted upon at the next meeting of the Health Images Board of Directors.
Because the trading prices of the HEALTHSOUTH Common Stock had decreased
somewhat from the price of such stock at the time of the November 9, 1996
preliminary term sheet, representatives of Health Images were instructed to
attempt to negotiate with HEALTHSOUTH an exchange ratio that would provide
Health Images' stockholders $17.50 per share in value based on the average sales
price of HEALTHSOUTH Common Stock for the ten trading days prior to the
announcement of the definitive agreement in lieu of the proposed fixed exchange
ratio.
Following the November 25, 1996 meeting, HEALTHSOUTH and Health Images
executives continued their respective due diligence reviews of each other's
company and their legal advisors negotiated the final terms of the Plan. In
addition, Health Images representatives continued discussions with HEALTHSOUTH
with respect to the method of determining the exchange ratio. During these
discussions, HEALTHSOUTH expressed its unwillingness to replace the fixed ratio
contained in the November 9, 1996 preliminary term sheet with an exchange ratio
to be determined based on an average stock price.
On December 1, 1996, the Health Images Board of Directors met to consider the
proposed Plan and Merger. At this meeting, the Health Images Board of Directors'
legal and financial advisors reviewed in detail the terms of the proposed Plan
with the Board of Directors. The Plan
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<PAGE>
reflected a fixed exchange ratio of 0.446 of a share of HEALTHSOUTH Common Stock
for each share of Health Images Common Stock, representing $16.61 per share in
value based on the closing price of the HEALTHSOUTH Common Stock on November 27,
1996. At such meeting, Smith Barney also delivered to the Health Images Board of
Directors its oral opinion (subsequently confirmed by delivery of a written
opinion dated December 2, 1996) to the effect that, as of such date and based
upon and subject to certain matters stated in the written opinion, the proposed
exchange ratio was fair to holders of Health Images Common Stock from a
financial point of view, and reviewed with the Health Images Board of Directors
certain financial analyses performed by Smith Barney in connection with such
opinion. See "-- Opinion of Financial Advisor to Health Images". The Health
Images Board of Directors unanimously approved the Plan and the Merger and
authorized Health Images to execute and deliver the Plan and recommended the
Merger for approval by Health Images' stockholders. Separately, the Board of
Directors of HEALTHSOUTH also met on December 1, 1996, and approved the Plan and
the Merger. HEALTHSOUTH and Health Images issued a joint press release on
December 2, 1996 announcing the execution of the definitive Plan and the basic
terms of the Merger.
REASONS FOR THE MERGER; RECOMMENDATION OF HEALTH IMAGES' BOARD OF DIRECTORS
The Board of Directors of Health Images, in approving the Merger and
recommending it to Health Images' stockholders, believes that the terms of the
Merger are fair to the stockholders of Health Images and in the best interests
of Health Images. The Exchange Ratio was negotiated on an arm's length basis
between representatives of Health Images and representatives of HEALTHSOUTH. The
Health Images Board of Directors concluded, based on the factors stated below,
that the Merger should be approved and recommends that the Health Images
stockholders vote in favor of the Merger.
In reaching its conclusions to approve the Plan and the Merger and to
recommend that the Health Images stockholders vote for the approval and adoption
of the Plan, the Board of Directors of Health Images considered a number of
factors including, without limitation and without assigning relative weights
thereto, the following:
(i) The value of the consideration to be received by Health Images
stockholders in the Merger which, based on the closing price of the
HEALTHSOUTH Common Stock on November 27, 1996 (the last full trading day
prior to the announcement of the Merger) represented a 22% premium over the
closing price of the Health Images Common Stock on November 27, 1996, 32%
over the closing price of Health Images Common Stock four weeks prior to
such date and 44% and 69% over the average price of the Health Images Common
Stock during the previous six and 12 months, respectively;
(ii) The Health Images Board of Directors' belief that the increasing
role of managed care in the healthcare industry threatened the ability of
single services providers (i.e., radiology services in Health Images' case)
to increase market share and unit volumes, particularly in an environment of
declining reimbursements, and in light of the fact that managed care plans
are more likely to contract with entities that can provide a broader range
of healthcare services. Accordingly, the Health Images Board of Directors
believed that the more successful companies in the industry would be
companies that offer a broader range of healthcare services and have strong
nationwide presence and reputations;
(iii) The Health Images Board of Directors' belief that the potential
for increased clinic volumes through the HEALTHSOUTH affiliation, in the
context of the capital-intensive nature of the Health Images business,
results in increased economies of scale, lower per-unit costs and increased
pricing flexibility;
(iv) The Health Images Board of Directors' belief that there were
significant other synergies available to the combined business, particularly
in reducing general and administrative expenses incurred in operating as two
separate public companies;
(v) The Health Images Board of Directors' belief that companies
operating substantially or exclusively in the diagnostic imaging industry
were not favored by the investment community and, therefore, were not, and
would not be expected in the foreseeable future to be, valued at the same
multiples as companies in the healthcare industry that provided a broader
range of services;
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<PAGE>
(vi) The fact that the Merger offered an opportunity for Health Images
stockholders to continue, if they so desire, to share in the potential for
long-term growth in the healthcare industry;
(vii) The business reputation and capabilities of HEALTHSOUTH and its
management, HEALTHSOUTH's financial strength, business prospects, market
position and strategic objectives, and the liquidity and historical
performance of HEALTHSOUTH Common Stock;
(viii) The financial presentation of Smith Barney delivered to the
Board of Directors of Health Images at its special meeting held on December
1, 1996 and Smith Barney's oral opinion (subsequently confirmed by delivery
of a written opinion dated December 2, 1996) to the effect that, as of the
date of such opinion and based upon and subject to certain matters set forth
in the written opinion, the Exchange Ratio was fair to the holders of Health
Images Common Stock from a financial point of view (see "-- Opinion of
Financial Advisor to Health Images");
(ix) The Health Images Board of Directors' familiarity with Health
Images' business, prospects, financial conditions, results of operations,
assets and trends in the healthcare industry;
(x) The Health Images Board of Directors' belief that, at the time the
Merger was under consideration, the strength of Health Images' business and
market prices of its stock coupled with the uncertainties facing the
healthcare industry made the price that could be obtained by the Health
Images stockholders more favorable than what the stockholders may obtain by
continuing to operate the business as a stand-alone entity; and
(xi) The terms and conditions of the proposed Merger, including the
nature and extent of Health Images' representations, warranties and
covenants, the conditions to the parties' respective obligations and the
circumstances under which Health Images may terminate the Plan if it
receives a higher offer.
On December 1, 1996, the HEALTHSOUTH Board of Directors approved the Plan and
the Merger. The HEALTHSOUTH Board of Directors believes that the Merger is
desirable for the following reasons, among others:
(i) The reputation and expertise of Health Images as a leader in the
diagnostic imaging field;
(ii) The fact that almost 96% of Health Images' facility locations
overlap with existing outpatient surgery and rehabilitation locations of
HEALTHSOUTH;
(iii) HEALTHSOUTH's belief that the transaction will be accretive to
1997 earnings per share; and
(iv) The prospect of utilizing Health Images' existing operations in
the United Kingdom as a platform for exploring other opportunities overseas.
OPINION OF FINANCIAL ADVISOR TO HEALTH IMAGES
Smith Barney was retained by Health Images to act as its financial advisor in
connection with the proposed Merger. In connection with such engagement, Health
Images requested that Smith Barney evaluate the fairness, from a financial point
of view, to the holders of Health Images Common Stock of the consideration to be
received by such holders in the Merger. On December 1, 1996, at a meeting of the
Board of Directors of Health Images held to evaluate the proposed Merger, Smith
Barney delivered an oral opinion (subsequently confirmed by delivery of a
written opinion dated December 2, 1996) to the Board of Directors of Health
Images to the effect that, as of the date of such opinion and based upon and
subject to certain matters stated therein, the Exchange Ratio was fair, from a
financial point of view, to the holders of Health Images Common Stock.
In arriving at its opinion, Smith Barney reviewed the Plan and held
discussions with certain senior officers, directors and other representatives
and advisors of Health Images and certain senior officers and other
representatives of HEALTHSOUTH concerning the businesses, operations and
prospects of Health Images and HEALTHSOUTH. Smith Barney examined certain
publicly available business and financial information relating to Health Images
and HEALTHSOUTH as well as certain financial forecasts and other information and
data for Health Images and HEALTHSOUTH which were provided to
24
<PAGE>
or otherwise discussed with Smith Barney by the respective managements of Health
Images and HEALTHSOUTH, including information relating to certain strategic
implications and operational benefits anticipated to result from the Merger.
Smith Barney reviewed the financial terms of the Merger as set forth in the Plan
in relation to, among other things: current and historical market prices and
trading volumes of Health Images Common Stock and HEALTHSOUTH Common Stock; the
respective companies' historical and projected earnings and other operating
data; and the capitalization and financial condition of Health Images and
HEALTHSOUTH. Smith Barney also considered, to the extent publicly available, the
financial terms of certain other similar transactions recently effected which
Smith Barney considered relevant in evaluating the Merger and analyzed certain
financial, stock market and other publicly available information relating to the
businesses of other companies whose operations Smith Barney considered relevant
in evaluating those of Health Images and HEALTHSOUTH. Smith Barney also
evaluated the potential pro forma financial impact of the Merger on HEALTHSOUTH.
In connection with its engagement, Smith Barney was requested to approach, and
held discussions with, certain third parties to solicit indications of interest
in a possible acquisition of Health Images. In addition to the foregoing, Smith
Barney conducted such other analyses and examinations and considered such other
financial, economic and market criteria as Smith Barney deemed appropriate in
arriving at its opinion. Smith Barney noted that its opinion was necessarily
based upon information available, and financial, stock market and other
conditions and circumstances existing and disclosed, to Smith Barney as of the
date of its opinion.
In rendering its opinion, Smith Barney assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information and data publicly available or furnished to or otherwise
reviewed by or discussed with Smith Barney. With respect to financial forecasts
and other information and data furnished to or otherwise reviewed by or
discussed with Smith Barney, the managements of Health Images and HEALTHSOUTH
advised Smith Barney that such forecasts and other information and data were
prepared on bases reflecting reasonable estimates and judgments as to the future
financial performance of Health Images and HEALTHSOUTH and the strategic
implications and operational benefits anticipated to result from the Merger.
Smith Barney assumed, with the consent of the Board of Directors of Health
Images, that the Merger will be treated as a pooling of interests in accordance
with generally accepted accounting principles and as a tax-free reorganization
for federal income tax purposes. Smith Barney's opinion, as set forth therein,
relates to the relative values of Health Images and HEALTHSOUTH. Smith Barney
did not express any opinion as to what the value of the HEALTHSOUTH Common Stock
actually will be when issued to Health Images stockholders pursuant to the
Merger or the price at which the HEALTHSOUTH Common Stock will trade subsequent
to the Merger. Smith Barney did not make and was not provided with an
independent evaluation or appraisal of the assets or liabilities (contingent or
otherwise) of Health Images or HEALTHSOUTH nor did Smith Barney make any
physical inspection of the properties or assets of Health Images or HEALTHSOUTH.
Although Smith Barney evaluated the Exchange Ratio from a financial point of
view, Smith Barney was not asked to and did not recommend the specific
consideration payable in the Merger, which was determined through negotiation
between Health Images and HEALTHSOUTH. No other limitations were imposed by
Health Images on Smith Barney with respect to the investigations made or
procedures followed by Smith Barney in rendering its opinion.
The full text of the written opinion of Smith Barney dated December 2, 1996,
which sets forth the assumptions made, matters considered and limitations on the
review undertaken, is attached hereto as Annex B, and is incorporated herein by
reference. Holders of Health Images Common Stock are urged to read this opinion
carefully in its entirety. The opinion of Smith Barney is directed only to the
fairness of the Exchange Ratio from a financial point of view, does not address
any other aspect of the Merger or related transactions and does not constitute a
recommendation to any stockholder as to how such stockholder should vote at the
Special Meeting. The summary of the opinion of Smith Barney set forth in this
Prospectus-Proxy Statement is qualified in its entirety by reference to the full
text of such opinion.
In preparing its opinion, Smith Barney performed a variety of financial and
comparative analyses, including those described below. The summary of such
analyses does not purport to be a complete description of the analyses
underlying Smith Barney's opinion. The preparation of a fairness opinion is a
complex analytic process involving various determinations as to the most
appropriate and relevant meth
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ods of financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. Accordingly, Smith Barney believes that its analyses must
be considered as a whole and that selecting portions of its analyses and
factors, without considering all analyses and factors, could create a misleading
or incomplete view of the processes underlying such analyses and opinion. In its
analyses, Smith Barney made numerous assumptions with respect to Health Images,
HEALTHSOUTH, industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
Health Images and HEALTHSOUTH. The estimates contained in such analyses and the
valuation ranges resulting from any particular analysis are not necessarily
indicative of actual values or predictive of future results or values, which may
be significantly more or less favorable than those suggested by such analyses.
In addition, analyses relating to the value of businesses or securities do not
purport to be appraisals or to reflect the prices at which businesses or
securities actually may be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty. Smith Barney's opinion and
analyses were only one of many factors considered by the Board of Directors of
Health Images in its evaluation of the Merger and should not be viewed as
determinative of the views of the Board of Directors or management of Health
Images with respect to the Exchange Ratio or the proposed Merger.
Selected Company Analysis. Using publicly available information, Smith Barney
analyzed, among other things, the market values and trading multiples of Health
Images and the following six selected publicly traded companies in the
diagnostic imaging industry: Alliance Imaging, Inc., Diagnostic Health Services,
Inc., Insight Health Services Corp., Medical Resources, Inc., SMT Health
Services, Inc. and U.S. Diagnostic Inc. (collectively, the "Selected
Companies"). Smith Barney compared market values as multiples of, among other
things, latest 12 months and estimated calendar 1996 and 1997 net income, and
adjusted market values (equity market value, plus total debt, minority interest
and the book value of preferred stock, less cash and cash equivalents) as
multiples of, among other things, latest 12 months revenue and earnings before
interest, taxes, depreciation and amortization ("EBITDA"). Net income
projections for the Selected Companies were based on estimates of selected
investment banking firms and net income projections for Health Images were based
on internal estimates of the management of Health Images. All multiples were
based on closing stock prices as of November 27, 1996. Applying a range of
multiples for the Selected Companies (excluding outliers) of latest 12 months
net income and estimated calendar 1996 and 1997 net income of 16.7x to 25.3x,
12.6x to 18.3x and 10.4x to 15.2x, respectively, and latest 12 months revenue
and EBITDA of 1.5x to 3.2x and 5.8x to 6.8x, respectively, to corresponding
financial data for Health Images resulted in an equity reference range for
Health Images of approximately $11.10 to $15.37 per share, as compared to the
equity value implied by the Exchange Ratio of approximately $16.61 per share
based on the closing stock price of HEALTHSOUTH Common Stock on November 27,
1996.
Smith Barney also analyzed, among other things, the market values and trading
multiples of HEALTHSOUTH and the following four selected publicly traded
companies in the rehabilitation industry: NovaCare, Inc., RehabCare Group, Inc.,
TheraTx, Inc. and U.S. Physical Therapy, Inc. (the "Rehabilitation Companies").
Smith Barney compared market values as multiples of, among other things, latest
12 months and estimated calendar 1996 and 1997 net income, and adjusted market
values as multiples of, among other things, latest 12 months net revenue and
EBITDA. Net income projections for HEALTHSOUTH and the Rehabilitation Companies
were based on estimates of selected investment banking firms. All multiples were
based on closing stock prices as of November 27, 1996. Mean and median multiples
of latest 12 months and estimated calendar 1996 and 1997 net income and latest
12 months net revenue and EBITDA for the Rehabilitation Companies were as
follows: (i) latest 12 months net income: 19.7x (mean) and 22.5x (median); (ii)
estimated calendar 1996 and 1997 net income: 16.7x (mean) and 16.0x (median) and
14.5x (mean) and 14.4x (median), respectively; (iii) latest 12 months net
revenue: 1.1x (mean) and 1.0x (median); and (iv) latest 12 months EBITDA: 8.4x
(mean) and 8.2x (median). The multiples of latest 12 months and estimated
calendar 1996 and 1997 net income and latest 12 months net revenue and EBITDA
for HEALTHSOUTH were 26.0x, 25.2x, 20.2x, 3.2x and 11.0x, respectively.
Selected Merger and Acquisition Transactions Analysis. Using publicly
available information, Smith Barney reviewed the purchase price and implied
transaction multiples paid or proposed to be paid in the
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following eight selected transactions in the outpatient rehabilitation and
diagnostic imaging industries, consisting of (acquiror/target): (i) six
transactions involving outpatient rehabilitation companies: Horizon/CMS
Healthcare Corporation/Pacific Rehabilitation and Sports Medicine, Inc.,
HEALTHSOUTH/Professional Sports Care Management, Inc., HEALTHSOUTH/Advantage
Health Corporation, Living Centers of America, Inc./Rehability Corporation,
Horizon Healthcare Corporation/Continental Medical Systems, Inc., and
HEALTHSOUTH/ReLife, Inc. (the "Outpatient Rehabilitation Transactions") and (ii)
two transactions involving diagnostic imaging companies: U.S. Diagnostic
Inc./Medical Imaging Centers of America, Inc., and Health Images /MedAlliance,
Inc. (the "Diagnostic Imaging Transactions" and, together with the Outpatient
Rehabilitation Transactions, the "Selected Transactions"). With respect to the
Selected Transactions, Smith Barney focused primarily on the Outpatient
Rehabilitation Transactions, which Smith Barney considered to be the most
comparable to the Merger. Smith Barney compared purchase prices as a multiple of
latest 12 months net income and transaction values as multiples of latest 12
months revenue and EBITDA. Applying a range of multiples for the Selected
Transactions (excluding outliers) of latest 12 months net income, revenue and
EBITDA of 18.4x to 32.8x, 0.7x to 2.2x and 6.5x to 12.8x, respectively, to
corresponding financial data for Health Images resulted in an equity reference
range for Health Images of approximately $14.96 to $20.14 per share, as compared
to the equity value implied by the Exchange Ratio of approximately $16.61 per
share based on the closing stock price of HEALTHSOUTH Common Stock on November
27, 1996.
No company, transaction or business used in the "Selected Company Analysis"
or "Selected Merger and Acquisition Transactions Analysis" as a comparison is
identical to Health Images, HEALTHSOUTH or the Merger. Accordingly, an analysis
of the results of the foregoing is not entirely mathematical; rather, it
involves complex considerations and judgments concerning differences in
financial and operating characteristics and other factors that could affect the
acquisition, public trading or other values of the Selected Companies, the
Selected Transactions or the business segment, company or transaction to which
they are being compared.
Discounted Cash Flow Analysis. Smith Barney performed a discounted cash flow
analysis of the projected free cash flow of Health Images for the fiscal years
1997 through 2000, based on internal estimates of the management of Health
Images. The stand-alone discounted cash flow analysis of Health Images was
determined by (i) adding (x) the present value of projected free cash flows over
the four-year period from 1997 to 2000 and (y) the present value of Health
Images estimated terminal value in year 2000 and (ii) subtracting the current
net debt of Health Images. The range of terminal values for Health Images at the
end of the four-year period was calculated by applying terminal multiples
ranging from 10.0x to 15.0x to Health Images projected 2001 unlevered net
income, representing Health Images estimated value beyond the year 2000. The
cash flows and terminal values of Health Images were discounted to present value
using discount rates ranging from 12.0% to 16.0%, with particular focus on a
discount rate of 14.0%. Based on such terminal value multiples and a discount
rate of 14.0%, this analysis resulted in an equity reference range for Health
Images of approximately $13.20 to $19.49 per share.
Contribution Analysis. Smith Barney analyzed the respective contributions of
Health Images and HEALTHSOUTH to the estimated revenue, EBITDA, earnings before
interest and taxes ("EBIT") and net income of the combined company for, among
other things, fiscal years 1996 and 1997 based, in the case of Health Images, on
internal estimates of the management of Health Images and, in the case of
HEALTHSOUTH, on estimates of selected investment banking firms. This analysis
indicated that (i) in fiscal year 1996, Health Images would contribute
approximately 5.1% of revenue, 4.8% of EBITDA, 3.2% of EBIT and 3.3% of net
income, and HEALTHSOUTH would contribute approximately 94.9% of revenue, 95.2%
of EBITDA, 96.8% of EBIT and 96.7% of net income, of the combined company, and
(ii) in fiscal year 1997, Health Images would contribute approximately 4.8% of
revenue, 4.6% of EBITDA, 3.2% of EBIT and 3.3% of net income, and HEALTHSOUTH
would contribute approximately 95.2% of revenue, 95.4% of EBITDA, 96.8% of EBIT
and 96.7% of net income, of the combined company. Immediately following
consummation of the Merger, stockholders of Health Images and HEALTHSOUTH would
own approximately 3.2% and 96.8%, respectively, of the combined company.
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Pro Forma Merger Analysis. Smith Barney analyzed certain pro forma effects
resulting from the Merger, including, among other things, the impact of the
Merger on HEALTHSOUTH's projected earnings per share ("EPS") for fiscal years
1997 through 2000 based, in the case of Health Images, on internal estimates of
the management of Health Images for fiscal years 1997 and 1998 and extrapolated
for subsequent years based on analysts' growth rate estimates for Health Images
and, in the case of HEALTHSOUTH, on estimates of selected investment banking
firms for fiscal years 1997 and 1998 and extrapolated for subsequent fiscal
years based on analysts' growth rate estimates for HEALTHSOUTH. The results of
the pro forma merger analysis suggested that the Merger could be accretive to
HEALTHSOUTH's EPS in each of the fiscal years analyzed. The actual results
achieved by the combined company may vary from projected results and the
variations may be material.
Exchange Ratio Analysis. Smith Barney compared the Exchange Ratio with the
historical ratio of the daily closing prices of Health Images Common Stock and
HEALTHSOUTH Common Stock during the six-month and 12-month periods preceding
November 27, 1996. The exchange ratios of the daily closing prices of one share
of Health Images Common Stock to one share of HEALTHSOUTH Common Stock during
the six-month and 12-month periods preceding November 27, 1996 were 0.3237 and
0.2806, respectively, as compared to the Exchange Ratio of 0.446.
Other Factors and Comparative Analyses. In rendering its opinion, Smith
Barney considered certain other factors and conducted certain other comparative
analyses, including, among other things, a review of (i) Health Images' and
HEALTHSOUTH's historical and projected financial results; (ii) the history of
trading prices and volume for Health Images Common Stock and HEALTHSOUTH Common
Stock and the relationship between movements of such Common Stock, movements of
the common stock of the Selected Companies and movements in the S&P 500 Index;
(iii) selected published analysts' reports on Health Images and HEALTHSOUTH,
including analysts' estimates as to the earnings growth potential of Health
Images and HEALTHSOUTH and historical earnings performance of the respective
companies relative to earnings estimates of selected investment banking firms;
(iv) the premiums paid in selected transactions having a transaction value of
$100 million to $400 million; and (v) the pro forma ownership of the combined
company.
Pursuant to the terms of Smith Barney's engagement, Health Images has agreed
to pay Smith Barney for its services in connection with the Merger an aggregate
financial advisory fee equal to 1% of the total consideration (including
liabilities assumed) payable in connection with the Merger. Health Images has
also agreed to reimburse Smith Barney for travel and other reasonable
out-of-pocket expenses incurred by Smith Barney in performing its services,
including the reasonable fees and expenses of its legal counsel, and to
indemnify Smith Barney and related persons against certain liabilities,
including liabilities under the federal securities laws, arising out of Smith
Barney's engagement.
Smith Barney has advised Health Images that, in the ordinary course of
business, Smith Barney and its affiliates may actively trade or hold the
securities of Health Images and HEALTHSOUTH for their own account or for the
account of customers and, accordingly, may at any time hold a long or short
position in such securities. Smith Barney has in the past provided investment
banking and financial advisory services to Health Images and HEALTHSOUTH
unrelated to the proposed Merger, for which services Smith Barney has received
compensation. In addition, Smith Barney and its affiliates (including Travelers
Group Inc. and its affiliates) may maintain relationships with Health Images and
HEALTHSOUTH.
Smith Barney is a nationally recognized investment banking firm and was
selected by Health Images based on its experience, expertise and familiarity
with Health Images and its business. Smith Barney regularly engages in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes.
EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the filing of a Certificate of Merger
by the Subsidiary and Health Images under the DGCL, or at such later time as may
be specified in such Certificate of Merger. The Plan requires that this filing
be made, subject to satisfaction or waiver of the separate conditions to
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the obligations of each party to consummate the Merger, no later than two
business days after satisfaction or waiver of the various conditions to the
Merger set forth in the Plan, or at such other time as may be agreed by
HEALTHSOUTH and Health Images. It is presently anticipated that such filing will
be made as soon as reasonably possible after the Special Meeting and after all
regulatory approvals have been obtained, and that the Effective Time will occur
upon such filing. However, there can be no assurance as to whether or when the
Merger will occur. See "-- Conditions to the Merger" and "-- Regulatory
Approvals".
EXCHANGE OF CERTIFICATES
From and after the Effective Time, each holder of a stock certificate which
immediately prior to the Effective Time represented outstanding Health Images
Shares (collectively, the "Certificates") will be entitled to receive in
exchange therefor, upon surrender thereof to the Exchange Agent (as defined in
the Plan), a certificate or certificates representing the number of whole shares
of HEALTHSOUTH Common Stock into which such holder's Health Images Shares have
been converted, cash in lieu of fractional shares and any dividends or other
distributions to which such holder is entitled as a result of the Merger.
As soon as reasonably practicable after the Effective Time, HEALTHSOUTH will
deliver through the Exchange Agent to each holder of record of Health Images
Shares at the Effective Time transmittal materials for use in exchanging the
Certificates for certificates for shares of HEALTHSOUTH Common Stock. After the
Effective Time, there will be no transfers on the stock transfer books of Health
Images Shares which were issued and outstanding immediately prior to the
Effective Time and converted in the Merger.
No fractional shares of HEALTHSOUTH Common Stock and no certificates or scrip
therefor, or other evidence of ownership thereof, will be issued in the Merger;
instead, HEALTHSOUTH will pay to each holder of Health Images Shares who would
otherwise be entitled to a fractional share an amount of cash in an amount equal
to the value of such fractional part of a share of HEALTHSOUTH Common Stock. See
"-- Terms of the Merger".
The certificates representing shares of HEALTHSOUTH Common Stock, the
fractional share payment (if any) which any holder of Health Images Shares is
entitled to receive, and any dividends or other distributions paid on such
HEALTHSOUTH Common Stock prior to the delivery to HEALTHSOUTH of the
Certificates, will not be delivered to such stockholder until the Certificates
are delivered to HEALTHSOUTH through the Exchange Agent (as defined in the
Plan). No interest will be paid on dividends or other distributions or on any
fractional share payment which the holder of such shares shall be entitled to
receive upon such delivery.
At the Effective Time, holders of Health Images Shares immediately prior to
the Effective Time will cease to be, and shall have no rights as, stockholders
of Health Images, other than the right to receive the shares of HEALTHSOUTH
Common Stock into which such shares have been converted and any fractional share
payment and any dividends or other distributions to which they may be entitled
under the Plan. Holders of Health Images Shares will be treated as stockholders
of record of HEALTHSOUTH for purposes of voting at any annual or special meeting
of stockholders of HEALTHSOUTH after the Effective Time, both before and after
such time as they exchange their Certificates for certificates of HEALTHSOUTH
Common Stock as provided in the Plan.
Neither HEALTHSOUTH nor Health Images will be liable to any holder of Health
Images Shares for any shares of HEALTHSOUTH Common Stock (or dividends or other
distributions with respect thereto) or cash in lieu of fractional shares
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.
REPRESENTATIONS AND WARRANTIES
The Plan contains various customary representations and warranties of the
parties thereto. The representations and warranties of HEALTHSOUTH and the
Subsidiary, made jointly and severally, include, but are not limited to,
representations as to: (i) the corporate organization of the Subsidiary, (ii)
the power and authority of the Subsidiary to execute and perform the Plan and
(iii) the absence of contracts, liabilities and legal proceedings relating to or
affecting the Subsidiary.
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The representations and warranties of HEALTHSOUTH include, but are not
limited to, representations as to: (i) the organization of HEALTHSOUTH, (ii) the
power and authority of HEALTHSOUTH to execute, deliver and perform the Plan,
(iii) the capitalization of HEALTHSOUTH, (iv) ownership of Subsidiary Common
Stock by HEALTHSOUTH, (v) the fact that HEALTHSOUTH has furnished Health Images
with true and complete copies of certain reports, schedules, registration
statements and proxy statements filed by HEALTHSOUTH with the SEC since January
1, 1995, (vi) the absence of material legal proceedings against HEALTHSOUTH,
(vii) the fact that HEALTHSOUTH has not incurred any material adverse changes
since September 30, 1996, (viii) HEALTHSOUTH's investment intent with respect to
the Health Images Shares acquired, and (ix) the absence of untrue
representations by HEALTHSOUTH in the Plan or in connection with the Merger.
The representations and warranties of Health Images include, but are not
limited to, representations and warranties as to: (i) the organization of Health
Images and its subsidiaries, (ii) the power and authority of Health Images to
execute, deliver and perform the Plan, (iii) the capitalization of Health
Images, (iv) the fact that Health Images has furnished HEALTHSOUTH with true and
complete copies of certain reports, schedules, registration statements and proxy
statements filed by Health Images with the SEC since January 1, 1995, (v) the
absence of undisclosed material legal proceedings against Health Images, (vi)
the validity of Health Images' material contracts, (vii) the fact that Health
Images has not incurred any material adverse changes since September 30, 1996,
(viii) the status of Health Images' accounts receivable, (ix) the opinion of
Health Images' financial advisor, (x) the filing of Health Images' tax returns,
(xi) Health Images' employee benefits, (xii) Health Images' licenses,
accreditation and regulatory approvals, (xiii) Health Images' compliance with
laws in general, (xiv) the vote required by holders of Health Images capital
stock to approve the Plan, and (xv) the absence of untrue representations by
Health Images in the Plan or in connection with the Merger.
CONDITIONS TO THE MERGER
The obligation of HEALTHSOUTH and the Subsidiary to consummate the Merger is
subject to, among others, the following conditions: (i) Health Images shall have
performed all of its obligations as contemplated by the Plan at or prior to the
consummation date of the Merger; (ii) the representations and warranties of
Health Images set forth in the Plan shall be true and correct in all material
respects as of the dates specified in the Plan; (iii) HEALTHSOUTH shall have
received the opinion of its counsel that the Merger constitutes a tax-free
reorganization under the Code; (iv) HEALTHSOUTH and the Subsidiary shall have
obtained, or obtained the transfer of, any licenses, certificates of need and
other regulatory approvals necessary to allow the Surviving Corporation to
operate the Health Images facilities, unless the failure to obtain such transfer
or approval would not have a material adverse effect on the Surviving
Corporation; and (v) HEALTHSOUTH shall have received an opinion of Health
Images' counsel substantially in the form specified in the Plan.
The obligation of Health Images to consummate the Merger is subject to, among
others, the following conditions: (i) HEALTHSOUTH and the Subsidiary shall have
performed all of their obligations as contemplated by the Plan at or prior to
the consummation of the Merger; (ii) the representations and warranties of
HEALTHSOUTH and the Subsidiary set forth in the Plan shall be true and correct
as of the dates specified in the Plan; (iii) Health Images shall have received
the opinion of its counsel that the Merger constitutes a tax-free reorganization
under the Code; and (iv) Health Images shall have received an opinion of
HEALTHSOUTH's counsel substantially in the form specified in the Plan.
The obligation of each of HEALTHSOUTH, the Subsidiary and Health Images to
consummate the Merger is subject to certain additional conditions, including the
following: (i) no order, decree or injunction by a court of competent
jurisdiction preventing the consummation of the Merger or imposing any material
limitation on the ability of HEALTHSOUTH effectively to exercise full rights of
ownership of the common stock of the Surviving Corporation or any material
portion of the assets or business of Health Images shall be in effect; (ii) no
statute, rule or regulation shall have been enacted by the government of the
United States or any state, municipality or other political subdivision thereof
that makes the consummation of the Merger or any other transaction contemplated
by the Plan illegal; (iii) the waiting period under the HSR Act shall have
expired or shall have been terminated; (iv) the Reg
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istration Statement shall have been declared effective under the Securities Act
and shall not be subject to any stop order; (v) the Merger shall have been
approved by the requisite vote of the holders of the outstanding Health Images
Shares entitled to vote thereon; (vi) the shares of HEALTHSOUTH Common Stock to
be issued in connection with the Merger shall have been approved for listing on
the NYSE upon official notice of issuance; and (vii) the Merger shall qualify
for pooling-of-interests accounting treatment and HEALTHSOUTH and Health Images
each shall have received a letter from Ernst & Young LLP, dated the Closing Date
of the Merger, regarding that firm's concurrence with the conclusions of the
managements of HEALTHSOUTH and Health Images, respectively, as to the
appropriateness of pooling-of-interests accounting for the Merger under APB 16
if closed and consummated in accordance with the Plan.
REGULATORY APPROVALS
The HSR Act prohibits consummation of the Merger until certain information
has been furnished to the Antitrust Division of the DOJ and the FTC and certain
waiting period requirements have been satisfied. On January 7, 1997, HEALTHSOUTH
and Health Images made their respective filings with the DOJ and the FTC with
respect to the Plan. Under the HSR Act, the filings commenced a waiting period
of up to 30 days during which the Merger cannot be consummated, which waiting
period will expire on February 6, 1997, unless extended by a request for
additional information. Notwithstanding the termination of the HSR Act waiting
period, at any time before or after the Effective Time, the FTC, the DOJ or
others could take action under the antitrust laws, including seeking to enjoin
the consummation of the Merger or seeking the divestiture by HEALTHSOUTH of all
or any part of the stock or assets of Health Images. There can be no assurance
that a challenge to the Merger on antitrust grounds will not be made or, if such
a challenge were made, that it would not be successful.
As conditions precedent to the consummation of the Merger, the Plan requires,
among other things: (i) that the HSR Act waiting period has expired or been
terminated, and (ii) that all other governmental approvals required for the
consummation of the Merger have been obtained, except where the failure to
obtain such approvals would not have a material adverse effect on the business
of the Surviving Corporation.
HEALTHSOUTH and Health Images believe that the Merger does not violate the
antitrust laws and intend to resist vigorously any assertion to the contrary by
the FTC, the DOJ or others. Any such resistance could delay consummation of the
Merger, perhaps for a considerable period. Prior to the Merger, the FTC or the
DOJ could seek to enjoin the consummation of the Merger under the federal
antitrust laws or require that HEALTHSOUTH or Health Images divest certain
assets to avoid such a proceeding. The FTC or DOJ could also, following the
Merger, take action under the federal antitrust laws to rescind the Merger, to
require divestiture of assets of either HEALTHSOUTH or Health Images, or to
obtain other relief.
Certain other persons, such as states' attorneys general and private parties,
could challenge the Merger as violative of the antitrust laws and seek to enjoin
the consummation of the Merger and, in the case of private persons, also to
obtain treble damages. There can be no assurance that a challenge to the Merger
on antitrust grounds will not be made or, if such a challenge is made, that it
would not be successful. Neither HEALTHSOUTH nor Health Images intends to seek
any further stockholder approval or authorization of the Plan as a result of any
action that it may take to resist or resolve any FTC, DOJ or other objections,
unless required to do so by applicable law.
The operations of each Company are subject to a substantial body of federal,
state, local and accrediting body laws, rules and regulations relating to the
conduct, licensing and development of healthcare businesses and facilities. As a
result of the Merger, certain of the arrangements between Health Images and
third-party payors may be deemed to have been transferred, requiring the
approval and consent of such payors. It is anticipated that, prior to the time
this Prospectus-Proxy Statement is mailed to the stockholders of Health Images,
all filings required to be made prior to such date to obtain the consents and
approvals required from federal and state healthcare regulatory bodies and
agencies will have been made. However, certain of such filings cannot be made
under the applicable laws, rules and regulations until after the Effective Time.
Although no assurances to this effect can be given, it is anticipated that the
Companies will be able to obtain any required consent or approval.
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BUSINESS PENDING THE MERGER
The Plan provides that, during the period from the date of the Plan to the
Effective Time, except as provided in the Plan, HEALTHSOUTH and Health Images
will conduct their respective businesses in the usual, regular and ordinary
course in substantially the same manner as previously conducted, and Health
Images will use its reasonable best efforts to preserve intact its present
business organizations and to preserve its relationships with customers,
suppliers and others having business dealings with it.
Under the Plan, Health Images may not (other than as required pursuant to or
contemplated by the terms of the Plan and related documents), without first
obtaining the written consent of HEALTHSOUTH, (i) encumber any asset or enter
into any transaction or make any contract or commitment relating to its
properties, assets and business, other than in the ordinary course of business
or as otherwise disclosed in the Plan; (ii) enter into any employment contract
which is not terminable upon notice of 30 days or less, at will and without
penalty to it, except as provided in the Plan; (iii) enter into any contract or
agreement which cannot be performed within three months or which involves the
expenditure of over $250,000; (iv) issue or sell, or agree to issue or sell, any
shares of its capital stock or other securities of Health Images except upon
exercise of currently outstanding stock options or warrants or pursuant to the
Health Images Employee Stock Purchase Plan; (v) make any contribution, payment
or distribution to the trustee under any bonus, pension, profit sharing or
retirement plan or incur any obligation to make any such payment or contribution
which is not in accordance with Health Images' usual past practice, or establish
or enter into any other plan or contract or arrangement providing for bonuses,
executive incentive compensation, pensions, deferred compensation, retirement
payments, profit sharing or the like, establish or enter into any such plan,
contract or arrangement, or terminate any such plan; (vi) extend credit to
anyone, except in the ordinary course of business consistent with past
practices; (vii) guarantee the obligation of any person, firm or corporation,
except in the ordinary course of business consistent with past practices; (viii)
amend its Certificate of Incorporation or Bylaws; (ix) discharge or satisfy any
material lien or encumbrance or pay or satisfy any material obligation or
liability (absolute, accrued, contingent or otherwise) other than liabilities
shown or reflected on the Health Images September 30, 1996 balance sheet; (x)
increase or establish any reserve for taxes or any other liability on its books
or otherwise provide therefor which would have a material adverse effect on
Health Images, except as may be required due to income or operations of Health
Images since September 30, 1996; (xi) mortgage, pledge or subject to any lien,
charge or other encumbrance any of the assets, tangible or intangible, which
assets are material to the consolidated business or financial condition of
Health Images; (xii) sell or transfer any of the assets material to the
consolidated business of Health Images, cancel any material debts or claims or
waive any material rights, except in the ordinary course of business; (xiii)
grant any general or uniform increase in the rates of pay of employees or any
material increase in salary payable or to become payable by Health Images to any
officer or employee, consultant or agent (other than normal merit increases) or,
by means of any bonus or pension plan, contract or other commitment, increase in
a material respect the compensation of any officer, employee, consultant or
agent except for increases in bonus compensation relating to Health Images'
financial performance during fiscal 1996, not to exceed $300,000 in the
aggregate for the executive officers of Health Images; (xiv) except for the Plan
and the other agreements executed and delivered pursuant to the Plan, enter into
any material transaction other than in the ordinary course of business or
permitted under the Plan; (xv) issue any stock, bonds or other securities, other
than stock issued pursuant to options or warrants that are disclosed in the
Plan; and (xvi) incur any material adverse change.
WAIVER AND AMENDMENT
The Plan provides that, at any time prior to the Effective Time, HEALTHSOUTH
and Health Images may (i) extend the time for the performance of any of the
obligations or other acts of the other party contained in the Plan; (ii) waive
any inaccuracies in the representations and warranties of the other party
contained in the Plan or in any document delivered pursuant to the Plan; and
(iii) waive compliance with the agreements or conditions under the Plan. In
addition, the Plan may be amended at any time upon the written agreement of
HEALTHSOUTH and Health Images without the approval of stockholders of either
Company, except that after the Special Meeting no amendment may be made which by
law requires a further approval by the stockholders of Health Images without
such further approval's being obtained.
