SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for use of the Commission only (as permitted by Rule
14a-6(e) (2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
HEALTHSOUTH CORPORATION
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(Name of Registrant as Specified In Its Charter)
HEALTHSOUTH CORPORATION
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(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11:(1)
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed
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1. Set forth the amount on which the filing fee is calculated and state how it
was determined
<PAGE>
HEALTHSOUTH CORPORATION
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
April 9, 1997
The Annual Meeting of Stockholders of HEALTHSOUTH Corporation (the "Company")
will be held at One HealthSouth Parkway, Birmingham, Alabama, on Thursday, May
1, 1997, at 2:00 p.m., C.D.T., for the following purposes:
1. To elect thirteen Directors to serve until the next Annual Meeting of
Stockholders and until their successors are duly elected and qualified.
2. To transact such other business as may properly come before the Annual
Meeting or any adjournment thereof.
3. To approve the 1997 Stock Option Plan of the Company.
Stockholders of record at the close of business on March 27, 1997, are
entitled to notice of, and to vote at, the Annual Meeting or any adjournment
thereof.
IF YOU CANNOT ATTEND THE ANNUAL MEETING IN PERSON, PLEASE DATE AND EXECUTE
THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY TO THE COMPANY. IF YOU ATTEND THE
ANNUAL MEETING, YOU MAY REVOKE YOUR PROXY AND VOTE IN PERSON IF YOU DESIRE TO DO
SO, BUT ATTENDANCE AT THE ANNUAL MEETING DOES NOT OF ITSELF SERVE TO REVOKE YOUR
PROXY.
ANTHONY J. TANNER
Secretary
<PAGE>
HEALTHSOUTH CORPORATION
PROXY STATEMENT
INTRODUCTION
This Proxy Statement is furnished to the holders of Common Stock, par value
$.01 per share, of HEALTHSOUTH Corporation (the "Company") in connection with
the solicitation of Proxies by and on behalf of the Board of Directors of the
Company for use at the Annual Meeting of Stockholders to be held on May 1, 1997
or any adjournment thereof. A form of Proxy for use at the Annual Meeting is
also enclosed. Any such Proxy may be revoked by a stockholder at any time before
it is exercised by either giving written notice of such revocation to the
Secretary of the Company or submitting a later-dated Proxy to the Company prior
to the Annual Meeting. A stockholder attending the Annual Meeting may revoke his
Proxy and vote in person if he desires to do so, but attendance at the Annual
Meeting will not of itself revoke the Proxy.
The Company's principal executive offices are located at One HealthSouth
Parkway, Birmingham, Alabama 35243. The Company's telephone number is (205)
967-7116.
Proxy materials will be mailed to stockholders by the Management of the
Company on or about April 9, 1997. The Company has retained Morrow & Co. to
solicit proxies on its behalf and will pay Morrow & Co. a fee of $4,000 for
those services. The Company will reimburse Morrow & Co. for out-of-pocket
expenses incurred in connection with such solicitation. Additional solicitation
may be made by mail, telephone or telegram by the officers or regular employees
of the Company, who will receive no additional compensation therefor.
Arrangements will also be made with brokerage houses, custodians, nominees and
fiduciaries for the forwarding of proxy materials to the beneficial owners of
Common Stock held of record by such persons, and the Company will reimburse such
brokerage houses, custodians, nominees and fiduciaries for reasonable
out-of-pocket expenses incurred by them in connection therewith. The entire
expense of solicitation, including the cost of preparing, assembling and mailing
the proxy materials, will be borne by the Company.
The purposes of the Annual Meeting of Stockholders are to (a) elect a Board
of Directors to serve until the next Annual Meeting of Stockholders and (b) to
approve the 1997 Stock Option Plan of the Company. The Company is not aware at
this time of any other matters that will come before the Annual Meeting. If any
other matters properly come before the Annual Meeting, it is the intention of
the persons designated as proxies to vote in accordance with their judgment on
such matters. Shares represented by executed and unrevoked Proxies will be voted
in accordance with instructions contained therein or, in the absence of such
instructions, in accordance with the recommendations of the Board of Directors.
Abstentions and broker non-votes will not be counted for purposes of determining
whether any given proposal has been approved by the stockholders of the Company.
Accordingly, abstentions and broker non-votes will not affect the votes to be
taken on the election of Directors or the approval of the 1997 Stock Option
Plan, which require for approval the affirmative vote of a majority of the
shares of Common Stock present or represented and entitled to vote at the Annual
Meeting.
As to all matters that may come before the Annual Meeting, each stockholder
will be entitled to one vote for each share of Common Stock of the Company held
by him at the close of business on March 27, 1997. The holders of a majority of
the shares of Common Stock of the Company present in person or by proxy and
entitled to vote will constitute a quorum at the Annual Meeting. Abstentions and
broker non-votes will be counted for purposes of determining the presence of a
quorum. At March 27, 1997, the record date for the Annual Meeting, there were
328,850,186 shares of Common Stock outstanding.
DISSENTERS' RIGHT OF APPRAISAL
There are no dissenters' rights of appraisal in connection with any vote of
stockholders to be taken at the 1997 Annual Meeting of Stockholders.
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PROPOSALS BY STOCKHOLDERS
Any proposals by stockholders of the Company intended to be presented at the
1998 Annual Meeting of Stockholders must be received by the Company for
inclusion in the Company's Proxy Statement and form of Proxy by December 10,
1997.
ELECTION OF DIRECTORS
NOMINEES FOR DIRECTOR
At the Annual Meeting, thirteen Directors are to be elected. The Bylaws of
the Company permit the Board of Directors to determine the number of Directors
of the Company. Unless other instructions are specified, the enclosed Proxy will
be voted in favor of the persons named below to serve until the next Annual
Meeting of Stockholders and until their successors shall have been duly elected
and qualified. The affirmative vote of a majority of the shares of Common Stock
present or represented and entitled to vote at the Annual Meeting is required
for the election of each Director. In the event any of the nominees shall be
unable to serve as a Director, it is the intention of the persons designated as
proxies to vote for substitutes selected by the Board of Directors. The Board of
Directors of the Company has no reason to believe that any of the nominees named
below will be unable to serve if elected.
The following table sets forth certain information concerning the thirteen
nominees for Director of the Company:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
AND ALL POSITIONS A DIRECTOR
NAME AGE WITH THE COMPANY SINCE
- ------------------------ ----- --------------------------------------------------- ------------
<S> <C> <C> <C>
Richard M. Scrushy .... 44 Chairman of the Board and Chief Executive Officer
and Director 1984
Phillip C. Watkins, M.D. 55 Physician, Birmingham, Alabama, and Director 1984
George H. Strong ....... 70 Private Investor, Locust, New Jersey, and Director 1984
C. Sage Givens ......... 40 General Partner, Acacia Venture Partners, and
Director 1985
Charles W. Newhall III.. 52 Partner, New Enterprise Associates Limited
Partnerships, and Director 1985
Aaron Beam, Jr. ........ 53 Executive Vice President and Chief Financial
Officer and Director 1993
James P. Bennett ....... 39 President and Chief Operating Officer and Director 1993
Larry R. House ......... 53 Chairman of the Board, President and Chief
Executive Officer, MedPartners, Inc., and Director 1993
Anthony J. Tanner ...... 48 Executive Vice President -- Administration and
Secretary and Director 1993
John S. Chamberlin .... 69 Private Investor, Princeton, New Jersey, and
Director 1993
Richard F. Celeste .... 59 Managing Partner, Celeste and Sabaty, Ltd. and
Director 1991
P. Daryl Brown ......... 42 President -- HEALTHSOUTH Outpatient Centers and
Director 1995
Joel C. Gordon ......... 68 Private Investor, Nashville, Tennessee, Consultant
to the Company and Director 1996
</TABLE>
Richard M. Scrushy, one of the Company's management founders, has served as
Chairman of the Board and Chief Executive Officer of the Company since 1984, and
also served as President of the Company from 1984 until March 1995. From 1979 to
1984, Mr. Scrushy was with Lifemark Corporation, a publicly-owned healthcare
corporation, serving in various operational and management positions. Mr.
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Scrushy is also a director of MedPartners, Inc., a publicly-traded physician
practice management company, and Chairman of the Board of Capstone Capital,
Inc., a publicly-traded real estate investment trust. He also serves on the
Boards of Directors of several privately-held healthcare corporations.
Phillip C. Watkins, M.D., FACC, is and has been for more than five years in
the private practice of medicine in Birmingham, Alabama. A graduate of The
Medical College of Alabama, Dr. Watkins is a Diplomate of the American Board of
Internal Medicine. He is also a Fellow of the American College of Cardiology and
the Subspecialty Board of Cardiovascular Disease.
George H. Strong retired as Senior Vice President and Chief Financial Officer
of Universal Health Services, Inc. in December 1984, a position he held for more
than six years. Mr. Strong is a private investor and continued to act as a
Director of Universal Health Services, Inc., a publicly-traded hospital
management corporation, until 1993. Mr. Strong is also a director of Core Funds,
a public mutual fund group, Integrated Health Services, Inc., a publicly-traded
healthcare corporation, and AmeriSource, Inc., a large drug wholesaler.
C. Sage Givens is a general partner of Acacia Venture Partners, a private
venture capital fund capitalized at $66,000,000. From 1983 to June 30, 1995, Ms.
Givens was a general partner of First Century Partners, a private venture
capital fund capitalized to $100,000,000. Ms. Givens managed the fund's
healthcare investments. Ms. Givens serves on the Boards of Directors of PhyCor,
Inc. and UroHealth Systems, Inc., both publicly-traded healthcare corporations,
and several privately-held healthcare companies.
Charles W. Newhall III is a general partner and founder of New Enterprise
Associates Limited Partnerships, Baltimore, Maryland, where he has been engaged
in the venture capital business since 1978. Mr. Newhall is also a Director of
Integrated Health Services, Inc., MedPartners, Inc. and Opta Food Ingredients,
Inc., all of which are publicly-traded corporations.
Aaron Beam, Jr., C.P.A., a management founder, serves as Executive Vice
President and Chief Financial Officer of the Company and was elected a Director
in February 1993. From 1980 to 1984, Mr. Beam was employed by Lifemark
Corporation in several financial and operational management positions for the
Shared Services Division, including division controller. Mr. Beam is a director
of Ramsey Healthcare, Inc., a publicly-traded healthcare corporation.
James P. Bennett joined the Company in May 1991 as Director of Inpatient
Operations, was promoted to Group Vice President -- Inpatient Rehabilitation
Operations in September 1991, again to President and Chief Operating Officer --
HEALTHSOUTH Rehabilitation Hospitals in June 1992, to President -- HEALTHSOUTH
Inpatient Operations in February 1993, and to President and Chief Operating
Officer of the Company in March 1995. Mr. Bennett was elected a Director in
February 1993. From August 1987 to May 1991, Mr. Bennett was employed by Russ
Pharmaceuticals, Inc., Birmingham, Alabama, as Vice President -- Operations,
Chief Financial Officer, Secretary and Director. Mr. Bennett served as certified
public accountant on the audit staff of the Birmingham, Alabama office of Ernst
& Whinney (now Ernst & Young LLP) from October 1980 to August 1987.
Larry R. House is Chairman of the Board, President and Chief Executive
Officer of MedPartners, Inc. a publicly-traded physician practice management
firm, a position he assumed as his principal occupation in August 1993. Mr.
House was elected a Director of the Company in February 1993. At the same time
he became President -- HEALTHSOUTH International, Inc. and New Business
Ventures, a position which he held until August 31, 1994, when he terminated his
employment with the Company to concentrate on his duties at MedPartners. Mr.
House joined the Company in September 1985 as Director of Marketing,
subsequently served as Senior Vice President and Chief Operating Officer of the
Company, and in June 1992 became President and Chief Operating Officer --
HEALTHSOUTH Medical Centers. Prior to joining the Company, Mr. House was
President and Chief Executive Officer of a provider of clinical contract
management services for more than ten years.
Anthony J. Tanner, Sc.D., a management founder, serves as Executive Vice
President -- Administration and Secretary of the Company and was elected a
Director in February 1993. From 1980 to 1984, Mr. Tanner was with Lifemark
Corporation in the Shared Services Division as Director, Clinical and
Professional Programs (1982-1984) and Director, Quality Assurance and Education
(1980-1982), where he was responsible for the development of clinical programs
and marketing programs.
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<PAGE>
P. Daryl Brown joined the Company in April 1986 and served until June 1992 as
Group Vice President -- Outpatient Operations. He became President --
HEALTHSOUTH Outpatient Centers in June 1992, and was elected as a Director in
March 1995. From 1977 to 1986, Mr. Brown served with the American Red Cross,
Alabama Region, in several positions, including Chief Operating Officer,
Administrative Director for Financing and Administration and Controller.
John S. Chamberlin retired in 1988 as President and Chief Operating Officer
of Avon Products, Inc., a position he had held since 1985. From 1976 until 1985,
he served as Chairman and Chief Executive Officer of Lenox, Incorporated, after
22 years in various assignments for General Electric. From 1990 to 1991, he
served as Chairman and Chief Executive Officer of New Jersey Publishing Co. Mr.
Chamberlin is Chairman of the Board of Life Fitness Company and WNS, Inc., and
is a director of The Scotts Company and UroHealth Systems, Inc. He is a member
of the Board of Trustees of the Medical Center at Princeton and the Board of
Overseers of Parsons School of Design and is a trustee of the Woodrow Wilson
National Fellowship Foundation.
Richard F. Celeste originally joined the Board of Directors in 1991, took a
leave of absence from the Board of Directors in August 1993 to head the
Democratic National Committee's healthcare reform campaign, and rejoined the
Board in May 1994. He is Managing Partner of Celeste and Sabaty, Ltd., a
business advisory firm located in Columbus, Ohio, which assists United States
companies to build strategic business alliances in Europe, Africa, South Asia
and the Pacific Rim. He served as Governor of Ohio from 1983 to 1991, during
which time he chaired the National Governors' Association Committee on Science
and Technology, and directed the United States Peace Corps from 1979 to 1981. He
is a member of the Advisory Council of the Carnegie Commission on Science,
Technology and Government, and chairs Carnegie's Task Force on Science,
Technology and the States. He is a director of Navistar International, Inc. and
Republic Engineered Steels, Inc., both of which are publicly-traded companies.
Joel C. Gordon served as Chairman of the Board of Directors of Surgical Care
Affiliates, Inc. ("SCA") from its founding in 1982 until January 17, 1996, when
SCA was acquired by the Company. Mr. Gordon also served as Chief Executive
Officer of SCA from 1987 until January 17, 1996. Mr. Gordon serves on the Boards
of Directors of Genesco, Inc., an apparel manufacturer, and SunTrust Bank of
Nashville, N.A.
Directors hold office until the next Annual Meeting of Stockholders of the
Company and until their successors are elected and qualified. Officers are
elected annually by the Board of Directors and serve at the discretion of the
Board of Directors.
MANAGEMENT MATTERS
There are no arrangements or understandings known to the Company between any
of the Directors, nominees for Director or executive officers of the Company and
any other person pursuant to which any such person was elected as a Director or
an executive officer, except the Employment Agreement between the Company and
Richard M. Scrushy described under "Executive Compensation and Other Information
- -- Audit and Compensation Committee Report on Executive Compensation -- Chief
Executive Officer Compensation" in this Proxy Statement and except that Mr.
Gordon and Raymond J. Dunn, III, a retiring Director, were initially named to
the Board of Directors under the terms of the merger agreements pursuant to
which the Company acquired SCA and Advantage Health Corporation, respectively.
There are no family relationships between any Directors, nominees for Director
or executive officers of the Company. The Board of Directors of the Corporation
held a total of eight meetings during 1996.
There are no employment contracts between the Company and any executive
officer named in the Summary Compensation Table under "Executive Compensation
and Other Information -- Executive Compensation -- General", other than the
Employment Agreement with Richard M. Scrushy described under "Executive
Compensation and Other Information -- Audit and Compensation Committee Report on
Executive Compensation -- Chief Executive Officer Compensation" in this Proxy
Statement. Except for such Employment Agreement and except for the broad-based
retirement plans of the Company described under "Executive Compensation and
Other Information -- Retirement Investment Plan"
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<PAGE>
and "Executive Compensation and Other Information -- Employee Stock Benefit
Plan", there are no compensatory plans or arrangements with respect to any such
executive officer which result or will result from the resignation, retirement
or any other termination of such executive officer's employment with the Company
and its subsidiaries or from a change in control of the Company or from a change
in such executive officer's responsibilities following a change in control of
the Company.
The Audit and Compensation Committee of the Board is responsible for
reviewing all reports from the Company's auditors, monitoring internal controls
and reviewing the Company's compensation program, as well as administering the
Company's stock option plans. On May 2, 1996, C. Sage Givens, George H. Strong
and Phillip C. Watkins, all of whom are outside Directors, were appointed to
serve on this committee for a period of one year or until their successors are
appointed. They continue to serve in such capacity. This committee held two
meetings and acted seven times by unanimous written consent during 1996.