32
<PAGE>
TERMINATION
The Plan may be terminated at any time prior to the Effective Time, whether
before or after approval of the Plan by the stockholders of Health Images: (i)
by mutual written consent of HEALTHSOUTH, the Subsidiary and Health Images; (ii)
by either HEALTHSOUTH or Health Images if there is a material breach on the part
of the other party of any representation, warranty, covenant or other agreement
set forth in the Plan which is not cured as provided in the Plan; (iii) by
either HEALTHSOUTH or Health Images if any governmental entity or court of
competent jurisdiction shall have issued a final, permanent order, decree, or
ruling or other action enjoining or otherwise prohibiting the Merger and such
order, decree, or ruling or other action shall have become non-appealable; (iv)
by either HEALTHSOUTH or Health Images if the Merger has not been consummated on
or before May 31, 1997 (or such later date as may be determined under the Plan),
unless the failure to consummate the Merger by such time is due to the breach of
the Plan by the party seeking to terminate the Plan; (v) by either HEALTHSOUTH
or Health Images if any required approval of the Plan by stockholders of Health
Images has not been obtained by the required votes at a duly held meeting of
stockholders; (vi) by Health Images, if Health Images' Board of Directors shall
have determined, in the exercise of its fiduciary duties under applicable law,
not to recommend the Merger to the stockholders of Health Images or shall have
withdrawn such recommendation, or shall have approved, recommended or endorsed
any proposal to acquire Health Images upon a merger, purchase of assets,
purchase of or tender offer for shares of Health Images or similar transaction
other than the Merger, or shall have resolved to do any of the foregoing and
(vii) by either HEALTHSOUTH or Health Images if such party has not received by
December 31, 1996 a letter from Ernst & Young LLP regarding that firm's
concurrence with the conclusions of the managements of HEALTHSOUTH and Health
Images, respectively, as to the appropriateness of pooling-of-interests
accounting for the Merger under APB 16 if closed and consummated in accordance
with the Plan. Such letter was received by HEALTHSOUTH and Health Images on such
date.
BREAK-UP FEE; THIRD PARTY BIDS
If the Plan is terminated by Health Images because its Board of Directors (i)
has determined, in the exercise of its fiduciary duties under applicable law,
not to recommend the Merger to the holders of Health Images Shares, or shall
have withdrawn such recommendation, or (ii) shall have approved, recommended or
endorsed an Acquisition Transaction (as defined in the Plan) other than the
Plan, and within one year after the effective date of such termination Health
Images is the subject of a Third Party Acquisition Event (as defined in the
Plan), then at the time of consummation of such a Third Party Acquisition Event,
Health Images shall pay to HEALTHSOUTH a break-up fee of $10,000,000.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of the Board of Directors of Health Images
with respect to the Plan and the transactions contemplated thereby, stockholders
of Health Images should be aware that certain members of the management of
Health Images and the Board of Directors of Health Images have certain interests
in the Merger that are in addition to the interests of the stockholders
generally.
At the Closing (as defined in the Plan), HEALTHSOUTH has agreed to enter into
a Consulting and Non-Competition Agreement with Robert D. Carl, III , Chairman
of the Board, President and Chief Executive Officer of Health Images, pursuant
to which Mr. Carl has agreed to provide certain consulting services to
HEALTHSOUTH and has agreed to refrain from competing with the diagnostic imaging
business of HEALTHSOUTH during the term of such agreement. Such agreement has an
initial term of three years. Under such agreement, HEALTHSOUTH has agreed to pay
Mr. Carl a fee at the annual rate of $350,000. The fees payable to Mr. Carl will
be in lieu of any payments Mr. Carl would be entitled to receive as a result of
the Merger pursuant to his current employment and non-competition agreement with
Health Images.
In addition, pursuant to the terms of Health Images' stock option plans,
Health Images stock options which are not fully vested prior to the Effective
Time will accelerate and vest in full as a result of the Merger at the Effective
Time. Certain directors and members of Health Images management hold such
options.
33
<PAGE>
INDEMNIFICATION
The Plan provides that Health Images shall, and after the Effective Time
HEALTHSOUTH and the Surviving Corporation shall, indemnify, defend and hold
harmless each person who is, or has ever been at any time prior to the Effective
Time, an officer, director or employee of Health Images or any of its
subsidiaries (the "Indemnified Parties") against all losses, claims, damages,
costs, expenses, liabilities or judgments, or amounts that are paid in
settlement with the approval of the indemnifying party, in connection with any
claim arising, in whole or in part, out of the fact that such person is or was a
director, officer or employee of Health Images, pertaining to a matter occurring
or existing at or prior to the Effective Time.
ACCOUNTING TREATMENT
Consummation of the Merger is conditioned upon the receipt by HEALTHSOUTH and
Health Images of a letter from Ernst & Young LLP, HEALTHSOUTH's independent
auditors, regarding that firm's concurrence with the conclusions of the
managements of HEALTHSOUTH and Health Images, respectively, as to the
appropriateness of pooling-of-interests accounting for the Merger under APB 16
if closed and consummated in accordance with the Plan. HEALTHSOUTH and Health
Images have agreed not to intentionally take or cause to be taken any action
that would disqualify the Merger as a pooling of interests for accounting
purposes.
Under the pooling-of-interests method of accounting, the historical basis of
the assets and liabilities of HEALTHSOUTH and Health Images will be combined at
the Effective Time and carried forward at their previously recorded amounts, the
stockholders' equity accounts of HEALTHSOUTH and Health Images will be combined
on HEALTHSOUTH's consolidated balance sheet and no goodwill or other intangible
assets will be created. Financial statements of HEALTHSOUTH issued after the
Merger will be restated retroactively to reflect the consolidated operations of
HEALTHSOUTH and Health Images as if the Merger had taken place prior to the
periods covered by such financial statements.
The unaudited condensed combined pro forma financial information contained in
this Prospectus-Proxy Statement has been prepared using the pooling-of-interests
accounting method to account for the Merger. See "PRO FORMA CONDENSED FINANCIAL
INFORMATION".
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of the principal federal income tax
consequences of the Merger to the holders of Health Images Shares. The
discussion is based on currently existing provisions of the Code, Treasury
Regulations thereunder, administrative rulings and court decisions. All of the
foregoing are subject to change and any such change can affect the continuing
validity of this discussion. This summary applies to holders of Health Images
Shares who hold their Health Images Shares as capital assets. This summary does
not discuss all aspects of income taxation that may be relevant to a particular
holder of Health Images Shares in light of such holder's specific circumstances
or to certain types of holders subject to special treatment under the federal
income tax laws (for example, foreign persons, dealers in securities, banks and
other financial institutions, insurance companies, tax-exempt organizations and
holders who acquired Health Images Shares pursuant to the exercise of options or
otherwise as compensation or through a tax-qualified retirement plan or holders
who are subject to the alternative minimum tax provisions of the Code), and it
does not discuss any aspect of state, local, foreign or other tax law.
It is a condition to the consummation of the Merger that Health Images
receive an opinion from its counsel, Powell, Goldstein, Frazer & Murphy LLP
("Powell Goldstein"), and that HEALTHSOUTH receive an opinion from its counsel,
Haskell Slaughter & Young, L.L.C. ("Haskell Slaughter", and together with Powell
Goldstein , "Tax Counsel"), substantially to the effect that for federal income
tax purposes the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code. Consistent with such opinions, it is expected that
the material federal income tax consequences of the Merger will be that: (i) no
gain or loss will be recognized by HEALTHSOUTH, the Subsidiary or Health Images
as a result of the Merger, (ii) no gain or loss will be recognized by the
stockholders of Health Images upon the exchange of their Health Images Shares
solely for shares of HEALTHSOUTH
34
<PAGE>
Common Stock pursuant to the Merger, except that a Health Images stockholder who
receives cash proceeds in lieu of a fractional share of HEALTHSOUTH Common Stock
will recognize gain or loss equal to the difference, if any, between such
stockholder's tax basis allocated to such fractional share (as described in
clause (iii) below) and the amount of cash received, and such gain or loss will
constitute capital gain or loss if such stockholder's Health Images Shares with
respect to which gain or loss is recognized are held as a capital asset at the
Effective Time and such payment in lieu of the fractional shares is not
essentially equivalent to a dividend within the meaning of Section 302(b)(l) of
the Code, (iii) the aggregate tax basis of the shares of the HEALTHSOUTH Common
Stock received solely in exchange for Health Images Shares pursuant to the
Merger (including fractional shares of HEALTHSOUTH Common Stock for which cash
is received) will be the same as the aggregate tax basis of the Health Images
Shares exchanged therefor, and (iv) the holding period for HEALTHSOUTH Common
Stock received in exchange for Health Images Shares pursuant to the Merger will
include the holding period of the Health Images Shares exchanged therefor,
provided such Health Images Shares were held as a capital asset at the Effective
Time.
Neither HEALTHSOUTH nor Health Images has requested or will receive an
advance ruling from the Internal Revenue Service (the "Service") as to the
federal income tax consequences of the Merger. In rendering their opinions, Tax
Counsel may receive and will rely upon representations contained in certificates
of HEALTHSOUTH, the Subsidiary, Health Images and others. Tax Counsel's opinions
will be subject to certain limitations and qualifications and will be based upon
the truth and accuracy of these representations and upon certain factual
assumptions and represent Tax Counsel's best legal judgment. The tax opinions
are not binding on the Service or the courts and do not preclude the Service
from adopting a contrary position.
EACH HOLDER OF HEALTH IMAGES SHARES IS URGED TO CONSULT SUCH HOLDER'S TAX
ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO SUCH HOLDER,
INCLUDING THE APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS.
RESALE OF HEALTHSOUTH COMMON STOCK BY AFFILIATES
The shares of HEALTHSOUTH Common Stock to be issued to holders of Health
Images Shares in connection with the Merger have been registered under the
Securities Act. HEALTHSOUTH Common Stock received by the stockholders of Health
Images upon consummation of the Merger will be freely transferable under the
Securities Act, except for shares issued to any person who may be deemed an
"Affiliate" (as defined below) of Health Images or HEALTHSOUTH within the
meaning of Rule 145 under the Securities Act. "Affiliates" are generally defined
as persons who control, are controlled by, or are under common control with
Health Images or HEALTHSOUTH at the time of the Special Meeting (generally,
directors, certain executive officers and major stockholders). Affiliates of
Health Images or HEALTHSOUTH may not sell their shares of HEALTHSOUTH Common
Stock acquired in connection with the Merger, except pursuant to an effective
registration statement under the Securities Act covering such shares or in
compliance with Rule 145 or another applicable exemption from the registration
requirements of the Securities Act. In general, under Rule 145, for two years
following the Effective Time, an Affiliate (together with certain related
persons) would be entitled to sell shares of HEALTHSOUTH Common Stock acquired
in connection with the Merger only through unsolicited "brokers' transactions"
or in transactions directly with a "market maker", as such terms are defined in
Rule 144 under the Securities Act. Additionally, the number of shares to be sold
by an Affiliate (together with certain related persons and certain persons
acting in concert) during such two-year period within any three-month period for
purposes of Rule 145 may not exceed the greater of (i) 1% of the outstanding
shares of HEALTHSOUTH Common Stock or (ii) the average weekly trading volume of
such stock during the four calendar weeks preceding such sale. Rule 145 would
remain available to Affiliates only if HEALTHSOUTH remained current with its
information filings with the SEC under the Exchange Act. Two years after the
Effective Time, an Affiliate would be able to sell such HEALTHSOUTH Common Stock
without such manner of sale or volume limitations, provided that HEALTHSOUTH
were current with its Exchange Act information filings and such Affiliate were
not then an Affiliate of HEALTHSOUTH. Three years after the Effective Time, an
Affiliate would be able to sell such shares of HEALTHSOUTH Common Stock without
any restrictions so long as such Affiliate had not been an Affiliate of
HEALTHSOUTH for at least three months prior thereto.
35
<PAGE>
Health Images has agreed to use its reasonable, good faith efforts to cause
each holder of Health Images Shares deemed to be an Affiliate of Health Images
to enter into an agreement providing that such Affiliate will not sell, pledge,
transfer or otherwise dispose of shares of HEALTHSOUTH Common Stock to be
received by such person in the Merger, (i) except in compliance with the
applicable provisions of the Securities Act and the rules and regulations
thereunder and (ii) until after such time as results covering at least thirty
days of post-Merger combined operations of HEALTHSOUTH and Health Images have
been published. HEALTHSOUTH has agreed that within 20 days after the end of the
first calendar month following at least 30 days after the Effective Time,
HEALTHSOUTH shall cause the publication of such results.
NO APPRAISAL RIGHTS
Under the DGCL, holders of Health Images Common Stock will not be entitled to
dissenters' rights of appraisal in connection with the Merger.
NO SOLICITATION OF TRANSACTIONS
Health Images has agreed that it will not, and will direct each officer,
director, employee, representative and agent of Health Images not to, directly
or indirectly, encourage, solicit, participate in or initiate discussions or
negotiations with or provide any information to any corporation, partnership,
person or other entity or group (other than HEALTHSOUTH or an affiliate,
associate or agent of HEALTHSOUTH) concerning any merger, sale of assets, sale
of or tender offer for Health Images Shares or similar transactions involving
Health Images. Under the Plan, Health Images may furnish information concerning
Health Images to other corporations, partnerships, persons or other entities or
groups, and may participate in discussions and negotiate with such entities
concerning any proposal to acquire Health Images upon a merger, purchase of
assets, purchase of or tender offer for Health Images Shares or similar
transaction (an "Acquisition Transaction"), in response to unsolicited requests
therefor, if the Board of Directors of Health Images determines in its good
faith judgment in the exercise of its fiduciary duties or its duties under Rule
14e-2 under the Exchange Act that such action is appropriate in furtherance of
the best interest of its stockholders. Health Images has further agreed that it
will notify HEALTHSOUTH if it enters into a confidentiality agreement with any
third party in response to any unsolicited request for information and access in
connection with a possible Acquisition Transaction, including providing
HEALTHSOUTH with the identity of the third party.
EXPENSES
The Plan provides that all costs and expenses incurred in connection with the
Plan and the transactions contemplated thereby shall be paid by the party
incurring such expense, except that expenses of printing and mailing this
Prospectus-Proxy Statement shall be shared equally by HEALTHSOUTH and Health
Images.
NYSE LISTING
A listing application will be filed with the NYSE to list the shares of
HEALTHSOUTH Common Stock to be issued to Health Images stockholders in
connection with the Merger. Although no assurance can be given that the shares
of HEALTHSOUTH Common Stock so issued will be accepted for listing, HEALTHSOUTH
and Health Images anticipate that these shares will qualify for listing on the
NYSE upon official notice of issuance thereof. It is a condition to the Merger
that such shares of HEALTHSOUTH Common Stock be approved for listing on the NYSE
upon official notice of issuance at the Effective Time.
36
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA -- HEALTHSOUTH
The consolidated income statement data set forth below for the years ended
December 31, 1991, 1992, 1993, 1994 and 1995 and the consolidated balance sheet
data at December 31, 1991 1992, 1993, 1994 and 1995 are derived from the audited
consolidated financial statements of HEALTHSOUTH. The data for the nine months
ended September 30, 1995 and 1996 and at September 30 , 1996 are derived from
the unaudited consolidated financial statements of HEALTHSOUTH. In the opinion
of HEALTHSOUTH, the consolidated income statement data for the nine months ended
September 30, 1996 and 1995, and the consolidated balance sheet data at
September 30, 1996, reflect all adjustments (which consist of only normal
recurring adjustments) necessary for a fair presentation of results of interim
periods. Operating results for the nine months ended September 30, 1995 and 1996
are not necessarily indicative of results for the full fiscal year or for any
future interim period. The data set forth below should be read in conjunction
with the consolidated financial statements, related notes and other information
incorporated by reference herein. The financial information for all periods set
forth below has been restated to reflect the acquisitions of ReLife, Inc.
("ReLife") in December 1994, Surgical Health Corporation ("SHC") in June 1995,
Sutter Surgery Centers Inc. ("SSCI") in October 1995, Surgical Care Affiliates,
Inc. ("SCA") in January 1996 and Advantage Health Corporation ("Advantage
Health") in March 1996, each of which has been accounted for as a pooling of
interests.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------------------------------------- --------------------------
1991 1992 1993 1994 1995 1995 1996
----------- ----------- ----------- ------------- ------------ ------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues ................................... $468,572 $750,134 $979,206 $1,649,199 $2,003,146 $1,470,049 $1,793,766
Operating expenses:
Operating units ........................... 316,628 521,619 668,201 1,161,758 1,371,740 1,014,302 1,173,148
Corporate general and administrative ...... 17,347 25,667 37,043 61,640 56,920 40,479 49,462
Provision for doubtful accounts ............ 9,345 16,553 20,026 32,904 37,659 28,172 39,873
Depreciation and amortization............... 24,295 42,107 63,572 113,977 143,322 104,874 137,320
Interest expense ........................... 19,273 18,237 24,200 73,644 101,790 75,035 69,967
Interest income ............................ (9,489) 8,595) (5,903) (6,387) (7,882) (6,244) (4,449)
Merger and acquisition related expenses(1).. -- -- 333 6,520 34,159 -- --
Gain on sale of MCA Stock(2) ............... -- -- -- (7,727) -- 29,194 34,452
Loss on impairment of assets (2)............ -- -- -- 10,500 53,549 -- --
Loss on abandonment of computer project (2) -- -- -- 4,500 -- 11,192 --
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 -- -- -- -- --
Gain on sale of partnership interest ....... -- -- (1,400) -- -- -- --
Provision for contingent payment............ 5,400 -- -- -- -- -- --
---------- ---------- ----------- ------------- ------------ ------------ ------------
382,799 620,136 855,814 1,464,526 1,791,257 1,297,004 1,499,773
---------- ---------- ----------- ------------- ------------ ------------ ------------
Income before income taxes and minority
interests................................ 85,773 129,998 123,392 184,673 211,889 173,045 293,993
Provision for income taxes................. 24,582 38,550 37,993 65,121 76,221 55,784 97,528
---------- ---------- ----------- ------------- ------------ ------------ ------------
61,191 91,448 85,399 119,552 135,668 117,261 196,465
Minority interests......................... 18,613 25,943 29,377 31,469 43,147 30,766 38,015
---------- ---------- ----------- ------------- ------------ ------------ ------------
Income from continuing operations.......... 42,578 65,505 56,022 88,083 92,521 86,495 158,450
Income from discontinued operations(2)..... 2,971 3,283 4,452 -- -- -- --
---------- ---------- ----------- ------------- ------------ ------------ ------------
Net income ................................ $ 45,549 $ 68,788 $ 60,474 $ 88,083 $ 92,521 $ 86,495 $158,450
========== ========== =========== ============= ============ ============ ============
Weighted average common and common
equivalent shares outstanding(3)........ . 105,451 127,148 132,479 140,427 148,730 143,911 165,793
========== ========== =========== ============= ============ ============ ============
Net income per common and common equivalent
share:(3)
Continuing operations.................... $ 0.40 $ 0.51 $ 0.43 $ 0.63 $ 0.62 $ 0.60 $ 0.96
Discontinued operations ................. 0.03 0.03 0.03 -- -- -- --
---------- ---------- ----------- ------------- ------------ ------------ ------------
$ 0.43 $ 0.54 $ 0.46 $ 0.63 $ 0.62 $ 0.60 $ 0.96
========== ========== =========== ============= ============ ============ ============
Net income per common share -- assuming
full dilution (3)(4) ..................... $ 0.42 N/A N/A $ 0.63 $ 0.62 $ 0.60 $ 0.94
========== ========== =========== ============= ============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------- ---------------
1991 1992 1993 1994 1995 1996
----------- ------------ ------------ ------------ ----------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and marketable securities $173,290 $ 179,725 $ 148,308 $ 129,971 $ 156,321 $ 124,852
Working capital .............. 225,794 269,120 284,691 282,667 406,125 469,609
Total assets ................. 737,472 1,143,235 1,881,211 2,230,093 2,931,495 3,182,772
Long-term debt(5) ............ 253,483 413,656 1,008,429 1,139,087 1,391,664 1,463,927
Stockholders' equity ......... 391,452 581,954 646,397 757,583 1,185,898 1,397,231
</TABLE>
- ------------
(1) Expenses related to SHC's Ballas merger in 1993, the ReLife and Heritage
mergers in 1994, the SHC and SSCI mergers and NovaCare Rehabilitation
Hospitals Acquisition in 1995 and the SCA, Advantage Health and
Professional Sports Care Management, Inc. ("PSCM") mergers in 1996.
(2) See "Notes to Consolidated Financial Statements" in the HEALTHSOUTH
documents incorporated herein by reference.
(3) Adjusted to reflect a three-for-two stock split effected in the form of a
50% stock dividend paid on December 31, 1991 and a two-for-one stock split
effected in the form of a 100% stock dividend paid on April 17, 1995.
(4) Fully-diluted earnings per share in 1991 reflect shares reserved for
issuance upon exercise of dilutive stock options and shares reserved for
issuance upon conversion of HEALTHSOUTH's 7 3/4 % Convertible Subordinated
Debentures Due 2014, all of which were converted into Common Stock prior to
June 3, 1991. Fully-diluted earnings per share in 1994 and 1995 and the
nine months ended September 30, 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.
37
<PAGE>
SELECTED CONSOLIDATED HISTORICAL AND PRO FORMA
FINANCIAL DATA -- HEALTH IMAGES
The selected consolidated financial data presented below for each of the five
fiscal years in the five-year period ended December 31, 1995 and as of the end
of each such fiscal year have been derived from the consolidated financial
statements of Health Images audited by Joseph Decosimo and Company, LLP,
independent public accountants. The selected consolidated financial data
presented below for the nine months ended September 30, 1995 and 1996 and as of
September 30, 1996 have been derived from the unaudited consolidated financial
statements of Health Images and, in the opinion of Health Images, reflect all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial position and results of operations of Health
Images for such periods. The results of operations for the nine months ended
September 30, 1996 are not necessarily indicative of the results that may be
expected for a full fiscal year. The historical consolidated financial data for
the year ended December 31, 1995 for Health Images includes the activity of the
15 centers acquired from MedAlliance from April 1, 1995, the effective date of
the MedAlliance Centers Acquisition. The unaudited pro forma statement of
operations for 1995 gives effect to the MedAlliance Centers Acquisition and the
related financings on a consolidated basis as if they had occurred on January 1,
1995. The pro forma statement of operations is for informational purposes only,
does not purport to represent what results of operations would have been if the
MedAlliance Centers Acquisition had in fact occurred on January 1, 1995, and is
not intended to project Health Images' results of operations for any future
period. The selected consolidated historical and pro forma financial data set
forth below should be read in conjunction with the consolidated historical and
pro forma financial statements of Health Images and the related notes thereto
incorporated by reference in this Prospectus-Proxy Statement.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------- -------------------
PRO
FORMA(1)
1991 1992 1993 1994 1995 1995 1995 1996
--------- --------- --------- ---------- ---------- ----------- --------- ---------
(UNAUDITED) (UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Total Net Revenue.................... $61,151 $69,927 $76,089 $77,122 $115,536 $127,049 $83,315 $98,979
--------- --------- --------- ---------- ---------- ----------- --------- ---------
Costs and Expenses
Operating Costs..................... 34,967 39,792 46,988 45,949 69,319 75,220 50,292 60,803
Depreciation and Amortization
Expenses........................... 8,433 9,865 11,853 12,171 17,580 19,948 12,866 13,538
Provision for Bad Debts............. 1,896 2,202 2,652 2,835 4,646 5,086 3,333 3,631
General and Administrative Expenses. 5,529 6,126 6,335 6,159 8,504 9,570 5,686 6,942
--------- --------- --------- ---------- ---------- ----------- --------- ---------
Total Operating Expenses........... 50,825 57,985 67,828 67,114 100,049 109,824 72,178 84,914
--------- --------- --------- ---------- ---------- ----------- --------- ---------
Operating Income.................... 10,326 11,942 8,261 10,008 15,487 17,225 11,138 14,065
Interest Income..................... 1,539 1,162 276 271 127 209 101 64
Interest Expense.................... (1,853) (1,927) (1,683) (1,251) (3,727) (4,910) (2,731) (2,881)
--------- --------- --------- ---------- ---------- ----------- --------- ---------
Income from Continuing Operations
Before Minority Interest and
Provision for Income Taxes......... 10,012 11,177 6,854 9,028 11,887 12,524 8,508 11,248
---------
Minority Interest in Income of
Consolidated Entities.............. 621 379 172 196 606 806 494 593
---------
Provision for Income Taxes.......... 3,477 4,071 2,457 3,439 4,390 4,560 3,113 3,958
--------- --------- --------- ---------- ---------- ----------- --------- ---------
Net Income from Continuing
Operations......................... 5,914 6,727 4,225 5,393 6,891 7,158 4,901 6,697
Discontinued Operations:
Loss on Discontinued Operations (Net
of Income Taxes)(2)................ -- 240 466 6,528 418 418 419 --
Loss on Disposal of Discontinued
Operations (Net of Income
Taxes)(2).......................... -- -- -- -- 744 744 744
--------- --------- --------- ---------- ---------- ----------- --------- ---------
Net Income (Loss).................... $ 5,914 $ 6,487 $ 3,759 $(1,135) $ 5,729 $ 5,996 $ 3,738 $ 6,697
========= ========= ========= ========== ========== =========== ========= =========
Primary Earnings (Loss) Per Common
and Common and Equivalent Share:
Net Income from Continuing
Operations Per Share............... $ 0.49 $ 0.55 $ 0.36 $ 0.46 $ 0.59 $ 0.62 $ 0.42 $ 0.56
Discontinued Operations Per Share.. -- (0.02) (0.04) (0.56) (0.10) (0.10) (0.10) --
--------- --------- --------- ---------- ---------- ----------- --------- ---------
Net Income (Loss) Per Share........ $ 0.49 $ 0.53 $ 0.32 $ (0.10) $ 0.49 $ 0.52 $ 0.32 $ 0.56
========= ========= ========= ========== ========== =========== ========= =========
Weighted Average Common Shares and
Common Share Equivalents ......... 12,133 12,299 11,612 11,728 11,651 11,651 11,657 11,855
========= ========= ========= ========== ========== =========== ========= =========
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
--------- --------- --------- --------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Working Capital.............. $ 32,091 $ 16,525 $ 16,185 $ 25,874 $ (161) $ 406
Total Assets................. 115,058 121,100 119,355 125,827 176,312 185,242
Long Term Debt............... 18,726 20,376 18,354 23,071 45,001 45,804
Stockholders' Equity......... 81,467 79,892 81,354 79,578 83,789 89,439
</TABLE>
- --------------
(1) The pro forma information gives effect to the MedAlliance Centers
Acquisition as if it had occurred January 1, 1995. See "Pro Forma Condensed
Consolidated Statement of Income".
(2) Relates to Health Images' investment in National Diagnostic Systems, Inc.
and the subsequent discontinuance of its operations and write-off of assets.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Results of Operations in Health Images' Annual Report on
Form 10-K for fiscal year ended December 31, 1995, incorporated by reference
in this Prospectus-Proxy Statement".
39
<PAGE>
HEALTH IMAGES, INC. AND SUBSIDIARIES
MEDALLIANCE IMAGING CENTERS ACQUISITION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
HISTORICAL
HISTORICAL MEDALLIANCE
HEALTH IMAGING PRO FORMA
IMAGES, INC. CENTERS ADJUSTMENTS NOTES PRO FORMA
------------- ------------- ------------- ------- ------------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Total Net Revenue...................... $ 115,536 $11,513 $ 127,049
Cost and Expenses
Operating Costs....................... 69,319 5,901 75,220
Depreciation and Amortization
Expenses............................. 17,580 2,070 298 1,2 19,948
Provision for Bad Debts............... 4,646 440 5,086
General and Administrative Expenses... 8,504 1,066 9,570
-------------- ------------- ------------- ------- ------------
Total Operating Expenses............... 100,049 9,477 298 109,824
-------------- ------------- ------------- ------- ------------
Operating Income....................... 15,487 2,036 (298) 17,225
Other Income........................... 127 82 209
Interest Expense....................... (3,727) (592) (591) 3 (4,910)
Income from Continuing Operations
Before Minority Interest and
Provision for Income Taxes........... 11,887 1,526 (889) 12,524
Minority Interest in Income of
Consolidated Entities................ 606 200 -- 806
Income from Continuing Operations
Before Provision for Income Taxes.... 11,281 1,326 (889) 11,718
Provision for Income Taxes............ 4,390 -- 170 4 4,560
-------------- ------------- ------------- ------- ------------
Net Income from Continuing Operations . $ 6,891 $ 1,326 $1,059 $ 7,158
-------------- ------------- ------------- ------- ------------
Net Income Per Share from Continuing
Operations............................ $ 0.59 $ 0.62
Weighted Average Common Shares and
Common Share Equivalents Outstanding.. 11,651,100 11,651,100
</TABLE>
- -----------
1. To record an additional $363,000 amortization expense for goodwill and loan
acquisition costs associated with acquisition. The amortization period used
for goodwill is 20 years and the amortization period used for loan
acquisition costs is six years. Pro forma goodwill amortization expense
includes one month of amortization expense related to goodwill associated
with the $6,241,600 net earnout payment which was determined on December 1,
1995. Including goodwill amortization expense related to the earnout
payment, total amortization expense related to the MedAlliance Centers
Acquisition will approximate $143,400 a month or $1,720,500 a year for
future periods.
2. To record a $65,000 adjustment to depreciation expense for fair market value
adjustment to assets acquired.
3. To record additional interest expense on borrowings used to finance the
acquisition. The interest rate used is the current rate on Health Images'
primary credit facility (prime minus 0.5%).
4. To record additional income taxes at the acquiror's effective tax rate.
40
<PAGE>
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following pro forma condensed combined financial information and
explanatory notes are presented to reflect the effect for all periods presented
of the merger of a wholly-owned subsidiary of HEALTHSOUTH with Health Images in
a transaction to be accounted for as a pooling of interests, which merger is
expected to be consummated in the first quarter of 1997 (the "Health Images
Merger").
The HEALTHSOUTH historical amounts reflect the combination of HEALTHSOUTH,
ReLife, Inc. ("ReLife"), Surgical Health Corporation ("SHC"), Sutter Surgery
Centers, Inc. ("SSCI"), Surgical Care Affiliates, Inc. ("SCA") and Advantage
Health Corporation ("Advantage Health") for all periods presented, as
HEALTHSOUTH acquired ReLife in December 1994, SHC in June 1995, SSCI in October
1995, SCA in January 1996 and Advantage Health in March 1996 in transactions
accounted for as poolings of interests.
HEALTHSOUTH acquired Professional Sports Care Management, Inc. ("PSCM") in
August 1996 in a transaction accounted for as a pooling of interests. However,
due to the immateriality of the PSCM merger, HEALTHSOUTH has not restated its
historical financial statements for periods prior to July 1, 1996, the beginning
of the quarter in which the PSCM merger was completed. PSCM's results of
operations from July 1, 1996 forward are combined with and included in the
HEALTHSOUTH historical amounts in the accompanying pro forma condensed combined
financial statements.
In addition to the Health Images Merger, the following pro forma condensed
combined financial information reflects the effects for all periods presented of
the merger of a wholly-owned subsidiary of HEALTHSOUTH with ReadiCare, Inc.
("ReadiCare") in a transaction accounted for as a pooling of interests, which
merger was consummated in the fourth quarter of 1996 (the "ReadiCare Merger"
and, together with the Health Images Merger, the "Mergers").
In addition, the pro forma condensed combined financial information reflects
the impact of HEALTHSOUTH's acquisition, effective April 1, 1995, from NovaCare,
Inc. ("NovaCare") of 11 rehabilitation hospitals, 12 other facilities and two
Certificates of Need (the "NovaCare Rehabilitation Hospitals Acquisition") on
the results of operations for the years ended December 31, 1994 and 1995 and the
nine months ended September 30, 1995.
The pro forma condensed combined balance sheet assumes that the Mergers were
consummated on September 30, 1996, and the pro forma condensed income statements
assume that the Mergers were consummated on January 1, 1993. The assumptions are
described in the accompanying Notes to Pro Forma Condensed Combined Financial
Information.
All HEALTHSOUTH shares outstanding and per share amounts have been adjusted
to reflect a two-for-one stock split effected in the form of a 100 percent stock
dividend on April 17, 1995.
The pro forma information should be read in conjunction with the historical
financial statements of HEALTHSOUTH and Health Images. Certain balance sheet and
income statement amounts from the Health Images historical financial statements
have been reclassified in order to conform to the HEALTHSOUTH method of
presentation. The pro forma financial information is presented for informational
purposes only and is not necessarily indicative of the combined results of
operations or financial position that would have resulted had the Mergers been
consummated at the dates indicated, nor is it necessarily indicative of the
combined results of operations of future periods or future combined financial
position.
41
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PRO FORMA HEALTH PRO FORMA PRO FORMA
HEALTHSOUTH READICARE ADJUSTMENTS IMAGES ADJUSTMENTS COMBINED
------------- ----------- -------------- ----------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............... $ 121,067 $ 3,286 $ 0 $ 3,073 $ 0 $ 127,426
Other marketable securities ............. 3,785 0 0 0 0 3,785
Accounts receivable ..................... 504,666 6,917 0 28,273 0 539,856
Inventories, prepaid expenses and other
current assets ......................... 82,717 1,018 0 2,973 0 86,708
Deferred income taxes ................... 22,396 238 0 2,942 0 25,576
------------- ----------- -------------- ----------- -------------- -------------
Total current assets ..................... 734,631 11,459 0 37,261 0 783,351
Other assets ............................. 75,039 145 0 1,095 0 76,279
Deferred income taxes .................... 0 184 (184)(3) 0 0 0
Property, plant and equipment, net ...... 1,354,321 5,851 0 101,038 0 1,461,210
Intangible assets, net ................... 1,018,781 553 0 45,848 0 1,065,182
------------- ----------- -------------- ----------- -------------- -------------
Total assets ............................ $3,182,772 $18,192 $ (184) $185,242 $ 0 $3,386,022
============= =========== ============== =========== ============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................ $ 75,546 $ 984 $ 7,000 (1) $ 9,047 $ 12,000 (1) $ 104,577
Salaries and wages payable .............. 64,141 989 0 1,304 0 66,434
Accrued interest payable and other
liabilities............................. 86,183 518 (2,800)(1) 10,277 (4,800)(1) 89,378
Current portion of long-term debt ....... 39,152 0 0 16,227 0 55,379
------------- ----------- -------------- ----------- -------------- -------------
Total current liabilities ................ 265,022 2,491 4,200 36,855 7,200 315,768
Long-term debt ........................... 1,424,775 0 0 45,803 0 1,470,578
Deferred income taxes .................... 26,718 0 (184)(3) 11,201 0 37,735
Other long-term liabilities .............. 5,375 0 0 259 0 5,634
Deferred revenue ......................... 597 0 0 0 0 597
Minority interests ....................... 63,054 0 0 1,685 0 64,739
Stockholders' equity:
Preferred Stock, $.10 par ............... 0 0 0 0 0 0
Common Stock, $.01 par .................. 1,562 83 (63)(2) 135 (75)(2) 1,642
Additional paid-in capital .............. 936,396 20,334 63 (2) 78,157 75 (2) 1,035,025
Retained earnings ....................... 479,124 (4,716) (4,200)(1) 26,754 (7,200)(1) 489,762
Treasury stock .......................... (323) 0 0 (15,607) 0 (15,930)
Receivable from Employee Stock Ownership
Plan.................................... (14,148) 0 0 0 0 (14,148)
Notes receivable from stockholders ...... (5,380) 0 0 0 0 (5,380)
------------- ----------- -------------- ----------- -------------- -------------
Total stockholders' equity ............... 1,397,231 15,701 (4,200) 89,439 (7,200) 1,490,971
------------- ----------- -------------- ----------- -------------- -------------
Total liabilities and stockholders'
equity .................................. $3,182,772 $18,192 $ (184) $185,242 $ 0 $3,386,022
============= =========== ============== =========== ============== =============
</TABLE>
See accompanying notes.
42
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED INCOME STATEMENT (UNAUDITED)
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
ACQUISITION
---------------------------------
PRO FORMA PRO FORMA
HEALTHSOUTH NOVACARE ADJUSTMENTS COMBINED READICARE
----------- -------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues .................................. $2,003,146 $37,942 $1,860 (5) $2,042,948 $36,961
Operating expenses:
Operating units .......................... 1,371,740 33,065 (910)(2) 1,403,895 28,730
Corporate general and administrative ..... 56,920 0 0 56,920 4,687
Provision for doubtful accounts ........... 37,659 322 0 37,981 760
Depreciation and amortization ............. 143,322 1,996 (999)(1) 146,201 1,382
1,882 (3)
Interest expense .......................... 101,790 2,595 2,684 (4) 107,069 15
Interest income ........................... (7,882) 0 0 (7,882)(4) 0
Merger and acquisition related expenses .. 34,159 0 0 34,159 0
Loss on impairment of assets .............. 53,549 0 0 53,549 0
----------- -------- ----------- ---------- ---------
1,791,257 37,978 2,657 1,831,892 35,570
----------- -------- ----------- ---------- ---------
Income (loss) before income taxes and
minority interests ....................... 211,889 (36) (797) 211,056 1,391
Provision (benefit) for income taxes ..... 76,221 (101) (259)(6) 75,861 167
----------- -------- ----------- ---------- ---------
135,668 65 (538) 135,195 1,224
Minority interests ........................ 43,147 89 0 43,236 0
----------- -------- ----------- ---------- ---------
Income (loss) from continuing operations . 92,521 (24) (538) 91,959 1,224
Loss from discontinued operations ........ 0 0 0 0 0
----------- -------- ----------- ---------- ---------
Net income (loss) ......................... $ 92,521 $ (24) $ (538) $ 91,959 $ 1,224
=========== ======== =========== ========== =========
Weighted average common and common
equivalent shares outstanding ............ 148,730 N/A N/A 148,730 8,319
=========== ======== =========== ========== =========
Net income per common and common
equivalent share: ........................
Continuing operations ................... $ 0.62 N/A N/A $ 0.62 $ 0.15
Discontinued operations ................. 0 N/A N/A 0 0
----------- -------- ----------- ---------- ---------
$ 0.62 N/A N/A $ 0.62 $ 0.15
=========== ======== =========== ========== =========
Net income per common share-- assuming
full dilution ............................ $ 0.62 N/A N/A $ 0.62 N/A
=========== ======== =========== ========== =========
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA HEALTH PRO FORMA PRO FORMA
ADJUSTMENTS IMAGES ADJUSTMENTS COMBINED
----------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues .................................. $ 0 $115,535 $ 0 $2,195,444
Operating expenses:
Operating units .......................... 0 69,319 0 1,501,944
Corporate general and administrative ..... 0 8,504 0 70,111
Provision for doubtful accounts ........... 0 4,646 0 43,387
Depreciation and amortization ............. 0 17,579 0 165,162
Interest expense .......................... 0 3,727 0 110,811
Interest income ........................... 0 (127) 0 (8,013)
Merger and acquisition related expenses .. 0 0 0 34,159
Loss on impairment of assets .............. 0 0 0 53,549
----------- -------- ----------- ----------
0 103,648 0 1,971,110
----------- -------- ----------- ----------
Income (loss) before income taxes and
minority interests ....................... 0 11,887 0 224,334
Provision (benefit) for income taxes ..... 0 4,390 0 80,418
----------- -------- ---------- -----------
0 7,497 0 143,916
Minority interests ........................ 0 606 0 43,842
----------- -------- ---------- -----------
Income (loss) from continuing operations . 0 6,891 0 100,074
Loss from discontinued operations ........ 0 (1,162) 0 (1,162)
----------- -------- ---------- -----------
Net income (loss) ......................... $ 0 $ 5,729 $ 0 $ 98,912
=========== ======== =========== ===========
Weighted average common and common
equivalent shares outstanding ............ (6,302)(2) 11,583 (6,417)(2) 155,913
=========== ========== =========== ===========
Net income per common and common
equivalent share:
Continuing operations ................... N/A $ 0.59 N/A $ 0.64
Discontinued operations ................. N/A (0.10) N/A (0.01)
---------- -------- ----------- -----------
N/A $ 0.49 N/A $ 0.63
=========== ======== =========== ===========
Net income per common share-- assuming
full dilution ........................... N/A $ 0.49 N/A $ 0.63
=========== ======== =========== ===========
See accompanying notes.
</TABLE>
43
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED INCOME STATEMENT (UNAUDITED)
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
ACQUISITION
----------------------------------
PRO FORMA PRO FORMA
HEALTHSOUTH NOVACARE ADJUSTMENTS COMBINED
----------- --------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues ....................................... $1,649,199 $142,548 $ 8,058 (5) $1,799,805
Operating expenses: ............................
Operating units ............................... 1,161,758 128,233 (12,406)(2) 1,277,585
Corporate general and administrative .......... 61,640 0 0 61,640
Provision for doubtful accounts ................ 32,904 1,269 0 34,173
Depreciation and amortization .................. 113,977 7,041 (1,918)(1) 126,626
7,526 (3)
Interest expense ............................... 73,644 11,096 10,100 (4) 94,840
Interest income ................................ (6,387) 0 0 (6,387)
Merger and acquisition related expenses ....... 6,520 0 0 6,520
Gain on sale of MCA Stock ...................... (7,727) 0 0 (7,727)
Loss on impairment of assets ................... 10,500 0 0 10,500
Loss on abandonment of computer project ....... 4,500 0 0 4,500
Loss on disposal of surgery centers ............ 13,197 0 0 13,197
----------- --------- ----------- -----------
1,464,526 147,639 3,302 1,615,467
----------- --------- ----------- -----------
Income (loss) before income taxes and minority
interests ..................................... 184,673 (5,091) 4,756 184,338
Provision (benefit) for income taxes ........... 65,121 (1,084) 780 (6) 64,817
----------- --------- ----------- -----------
119,552 (4,007) 3,976 119,521
Minority interests ............................. 31,469 445 0 31,914
----------- --------- ----------- -----------
Income (loss) from continuing operations ...... 88,083 (4,452) 3,976 87,607
Income (loss) from discontinued operations ..... 0 0 0 0
----------- --------- ----------- -----------
Net income (loss) .............................. $ 88,083 $ (4,452) $ 3,976 $ 87,607
=========== ========= =========== ===========
Weighted average common and common equivalent
shares outstanding ............................ 140,427 N/A N/A 140,427
=========== ========= =========== ===========
Net income per common and common equivalent
share: ........................................
Continuing operations ......................... $ 0.63 N/A N/A $ 0.62
Discontinued operations ....................... 0 N/A N/A 0
----------- --------- ----------- -----------
$ 0.63 N/A N/A $ 0.62
=========== ========= =========== ===========
Net income per common share-- assuming full
dilution ...................................... $ 0.63 N/A N/A $ 0.62
=========== ========= =========== ===========
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA HEALTH PRO FORMA PRO FORMA
READICARE ADJUSTMENTS IMAGES ADJUSTMENTS COMBINED
---------- ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues ....................................... $36,285 $ 0 77,122 $ 0 $1,913,212
Operating expenses:
Operating units ............................... 29,283 0 45,949 0 1,352,817
Corporate general and administrative .......... 4,419 0 6,158 0 72,217
Provision for doubtful accounts................. 770 0 2,836 0 37,779
Depreciation and amortization .................. 1,369 0 12,171 0 140,166
Interest expense ............................... 94 0 1,251 0 96,185
Interest income ................................ (2) 0 (271) 0 (6,660)
Merger and acquisition related expenses ....... 0 0 0 0 6,520
Gain on sale of MCA Stock ...................... 0 0 0 0 (7,727)
Loss on impairment of assets ................... 0 0 0 0 10,500
Loss on abandonment of computer project ....... 0 0 0 0 4,500
Loss on disposal of surgery centers ............ 0 0 0 0 13,197
--------- ----------- -------- ----------- -----------
35,933 0 68,094 0 1,719,494
--------- ----------- -------- ----------- -----------
Income (loss) before income taxes and minority
interests ..................................... 352 0 9,028 0 193,718
Provision (benefit) for income taxes ........... 52 0 3,439 0 68,308
--------- ----------- -------- ----------- -----------
300 0 5,589 0 125,410
Minority interests ............................. 0 0 196 0 32,110
--------- ----------- -------- ----------- -----------
Income (loss) from continuing operations ...... 300 0 5,393 0 93,300
Income (loss) from discontinued operations ..... 85 0 (6,528) 0 (6,443)
--------- ----------- -------- ----------- -----------
Net income (loss) .............................. $ 385 $ 0 $(1,135) $ 0 $ 86,857
========= =========== ======== =========== ===========
Weighted average common and common equivalent
shares outstanding ............................ 8,178 (6,195)(2) 11,726 (6,496)(2) 147,640
========= =========== ======== =========== ===========
Net income per common and common equivalent
share: ........................................
Continuing operations ......................... $ 0.04 N/A $ 0.46 N/A $ 0.63
Discontinued operations ....................... 0.01 N/A (0.56) N/A (0.04)
--------- ----------- -------- ----------- -----------
$ 0.05 N/A $ (0.10) N/A $ 0.59
========= =========== ======== =========== ===========
Net income per common share-- assuming full
dilution ...................................... N/A N/A $ (0.10) N/A $ 0.59
========= =========== ======== =========== ===========
</TABLE>
See accompanying notes.
44
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED INCOME STATEMENT (UNAUDITED)
YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
PRO FORMA HEALTH PRO FORMA PRO FORMA
HEALTHSOUTH READICARE ADJUSTMENTS IMAGES ADJUSTMENTS COMBINED
------------- ----------- -------------- --------- -------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Revenues ................................. $979,206 $37,426 $ 0 $76,089 $ 0 $1,092,721
Operating expenses:
Operating units ......................... 668,201 30,857 0 46,988 0 746,046
Corporate general and administrative .... 37,043 3,967 0 6,335 0 47,345
Provision for doubtful accounts .......... 20,026 793 0 2,651 0 23,470
Depreciation and amortization ............ 63,572 1,836 0 11,853 0 77,261
Interest expense ......................... 24,200 174 0 1,684 0 26,058
Interest income .......................... (5,903) (20) 0 (276) 0 (6,199)
Merger and acquisition related expenses . 333 0 0 0 0 333
NME Selected Hospitals Acquisition related
related expense ......................... 49,742 0 0 0 0 49,742
Gain on sale of partnership interest .... (1,400) 0 0 0 0 (1,400)
Loss on impairment of assets ............. 0 6,675 0 0 0 6,675
------------- ----------- -------------- --------- -------------- -------------
855,814 44,282 0 69,235 0 969,331
------------- ----------- -------------- --------- -------------- -------------
Income (loss) before income taxes and
minority interests ...................... 123,392 (6,856) 0 6,854 0 123,390
Provision for income taxes ............... 37,993 505 0 2,457 0 40,955
------------- ----------- -------------- --------- -------------- -------------
85,399 (7,361) 0 4,397 0 82,435
Minority interests ....................... 29,377 0 0 172 0 29,549
------------- ----------- -------------- --------- -------------- -------------
Income (loss) from continuing operations 56,022 (7,361) 0 4,225 0 52,886
Income (loss) from discontinued
operations .............................. 4,452 (1,768) 0 (466) 0 2,218
------------- ----------- -------------- --------- -------------- -------------
Net income (loss) ........................ $ 60,474 $(9,129) $ 0 $ 3,759 $ 0 $ 55,104
============= =========== ============== ========= ============== =============
Weighted average common and common
equivalent shares outstanding ........... 132,479 8,195 (6,208)(2) 11,612 (6,433)(2) 139,645
============= =========== ============== ========= ============== =============
Net income (loss) per common and common
equivalent share: .......................
Continuing operations .................. $ 0.43 $ (0.89) N/A $ 0.36 N/A $ 0.38
Discontinued operations ................ 0.03 (0.22) N/A (0.04) N/A 0.02
------------- ----------- -------------- --------- -------------- -------------
$ 0.46 $ (1.11) N/A $ 0.32 N/A $ 0.40
============= =========== ============== ========= ============== =============
</TABLE>
See accompanying notes.
45
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED INCOME STATEMENT (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PRO FORMA HEALTH PRO FORMA PRO FORMA
HEALTHSOUTH READICARE ADJUSTMENTS IMAGES ADJUSTMENTS COMBINED
------------- ----------- ------------- ---------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Revenues ............................... $1,793,766 $28,943 $ 0 $98,979 $ 0 $1,921,688
Operating expenses:
Operating units ....................... 1,173,148 22,553 0 60,802 0 1,256,503
Corporate general and administrative .. 49,462 3,589 0 6,943 0 59,994
Provision for doubtful accounts ....... 39,873 496 0 3,631 0 44,000
Depreciation and amortization .......... 137,320 950 0 13,538 0 151,808
Interest expense ....................... 69,967 0 0 2,881 0 72,848
Interest income ........................ (4,449) (43) 0 (64) 0 (4,556)
Merger and acquisition related expenses 34,452 63 0 0 0 34,515
------------- ----------- ------------- ---------- ------------- -------------
1,499,773 27,608 0 87,731 0 1,615,112
------------- ----------- ------------- ---------- ------------- -------------
Income before income taxes and minority
interests ............................. 293,993 1,335 0 11,248 0 306,576
Provision for income taxes ............. 97,528 160 0 3,958 0 101,646
------------- ----------- ------------- ---------- ------------- -------------
196,465 1,175 0 7,290 0 204,930
Minority interests ..................... 38,015 0 0 593 0 38,608
------------- ----------- ------------- ---------- ------------- -------------
Net income ............................. $ 158,450 $ 1,175 $ 0 $ 6,697 $ 0 $ 166,322
============= =========== ============= ========== ============= =============
Weighted average common and common
equivalent shares outstanding ......... 165,793 8,633 (6,539)(2) 11,699 (6,481)(2) 173,105
============= =========== ============= ========== ============= =============
Net income per common and common
equivalent share ...................... $ 0.96 $ 0.14 N/A $ 0.57 N/A $ 0.96
============= =========== ============= ========== ============= =============
Net income per common share-- assuming
full dilution ......................... $ 0.94 N/A N/A $ 0.56 N/A $ 0.94
============= =========== ============= ========== ============= =============
</TABLE>
See accompanying notes.
46
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED INCOME STATEMENT (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
ACQUISITION
--------------------
PRO FORMA PRO FORMA
HEALTHSOUTH NOVACARE ADJUSTMENTS COMBINED
----------- -------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues ..................................... $1,470,049 37,942 1,860 (5) $1,509,851
Operating expenses:
Operating units ............................. 1,014,302 33,065 (910)(2) 1,046,457
Corporate general and administrative ........ 40,479 0 0 40,479
Provision for doubtful accounts .............. 28,172 322 0 28,494
Depreciation and amortization ................ 104,874 1,996 (999)(1) 107,753
1,882 (3)
Interest expense ............................. 75,035 2,595 2,684 (4) 80,314
Interest income .............................. (6,244) 0 0 (6,244)
Merger and acquisition related expenses ..... 29,194 0 0 29,194
Loss on impairment of assets ................. 11,192 0 0 11,192
----------- -------- ----------- -----------
1,297,004 37,978 2,657 1,337,639
----------- -------- ----------- -----------
Income (loss) before income taxes and
minority interests .......................... 173,045 (36) (797) 172,212
Provision (benefit) for income taxes ........ 55,784 (101) (259)(6) 55,424
----------- -------- ----------- -----------
117,261 65 (538) 116,788
Minority interests ........................... 30,766 89 0 30,855
----------- -------- ----------- -----------
Income (loss) from continuing operations .... 86,495 (24) (538) 85,933
Loss from discontinued operations ............ 0 0 0 0
----------- -------- ----------- -----------
Net income (loss) ............................ $ 86,495 $ (24) $ (538) $ 85,933
=========== ======== =========== ===========
Weighted average common and common equivalent
shares outstanding .......................... 143,911 N/A N/A 143,911
----------- -------- ----------- -----------
Net income per common and common equivalent
share:
Continuing operations ....................... $ 0.60 N/A N/A $ 0.60
Discontinued operations ..................... 0 N/A N/A 0
----------- -------- ----------- -----------
$ 0.60 N/A N/A $ 0.60
=========== ======== =========== ===========
Net income per common share--assuming full
dilution .................................... $ 0.60 N/A N/A $ 0.59
=========== ======== =========== ===========
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA HEALTH PRO FORMA PRO FORMA
READICARE ADJUSTMENTS IMAGES ADJUSTMENTS COMBINED
--------- ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues ..................................... $27,858 $ 0 $83,315 $ 0 $1,621,024
Operating expenses:
Operating units ............................. 21,548 0 50,292 0 1,118,297
Corporate general and administrative ........ 3,448 0 5,685 0 49,612
Provision for doubtful accounts .............. 518 0 3,333 0 32,345
Depreciation and amortization ................ 1,039 0 12,866 0 121,658
Interest expense ............................. 17 0 2,731 0 83,062
Interest income .............................. (2) 0 (101) 0 (6,347)
Merger and acquisition related expenses ..... 0 0 0 0 29,194
Loss on impairment of assets ................. 0 0 0 0 11,192
--------- ----------- -------- ----------- -----------
26,568 0 74,806 0 1,439,013
--------- ----------- -------- ------------ -----------
Income (loss) before income taxes and
minority interests .......................... 1,290 0 8,509 0 182,011
Provision (benefit) for income taxes ........ 154 0 3,113 0 58,691
--------- ----------- -------- ----------- -----------
1,136 0 5,396 0 123,320
Minority interests ........................... 0 0 495 0 31,350
--------- ----------- -------- ----------- -----------
Income (loss) from continuing operations .... 1,136 0 4,901 0 91,970
Loss from discontinued operations ............ 0 0 (1,163) 0 (1,163)
--------- ----------- -------- ----------- -----------
Net income (loss) ............................ $ 1,136 $ 0 $ 3,738 $ 0 $ 90,807
========= =========== ======== =========== ===========
Weighted average common and common equivalent
shares outstanding .......................... (2) 8,202 (6,213)(2) 11,587 (6,419)(2) 151,068
--------- ----------- -------- ----------- -----------
Net income per common and common equivalent
share:
Continuing operations ....................... $ 0.14 N/A $ 0.42 N/A $ 0.61
Discontinued operations ..................... 0 N/A (0.10) N/A (0.01)
--------- ----------- -------- ----------- -----------
$ 0.14 N/A $ 0.32 N/A $ 0.60
========= =========== ======== =========== ===========
Net income per common share--assuming full
dilution .................................... N/A N/A $ 0.32 N/A $ 0.60
========= =========== ======== =========== ===========
</TABLE>
See accompanying notes.
47
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
A. THE NOVACARE REHABILITATION HOSPITALS ACQUISITION
Effective April 1, 1995 HEALTHSOUTH completed the acquisition of the
rehabilitation hospitals division of NovaCare, consisting of 11 rehabilitation
hospitals, 12 other facilities, and certificates of need to build two additional
facilities (the "NovaCare Rehabilitation Hospitals Acquisition"). The purchase
price was approximately $234,807,000. The transaction was accounted for as a
purchase and, accordingly, the results of the acquired NovaCare facilities are
included in HEALTHSOUTH's historical financial statements from the effective
date of the acquisition. HEALTHSOUTH financed the cost of the NovaCare
Rehabilitation Hospitals Acquisition through additional borrowings under its
existing credit facilities, as amended.
The accompanying pro forma income statements for the years ended December 31,
1994 and 1995 and the nine months ended September 30, 1995 assume that the
transaction was consummated at the beginning of each of the periods presented.
Certain assets and liabilities of Rehab Systems Company (a wholly-owned
subsidiary of NovaCare) were excluded from the NovaCare Rehabilitation Hospitals
Acquisition. The excluded assets and liabilities are as follows (in thousands):
Cash and cash equivalents............................ $ 4,973
Accounts receivable ................................. 259
Other current assets ................................ 42
Equipment, net ...................................... 4,719
Intangible assets, net .............................. 56,321
Other assets (primarily investments in subsidiaries) 40,637
Accounts payable .................................... (454)
Other current liabilities ........................... (275)
Current portion of long-term debt ................... (146)
Long-term debt....................................... (38,620)
Payable to affiliates................................ (92,377)
-----------
Net excluded asset (liability) ...................... $(24,921)
===========
The following pro forma adjustments are necessary for the NovaCare
Rehabilitation Hospitals Acquisition:
1. To exclude historical depreciation and amortization expense related to the
excluded assets described above. The total expense excluded amounts to
$1,918,000 for the year ended December 31, 1994 and $999,000 for the nine months
ended September 30, 1995 and year ended December 31, 1995.
2. To eliminate intercompany management fees and royalty fees totaling
$12,406,000 for the year ended December 31, 1994 and $910,000 for the nine
months ended September 30, 1995 and year ended December 31, 1995 of the acquired
NovaCare facilities.
3. To adjust depreciation and amortization expense to reflect the allocation
of the excess purchase price over the net tangible asset value as follows (in
thousands):
PURCHASE PRICE USEFUL ANNUAL QUARTERLY
ALLOCATION ADJUSTMENT LIFE AMORTIZATION AMORTIZATION
---------------------- ----------- -------------- -------------
Leasehold
value.......... $128,333 20 years $6,417 $1,605
Goodwill....... 44,365 40 years 1,109 277
-------- ---------
$7,526 $1,882
======== =========
No additional adjustments to NovaCare's historical depreciation and
amortization are necessary. The remaining net assets acquired approximate their
fair value.
48
<PAGE>
Because NovaCare's results of operations before intercompany items (described
in Note 2 above) are profitable, both on a historical and pro forma basis, the
40-year amortization period for goodwill is appropriate and consistent with
HEALTHSOUTH policy. Leasehold value is being amortized over the weighted average
remaining terms of the leases, which is 20 years.
4. To increase interest expense by $19,559,000 for the year ended December
31, 1994 and $4,889,000 for the nine months ended September 30, 1995 and year
ended December 31, 1995 to reflect pro forma borrowings of $234,807,000,
described above, at a 8.33% variable interest rate, which represents
HEALTHSOUTH's weighted average cost of debt, as if they were outstanding for the
entire period, and to decrease interest expense by $9,459,000 for the year ended
December 31, 1994 and $2,205,000 for the six months ended June 30, 1995 and year
ended December 31, 1995, which represents interest on NovaCare debt not assumed
by HEALTHSOUTH. A .125% variance in the assumed interest rate would change
annual pro forma interest expense by approximately $294,000.
5. To adjust estimated Medicare reimbursement for the changes in reimbursable
expenses described in items 1, 2, 3 and 4 above. These changes are as follows
(in thousands):
YEAR ENDED
DECEMBER 31, 1995
AND
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1994 1995
-------------- ------------
Depreciation and amortization (Note 1). $(1,918) $ (999)
Intercompany management fees (Note 2).. (4,196) (910)
Depreciation and amortization (Note 3). 7,526 1,882
Interest expense (Note 4).............. 10,100 2,684
--------------- ------------
11,512 2,657
Assumed Medicare utilization........... 70% 70%
----------------- ------------
Increased reimbursement................ $ 8,058 $1,860
================= ============
The Medicare utilization rate of 70% assumes a slight improvement in
NovaCare's historical Medicare percentage of 78% as a result of bringing these
facilities into the HEALTHSOUTH network.
6. To adjust the NovaCare provision for income taxes to an effective rate
of 39% (net of minority interests).
B. THE READICARE MERGER
The ReadiCare Merger is to be accounted for as a pooling of interests. The
pro forma condensed combined income statements assume that the ReadiCare Merger
was consummated on January 1, 1993. The pro forma condensed combined balance
sheet assumes that the ReadiCare Merger was consummated on September 30, 1996.
The pro forma condensed combined financial information contains no
adjustments to conform the accounting policies of the two companies because any
such adjustments have been determined to be immaterial by the management of
HEALTHSOUTH.
The following pro forma adjustments are necessary for the ReadiCare Merger:
1. The pro forma income statements do not reflect non-recurring costs
resulting directly from the ReadiCare Merger. The management of HEALTHSOUTH
estimates that these costs will approximate $7,000,000 and will be charged to
operations in the quarter the ReadiCare Merger is consummated. The amount
includes costs to merge the two companies and professional fees. However, this
estimated expense, net of taxes of $2,800,000, has been charged to retained
earnings in the accompanying pro forma balance sheet.
2. To adjust pro forma share amounts based on historical share amounts,
converting each outstanding ReadiCare Share into .2425 shares of HEALTHSOUTH
Common Stock.
49
<PAGE>
3. To net ReadiCare's deferred income tax asset against HEALTHSOUTH's
deferred income tax liability.
C. THE HEALTH IMAGES MERGER
The Health Images Merger is to be accounted for as a pooling of interests.
The pro forma condensed combined income statements assume that the Health Images
Merger was consummated on January 1, 1993. The pro forma condensed combined
balance sheet assumes that the Health Images Merger was consummated on September
30, 1996.
The pro forma condensed combined financial information contains no
adjustments to conform the accounting policies of the two companies because any
such adjustments have been determined to be immaterial by the management of
HEALTHSOUTH.
The following pro forma adjustments are necessary for the Health Images
Merger:
1. The pro forma income statements do not reflect non-recurring costs
resulting directly from the Health Images Merger. The management of HEALTHSOUTH
estimates that these costs will approximate $12,000,000 and will be charged to
operations in the quarter the Health Images Merger is consummated. The amount
includes costs to merge the two companies and professional fees. However, this
estimated expense, net of taxes of $4,800,000, has been charged to retained
earnings in the accompanying pro forma balance sheet.
2. To adjust the pro forma share amounts based on historical share amounts,
converting each outstanding Health Images Share into 0.446 of a share of
HEALTHSOUTH Common Stock.
50
<PAGE>
BUSINESS OF HEALTHSOUTH
GENERAL
HEALTHSOUTH is the nation's largest provider of outpatient and rehabilitative
healthcare services. HEALTHSOUTH provides these services through its national
network of outpatient and inpatient rehabilitation facilities, outpatient
surgery centers, medical centers and other healthcare facilities. HEALTHSOUTH
believes that it provides patients, physicians and payors with high-quality
healthcare services at significantly lower costs than traditional inpatient
hospitals. Additionally, HEALTHSOUTH's national network, reputation for quality
and focus on outcomes has enabled it to secure contracts with national and
regional managed care payors. At December 31, 1996, HEALTHSOUTH had over 1,000
patient care locations in 50 states.
In its outpatient and inpatient rehabilitation facilities, HEALTHSOUTH
provides interdisciplinary programs for the rehabilitation of patients
experiencing disability due to a wide variety of physical conditions, such as
stroke, head injury, orthopaedic problems, neuromuscular disease and
sports-related injuries. HEALTHSOUTH's rehabilitation services include physical
therapy, sports medicine, work hardening, neurorehabilitation, occupational
therapy, respiratory therapy, speech-language pathology and rehabilitation
nursing. Independent studies have shown that rehabilitation services like those
provided by HEALTHSOUTH can save money for payors and employers.
HEALTHSOUTH operates the largest network of free-standing outpatient surgery
centers in the United States. HEALTHSOUTH's outpatient surgery centers provide
the facilities and medical support staff necessary for physicians to perform
non-emergency surgical procedures. While outpatient surgery is widely recognized
as generally less expensive than surgery performed in a hospital, HEALTHSOUTH
believes that outpatient surgery performed at a free-standing outpatient surgery
center is generally less expensive than hospital-based outpatient surgery.
Approximately 80% of HEALTHSOUTH's surgery center facilities are located in
markets served by its rehabilitative service facilities, enabling HEALTHSOUTH to
pursue opportunities for cross-referrals.
Over the last two years, HEALTHSOUTH has completed several significant
acquisitions in the rehabilitation business and has expanded into the surgery
center and occupational medicine businesses. HEALTHSOUTH believes that these
acquisitions complement its historical operations and enhance its market
position. HEALTHSOUTH further believes that its expansion into the outpatient
surgery and occupational medicine businesses provides it with a platform for
future growth. HEALTHSOUTH is continually evaluating potential acquisitions in
the outpatient and rehabilitative healthcare services industry.
COMPANY STRATEGY
HEALTHSOUTH's principal objective is to be the provider of choice for
patients, physicians and payors alike for outpatient and rehabilitative
healthcare services throughout the United States. HEALTHSOUTH's growth strategy
is based upon four primary elements: (i) the implementation of HEALTHSOUTH's
integrated service model in appropriate markets, (ii) successful marketing to
managed care organizations and other payors, (iii) the provision of
high-quality, cost-effective healthcare services, and (iv) the expansion of its
national network.
o Integrated Service Model. HEALTHSOUTH seeks, where appropriate, to provide
an integrated system of healthcare services, including outpatient
rehabilitation services, inpatient rehabilitation services, ambulatory
surgery services and outpatient diagnostic services. HEALTHSOUTH believes
that its integrated system offers payors the convenience of dealing with a
single provider for multiple services. Additionally, it believes that its
facilities can provide extensive referral opportunities. For example,
HEALTHSOUTH estimates that approximately one-third of its outpatient
rehabilitation patients have had outpatient surgery, virtually all
inpatient rehabilitation patients will require some form of outpatient
rehabilitation, and virtually all inpatient rehabilitation patients have
had some type of diagnostic procedure. HEALTHSOUTH has implemented its
integrated service model in certain of its markets, and intends to expand
the model into other appropriate markets.
51
<PAGE>
o Marketing to Managed Care Organizations and Other Payors. Since the late
1980s, HEALTHSOUTH has focused on the development of contractual
relationships with managed care organizations, major insurance companies,
large regional and national employer groups and provider alliances and
networks. HEALTHSOUTH's documented outcomes and experience with several
hundred thousand patients in delivering quality healthcare services at
reasonable prices has enhanced its attractiveness to such entities and has
given HEALTHSOUTH a competitive advantage over smaller and regional
competitors. These relationships have increased patient flow to
HEALTHSOUTH's facilities and contributed to HEALTHSOUTH's same-store
growth.
o Cost-Effective Services. HEALTHSOUTH's goal is to provide high-quality
healthcare services in cost-effective settings. To that end, HEALTHSOUTH
has developed standardized clinical protocols for the treatment of its
patients. This results in "best practices" techniques being utilized at
all of HEALTHSOUTH's facilities, allowing the consistent achievement of
demonstrable, cost-effective clinical outcomes. HEALTHSOUTH's reputation
for its clinical programs is enhanced through its relationships with major
universities throughout the nation, and its support of clinical research
in its facilities. Further, independent studies estimate that, for every
dollar spent on rehabilitation, $11 to $35 is saved. Finally, surgical
procedures typically are less expensive in outpatient surgery centers than
in hospital settings. HEALTHSOUTH believes that outpatient and
rehabilitative healthcare services will assume increasing importance in
the healthcare environment as payors continue to seek to reduce overall
costs by shifting patients to more cost-effective treatment settings.
o Expansion of National Network. As the largest provider of outpatient and
rehabilitative healthcare services in the United States, HEALTHSOUTH is
able to realize economies of scale and compete successfully for national
contracts with large payors and employers while retaining the flexibility
to respond to particular needs of local markets. The national network
affords HEALTHSOUTH the opportunity to offer large national and regional
employers and payors the convenience of dealing with a single provider, to
utilize greater buying power through centralized purchasing, to achieve
more efficient costs of capital and labor and to more effectively recruit
and retain clinicians. HEALTHSOUTH believes that its recent and pending
acquisitions in the outpatient surgery and diagnostic imaging fields will
further enhance its national presence by broadening the scope of its
existing services and providing new opportunities for growth. These
national benefits are realized without sacrificing local market
responsiveness. HEALTHSOUTH's objective is to provide those outpatient and
rehabilitative healthcare services needed within each local market by
tailoring its services and facilities to that market's needs, thus
bringing the benefits of nationally recognized expertise and quality into
the local setting.
PATIENT CARE SERVICES: GENERAL
HEALTHSOUTH began its operations in 1984 with a focus on providing
comprehensive orthopaedic and musculoskeletal rehabilitation services on an
outpatient basis. Over the succeeding 12 years, HEALTHSOUTH has consistently
sought and implemented opportunities to expand its services through acquisitions
and de novo development activities that complement its historic focus on
orthopaedic, sports medicine and occupational medicine services and that provide
independent platforms for growth. HEALTHSOUTH's acquisitions and internal growth
have enabled it to become the largest provider of rehabilitative healthcare
services, both inpatient and outpatient, in the United States. In addition,
HEALTHSOUTH has added outpatient surgery services, diagnostic imaging services
and other outpatient services which provide natural enhancements to its
rehabilitative healthcare locations and facilitate the implementation of its
integrated service model. HEALTHSOUTH believes that these additional businesses
also provide opportunities for growth in other areas not directly related to the
rehabilitative business, and HEALTHSOUTH intends to pursue further expansion in
those businesses.
52
<PAGE>
OUTPATIENT REHABILITATION SERVICES
HEALTHSOUTH operates the largest group of affiliated proprietary outpatient
rehabilitation facilities in the United States. HEALTHSOUTH's outpatient
rehabilitation centers offer a comprehensive range of rehabilitative healthcare
services, including physical therapy and occupational therapy, that are tailored
to the individual patient's needs, focusing predominantly on orthopaedic
injuries, sports injuries, work injuries, hand and upper extremity injuries,
back injuries and various neurological and neuromuscular conditions. As of
November 30, 1996, HEALTHSOUTH provided outpatient rehabilitative healthcare
services through approximately 738 outpatient locations, including freestanding
outpatient centers and their satellites and outpatient satellites of inpatient
facilities.
INPATIENT REHABILITATION SERVICES
At November 30, 1996, HEALTHSOUTH operated 96 inpatient rehabilitation
facilities with 5,749 beds, representing the largest group of proprietary
inpatient rehabilitation facilities in the United States. HEALTHSOUTH's
inpatient rehabilitation facilities provide high-quality comprehensive services
to patients who require intensive institutional rehabilitation care. Certain of
HEALTHSOUTH's inpatient rehabilitation facilities also provide outpatient
rehabilitation services for patients who have completed their inpatient course
of treatment but remain in need of additional therapy that can be accomplished
on an outpatient basis.
MEDICAL CENTERS
HEALTHSOUTH operates five medical centers with 912 licensed beds in four
distinct markets. These facilities, which are licensed as general, acute-care
hospitals, provide general and specialty medical and surgical healthcare
services, emphasizing orthopaedics, sports medicine and rehabilitation.
SURGERY CENTERS
As a result of three acquisitions of major surgery center operators in 1995
and early 1996, HEALTHSOUTH became the largest operator of outpatient surgery
centers in the United States. It currently operates 140 free-standing surgery
centers, including five mobile lithotripsy units, in 33 states, and has an
additional ten free-standing surgery centers under development. Approximately
80% of these facilities are located in markets served by HEALTHSOUTH outpatient
and rehabilitative service facilities, enabling HEALTHSOUTH to pursue
opportunities for cross-referrals between surgery and rehabilitative facilities
as well as to centralize administrative functions. HEALTHSOUTH's surgery centers
provide the facilities and medical support staff necessary for physicians to
perform non-emergency surgical procedures that do not generally require
overnight hospitalization. Its typical surgery center is a free-standing
facility with two to six fully equipped operating and procedure rooms and
ancillary areas for reception, preparation, recovery and administration. Each of
HEALTHSOUTH's surgery centers is available for use only by licensed physicians,
oral surgeons and podiatrists, and the centers generally do not perform surgery
on an emergency basis.
Outpatient surgery centers, unlike hospitals, have not historically provided
overnight accommodations, food services or other ancillary services. Over the
past several years, states have increasingly permitted the use of extended-stay
recovery facilities by outpatient surgery centers. As a result, many outpatient
surgery centers are adding extended recovery care capabilities where permitted.
Fifty-two of HEALTHSOUTH's surgery centers currently provide for extended
recovery stays. HEALTHSOUTH's ability to develop such recovery care facilities
is dependent upon state regulatory environments in the particular states where
its centers are located.
OTHER PATIENT CARE SERVICES
In certain of its markets, HEALTHSOUTH provides other patient care services,
including home healthcare, diagnostic services, physician services and contract
management of hospital-based rehabilitative healthcare services. HEALTHSOUTH
evaluates market opportunities on a case-by-case basis in determining whether to
provide additional services of these types, which may be complementary to
facility-based services provided by HEALTHSOUTH or stand-alone businesses.
53
<PAGE>
LOCATIONS
The following table sets forth a listing of HEALTHSOUTH's patient care
services locations by state at December 31, 1996:
<TABLE>
<CAPTION>
INPATIENT
OUTPATIENT REHABILITATION MEDICAL
REHABILITATION FACILITIES CENTERS SURGERY DIAGNOSTIC OTHER
STATE CENTERS(1) (BEDS)(2) (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) 4
Arkansas............. 1 1 (80) 2
California .......... 48 1 (60) 21 31
Colorado ............ 28 5 12
Connecticut ......... 18 2 (40) 1
Delaware............. 7 1
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 4
Indiana ............. 13 1 (80) 2
Iowa................. 3 1
Kansas............... 5 1
Kentucky ............ 3 1 (40) 1
Louisiana ........... 2 1 (43) 1 1
Maine ............... 9 4 (155) 1
Maryland ............ 14 1 (44) 7 3
Massachusetts ....... 37 10 (639) 1 10
Michigan ............ 3 1
Minnesota............ 11
Mississippi ......... 2
Missouri ............ 34 4 (107) 7 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 ...... 11 3
North Dakota......... 1
Ohio................. 27 1 (24) 4 3
Oklahoma ............ 11 1 (111) 5 1
Oregon............... 1
Pennsylvania ........ 31 12 (1,041) 5
Rhode Island......... 3
South Carolina....... 9 4 (235) 2
South Dakota......... 1
Tennessee ........... 13 5 (330) 6 1
Texas ............... 72 10 (633) 1 (96) 17 2 14
Utah ................ 1 1 (86) 1
Vermont.............. 2 (52)
Virginia ............ 11 2 (84) 1 (200) 1 2 10
Washington .......... 36 1 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.
54
<PAGE>
BUSINESS OF HEALTH IMAGES
GENERAL
Health Images is a leading provider of diagnostic imaging services and one of
the largest independent operators of magnetic resonance imaging ("MRI") centers
in the United States. MRI is considered the premier diagnostic modality for
cross-sectional imaging of human tissue. Health Images operates 49 freestanding
diagnostic imaging centers in 13 states in the United States and six in England.
Health Images offers MRI services at all of its imaging centers. In addition,
Health Images provides computerized tomography ("CT") services at 18 of its
centers, x-ray services at 19 centers, ultrasound services at 15 centers,
mammography services at 13 centers, nuclear medicine at seven centers and
fluoroscopy at eight centers.
OVERVIEW OF DIAGNOSTIC IMAGING INDUSTRY
Medical diagnostic imaging systems facilitate the diagnosis of diseases and
disorders at an early stage, often minimizing the amount and cost of care needed
to stabilize, treat or cure the patient and frequently obviating the need for
invasive diagnostic procedures, such as exploratory surgery. Diagnostic imaging
systems are based on the ability of energy waves to penetrate human tissue and
generate images of the body which can be displayed either on film or on a video
monitor. Imaging systems have evolved from conventional x-ray to the advanced
technologies of MRI, CT, nuclear medicine and ultrasound. The use of these
technologies has grown significantly in the United States during the last
several years due to increasing acceptance by physicians of the value of
diagnostic imaging technologies in the early diagnosis of disease, the expanding
applications of MRI and ultrasound and the growing patient base attributable to
an aging population. While conventional x-ray continues to be the most widely
used imaging modality, MRI, CT and nuclear medicine provide more sophisticated
imaging capabilities that frequently justify their greater costs. Physicians
increasingly use MRI, CT and nuclear medicine to visualize structures inside the
human body because these modalities provide images in digital form with a tissue
resolution that approaches what could previously be seen only through surgery.
In addition, dedicated computer systems can enhance and manipulate the images
provided by these modalities to create three-dimensional images. These images
allow physicians to contemplate various medical scenarios in real time.
OUTPATIENT VS. INPATIENT DELIVERY OF SERVICES
Health Images believes the diagnostic imaging industry is experiencing a
trend toward outpatient delivery of imaging services, particularly with respect
to more sophisticated, capital intensive modalities such as MRI and CT. Health
Images believes this trend is the result of the continuing search for more
cost-effective and convenient delivery of services in the healthcare industry.
Outpatient imaging centers generally are more cost-effective than inpatient
facilities because they do not have to incur the high overhead cost associated
with full-service medical institutions and can be more selective with respect to
the services provided. Health Images has found, however, that some hospitals
that have invested in imaging equipment may be more willing to accept lower
reimbursement rates from managed care payors than outpatient centers to increase
volume to cover some of their fixed overhead.
Given an alternative, Health Images believes that physicians and patients
prefer outpatient care to inpatient imaging services for the following reasons:
- Physicians frequently rely on MRI or CT to aid in diagnosing individuals
whose symptoms and complaints do not yet merit hospitalization.
- Outpatient imaging centers provide the necessary imaging services without
requiring the patient to undergo the often time-consuming and tedious
hospital admission process. Outpatient delivery allows the patient to
obtain the procedure at his or her convenience by providing more
convenient access and more flexible and dependable hours than hospitals.
- A scheduled appointment time at an outpatient facility is generally more
reliable than that of an inpatient imaging facility because of less
likelihood of preemption from emergency care.
55
<PAGE>
In addition, in the current climate of declining reimbursements and cost
containment in the healthcare industry, hospitals are looking for areas to cut
back. Health Images believes that hospitals are more likely to reduce capital
budgets rather than cut back on services that must be provided on-site to
hospitalized patients. These cutbacks may result in increased reliance by
hospitals on outpatient services to meet certain needs of their patients. In
Health Images' experience, hospitals often prefer to contract out overflow of
diagnostic imaging procedures rather than purchase additional equipment.
THE IMAGING SELECTION PROCESS
Health Images and its imaging centers compete with local hospitals, other
multi-center imaging companies, local independent diagnostic imaging centers and
imaging centers owned by local physician groups. Health Images believes that the
principal competitive factors in the diagnostic imaging market 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.
The patient's physician, most frequently an orthopaedic or neurology
specialist, determines the imaging modality necessary or appropriate for the
patient. The physician also determines the facility or imaging center to which
the patient should be referred, based primarily on the requirements of the
patient's insurance carrier or managed care provider, reputation of the
radiologist or radiology group providing interpretation services at available
facilities and the quality and convenience of service both to the patient and to
the physician and his office staff.
IMPACT OF MANAGED CARE AND MEDICARE/MEDICAID PROGRAMS ON REIMBURSEMENTS
Diagnostic imaging services, like most other healthcare services, are
generally paid for, directly or indirectly, by commercial insurance carriers,
managed care organizations, Medicare, Medicaid or another government
instrumentality or, in some limited instances, by patients directly. Prices for
imaging services vary by region and locality and are determined by competitive
conditions in the local market. Diagnostic imaging services providers often
enter into contracts with private insurance and managed care payors that provide
for contractual discounts from list price. An unwillingness to discount on the
part of a diagnostic imaging services provider would result in its exclusion
from the managed care networks in which many patients now participate. Managed
care payors differ in policy and practice on whether they contract with many
diagnostic imaging providers or only a few in a given market. Some managed care
payors emphasize the breadth of their networks while others emphasize tight
control over a limited number of providers. Health Images believes many managed
care payors prefer to contract with imaging services providers that can offer
competitive pricing, multiple imaging modalities and convenient locations in a
particular geographical area. In addition, Medicare and Medicaid have specific
reimbursement rates that are significantly lower than list prices for imaging
procedures. Medicare and Medicaid reimbursement rates also vary among states and
regions.
INDUSTRY CONSOLIDATION
Health Images believes that the diagnostic imaging industry, like other
segments of the healthcare industry, is consolidating. Health Images believes
that this consolidation is driven primarily by the increasing role of private
insurers and managed care payors in controlling reimbursement rates in the
diagnostic imaging industry. Also, the number of self-referral practices is
declining as investment and other economic relationships between referring
physicians and imaging centers are reduced or eliminated. The current federal
and state legislative environments and managed care payors all create pressures
that discourage imaging centers that rely on physician self-referral. Another
consolidation factor results when private insurance payors and managed care
payors increasingly seek adequate market coverage from a single source providing
multiple procedures. These trends are likely to encourage multi-center companies
to seek to strengthen their respective networks of centers in regional markets
to offer full geographic coverage without reliance on self-referrals. Health
Images believes that these trends threaten the long-term viability of any
imaging center that relies on physician self-referral as well as the viability
of less efficient and higher cost imaging centers. Health Images also believes
that single-site
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<PAGE>
competitors, in particular, will likely become acquisition candidates in many
markets in the future. Health Images believes this consolidation trend will
provide expansion opportunities for large, efficient, financially sound
multi-center operators.