The Company has no other standing audit, nominating or compensation
committees of the Board of Directors.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and Directors, and persons who beneficially own more than 10% of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the New York Stock Exchange. Officers, Directors and beneficial owners of
more than 10% of the Company's Common Stock are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms that they file. Based
solely on review of the copies of such forms furnished to the Company, or
written representations that no reports on Form 5 were required, the Company
believes that for the period from January 1, 1996 through December 31, 1996, all
of its officers, Directors and greater-than-10% beneficial owners complied with
Section 16(a) filing requirements applicable to them, except as set forth below.
Raymond J. Dunn, III, a retiring Director of the Company, did not timely
report sales aggregating 393,330 shares of the Company's Common Stock in four
transactions in September 1996 and "private collar" derivative security
transactions in June 1996. All such transactions were reported on Form 5 in
February 1997.
1997 STOCK OPTION PLAN
GENERAL
The Company's Board of Directors has adopted the 1997 Stock Option Plan (the
"1997 Plan") for the Company's Directors, executives and other key employees of
the Company and its subsidiaries. The 1997 Plan is intended to advance the
Company's interests by providing such persons with additional incentives to
promote the success of the Company's business, to increase their proprietary
interest in the success of the Company and to encourage them to remain in the
Company's employ. Management believes that the 1997 Plan is a necessary tool to
help the Company compete effectively with other enterprises for the services of
new employees and to retain key employees and Directors, all as may be required
for the future development of the Company's business. Management intends for the
1997 Plan to complement the other stock option plans of the Company described
herein by making additional shares available for issuance pursuant to options
granted under the 1997 Plan. See "Executive Compensation - Stock Option Plans".
It should be noted that each Director, each nominee for Director and each
officer and employee of the Company has, by reason of being eligible to receive
options under the 1997 Plan, an interest in seeing that the 1997 Plan is adopted
by the stockholders.
Set forth below is a summary of the major features of the 1997 Plan. This
summary does not purport to be a complete statement of all the provisions of the
1997 Plan, and is qualified in its entirety by the text of the composite copy of
the 1997 Plan attached to this Proxy Statement as Appendix A. See
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<PAGE>
"Executive Compensation and Other Information--Stock Option Plans" in this Proxy
Statement for information with respect to stock options granted to certain
Directors and executives of the Company under the other stock option plans of
the Company described herein.
NATURE OF OPTIONS TO BE GRANTED PURSUANT TO THE 1997 PLAN
The 1997 Plan provides for the grant of both non-qualified stock options
("NQSOs") and options intended to qualify as "incentive stock options" ("ISOs")
under Section 422(b) of the Internal Revenue Code of 1986 (the "Code"). Options
designated as ISOs by the Audit and Compensation Committee of the Board of
Directors (the "Committee") will contain terms designed to comply with the
provisions of Section 422(b). All options issued pursuant to the 1997 Plan and
not expressly designated as ISOs shall be conclusively deemed to be NQSOs.
COMMON STOCK SUBJECT TO THE 1997 PLAN
The aggregate number of shares of Common Stock covered by the 1997 Plan is
5,000,000 shares. Shares issued upon exercise of options under the 1997 Plan may
be either authorized but unissued shares or shares reacquired by the Company.
If, on or prior to the termination of the 1997 Plan, an option granted
thereunder expires or is terminated for any reason without having been exercised
in full, the unpurchased shares covered thereby will again become available for
the grant of options under the 1997 Plan. Shares of stock covered by options
surrendered in connection with the exercise of other options shall be deemed to
have been exercised and shall not again become available for the grant of
options under the 1997 Plan. The maximum number of shares of Common Stock for
which any individual may be granted options under the 1997 Plan during any
calendar year is 1,000,000.
The purchase price of the shares of Common Stock covered by each option
granted under the 1997 Plan will be at least 100% of the fair market value, but
in no event less than the par value, of the Common Stock at the time the option
is granted. No option granted to any person who, at the time of such grant,
owns, taking into account the attribution rules of Section 425(d) of the Code,
stock possessing more than 10% of the total combined voting power of all classes
of the Company's stock or of the stock of any of its corporate subsidiaries, may
be designated as an ISO unless at the time of such grant the purchase price of
the shares of Common Stock covered by such option is at least 110% of the fair
market value, but in no event less than the par value, of such shares.
Notwithstanding any contrary provision contained in the 1997 Plan, the aggregate
fair market value (determined as of the time each ISO is granted) of the shares
of Common Stock with respect to which ISOs issued to any one person thereunder
are exercisable for the first time during any calendar year shall not exceed
$100,000.
The 1997 Plan prohibits any reduction of the exercise price of outstanding
options granted under the plan except by reason of an adjustment pursuant to a
stock split, merger, business combination, recapitalization or similar change in
the capitalization of the Company. The 1997 Plan likewise prohibits the
cancellation of outstanding options accompanied by the reissuance of substitute
options at a lower exercise price.
The 1997 Plan provides that if the Common Stock is listed upon a national
securities exchange or exchanges, such fair market value shall be deemed to be
the last reported sale price at which the shares of Common Stock were traded on
such securities exchange or exchanges immediately prior to the commencement of
the meeting of the Committee at which the option is granted, or if no sale of
the Common Stock was made on any national securities exchange on such date, then
on the next preceding day on which there was a sale of the Common Stock. The
1997 Plan prescribes other methodologies for determining fair market value if
the Common Stock is not listed upon a national securities exchange or exchanges.
Since September 13, 1989, the Common Stock has been listed on the New York Stock
Exchange.
ADMINISTRATION OF THE 1997 PLAN
The 1997 Plan is administered by the Audit and Compensation Committee of the
Board of Directors (the "Committee", as defined above), each member of which is
an outside Director. The Committee has full and exclusive authority to determine
the grant of options under the 1997 Plan. Under the terms
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of the 1997 Plan, each outside Director, including the members of the Committee,
is to receive an annual grant of options covering 25,000 shares of Common Stock
under the 1997 Plan or another stock option plan of the Company, such grant to
be made on the first business day in January in each calendar year commencing
with January 1998. Currently, Phillip C. Watkins, M.D., C. Sage Givens and
George H. Strong serve as the Committee.
PURCHASE OF COMMON STOCK UNDER THE 1997 PLAN
Each option granted under the 1995 Plan shall be granted pursuant to and
subject to the terms and conditions of a stock option agreement (a "Stock Option
Agreement") to be entered into between the Company and the optionholder at the
time of such grant. Any such Stock Option Agreement shall incorporate by
reference all of the terms and provisions of the 1997 Plan as in effect at the
time of grant and may contain such other terms and provisions as shall be
approved and adopted by the Committee.
The expiration date of an option granted under the 1997 Plan shall be as
determined by the Committee at the time of grant, provided that each such option
shall expire not more than ten years after the date such option is granted.
Notwithstanding the preceding sentence, no option granted to any person who, at
the time of such grant, owns, taking into account the attribution rules of
Section 425(d) of the Code, stock possessing more than 10% of the total combined
voting power of all classes of Common Stock or the stock of any of the Company's
corporate subsidiaries, may be designated as an ISO unless by its terms each
such option shall expire not more than five years after the date such option was
granted. Each option shall become exercisable in whole, in part or in
installments at such time or times as the Committee may prescribe and specify in
the Stock Option Agreement at the time the option is granted.
In the event of a "Change in Control" (as defined), of the Company, options
granted under the 1997 Plan which are, by their terms, exercisable in
installments, will become immediately exercisable in full. A "Change in Control"
is defined to include the acquisition of more than 25% of the outstanding voting
securities of the Company by a single person or group, the election to the Board
of Directors of persons constituting a majority of the Board of Directors who
are not "Incumbent Directors" (as defined), or the approval by the stockholders
of the Company of (i) a merger, reorganization or similar transaction which
results in the then-current stockholders of the Company owning less than 75% of
the combined voting power of the reorganized or merged entity, (ii) the
liquidation or dissolution of the Company, or (iii) the sale of all or
substantially all of the assets of the Company. These provisions of the 1997
Plan may have some deterrent effect on certain mergers, tender offers or other
takeover attempts, thereby having some potential adverse effect on the market
price of the Company's Common Stock.
The exercise price for options granted under the 1997 Plan may be paid in any
of the following ways, which may be combined for any given exercise: (a) the
exercise price may be paid in cash; (b) the exercise price may be paid by
tendering outstanding shares of Common Stock having a fair market value equal to
the aggregate exercise price for the options being exercised; or (c) subject to
applicable requirements of the Exchange Act, the optionholder may deliver with
his exercise notice irrevocable instructions to a broker to promptly deliver to
the Company an amount of sale or loan proceeds sufficient to pay the exercise
price. In addition, with respect to optionholders who are subject to reporting
requirements under Section 16(a) of the Exchange Act, the optionholder may
surrender unexercised options having a "Spread" equal to the exercise price of
the options sought to be exercised. For purposes of the 1997 Plan, "Spread"
means, with respect to a surrendered option, (i) the average price per share of
Common Stock on the date of exercise, less (ii) the exercise price of the
surrendered option.