IMAGING MODALITIES
The following table sets forth certain information concerning the principal
diagnostic imaging modalities used in the diagnostic imaging industry:
<TABLE>
<CAPTION>
LIST(1)
PRICE RANGES
PER
MODALITY MOST FREQUENT USES ADVANTAGES DISADVANTAGES PROCEDURE
- ----------------- ------------------------ ----------------------------- ------------------------------ --------------
<S> <C> <C> <C> <C>
Magnetic Lumbar (lower back), Does not use ionizing More expensive than other $695-$1,660
Resonance spine, cervical spine, radiation procedures (principally CT)
Imaging (MRI) brain Three-dimensional can image that may be used to
cross-sections and various investigate the same or
planes of area being similar symptoms
examined
Computerized Sinus, abdomen, brain Less expensive than MRI Uses ionizing radiation $225-$850
Tomography (CT) Higher resolution images Lower resolution images
than MRI for bones and than MRI for soft tissue
cartilage
Ultrasound Pelvic, abdomen, breast Does not use ionizing Limited three-dimensional $78-$593
radiation imaging capabilities
Relatively inexpensive
procedure providing "real
time" images
Mammography Breast Relatively inexpensive Uses ionizing radiation $85-$135
High spatial resolution Results less certain than
for other imaging procedures
Nuclear Medicine Bone marrow scan, Evaluates organ functions Inferior spatial resolution $223-$1,069
thyroid scan, bone scan Relatively low costs Difficult to determine the
Total body evaluation medical causes of specific
Provides detailed diseases by results of
information procedure
General Radiology Chest, lumbar (lower Less expensive than other Uses ionizing radiation $50-$190
back), spine imaging procedures Two-dimensional, static
Non-invasive images Very limited soft
Less time consuming than all tissue detail
other imaging procedures
Fluoroscopy Gastrointestinal tract, Relatively inexpensive Uses ionizing radiation $141-$443
barium enema, lumbar procedure providing "real Invasive
myelogram time" images
Generally no preparation
necessary
</TABLE>
- -------------
(1) Price quoted by Health Images, not taking into account any contractual
discounts or allowances or any statutory or regulatory restrictions on
reimbursements. Health Images believes that contractual discounts and
allowances are customary in the healthcare industry. The amount of
contractual discounts varies depending upon the market in which the imaging
center operates, the ability of the managed care payor to channel patients,
the number of beneficiaries covered and the effective date of the contract.
MAGNETIC RESONANCE IMAGING (MRI)
MRI is a sophisticated diagnostic imaging system that utilizes a strong
magnetic field in conjunction with low energy electromagnetic waves which are
processed by a dedicated computer to produce high resolution multiple images of
body tissue. MRI can be used to diagnose various cancers, tumors, vascular
aneurysms and stenosis (blood vessel occlusions that can lead to strokes),
muscle/ligament and ten
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<PAGE>
don injury, spinal and disc problems, neurological deformities and general
anatomical problems. A principal advantage of MRI is that it allows the
differentiation of internal organs and normal and diseased tissue without using
ionizing radiation like conventional x-ray and CT. Ionizing radiation can cause
tissue damage in high doses or after repeated screenings. MRI relies on the fact
that atoms in various kinds of body tissue behave differently in response to a
magnetic field.
During an MRI procedure, a patient is placed in a large, cylindrical magnet.
Multiple images in three-dimensional planes and cross-sections can be created
without moving the patient. The images can be displayed on a computer screen,
stored within the computer, or transferred to film for interpretation by a
physician and retention in a patient's file. As with most other diagnostic
imaging technologies, MRI is generally non-invasive. Due to the contrast and
detail available from an MRI scan, the use of MRI equipment frequently
facilitates the identification of disease and disorders of a patient without
using invasive procedures, such as exploratory surgery.
The number of MRI units in operation has increased from fewer than 200 in
1984 to more than 3,600 in 1994. This rapid growth resulted from increasing
acceptance by physicians, patients and payors of MRI, an increasing need for MRI
usage in imaging different body organ systems and disease conditions and a focus
of managed care payors on reduction of the amount and cost of care needed to
treat the patients by avoiding expensive exploratory surgery. New software
programs and hardware capabilities, coupled with new contrast agents (chemicals
administered to the patient that enhance the signal generated by body tissues),
are anticipated to expand the usage of MRI technology by physicians.
COMPUTERIZED TOMOGRAPHY (CT)
CT (also known as "CAT") uses x-rays to produce images of body tissue. CT,
like conventional x-ray, uses ionizing radiation. CT can be used to detect
tumors and other conditions affecting the skeleton and internal organs. CT
provides higher resolution images than conventional x-rays, but generally less
well defined images than those produced by MRI. CT procedures produce higher
resolution images of bone and cartilage structures and are less expensive than
MRI scans. During a CT procedure, a patient is placed inside a large ring on
which a rotating x-ray tube is mounted. A dedicated computer directs the
movement of the x-ray tube to produce multiple cross-sectional images of a
particular organ or area of the body. CT can be used to perform examinations of
any part of the human anatomy and provides delineation of tissue not possible
with conventional x-ray. CT eliminates the problem of overlapping structures
such as bone and soft tissue inherent in images produced by conventional x-ray.
The most commonly performed CT examinations are of the brain, abdomen, and
lumbo-sacral spine, although examinations of the chest, pelvis and extremities
are also performed. Health Images believes that recently there has been an
increase in CT procedures because some managed care payors stipulate that a CT
examination rather than MRI be used for certain types of complaints and symptoms
due to CT's lower cost.
ULTRASOUND
Ultrasound imaging relies on the computer-assisted processing of sound waves
to develop images of internal organs and the vascular system. The sound waves
are generated and recorded by probes that are either passed over or inserted
into the body. A dedicated computer processes sound waves as they are reflected
by body tissue, providing an image that may be viewed immediately on a computer
screen or recorded continuously or in single images for further interpretation.
Like MRI, ultrasound does not utilize ionizing radiation. Ultrasound has
widespread application, particularly for procedures in obstetrics, gynecology,
gastroenterology and cardiology, because it is a low medical risk procedure that
is noninvasive, versatile and relatively inexpensive.
MAMMOGRAPHY
Mammography uses low dosage x-rays to visualize breast tissue. Mammography
equipment is used primarily for screening and diagnosis of breast cancer but can
also be used to monitor treatment and recovery. During an initial screening
mammography, a baseline x-ray is taken of the breast. In subse
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<PAGE>
quent years, the mammogram's x-rays are compared to those taken during previous
examinations in an attempt to identify any anatomical changes which may have
occurred. Mammography provides high contrast images with high spatial
resolution. In addition, the low cost of x-rays makes screen-film mammograms the
preferred modality for screening for breast cancer. Mammography equipment allows
radiologists to detect between 85% and 90% of all breast cancers.
NUCLEAR MEDICINE
Nuclear medicine is used primarily to study anatomy and metabolic functions.
Nuclear medicine utilizes short-lived radioactive isotopes administered to the
patient by ingestion or injection to provide images of various anatomical
structures. The isotopes break down rapidly, releasing small amounts of
radioactivity that can be recorded by a gamma or scintigraphic camera and
processed by a computer to produce a flat image of various anatomical
structures. Nuclear medicine provides anatomic images and functional information
crucial to the understanding of the cause, nature and extent of diseases such as
heart disease, skeletal disease, degenerative joint disease, sports related
injuries, and complications resulting from diabetes. The spatial resolution of
nuclear medicine images is generally inferior to other modalities. However,
nuclear medicine is more versatile and effective in defining the structure and
function of organ systems, which aids physicians to diagnose and treat diseases.
GENERAL RADIOLOGY AND FLUOROSCOPY
General radiology and fluoroscopy are the most frequently used types of
imaging equipment. X-rays are a quick and relatively inexpensive method of
obtaining diagnostic information. General x-rays use ionizing radiation to
penetrate the body and record the resulting two-dimensional images of the body's
internal structures on film. It is usually necessary to take at least two or
more views to gain information about the third dimension. Fluoroscopy is a more
versatile form of x-ray that uses a video viewing system for real-time
monitoring of the organs being visualized. Fluoroscopy differs from general
x-ray in that the x-rays that pass through the body are captured by an image
intensifier tube which sends an image to a television monitor for viewing rather
than simply recording the image on film. Accordingly, fluoroscopy allows the
examining physician to view organs in motion during the exam, evaluate their
functional activities, isolate anatomical structures and "record" an image onto
film for later evaluation. The imaging of the gastrointestinal tract,
angiography and interventional radiology are the three circumstances in which
fluoroscopy is most widely used. In Health Images' experience, either a C-arm
x-ray machine or a fluoroscope is the imaging equipment most likely to be used
during pain management procedures.
HEALTH IMAGES' POSITION IN THE INDUSTRY
Health Images is a leading provider of diagnostic imaging services and one of
the largest independent operators of MRI centers in the United States. Health
Images operates 49 freestanding imaging centers in 13 states in the United
States and six in England. Health Images offers MRI services at all of its
imaging centers. In addition, Health Images provides CT services at 18 of its
centers, x-ray services at 19 centers, ultrasound services at 15 centers,
mammography services at 13 centers, nuclear medicine at seven centers and
fluoroscopy at eight centers. Health Images currently has 33 centers that offer
only MRI, 27 of which are located in the United States.
Health Images is a vertically integrated diagnostic imaging services provider
which develops, manufactures and maintains its own MRI systems and services
certain MRI and CT systems of other manufacturers that it uses at its centers.
Health Images also has in-house imaging center development expertise consisting
of a licensed architect experienced in designing and managing the construction
of imaging centers and his staff. This expertise enhances the ability of Health
Images to control its costs and decreases the time necessary to establish an
imaging center. Since 1989, Health Images has manufactured the HI
Standard(Registered Trademark) MRI system, a midfield .6 Tesla system currently
used in all of the 33 imaging centers established by Health Images since the
development of the system. Health Images recently developed a new MRI system,
the HI STAR(Trademark), which was cleared by the FDA in September
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<PAGE>
1995. The HI STAR will allow Health Images to offer a broader array of
applications and to increase throughput capacity at its centers. Health Images'
vertical integration gives Health Images a competitive advantage in its markets
by reducing Health Images' capital expenditures and operating costs.
Health Images has six HI STAR systems operating in its centers and intends to
install at least 18 more during the remainder of 1997. Health Images' plans call
for the ultimate replacement of 33 of Health Images' MRI systems, all mid-field
strength MRI systems, over the next 24 months (including the three MRI systems
replaced with HI STAR to date). The HI STAR allows Health Images to increase
throughput capacity at its centers as the more powerful computer hardware and
software of the HI STAR reduce the necessary scan time. The demand for imaging
services is greater during certain times of the day. A faster scan time
increases the number of MRI scans that can be performed during these peak hours.
Health Images will not replace MRI systems at imaging centers where it is not
economically justifiable to make the capital expenditure necessary to install
the HI STAR system. The HI STAR system operates at .6 Tesla field strength,
features powerful shielded gradients with fast rise time and incorporates
powerful and up-to-date computer technology. The HI STAR also provides increased
flexibility to add applications that may be developed in the future.
The HI STAR system can also perform MR angiography studies -- a non-invasive
procedure for highlighting the flow inside blood vessels without the use of
contrast agents. Neurologists and neurosurgeons are the primary sources for MR
angiography referrals. Health Images' marketing research indicates that some of
these physicians will not use an imaging center that lacks MR angiography
capability. This MR angiography capability should allow Health Images to market
effectively to an important source of referrals that in some cases had
previously been unreceptive.
In addition to its vertical integration, Health Images believes that the size
of its imaging business is a distinct advantage which enables it to negotiate
for the purchase of necessary products and services such as film, contrast
agents and liability insurance at favorable prices. Health Images' policy is to
purchase goods and services, where possible, on a company-wide basis to maximize
its negotiating leverage with suppliers. Health Images' lower operating costs
give Health Images price flexibility as compared with other providers of
diagnostic services in its regional markets. Health Images believes that the
competitive advantages derived from vertical integration and from economies of
scale will become more pronounced if, as expected, healthcare reimbursements
continue to decline.
Health Images is able to compete with hospitals and other operators of
imaging centers by providing high quality services in a patient friendly,
non-institutional environment. Health Images believes its specialization in
diagnostic imaging gives it a service advantage over hospitals because, for
hospitals, diagnostic imaging services represent a relatively minor and
ancillary aspect of their operations. Health Images' imaging centers maintain
flexible hours appropriate for the local medical community. Health Images seeks
to accommodate patients within 24 to 48 hours of referral and generally offers
report turn-around within 24 hours. Health Images' marketing research indicates
that this quick turnaround and prompt service is appreciated by patients and
referring physicians and compares favorably with turnaround and service provided
by hospitals. Health Images' multi-modality imaging centers are well-positioned
to meet a growing preference by managed care payors to contract with imaging
centers that offer the whole spectrum of diagnostic imaging services. Health
Images plans to add modalities to imaging centers where demand is sufficient to
justify the costs of adding the modality.
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OPERATIONS
IMAGING CENTER OPERATIONS
Health Images provides its diagnostic imaging services through 49 imaging
centers located in 13 states in the United States and six in England. The number
of imaging centers operated by Health Images has increased approximately 65% in
the last five years from 33 at the end of 1991 to 55 as of December 31, 1996.
The following table sets forth information regarding the number of imaging
centers operated by Health Images during the periods indicated:
CENTERS
AT END
CENTERS CENTERS CENTERS OF
YEAR ACQUIRED DEVELOPED SOLD OR MERGED PERIOD
- ------------------------- ---------- ----------- ---------------- ---------
1991 ....................... 1 4 0 33
1992 ....................... 4 3 0 40
1993 ....................... 1 3 0 44
1994 ....................... 0 0 2 42
1995 ....................... 15 0 4* 53
1996 (through December 31).. 0 2 0 55
- ------------
* Of these centers, three were sold and one was merged with another center.
Three of these centers had been acquired from MedAlliance and their sale or
closure was contemplated by Health Images at the time of the acquisition.
Health Images' imaging centers provide high-quality services in a
patient-friendly, non-institutional environment. Each imaging center is staffed
by administrative and technical personnel, employs a scheduling clerk and offers
free transportation to patients upon request. Patients are scheduled for an
appointment, informed of any medications needed for the test and pre-qualified
with respect to their medical requirements and insurance coverage by Company
personnel. Procedures at Health Images' imaging centers are designed to avoid
the admission and administration complexities of inpatient diagnostic imaging
services. In addition, a physician or a physician group, generally board
certified radiologists, provides professional services and interprets studies
for each imaging center under a contract with Health Images. Such physicians are
independent contractors and are not employees of Health Images. Following the
diagnostic procedures, the images are reviewed by the interpreting physicians
who prepare reports of these tests and their findings. These reports are
transcribed by Company personnel and then delivered to the referring physicians
usually within 24 hours of the procedure. The imaging centers are open at such
hours as are appropriate for the local medical community. Many are open from
7:30 a.m. to 9:00 p.m. each weekday, and in order to provide scheduling
flexibility approximately one-third of the imaging centers routinely maintain
hours on Saturdays, while others will open on Saturdays as needed.
Each imaging center is locally managed. An Administrator or Regional
Administrator is responsible for the operations of an imaging center or groups
of centers located in a particular market or in contiguous markets. The
Administrators and Regional Administrators have direct profit and loss
responsibility and a portion of their compensation is based on the operating
income generated by centers under their supervision.
Each imaging center generally charges patients a fee for providing diagnostic
studies on a per-procedure or per-study basis. The physician or physician group
that provides diagnostic readings of the studies generally receives a
contractually specified percentage of such fee when and if collected by Health
Images. At certain imaging centers, the physician or physician group which
provides the diagnostic readings bills the patient or third-party payor directly
for such services.
Although the majority of the MRI systems operated by Health Images are HI
Standard or Diasonics systems operating at mid-field strength, Health Images
also has MRI systems of other manufacturers (General Electric, Siemens, Hitachi,
Fonar, Philips and Picker). Most of these systems operate at high-field strength
and were acquired by Health Images in the MedAlliance Centers Acquisition.
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MANUFACTURING OPERATIONS
Health Images began service and manufacturing operations in an effort to
maintain its systems technology. In 1986, in response to the decision of Johnson
& Johnson to discontinue the MRI system manufacturing business of its
wholly-owned subsidiary, Technicare Corporation ("Technicare"), Health Images'
management established an Engineering Services Division to service Technicare
MRI systems owned by Health Images. Health Images hired a number of MRI field
service technicians experienced in servicing Technicare CT and MRI systems and
purchased parts inventories in order to conduct its own engineering and service
functions. As a result of the expertise acquired in repairing and improving
Company MRI systems and pursuant to the licenses described below, Health Images,
through its Engineering Services Division, developed its own MRI system, the HI
Standard, and began to manufacture this system in August 1988 for use in Health
Images' imaging centers.
To enable Health Images to manufacture MRI systems using the Technicare
technology, Health Images entered into a Master Patent License Agreement (the
"Patent Agreement") with The National Research Development Corporation, an
English corporation d/b/a British Technology Group ("BTG"), as of October 1,
1987, and a license agreement (the "J&J Agreement") with Johnson & Johnson as of
April 1, 1988. Pursuant to the Patent Agreement, Health Images obtained
non-exclusive perpetual licenses under certain patents and patent applications
of which BTG is the proprietor. The licenses allow Health Images to develop,
manufacture and market MRI systems and upgrade packages for MRI systems in the
United States. The Patent Agreement was amended as of January 1, 1989 to allow
Health Images to develop, manufacture and market MRI systems and upgrade
packages for MRI systems worldwide. Under the J&J Agreement, Health Images
obtained non-exclusive perpetual licenses to create, copy, use, license and sell
certain Johnson & Johnson MRI software, hardware and derivative works relating
to the Teslacon II MRI system anywhere in the world. Johnson & Johnson is the
assignee of its wholly-owned subsidiary, Technicare.
In June 1993, the Board of Directors approved a major technology program to
develop a state-of-the-art MRI system. Health Images then hired computer
programmers and physicists experienced in MRI technology to develop and
integrate the new system. The MRI system developed under this program, the HI
STAR, is not based on Technicare technology, although it uses fundamental MRI
patented technology which Health Images licenses from BTG. The HI STAR is a high
performance MRI system that operates at .6 Tesla field strength. The HI STAR
systems use existing magnets, which have a virtually unlimited operating life.
Using existing magnets increases the cost advantage of the HI STAR system
relative to purchasing a comparable MRI system. The HI STAR system features
powerful shielded gradients (15 mTesla/m) and a rise time of 550 microseconds,
with reconstruction time of a half-second for a 256 x 256 pixel image as
compared with reconstruction time of seven seconds for the HI Standard. The HI
STAR runs on i860 Intel-based array processor, with dual Pentium host computers
running Windows NT. The HI STAR's capabilities include high resolution imaging,
snapshot imaging (the ability to produce an image in a breath-hold, an important
new technique for abdominal imaging) and MR angiography (a non-invasive
technique for highlighting the flow inside blood vessels without the use of
contrast agents). In September 1995, the HI STAR MRI system was cleared by the
FDA through the 510(k) notification process. Since June 1996, Health Images has
installed fixed-site HI STAR MRI systems at its Atlanta-North location, at its
Darlington Hospital site in England, at its Lancaster, Pennsylvania imaging
center, at Athens Magnetic Imaging in Athens, Georgia, at Hertfordshire Magnetic
Imaging in Hertfordshire, England and at a third party site in Cleveland, Ohio
for a long-term customer. Health Images has two HI STAR systems installed at its
Atlanta-North location. One of the systems is used for testing new capabilities,
software and protocols.
The 33 imaging centers opened from the beginning of 1989 until the
installation of the first fixed site HI STAR system were equipped with the HI
Standard MRI system. Health Images intends to replace most of its HI Standard
and Diasonics MRI systems with HI STAR systems within the next 24 months.
Because Health Images' own MRI systems cost Health Images less than MRI systems
purchased from other manufacturers, the operating break even point is
significantly lower at the imaging centers which use the HI Standard or HI STAR
MRI system than the operating break-even point at centers that purchase MRI
systems from other manufacturers.
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Health Images also owns and operates seven mobile MRI systems. Two mobiles
are currently leased to third parties. The remaining mobiles are used at Health
Images' imaging centers when an upgrade will result in downtime of the fixed
site MRI system. Health Images plans to use the mobiles when it installs the HI
STAR MRI systems to prevent any loss of MRI capability during the installation.
SERVICE OPERATIONS
The Engineering Services Division services and maintains Health Images' HI
STAR and HI Standard MRI systems and five MRI and six CT systems acquired from
other manufacturers. In addition, the Engineering Services Division services the
magnets on eight of Health Images' General Electric MRI systems. The cost of
servicing and maintaining Health Images' equipment is significantly lower than
the service and maintenance fees that would be charged by manufacturers or other
third party providers. The Engineering Services Division services MRI systems
operated by parties other than Health Images. As of December 31, 1996, the
Engineering Services Division serviced and maintained 35 MRI systems owned and
operated by third parties. However, certain equipment manufactured by third
parties and used by Health Images continues to be serviced under contracts with
the manufacturers. The Engineering Services Division also sells MRI system
upgrades, such as surface coils, and is engaged in research and development
relating to enhancing and upgrading MRI systems.
PROPERTIES
The following table sets forth certain information concerning the imaging
centers owned and operated by Health Images as of December 31, 1996 and the
diagnostic modalities provided by each center.
<TABLE>
<CAPTION>
DEVELOPED DATE DEVELOPED
OR OR
LOCATION ACQUIRED ACQUIRED MODALITIES(1)
- -------------------------- ------------- ------------------ ---------------------------
<S> <C> <C> <C>
Alabama
Birmingham............... Acquired April 1995 MRI, CT, X-Ray, MM, US
Huntsville............... Acquired April 1995 MRI, CT, X-Ray, MM, US
Colorado
Aurora (North)........... Acquired April 1995 MRI
Aurora (South)........... Acquired April 1995 MRI
Colorado Springs......... Acquired June 1992 MRI, CT, X-Ray, MM, Fluoro
Denver................... Acquired April 1995 MRI, CT, X-Ray, MM, US
Florida
Cape Coral............... Developed July 1993 MRI
Fort Myers............... Developed November 1990 MRI
MRI, X-Ray, MM, CT, US,
Jacksonville(2).......... Developed July 1986 Fluoro, Nuc. Med.
Orange Park.............. Developed June 1988 MRI, X-Ray
Georgia
Athens................... Developed December 1987 MRI
Atlanta.................. Developed November 1984 MRI, CT, US
Augusta.................. Developed December 1989 MRI
Columbus................. Developed August 1989 MRI
Riverdale................ Developed September 1987 MRI
Savannah................. Developed July 1989 MRI
Warner Robins............ Developed February 1990 MRI, X-Ray
Illinois
Belleville............... Acquired April 1992 MRI
Effingham................ Developed December 1990 MRI
Wheaton.................. Developed March 1990 MRI
Louisiana
MRI, CT, X-Ray, MM,US,
Baton Rouge.............. Acquired April 1995 Fluoro, Nuc. Med.
MRI, CT, X-Ray, MM, US,
Baton Rouge.............. Acquired April 1995 Fluoro, Nuc. Med.
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DEVELOPED DATE DEVELOPED
OR OR
LOCATION ACQUIRED ACQUIRED MODALITIES(1)
- -------------------------- ------------- ------------------ --------------------------
Maryland
Frederick................ Developed December 1985 MRI
New Jersey
Stratford................ Developed April 1989 MRI
Oklahoma
Tulsa.................... Developed October 1991 MRI
Pennsylvania
Lancaster................ Developed November 1985 MRI
Lebanon.................. Developed October 1989 MRI
Philadelphia............. Developed April 1987 MRI, X-Ray, US
Wyomissing............... Developed January 1993 MRI, CT, X-Ray, US
South Carolina
Anderson................. Developed May 1988 MRI
Columbia................. Developed June 1990 MRI
MRI, CT, X-Ray, MM, US,
Greenville............... Acquired April 1995 Fluoro, Nuc. Med.
Hilton Head.............. Developed April 1991 MRI
North Charleston......... Developed February 1989 MRI
Tennessee
MRI, CT, X-Ray, MM, US,
Knoxville................ Acquired April 1995 Fluoro, Nuc. Med.
Memphis.................. Developed July 1990 MRI
Nashville................ Acquired April 1995 MRI, CT, X-Ray, MM, US
Texas
MRI, CT, X-Ray, MM, US,
Arlington(3)............. Acquired September 1992 Fluoro
Austin................... Developed September 1991 MRI
MRI, CT, X-Ray, MM, US, Nuc.
Beaumont................. Acquired April 1995 Med.
Clear Lake (Galveston)... Developed February 1990 MRI
Fort Worth............... Developed June 1990 MRI
Grove.................... Acquired April 1995 MRI, CT
MRI, CT, X-Ray, MM, US,
Houston(4)............... Developed August 1988 Fluoro, Nuc. Med.
Hurst (NE Fort Worth).... Developed November 1991 MRI, CT, X-Ray
South Dallas............. Developed May 1992 MRI, CT, X-Ray
Tyler.................... Developed March 1991 MRI
Waco..................... Developed August 1992 MRI
England
Darlington............... Developed April 1992 MRI
Darlington Hospital...... Developed October 1996 MRI
Guildford................ Developed November 1990 MRI
Somerset................. Acquired November 1992 MRI
York..................... Developed July 1996 MRI
Welwyn Garden City....... Developed August 1993 MRI
</TABLE>
- --------------
(1) "MRI" means magnetic resonance imaging; "CT" means computerized tomography;
"X-Ray" means conventional x-ray; "MM" means mammography; "US" means
ultrasound; "Fluoro" means fluoroscopy; and "Nuc. Med." means nuclear
medicine.
(2) The Jacksonville, Florida imaging center expanded into a new 11,000 square
foot multi-modality facility in August of 1996 to offer CT, ultrasound,
mammography, nuclear medicine and fluoroscopy in addition to MRI.
(3) The Arlington, Texas imaging center is relocating to a new 10,000 square
foot facility opening in late January 1997 that will offer a fixed site MRI
system (rather than a mobile) and will add nuclear medicine.
(4) The Houston (Shamrock), Texas imaging center has changed its name to Health
Images -- Medical Center and added a 6,000 square foot expansion in
September 1996 to include a second MRI system operating at a higher field
strength (1.5 Tesla) (due to repeated requests from referring physicians
with practices concentrating on sports-related injuries), fluoroscopy, and
nuclear
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medicine services. Health Images -- Medical Center is the first of Health
Images' imaging centers to offer pain management services. The Health Images
-- Medical Center's pain management operation is licensed by the Texas
Department of Health as an ambulatory surgical center.
In 1990, Health Images opened a radiation oncology center in Williamsport,
Pennsylvania (the "Oncology Center") which provides radiation treatment therapy
to cancer patients in the Williamsport area on an outpatient basis. Radiation
therapy uses high energy x-rays produced by a machine called a linear
accelerator designed to stop cancer cells from growing and multiplying. The
Oncology Center's medical equipment is used by its board-certified oncologists
and professional staff to assess, plan and provide treatment to cancer patients.
Health Images does not contemplate opening any other radiation oncology centers.
Health Images owns the land and building at 39 of Health Images' imaging
centers, leases the land or building at 15 imaging centers and manages one
imaging center on a fee basis. The real property at company-owned imaging
centers and improvements thereon may be subject to real estate mortgages or
security deeds. The real property and improvements for the other existing
centers are subject to leases expiring between 1997 and 2010.
The existing single modality imaging centers occupy an average of 3,642
square feet. Multi-modality centers occupy an average of 10,500 square feet.
Health Images owns most of the diagnostic modalities utilized by Health Images
at the imaging centers existing prior to the MedAlliance Centers Acquisition.
Most of the diagnostic modalities at the centers acquired from MedAlliance were
leased and Health Images assumed the leases. Health Images' equipment is used
from time to time as collateral for loans obtained by Health Images.
Health Images' headquarters are located in Atlanta, Georgia. In December 1996
Health Images moved its headquarters and manufacturing operations to a new
74,000 square foot facility located on 16 acres at the Windward Business Park
north of Atlanta. Health Images believes that the new location will better suit
the manufacturing needs of Health Images, provide expansion capability no longer
available at the current site and will be more cost effective than its current
location. Health Images owns the land and the building for its new headquarters
and manufacturing facility. Health Images relinquished its previous corporate
headquarters space in December 1996 without penalty for early termination of the
lease. Management believes that its corporate headquarters and the facilities in
which each of the imaging centers is located are suitable for the purposes for
which they are used.
MARKETING
Health Images' marketing program focuses on developing relationships with
physicians and their office staff, patients, hospitals, community and civic
organizations, managed care organizations, private insurance carriers and the
general public. In order to cultivate these relationships, Health Images employs
marketing personnel who explain Health Images' services to existing and
potential customers in individual meetings, group presentations and seminars and
through advertising. Health Images' marketing personnel are trained and given
corporate assistance with research and analysis, planning, and the production of
support materials to develop customized plans to suit each customer's needs.
Health Images targets individual physicians and physician groups who may
require Health Images' services for their patients. Company marketing executives
meet with and provide literature to physicians and their staff in an attempt to
inform them about the availability and capabilities of various imaging
modalities at Health Images' imaging centers, and to update them on advances,
improvements and other recent developments in diagnostic imaging technology.
Health Images also markets to the public in general by providing information
concerning the availability of imaging technology, especially mammography, for
the early diagnosis of disorders by giving presentations at and participating in
community service clubs, charity events and health fairs.
INFORMATION SYSTEMS
Health Images has developed and maintains its own management information
system which operates on a local area network located at Health Images' Atlanta
headquarters. The system receives data from two primary billing and collections
packages (one of which was in use at the centers acquired from
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MedAlliance) installed at Health Images' imaging centers. The system tracks and
reports critical center operating data on a daily basis and includes details on
number of procedures, gross revenues, contractual discounts, same center
comparisons and collections. This information is presented in summary form and
detailed by center and modality. This daily information allows management to
detect trends and difficulties at each of its imaging centers and to take
appropriate and timely remedial measures. Health Images believes this system
also enables it to identify industry trends sooner than its competitors. Health
Images' reporting system enables management to monitor billing practices and
compliance with current revenue recognition policies.
Health Images is currently developing a new Windows NT-based center software
package with a third-party supplier to replace the two independent systems that
provide information to the central management information system. This new
system will provide conformity at all centers and provide Health Images with the
ability to integrate a new center, whether developed internally or acquired,
quickly and efficiently. This client-server technology will support a
Company-wide solution for billing, collection and financial management while
allowing flexibility in conducting centralized and local operations. The package
will also allow each imaging center to better manage scheduling. Health Images
believes that its center management package will further reduce the number of
days it takes to bill and collect for its services. This system will also allow
for the integration of other types of entities, such as physician practices,
into Health Images system.
Health Images' accounting and engineering applications are third party
software systems which operate within a token ring network on an IBM RISC
platform at Health Images' Atlanta headquarters. These systems have been in
place since late 1991 and handle all aspects of Health Images' accounting,
payroll, accounts payable, purchasing, inventory, manufacturing and field
service processes. These software systems are reaching a point of saturation.
The MedAlliance Centers Acquisition and the contemplated level of near term
expansion of Health Images' business had prompted management to begin the
process of selecting a new general ledger, payroll and human resources software
package. These plans have been put on hold pending the Merger to avoid
unnecessary duplication of costs.
REIMBURSEMENT
Because most procedures are paid for by third-party or government payors, the
amount and availability of third-party and government reimbursement for imaging
services directly impact the use and revenues of Health Images' imaging centers.
Private third-party insurance carriers generally pay for medically necessary MRI
and other imaging procedures. Health Images' imaging centers accept Medicare
patients and, for competitive reasons, enter from time to time into contractual
reimbursement arrangements with various third parties, including HMOs, Blue
Cross/Blue Shield and other insurers. For 1995, Health Images derived 30% of its
net patient service revenue from managed care/HMO, 25% of such revenue from
private insurance, 15% from Medicare/Medicaid, 6% from private pay, and 24% from
other sources.
Pricing of diagnostic imaging services varies by region and locality. The
imaging centers maintain a competitive billing strategy based upon evaluation of
available pricing data with respect to each location. Each imaging center adopts
standard pricing procedures which may be modified under certain circumstances.
In most cases, however, contracted prices are discounted and the average
realizable charge per MRI is substantially less than the list price. Health
Images seeks to participate in as many managed care plans as is financially
prudent. Health Images evaluates the number of beneficiaries covered in a
particular plan and the plan's ability to channel patients in determining what
is an acceptable reimbursement per procedure. Health Images will not accept a
managed care contract if it regards the reimbursement rates as too low and the
channeling capabilities as too limited. Each imaging center maintains sufficient
price flexibility to enable it to compete with other diagnostic imaging services
provided in the local community.
Health Images' reimbursements have declined in recent years due to a number
of factors, although the rate of decline has diminished recently. The reasons
for this decline arise from cost containment efforts at federal and state levels
and from efforts of insurers and businesses to control healthcare costs. For
example, beginning in January 1992, the Health Care Financing Administration
("HCFA"), at the
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direction of Congress, changed the way it paid for many healthcare services
reimbursed under Medicare, including MRI services. In addition, Pennsylvania,
where five of Health Images' imaging centers are located, adopted legislation
that limits reimbursement in workmen's compensation and automobile injury cases.
Effective August 31, 1993, such legislation limits reimbursement to 113% of the
Medicare reimbursement for the medical service. Health Images' average
reimbursements per scan from Medicare, Medicaid and Blue Cross/Blue Shield
(which has a particularly strong presence in Health Images' Pennsylvania market)
have all declined in recent years. Health Images' increased number of
reimbursement arrangements with managed care providers has also resulted in
fewer patients paying list prices for MRI scans because an increasing percentage
of patients are covered under managed care agreements which stipulate a
discount. Health Images anticipates that this trend of discounting prices under
managed care contracts with health maintenance organization ("HMOs"), preferred
provider organizations ("PPOs"), independent practice associations ("IPAs"),
third-party administrators ("TPAs") and directly with businesses for their own
employees will continue. However, Health Images believes that the value realized
by its arrangements with managed care providers, both in adding new patients and
protecting its current patient base, more than offsets the effect of the lower
prices provided for in such arrangements.
COMPETITION
The diagnostic imaging industry is highly competitive. Health Images and its
imaging centers compete with local hospitals, other multi-center imaging
companies, local independent imaging diagnostic centers and imaging centers
owned by local physician groups. Health Images believes that the principal
competitive factors in the diagnostic imaging services market 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. In addition, certain physicians are
reluctant to refer patients to an imaging center that uses equipment that does
not have a high-field strength MRI system or does not offer MR angiography
capabilities. Health Images believes the upgrade of its facilities to the HI
STAR MRI system will encourage these physicians to use Health Images' centers
for all of their imaging requirements, thereby increasing volume at these
centers. Also, in certain markets, a single-modality imaging center may be at a
disadvantage compared to a multi-modality imaging center in marketing to and
negotiating with certain managed care payors and physicians who prefer to
contract with or refer patients to imaging centers that supply all the imaging
services required by patients.
Health Images' most significant competitors are local hospitals that offer
imaging services on an inpatient basis or on an outpatient basis through owned
imaging centers or centers operated as joint ventures with hospital
participation. Some hospitals use their control over inpatient services to
extract exclusive arrangements or advantageous pricing from third party payors
for their outpatient services such as diagnostic imaging.
Most of Health Images' MRI systems are "mid-range" in terms of Tesla ratings,
which measure the strength of the magnetic field. Health Images believes that
mid-range MRI systems are sufficient for most diagnostic purposes in the imaging
industry and are less expensive to acquire and operate than high-field systems.
The quality and reliability of MRI scans performed by mid-range systems are
comparable with most types of scans produced by high-field systems. In Health
Images' experience, managed care payors are indifferent to field strength and do
not pay a premium for MRI scans performed by high-field systems. A lower
operating break-even point gives imaging centers operating mid-range MRI systems
more flexibility on pricing for their services when negotiating with managed
care payors and may allow a center to be profitable despite declining
reimbursements from most payors. However, some referring physicians, especially
those practicing in highly specialized orthopaedic or neurologic areas and those
affiliated with research facilities, prefer high-field MRI equipment and will
refer patients only to facilities that operate such systems.
Health Images does not currently operate any so-called "open" MRI systems,
although Health Images plans to open an MRI center in Denver, Colorado in 1997
that will feature an open MRI system. The open MRI system will accommodate
certain patients who cannot tolerate a closed bore MRI system
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and should complement Health Images' existing operations in the Denver area. The
Denver medical complex where this new center will be located does not currently
have any open MRI systems. Health Images does not have any further current plans
to add open MRI systems because Health Images believes that open MRI systems are
not as cost effective as Health Images' HI STAR MRI system.
In general, open MRI systems emphasize patient comfort and are generally
lower in cost than other MRI systems available from third party manufacturers.
Open MRI systems operate at a relatively low-field strength, .2 Tesla, and may
produce images with less clarity than mid-field and high-field MRI systems. Open
MRI systems have recently been the subject of local advertising campaigns
supported by manufacturers of such systems, some of whom have greater financial
resources than Health Images. In response to such advertising, certain patients
have begun to request open MRI. Health Images believes that its STARVIEW MRI
Patient Entertainment System is an effective remedy to concerns about
claustrophobia among patients. There can be no assurance, however, that open MRI
systems will not be preferred by patients and therefore become the preferred
choice in MRI systems among referring physicians. In such a case, Health Images
may consider adding open MRI systems purchased from third party vendors.
Some hospitals and other competitors of Health Images have greater financial
resources than Health Images. Other competitors may have existing relationships
with the medical community which may be superior to those of Health Images'
imaging centers.
MRI competes with less expensive imaging diagnostic devices and procedures
which may provide similar information to the physician. Alternative imaging
diagnostic technology includes CT scans, nuclear medicine, radiography/
fluoroscopy, ultrasound, x-ray mammography, and conventional x-ray. The cost of
a particular study depends upon the complexity of the procedure, the length of
time of equipment utilization and whether the procedure requires introduction of
contrast agents into the body. Management believes that MRI's significant
benefits generally justify a payor paying the pricing differential between MRI
and other modalities.
As a provider of maintenance services to facilities operating major medical
diagnostic equipment, Health Images' Engineering Services Division competes with
other companies that have significantly more capital, parts inventory, personnel
and office locations with which to provide such
services.
GOVERNMENT REGULATION
The diagnostic imaging industry in the United States is subject to federal
and state laws and regulations and in England the overview of the Health and
Safety Executive. While Health Images believes that its operations substantially
comply with applicable laws and regulations, Health Images has not sought or
received interpretive rulings to that effect. Additionally, there can be no
assurance that subsequent laws, subsequent changes in present laws or
interpretations of laws will not adversely affect Health Images' operations.
Certain applicable laws and regulations are generally described below:
FDA REGULATION OF MEDICAL DEVICES
The manufacture and sale of Health Images' MRI systems and upgrades are
subject to regulation by numerous governmental authorities, principally the FDA
and corresponding state and foreign agencies. The regulatory process is lengthy,
expensive and uncertain. Prior to commercial sale in the U.S., most medical
devices, including Health Images' MRI systems and upgrades, must be cleared by
the FDA. Securing FDA clearance may require the submission of extensive clinical
data and supporting information to the FDA. Current FDA enforcement policy
strictly prohibits the marketing of medical devices for uses other than those
for which the product has been cleared. Product clearances can be withdrawn for
failure to comply with regulatory standards or the occurrence of unforeseen
problems following initial marketing. Foreign governments also have review
processes for new products which present many of the same risks.
Health Images' new HI STAR MRI system and its predecessor HI Standard MRI
system have been cleared by the FDA through the 510(k) premarket notification
process. Health Images received 510(k) clearance of the HI STAR MRI system in
September 1995. There can be no assurance that Health
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Images will be able to obtain necessary regulatory clearances on a timely basis,
if at all, for any new products or modifications of existing products and delays
in receipt of or failure to receive such clearances, the loss of previously
received clearances, or failure to comply with existing or future regulatory
requirements would have a material adverse effect on Health Images' business,
financial condition and results of operation.
Health Images is also required to adhere to FDA regulations setting forth
requirements for Good Manufacturing Practices ("GMP") which include testing,
control and documentation requirements. Ongoing compliance with GMP, labeling
and other applicable regulatory requirements is monitored through periodic
inspections by state and federal agencies, including the FDA. Failure to comply
with applicable regulations could result in sanctions being imposed on Health
Images, including fines, injunctions, civil penalties, failure of the government
to grant premarket clearance, delays, suspension or withdrawal of approvals,
seizures or recalls of products, operating restrictions and criminal
prosecutions.
Under the Federal Food, Drug and Cosmetic Act, as amended, medical devices
are classified into one of three classes (i.e., Class I, II, or III) on the
basis of the controls necessary to reasonably ensure their safety and
effectiveness. Safety and effectiveness can reasonably be assured for Class I
devices through general controls (e.g., labeling, premarket notification and
adherence to GMPs) and for Class II devices through the use of general and
special controls (e.g., performance standards, postmarket surveillance, patient
registries, and FDA guidelines). Generally, Class III devices are those which
must receive premarket approval by the FDA to ensure their safety and
effectiveness (e.g., life-sustaining, life-supporting and implantable devices,
or new devices which have been found not to be substantially equivalent to
legally marketed devices).
Before a new device can be introduced to the market, the manufacturer
generally must obtain FDA clearance through either a 510(k) premarket
notification or a premarket approval. A 510(k) clearance will be granted if the
submitted data establishes that the proposed device is "substantially
equivalent" to a legally marketed Class I or Class II medical device, or to a
Class III medical device for which the FDA has not called for premarket
approval. Modifications or enhancements to Health Images' products that are
cleared through the 510(k) process that could significantly affect safety or
effectiveness will require new submissions. On June 23, 1989, the FDA
reclassified the HI Standard MRI system from a Class III to a Class II Medical
Device, which reduces the level of FDA regulation applicable to new
technological developments. Health Images received clearance of the HI STAR MRI
system from the FDA in September 1995 through the 510(k) premarket notification
process.
FDA REGULATION OF MAMMOGRAPHY
Diagnostic imaging centers performing mammography services must meet federal,
and in some jurisdictions, state standards for quality as well as certification
requirements. Under FDA regulations which became effective on October 1, 1994,
all mammography facilities must be accredited, undergo an annual inspection and
physics survey, meet qualification standards for interpreting physicians,
mammography technologists and medical physicists, meet certification
requirements for adequacy, training and experience of personnel, meet quality
standards for equipment and practices, and meet various requirements governing
recordkeeping of patient files. Although all of Health Images' imaging centers
which provide mammography services are currently accredited by the Mammography
Accreditation Program of the American College of Radiology, and Health Images
anticipates continuing to meet the requirements for accreditation, the
withdrawal of such accreditation could result in the revocation of
certification, if the FDA so determines. All of Health Images' imaging centers
that provide mammography services have received their FDA certifications.
CERTIFICATES OF NEED
Most states have Certificate of Need ("CON") programs which control and
regulate the construction of healthcare facilities and the acquisition by
healthcare facilities of major medical equipment. Although such programs vary
from state to state, generally a CON is required before constructing a
"healthcare facility", and a healthcare facility must obtain a CON before
acquiring major medical equipment or establishing new institutional services. A
CON is granted on the basis of various criteria relating
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to need, giving consideration to the extent to which such facilities, equipment
or services are available to a specified geographical area and the population of
such area. The term "healthcare facility", as defined by many states, does not
include facilities that provide service only to outpatients. Accordingly, in
those jurisdictions, an outpatient clinic need not obtain a CON.
Some states, however, require that any person acquiring major medical
equipment, such as an MRI system, first obtain a CON regardless of whether or
not the MRI system is acquired by or placed in a healthcare facility. In those
states, even if an imaging center may be constructed without a CON, the purchase
of an MRI system at a cost comparable to that paid by the imaging centers will
require a CON.
Health Images has CONs for its Memphis and Nashville, Tennessee, imaging
centers, its Philadelphia, Lancaster and Lebanon, Pennsylvania, imaging centers
and its centers in Greenville, Charleston and Hilton Head, South Carolina.
Health Images' Knoxville, Tennessee imaging center was grandfathered by the
State of Tennessee when it adopted its current CON laws. Health Images is
currently applying for a CON for its Effingham, Illinois MRI center in
conjunction with a local area hospital.
PROHIBITION AGAINST PRACTICE OF MEDICINE
The establishment, marketing and operation of the imaging centers are subject
to laws prohibiting the practice of medicine by non-physicians and the rebate or
division of fees between physicians and non-physicians. Such laws also limit the
manner in which patients may be solicited. Management believes that its plan of
operations complies with such laws. Under Health Images' plan, the employees of
each imaging center provide only technical services relating to the diagnostic
scans. Professional medical services, such as the reading of the diagnostic
studies and related diagnosis and the providing of pain management medical
procedures, are separately provided by licensed physicians. These physicians are
independent contractors who retain all control over the medical component of
providing imaging and pain management services. There can be no assurance,
however, that state authorities or courts will not determine that these
relationships constitute the unauthorized practice of medicine by Health Images.
Such determinations could have a materially adverse effect upon Health Images
and would prohibit the affected imaging centers from continuing their current
procedures for conducting business.
FRAUD AND ABUSE
All medical providers that accept Medicare or Medicaid reimbursements are
currently subject to the fraud and abuse provisions of the Social Security Act
(the "Act"), which essentially prohibit bribes, kickbacks, and rebates and any
direct or indirect remuneration for the referral of Medicare or Medicaid
patients or for providing Medicare-covered or Medicaid-covered services, items
or equipment. As written, the statute technically prohibits many common
arrangements between medical service providers and physicians. A violation of
these provisions may result in civil and criminal penalties and exclusion from
participation in the Medicare and Medicaid programs. The Department of Justice
gives healthcare fraud a high priority and has made more personnel available to
investigate instances of alleged healthcare fraud in recent years.
In July 1991, the Office of the Inspector General at the Department of Health
and Human Services ("OIG") issued regulations (the "HHS Regulations") which
provide specific "safe harbors" for certain practices that would not violate the
provisions of the Act. These regulations specify limited circumstances under
which a "safe harbor" will be available when physician investors refer Medicare
patients to entities in which they maintain a passive investment interest (i.e.,
either as a shareholder or a limited partnership interest). Under the safe
harbor rules, payments constituting a return on investment (e.g., dividends,
interest) will not constitute proscribed remuneration under the Act in certain
circumstances. Failure to satisfy the conditions of an applicable safe harbor
does not necessarily indicate that the arrangement in question violates the Act,
but means that the arrangement is not protected from criminal or civil sanctions
under the Act.
Health Images has five imaging centers that are not 100% owned by Health
Images. These centers are located in Athens, Georgia, Frederick, Maryland,
Lancaster, Pennsylvania, Philadelphia, Pennsylvania, and Anderson, South
Carolina. These centers are owned by limited partnerships in which Health
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Images is sole general partner, except Lancaster and Philadelphia where it is a
co-general partner. Health Images has a 93% to 98% limited partnership interest
in each of the Partnerships. None of Health Images' affiliated partnerships (the
"Partnerships") meet all of the criteria to satisfy any of the safe harbors set
forth in the HHS Regulations because one of the safe harbor criteria states that
no more than 40% of the investments in an entity (such as one of the
Partnerships) can be held by investors who do business with the entity. Doing
business with the entity is defined more broadly than simply making or
influencing referrals. It also includes furnishing items or services to the
partnership. Therefore, although far less than 40% of the ownership interests in
each of the Partnerships is held by limited partners who refer or can influence
referrals to the center owned by the Partnership, the Partnerships nevertheless
fail to meet this criterion because Health Images is the managing general
partner of each of the Partnerships. As managing general partner, Health Images
provides services to each of the Partnerships for which it receives compensation
in the form of its management fee. Health Images' ownership interest as majority
limited partner coupled with the services provided as general partner prevents
each of the Partnerships from meeting one of the criteria for satisfying the
safe harbor. Health Images believes it meets the other criteria for the safe
harbor.
The fact that a given business relationship does not meet the criteria to
fall within the safe harbor does not render the conduct illegal. It is currently
impossible to predict the risk of prosecution although Health Images believes it
to be very slight because of the minor ownership interest of these limited
partners and the small percentage of such limited partners' referrals relative
to the aggregate referrals to the center. In addition, any examination of the
pattern of distributions to the limited partners of the Partnerships would show
that all limited partners are treated equally, regardless of referrals, based
solely on their respective ownership interests and distributions are made only
when merited by the operating income of the Partnerships. Health Images has
offered to purchase the interests of the limited partners in each of the
Partnerships to effect a termination of the Partnerships and avoid any risk that
Health Images or the limited partners will be prosecuted under the Act. Although
none of the remaining limited partners wishes to sell, none of such limited
partners has more than a nominal interest in the limited partnership. Health
Images does not believe that the ownership interest of these limited partners
creates the potential for abuse.
In November 1995, the OIG adopted a second set of safe harbors that would
protect certain managed care activities from the reach of the Act. In some
instances, the safe harbor would cover price reductions offered by providers to
health plans.
The OIG also periodically issues "Fraud Alerts", which identify specific
practices within the healthcare industry that the OIG believes could raise
questions under the federal fraud and abuse laws. The following areas have been
the subject of Fraud Alerts by the OIG: joint venture arrangements; routine
waiver of Medicare Part B copayments and deductibles; hospital incentives to
referring physicians; prescription drug marketing practices; arrangements for
the provision of clinical laboratory services; arrangements for home health
services; and arrangements involving nursing homes. Health Images monitors these
Fraud Alerts to determine what action, if any, is necessary to comply with their
requirements.
In addition, many states in which Health Images conducts business (e.g.,
Texas) also have their own anti-kickback laws which are similar in scope and
purpose to the Act. Health Images continuously monitors these laws to determine
what action, if any, is necessary to comply with their requirements.
The Omnibus Budget Reconciliation Act of 1993 ("OBRA '93") enacted
restrictions on the practice of physician self-referral; i.e., the practice by
which physicians refer to entities with which they have a financial
relationship. With respect to diagnostic imaging services, OBRA '93 makes it
unlawful for a physician, a physician's immediate family, or an entity in which
either has an ownership interest to refer Medicare or Medicaid patients for MRI
or CT, to an entity with which any one of them has a "financial relationship".
The statute defines "financial relationship" to include not only an ownership or
other investment interest but also any economic interest. Any compensation
arrangement between a referring physician and an imaging center is therefore
covered by OBRA '93. Although OBRA '93 became effective on January 1, 1995, no
regulations implementing OBRA '93 provisions have been proposed
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and the form on which providers would report their financial relationships has
not been issued. With respect to the five imaging centers that are limited
partnerships, there may have been a very small number of isolated referrals by
physician investors of Medicare patients. Health Images has implemented
procedures to preclude billing of such referrals in the future. Moreover, while
Health Images attempts to structure its contracts with referring physicians who
also provide services to or receive services from Health Images to comply with
OBRA '93, there is no assurance that Health Images is currently in compliance
with such statute.
OBRA '93 also modified several of the exceptions to the self-referral
prohibition that were in existence prior to its enactment. With respect to MRI,
these exceptions also became effective in January 1995. Health Images does not
believe that the provisions of OBRA '93 will impact its business directly, but
there may be an indirect effect over time if some competitors of Health Images
who rely on physician self-referral and have a high volume of Medicare or
Medicaid business cease operations or direct their Medicare and Medicaid
patients elsewhere. Health Images has not yet seen any material impact from the
statutes.
On August 21, 1996, the President signed into law the Health Insurance
Portability and Accountability Act of 1996 ("HIPPA"). The HIPPA contained a
number of provisions relating to healthcare fraud and abuse, including (i) the
establishment of a national fraud and abuse control program involving federal
and state agencies; (ii) a requirement that the federal Department of Health and
Human Services ("DHHS") issue advisory opinions regarding the applicability of
certain aspects of the anti-kickback statute to specific or proposed
arrangements that would be binding on the Department and the party requesting
the opinion; (iii) new authority for the DHHS to exclude from participation in
the Medicare and Medicaid programs an officer or managing employee of an entity
convicted of criminal offenses related to the delivery of services under the
Medicare and Medicaid programs; (iv) the establishment of a new criminal offense
of healthcare fraud; (v) clarification of the level of knowledge required for
the imposition of civil monetary penalties; and (vi) increases in monetary
penalties for violations of fraud and abuse laws. To date, no regulations have
been issued implementing these new provisions. Other proposals for curtailing
fraud and abuse by healthcare providers have been proposed and may be adopted in
the future.
STATE REGULATION
Many states are implementing their own healthcare reform plans, which may
include provisions that could affect the structure of healthcare and the manner
in which healthcare services are delivered in a particular state. Health Images'
management monitors such legislation to determine what action, if any, is
necessary as a result of such provisions.
Also, certain of the states in which Health Images has imaging centers have
enacted provisions concerning physician self-referral. The State of New Jersey
has a law that prohibits physicians from referring any patient to a healthcare
entity in which they have a financial interest. This law, however, exempted
those entities that like Health Images' Stratford, New Jersey imaging center,
were in existence on the effective date of the law, August 1, 1991. The State of
Illinois has also enacted prohibitions on self-referral of diagnostic imaging.
In addition, the States of Florida, Georgia, Maryland, South Carolina and
Tennessee have all passed legislation that does, in some form, prohibit
physicians from referring patients to entities in which they have a financial
interest. Other states have enacted or may be considering similar legislation.
Health Images is studying the proposed regulations and monitoring legislative
activity with respect to limiting physician investments in MRI centers to
determine what action, if any, may be necessary to comply with pending
legislation or new interpretations of existing laws applicable to Health Images'
business.
HAZARDOUS WASTES
Health Images is also subject to licensing and regulation under federal and
state laws relating to the handling and disposal of center hazardous waste and
radioactive materials as well as to the safety and health of center employees.
The sanctions for failure to comply with these regulations may be denial of
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the right to conduct business, significant fines and criminal penalties, any of
which, if imposed, could have a material adverse effect on Health Images. Health
Images believes that it is in substantial compliance with all applicable laws
and regulations relating to these materials.
QUALITY ASSURANCE
Health Images has a quality assurance program under which it monitors
performance at both the corporate and the imaging center level to ensure that
Health Images' high quality standards are maintained. At the corporate level,
Health Images' Operations Department requests and reviews files from each center
on a monthly basis to ensure that each center maintains the standards set by
Health Images, including image quality, quality of interpretation, and quality
of service to patients and referring physicians. This review also allows an
objective party to monitor images over an extended period to detect any gradual
deterioration of image quality. At the imaging center level, each imaging center
manger randomly selects and surveys three patients and two referring physicians
per week, to ensure that standards of services set by Health Images, including
service to the referring physicians as well as patients, are maintained.
Although the Joint Commission of Accreditation of Healthcare Organization
("JCAHO") is best known for hospital accreditation, JCAHO also accredits
diagnostic imaging centers. Managed care payors frequently request JCAHO
accreditation. Although JCAHO accreditation has not yet become a general
requirement for managed care payors reviewing diagnostic imaging centers, Health
Images believes this is likely to occur in the future, especially in
metropolitan areas. Health Images has hired a specialist in JCAHO accreditation
and plans to begin applying for JCAHO accreditation for certain of its centers
within one year. The first such center, Health Images of Jacksonville, has
passed its JCAHO inspection and received its JCAHO accreditation in November
1996. Health Images chose a multi-modality center as its first JCAHO site in
order to develop JCAHO standards for all sites as expeditiously as possible.
Health Images has reviewed JCAHO guidelines and believes that its policies and
procedures often exceed the JCAHO accreditation standards. Some of Health
Images' centers acquired in the MedAlliance Centers Acquisition have already
been reviewed by JCAHO as providers of services for hospitals as part of such
hospitals' accreditation process. Several of the centers acquired from
MedAlliance were also preparing to apply for JCAHO accreditation at the time of
the acquisition.
INSURANCE
Health Images carries workers' compensation insurance and maintains
comprehensive and general liability and fire insurance in amounts deemed
adequate by management with respect to each imaging center. Health Images is
self-insured with respect to its health and dental insurance risk. Health Images
provides MRI technical services and has professional liability insurance. Health
Images is not engaged in the practice of medicine, and requires that physicians
reading the diagnostic scans maintain medical malpractice insurance. In
addition, Health Images maintains liability insurance coverage. There can be no
assurance that claims will not exceed the amounts of insurance coverage, that
the cost for such coverage will not increase to such an extent that Health
Images will be forced to self-insure a substantial portion of this risk, or that
such coverage will not be reduced or become unavailable. Health Images does not
maintain product liability insurance coverage with respect to MRI systems and
upgrades it manufactures. Health Images carries officers' and directors'
liability insurance.
EMPLOYEES
At September 30, 1996, Health Images had 1,056 employees (865 full-time and
191 part-time). An MRI imaging center typically has a full-time staff of
approximately ten employees, generally consisting of three MRI technicians, one
marketing representative, two billing clerks, one transcriptionist, two
receptionists and one office manager. A multi-modality imaging center requires
more personnel and typically has a staff of 30 employees. Health Images attracts
and maintains qualified personnel by paying competitive salaries and offering
opportunities for rapid advancement.
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LEGAL PROCEEDINGS
Health Images acquired the 51.5% interest in National Diagnostic Systems,
Inc. ("NDS") it did not already own from shareholders of NDS in an August 4,
1994, acquisition. On February 21, 1995, Health Images filed a lawsuit in the
Superior Court of the State of California, San Mateo County, against each of the
selling shareholders of NDS. Health Images' complaint is for rescission and
restitution, breach of contract, intentional misrepresentation, negligent
misrepresentation, suppression of fact, and indemnification. Health Images'
complaint was instituted after the selling shareholders failed to respond
adequately to a February 13, 1995 demand letter for rescission of the
transaction. On February 17, 1995, one of the selling shareholders, James J.
Fitzsimmons, the former President and Chief Executive Officer of Interactive
Diagnostic Services, Inc. ("IDSI") (the successor entity to NDS), filed a
complaint against Health Images and IDSI in the Superior Court of the State of
California, San Mateo County. Mr. Fitzsimmons' complaint alleges breach of his
employment agreement with IDSI and Health Images and a breach of implied
covenant of good faith and fair dealing and seeks declaratory relief. Mr.
Fitzsimmons' employment with IDSI terminated as of January 20, 1995. On March
21, 1995, Mr. Fitzsimmons amended his complaint to substitute attorneys, add the
remaining selling shareholders as plaintiffs, and change the causes of action.
The amended complaint sets forth causes of action, including a breach of
fiduciary duty by Health Images, fraud by Health Images, and a breach of implied
covenant of good faith and fair dealing by Health Images and IDSI, in addition
to the previous causes of action asserted by Mr. Fitzsimmons. In August 1995,
the California Superior Court judge ruled that Health Images' complaint and the
selling shareholders' complaint be consolidated into a single binding
arbitration proceeding to be heard by an arbitrator appointed through the
American Arbitration Association ("AAA"). The AAA selected an arbitrator in
February 1996. The arbitrator held hearings in September and November 1996 and
has scheduled the final hearings in the arbitration for January 27-February 5,
1997. Health Images intends to defend itself vigorously against this lawsuit by
the selling shareholders, and will continue to pursue its claims against the
selling shareholders. Management believes that its claims against the selling
shareholders are meritorious. Management regards the claims asserted in the
amended complaint as without merit. It is nevertheless impossible to predict the
outcome of the arbitration. In the event the arbitration were to be decided in a
manner adverse to Health Images, such determination could have an adverse effect
on Health Images' financial results for a particular period. Health Images does
not anticipate any ruling until the second quarter of 1997 after closing
arguments and the submission of final briefs.
On April 12, 1995, Paul W. Harris, who was involved in the acquisition of NDS
and served as an Executive Vice President of IDSI, sued Health Images alleging
breach of his employment agreement because he received no severance pay
following his December 9, 1994, termination. Health Images has agreed to settle
this lawsuit under confidential terms that are not material to Health Images'
operations. The parties are in the process of finalizing the language of the
settlement agreement.
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PRINCIPAL STOCKHOLDERS OF HEALTH IMAGES
The following table sets forth certain information regarding the beneficial
ownership of the shares of Health Images Common Stock as of December 31, 1996,
by (i) each person known by Health Images to be the beneficial owner of more
than 5% of such outstanding shares and (ii) all directors and executive officers
of Health Images as a group. Under the rules and regulations of the SEC, one is
a "beneficial owner" of securities if one has or shares the power to vote them
or direct their investment. No directors or executive officers of Health Images
other than Mr. Carl beneficially own 1% or more of the outstanding shares of
Health Images Common Stock.
NUMBER OF SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) SHARES
- -------------------------------------------- ---------------- ---------------
Robert D. Carl, III......................... 1,002,838 (2) 8.1%
5905 Windward Pkwy
Alpharetta, Georgia 30202
Lindner Fund, Inc........................... 1,071,200 8.6%
7711 Carondelet Avenue
Box 16900
St. Louis, Missouri 63105
All Executive Officers and Directors of
Health Images as a Group (12 persons) ..... 1,494,660 (3) 12.1%
- -----------
(1) Unless otherwise specified in the footnotes, the shareholder has sole voting
and dispositive power.
(2) Includes 525,900 shares of Common Stock owned individually by Mr. Carl.
Includes options for 223,542 shares of Common Stock which are or will become
exercisable by Mr. Carl within the 60 day period following December 31, 1996
and a currently exercisable warrant to purchase 250,000 shares of Common
Stock. Includes 1,621 shares held in Health Images's 401(k) Plan. Includes
1,775 shares of Common Stock owned by Mr. Carl's mother for which shares Mr.
Carl disclaims any beneficial ownership. Excludes 4,600 shares of Common
Stock owned by Mr. Carl's spouse.
(3) Includes options for 609,376 shares of Common Stock and a warrant for
250,000 shares of Common Stock which are or will become exercisable by the
executive officers and directors within the 60 day period following December
31, 1996.
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DESCRIPTION OF CAPITAL STOCK OF HEALTHSOUTH
COMMON STOCK
HEALTHSOUTH is authorized by the HEALTHSOUTH Restated Certificate of
Incorporation (the "HEALTHSOUTH Certificate") to issue up to 251,500,000 shares
of capital stock, of which 250,000,000 shares are designated Common Stock, par
value $.01 per share, and 1,500,000 shares are designated Preferred Stock, par
value $.10 per share. As of January , 1997, there were
shares of HEALTHSOUTH Common Stock outstanding (including shares
reserved for issuance in connection with HEALTHSOUTH's 1995 and 1996 mergers
which had not yet been claimed by holders of the stock of the acquired
companies). In addition, there were outstanding options under HEALTHSOUTH's
stock option plans to purchase an additional shares of HEALTHSOUTH Common Stock.
An additional shares of HEALTHSOUTH Common Stock were reserved for future option
grants under such plans. Additionally, shares are currently reserved for
issuance upon conversion of HEALTHSOUTH's 5% Convertible Subordinated Debentures
due 2001 (the "Debentures"), and 76,639 shares are reserved for issuance upon
the exercise of outstanding warrants.
Holders of HEALTHSOUTH Common Stock are entitled to participate equally in
dividends when and as declared by the Board of Directors out of funds legally
available therefor and, in the event of liquidation or distribution of assets of
HEALTHSOUTH, are entitled to share ratably in such assets remaining after
payment of liabilities. Stockholders are entitled to one vote per share. Holders
of HEALTHSOUTH Common Stock have no conversion, preemptive or other subscription
rights, and there are no redemption or sinking fund provisions with respect to
such stock. The outstanding shares of HEALTHSOUTH Common Stock are fully paid
and nonassessable.
FAIR PRICE PROVISION
The HEALTHSOUTH Certificate contains certain provisions requiring
supermajority stockholder approval to effect specified extraordinary corporate
transactions unless certain conditions are met. The HEALTHSOUTH Certificate
requires the affirmative vote of 66 2/3 % of all shares of HEALTHSOUTH entitled
to vote in the election of Directors to approve a "business combination" with
any "other entity" that is the beneficial owner, directly or indirectly, of more
than 20% of the outstanding shares of HEALTHSOUTH entitled to vote in the
election of Directors. For purposes of this restriction, a "business
combination" includes: (a) the sale, exchange, lease, transfer or other
disposition by HEALTHSOUTH of all, or substantially all, of its assets or
business; (b) any merger or consolidation of HEALTHSOUTH; and (c) certain sales
of HEALTHSOUTH's Common Stock in exchange for cash, assets, securities or any
combination thereof. An "other entity" is defined to include, generally, any
corporation, person or entity, and any affiliate or associate of such
corporation, person or entity.
The foregoing supermajority vote shall not be required where, in the business
combination, (i) HEALTHSOUTH's stockholders receive consideration per share not
less than the highest per share price paid by the other entity in acquiring any
of its holdings of HEALTHSOUTH's Common Stock (subject to certain adjustments
upward) and (ii) certain other requirements, designed to prevent the other
entity from receiving disproportionate gains in connection with the business
combination, are satisfied.
The provisions of the HEALTHSOUTH Certificate described in the preceding
paragraphs, and its Bylaws, may be amended or repealed only by the affirmative
vote of 66 2/3 % of the shares entitled to vote thereon.
The effect of the foregoing provisions is to make it more difficult for a
person, entity or group to effect a change in control of HEALTHSOUTH through the
acquisition of a large block of HEALTHSOUTH's voting stock, or to effect a
merger or other acquisition that is not approved by a majority of HEALTHSOUTH's
Directors serving in office prior to the acquisition by the other entity of 5%
or more of HEALTHSOUTH's stock. In addition, holders of the Debentures have the
right to require HEALTHSOUTH to redeem the Debentures at 100% of the principal
amount thereof, plus accrued interest, upon the occurrence of certain events
involving a sale or merger of HEALTHSOUTH,
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unless holders of HEALTHSOUTH's Common Stock shall receive an amount per share
at least equal to the conversion price of the Debentures in effect on the date
such sale or merger is consummated. Such holders' redemption option may impede
certain forms of takeovers if the potential acquiror is unable to finance the
redemption of the Debentures.
SECTION 203 OF THE DGCL
HEALTHSOUTH is subject to the provisions of Section 203 of the DGCL. That
section provides, with certain exceptions, that a Delaware corporation may not
engage in any of a broad range of business combinations with a person or
affiliate or associate of such person who is an "interested stockholder" for a
period of three years from the date that such person became an interested
stockholder unless: (i) the transaction resulting in a person's becoming an
interested stockholder, or the business combination, is approved by the board of
directors of the corporation before the person becomes an interested
stockholder, (ii) the interested stockholder acquires 85% or more of the
outstanding voting stock of the corporation in the same transaction that makes
it an interested stockholder (excluding shares held by directors, officers and
certain employee stock ownership plans); or (iii) on or after the date the
person becomes an interested stockholder, the business combination is approved
by the corporation's board of directors and by the holders of at least 66 2/3 %
of the corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. An "interested
stockholder" is defined to include any person, and the affiliates and associates
of such person that (i) is the owner of 15% or more of the outstanding voting
stock of the corporation or (ii) is an affiliate or associate of the corporation
and was the owner of 15% or more of the outstanding voting stock of the
corporation at any time within the three-year period immediately prior to the
date on which it is sought to be determined whether such person is an interested
stockholder. It is anticipated that the provisions of Section 203 of the DGCL
may encourage companies or others interested in acquiring HEALTHSOUTH to
negotiate in advance with the HEALTHSOUTH Board of Directors, since the
stockholder approval requirement would be avoided if a majority of the directors
then in office approve either the business combination or the transaction which
results in the acquiror becoming an interested stockholder.
PREFERRED STOCK
The HEALTHSOUTH Certificate authorizes the issuance of up to 1,500,000 shares
of Preferred Stock, par value $.10 per share (the "HEALTHSOUTH Preferred
Stock"). The Board of Directors has the authority to issue the HEALTHSOUTH
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions, including the dividend rights, dividend rate,
conversion rights, voting rights, terms of redemption, redemption price or
prices, liquidation preferences and the number of shares constituting any series
or the designations of such series, without any further vote or action by the
stockholders. Issuance of shares of HEALTHSOUTH Preferred Stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from acquiring, a majority of the
outstanding voting stock of HEALTHSOUTH. Any such issuance could also adversely
affect the voting power of the holders of the HEALTHSOUTH Common Stock. The
Board of Directors of HEALTHSOUTH has no current intention of issuing any shares
of HEALTHSOUTH Preferred Stock.
TRANSFER AGENT
The transfer agent and registrar for the HEALTHSOUTH Common Stock is
ChaseMellon Shareholder Services, New York, New York.
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COMPARISON OF RIGHTS OF HEALTH IMAGES
AND HEALTHSOUTH STOCKHOLDERS
Both Health Images and HEALTHSOUTH are incorporated in Delaware. Holders of
the Health Images Shares will continue to have their rights and obligations as
stockholders of HEALTHSOUTH after the Merger governed by Delaware law. Set forth
below is a summary comparison of the rights of a HEALTHSOUTH stockholder under
the HEALTHSOUTH Certificate and HEALTHSOUTH's Bylaws (the "HEALTHSOUTH Bylaws"),
on the one hand, and the rights of a Health Images stockholder under the Health
Images Certificate of Incorporation, as amended (the "Health Images
Certificate"), and Health Images' Bylaws, as amended (the "Health Images
Bylaws"), on the other hand. The information set forth below is qualified in its
entirety by reference to the HEALTHSOUTH Certificate, the HEALTHSOUTH Bylaws,
the Health Images Certificate and the Health Images Bylaws.
CLASSES AND SERIES OF CAPITAL STOCK
Health Images. Pursuant to the Health Images Certificate, Health Images is
authorized to issue up to 42,000,000 shares of capital stock, of which
40,000,000 shares are designated Common Stock, par value $.01 per share, and
2,000,000 shares are designated Preferred Stock, par value $.01 per share. As of
December 31, 1996, 11,532,269 shares of Health Images Common Stock were issued
and outstanding. In addition, 250,000 shares of Health Images Common Stock were
subject to an exercisable warrant and 1,193,653 shares were subject to options
which were exercisable or will become exercisable upon the Effective Time. The
Board of Directors of Health Images has the authority to issue the Health Images
Preferred Stock in one or more series, and to fix the designation, powers,
preferences, rights, qualifications, limitations or restrictions of each such
series, without any further vote or action by its stockholders. As of December
31, 1996, there were no shares of Health Images Preferred Stock issued and
outstanding. The Board of Directors of Health Images has no present intention of
issuing shares of Health Images Preferred Stock.
HEALTHSOUTH. HEALTHSOUTH is authorized by the HEALTHSOUTH Certificate to
issue up to 251,500,000 shares of capital stock, of which 250,000,000 shares are
designated Common Stock, par value $.01 per share, and 1,500,000 shares are
designated Preferred Stock, par value $.10 per share. See "DESCRIPTION OF
CAPITAL STOCK OF HEALTHSOUTH". The Board of Directors of HEALTHSOUTH has the
authority to issue the HEALTHSOUTH Preferred Stock in one or more series and to
fix the rights, preferences, privileges and restrictions for each such series,
without any further vote or action by the stockholders. As of January , 1996,
there were no shares of HEALTHSOUTH Preferred Stock issued and outstanding, and
the Board of Directors of HEALTHSOUTH has no present intention of issuing shares
of HEALTHSOUTH Preferred Stock.
SIZE AND ELECTION OF THE BOARD OF DIRECTORS
Health Images. The Health Images Bylaws provide that the Health Images Board
of Directors shall consist of at least three and not more than seven directors
and that the size of the Health Images Board of Directors may be fixed, within
such limits, by the Directors then in office. Directors of Health Images are
elected by a plurality of votes cast at the Annual Meeting of Stockholders. The
Health Images Certificate and the Health Images Bylaws do not provide for
cumulative voting. Vacancies in the Health Images Board of Directors and newly
created directorships resulting from any increase in the authorized number of
directors may be filled by a majority of the directors then in office or by the
sole remaining director.
HEALTHSOUTH. The HEALTHSOUTH Bylaws provide that the HEALTHSOUTH Board of
Directors shall consist of at least one director and that the size of the
HEALTHSOUTH Board of Directors may be fixed by the directors then in office.
Directors of HEALTHSOUTH are elected by a plurality of votes cast at the annual
meeting of stockholders. The HEALTHSOUTH Certificate and the HEALTHSOUTH Bylaws
do not provide for cumulative voting. Vacancies in HEALTHSOUTH's Board of
Directors and newly created directorships resulting from any increase in the
authorized number of directors are filled by a majority of directors then in
office.
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REMOVAL OF DIRECTORS
Health Images. The Health Images Bylaws provide that any director or the
entire board of directors may be removed, with or without cause, by the holders
of a majority of the shares of capital stock entitled to vote at an election of
directors.
HEALTHSOUTH. The HEALTHSOUTH Bylaws provide that a director may be removed
with or without cause by the vote of the holders of a majority of the shares of
capital stock entitled to vote thereon.
OTHER VOTING RIGHTS
Health Images. The Health Images Common Stock is not divided into classes,
and Health Images has no classes or series of capital stock issued or
outstanding other than the Health Images Common Stock. Each Health Images
stockholder holding shares of Health Images Common Stock entitled to be voted on
any matter shall have one vote on each such matter submitted to vote at a
meeting of stockholders for each such share of Health Images Common Stock held
by such stockholder as of the record date for such meeting. Except as
specifically provided otherwise by law or by the Health Images Certificate or
the Health Images Bylaws, the vote of the holders of a majority of the shares of
capital stock present or represented and entitled to vote is required for the
approval of any matter at a meeting of Health Images stockholders.
HEALTHSOUTH. The HEALTHSOUTH Common Stock is not divided into classes, and
HEALTHSOUTH has no classes or series of capital stock issued or outstanding
other than the HEALTHSOUTH Common Stock. Each HEALTHSOUTH stockholder holding
shares of HEALTHSOUTH Common Stock entitled to be voted on any matter, including
the election of directors, shall have one vote on each such matter submitted to
vote at a meeting of stockholders for each such share of HEALTHSOUTH Common
Stock held by such stockholder as of the record date for such meeting. Except as
specifically provided otherwise by law or by the HEALTHSOUTH Certificate or the
HEALTHSOUTH Bylaws, the vote of the holders of a majority of the shares of
capital stock present or represented and entitled to vote is required for the
approval of any matter at a meeting of HEALTHSOUTH stockholders.
CONVERSION AND DISSOLUTION
Health Images. The Health Images Common Stock has no conversion features. The
Health Images Certificate authorizes 2,000,000 shares of Preferred Stock, par
value $.01 per share, 200,000 shares of which have been designated as Series B
Participating Preferred Stock, par value $1.00 per share. The Health Images
Certificate provides that shares of Health Images Preferred Stock may have such
voting powers, preferences and other special rights (including, without
limitation, the right to convert the shares of such Health Images Preferred
Stock into shares of Health Images Common Stock) as shall be stated in the
Health Images Certificate or resolutions providing for the issuance of Health
Images Preferred Stock. If the Board of Directors were to designate such a
series of Health Images Preferred Stock, such Health Images Preferred Stock
could be entitled to preferential payments in the event of a liquidation,
dissolution or winding up of Health Images.
HEALTHSOUTH. The HEALTHSOUTH Common Stock has no conversion features. The
HEALTHSOUTH Certificate authorizes 1,500,000 shares of Preferred Stock, par
value $.10 per share, and provides that such shares of HEALTHSOUTH Preferred
Stock may have such voting powers, preferences and other special rights
(including, without limitation, the right to convert the shares of such
HEALTHSOUTH Preferred Stock into shares of HEALTHSOUTH Common Stock) as shall be
stated in the HEALTHSOUTH Certificate or resolutions providing for the issuance
of HEALTHSOUTH Preferred Stock. If the Board of Directors were to designate such
a series of HEALTHSOUTH Preferred Stock, such HEALTHSOUTH Preferred Stock could
be entitled to preferential payments in the event of dissolution of HEALTHSOUTH.
BUSINESS COMBINATIONS
Health Images. Neither the Health Images Certificate nor the Health Images
Bylaws contains any provisions similar to the provisions of the HEALTHSOUTH
Certificate described below or otherwise restricting business combinations.
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HEALTHSOUTH. The HEALTHSOUTH Certificate provides that the vote of the
holders of 66-2/3% of all shares of HEALTHSOUTH entitled to vote in the election
of directors is required for the approval and adoption of a business combination
(as defined in the HEALTHSOUTH Certificate) with any entity (as defined in the
HEALTHSOUTH Certificate) if, on the record date for the determination of
stockholders entitled to vote thereon, the other entity is the beneficial owner,
directly or indirectly, of more than 20% of the outstanding shares of
HEALTHSOUTH entitled to vote in the election of directors. The voting
requirements of the "fair price" provision are not applicable to a business
combination involving a holder of 20% or more of HEALTHSOUTH's voting stock in
the business combination, if: (i) HEALTHSOUTH's stockholders receive
consideration per share not less than the highest per share price paid by the
other entity in acquiring any of its holdings of the HEALTHSOUTH Common Stock
(subject to certain upward adjustments); and (ii) certain other requirements,
designed to prevent the other entity from receiving disproportionate gains in
connection with the business combination, are satisfied. See "DESCRIPTION OF
CAPITAL STOCK OF HEALTHSOUTH -- Fair Price Provision".
AMENDMENT OR REPEAL OF THE CERTIFICATE OF INCORPORATION
Under Delaware law, unless its certificate of incorporation or by-laws
otherwise provide, amendments of a corporation's certificate of incorporation
generally require the approval of the holders of a majority of the outstanding
stock entitled to vote thereon, and if such amendment would increase or decrease
the number of authorized shares of any class or series or the par value of such
shares or would adversely affect the shares of such class or series, the
approval of a majority of the outstanding stock of such class or series.
Health Images. The Health Images Certificate contains no provisions requiring
approval of amendments to the Health Images Certificate other than as generally
required under Delaware law, as described above. The Health Images Certificate
also provides that the Health Images Board of Directors may make, alter or
repeal the Health Images Bylaws.
HEALTHSOUTH. The HEALTHSOUTH Certificate requires approval by holders of at
least 662/3% of the outstanding shares entitled to vote thereon to repeal or
amend Article SIXTH of the HEALTHSOUTH Certificate (regarding the calling of
special meetings by the stockholders), Article SEVENTH of the HEALTHSOUTH
Certificate (regarding the "fair price" provision) and Article EIGHTH of the
HEALTHSOUTH Certificate (regarding the amendment of the HEALTHSOUTH
Certificate). The HEALTHSOUTH Certificate also provides that a majority of the
HEALTHSOUTH Board of Directors may make, alter or repeal the HEALTHSOUTH Bylaws.
SPECIAL MEETING OF STOCKHOLDERS
Health Images. The Health Images Bylaws provide that special meetings of
stockholders may be called at any time, upon not less than 10 days' written
notice, by the Chairman of the Board, or the Board of Directors or any one or
more stockholder(s) holding not less than 10% of the shares entitled to vote at
such meeting.
HEALTHSOUTH. The HEALTHSOUTH Bylaws provide that a special meeting of the
HEALTHSOUTH stockholders may be called by a majority of the Board of Directors
or by the holders of at least 20% of the outstanding shares of capital stock of
HEALTHSOUTH entitled to vote in the election of directors.
LIABILITY OF DIRECTORS
The DGCL permits a corporation to include a provision in its certificate of
incorporation eliminating or limiting the personal liability of a director or
officer to the corporation or its stockholders for monetary damages for breach
of the director's fiduciary duty, subject to certain limitations. Each of the
HEALTHSOUTH Certificate and the Health Images Certificate includes such a
provision, as set forth below, to the maximum effect permitted by law.
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Each of the HEALTHSOUTH Certificate and the Health Images Certificate
provides that a director will not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL, which concerns unlawful payments of dividends, stock
purchases or redemptions or (iv) for any transaction from which the director
derived an improper personal benefit.
While these provisions provide directors with protection from awards of
monetary damages for breaches of their duty of care, they do not eliminate such
duty. Accordingly, these provisions will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's
breach of his or her duty of care. The provisions described above apply to an
officer of the corporation only if he or she is a director of the corporation
and is acting in his or her capacity as director, and do not apply to officers
of the corporation who are not directors.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The DGCL permits a corporation to indemnify officers, directors, employees
and agents for actions taken in good faith and in a manner they reasonably
believed to be in, or not opposed to, the best interests of the corporation, and
with respect to any criminal action, which they had no reasonable cause to
believe was unlawful. The DGCL provides that a corporation may advance expenses
of defense (upon receipt of a written undertaking to reimburse the corporation
if indemnification is not appropriate) and must reimburse a successful defendant
for expenses, including attorneys' fees, actually and reasonably incurred, and
permits a corporation to purchase and maintain liability insurance for its
directors and officers. The DGCL provides that indemnification may not be made
for any claim, issue or matter as to which a person has been adjudged by a court
of competent jurisdiction, after exhaustion of all appeals therefrom, to be
liable to the corporation, unless and only to the extent a court determines that
the person is entitled to indemnity for such expenses as the court deems proper.