Options granted under the 1997 Plan shall be assignable or transferable only
by will or pursuant to the laws of descent and distribution, and shall be
exercisable during the optionholder's lifetime only by the optionholder himself
or herself, except for certain permitted transfers to or for the benefit of
immediately family members of the optionholder or to charitable organizations.
No holder of any option shall have any rights to dividends or other rights of a
stockholder with respect to shares subject to an option prior to the purchase of
such shares upon exercise of the option.
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<PAGE>
TERMINATION OF EMPLOYMENT, DEATH OR DISABILITY OF OPTIONHOLDER
With respect to an option which, by its terms, is not exercisable for one
year from the date on which it is granted, if an optionholder's employment by,
or other relationship with, the Company or any of its subsidiaries terminates
for any reason other than death within one year after the date an unexercised
option is granted under the 1997 Plan, the option shall terminate on the date of
termination of such employment or other relationship. With respect to all
options granted under the 1997 Plan, if an optionholder's employment by, or
other relationship with, the Company is terminated by reason of his death, the
option shall terminate one year after the date of death, unless the option
otherwise expires. If an optionholder's employment by, or other relationship
with, the Company terminates for any other reason, or at any other time, other
than as set forth above, the option shall terminate three months after the date
of termination of such employment or other relationship, unless the option
earlier expires, provided that: (a) if the optionholder dies within such
three-month period, the option shall terminate one year after the date of his
death, unless the option earlier expires; (b) the Board of Directors may, at any
time prior to any termination of such employment or other relationship under the
circumstances covered herein, determine in its discretion that the option shall
terminate on the date of termination of such employment or other relationship;
and (c) the exercise of any option after termination of such employment or other
relationship shall be subject to satisfaction of the conditions precedent that
the optionholder refrain from engaging, directly or indirectly, in any activity
which is competitive with any activity of the Company or any subsidiary and from
otherwise acting, either prior to or after termination of such employment or
other relationship, in any manner inimical or in any way contrary to the best
interests of the Company and that the optionholder furnish to the Company such
information with respect to the satisfaction of the foregoing conditions
precedent as the Board of Directors shall reasonably request.
EXPIRATION, TERMINATION AND AMENDMENT OF THE 1995 PLAN
The 1997 Plan will terminate on the earliest of (a) April 30, 2007, (b) the
date on which all shares of Common Stock reserved for issuance under the 1997
Plan shall have been acquired through exercise of options granted thereunder, or
(c) such earlier time as the Board of Directors may determine. Any option
outstanding under the 1997 Plan at the time of its termination shall remain in
effect in accordance with its terms and conditions and those of the 1997 Plan.
The 1997 Plan may, at any time or from time to time, be terminated, modified
or amended by the stockholders of the Company by the affirmative vote of the
holders of a majority of the outstanding shares of Common Stock entitled to
vote. The Board of Directors may, insofar as permitted by law, from time to time
with respect to any shares of Common Stock at the time not subject to options,
suspend or discontinue the 1997 Plan or revise or amend it in any respect
whatsoever, except that, without approval of the stockholders of the Company, no
such revision or amendment shall increase the number of shares subject to the
1997 Plan, decrease the price at which the options may be granted, permit
exercise of options unless full payment is made at the time of exercise (except
as provided in the 1997 Plan), extend the period during which options may be
exercised, or change the provisions relating to adjustment to be made upon
changes in capitalization. Subject to the provisions described above, the Board
of Directors has the power to amend the 1997 Plan and any outstanding options
granted thereunder in such respects as the Board of Directors shall, in its sole
discretion, deem advisable in order to incorporate in the 1997 Plan or any such
option any new provision or change designed to comply with or take advantage of
requirements or provisions of the Code or other statute, or rules or regulations
of the Internal Revenue Service or other federal or state governmental agency
enacted or promulgated after the adoption of the 1997 Plan.
FEDERAL TAX CONSEQUENCES
Pursuant to the Code, upon the exercise of an NQSO under the 1997 Plan, the
Company is generally entitled to a tax deduction in an amount equal to the
difference between the option price and the fair market value of the Common
Stock on the date the NQSO is exercised. For federal tax purposes, the person
exercising the option must pay personal income taxes on an amount equal to the
difference
8
<PAGE>
between the option price and the fair market value of the Common Stock on the
date the NQSO is exercised. The basis of the Common Stock obtained by exercising
the NQSO will be the option price paid plus the amount equal to the difference
between the option price and the fair market value of the Common Stock on the
date the NQSO is exercised, which amount was subject to federal income tax. A
subsequent sale of the Common Stock by the person exercising the NQSO will
result in a long- or short-term capital gain or loss depending on the total
period of time that the shares of Common Stock are held. Generally, no taxable
event occurs under the Code upon the grant of an NQSO under the 1997 Plan.
Pursuant to the Code, the holder of an ISO will recognize no taxable income
(or loss) upon the grant or exercise of an ISO. Upon the sale of the underlying
shares of Common Stock, the optionholder will incur a long-term capital gain or
loss if the provisions of Section 422(b) of the Code are complied with. In such
case, there is no taxable event for the Company. The principal requirement of
Section 422(b), other than the limitations on option price, duration of option
period, time of exercise and volume exercisable in one year described above, is
that, in order for an option to qualify for ISO treatment, shares received
pursuant to exercise of the option may not be disposed of within two years from
the date of grant and one year from the date of exercise of the option. If an
option designated as an ISO ceases to qualify as an ISO, the tax effects for the
optionholder and the Company will be identical to those described above for
NQSOs.
NEW PLAN BENEFITS
No options have been granted under the 1997 Plan. The number of shares
covered by particular options to be granted under the 1997 Plan is not
determinable at this time.
VOTE REQUIRED; RECOMMENDATION OF THE BOARD OF DIRECTORS
Management recommends a vote FOR the adoption of the 1997 Stock Option Plan.
The affirmative vote of the holders of a majority of the outstanding shares of
the Common Stock present or represented and entitled to vote at the Annual
Meeting will be necessary for stockholder approval of the 1997 Stock Option
Plan.
9
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
EXECUTIVE COMPENSATION -- GENERAL
The following table sets forth compensation paid or awarded to the Chief
Executive Officer and each of the other four most highly compensated executive
officers of the Company (the "Named Executive Officers") for all services
rendered to the Company and its subsidiaries in 1994, 1995 and 1996.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
NAME AND PRINCIPAL POSITION ------------------------------------ ------------------------
BONUS/ANNUAL STOCK LONG-TERM
CENTIVE OPTION INCENTIVE ALL OTHER
YEAR SALARY AWARD AWARDS PAYOUTS COMPENSATION(1)
----- ----------- ------------ ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Richard M. Scrushy ......... 1994 $1,207,228 $2,000,000 -- -- $ 12,991
Chairman of the Board ..... 1995 1,737,526 5,000,000 2,000,000 -- 650,108 (2)
and Chief Executive Officer 1996 3,380,295 8,000,000 1,500,000 -- 34,280 (2)
James P. Bennett ........... 1994 357,740 250,000 -- -- 10,760
President and Chief ........ 1995 371,558 600,000 300,000 -- 7,835
Operating Officer .......... 1996 485,110 800,000 200,000 -- 32,106 (2)
Michael D. Martin .......... 1994 189,013 250,000 -- -- 7,311
Executive Vice President .. 1995 165,626 500,000 170,000 -- 7,919
and Treasurer .............. 1996 270,164 750,000 120,000 -- 31,587 (2)
P. Daryl Brown ............. 1994 272,573 200,000 -- -- 10,226
President -- HEALTHSOUTH .. 1995 263,462 300,000 260,000 -- 8,580
Outpatient Centers ......... 1996 324,345 400,000 100,000 -- 11,181
Aaron Beam, Jr. ............ 1994 298,223 175,000 -- -- 11,272
Executive Vice President .. 1995 247,903 300,000 200,000 -- 8,695
and Chief Financial Officer 1996 287,417 350,000 30,000 -- 33,314 (2)
</TABLE>
(1) Includes car allowances of $500 per month for Mr. Scrushy and $350 per month
for the other Named Executive Officers. Also includes (a) matching
contributions under the Company's Retirement Investment Plan for 1994, 1995
and 1996, respectively, of: $318, $292 and $708 to Mr. Scrushy; $355, $900
and $1,289 to Mr. Beam; $625, $900 and $1,425 to Mr. Bennett; $526, $900 and
$1,371 to Mr. Martin; and $274, $900 and $1,897 to Mr. Brown; (b) awards
under the Company's Employee Stock Benefit Plan for 1994, 1995 and 1996,
respectively, of $4,910, $1,626 and $3,389 to Mr. Scrushy; $4,910, $1,626
and $3,389 to Mr. Beam; $4,910, $1,626 and $3,387 to Mr. Bennett; $1,345,
$1,626 and $3,386 to Mr. Martin; and $4,910, $1,626 and $3,389 to Mr. Brown;
and (c) split-dollar life insurance premiums paid in 1994 and 1995 of
$1,723, $2,190 and $2,312 with respect to Mr. Scrushy; $1,807, $1,969 and
$2,559 with respect to Mr. Beam; $1,025, $1,109 and $1,217 with respect to
Mr. Bennett; $1,240, $1,193 and $752 with respect to Mr. Martin; and $842,
$1,854 and $1,695 with respect to Mr. Brown. See "Executive Compensation --
Retirement Investment Plan" and "Executive Compensation -- Employee Stock
Benefit Plan".