The HEALTHSOUTH Bylaws provide that each person who is involved in any actual
or threatened action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he or she is or was
a director, officer, employee or agent of HEALTHSOUTH, or is or was serving at
the request of HEALTHSOUTH as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to an employee benefit plan, will be indemnified
by HEALTHSOUTH to the full extent permitted by the DGCL, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits HEALTHSOUTH to provide broader
indemnification rights than said law permitted prior to such amendment) or by
other applicable laws then in effect. The Health Images Bylaws also provide for
indemnification to the full extent permitted by the DGCL for officers and
directors.
The Plan provides that all rights to indemnification for acts or omissions
occurring prior to the Effective Time of the Merger now existing in favor of the
current or former directors or officers of Health Images as provided in the
Health Images Certificate or the Health Images Bylaws shall survive the Merger
and shall continue in full force and effect in accordance with their terms.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling HEALTHSOUTH
pursuant to the foregoing provisions, HEALTHSOUTH has been informed that in the
opinion of the SEC such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.
STOCKHOLDER RIGHTS PLAN
Health Images. The Board of Directors of Health Images adopted a Stockholder
Rights Plan on May 10, 1989 (the "Stockholder Rights Plan"). Pursuant to the
Stockholder Rights Plan, Health Images distributed to its stockholders of record
at the close of business on May 22, 1989 certain share purchase rights
("Rights") governed by a Rights Agreement dated May 20, 1989 between Health
Images and The Provident Bank acting as Rights Agent.
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The Rights presently are not exercisable and do not trade separately from the
Health Images Common Stock. If another party becomes the beneficial owner of
securities having 20% or more of the voting power of all the then outstanding
voting securities of Health Images or announces a tender offer for securities
having 20% or more of the voting power of the then outstanding voting securities
of Health Images, however, then the Rights detach and are initially exercisable
to purchase one one-hundredth of a share of Series B Participating Preferred
Stock, $1.00 stated value per share ("Series B Preferred Stock"), of Health
Images, at a price of $56.00 per Right, subject to certain adjustments.
In the event that a person becomes the beneficial owner of securities having
20% or more of the voting power of all of the then outstanding voting securities
of Health Images (unless pursuant to a tender offer or exchange offer for all
outstanding shares of Common Stock at a price and on terms determined by at
least a majority of the members of the Board of Directors who are not officers
of Health Images to be both adequate and otherwise in the best interests of
Health Images and its stockholders (a "Permitted Offer"))(such person being
called an "Acquiring Person"), each holder of a Right (other than the Acquiring
Person) will for a 60-day period thereafter have the right to receive, upon
exercise, that number of shares of Health Images Common Stock having a market
value of two times the exercise price of the Right, to the extent available, and
then (after all authorized and unreserved shares of Health Images Common Stock
have been issued) a common stock equivalent (such as Preferred Stock or another
equity security with at least the same economic value as the Health Images
Common Stock) having a market value of two times the exercise price of the
Right, with Health Images Common Stock to the extent available being issued
first (such right being called the "Subscription Right"). After a person or
entity has become an Acquiring Person, if Health Images is involved in a merger
or other business combination transaction in which the Health Images Common
Stock is exchanged or changed, or 50% or more of Health Images' assets or
earning power is sold (in one transaction or a series of transactions), each
holder of a Right (other than the Acquiring Person) will have the right to
receive, upon the exercise thereof at the then current exercise price of the
Right, that number of shares of common stock of the acquiring company which at
the time of such transaction would have a market value of two times the exercise
price of the Right (such right being called the "Merger Right"). The holder of a
Right will continue to have the Merger Right whether or not such holder
exercises the Subscription Right.
The Board of Directors of Health Images may, at its option, at any time after
a person becomes an Acquiring Person, exchange all or part of the outstanding
Rights (except those owned by the Acquiring Person) for shares of the Health
Images Common Stock at an exchange ratio of one share of Health Images Common
Stock per Right. However, the Board is not empowered to effect any such exchange
after a person acquires 50% or more of the Health Images Common Stock
outstanding. Under certain circumstances, Health Images may redeem the Rights at
a price of $.01 per Right.
The Series B Preferred Stock purchasable upon exercise of the Rights will be
nonredeemable and junior to any other series of Preferred Stock Health Images
may issue (unless otherwise provided in the terms of such other series of
Preferred Stock). Each share of Series B Preferred Stock will have a
preferential quarterly dividend and preference in liquidation. Each one
one-hundredth of a share of Series B Preferred Stock will, for a period of 90
days after issuance, be convertible into one share of Common Stock of Health
Images. Each share of Series B Preferred Stock will generally have 100 votes,
voting together with the shares of Health Images Common Stock.
The Rights will cause substantial dilution to an Acquiring Person unless the
Rights are redeemed. However, the Rights should not interfere with any merger or
other business combination pursuant to a Permitted Offer. The Rights expire on
May 21, 1999 unless extended or earlier redeemed by Health Images.
The Stockholder Rights Plan could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from acquiring,
control of Health Images, and could adversely affect the price of the Health
Images Common Stock. The Stockholder Rights Plan may also have the effect of
discouraging or preventing transactions involving an actual or threatened change
of control of Health Images (including unsolicited takeover attempts), even
though such a transaction may offer Health Images' stockholders the opportunity
to sell their stock at a price above the prevailing market price.
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The Plan and the Merger constitute a "Permitted Offer" under the Stockholder
Rights Plan. Health Images will redeem all outstanding Rights at a redemption
price of $.01 per Right immediately prior to the Effective Time.
HEALTHSOUTH. HEALTHSOUTH has no plans or arrangements similar to the
Stockholder Rights Plan of Health Images.
OPERATIONS AND MANAGEMENT
OF HEALTHSOUTH AFTER THE MERGER
OPERATIONS
After the consummation of the Merger, Health Images will be a wholly-owned
subsidiary of HEALTHSOUTH, and all of Health Images' subsidiaries will be
indirect wholly-owned subsidiaries of HEALTHSOUTH. HEALTHSOUTH will continue to
engage in the business of providing rehabilitative healthcare services as prior
to the Merger, working with the management of Health Images to operate and
continue to expand Health Images' business. No material disposition or
restructuring of either of HEALTHSOUTH or Health Images or any material part
thereof is contemplated as a result of the Merger. See the information set forth
herein and in the documents incorporated herein by reference as set forth under
"INCORPORATION OF CERTAIN INFORMATION BY REFERENCE", "BUSINESS OF HEALTHSOUTH"
and "BUSINESS OF HEALTH IMAGES".
MANAGEMENT
After the consummation of the Merger, HEALTHSOUTH will be managed by the same
Board of Directors and executive officers as existed prior to the Merger.
EXPERTS
The consolidated financial statements and schedule of HEALTHSOUTH
Corporation, the consolidated financial statements of Surgical Health
Corporation, the consolidated financial statements of Rehab Systems Company, the
consolidated financial statements of ReLife, Inc., the consolidated financial
statements of Sutter Surgery Centers, Inc., the consolidated financial
statements of Advantage Health Corporation, and the consolidated financial
statements of Harmarville Rehabilitation Center, Inc., incorporated by reference
in this Prospectus-Proxy Statement and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, to the extent indicated in their
reports thereon also incorporated by reference. Such consolidated financial
statements have been incorporated by reference herein in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements and schedules of Health Images
incorporated by reference in this Prospectus-Proxy Statement and the
Registration Statement have been audited by Joseph Decosimo and Company, LLP,
Atlanta, Georgia, independent auditors, as indicated in their reports with
respect thereto, and are so included and incorporated by reference in reliance
upon and authority of said firm as experts in accounting and auditing.
The financial statements of MedAlliance Imaging Centers (a division of
MedAlliance, Inc.) included in Health Images' Amendment No. 1 on Form 8-K/A
dated June 30, 1995 to Current Report on Form 8-K, incorporated by reference
herein, have been audited by Deloitte & Touche LLP, independent auditors, and
are so incorporated by reference in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
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LEGAL MATTERS
The validity of the shares of HEALTHSOUTH Common Stock to be issued to the
stockholders of Health Images pursuant to the Merger will be passed upon by
Haskell Slaughter & Young, L.L.C.
ADDITIONAL INFORMATION
OTHER BUSINESS
The Board of Directors of Health Images does not know of any matter to be
brought before its Special Meeting other than as described in the Notice of
Special Meeting accompanying this Prospectus-Proxy Statement mailed to the
stockholders of Health Images. If any other matter comes before the Special
Meeting, it is the intention of the persons named in the accompanying proxy to
vote the proxy in accordance with their best judgment with respect to such other
matter.
STOCKHOLDER PROPOSALS
If the Plan is not approved by the Health Images stockholders at the Special
Meeting or any adjournments or postponements thereof, Health Images intends to
hold its next Annual Meeting of Stockholders on , 1997. Stockholders' proposals
intended to be presented at the 1997 Annual Meeting must be received by Health
Images no later than , 1997, for inclusion in Health Images' proxy statement and
form of proxy relating to that meeting.
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ANNEX A
PLAN AND AGREEMENT OF MERGER
PLAN AND AGREEMENT OF MERGER (the "Plan of Merger"), made and entered into as
of the 2nd day of December, 1996, by and among HEALTHSOUTH Corporation, a
Delaware corporation ("HEALTHSOUTH"), HAMMER ACQUISITION CORPORATION, a Delaware
corporation (the "Subsidiary"), and HEALTH IMAGES, INC., a Delaware corporation
("Health Images") (the Subsidiary and Health Images being sometimes collectively
referred to herein as the "Constituent Corporations").
W I T N E S S E T H:
WHEREAS, the respective Boards of Directors of HEALTHSOUTH, the Subsidiary
and Health Images have approved the merger of the Subsidiary with and into
Health Images (the "Merger"), upon the terms and conditions set forth in this
Plan of Merger, whereby all shares of Common Stock, par value $.01 per share, of
Health Images (the "Health Images Common Stock"), not owned directly or
indirectly by Health Images, will be converted into the right to receive the
Merger Consideration (as hereinafter defined);
WHEREAS, each of HEALTHSOUTH, the Subsidiary and Health Images desires to
make certain representations, warranties, covenants and agreements in connection
with the Merger and also to prescribe various conditions to the Merger;
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization under the provisions of Section 368 of the
Internal Revenue Code of 1986, as amended; and
WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a "pooling of interests".
NOW, THEREFORE, in consideration of the premises, and the mutual covenants
and agreements contained herein, the parties hereto do hereby agree as follows:
SECTION 1. THE MERGER.
1.1 The Merger. Upon the terms and conditions set forth in this Plan of
Merger, and in accordance with the Delaware General Corporation Law (the
"DGCL"), the Subsidiary shall be merged with and into Health Images at the
Effective Time (as defined in Section 1.3). Following the Effective Time, the
separate corporate existence of the Subsidiary shall cease and Health Images
shall continue as the surviving corporation (the "Surviving Corporation") under
the name "Health Images, Inc." and shall succeed to and assume all the rights
and obligations of the Subsidiary and Health Images in accordance with the DGCL.
1.2 The Closing. The closing of the Merger (the "Closing") will take place at
10:00 a.m. Central Time on a date to be specified by the parties (the "Closing
Date"), which (subject to satisfaction or waiver of the conditions set forth in
Sections 9.2 and 9.3) shall be no later than the second business day after
satisfaction or waiver of the conditions set forth in Section 9.1 (other than
Section 9.1(a)), at the offices of Haskell Slaughter & Young, L.L.C.,
Birmingham, Alabama, unless another date or place is agreed to in writing by the
parties hereto.
1.3 Effective Time. Subject to the provisions of this Plan of Merger, the
parties shall file a certificate of merger (the "Certificate of Merger")
executed in accordance with the relevant provisions of the DGCL and shall make
all other filings or recordings required under the DGCL as soon as practicable
on or after the Closing Date. The Merger shall become effective at such time as
the Certificate of Merger is duly filed with the Delaware Secretary of State, or
at such other time as the Subsidiary and Health Images shall agree should be
specified in the Certificate of Merger (the "Effective Time").
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1.4 Effect of the Merger. The Merger shall have the effects set forth in
Section 259 of the DGCL.
SECTION 2. EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
CORPORATIONS; EXCHANGE OF CERTIFICATES.
2.1 Effect on Capital Stock. As of the Effective Time, by virtue of the
Merger and without any action on the part of any holder of shares of Health
Images Common Stock or any shares of capital stock of the Subsidiary:
(a) Subsidiary Common Stock. Each share of capital stock of the Subsidiary
issued and outstanding immediately prior to the Effective Time shall be
converted into one fully paid and nonassessable share of common stock of the
Surviving Corporation.
(b) Cancellation of Treasury Stock. Each share of Health Images Common Stock
that is owned by Health Images or by any subsidiary of Health Images shall
automatically be canceled and retired and shall cease to exist, and none of the
Common Stock, par value $.01 per share, of HEALTHSOUTH ("HEALTHSOUTH Common
Stock"), cash or other consideration shall be delivered in exchange therefor.
(c) Conversion of Health Images Shares. Subject to Section 2.2(e), each
issued and outstanding share of Health Images Common Stock (other than shares to
be canceled in accordance with Section 2.1(b)) (collectively, the "Exchanging
Health Images Shares") shall be converted into the right to receive .446 (the
"Exchange Ratio") of a share of HEALTHSOUTH Common Stock, as may be adjusted as
provided in Section 2.1(e) below (the "Merger Consideration"). As of the
Effective Time, all such Exchanging Health Images Shares shall no longer be
outstanding and shall automatically be canceled and retired and shall cease to
exist, and each holder of a certificate representing any Exchanging Health
Images Shares shall cease to have any rights with respect thereto, except the
right to receive the Merger Consideration and any cash in lieu of fractional
shares of HEALTHSOUTH Common Stock to be issued or paid in consideration
therefor upon surrender of such certificate in accordance with Section 2.2,
without interest.
(d) Stock Options and Warrants. At the Effective Time, all rights with
respect to Health Images Common Stock pursuant to any Health Images stock
options or stock purchase warrants which are outstanding at the Effective Time,
whether or not then exercisable, shall be converted into and become rights with
respect to HEALTHSOUTH Common Stock, and HEALTHSOUTH shall assume each Health
Images stock option and stock purchase warrant, in accordance with the terms of
any stock option plan under which it was issued and any stock option agreement
or warrant agreement by which it is evidenced. It is intended that, unless
otherwise agreed between HEALTHSOUTH and a particular optionee, the foregoing
provisions shall be undertaken in a manner that will not constitute a
"modification" as defined in Section 424 of the Code, as to any stock option
which is an "incentive stock option". Each Health Images stock option or stock
purchase warrant so assumed shall be exercisable for that number of shares of
HEALTHSOUTH Common Stock equal to the number of Health Images shares subject
thereto multiplied by the Exchange Ratio, and shall have an exercise price per
share equal to the Health Images exercise price divided by the Exchange Ratio.
(e) Anti-Dilution Provisions. If after the date hereof and prior to the
Effective Time HEALTHSOUTH shall have declared a stock split (including a
reverse split) of HEALTHSOUTH Common Stock or a dividend payable in HEALTHSOUTH
Common Stock, or any other distribution of securities or dividend (in cash or
otherwise) to holders of HEALTHSOUTH Common Stock with respect to their
HEALTHSOUTH Common Stock (including without limitation such a distribution or
dividend made in connection with a recapitalization, reclassification, merger,
consolidation, reorganization, reclassification, merger, consolidation,
reorganization or similar transaction) then (i) the Exchange Ratio shall be
appropriately adjusted to reflect such stock split or dividend or other
distribution of securities and (ii) if such stock split, dividend or
distribution has a record date prior to the Effective Time, then the number of
shares of HEALTHSOUTH Common Stock to be issued upon conversion of a share of
Health Images Common Stock pursuant to Section 2.1(c) shall be appropriately
adjusted to reflect such stock split, dividend or other distribution of
securities.
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2.2 Exchange of Certificates. (a) Exchange Agent. Prior to the Effective
Time, HEALTHSOUTH shall enter into an agreement with such bank or trust company
as may be designated by HEALTHSOUTH (the "Exchange Agent") which shall provide
that HEALTHSOUTH shall deposit with the Exchange Agent as of the Effective Time,
for the benefit of the holders of Exchanging Health Images Shares, for exchange
in accordance with this Section 2, through the Exchange Agent, certificates
representing the shares of HEALTHSOUTH Common Stock (such shares of HEALTHSOUTH
Common Stock, together with any dividends or distributions with respect thereto
with a record date after the Effective Time, being hereinafter referred to as
the "Exchange Fund") issuable pursuant to Section 2.1 in exchange for
outstanding shares of Health Images Common Stock.
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, but in any event within five business day following the
Effective Time, the Surviving Corporation shall cause the Exchange Agent to mail
to each holder of record of a certificate or certificates which immediately
prior to the Effective Time represented outstanding shares of Health Images
Common Stock (the "Certificates") whose shares were converted into the right to
receive the Merger Consideration pursuant to Section 2.1, (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such other
provisions as HEALTHSOUTH may reasonably specify) and (ii) instructions for use
in effecting the surrender of the Certificates in exchange for certificates
representing shares of HEALTHSOUTH Common Stock. Upon surrender of a Certificate
for cancellation to the Exchange Agent or to such other agent or agents as may
be appointed by HEALTHSOUTH, together with such letter of transmittal, duly
executed, and such other documents as may reasonably be required by the Exchange
Agent, the holder of such Certificate shall be entitled to receive in exchange
therefor a certificate representing that number of whole shares of HEALTHSOUTH
Common Stock which such holder has the right to receive pursuant to the
provisions of this Section 2, and the Certificate so surrendered shall forthwith
be canceled. In the event of a transfer of ownership of shares of Health Images
Common Stock which is not registered in the transfer records of Health Images, a
certificate representing the proper number of shares of HEALTHSOUTH Common Stock
may be issued to a person other than the person in whose name the Certificate so
surrendered is registered, if such Certificate shall be properly endorsed or
otherwise be in proper form for transfer and the person requesting such payment
shall pay any transfer or other taxes required by reason of the issuance of
shares of HEALTHSOUTH Common Stock to a person other than the registered holder
of such Certificate or establish to the satisfaction of HEALTHSOUTH that such
tax has been paid or is not applicable. Until surrendered as contemplated by
this Section 2.2, each Certificate shall be deemed at any time after the
Effective Time to represent only the right to receive upon such surrender the
certificate representing shares of HEALTHSOUTH Common Stock and cash in lieu of
any fractional shares of HEALTHSOUTH Common Stock as contemplated by this
Section 2.2. No interest will be paid or will accrue on any cash payable in lieu
of any fractional shares of HEALTHSOUTH Common Stock. To the extent permitted by
law, former stockholders of record of Health Images shall be entitled to vote
after the Effective Time at any meeting of HEALTHSOUTH stockholders the number
of whole shares of HEALTHSOUTH Common Stock into which their respective shares
of Health Images Common Stock are converted, regardless of whether such holders
have exchanged their Certificates for certificates representing HEALTHSOUTH
Common Stock in accordance with this Section 2.2.
(c) Distributions with Respect to Unexchanged Shares. No dividends or other
distributions with respect to HEALTHSOUTH Common Stock with a record date after
the Effective Time of the Merger shall be paid to the holder of any
unsurrendered Certificate with respect to the shares of HEALTHSOUTH Common Stock
represented thereby and no cash payment in lieu of fractional shares shall be
paid to any such holder pursuant to Section 2.2(e) until the surrender of such
Certificate in accordance with this Section 2. Subject to the effect of
applicable laws, following surrender of any such Certificate, there shall be
paid to the holder of the certificate representing whole shares of HEALTHSOUTH
Common Stock issued in exchange therefor, without interest, (i) at the time of
such surrender, the amount of any cash payable in lieu of a fractional share of
HEALTHSOUTH Common Stock to which such holder is entitled pursuant to Section
2.2(e) and the amount of dividends or other distributions with a record date
after the Effective Time theretofore paid with respect to such whole
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shares of HEALTHSOUTH Common Stock, and (ii) at the appropriate payment date,
the amount of dividends or other distributions with a record date after the
Effective Time but prior to such surrender and with a payment date subsequent to
such surrender payable with respect to such whole shares of HEALTHSOUTH Common
Stock.
(d) No Further Ownership Rights in Exchanging Health Images Shares. All
shares of HEALTHSOUTH Common Stock issued upon the surrender for exchange of
Certificates in accordance with the terms of this Section 2 (including any cash
paid pursuant to Section 2.2(c) or 2.2(e)) shall be deemed to have been issued
(and paid) in full satisfaction of all rights pertaining to the Exchanging
Health Images Shares theretofore represented by such Certificates. If, after the
Effective Time, Certificates are presented to the Surviving Corporation or the
Exchange Agent for any reason, they shall be canceled and exchanged as provided
in this Section 2, except as otherwise provided by law.
(e) No Fractional Shares. No certificates or scrip representing fractional
shares of HEALTHSOUTH Common Stock shall be issued upon the surrender for
exchange of Certificates, and such fractional share interests will not entitle
the owner thereof to vote or to any rights of a stockholder of HEALTHSOUTH.
Notwithstanding any other provision of this Plan of Merger, each holder of
Exchanging Health Images Shares exchanged pursuant to the Merger who would
otherwise have been entitled to receive a fraction of a share of HEALTHSOUTH
Common Stock (after taking into account all Certificates delivered by such
holder) shall receive, in lieu thereof, cash (without interest) in an amount
equal to such fractional part of a share of HEALTHSOUTH Common Stock multiplied
by the closing price per share of HEALTHSOUTH Common Stock on the date on which
the Effective Time occurs, as reported on the New York Stock Exchange Composite
Transactions Tape.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the holders of the Certificates for six months after
the Effective Time shall be delivered to HEALTHSOUTH, upon demand, and any
holders of the Certificates who have not theretofore complied with this Section
2 shall thereafter look only to HEALTHSOUTH for payment of HEALTHSOUTH Common
Stock, any cash in lieu of fractional shares of HEALTHSOUTH Common Stock and any
dividends or distributions with respect to HEALTHSOUTH Common Stock.
(g) No Liability. None of HEALTHSOUTH, the Subsidiary, Health Images or the
Exchange Agent shall be liable to any person in respect of any shares of
HEALTHSOUTH Common Stock (or dividends or distributions with respect thereto) or
cash from the Exchange Fund delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law. If any Certificates shall
not have been surrendered prior to seven years after the Effective Time (or
immediately prior to such earlier date on which any shares of HEALTHSOUTH Common
Stock, any cash in lieu of fractional shares of HEALTHSOUTH Common Stock or any
dividends or distributions with respect to HEALTHSOUTH Common Stock in respect
of such Certificates would otherwise escheat to or become the property of any
governmental entity), any such shares, cash, dividends or distributions in
respect of such Certificates shall, to the extent permitted by applicable law,
become the property of the Surviving Corporation, free and clear of all claims
or interest of any person previously entitled thereto.
(h) Investment of Exchange Fund. The Exchange Agent shall invest any cash
included in the Exchange Fund in deposit accounts or short-term money market
instruments, as directed by HEALTHSOUTH, on a daily basis. Any interest and
other income resulting from such investments shall be paid to HEALTHSOUTH.
2.3 Certificate of Incorporation of Surviving Corporation. The Certificate of
Incorporation of Health Images shall be amended and restated, effective at the
Effective Time, in a manner satisfactory to HEALTHSOUTH. The Certificate of
Incorporation of Health Images, as so amended and restated, shall become the
Certificate of Incorporation of the Surviving Corporation from and after the
Effective Time and until thereafter amended as provided by law.
2.4 Bylaws of the Surviving Corporation. The Bylaws of the Subsidiary shall
be the Bylaws of the Surviving Corporation from and after the Effective Time and
until thereafter altered, amended or repealed in accordance with the laws of the
State of Delaware, the Certificate of Incorporation of Health Images and the
said Bylaws.
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2.5 Directors and Officers of the Surviving Corporation. The Directors and
officers of the Subsidiary immediately prior to the Effective Time shall be the
Directors and officers of the Surviving Corporation, each to hold office in
accordance with the Certificate of Incorporation and Bylaws of the Surviving
Corporation.
2.6 Assets, Liabilities, Reserves and Accounts. At the Effective Time, the
assets, liabilities, reserves and accounts of each of the Subsidiary and Health
Images shall be taken up on the books of the Surviving Corporation at the
amounts at which they respectively shall be carried on the books of said
corporations immediately prior to the Effective Time, except as otherwise set
forth in the Plan of Merger and subject to such adjustments, or elimination of
intercompany items, as may be appropriate in giving effect to the Merger in
accordance with generally accepted accounting principles.
2.7 Corporate Acts of the Subsidiary. All corporate acts, plans, policies,
approvals and authorizations of the Subsidiary, its sole stockholder, its Board
of Directors, committees elected or appointed by the Board of Directors, and all
officers and agents, valid immediately prior to the Effective Time, shall be
those of the Surviving Corporation and shall be as effective and binding thereon
as they were with respect to the Subsidiary. The employees and agents of the
Subsidiary shall become the employees and agents of the Surviving Corporation
and continue to be entitled to the same rights and benefits which they enjoyed
as employees and agents of the Subsidiary.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF HEALTH IMAGES.
Health Images hereby represents and warrants to HEALTHSOUTH and the
Subsidiary as follows:
3.1 Organization, Existence and Good Standing. Health Images is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware. Health Images has all necessary corporate power to own its
properties and assets and to carry on its business as presently conducted.
Health Images is not, and has not been within the two years immediately
preceding the date of this Plan of Merger, a subsidiary or division of another
corporation, nor has Health Images within such time owned, directly or
indirectly, any shares of HEALTHSOUTH Common Stock or Subsidiary Common Stock.
3.2 Health Images Capital Stock. Health Images's authorized capital consists
of 40,000,000 shares of Health Images Common Stock, par value $.01 per share, of
which 11,418,123 shares were issued and outstanding as of September 30, 1996,
and 2,040,762 shares were issued and held as treasury shares, and 2,000,000
shares of Preferred Stock, par value $.01 per share, none of which shares are
issued and outstanding or held as treasury stock. All of the issued and
outstanding shares of Health Images Common Stock are duly and validly issued,
fully paid and nonassessable. Except as set forth on Exhibit 3.2 to the
Disclosure Schedule delivered by Health Images to HEALTHSOUTH simultaneously
with the execution and delivery hereof (the "Disclosure Schedule") or otherwise
disclosed in the Health Images Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 (the "Health Images 10-K"), there are no options,
warrants, or similar rights granted by Health Images or any other agreements to
which Health Images is a party providing for the issuance or sale by it of any
additional securities which would remain in effect after the Effective Time.
There is no liability for dividends declared or accumulated but unpaid with
respect to any of the shares of Health Images Common Stock. Health Images has
not made any distributions to any holders of Health Images Common Stock or
participated in or effected any issuance, exchange or retirement of shares of
Health Images Common Stock, or otherwise changed the equity interests of holders
of Health Images Common Stock, in contemplation of effecting the Merger within
the two years immediately preceding the date of this Plan of Merger. Any shares
of Health Images Common Stock that Health Images has re-acquired during the two
years immediately preceding the date of this Plan of Merger have been so
re-acquired only for purposes other than "business combinations", as such term
is defined in Accounting Principles Board Opinion No. 16, as amended ("Business
Combinations").
3.3 Subsidiaries and Affiliated Partnerships. (a)) Attached to the Disclosure
Schedule as Exhibit 3.3 is a list of all subsidiaries of Health Images
(individually, a "Health Images Subsidiary", and collectively, the "Health
Images Subsidiaries") and their states of incorporation. Except as set forth on
Ex-
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hibit 3.3, Health Images does not own stock in and does not control, directly or
indirectly, any other corporation, association or business organization other
than the Health Images Other Entities (as defined below).
(b) Also disclosed on Exhibit 3.3 is a list of all general or limited
partnerships in which a general partner is Health Images, a Health Images
Subsidiary or another Health Images Partnership (individually, a "Health Images
Partnership" and collectively, the "Health Images Partnerships"), and all
limited liability companies in which Health Images, a Health Images Subsidiary
or a Health Images Partnership is a member (individually, a "Health Images LLC"
and collectively, the "Health Images LLCs") (the Health Images Partnerships and
the Health Images LLCs being collectively called the "Health Images Other
Entities"), and their states of organization. Except as set forth on Exhibit
3.3, neither Health Images nor any Health Images Subsidiary owns an equity
interest in, nor does such entity control, directly or indirectly, any other
joint venture, limited liability company or partnership.
3.4 Organization, Existence and Good Standing of Health Images Subsidiaries
and Health Images Other Entities. (a) Each Health Images Subsidiary is a
corporation duly organized, validly existing and in good standing under the laws
of its respective state of incorporation. Each Health Images Subsidiary has all
necessary corporate power to own its properties and assets and to carry on its
business as presently conducted.
(b) Each Health Images Partnership that is a limited partnership is validly
formed, each Health Images Partnership that is a general partnership has been
duly organized, and each Health Images Partnership is in good standing under the
laws of its respective state of organization. Each Health Images Partnership has
all necessary power to own its property and assets and to carry on its business
as presently conducted.
(c) Each Health Images LLC is a limited liability company validly formed and
in good standing under the laws of its respective state of organization. Each
Health Images LLC has all necessary power to own its property and assets to
carry on its business as presently conducted.
3.5 Foreign Qualifications. Health Images, each Health Images Subsidiary and
each Health Images Other Entity that is not a general partnership is qualified
to do business as a foreign corporation, foreign limited partnership or foreign
limited liability company, as the case may be, and is in good standing in each
jurisdiction where the nature or character of the property owned, leased or
operated by it or the nature of the business transacted by it makes such
qualification necessary, except where the failure to so qualify would not have a
material adverse effect on Health Images, the Health Images Subsidiaries and the
Health Images Other Entities, taken as a whole.
3.6 Power and Authority. Subject to the satisfaction of the conditions
precedent set forth herein, Health Images has the corporate power to execute,
deliver and perform the Plan of Merger and all agreements and other documents
executed and delivered or to be executed and delivered by it pursuant to the
Plan of Merger, and, subject to the satisfaction of the conditions precedent set
forth herein, has taken all action required by its Certificate of Incorporation,
Bylaws or otherwise, to authorize the execution, delivery and performance of the
Plan of Merger and such related documents. Except as set forth on Exhibit 3.6 to
the Disclosure Schedule, the execution and delivery of the Plan of Merger does
not and, subject to the receipt of required stockholder and regulatory approvals
and any other required third-party consents or approvals, the consummation of
the Merger will not, violate any provisions of the Certificate of Incorporation
of Health Images or any provisions of, or result in the acceleration of any
obligation under, any material mortgage, lien, lease, agreement, instrument,
order, arbitration award, judgment or decree, to which Health Images or any
Health Images Subsidiary or Health Images Other Entity is a party, or by which
it is bound, or violate any restrictions of any kind to which it is subject
which, if violated or accelerated, would have a material adverse effect on
Health Images, the Health Images Subsidiaries and the Health Images Other
Entities, taken as a whole. The execution and delivery of this Plan of Merger
has been approved by the Board of Directors of Health Images. This Plan of
Merger has been duly executed and delivered by Health Images and, assuming this
Plan of Merger constitutes a valid and binding obligation of HEALTHSOUTH and the
Subsidiary, as the case may be, constitutes a valid and binding obligation of
Health Images, enforceable against Health Images in accordance with its terms.
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3.7 Health Images Public Information. Health Images has heretofore furnished
HEALTHSOUTH with a true and complete copy of each report, schedule, registration
statement and definitive proxy statement filed by it with the Securities and
Exchange Commission (the "SEC") (as any such documents have since the time of
their original filing been amended, the "Health Images Documents") since January
1, 1995, which are all the documents (other than preliminary material) that it
was required to file with the SEC from such date through the date of this Plan
of Merger. As of their respective dates, the Health Images Documents did not
contain any untrue statements of material facts or omit to state material facts
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. As of
their respective dates, the Health Images Documents complied in all material
respects with the applicable requirements of the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated under such statutes. The financial statements contained
in the Health Images Documents, together with the notes thereto, have been
prepared in accordance with generally accepted accounting principles
consistently followed throughout the periods indicated (except as may be
indicated in the notes thereto, or, in the case of the unaudited financial
statements, as permitted by Form 10-Q), reflect all known liabilities of Health
Images required to be stated therein, including all such known contingent
liabilities as of the end of each period reflected therein, and present fairly
the financial condition of Health Images at said dates and the consolidated
results of operations and cash flows of Health Images for the periods then
ended. The consolidated balance sheet of Health Images at September 30, 1996
included in the Health Images Documents is herein sometimes referred to as the
"Health Images Balance Sheet".
3.8 Visit Analysis. Exhibit 3.8 to the Disclosure Schedule sets forth a visit
analysis by facility for each facility operated by Health Images, any Health
Images Subsidiary or any Health Images Other Entity describing aggregate patient
visits by modality for the three months and nine months ended September 30,
1996. Such visit analysis is true and correct in all
material respects.
3.9 Legal Proceedings. Except as disclosed in the Health Images Documents or
on Exhibit 3.9 to the Disclosure Schedule, there is no material litigation,
governmental investigation or other proceeding pending or, so far as is known to
Health Images, threatened against or relating to Health Images, its properties
or business, or the transaction contemplated by the Plan of Merger and, so far
as is known to Health Images, no basis for any such action exists.
3.10 Contracts, etc. All material contracts, leases, agreements and
arrangements to which Health Images or any of the Health Images Subsidiaries or
Health Images Other Entities is a party are legally valid and binding in
accordance with their terms and in full force and effect, and to the knowledge
of Health Images, no party is in default thereunder, and no event has occurred
which, but for the passage of time or the giving of notice or both, would
constitute a default thereunder, except, in each case, where the invalidity of
the lease, contract, agreement or arrangement or the default or breach
thereunder or thereof would not, individually or in the aggregate, have a
material adverse effect on Health Images, the Health Images Subsidiaries and the
Health Images Other Entities, taken as a whole.
(b) Except as set forth on Exhibit 3.10 to the Disclosure Schedule, no
contract or agreement to which Health Images or any Health Images Subsidiary or
Health Images Other Entity is a party will, by its terms, terminate as a result
of the transactions contemplated hereby or require any consent from any obligor
thereto in order to remain in full force and effect immediately after the
Effective Time, except for contracts or agreements which, if terminated, would
not have a material adverse effect on Health Images, the Health Images
Subsidiaries and the Health Images Other Entities, taken as a whole.
(c) Except as set forth on Exhibit 3.10 to the Disclosure Schedule, none of
Health Images, any Health Images Subsidiary or any Health Images Other Entity
has granted any right of first refusal or similar right in favor of any third
party with respect to any material portion of its properties or assets or
entered into any non-competition agreement or similar agreement restricting its
ability to engage in any business in any location.
3.11 Subsequent Events. Except as set forth on Exhibit 3.11 to the Disclosure
Schedule or disclosed in the Health Images Documents, Health Images has not,
since the date of the last-filed Health Images Document:
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(a) Incurred any material adverse change, including, but not limited to, any
material adverse change in patient visits by modality from those reflected on
Exhibit 3.8.
(b) Discharged or satisfied any material lien or encumbrance, or paid or
satisfied any material obligation or liability (absolute, accrued, contingent or
otherwise) other than (i) liabilities shown or reflected on the Health Images
Balance Sheet or (ii) liabilities incurred since the date of the last-filed
Health Images Document in the ordinary course of business, which discharge or
satisfaction would have a material adverse effect on Health Images, the Health
Images Subsidiaries and the Health Images Other Entities, taken as a whole.
(c) Increased or established any reserve for taxes or any other liability on
its books or otherwise provided therefor which would have a material adverse
effect on Health Images, the Health Images Subsidiaries and the Health Images
Other Entities, taken as a whole, except as may have been required due to
consolidated income or operations of Health Images since the date of the
last-filed Health Images Document.
(d) Mortgaged, pledged or subjected to any lien, charge or other encumbrance
any of the assets, tangible or intangible, which assets are material to the
consolidated business or financial condition of Health Images.
(e) Sold or transferred any of the assets material to the consolidated
business of Health Images, cancelled any material debts or claims or waived any
material rights, except in the ordinary course of business.
(f) Granted any general or uniform increase in the rates of pay of employees
or any material increase in salary payable or to become payable by Health Images
to any officer or employee, consultant or agent (other than normal merit
increases), or by means of any bonus or pension plan, contract or other
commitment, increased in a material respect the compensation of any officer,
employee, consultant or agent, except for increases in bonus compensation
relating to Health Images' financial performance during fiscal 1996, which
increases shall not exceed $300,000 in the aggregate for the executive officers
of Health Images.
(g) Except for this Plan of Merger and any other agreement executed and
delivered pursuant to this Plan of Merger, entered into any material transaction
other than in the ordinary course of business or permitted under other Sections
hereof.
(h) Issued any stock, bonds or other securities, other than stock options
granted to employees, directors or consultants of Health Images or warrants
granted to third parties, all of which are disclosed on Exhibit 3.2 to the
Disclosure Schedule or reflected in the Health Images Documents.
3.12 Accounts Receivable. (a) Since the date of the Health Images 10-K,
Health Images has not changed any material principle or practice with respect to
the recordation of accounts receivable or the calculation of reserves therefor,
or any material collection, discount or write-off policy or procedure. Health
Images (including the Health Images Subsidiaries and Health Images Other
Entities) is in compliance with the terms and conditions of all third-party
payor arrangements relating to its accounts receivable, except to the extent
that such noncompliance would not have a material adverse effect on Health
Images, the Health Images Subsidiaries and the Health Images Other Entities,
taken as a whole.
(b) Without limiting the generality of the foregoing, each of Health Images
and the Health Images Subsidiaries and the Health Images Other Entities is in
compliance with all Medicare and Medicaid provider agreements to which it is a
party, except to the extent that such noncompliance would not have a material
adverse effect on Health Images, the Health Images Subsidiaries and the Health
Images Other Entities, taken as a whole.
3.13 Tax Returns. Health Images has filed all tax returns required to be
filed by it or requests for extensions to file such returns or reports have been
timely filed and granted and have not expired, except to the extent that such
failures to file, taken together, do not have a material adverse effect on
Health Images. Health Images has made all payments shown as due on such returns.
Health Images has not been notified that any tax returns of Health Images are
currently under audit by the Internal
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Revenue Service or any state or local tax agency, except for local tax audits
that in the aggregate are not material. No agreements have been made by Health
Images for the extension of time or the waiver of the statute of limitations for
the assessment or payment of any federal, state or local taxes.
3.14 Commissions and Fees. Except as set forth in Exhibit 3.14 to the
Disclosure Schedule, there are no valid claims for brokerage commissions or
finder's or similar fees in connection with the transactions contemplated by
this Plan of Merger which may be now or hereafter asserted against HEALTHSOUTH
resulting from any action taken by Health Images or its stockholders, officers
or Directors, or any of them.
3.15 Employee Benefit Plans; Employment Matters. (a) Except as described in
the Health Images Documents or set forth on Exhibit 3.15(a) to the Disclosure
Schedule, Health Images has neither established nor maintains nor is obligated
to make contributions to or under or otherwise participate in (a) any bonus or
other type of incentive compensation plan, program, agreement, policy,
commitment, contract or arrangement (whether or not set forth in a written
document), (b) any pension, profit-sharing, retirement or other plan, program or
arrangement, or (c) any other employee benefit plan, fund or program, including,
but not limited to, those described in Section 3(3) of ERISA. All such plans
(individually, a "Plan" and collectively, the "Plans") have been operated and
administered in all material respects in accordance with, as applicable, ERISA,
the Internal Revenue Code of 1986, as amended, Title VII of the Civil Rights Act
of 1964, as amended, the Equal Pay Act of 1967, as amended, the Age
Discrimination in Employment Act of 1967, as amended, and the related rules and
regulations adopted by those federal agencies responsible for the administration
of such laws. No act or failure to act by Health Images has resulted in a
"prohibited transaction" (as defined in ERISA) with respect to the Plans that is
not subject to a statutory or regulatory exception. No "reportable event" (as
defined in ERISA) has occurred with respect to any of the Plans which is subject
to Title IV of ERISA. Health Images has not previously made, is not currently
making, and is not obligated in any way to make, any contributions to any
multi-employer plan within the meaning of the Multi-Employer Pension Plan
Amendments Act of 1980.
(b) Except as described in the Health Images Documents or set forth on
Exhibit 3.15(b) to the Disclosure Schedule, Health Images is not a party to any
oral or written (i) union, guild or collective bargaining agreement which
agreement covers employees in the United States (nor is it aware of any union
organizing activity currently being conducted in respect to any of its
employees), (ii) agreement with any executive officer or other key employee the
benefits of which are contingent, or the terms of which are materially altered,
upon the occurrence of a transaction of the nature contemplated by this Plan of
Merger and which provides for the payment of in excess of $50,000, or (iii)
agreement or plan, including any stock option plan, stock appreciation rights
plan, restricted stock plan or stock purchase plan, any of the benefits of which
will be increased, or the vesting the benefits of which will be accelerated, by
the occurrence of any of the transactions contemplated by this Plan of Merger or
the value of any of the benefits of which will be calculated on the basis of any
of the transactions contemplated by this Plan of Merger.
3.16 Compliance with Laws in General. Except as set forth on Exhibit 3.16 to
the Disclosure Schedule or disclosed in the Health Images Documents, Health
Images has not received any notices of material violations of any federal, state
and local laws, regulations and ordinances relating to its business and
operations, including, without limitation, the Federal Environmental Protection
Act, the Occupational Safety and Health Act, the Americans with Disabilities
Act, the Medicare or applicable Medicaid statutes and regulations and any
Environmental Laws, and no notice of any pending inspection or violation of any
such law, regulation or ordinance has been received by Health Images which, if
it were determined that a violation had occurred, would have a material effect
on Health Images, the Health Images Subsidiaries and the Health Images Other
Entities, taken as a whole.
3.17 Licenses, Accreditation and Regulatory Approvals. (a) Except as
disclosed in the Health Images Documents or set forth on Exhibit 3.17 to the
Disclosure Schedule, Health Images and the Health Images Subsidiaries and Health
Images Other Entities hold all licenses, permits, certificates of need and other
regulatory approvals which are needed or required by law with respect to their
businesses, oper-
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ations and facilities as they are currently or presently conducted
(collectively, the "Licenses"), except where the failure to possess such
Licenses does not have a material adverse effect on Health Images, the Health
Images Subsidiaries and the Health Images Other Entities, taken as a whole. All
such Licenses are in full force and effect, and Health Images is in compliance
in all material respects with all conditions and requirements of the Licenses
and with all rules and regulations relating thereto. Health Images, the Health
Images Subsidiaries and the Health Images Other Entities are, to the extent
applicable to their operations, (i) eligible to receive payment under Titles
XVIII and XIX of the Social Security Act, (ii) providers under existing provider
agreements with the Medicare program through the applicable intermediaries and
(iii) in compliance with the conditions of participation in the Medicare program
except for such noncompliance as does not have a material adverse effect on
Health Images, the Health Images Subsidiaries and the Health Images Other
Entities, taken as a whole. Except to the extent that the failure to timely make
such filings would not have a material adverse effect on Health Images, the
Health Images Subsidiaries and the Health Images Other Entities, taken as a
whole, Health Images, the Health Images Subsidiaries and the Health Images Other
Entities have timely filed all requisite claims and other reports required to be
filed in connection with the Medicare, Medicaid and other governmental health
programs due on or before the date hereof, all of which were, when filed,
complete and correct in all material respects. There are no current claims,
actions or appeals pending, and neither Health Images nor the Health Images
Subsidiaries nor the Health Images Other Entities have filed any claims or
reports which would result in such claims, actions or appeals, before any
commission, board or agency, including, without limitation, any intermediary or
carrier, the Provider Reimbursement Review Board or the Administrator of the
Health Care Financing Administration with respect to any Medicare claims, or any
disallowances in connection with any audit of claims, which would have a
material adverse effect on Health Images, the Health Images Subsidiaries and the
Health Images Other Entities taken as a whole. The amounts established as
provisions for adjustments by Medicare, Medicaid and other third-party payors on
the financial statements set forth in the last-filed Health Images Document are
sufficient to pay any amounts for which Health Images believes it will be
liable. To the knowledge of Health Images, neither Health Images nor the Health
Images Subsidiaries nor the Health Images Other Entities nor their respective
employees have committed a violation of the Medicare and Medicaid fraud and
abuse provisions of the Social Security Act. Any and all past litigation
concerning such licenses, certificates of need and regulatory approvals, and all
claims and causes of action raised therein, has been finally adjudicated. No
such license, certificate of need or regulatory approval has been revoked,
conditioned (except as may be customary) or restricted, and no action
(equitable, legal or administrative), arbitration or other process is pending,
or to the knowledge of Health Images, threatened, which in any way challenges
the validity of, or seeks to revoke, condition or restrict any such license,
certificate of need, or regulatory approval. Subject to compliance with
applicable securities laws, the Hart Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"), and state or local statutes, rules or
regulations requiring notice, approval, or other action upon the occurrence of a
change in control of Health Images or any of the Health Images Subsidiaries, the
consummation of the Merger will not violate any law or regulation to which
Health Images is subject which, if violated, would have a material adverse
effect on Health Images, the Health Images Subsidiaries and the Health Images
Other Entities, taken as a whole.
(b) Without limiting the generality of the foregoing, Health Images is in
compliance in all material respects with the Food, Drug and Cosmetic Act, as
amended, and all regulations of the Food and Drug Administration (the "FDA") and
holds all FDA approvals required for the conduct of its business as currently
conducted.
3.18) Retirement or Re-Acquisition of HEALTHSOUTH Common Stock. Health Images
is not a party to any agreement the effect of which would be to require
HEALTHSOUTH directly or indirectly to retire or re-acquire all or part of the
shares of HEALTHSOUTH Common Stock issued pursuant to Section 2.1 hereof.
3.19 Disposition of Assets of Surviving Corporation. Health Images is not a
party to any plan to dispose of a significant part of the assets of the
Surviving Corporation within two years after the Closing Date, other than
dispositions in the ordinary course of business of the Surviving Corporation and
dispositions intended to eliminate duplicate facilities or excess capacity.
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3.20 Vote Required. The affirmative vote of the holders of a majority of the
outstanding shares of the Health Images Common Stock entitled to vote thereon is
the only vote of the holders of any class or series of Health Images capital
stock necessary to approve this Plan of Merger, the Merger and the transactions
contemplated hereby.
3.21 Opinion of Financial Advisor. The Board of Directors of Health Images
has received the oral opinion of Smith Barney Inc. to the effect that, as of the
date of this Plan of Merger, the Exchange Ratio is fair to the holders of Health
Images Common Stock from a financial point of view, a written copy of which
opinion will be delivered by Health Images to HEALTHSOUTH prior to the date on
which the definitive proxy materials for the Proxy Statement (as defined in
Section 7.4(a)) are filed with the SEC.
3.22 No Untrue Representations. No representation or warranty by Health
Images in this Plan of Merger, and no Exhibit or certificate issued by Health
Images and furnished or to be furnished to HEALTHSOUTH pursuant hereto, or in
connection with the transactions contemplated hereby, contains or will contain
any untrue statement of a material fact in response to the disclosure requested,
or omits or will omit to state a material fact necessary to make the statements
or facts contained therein in response to the disclosure requested not
misleading in light of all of the circumstances then prevailing.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE SUBSIDIARY AND HEALTHSOUTH.
The Subsidiary and HEALTHSOUTH, jointly and severally, hereby represent and
warrant to Health Images as follows:
4.1 Organization, Existence and Capital Stock. The Subsidiary is a
corporation duly organized and validly existing and is in good standing under
the laws of the State of Delaware. The Subsidiary's authorized capital consists
of 1,000 shares of Common Stock, par value $.01 per share, all of which shares
are issued and registered in the name of HEALTHSOUTH. The Subsidiary has not,
within the two years immediately preceding the date of this Plan of Merger,
owned, directly or indirectly, any shares of Health Images Common Stock.
4.2 Power and Authority. The Subsidiary has corporate power to execute,
deliver and perform the Plan of Merger and all agreements and other documents
executed and delivered, or to be executed and delivered, by it pursuant to the
Plan of Merger, and, subject to the satisfaction of the conditions precedent set
forth herein, has taken all actions required by law, its Certificate of
Incorporation, its Bylaws or otherwise, to authorize the execution and delivery
of the Plan of Merger and such related documents. The execution and delivery of
the Plan of Merger does not and, subject to the receipt of required stockholder
and regulatory approvals and any other required third-party consents or
approvals, the consummation of the Merger contemplated hereby will not, violate
any provisions of the Certificate of Incorporation or Bylaws of the Subsidiary,
or any agreement, instrument, order, judgment or decree to which the Subsidiary
is a party or by which it is bound, violate any restrictions of any kind to
which the Subsidiary is subject, or result in the creation of any lien, charge
or encumbrance upon any of the property or assets of the Subsidiary.
4.3 No Subsidiaries. The Subsidiary does not own stock in, and does not
control directly or indirectly, any other corporation, association or business
organization. The Subsidiary is not a party to any joint venture or partnership.
4.4 Legal Proceedings. There are no actions, suits or proceedings pending or
threatened against the Subsidiary, at law or in equity, relating to or affecting
the Subsidiary, including the Merger. The Subsidiary does not know or have any
reasonable grounds to know of any justification for any such action, suit or
proceeding.
4.5 No Contracts or Liabilities. Other than the obligations created under the
Plan of Merger, the Subsidiary is not obligated under any contracts, claims,
leases, liabilities (contingent or otherwise), loans or otherwise.
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SECTION 5. REPRESENTATIONS AND WARRANTIES OF HEALTHSOUTH.
HEALTHSOUTH hereby represents and warrants to Health Images as follows:
5.1 Organization, Existence and Good Standing. HEALTHSOUTH is a corporation
duly organized and validly existing and is in good standing under the laws of
the State of Delaware. HEALTHSOUTH has all necessary corporate power to own its
properties and assets and to carry on its business as presently conducted.
HEALTHSOUTH is duly qualified to do business and is in good standing in all
jurisdictions in which the character of the property owned, leased or operated
or the nature of the business transacted by it makes qualification necessary.
HEALTHSOUTH is not, and has not been within the two years immediately preceding
the date of this Plan of Merger, a subsidiary or division of another
corporation, nor has HEALTHSOUTH within such time owned, directly or indirectly,
any shares of Health Images Common Stock.
5.2 Power and Authority. HEALTHSOUTH has corporate power to execute, deliver
and perform the Plan of Merger and all agreements and other documents executed
and delivered, or to be executed and delivered, by it pursuant to the Plan of
Merger, and, subject to the satisfaction of the conditions precedent set forth
herein has taken all actions required by law, its Certificate of Incorporation,
its Bylaws or otherwise, to authorize the execution and delivery of the Plan of
Merger and such related documents. The execution and delivery of the Plan of
Merger does not and, subject to the receipt of required stockholder and
regulatory approvals and any other required third-party consents or approvals,
the consummation of the Merger contemplated hereby will not, violate any
provisions of the Certificate of Incorporation or Bylaws of HEALTHSOUTH, or any
provision of, or result in the acceleration of any obligation under, any
mortgage, lien, lease, agreement, instrument, order, arbitration award, judgment
or decree to which HEALTHSOUTH is a party or by which it is bound, or violate
any restrictions of any kind to which HEALTHSOUTH is subject. The execution and
delivery of this Plan of Merger has been approved by the Board of Directors of
HEALTHSOUTH. This Plan of Merger has been duly executed and delivered by
HEALTHSOUTH and the Subsidiary and, assuming this Plan of Merger constitutes a
valid and binding obligation of Health Images, constitutes a valid and binding
obligation of HEALTHSOUTH and the Subsidiary, enforceable against HEALTHSOUTH
and the Subsidiary in accordance with its terms.
5.3 HEALTHSOUTH Common Stock. On the Closing Date, HEALTHSOUTH will have a
sufficient number of authorized but unissued and/or treasury shares of its
Common Stock available for issuance to the holders of Health Images Common Stock
in accordance with the provisions of the Plan of Merger. The HEALTHSOUTH Common
Stock to be issued pursuant to the Plan of Merger will, when so delivered, be
(i) duly and validly issued, fully paid and nonassessable, (ii) issued pursuant
to an effective registration statement under the Securities Act of 1933, as
amended, and (iii) authorized for listing on the New York Stock Exchange, Inc.
(the "Exchange") upon official notice of issuance.
5.4 Capitalization. HEALTHSOUTH's authorized capital stock consists of
1,500,000 shares of Preferred Stock, par value $.10 per share, of which no
shares are issued and outstanding, and no shares are held in treasury, and
250,000,000 shares of Common Stock, par value $.01 per share, of which
155,481,368 shares are issued and outstanding, and 93,000 shares are held in
treasury. All of the issued and outstanding shares of HEALTHSOUTH Common Stock
have been duly and validly issued and are fully paid and non-assessable. Except
as disclosed in the HEALTHSOUTH Annual Report on Form 10-K for the fiscal year
ended December 31, 1995, as amended (the "HEALTHSOUTH 10-K"), there are no
options, warrants, convertible debentures or similar rights granted by
HEALTHSOUTH or any other agreements to which HEALTHSOUTH is a party providing
for the issuance or sale by it of any additional securities, other than stock
options granted in the ordinary course since such date. There is no liability
for dividends declared or accumulated but unpaid with respect to any shares of
HEALTHSOUTH Common Stock. HEALTHSOUTH has not made any distributions to any
holder of HEALTHSOUTH Common Stock or participated in or effected any issuance,
exchange or retirement of HEALTHSOUTH Common Stock, or otherwise changed the
equity interests of holders of HEALTHSOUTH Common Stock, in contemplation of
effecting the Merger within the two years immediately preceding the date of this
Plan of Merger. Any shares of HEALTHSOUTH Common Stock that HEALTHSOUTH has
re-acquired during the two years immediately preceding the date of this Plan of
Merger have been so re-acquired only for purposes other than Business
Combinations.
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5.5 Subsidiary Common Stock. HEALTHSOUTH owns, beneficially and of record,
all of the issued and outstanding shares of Subsidiary Common Stock, which are
validly issued and outstanding, fully paid and nonassessable, free and clear of
all liens and encumbrances. HEALTHSOUTH has the corporate power to endorse and
surrender such Subsidiary Shares for cancellation pursuant to the Plan of
Merger. HEALTHSOUTH has taken all such actions as may be required in its
capacity as the sole stockholder of the Subsidiary to approve the Merger.
5.6 HEALTHSOUTH Documents. HEALTHSOUTH has heretofore furnished Health Images
with a true and complete copy of each report, schedule, registration statement
and definitive proxy statement filed by it with the SEC (as any such documents
have since the time of their original filing been amended, the "HEALTHSOUTH
Documents") since January 1, 1995, which are all the documents (other than
preliminary material) that it was required to file with the SEC since such date.
As of their respective dates, the HEALTHSOUTH Documents did not contain any
untrue statements of material facts or omit to state material facts required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. As of their respective
dates, the HEALTHSOUTH Documents complied in all material respects with the
applicable requirements of the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated under such statutes. The financial statements contained in the
HEALTHSOUTH Documents, together with the notes thereto, have been prepared in
accordance with generally accepted accounting principles consistently followed
throughout the periods indicated (except as may be indicated in the notes
thereto, or, in the case of the unaudited financial statements, as permitted by
Form 10-Q), reflect all known liabilities of HEALTHSOUTH required to be stated
therein, including all known contingent liabilities as of the end of each period
reflected therein, and present fairly the financial condition of HEALTHSOUTH at
said dates and the consolidated results of operations and cash flows of
HEALTHSOUTH for the periods then ended.
5.7 Investment Intent. HEALTHSOUTH is acquiring the shares of Health Images
Common Stock hereunder for its own account and not with a view to the
distribution or sale thereof, and HEALTHSOUTH has no understanding, agreement or
arrangement to sell, distribute, partition or otherwise transfer or assign all
or any part of the shares of Health Images Common Stock to any other person,
firm or corporation.
5.8 Legal Proceedings. Except as disclosed in the HEALTHSOUTH 10-K, there is
no material litigation, governmental investigation or other proceeding pending
or, so far as is known to HEALTHSOUTH, threatened against or relating to
HEALTHSOUTH, its properties or business, or the transaction contemplated by the
Plan of Merger and, so far as is known to HEALTHSOUTH, no basis for any such
action exists.
5.9 No Violations. Subject to compliance with applicable securities laws and
the HSR Act, the consummation of the Merger will not violate any law or
restriction to which HEALTHSOUTH is subject.
5.10 Subsequent Events. Except as disclosed in the last-filed HEALTHSOUTH
Document, HEALTHSOUTH has not, since the date of the last-filed HEALTHSOUTH
Document:
(a) Incurred any material adverse change.
(b) Discharged or satisfied any material lien or encumbrance, or paid or
satisfied any material obligation or liability (absolute, accrued, contingent or
otherwise) other than (i) liabilities shown or reflected on the September 30,
1996 Balance Sheet contained in the HEALTHSOUTH Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996 (the "HEALTHSOUTH September 30 10-Q")
or (ii) liabilities incurred since the date of the HEALTHSOUTH September 30 10-Q
in the ordinary course of business, which discharge or satisfaction would have a
material adverse effect on HEALTHSOUTH.
(c) Increased or established any reserve for taxes or any other liability on
its books or otherwise provided therefor which would have a material adverse
effect on HEALTHSOUTH, except as may have been required due to income or
operations of HEALTHSOUTH since September 30, 1996.
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(d) Mortgaged, pledged or subjected to any lien, charge or other encumbrance
any of the assets, tangible or intangible, which assets are material to the
consolidated business or financial condition of HEALTHSOUTH.
(e) Sold or transferred any of the assets material to the consolidated
business of HEALTHSOUTH, cancelled any material debts or claims or waived any
material rights, except in the ordinary course of business.
(f) Granted any general or uniform increase in the rates of pay of employees
or any material increase in salary payable or to become payable by HEALTHSOUTH
to any officer or employee, consultant or agent (other than normal merit
increases), or by means of any bonus or pension plan, contract or other
commitment, increased in a material respect the compensation of any officer,
employee, consultant or agent.
(g) Except for this Plan of Merger and any other agreement executed and
delivered pursuant to this Plan of Merger, entered into any material transaction
other than in the ordinary course of business or permitted under other Sections
hereof.
(h) Issued any stock, bonds or other securities, other than (i) stock options
granted to employees or consultants of HEALTHSOUTH or warrants granted to third
parties, all of which are described in the HEALTHSOUTH Documents, and (ii)
approximately 300,000 shares of HEALTHSOUTH Common Stock issued in connection
with certain immaterial acquisitions.
5.11 Retirement or Re-Acquisition of HEALTHSOUTH Common Stock. HEALTHSOUTH
has not agreed directly or indirectly to retire or re-acquire all or part of the
shares of HEALTHSOUTH Common Stock issued pursuant to Section 2.1 hereof.
5.12 Disposition of Assets of Surviving Corporation. HEALTHSOUTH does not
intend or plan to dispose of, or to cause the Surviving Corporation to dispose
of, a significant part of the assets of the Surviving Corporation within two
years after the Effective Time, other than dispositions in the ordinary course
of business of the Surviving Corporation and dispositions intended to eliminate
duplicate facilities or excess capacity.
5.13 No Untrue Representation. No representation or warranty by HEALTHSOUTH
in this Plan of Merger, and no Exhibit or certificate issued by HEALTHSOUTH and
furnished or to be furnished to Health Images pursuant hereto, or in connection
with the transactions contemplated hereby, contains or will contain any untrue
statement of a material fact in response to the disclosure requested, or omits
or will omit to state a material fact necessary to make the statement or facts
contained therein in response to the disclosure requested not misleading in
light of all of the circumstances then prevailing.
SECTION 6. ACCESS TO INFORMATION AND DOCUMENTS.
6.1 Access to Information. Between the date hereof and the Closing Date, each
of Health Images and HEALTHSOUTH will give to the other party and its counsel,
accountants and other representatives full access to all the properties,
documents, contracts, personnel files and other records of such party and shall
furnish the other party with copies of such documents and with such information
with respect to the affairs of such party as the other party may from time to
time reasonably request. Each party will disclose and make available to the
other party and its representatives all books, contracts, accounts, personnel
records, letters of intent, papers, records, communications with regulatory
authorities and other documents relating to the business and operations of such
party. In addition, Health Images shall make available to HEALTHSOUTH all such
banking, investment and financial information as shall be necessary to allow for
the efficient integration of Health Images banking, investment and financial
arrangements with those of HEALTHSOUTH at the Effective Time.
6.2 Return of Records. If the transactions contemplated hereby are not
consummated and this Plan of Merger terminates, each party agrees to promptly
return all documents, contracts, records or properties of the other party and
all copies thereof furnished pursuant to this Section 6 or otherwise. All
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information disclosed by any party or any affiliate or representative of any
party shall be deemed to be "Confidential Information" under the terms of the
Confidentiality Agreement dated October 31, 1996, between Health Images and
HEALTHSOUTH, (the "Confidentiality Agreement").
6.3 Effect of Access. (a) Nothing contained in this Section 6 shall be deemed
to create any duty or responsibility on the part of either party to investigate
or evaluate the value, validity or enforceability of any contract, lease or
other asset included in the assets of the other party.
(b) With respect to matters as to which any party has made express
representations or warranties herein, the parties shall be entitled to rely upon
such express representations and warranties irrespective of any investigations
made by such parties, except to the extent that such investigations result in
actual knowledge of the inaccuracy or falsehood of particular representations
and warranties.
SECTION 7. COVENANTS.
7.1 Preservation of Business. Health Images will use its best efforts to
preserve the business organization of Health Images intact, to keep available to
HEALTHSOUTH and the Surviving Corporation the services of the present employees
of Health Images, and to preserve for HEALTHSOUTH and the Surviving Corporation
the goodwill of the suppliers, customers and others having business relations
with Health Images.
7.2 Material Transactions. Prior to the Effective Time, Health Images will
not (other than as required pursuant to the terms of the Plan of Merger and the
related documents, and other than with respect to transactions for which binding
commitments have been entered into prior to the date hereof which are described
on Exhibit 7.2 to the Disclosure Schedule), without first obtaining the written
consent of HEALTHSOUTH:
(a) Encumber any asset or enter into any transaction or make any contract or
commitment relating to the properties, assets and business of Health Images,
other than in the ordinary course of business or as otherwise disclosed herein.
(b) Enter into any employment contract which is not terminable upon notice of
30 days or less, at will, and without penalty to Health Images except as
provided herein.
(c) Enter into any contract or agreement (i) which cannot be performed within
three months or less, or (ii) which involves the expenditure of over $250,000.
(d) Issue or sell, or agree to issue or sell, any shares of capital stock or
other securities of Health Images, except upon exercise of currently outstanding
stock options or warrants or pursuant to the Health Images Employee Stock
Purchase Plan.
(e) Make any contribution, payment or distribution to the trustee under any
bonus, pension, profit-sharing or retirement plan or incur any obligation to
make any such payment or contribution which is not in accordance with Health
Images's usual past practice, or establish or enter into any other plan or
contract or arrangement providing for bonuses, executive incentive compensation,
pensions, deferred compensation, retirement payments, profit-sharing or the
like, or terminate any Plan.
(f) Extend credit to anyone, except in the ordinary course of business
consistent with prior practices.
(g) Guarantee the obligation of any person, firm or corporation, except in
the ordinary course of business consistent with prior practices.
(h) Amend its Certificate of Incorporation or Bylaws.
(i) Take any action of a character described in Section 3.11(a) to 3.11(h),
inclusive.
7.3 Meeting of Health Images Stockholders. (a) Health Images will take all
steps necessary in accordance with its Certificate of Incorporation and Bylaws
to call, give notice of, convene and hold a meeting of its stockholders (the
"Special Meeting") as soon as practicable after the effectiveness of the
Registration Statement (as defined in Section 7.4 hereof), for the purpose of
approving this Plan of
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Merger and for such other purposes as may be necessary. Unless this Plan of
Merger shall have been validly terminated as provided herein, the Board of
Directors of Health Images (subject to the provisions of Section 8.1(d) hereof)
will (i) recommend to Health Images stockholders the approval of this Plan of
Merger, the transactions contemplated hereby and any other matters to be
submitted to the stockholders in connection therewith, to the extent that such
approval is required by applicable law in order to consummate the Merger, and
(ii) use reasonable, good faith efforts to obtain the approval by Health Images'
stockholders of this Plan of Merger and the transactions contemplated hereby.
(b) Nothing contained herein shall affect the right of Health Images to take
action by written consent in lieu of meeting to the extent permitted by
applicable law and its Certificate of Incorporation and Bylaws.
7.4 Registration Statement. (a) HEALTHSOUTH shall prepare and file with the
SEC and any other applicable regulatory bodies, as soon as reasonably
practicable, a Registration Statement on Form S-4 with respect to the shares of
HEALTHSOUTH Common Stock to be issued in the Merger (the "Registration
Statement"), and will otherwise proceed promptly to satisfy the requirements of
the Securities Act of 1933 (the "Securities Act"), including Rule 145
thereunder. Such Registration Statement shall contain a proxy statement of
Health Images (the "Proxy Statement") containing the information required by the
Securities Exchange Act of 1934 (the "Exchange Act"). HEALTHSOUTH shall take all
reasonable steps to cause the Registration Statement to be declared effective
and to maintain such effectiveness until all of the shares covered thereby have
been distributed. HEALTHSOUTH shall promptly amend or supplement the
Registration Statement to the extent necessary in order to make the statements
therein not misleading or to correct any misstatements which have become false
or misleading. HEALTHSOUTH shall use its reasonable, good faith efforts to have
the Registration Statement cleared by the SEC under the provisions of the
Securities Act and the Exchange Act. HEALTHSOUTH shall provide Health Images
with copies of all filings made pursuant to this Section 7.4 and shall consult
with Health Images on responses to any comments made by the Staff of the SEC
with respect thereto.
(b) The information specifically designated as being supplied by Health
Images for inclusion in the Registration Statement shall not, at the time the
Registration Statement is declared effective and at the time the Proxy Statement
is first mailed to holders of Health Images Common Stock, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading. The information specifically designated as being supplied by Health
Images for inclusion in the Proxy Statement shall not, at the date the Proxy
Statement (or any amendment thereof or supplement thereto) is first mailed to
holders of Health Images Common Stock, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading. If at any time prior to
the Effective Time any event or circumstance relating to Health Images, or its
officers or directors, should be discovered by Health Images which should be set
forth in an amendment to the Registration Statement or a supplement to the Proxy
Statement, Health Images shall promptly inform HEALTHSOUTH. All documents, if
any, that Health Images is responsible for filing with the SEC in connection
with the transactions contemplated herein will comply as to form and substance
in all material respects with the applicable requirements of the Securities Act
and the rules and regulations thereunder and the Exchange Act and the rules and
regulations thereunder.
(c) The information specifically designated as being supplied by HEALTHSOUTH
for inclusion in the Registration Statement shall not, at the time the
Registration Statement is declared effective and at the time the Proxy Statement
is first mailed to holders of Health Images Common Stock, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading. The information specifically designated as being supplied by
HEALTHSOUTH for inclusion in the Proxy Statement to be sent to the holders of
Health Images Common Stock in connection with the Special Meeting shall not, at
the date the Proxy Statement (or any amendment thereof or supplement thereto) is
first mailed to holders of Health Images Common Stock, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in the
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light of the circumstances under which they are made, not misleading. If at any
time prior to the Effective Time any event or circumstance relating to
HEALTHSOUTH or its officers or directors, should be discovered by HEALTHSOUTH
which should be set forth in an amendment to the Registration Statement or a
supplement to the Proxy Statement, HEALTHSOUTH shall promptly inform Health
Images and shall promptly file such amendment to the Registration Statement. All
documents that HEALTHSOUTH is responsible for filing with the SEC in connection
with the transactions contemplated herein will comply as to form and substance
in all material respects with the applicable requirements of the Securities Act
and the rules and regulations thereunder and the Exchange Act and the rules and
regulations thereunder.
(d) Prior to the Closing Date, HEALTHSOUTH shall use its reasonable, good
faith efforts to cause the shares of HEALTHSOUTH Common Stock to be issued
pursuant to the Merger to be registered or qualified under all applicable
securities or Blue Sky laws of each of the states and territories of the United
States, and to take any other actions which may be necessary to enable the
Common Stock to be issued pursuant to the Merger to be distributed in each such
jurisdiction.
(e) Prior to the Closing Date, HEALTHSOUTH shall file an additional listing
application (the "Listing Application") with the Exchange relating to the shares
of HEALTHSOUTH Common Stock to be issued in connection with the Merger, and
shall use its reasonable, good faith efforts to cause such shares of HEALTHSOUTH
Common Stock to be approved for listing on the Exchange, upon official notice of
issuance, prior to the Closing Date.
(f) Health Images shall furnish all information to HEALTHSOUTH with respect
to Health Images and the Health Images Subsidiaries and Health Images Other
Entities as HEALTHSOUTH may reasonably request for inclusion in the Registration
Statement, the Proxy Statement and the Listing Application, and shall otherwise
cooperate with HEALTHSOUTH in the preparation and filing of such documents.
7.5 Exemption from State Takeover Laws; Health Images Rights Plan. Health
Images shall take all reasonable steps necessary to (a) exempt the Merger from
the requirements of any state takeover statute or other similar state law which
would prevent or impede the consummation of the transactions contemplated
hereby, by action of Health Images's Board of Directors or otherwise and (b) to
cause the Merger to be a "Permitted Offer" as such term is used in the
Stockholder Rights Plan of Health Images.
7.6 HSR Act Compliance. HEALTHSOUTH and Health Images shall promptly make
their respective filings, and shall thereafter use their reasonable, good faith
efforts to promptly make any required submissions, under the HSR Act with
respect to the Merger and the transactions contemplated hereby. HEALTHSOUTH and
Health Images will use their respective reasonable, good faith efforts to obtain
all other permits, authorizations, consents and approvals from third parties and
governmental authorities necessary to consummate the Merger and the transactions
contemplated hereby.
7.7 Public Disclosures. HEALTHSOUTH and Health Images will consult with each
other before issuing any press release or otherwise making any public statement
with respect to the transactions contemplated by this Plan of Merger, and shall
not issue any such press release or make any such public statement prior to such
consultation except as may be required by applicable law or requirements of the
Exchange. The parties shall issue a joint press release, mutually acceptable to
HEALTHSOUTH and Health Images, promptly upon execution and delivery of this Plan
of Merger.
7.8 Resignation of Health Images Directors. On or prior to the Closing Date,
Health Images shall deliver to HEALTHSOUTH evidence satisfactory to HEALTHSOUTH
of the resignation of the Directors of Health Images, such resignations to be
effective on the Closing Date.
7.9 Notice of Subsequent Events. Each party hereto shall notify the other
parties of any changes, additions or events which would cause any material
change in or material addition to any Exhibit to the Disclosure Schedule
delivered by the notifying party under this Plan of Merger, promptly after the
occurrence of the same. If the effect of such change or addition would,
individually or in the aggregate with the effect of changes or additions
previously disclosed pursuant to this Section 7.9, constitute a material adverse
effect on the notifying party, the non-notifying party may, within ten days
after receipt
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of such notice, elect to terminate this Plan of Merger. If the non-notifying
party does not give written notice of such termination within such 10-day
period, the non-notifying party shall be deemed to have consented to such change
or addition and shall not be entitled to terminate this Plan of Merger by reason
thereof.
7.10 No Solicitations. Health Images may, directly or indirectly, furnish
information and access, in response to unsolicited requests therefor, to the
same extent permitted by Section 6.1, to any corporation, partnership, person or
other entity or group, pursuant to appropriate confidentiality agreements, and
may participate in discussions and negotiate with such corporation, partnership,
person or other entity or group concerning any proposal to acquire Health Images
upon a merger, purchase of assets, purchase of or tender offer for shares of
Health Images Common Stock or similar transaction (an "Acquisition
Transaction"), if the Board of Directors of Health Images determines in its good
faith judgment in the exercise of its fiduciary duties or the exercise of its
duties under Rule 14e-2 under the Exchange Act, after consultation with legal
counsel and its financial advisors, that such action is appropriate in
furtherance of the best interest of its stockholders. Except as set forth above,
Health Images shall not, and will direct each officer, director, employee,
representative and agent of Health Images not to, directly or indirectly,
encourage, solicit, participate in or initiate discussions or negotiations with
or provide any information to any corporation, partnership, person or other
entity or group (other than HEALTHSOUTH or an affiliate or associate or agent of
HEALTHSOUTH) concerning any merger, sale of assets, sale of or tender offer for
shares of Health Images Common Stock or similar transactions involving Health
Images. Health Images shall promptly notify HEALTHSOUTH if it shall, on or after
the date hereof, have entered into a confidentiality agreement with any third
party in response to any unsolicited request for information and access in
connection with a possible Acquisition Transaction involving such party, such
notification to include the identity of such third party.
7.11 Other Actions. Subject to the provisions of Section 7.10 hereof, none of
Health Images, HEALTHSOUTH and the Subsidiary shall knowingly or intentionally
take any action, or omit to take any action, if such action or omission would,
or reasonably might be expected to, result in any of its representations and
warranties set forth herein being or becoming untrue in any material respect, or
in any of the conditions to the Merger set forth in this Plan of Merger not
being satisfied, or (unless such action is required by applicable law) which
would materially adversely affect the ability of Health Images or HEALTHSOUTH to
obtain any consents or approvals required for the consummation of the Merger
without imposition of a condition or restriction which would have a material
adverse effect on the Surviving Corporation or which would otherwise materially
impair the ability of Health Images or HEALTHSOUTH to consummate the Merger in
accordance with the terms of this Plan of Merger or materially delay such
consummation.
7.12 Accounting Methods. Neither HEALTHSOUTH nor Health Images shall change,
in any material respect, its methods of accounting in effect at its most recent
fiscal year end, except as required by changes in generally accepted accounting
principles as concurred in such parties' independent accountants.
7.13 Pooling and Tax-Free Reorganization Treatment. Neither HEALTHSOUTH nor
Health Images shall intentionally take or cause to be taken any action, whether
on or before the Effective Time, which would disqualify the Merger as a "pooling
of interests" for accounting purposes or as a "reorganization" within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended.
7.14 Affiliate and Pooling Agreements. Health Images will use its reasonable,
good faith efforts to cause each of its Directors and executive officers and
each of its "affiliates" (within the meaning of Rule 145 under the Securities
Act of 1933, as amended) to execute and deliver to HEALTHSOUTH as soon as
practicable an agreement in the form attached hereto as Exhibit 7.14 relating to
the disposition of shares of Health Images Common Stock and shares of
HEALTHSOUTH Common Stock held by such person and the shares of HEALTHSOUTH
Common Stock issuable pursuant to this Plan of Merger.
7.15 Cooperation. (a) HEALTHSOUTH and Health Images shall together, or
pursuant to an allocation of responsibility agreed to between them, (i)
cooperate with one another in determining whether any filings required to be
made or consents required to be obtained in any jurisdiction prior to
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the Effective Time in connection with the consummation of the transactions
contemplated hereby and cooperate in making any such filings promptly and in
seeking to obtain timely any such consents, (ii) use their respective best
efforts to cause to be lifted any injunction prohibiting the Merger, or any part
thereof, or the other transactions contemplated hereby, and (iii) furnish to one
another and to one another's counsel all such information as may be required to
effect the foregoing actions.
(b) Subject to the terms and conditions herein provided, and unless this Plan
of Merger shall have been validly terminated as provided herein, each of
HEALTHSOUTH and Health Images shall use all reasonable efforts (i) to take, or
cause to be taken, all actions necessary to comply promptly with all legal
requirements which may be imposed on such party (or any subsidiaries or
affiliates of such party) with respect to the Plan of Merger and to consummate
the transactions contemplated hereby, subject to the vote of Health Images's
stockholders described above, and (ii) to obtain (and to cooperate with the
other party to obtain) any consent, authorization, order or approval of, or any
exemption by, any governmental entity and/or any other public or private third
party which is required to be obtained or made by such party or any of its
subsidiaries or affiliates in connection with this Plan of Merger and the
transactions contemplated hereby. Each of HEALTHSOUTH and Health Images will
promptly cooperate with and furnish information to the other in connection with
any such burden suffered by, or requirement imposed upon, either of them or any
of their subsidiaries or affiliates in connection with the foregoing.
7.16 Health Images Stock Options and Warrants. (a) As soon as reasonably
practicable after the Effective Time of the Merger, HEALTHSOUTH shall deliver to
the holders of Health Images stock options and warrants appropriate notices
setting forth such holders' rights pursuant to any stock option plans under
which such Health Images stock options were issued and any stock option
agreements or warrant agreements evidencing such options or warrants, which
shall continue in full force and effect on the same terms and conditions
(subject to the adjustments required by Sections 2.1(d) or this Section 7.16
after giving effect to the Merger and the assumption of such options and
warrants by HEALTHSOUTH as set forth herein) as in effect immediately prior to
the Effective Time. HEALTHSOUTH shall comply with the terms of the stock option
plans, the stock option agreements and the warrant agreements as so adjusted,
and shall use its reasonable, good faith efforts to ensure, to the extent
required by, and subject to the provisions of, such plans or agreements, that
the Health Images stock options which qualified as incentive stock options prior
to the Effective Time shall continue to qualify as incentive stock options after
the Effective Time.
(b) HEALTHSOUTH shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of HEALTHSOUTH Common Stock for delivery
upon exercise of the Health Images stock options and warrants assumed by
HEALTHSOUTH in accordance with Section 2.1(d). As soon as practicable after the
Effective Time, HEALTHSOUTH shall file with the SEC (i) a registration statement
on Form S-8 with respect to shares of HEALTHSOUTH Common Stock subject to such
Health Images stock options and (ii) a registration statement on Form S-3
covering the resale of the shares of HEALTHSOUTH Common Stock subject to such
Health Images warrants and shall use its best efforts to maintain the
effectiveness of such registration statements (and maintain the current status
of the prospectus or prospectuses contained therein) for so long as such Health
Images stock options and warrants remain outstanding. HEALTHSOUTH shall
administer the plans assumed pursuant to Section 2.1(d) hereof in a manner that
complies with Rule 16b-3 promulgated under the Exchange Act to the extent the
applicable plan complied with such rule prior to the Merger.
(c) Except to the extent otherwise agreed to by the parties, all restrictions
or limitations on transfer with respect to the Health Images stock options
awarded under any plan, program, or arrangement of Health Images or any of its
subsidiaries, to the extent that such restrictions or limitations shall not have
already lapsed, shall remain in full force and effect with respect to such
options after giving effect to the Merger and the assumption by HEALTHSOUTH as
set forth above. HEALTHSOUTH hereby acknowledges that all Health Images stock
options outstanding, to the extent not already vested, shall become fully vested
at the Effective Time.
7.17 Publication of Combined Results. HEALTHSOUTH agrees that within 20 days
after the end of the first calendar month following at least 30 days after the
Effective Time, HEALTHSOUTH shall
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cause publication of the combined results of operations of HEALTHSOUTH and
Health Images. For purposes of this Section 7.17, the term "publication" shall
have the meaning provided in SEC Accounting Series Release No. 135.
7.18 Health Images Employees. HEALTHSOUTH shall retain all employees of
Health Images who are employed at the Effective Time as employees-at-will
(except to the extent that such employees are parties to contracts providing for
other employment terms, in which case such employees shall be retained in
accordance with the terms of such contracts) and shall provide such employees
with the same customary employee benefits as HEALTHSOUTH provides its existing
employees. HEALTHSOUTH shall cause Health Images to maintain a severance plan
for a period of at least 12 months following the Effective Time, which plan
shall contain eligibility and benefit provisions no less favorable than those
existing under the terms of the Health Images severance policy in effect
immediately prior to the Effective Time, a copy of which has been provided to
HEALTHSOUTH. HEALTHSOUTH shall give employees of Health Images credit for their
respective periods of employment with Health Images prior to the Effective Time
for purposes of determining their eligibility for and level of participation in
any employee benefit program, plan or arrangement which the Surviving
Corporation adopts, maintains or contributes to following the Effective Time.