(2) In addition to the amounts described in the preceding footnote, includes the
conveyance of real property valued at $640,000 to Mr. Scrushy in 1995, and
the forgiveness of loans in the amount of $21,877 each owed by Messrs.
Scrushy, Beam, Bennett and Martin in 1996.
10
<PAGE>
STOCK OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------
% OF TOTAL
OPTIONS
NUMBER OF GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE EXPIRATION GRANT DATE
NAME GRANTED FISCAL YEAR PER SHARE DATE PRESENT VALUE(1)
---- --------- ------------ ---------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Richard M. Scrushy.. 1,500,000 36.9% $16.25 1/17/06 $10,982,625
James P. Bennett... 200,000 4.9% 16.25 1/17/06 1,464,350
Michael D. Martin.. 100,000 2.5% 16.25 1/17/06 732,175
20,000 0.5% 16.44 8/14/06 146,435
P. Daryl Brown..... 100,000 2.5% 16.25 1/17/06 732,175
Aaron Beam, Jr..... 60,000 1.5% 16.25 1/17/06 439,305
</TABLE>
(1) Based on the Black-Scholes option pricing model adapted for use in valuating
executive stock options. The actual value, if any, an executive may realize
will depend upon the excess of the stock price over the exercise price on
the date the option is exercised, so that there is no assurance that the
value realized by an executive will be at or near the value estimated by the
Black-Scholes model. The estimated values under that model are based on
arbitrary assumptions as to certain variables, including the following: (i)
stock price volatility is assumed to be 37.5%; (ii) the risk-free rate of
return is assumed to be 6.21%; (iii) dividend yield is assumed to be 0; and
(iv) the time of exercise is assumed to be 5.5 years from the date of grant.
STOCK OPTION EXERCISE IN 1996 AND OPTION VALUES AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
NUMBER
OF SHARES NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED VALUE OPTIONS IN-THE-MONEY OPTIONS
ON EXERCISE REALIZED AT DECEMBER 31, 1996(1) AT DECEMBER 31, 1996(2)
----------- -------- ----------------------- -----------------------
NAME EXERCISED UNEXERCISED EXERCISED UNEXERCISED
---- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Richard M.
Scrushy........... 1,000,000 $16,168,845 13,869,892 2,632 $188,007,958 $ 35,836
James P. Bennett 90,000 1,183,950 860,000 -- 9,353,300 --
Michael D. Martin. 83,500 1,291,461 200,000 105,000 888,750 1,200,381
P. Daryl Brown ... 77,000 1,218,986 935,000 -- 12,048,828 --
Aaron Beam, Jr. .. 152,500 2,053,794 260,000 -- 2,371,250 --
</TABLE>
(1) Does not reflect any options granted and/or exercised after December 31,
1996. The net effect of any such grants and exercises is reflected in the
table appearing under "Principal Stockholders".
(2) Represents the difference between market price of the Company's Common Stock
and the respective exercise prices of the options at December 31, 1996. Such
amounts may not necessarily be realized. Actual values which may be
realized, if any, upon any exercise of such options will be based on the
market price of the Common Stock at the time of any such exercise and thus
are dependent upon future performance of the Common Stock.
11
<PAGE>
STOCKHOLDER RETURN COMPARISON(1)
Set forth below is a line graph comparing the total returns of the Company's
Common Stock, the Standard & Poor's 500 (S&P 500) Index and a peer group index
("Rehab Index") compiled by the Company, consisting of Tenet Healthcare
Corporation and NovaCare, Inc., publicly-traded healthcare companies whose
businesses are similar in some respects to that of the Company. The graph
assumes $100 invested on December 31, 1991, in HEALTHSOUTH Common Stock and each
of the indices. The Rehab Index has been weighted for market capitalization, and
the Company assumes reinvestment of dividends for purposes of the graph.
[GRAPHIC OMITTED]
December 31 HEALTHSOUTH S&P 500 Rehab Index
- ----------- ----------- ------- -----------
1991 100 100 100
1992 75 107 77
1993 72 119 75
1994 104 120 111
1995 166 165 111
1996 220 203 130
- ----------
(1) In previous proxy statements of the Company, the Rehab Index included
Continental Medical Systems, Inc. ("CMS"). In May 1995, CMS was acquired by
Horizon Healthcare Corp., which was the surviving corporation in the merger.
Because CMS was not publicly traded during all of 1995, data relating to CMS
has been deleted from the Rehab Index for all periods.
STOCK OPTION PLANS
Set forth below is information concerning the various stock option plans of
the Company at December 31, 1996. All share numbers and exercise prices have
been adjusted to reflect the Company's March 1997 two-for-one stock split.
1984 Incentive Stock Option Plan
The Company had a 1984 Incentive Stock Option Plan (the "ISO Plan"), intended
to qualify under Section 422(b) of the Internal Revenue Code of 1986, as amended
(the "Code"), covering an aggregate of 4,800,000 shares of Common Stock. The ISO
Plan expired on February 28, 1994, in accordance with its terms. As of December
31, 1996, there were outstanding under the ISO Plan options to purchase 31,702
shares of the Company's Common Stock at prices ranging from $2.52 to $3.78 per
share. All such options remain in full force and effect in accordance with their
terms and the ISO Plan. Under the ISO Plan, which was administered by the Board
of Directors, key employees could be granted options to purchase shares of
Common Stock at 100% of fair market value on the date of grant (or 110% of fair
market value in the case of a 10% stockholder/grantee). The outstanding options
granted under the ISO Plan must be exercised within ten years from the date of
grant, are cumulatively exercisable with respect to 25% of the shares covered
thereby after the expiration of each of the first through the fourth years
following the date of grant, are nontransferable except by will or pursuant to
the laws of descent and distribution, are protected against dilution and expire
within three months after termination of employment, unless such termination is
by reason of death.
12
<PAGE>
1988 Non-Qualified Stock Option Plan
The Company also has a 1988 Non-Qualified Stock Option Plan (the "NQSO Plan")
covering a maximum of 4,800,000 shares of Common Stock. As of December 31, 1996,
there were outstanding under the NQSO Plan options to purchase 57,300 shares of
the Company's Common Stock at prices ranging from $8.37 to $16.25 per share. The
NQSO Plan, which is administered by the Audit and Compensation Committee of the
Board of Directors, provides that Directors, executive officers and other key
employees may be granted options to purchase shares of Common Stock at 100% of
fair market value on the date of grant. The NQSO Plan terminates on the earliest
of (a) February 28, 1998, (b) such time as all shares of Common Stock reserved
for issuance under the NQSO Plan have been acquired through the exercise of
options granted thereunder or (c) such earlier time as the Board of Directors of
the Company may determine. Options granted pursuant to the NQSO Plan have a
ten-year term are exercisable at any time during such period, are
nontransferable except by will or pursuant to the laws of descent and
distribution, are protected against dilution and expire within three months of
termination of association with the Company as a Director or termination of
employment, unless such termination is by reason of death.
1989, 1990, 1991, 1992, 1993 and 1995 Stock Option Plans
The Company also has a 1989 Stock Option Plan (the "1989 Plan"), a 1990 Stock
Option Plan (the "1990 Plan"), a 1991 Stock Option Plan (the "1991 Plan"), a
1992 Stock Option Plan (the "1992 Plan"), a 1993 Stock Option Plan (the "1993
Plan") and a 1995 Stock Option Plan (the "1995 Plan"), under each of which
incentive stock options ("ISOs") and non-qualified stock options ("NQSOs") may
be granted. The 1989, 1990, 1991, 1992, 1993 and 1995 Plans cover a maximum of
2,400,000 shares, 3,600,000 shares, 11,200,000 shares, 5,600,000 shares,
5,600,000 shares and 11,563,548 (to be increased by 0.9% of the outstanding
Common Stock of the Company on each January 1, beginning January 1, 1996)
shares, respectively, of the Company's Common Stock. As of December 31, 1996,
there were outstanding options to purchase an aggregate of 28,188,880 shares of
the Company's Common Stock under such Plans at exercise prices ranging from
$2.52 to $19.12 per share. An additional 2,778,356 shares were reserved for
grants under such Plans. Each of the 1989, 1990, 1991, 1992, 1993 and 1995 Plans
is administered in the same manner as the NQSO Plan and provides that Directors,
executive officers and other key employees may be granted options to purchase
shares of Common Stock at 100% of fair market value on the date of grant. The
1989, 1990, 1991, 1992, 1993 and 1995 Plans terminate on the earliest of (a)
October 25, 1999, October 15, 2000, June 19, 2001, June 16, 2002, April 19, 2003
and June 5, 2005, respectively, (b) such time as all shares of Common Stock
reserved for issuance under the respective Plan have been acquired through the
exercise of options granted thereunder, or (c) such earlier times as the Board
of Directors of the Company may determine. Options granted under these Plans
which are designated as ISOs contain vesting provisions similar to those
contained in options granted under the ISO Plan and have a ten-year term. NQSOs
granted under these Plans have a ten-year term. Options granted under these
Plans are nontransferable except by will or pursuant to the laws of descent and
distribution (except for certain permitted transfers to or for the benefit of
family members and charitable organizations), are protected against dilution and
will expire within three months of termination of association with the Company
as a Director or termination of employment, unless such termination is by reason
of death.
1993 Consultants' Stock Option Plan
The Company also has a 1993 Consultants' Stock Option Plan (the "1993
Consultants' Plan"), under which NQSOs may be granted, covering a maximum of
3,000,000 shares of Common Stock. As of December 31, 1995, there were
outstanding under the 1993 Consultants' Plan options to purchase 1,636,000
shares of Common Stock at prices ranging from $3.37 to $17.75 per share. An
additional 40,000 shares were reserved for grants under such Plans. The 1993
Consultants' Plan, which is administered in the same manner as the NQSO Plan,
provides that certain non-employee consultants who provide significant services
to the Company may be granted options to purchase shares of Common Stock at such
prices as are determined by the Board of Directors or the appropriate committee.
The 1993 Consultants' Plan terminates on the earliest of (a) February 25, 2003,
(b) such time as all shares of Common
13
<PAGE>
Stock reserved for issuance under the 1993 Consultants' Plan have been acquired
through the exercise of options granted thereunder, or (c) such earlier time as
the Board of Directors of the Company may determine. Options granted under the
1993 Consultants' Plan have a ten-year term. Options granted under the 1993
Consultants' Plan are nontransferable except by will or pursuant to the laws of
descent and distribution, are protected against dilution and expire within three
months of termination of association with the Company as a consultant, unless
such termination is by reason of death.
Other Stock Option Plans
In connection with the acquisitions of Surgical Health Corporation, Sutter
Surgery Centers, Inc., Surgical Care Affiliates, Inc., Professional Sports Care
Management, Inc. and ReadiCare, Inc., the Company assumed certain existing stock
option plans of the acquired companies, and outstanding options to purchase
stock of the acquired companies under such plans were converted into options to
acquire Common Stock of the Company in accordance with the exchange ratios
applicable to such mergers. At December 31, 1996, there were outstanding under
these assumed plans options to purchase 1,906,200 shares of the Company's Common
Stock at exercise prices ranging from $2.14 to $25.75 per share. No additional
options are being granted under any such assumed plans.
EXECUTIVE LOANS
In order to enhance equity ownership by senior management, in 1989 the
Company adopted a program of making loans to officers holding the position of
Group Vice President and above to facilitate the exercise of stock options held
by such persons. Each loan bears interest at the prime rate announced from time
to time by AmSouth Bank of Alabama, Birmingham, Alabama and is secured by a
first lien on the shares of Common Stock acquired with the proceeds of the loan.
Each loan has a ten-year term, and the Company's lien on the shares of Common
Stock is released as the indebtedness is repaid at the rate of one share per the
weighted average option exercise price repaid. The only loan currently
outstanding under such program is a loan made on May 7, 1992 to P. Daryl Brown,
President -- HEALTHSOUTH Outpatient Centers, which had an original principal
balance of $213,613 and of which $190,000 remained outstanding at December 31,
1996.
RETIREMENT INVESTMENT PLAN
Effective January 1, 1990, the Company adopted the HEALTHSOUTH Retirement
Investment Plan (the "401(k) Plan"), a retirement plan intended to qualify under
Section 401(k) of the Internal Revenue Code of 1986, as amended. The 401(k) Plan
is open to all full-time and part-time employees of the Company who are over the
age of 21, have one full year of service with the Company and have at least
1,000 hours of service in the year in which they enter the 401(k) Plan. Eligible
employees may elect to participate in the Plan on January 1 and July 1 in each
year.
Under the 401(k) Plan, participants may elect to defer up to 20% of their
annual compensation (subject to nondiscrimination rules under the Internal
Revenue Code). The deferred amounts may be invested among four options, at the
participant's direction: a money market fund, a bond fund, a guaranteed
insurance contract or an equity fund. The Company will match a minimum of 10% of
the amount deferred by each participant, up to 4% of such participant's total
compensation, with the matched amount also directed by the participant.
Aaron Beam, Jr., Executive Vice President and Chief Financial Officer of the
Company, and Anthony J. Tanner, Executive Vice President -- Administration and
Secretary of the Company, serve as Trustees of the 401(k) Plan, which is
administered by the Company.
EMPLOYEE STOCK BENEFIT PLAN
Effective January 1, 1991, the Company adopted the HEALTHSOUTH Rehabilitation
Corporation and Subsidiaries Employee Stock Benefit Plan (the "ESOP"), a
retirement plan intended to qualify under sections 401(a) and 4975(e)(7) of the
Internal Revenue Code of 1986, as amended. The ESOP is open to all full-time and
part-time employees of the Company who are over the age of 21, have one full
14
<PAGE>
year of service with the Company and have at least 1,000 hours of service in the
year in which they begin participation in the ESOP on the next January 1 or July
1 after the date on which such employee satisfies the aforementioned conditions.
The ESOP was established with a $10,000,000 loan from the Company, the
proceeds of which were used to purchase 827,586 shares of the Company's Common
Stock. In 1992, an additional $10,000,000 loan was made to the ESOP, which was
used to purchase an additional 833,332 shares of Common Stock. Under the ESOP, a
Company Common Stock account (a "company stock account") is established and
maintained for each eligible employee who participates in the ESOP. In each plan
year, such account is credited with such employee's allocable share of the
Common Stock held by the ESOP and allocated with respect to such plan year. Each
employee's allocable share for any given plan year is determined according to
the ratio which such employee's compensation for such plan year bears to the
compensation of all eligible participating employees for the same plan year.
Under the ESOP, eligible employees who participate in the ESOP and who have
attained age 55 and have completed 10 years of participation in the ESOP may
elect to diversify the assets in their company stock account by directing the
plan administrator to transfer to the 401(k) Plan a portion of their company
stock account to be invested, as the eligible employee directs, in one or more
of the investment options available under the 401(k) Plan.
Richard M. Scrushy, Chairman of the Board and Chief Executive Officer of the
Company, Aaron Beam, Jr., Executive Vice President and Chief Financial Officer
of the Company, and Anthony J. Tanner, Executive Vice President --
Administration and Secretary of the Company, serve as Trustees of the ESOP,
which is administered by the Company.
STOCK PURCHASE PLAN
In order to further encourage employees to obtain equity ownership in the
Company, the Company's Board of Directors adopted an Employee Stock Purchase
Plan (the "Stock Purchase Plan") effective January 1, 1994. Under the Stock
Purchase Plan, participating employees may contribute $10 to $200 per pay period
toward the purchase of the Company's Common Stock in open-market transactions.
The Stock Purchase Plan is open to regular full-time or part-time employees who
have been employed for six months and are at least 21 years old. After six
months of participation in the Stock Purchase Plan, the Company will provide a
10% matching contribution to be applied to purchases under the Stock Purchase
Plan. The Company also pays all fees and brokerage commissions associated with
the purchase of the stock. The Stock Purchase Plan is administered by a
broker-dealer firm not affiliated with the Company.
BOARD COMPENSATION
Directors who are not also employed by the Company are paid Directors' fees
of $10,000 per annum, plus $3,000 for each meeting of the Board of Directors and
$1,000 for each Committee meeting attended. In addition, Directors are
reimbursed for all out-of-pocket expenses incurred in connection with their
duties as Directors. The Directors of the Company, including Mr. Scrushy, have
been granted non-qualified stock options to purchase shares of the Company's
Common Stock. See this Item, "Executive Compensation -- Stock Option Plans"
above.