7.19 Consulting and Non-Competition Agreement. At the Effective Time,
HEALTHSOUTH shall enter into a Consulting and Non-Competition Agreement with
Robert D. Carl, III, which Consulting and Non-Competition Agreement shall
provide for consulting and non-competition fees to Mr. Carl of $350,000 per year
for the three years following the Effective Time, and shall contain such other
terms and conditions as the parties may agree. The payments to Mr. Carl under
such Consulting and Non-Competition Agreement shall be in lieu of any other
payments to which Mr. Carl may be entitled after the Effective Time under any
employment agreement, severance arrangement or non-competition agreement or
arrangement of any kind whatsoever between Health Images and Mr. Carl.
7.20 Certain Information. For as long as any affiliate (as defined for
purposes of Rule 145 under the Securities Act of 1933) of Health Images holds
shares of HEALTHSOUTH Common Stock issued in the Merger (but not for a period in
excess of two years from the date of consummation of the Merger), HEALTHSOUTH
shall file with the Securities and Exchange Commission or otherwise make
publicly available all information about HEALTHSOUTH required pursuant to Rule
144(c) under the Securities Act of 1933 to enable such affiliate to resell such
shares under the provisions of Rule 145(d) under the Securities Act of 1933.
SECTION 8. TERMINATION, AMENDMENT AND WAIVER.
8.1 Termination. This Plan of Merger may be terminated at any time prior to
the Effective Time, whether before or after approval of matters presented in
connection with the Merger by the holders of shares of Health Images Common
Stock:
(a) by mutual written consent of HEALTHSOUTH and Health Images;
(b) by either HEALTHSOUTH or Health Images:
(i) if, upon a vote at a duly held meeting of stockholders or any
adjournment thereof, any required approval of the holders of shares of
Health Images Common Stock shall not have been obtained;
(ii) if the Merger shall not have been consummated on or before May
31, 1997, unless the failure to consummate the Merger is the result of a
willful and material breach of this Plan of Merger by the party seeking
to terminate this Plan of Merger; provided, however, that the passage of
such period shall be tolled for any part thereof (but not exceeding 60
days in the aggregate) during which any party shall be subject to a
nonfinal order, decree, ruling or action restraining, enjoining or
otherwise prohibiting the consummation of the Merger or the calling or
holding of a meeting of stockholders;
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(iii) if any court of competent jurisdiction or other governmental
entity shall have issued an order, decree or ruling or taken any other
action permanently enjoining, restraining or otherwise prohibited the
Merger and such order, decree, ruling or other action shall have become
final and nonappealable;
(iv) in the event of a breach by the other party of any
representation, warranty, covenant or other agreement contained in this
Plan of Merger which (A) would give rise to the failure of a condition
set forth in Section 9.2(a) or (b) or Section 9.3(a) or (b), as
applicable, and (B) cannot be or has not been cured within 30 days after
the giving of written notice to the breaching party of such breach (a
"Material Breach") (provided that the terminating party is not then in
Material Breach of any representation, warranty, covenant or other
agreement contained in this Plan of Merger); or
(v) if either HEALTHSOUTH or Health Images gives notice of
termination as a non-notifying party pursuant to Section 7.9;
(c) By either HEALTHSOUTH or Health Images in the event that (i) all of
the conditions to the obligation of such party to effect the Merger set
forth in Section 9.1 shall have been satisfied and (ii) any condition to the
obligation of such party to effect the Merger set forth in Section 9.2 (in
the case of HEALTHSOUTH) or Section 9.3 (in the case of Health Images) is
not capable of being satisfied prior to the end of the period referred to in
Section 8.1(b)(ii);
(d) By Health Images, if Health Images's Board of Directors shall have
(i) determined, in the exercise of its fiduciary duties under applicable
law, not to recommend the Merger to the holders of Health Images Common
Stock or shall have withdrawn such recommendation or (ii) approved,
recommended or endorsed any Acquisition Transaction (as defined in Section
7.10) other than this Plan of Merger or (iii) resolved to do any of the
foregoing; or
(e) By either HEALTHSOUTH or Health Images, if the condition set forth
in Section 9.1(g)(i) is not satisfied by December 31, 1996.
8.2 Effect of Termination. In the event of termination of this Plan of Merger
as provided in Section 8.1, this Plan of Merger shall forthwith become void and
have no effect, without any liability or obligation on the part of any party,
other than the provisions of Sections 6.2, 8.2 and 8.6, and except to the extent
that such termination results from the willful and material breach by a party of
any of its representations, warranties, covenants or other agreements set forth
in this Plan of Merger.
8.3 Amendment. This Plan of Merger may be amended by the parties at any time
before or after any required approval of matters presented in connection with
the Merger by the holders of shares of Health Images Common Stock; provided,
however, that after any such approval, there shall be made no amendment that
pursuant to Section 251(d) of the DGCL requires further approval by such
stockholders without the further approval of such stockholders. This Plan of
Merger may not be amended except by an instrument in writing signed on behalf of
each of the parties.
8.4 Extension; Waiver. At any time prior to the Effective Time of the Merger,
the parties may (a) extend the time for the performance of any of the
obligations or other acts of the other parties, (b) waive any inaccuracies in
the representations and warranties contained in this Plan of Merger or in any
document delivered pursuant to this Plan of Merger or (c) subject to the proviso
of Section 8.3, waive compliance with any of the agreements or conditions
contained in this Plan of Merger. Any agreement on the part of a party to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. The failure of any party to this Plan of
Merger to assert any of its rights under this Plan of Merger or otherwise shall
not constitute a waiver of such rights, except as otherwise provided in Section
7.9.
8.5 Procedure for Termination, Amendment, Extension or Waiver. A termination
of this Plan of Merger pursuant to Section 8.1, an amendment of this Plan of
Merger pursuant to Section 8.3, or an extension or waiver pursuant to Section
8.4 shall, in order to be effective, require in the case of HEALTHSOUTH, the
Subsidiary or Health Images, action by its Board of Directors or the duly
authorized designee of the Board of Directors.
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8.6 Expenses; Break-up Fees. (a) All costs and expenses incurred in
connection with this Plan of Merger and the transactions contemplated hereby
shall be paid by the party incurring such expense, except that expenses (other
than legal, accounting and investment banking costs, which shall be paid by the
party incurring such expenses) incurred in connection with preparing, filing,
printing and mailing the Proxy Statement and the Registration Statement shall be
shared equally by Health Images and HEALTHSOUTH.
(b) (i) If this Plan of Merger is terminated by Health Images pursuant to
Section 8.1(d), and within one year after the effective date of such termination
Health Images is the subject of a Third Party Acquisition Event with any Person
(as defined in Sections 3(a)(9) and 13(d)(3) of the Exchange Act) (other than a
party hereto), then at the time of consummation of such a Third Party
Acquisition Event, Health Images shall pay to HEALTHSOUTH a break-up fee of
$10,000,000 in immediately available funds, which fee represents the parties'
best estimates of the out-of-pocket costs incurred by HEALTHSOUTH and the value
of management time, overhead, opportunity costs and other unallocated costs of
HEALTHSOUTH incurred by or on behalf of HEALTHSOUTH in connection with this Plan
of Merger. Health Images shall not enter into any agreement with respect to any
Third Party Acquisition Event which does not, as a condition precedent to the
consummation of such Third Party Acquisition Event, require such break-up fee to
be paid to HEALTHSOUTH upon such consummation.
(ii) As used herein, the term "Third Party Acquisition Event" shall mean
either of the following:
(A) Health Images shall enter into any agreement for, or otherwise be
the subject of, any Acquisition Transaction (as defined in Section 7.10)
which is consummated (regardless of whether such consummation occurs within
the one-year period described in Section 8.6(b)(i)); or
(B) any Person (other than a party hereto or its affiliates) shall have
acquired beneficial ownership (as such term is defined in Rule 13d-3 under
the Exchange Act) or the right to acquire beneficial ownership of, or a new
group has been formed which beneficially owns or has the right to acquire
beneficial ownership of, 30% or more of the outstanding Health Images Common
Stock.
(c) Health Images acknowledges that the provisions for the payment of
break-up fees and allocation of expenses contained in this Section 8.6 are an
integral part of the transactions contemplated by this Plan of Merger and that,
without these provisions, HEALTHSOUTH would not have entered into this Plan of
Merger. Accordingly, if a break-up fee shall become due and payable by Health
Images, and Health Images shall fail to pay such amount when due pursuant to
this Section, and, in order to obtain such payment, suit is commenced which
results in a judgment against Health Images therefor, Health Images shall pay
HEALTHSOUTH reasonable costs and expenses (including reasonable attorneys' fees)
in connection with such suit, together with interest computed on any amounts
determined to be due pursuant to this Section (computed from the date upon which
such amounts were due and payable pursuant to this Section) and such costs
(computed from the date incurred) at the prime rate of interest announced from
time to time by NationsBank, N.A. (South). The obligations of Health Images
under this Section 8.6 shall survive any termination of this Plan of Merger.
SECTION 9. CONDITIONS TO CLOSING.
9.1 Mutual Conditions. The respective obligations of each party to effect the
Merger shall be subject to the satisfaction, at or prior to the Closing Date of
the following conditions (any of which may be waived in writing by HEALTHSOUTH
and Health Images):
(a) None of HEALTHSOUTH, the Subsidiary or Health Images nor any of their
respective subsidiaries shall be subject to any order, decree or injunction by a
court of competent jurisdiction which (i) prevents or materially delays the
consummation of the Merger or (ii) would impose any material limitation on the
ability of HEALTHSOUTH effectively to exercise full rights of ownership of the
Common Stock of the Surviving Corporation or any material portion of the assets
or business of Health Images, the Health Images Subsidiaries and the Health
Images Other Entities, taken as a whole.
(b) No statute, rule or regulation shall have been enacted by the government
(or any governmental agency) of the United States or any state, municipality or
other political subdivision thereof that makes the consummation of the Merger
and any other transaction contemplated hereby illegal.
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(c) Any waiting period (and any extension thereof) applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated.
(d) The Registration Statement shall have been declared effective and no stop
order with respect to the Registration Statement shall be in effect.
(e) The holders of Health Images Common Stock shall have approved the
adoption of this Plan of Merger and any other matters submitted to them in
accordance with the provisions of Section 7.3 hereof.
(f) The shares of HEALTHSOUTH Common Stock to be issued in connection with
the Merger shall have been approved for listing on the Exchange.
(g) The Merger shall qualify for "pooling of interests" accounting treatment,
and HEALTHSOUTH and Health Images shall each have received letters to that
effect from Ernst & Young, LLP, independent accountants for HEALTHSOUTH, dated
(i) not later than December 31, 1996, (ii) the date of the mailing of the Proxy
Statement and (iii) the Closing Date.
(h) HEALTHSOUTH and the Subsidiary shall have obtained, or obtained the
transfer of, any licenses, certificates of need and other regulatory approvals
necessary to allow the Surviving Corporation to operate the Health Images
facilities, unless the failure to obtain such transfer or approval would not
have a material adverse effect on the Surviving Corporation.
(i) HEALTHSOUTH and the Subsidiary shall have received all consents,
approvals and authorizations of third parties with respect to all material
leases and management agreements to which the Health Images Subsidiaries and the
Health Images Other Entities are parties, which consents, approvals and
authorizations are required of such third parties by such documents, in form and
substance acceptable to HEALTHSOUTH, except where the failure to obtain such
consent, approval or authorization would not have a material effect on the
business of the Surviving Corporation.
9.2 Conditions to Obligations of HEALTHSOUTH and the Subsidiary. The
obligations of HEALTHSOUTH and the Subsidiary to consummate the Merger and the
other transactions contemplated hereby shall be subject to the satisfaction, at
or prior to the Closing Date, of the following conditions (any of which may be
waived by HEALTHSOUTH and the Subsidiary):
(a) Each of the agreements of Health Images to be performed at or prior to
the Closing Date pursuant to the terms hereof shall have been duly performed in
all material respects, and Health Images shall have performed, in all material
respects, all of the acts required to be performed by it at or prior to the
Closing Date by the terms hereof.
(b) The representations and warranties of Health Images set forth in Section
3.11(a) shall be true and correct as of the date of this Plan of Merger and as
of the Closing Date. The representations and warranties of Health Images set
forth in this Plan of Merger that are qualified as to materiality shall be true
and correct, and those that are not so qualified shall be true and correct in
all material respects, as of the date of this Plan of Merger and as of the
Closing as though made at and as of such time, except to the extent such
representations and warranties expressly relate to an earlier date (in which
case such representations and warranties that are qualified as to materiality
shall be true and correct, and those that are not so qualified shall be true and
correct in all material respects, as of such earlier date); provided, however,
that Health Images shall not be deemed to be in breach of any such
representations or warranties by taking any action permitted (or approved by
HEALTHSOUTH) under Section 7.2. HEALTHSOUTH and the Subsidiary shall have been
furnished with a certificate, executed by a duly authorized officer of Health
Images, dated the Closing Date, certifying in such detail as HEALTHSOUTH and the
Subsidiary may reasonably request as to the fulfillment of the foregoing
conditions.
(c) HEALTHSOUTH shall have received an opinion from Haskell Slaughter &
Young, L.L.C., to the effect that the merger will constitute a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended, which opinion may be based upon reasonable representations of fact
provided by officers of HEALTHSOUTH, Health Images and the Subsidiary.
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(d) HEALTHSOUTH shall have received an opinion from Powell, Goldstein, Frazer
& Murphy substantially to the effect set forth in Exhibit 9.2(d) hereto.
9.3 Conditions to Obligations of Health Images. The obligations of Health
Images to consummate the Merger and the other transactions contemplated hereby
shall be subject to the satisfaction, at or prior to the Closing Date, of the
following conditions (any of which may be waived by Health Images):
(a) Each of the agreements of HEALTHSOUTH and the Subsidiary to be performed
at or prior to the Closing Date pursuant to the terms hereof shall have been
duly performed, in all material respects, and HEALTHSOUTH and the Subsidiary
shall have performed, in all material respects, all of the acts required to be
performed by them at or prior to the Closing Date by the terms hereof.
(b) The representations and warranties of HEALTHSOUTH set forth in Section
5.10(a) shall be true and correct as of the date of this Plan of Merger and as
of the Closing Date. The representations and warranties of HEALTHSOUTH set forth
in this Plan of Merger that are qualified as to materiality shall be true and
correct, and those that are not so qualified shall be true and correct in all
material respects, as of the date of this Plan of Merger and as of the Closing
as though made at and as of such time, except to the extent such representations
and warranties expressly relate to an earlier date (in which case such
representations and warranties that are qualified as to materiality shall be
true and correct, and those that are not so qualified shall be true and correct
in all material respects, as of such earlier date). Health Images shall have
been furnished with a certificate, executed by duly authorized officers of
HEALTHSOUTH and the Subsidiary, dated the Closing Date, certifying in such
detail as Health Images may reasonably request as to the fulfillment of the
foregoing conditions.
(c) Health Images shall have received an opinion from Powell, Goldstein,
Frazer & Murphy to the effect that the Merger will constitute a reorganization
with the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended, which opinion may be based upon reasonable representations of fact
provided by officers of HEALTHSOUTH, Health Images and the Subsidiary.
(d) Health Images shall have received an opinion from Haskell Slaughter &
Young, L.L.C., substantially to the effect set forth in Exhibit 9.3(d) hereto.
SECTION 10. MISCELLANEOUS
10.1 Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Plan of Merger or in any instrument
delivered pursuant to this Plan of Merger shall survive the Effective Time.
10.2 Notices. Any communications required or desired to be given hereunder
shall be deemed to have been properly given if sent by hand delivery or by
facsimile and overnight courier to the parties hereto at the following
addresses, or at such other address as either party may advise the other in
writing from time to time:
If to HEALTHSOUTH:
HEALTHSOUTH Corporation
Two Perimeter Park South
Birmingham, Alabama 35243
Attention: Michael D. Martin
Facsimile: (205) 969-4719
with a copy to:
William W. Horton, Esq.
HEALTHSOUTH Corporation
Two Perimeter Park South
Birmingham, Alabama 35243
Facsimile: (205) 969-4732
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If to Health Images:
Health Images, Inc.
8601 Dunwoody Place
Building 200
Atlanta, Georgia 30350
Attention: Robin Eubanks Murray, Esq.
Facsimile: (770) 642-1310
with a copy to:
Thomas R. McNeill, Esq.
Powell, Goldstein, Frazer & Murphy
Sixteenth Floor
191 Peachtree Street, N.E.
Atlanta, Georgia 30303
Facsimile: (404) 572-6999
All such communications shall be deemed to have been delivered on the date of
hand delivery or on the next business day following the deposit of such
communications with the overnight courier.
10.3 Further Assurances. Each party hereby agrees to perform any further acts
and to execute and deliver any documents which may be reasonably necessary to
carry out the provisions of this Plan of Merger.
10.4 Indemnification. (a) Health Images shall, and from and after the
Effective Time HEALTHSOUTH and the Surviving Corporation shall, indemnify,
defend and hold harmless each person who is now, or has been at any time prior
to the date of this Plan of Merger or who becomes prior to the Effective Time,
an officer, director or employee of Health Images or any of its subsidiaries
(the "Indemnified Parties") against (i) all losses, claims, damages, costs,
expenses, liabilities or judgments, or amounts that are paid in settlement with
the approval of the indemnifying party (which approval shall not be unreasonably
withheld) of, or in connection with, any claim, action, suit, proceeding or
investigation based in whole or in part on or arising in whole or in part out of
the fact that such person is or was a director, officer or employee of Health
Images or any of its subsidiaries, whether pertaining to any matter existing or
occurring at or prior to, or at or after, the Effective Time ("Indemnified
Liabilities") and (ii) all Indemnified Liabilities based in whole or in part on,
or arising in whole or in part out of, or pertaining to this Plan of Merger, the
Merger or any other transactions contemplated hereby or thereby, in each case to
the full extent a corporation is permitted under the DGCL to indemnify its own
directors, officers and employees, as the case may be (and HEALTHSOUTH and the
Surviving Corporation, as the case may be, will pay expenses in advance of the
final disposition of any such action or proceeding to each Indemnified Party to
the full extent permitted by law upon receipt of any undertaking contemplated by
Section 145(e) of the DGCL). Without limiting the foregoing, in the event any
such claim, action, suit, proceeding or investigation is brought against any
Indemnified Party (whether arising before or after the Effective Time), (i) the
Indemnified Parties may retain counsel satisfactory to them and Health Images
(or them and HEALTHSOUTH and the Surviving Corporation after the Effective
Time), (ii) Health Images (or after the Effective Time, HEALTHSOUTH and the
Surviving Corporation) shall pay all reasonable fees and expenses of such
counsel for the Indemnified Parties promptly as statements therefor are received
and (iii) Health Images (or after the Effective Time, HEALTHSOUTH and the
Surviving Corporation) will use all reasonable efforts to assist in the vigorous
defense of any such matter, provided that none of Health Images, HEALTHSOUTH or
the Surviving Corporation shall be liable for any settlement of any claim
effected without its written consent, which consent, however, shall not be
unreasonably withheld. Any Indemnified Party wishing to claim indemnification
under this Section 10.4, upon learning of any such claim, action, suit,
proceeding or investigation, shall notify Health Images, HEALTHSOUTH or the
Surviving Corporation (but the failure so to notify an Indemnifying Party shall
not relieve it from any liability which it may have under this Section 10.4
except to the extent such failure prejudices such party), and shall deliver to
Health Images (or after the Effective Time, HEALTHSOUTH and the Surviving
Corporation) the undertaking contemplated by Section 145(e) of the DGCL. The
Indemnified Parties as a group may retain only one law firm to represent them
with respect to such matter unless there is, under applicable standards of
professional conduct, a conflict on any significant issue between the positions
of any two or more Indemnified Parties.
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(b) The provisions of this Section 10.4 are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party and his or her heirs and
representatives.
10.5 Governing Law. This Plan of Merger shall be interpreted, construed and
enforced in accordance with the laws of the State of Delaware, applied without
giving effect to any conflicts-of-law principles.
10.6 "Including". The word "including", when following any general statement,
term or matter, shall not be construed to limit such statement, term or matter
to the specific terms or matters as provided immediately following the word
"including" or to similar items or matters, whether or not non-limiting language
(such as "without limitation", "but not limited to", or words of similar import)
is used with reference to the word "including" or the similar items or matters,
but rather shall be deemed to refer to all other items or matters that could
reasonably fall within the broadest possible scope of the general statement,
term or matter.
10.7 "Knowledge". "To the knowledge", "to the best knowledge, information and
belief", or any similar phrase shall be deemed to refer to the knowledge of the
Chairman of the Board, Chief Executive Officer, Chief Operating Officer or Chief
Financial Officer of a party and to include the assurance that such knowledge is
based upon a reasonable investigation, unless otherwise expressly provided.
10.8 "Material adverse change" or "material adverse effect". "Material
adverse change" or "material adverse effect" means, when used in connection with
Health Images or HEALTHSOUTH, any change, effect, event or occurrence that has,
or is reasonably likely to have, individually or in the aggregate, a material
adverse impact on the business or financial position of such party and its
subsidiaries taken as a whole; provided, however, that "material adverse change"
and "material adverse effect" shall be deemed to exclude the impact of (i)
changes in generally accepted accounting principles and (ii) the public
announcement of the Merger and compliance with the provisions of this Plan of
Merger, and (iii) any changes resulting from any restructuring or other similar
charges or write-offs taken by Health Images with the consent of HEALTHSOUTH;
provided, however, that no such charges or write-offs will be taken if such
would adversely affect pooling-of-interests accounting treatment for the Merger.
10.9 "Hazardous Materials". The term "Hazardous Materials" means any material
which has been determined by any applicable governmental authority to be harmful
to the health or safety of human or animal life or vegetation, regardless of
whether such material is found on or below the surface of the ground, in any
surface or underground water, airborne in ambient air or in the air inside any
structure built or located upon or below the surface of the ground or in
building materials or in improvements of any structures, or in any personal
property located or used in any such structure, including, but not limited to,
all hazardous substances, imminently hazardous substances, hazardous wastes,
toxic substances, infectious wastes, pollutants and contaminants from time to
time defined, listed, identified, designated or classified as such under any
Environmental Laws (as defined in Section 10.10) regardless of the quantity of
any such material.
10.10 Environmental Laws. The term "Environmental Laws" means any federal,
state or local statute, regulation, rule or ordinance, and any judicial or
administrative interpretation thereof, regulating the use, generation, handling,
storage, transportation, discharge, emission, spillage or other release of
Hazardous Materials or relating to the protection of the environment.
10.11 Taxes. For purposes of this Agreement, the term "tax" or "taxes" shall
mean all taxes, charges, fees, levies, penalties or other assessment imposed by
any United States federal, state, local or foreign taxing authority, including,
but not limited to, income, excise, property, sales, transfer, franchise,
payroll, withholding, Social Security or other taxes, including any interest,
penalties or additions attributable thereto. For purposes of this Agreement, the
term "tax return" shall mean any return, report, information return or other
document (including any related or supporting information) with respect to
taxes.
10.12 Captions. The captions or headings in this Plan of Merger are made for
convenience and general reference only and shall not be construed to describe,
define or limit the scope or intent of the provisions of this Plan of Merger.
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10.13 Integration of Exhibits. All Exhibits attached to this Plan of Merger
are integral parts of this Plan of Merger as if fully set forth herein, and all
statements appearing therein shall be deemed disclosed for all purposes and not
only in connection with the specific representation in which they are explicitly
referenced.
10.14 Entire Agreement. This instrument, including all Exhibits attached
hereto, together with the Confidentiality Agreement, contains the entire
agreement of the parties and supersedes any and all prior or contemporaneous
agreements between the parties, written or oral, with respect to the
transactions contemplated hereby. It may not be changed or terminated orally,
but may only be changed by an agreement in writing signed by the party or
parties against whom enforcement of any waiver, change, modification, extension,
discharge or termination is sought.
10.15 Counterparts. This Plan of Merger may be executed in several
counterparts, each of which, when so executed, shall be deemed to be an
original, and such counterparts shall, together, constitute and be one and the
same instrument.
10.16 Binding Effect. This Plan of Merger shall be binding on, and shall
inure to the benefit of, the parties hereto, and their respective successors and
assigns, and, except as provided in Section 10.4, no other person shall acquire
or have any right under or by virtue of this Plan of Merger. No party may assign
any right or obligation hereunder without the prior written consent of the other
parties.
10.17 No Rule of Construction. The parties acknowledge that this Plan of
Merger was initially prepared by HEALTHSOUTH, and that all parties have read and
negotiated the language used in this Plan of Merger. The parties agree that,
because all parties participated in negotiating and drafting this Plan of
Merger, no rule of construction shall apply to this Plan of Merger which
construes ambiguous language in favor of or against any party by reason of that
party's role in drafting this Plan of Merger.
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<PAGE>
IN WITNESS WHEREOF, HEALTHSOUTH, the Subsidiary and Health Images have caused
this Plan and Agreement of Merger to be executed by their respective duly
authorized officers, and have caused their respective corporate seals to be
hereunto affixed, all as of the day and year first above written.
HEALTH IMAGES, INC.
By /s/ Robert D. Carl, III
-------------------------------------
Robert D. Carl, III
Chairman of the Board, President and
Chief Executive Officer
ATTEST:
/s/ Robin Eubanks Murray
------------------------
Robin Eubanks Murray
Secretary
[ CORPORATE SEAL ]
HEALTHSOUTH Corporation
By /s/ Michael D. Martin
------------------------------------
Michael D. Martin
Executive Vice President
and Treasurer
ATTEST:
/s/ Anthony J. Tanner
---------------------
Anthony J. Tanner
Secretary
[ CORPORATE SEAL ]
HAMMER ACQUISITION CORPORATION
By /s/ Michael D. Martin
------------------------------------
Michael D. Martin
Vice President
ATTEST:
/s/ Anthony J. Tanner
---------------------
Anthony J. Tanner
Secretary
[ CORPORATE SEAL ]
A-28
<PAGE>
[LETTERHEAD OF SMITH BARNEY]
ANNEX B
December 2, 1996
The Board of Directors
Health Images, Inc.
8601 Dunwoody Place
Atlanta, Georgia 30350
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of the common stock of Health Images, Inc. ("Health
Images") of the consideration to be received by such holders pursuant to the
terms and subject to the conditions set forth in the Plan and Agreement of
Merger, dated as of December 2, 1996 (the "Merger Agreement"), by and among
HEALTHSOUTH Corporation ("HEALTHSOUTH"), Hammer Acquisition Corporation
("Subsidiary"), a wholly owned subsidiary of HEALTHSOUTH, and Health Images. As
more fully described in the Merger Agreement, (i) Subsidiary will be merged with
and into Health Images (the "Merger") and (ii) each outstanding share of the
common stock, par value $0.01 per share, of Health Images (the "Health Images
Common Stock") will be converted into the right to receive 0.446 (the "Exchange
Ratio") of a share of the common stock, par value $0.01 per share, of
HEALTHSOUTH (the "HEALTHSOUTH Common Stock").
In arriving at our opinion, we reviewed the Merger Agreement and held
discussions with certain senior officers, directors and other representatives
and advisors of Health Images and certain senior officers and other
representatives of HEALTHSOUTH concerning the businesses, operations and
prospects of Health Images and HEALTHSOUTH. We examined certain publicly
available business and financial information relating to Health Images and
HEALTHSOUTH as well as certain financial forecasts and other data for Health
Images and HEALTHSOUTH which were provided to or otherwise discussed with us by
the respective managements of Health Images and HEALTHSOUTH, including
information relating to certain strategic implications and operational benefits
anticipated to result from the Merger. We reviewed the financial terms of the
Merger as set forth in the Merger Agreement in relation to, among other things:
current and historical market prices and trading volumes of Health Images Common
Stock and HEALTHSOUTH Common Stock; the respective companies' historical and
projected earnings and other operating data; and the capitalization and
financial condition of Health Images and HEALTHSOUTH. We also considered, to the
extent publicly available, the financial terms of certain other similar
transactions recently effected which we considered relevant in evaluating the
Merger and analyzed certain financial, stock market and other publicly available
information relating to the businesses of other companies whose operations we
considered relevant in evaluating those of Health Images and HEALTHSOUTH. We
also evaluated the potential pro forma financial impact of the Merger on
HEALTHSOUTH. In connection with our engagement, we were requested to approach,
and held discussions with, certain third parties to solicit indications of
interest in a possible acquisition of Health Images. In addition to the
foregoing, we conducted such other analyses and examinations and considered such
other financial, economic and market criteria as we deemed appropriate in
arriving at our opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information and data publicly available or furnished to or otherwise reviewed by
or discussed with us. With respect to financial forecasts and other information
and data provided to or otherwise reviewed by or discussed with us, we have been
advised by the respective managements of Health Images and HEALTHSOUTH that such
forecasts and other infor
B-1
<PAGE>
mation and data were prepared on bases reflecting reasonable estimates and
judgments as to the future financial performance of Health Images and
HEALTHSOUTH and the strategic implications and operational benefits anticipated
to result from the Merger. We assumed, with your consent, that the Merger will
be treated as a pooling of interests in accordance with generally accepted
accounting principles and as a tax-free reorganization for federal income tax
purposes. Our opinion, as set forth herein, relates to the relative values of
Health Images and HEALTHSOUTH. We are not expressing any opinion as to what the
value of the HEALTHSOUTH Common Stock actually will be when issued to Health
Images stockholders pursuant to the Merger or the price at which the HEALTHSOUTH
Common Stock will trade subsequent to the Merger. We have not made or been
provided with an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of Health Images or HEALTHSOUTH nor have
we made any physical inspection of the properties or assets of Health Images or
HEALTHSOUTH. Our opinion is necessarily based upon information available to us,
and financial, stock market and other conditions and circumstances existing and
disclosed to us, as of the date hereof.
Smith Barney has been engaged to render financial advisory services to Health
Images in connection with the Merger and will receive a fee for our services, a
significant portion of which is contingent upon the consummation of the Merger.
We also will receive a fee upon the delivery of this opinion. In the ordinary
course of our business, we and our affiliates may actively trade or hold the
securities of Health Images and HEALTHSOUTH for our own account or for the
account of our customers and, accordingly, may at any time hold a long or short
position in such securities. We have in the past provided investment banking
services to Health Images unrelated to the proposed Merger. We also have in the
past provided financial advisory and investment banking services to HEALTHSOUTH
unrelated to the proposed Merger, for which services we have received
compensation. In addition, Smith Barney and its affiliates (including Travelers
Group Inc. and its affiliates) may maintain relationships with Health Images and
HEALTHSOUTH.
Our advisory services and the opinion expressed herein are provided for the
information of the Board of Directors of Health Images in its evaluation of the
proposed Merger, and our opinion is not intended to be and does not constitute a
recommendation to any stockholder as to how such stockholder should vote on the
proposed Merger. Our opinion may not be published or otherwise used or referred
to, nor shall any public reference to Smith Barney be made, without our prior
written consent.
Based upon and subject to the foregoing, our experience as investment bankers,
our work as described above and other factors we deemed relevant, we are of the
opinion that, as of the date hereof, the Exchange Ratio is fair, from a
financial point of view, to the holders of Health Images Common Stock.
Very truly yours,
SMITH BARNEY INC.
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102(b)(7) of the Delaware General Corporation Law ("DGCL") grants
corporations the right to limit or eliminate the personal liability of their
directors in certain circumstances in accordance with provisions therein set
forth. Article Nine of the HEALTHSOUTH Certificate filed in the Office of the
Secretary of the State of Delaware on June 13, 1995, contains a provision
eliminating or limiting director liability to HEALTHSOUTH and its stockholders
for monetary damages arising from acts or omissions in the director's capacity
as a director. The provision does not, however, eliminate or limit the personal
liability of a director (i) for any breach of such director's duty of loyalty to
HEALTHSOUTH or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
the Delaware statutory provision making directors personally liable, under a
negligence standard, for unlawful dividends or unlawful stock purchases or
redemptions, or (iv) for any transaction from which the director derived an
improper personal benefit. This provision offers persons who serve on the Board
of Directors of HEALTHSOUTH protection against awards of monetary damages
resulting from breaches of their duty of care (except as indicated above). As a
result of this provision, the ability of HEALTHSOUTH or a stockholder thereof to
successfully prosecute an action against a director for a breach of his duty of
care is limited. However, the provision does not affect the availability of
equitable remedies such as an injunction or rescission based upon a director's
breach of his duty of care. The SEC has taken the position that the provision
will have no effect on claims arising under the Federal securities laws.
Section 145 of the DGCL grants corporations the right to indemnify their
directors, officers, employees and agents in accordance with the provisions
therein set forth. Article Nine of the HEALTHSOUTH Certificate and Article IX of
the HEALTHSOUTH Bylaws provide for mandatory indemnification rights, subject to
limited exceptions, to any director, officer, employee, or agent of HEALTHSOUTH
who, by reason of the fact that he or she is a director, officer, employee, or
agent of HEALTHSOUTH, is involved in a legal proceeding of any nature. Such
indemnification rights include reimbursement for expenses incurred by such
director, officer, employee, or agent in advance of the final disposition of
such proceeding in accordance with the applicable provisions of the DGCL.
HEALTHSOUTH has entered into agreements with all of its directors and its
executive officers pursuant to which HEALTHSOUTH has agreed to indemnify such
directors and executive officers against liability incurred by them by reason of
their services as a director or executive officer to the fullest extent
allowable under applicable law.
See Item 22 of this Registration Statement on Form S-4.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Exhibits:
EXHIBIT
NO. DESCRIPTION
--- -----------
(2) Plan And Agreement Of Merger, Dated December 2, 1996, Among Healthsouth
Corporation, Hammer Acquisition Corporation And Health Images, Inc.
Attached To The Prospectus-proxy Statement As Annex A, is hereby
incorporated herein by reference.
(5) Opinion of Haskell Slaughter & Young, L.L.C. as to the legality of the
shares of HEALTHSOUTH Common Stock being registered. To be filed by
amendment.
(8) Opinion of Haskell Slaughter & Young, L.L.C. as to the description in
the Prospectus-Proxy Statement of certain federal income tax
consequences of the Merger. To be filed by amendment.
(23)-1 Consent of Ernst & Young LLP. See pages immediately following signature
pages to the (Registration Statement.
(23)-2 Consent of Joseph Decosimo and Company, LLP. See pages immediately
following signature pages to the Registration Statement.
(23)-3 Consent of Deloitte & Touche LLP. See pages immediately following
signature pages to the Registration Statement.
(23)-4 Consents of Haskell Slaughter & Young, L.L.C. (included in the opinions
filed as Exhibits (5) and (8)).
(24) Powers of Attorney. See signature pages.
(99) Health Images, Inc. Proxy.
ITEM 22. UNDERTAKINGS.
(1) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(2) The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is part of this registration statement, by any person or party
who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other items of the applicable form.
(3) The Registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (2) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-2
<PAGE>
(4) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not subject of and included in
the Registration Statement when it became effective.
(5) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Birmingham, State of
Alabama, on January 8, 1997.
HEALTHSOUTH Corporation
By /s/ RICHARD M. SCRUSHY
-------------------------------------
Richard M. Scrushy
Chairman of the Board and
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard M. Scrushy and Aaron Beam, Jr., and each
of them, his attorney-in-fact with powers of substitution for him in any and all
capacities, to sign any amendments, supplements, subsequent registration
statements relating to the offering to which this Registration Statement
relates, or other instruments he deems necessary or appropriate, and to file the
same, with exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact or his substitute may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RICHARD M. SCRUSHY Chairman Of The Board
- --------------------------- and Chief Executive Officer
Richard M. Scrushy and Director January 8, 1997
/s/ AARON BEAM, JR.
- --------------------------- Executive Vice President and
Aaron Beam, Jr. Chief Financial Officer January 8, 1997
/s/ WILLIAM T. OWENS
- --------------------------- Senior Vice President
William T. Owens and Controller (Principal
Accounting Officer) January 8, 1997
/s/ JAMES P. BENNETT
- --------------------------
James P. Bennett Director January 8, 1997
/s/ ANTHONY J. TANNER
- --------------------------
Anthony J. Tanner Director January 8, 1997
/s/ P. DARYL BROWN
- -------------------------
P. Daryl Brown Director January 8, 1997
/s/ PHILLIP C. WATKINS, M.D.
- -------------------------
Phillip C. Watkins, M.D. Director January 8, 1997
II-4
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ GEORGE H. STRONG
- ----------------------------
George H. Strong Director January 8, 1997
/s/ C. SAGE GIVENS
- ----------------------------
C. Sage Givens Director January 8, 1997
/s/ CHARLES W. NEWHALL III
- ----------------------------
Charles W. Newhall III Director January 8, 1997
/s/ LARRY R. HOUSE
- ----------------------------
Larry R. House Director January 8, 1997
/s/ JOHN S. CHAMBERLIN
- ----------------------------
John S. Chamberlin Director January 8, 1997
/s/ RICHARD F. CELESTE
- ----------------------------
Richard F. Celeste Director January 8, 1997
/s/ JOEL C. GORDON
- ----------------------------
Joel C. Gordon Director January 8, 1997
/s/ RAYMOND J. DUNN, III
- ----------------------------
Raymond J. Dunn, III Director January 8, 1997
II-5
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports on the entities and dated as listed below incorporated by
reference in the Registration Statement (Form S-4 No. 333- ) and the related
Prospectus-Proxy Statement of HEALTHSOUTH Corporation and Health Images, Inc.
HEALTHSOUTH Corporation and Subsidiaries ... May 23, 1996
Surgical Health Corporation ................. April 18, 1995
ReLife, Inc. ................................ February 17, 1995
Rehab Systems Company ....................... September 8, 1995
Sutter Surgery Centers, Inc. ................ March 31, 1995
Advantage Health Corporation ................ October 4, 1995
Harmarville Rehabilitation Center, Inc. .... August 25, 1995
ERNST & YOUNG LLP
January 8, 1997
EXHIBIT 23-2
INDEPENDENT AUDITORS' CONSENT
We consent to the reference to our firm under the caption "Experts" in this
Registration Statement on Form S-4 and related Prospectus-Proxy Statement and to
the incorporation by reference therein of our report dated February 23, 1996,
with respect to the consolidated financial statements and schedules of Health
Images, Inc. included or incorporated by reference in its Annual Report on Form
10-K for the year ended December 31, 1995, filed with the Securities and
Exchange Commission.
JOSEPH DECOSIMO AND COMPANY, LLP
Atlanta, Georgia
January 8, 1997
EXHIBIT 23-3
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
HEALTHSOUTH Corporation on Form S-4 of our report dated May 26, 1995 (relative
to the financial statements of MedAlliance Imaging Centers -- a division of
MedAlliance, Inc.), appearing in Amendment No. 1 on Form 8-K/A dated June 30,
1995 to current report on Form 8-K of Health Images, Inc. and to the reference
to us under the heading "Experts" in the Registration Statement.
DELOITTE & TOUCHE LLP
NASHVILLE, TENNESSEE
JANUARY 6, 1997
PROXY
PRELIMINARY COPY
HEALTH IMAGES, INC.
SPECIAL MEETING OF STOCKHOLDERS -- , 1997
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS
The undersigned hereby appoints ROBERT D. CARL, III and ROBIN EUBANKS MURRAY,
and either of them, with several powers of substitution, proxies to vote the
shares of Common Stock, par value $0.01 per share of Health Images, Inc.
("Health Images") which the undersigned could vote if personally present at the
Special Meeting of Stockholders of Health Images to be held at , on
, 1997, at : a.m., local time, and any adjournment thereof:
(Continued and to be signed on other side)
- ------------
Common
1. Approval and adoption of the Plan and Agreement of Merger, dated December
2, 1996, attached as Annex A to the Prospectus- Proxy Statement that has been
transmitted in connection with the Special Meeting, pursuant to which Hammer
Acquisition Corporation, a wholly-owned subsidiary of HEALTHSOUTH Corporation
("HEALTHSOUTH"), will merge with and into Health Images, and stockholders of
Health Images will receive 0.446 of a share of HEALTHSOUTH Common Stock for each
share of Health Images Common Stock surrendered for exchange, all as described
in said Prospectus-Proxy Statement.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. In their discretion to act upon any matters incidental to the foregoing
and such other business as may properly come before the Special Meeting or any
adjournment thereof.
This Proxy, when properly executed, will be voted in the manner directed
herein by the undersigned stockholder. If no direction is made, this Proxy will
be voted FOR Item 1. Any stockholder who wishes to withhold the discretionary
authority referred to in Item 2 above should mark a line through the entire
Item.
Dated: ___________________________
__________________________________
Signature(s)
__________________________________
(Please sign exactly and as fully
as your name appears on your stock
certificate. If shares are held
jointly, each stockholder should
sign.)