AUDIT AND COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
General
The Board of Directors of the Company has an Audit and Compensation
Committee (the "Committee"), consisting of Ms. Givens, Mr. Strong and Dr.
Watkins. The Committee is charged by the Board of Directors with establishing a
compensation plan which will enable the Company to compete effectively for the
services of qualified officers and key employees, to give such employees
appropriate incentive to pursue the maximization of long-term stockholder value,
and to recognize such employees'
15
<PAGE>
success in achieving both qualitative and quantitative goals for the benefit of
the Company. The Committee makes recommendations to the full Board of Directors
as to appropriate levels of compensation for specific individuals, as well as
compensation and benefit programs for the Company as a whole.
Compensation Philosophy and Policies for Executive Officers
As its first principle, the Committee believes that executives of the Company
should be rewarded based upon their success in meeting the Company's operational
goals, improving its earnings, maintaining its leadership role in the outpatient
and rehabilitative healthcare services fields, and generating consistent and
superior returns for its stockholders, and the Committee strives to establish
levels of compensation that take such factors into account and provide
appropriate recognition for past achievement and incentive for future success.
The Committee recognizes that the demand for executives with expertise and
experience in the outpatient and rehabilitative healthcare services fields is
intense. In order to attract and retain qualified persons, the Committee
believes that the Company must offer current compensation at levels consistent
with those of other publicly-traded healthcare companies. In addition, the
Committee believes that it is in the best interests of the Company's
stockholders to offer its executives meaningful equity participation in the
Company, in order that those executives' interests will be aligned with those of
the Company's stockholders. The Committee feels that the historic mix of cash
compensation and equity participation has proven to be effective in stimulating
the Company's executives to meet both long-term and short-term goals and has
been a major factor in limiting turnover among senior executives.
The Company's compensation program has three distinct elements: base salary;
incentive compensation, including both cash incentive compensation and
equity-based compensation; and retirement compensation. These elements are
discussed below.
Base Salary: While the demand for experienced managers in the healthcare
industry continues to grow, the Company has been very successful in attracting
and retaining key executives, many of whom have been with the Company since its
early days. The Company believes that its compensation package is instrumental
in such success. The Committee endeavors to establish base salary levels for
those key executives which are consistent with those provided for similarly
situated executives of other publicly-traded healthcare companies, taking into
account each executive's areas and level of responsibility, historical
performance and tenure with the Company. In establishing such levels, the
Company considers compensation for executives of other publicly-traded providers
of healthcare services, such as Columbia/HCA, Horizon/CMS Healthcare and Tenet
Healthcare Corporation, as well as other publicly-traded companies of similar
size and with a similar growth rate. Compensation decisions are not targeted to
specific levels in the range of compensation paid by such companies, nor does
the Company maintain a record of where its compensation stands with respect to
such other companies. However, the Committee and the Board of Directors take
such levels of compensation into account in determining appropriate levels of
compensation for the Company's executives.
Incentive Compensation: In addition to base salary, the Committee recommends
to the Board of Directors cash incentive compensation for executives of the
Company, based upon each such executive's success in meeting qualitative and
quantitative performance goals on an annual basis. The total incentive bonus
pool available for the Company's executives is capped at the lesser of (a) the
amount by which the Company's annual net income exceeds the budgeted annual net
income established by the Board of Directors and (b) 10% of the Company's annual
net income. No bonuses are payable unless annual net income exceeds budgeted net
income. Individual incentive bonuses within such bonus pool are not determined
in a formulary manner, but are determined on a basis that takes into account
each executive's success in achieving standards of performance, which may or may
not be quantitative, established by the Board of Directors and such executive's
superiors. Bonus determinations are made on a case-by-case basis, taking into
account appropriate quantitative and qualitative factors, and there is no fixed
relationship between any particular performance factor and the amount of a given
executive's bonus. Historically, incentive compensation has been a major
component of the Company's executive compensation, and the Committee believes
that placing executives at risk for such a component has been effective in
motivating such executives to achieve such goals.
16
<PAGE>
In 1994, the Committee engaged William M. Mercer, Inc. as a consultant to
perform a study of the Company's executive compensation programs. The Mercer
report concluded that the Company's compensation mix was significantly more
highly-leveraged, at risk and performance-focused than other companies selected
by Mercer for comparison, with 41% of the Company's cash compensation for
executive officers being at-risk, performance-based compensation, compared to
29% for the other companies reviewed by Mercer.
In addition to cash incentive compensation, as a growth company, the Company
has always utilized equity- based compensation, in the form of stock options, as
a tool to encourage its executives to work to meet its operational goals and
maximize long-term stockholder value. Because the value of stock options granted
to an executive is directly related to the Company's success in enhancing its
market value over time, the Committee feels that its stock option programs have
been very effective in aligning the interests of management and stockholders.
The Committee determines stock option grants under the Company's various
stock option plans, all of which are described above under "Executive
Compensation and Other Information -- Stock Option Plans". Specific grants are
determined taking into account an executive's current responsibilities and
historical performance, as well as the executive's perceived contribution to the
Company's results of operations. Options are also used to give incentive to
newly-promoted officers at the time that they are asked to assume greater
responsibilities, and, in some cases, to executives who have joined the Company
through acquisitions and have assumed significant leadership roles within the
Company. In evaluating option grants, the Board of Directors considers prior
grants and shares currently held, as well as the recipient's success in meeting
operational goals and the recipient's level of responsibility. However, no fixed
formula is utilized to determine particular grants. The Committee believes that
the opportunity to acquire a significant equity interest in the Company has been
a strong motivation for the Company's executives to pursue the long-term
interests of the Company and its stockholders, and has promoted longevity and
retention of key executives. Information relating to stock options granted to
the five most highly-compensated executive officers of the Company is set forth
elsewhere in this Proxy Statement.
In connection with the Company's use of stock options as a significant
component of compensation, the Mercer study referred to above indicated that
most companies in Mercer's long-term incentive survey utilized two long-term
incentive plans, while the Company used stock options as its only long-term
incentive plan. The Mercer study noted that the Company's use of stock options
was very consistent with the practices of high-growth companies that wished to
increase the ownership stake of executives in the company and to conserve cash
by using stock rather than cash in long-term plans.
Retirement Compensation: As described under "Executive Compensation and Other
Information -- Retirement Investment Plan", in 1991 the Company adopted a 401(k)
retirement plan in order to give all full-time employees an opportunity to
provide for their retirement on a tax-advantaged basis. In order to further tie
employees' interests to the long-term market value of the Company, the Company
adopted an Employee Stock Benefit Plan (the "ESOP") in 1991, which gives all
full-time employees an opportunity to invest a portion of their retirement funds
in Common Stock of the Company on a tax-advantaged basis. See "Executive
Compensation and Other Information -- Employee Stock Benefit Plan". While these
plans provide benefits to all full-time employees, the Committee believes that
the ESOP provides additional incentive to executives to maximize stockholder
value over the long term.
Chief Executive Officer Compensation
The Company is a party to an Employment Agreement with Richard M. Scrushy,
pursuant to which Mr. Scrushy, a management founder of the Company. is employed
as Chairman of the Board and Chief Executive Officer of the Company for a
five-year term which ends December 31, 2000. Such term is automatically extended
for an additional year on December 31 of each year. In addition, the Company has
agreed to use its best efforts to cause Mr. Scrushy to be elected as a Director
of the Company during the term of the Agreement. Under the Agreement, Mr.
Scrushy received a base salary of $999,000, excluding incentive compensation of
up to $2,400,000, in 1996 and is to receive the same base salary in 1997 and
each year thereafter, with incentive compensation of up to $2,400,000, subject
to annual review by the Board of Directors, and is entitled to participate in
any bonus plan approved by the Board of
17
<PAGE>
Directors for the Company's management. The incentive compensation is earned at
$200,000 per month in 1997, contingent upon the Company's success in meeting
certain monthly budgeted earnings per share targets. Mr. Scrushy earned the
entire $2,400,000 incentive component of his compensation in 1996, as all such
targets were met. In addition, Mr. Scrushy was awarded $8,000,000 under the
management bonus plan. Such additional bonus was based on the Committee's
assessment of Mr. Scrushy's contribution to the establishment of the Company as
the industry leader in outpatient surgery and rehabilitative healthcare
services, including his role in the negotiation and consummation of the
acquisitions of Surgical Care Affiliates, Advantage Health Corporation,
Professional Sports Care Management, Inc. and ReadiCare, Inc. and the
negotiation of the acquisitions of Health Images, Inc. and Horizon/CMS
Healthcare Corporation, as well as the Company's success in achieving annual
budgeted net income targets and other factors described below. Mr. Scrushy is
also provided with a car allowance in the amount of $500 per month and with
disability insurance. Under the Agreement, Mr. Scrushy's employment may be
terminated for cause or if he should become disabled. Termination of Mr.
Scrushy's employment under the Agreement will result in certain severance pay
arrangements. In the event that the Company were to be acquired, merged or
reorganized in such a manner as to result in a change of control of the Company,
Mr. Scrushy has the right to terminate his employment under the Agreement, in
which case he will receive a lump sum payment equal to three years' annual base
salary (including the gross incentive portion thereof) under the Agreement. Mr.
Scrushy has agreed not to compete with the Company during any period to which
any such severance pay relates. Mr. Scrushy may terminate the Agreement at any
time upon 180 days' notice, in which case he will receive one year's base salary
as severance pay.
The Committee reports to the Board of Directors on compensation arrangements
with Mr. Scrushy, and recommends to the Board of Directors the level of
incentive compensation, both cash and equity-based, which is appropriate for Mr.
Scrushy with respect to each fiscal year of the Company. In making such
recommendation, the Committee takes into account the Company's performance in
the marketplace, its success in meeting strategic goals and its success in
meeting monthly and annual budgets established by the Board of Directors. Again,
ultimate compensation decisions are not made in a formulary manner, but in a
manner which takes into account the Company's competitive position, its position
in the financial markets, and the significant contributions made by Mr. Scrushy
to the success of the Company. In making its decisions with respect to Mr.
Scrushy's compensation, the Committee believes that it is appropriate to
recognize that, as a management founder of the Company, Mr. Scrushy has played
an instrumental role in establishing the Company as the industry leader in
outpatient and rehabilitative healthcare services and that, under his
leadership, the Company has significantly enhanced stockholder value over a
period of years and continues to grow in assets, net revenues, net income and
market value.
Mr. Scrushy's stewardship of the Company has led it to 42 consecutive
profitable quarters since the second quarter of 1986, with steadily increasing
earnings per share. The Company's assets increased by 15.0% from December 31,
1995, to December 31, 1996; its net revenues and income (excluding the effect of
one-time charges in 1996 and 1996) rose 21.6% and 52.9%, respectively, in the
same period; and its stock price increased by 32.6% over the same period.
According to a study by an independent analyst, the Company's market
capitalization grew by 112.8% over that period, placing it in the 97th
percentile among 173 public companies with market capitalizations between
$5,000,000,000 and $10,000,000,000. Further, in the period since December 31,
1993, the Company, under Mr. Scrushy's leadership, has grown from the
fourth-largest provider of rehabilitative healthcare services to the largest
provider, and during 1995 and 1996 established itself as one of the largest
providers of outpatient surgery services through a series of strategic
acquisitions. During that same period, the Company has become the second-largest
publicly-traded healthcare provider (by market capitalization) in the nation,
has expanded its operations to 50 states, has been added to the S&P 500 and,
most recently, was named by Business Week as the best-performing healthcare
provider in the S&P 500. The Committee believes that Mr. Scrushy's leadership
has been essential to the Company's success and growth. In view of these
accomplishments, the Committee believes that it is important to ensure that, if
Mr. Scrushy is successful in leading the Company to achieve the goals set by the
Board of Directors, his compensation will be at a level commensurate with that
of chief executive officers of similarly-situated public companies and that he
will continue to have the opportunity to obtain a significant equity interest in
the Company.
18
<PAGE>
Section 162(m) of the Internal Revenue Code
The Omnibus Budget Reconciliation Act of 1993 contains a provision under
which a publicly-traded corporation is sometimes precluded from taking a federal
income tax deduction for compensation in excess of $1,000,000 that is paid to
the chief executive officer and the four other most highly-compensated
executives of the corporation during a corporation's tax year. Compensation in
excess of $1,000,000 continues to be deductible if that compensation is
"performance based" within the meaning of that term under Section 162(m) of the
Internal Revenue Code. Certain transition rules apply with respect to stock
option plans which were approved prior to December 20, 1993, pursuant to Rule
16b-3(b) under the Exchange Act.
The Company believes that its employee stock option plans meet the
requirements of Section 162(m) as performance-based plans. The Committee and the
Board of Directors have currently made a decision not to amend the Company's
cash compensation programs to meet all requirements of Section 162(m) because
such a decision would not be in the best interests of the Company's
stockholders. The Committee believes that, in establishing bonus and incentive
awards, certain subjective factors must be taken into account in particular
cases, based upon the experienced judgment of the Committee members as well as
on factors which may be objectively quantified. The preservation of tax
deductibility of all compensation is an important consideration. However, the
Committee believes that it is important that the Company retain the flexibility
to reward superior effort and accomplishment even where all cash compensation
may not be fully deductible. The Committee will continue to review the
requirements for deductibility under Section 162(m) and will take such
requirements into account in the future as it deems appropriate and in the best
interests of the Company's stockholders. Approximately $10,410,484 of Mr.
Scrushy's compensation paid with respect to 1996, as well as approximately
$312,404 and $46,994 paid to James P. Bennett, President and Chief Operating
Officer of the Company, and Michael D. Martin, Executive Vice President and
Chief Operating Officer of the Company, respectively, will not be deductible;
however, the Company believes that all other compensation paid to executive
officers will be fully deductible.
Conclusion
The Committee believes that the levels and mix of compensation provided to
the Company's executives during 1996 were appropriate and were instrumental in
the achievement of the Company's goals for 1996. It is the intent of the
Committee to ensure that the Company's compensation programs continue to
motivate its executives and reward them for being responsive to the long-term
interests of the Company and its stockholders.
The foregoing report is submitted by the following Directors of the Company,
constituting all of the members of the Committee of the Board of Directors:
C. Sage Givens
George H. Strong
Phillip C. Watkins, Chairman
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 17, 1997, (a) by each person
who is known by the Company to own beneficially more than 5% of the Company's
Common Stock, (b) by each of the Company's Directors and (c) by the Company's
five most highly compensated executive officers and all executive officers and
Directors as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND BENEFICIALLY PERCENTAGE OF
ADDRESS OF OWNER OWNED(1) COMMON STOCK
- ------------------------------------------------------------ ------------------- ---------------
<S> <C> <C>
Richard M. Scrushy ......................................... 15,076,658 (2) 4.51%
John S. Chamberlin ......................................... 222,000 (3) *
C. Sage Givens ............................................. 392,100 (4) *
Charles W. Newhall III ..................................... 711,920 (5) *
George H. Strong ........................................... 577,882 (6) *
Phillip C. Watkins, M.D. ................................... 797,854 (7) *
Aaron Beam, Jr. ............................................ 323,620( 8) *
James P. Bennett ........................................... 1,250,000 (9) *
Larry R. House ............................................. 459,600(10) *
Anthony J. Tanner .......................................... 1,043,808(11) *
Richard F. Celeste ......................................... 260,000(12) *
P. Daryl Brown ............................................. 1,093,000(13) *
Joel C. Gordon ............................................. 3,660,668(14) 1.14%
Raymond J. Dunn, III ....................................... 3,226,166(15) 1.01%
Michael D. Martin .......................................... 457,008(16) *
FMR Corp. .................................................. 38,509,640(17) 12.03%
82 Devonshire Street
Boston, Massachusetts 02109
Putnam Investments, Inc. ................................... 22,880,090 (18) 7.15%
One Post Office Square
Boston, Massachusetts 02109
All Executive Officers and Directors as a Group (20
persons) .................................................. 32,119,688(19) 9.33%
</TABLE>
(1) The persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
except as otherwise indicated.
(2) Includes 14,472,524 shares subject to currently exercisable stock options.
(3) Includes 150,000 shares subject to currently exercisable stock options.
(4) Includes 2,100 shares owned by Ms. Givens's spouse and 390,000 shares
subject to currently exercisable stock options.
(5) Includes 790 shares owned by members of Mr. Newhall's immediate family and
710,000 shares subject to currently exercisable stock options. Mr. Newhall
disclaims beneficial ownership of the shares owned by his family members
except to the extent of his pecuniary interest therein.
(6) Includes 103,662 shares owned by trusts of which Mr. Strong is a trustee and
claims shared voting and investment power and 300,000 shares subject to
currently exercisable stock options.
(7) Includes 600,000 shares subject to currently exercisable stock options.
20
<PAGE>
(8) Includes 320,000 shares subject to currently exercisable stock options.
(9) Includes 1,160,000 shares subject to currently exercisable stock options.
(10) Includes 457,996 shares subject to currently exercisable stock options.
(11)Includes 72,000 shares held in trust by Mr. Tanner for his children and
910,000 shares subject to currently exercisable stock options.
(12) All of the shares are subject to currently exercisable stock options.
(13) Includes 1,035,000 shares subject to currently exercisable stock options.
(14)Includes 364,340 shares owned by his spouse, 144,988 shares owned by trusts
of which he is a trustee and 384,520 shares subject to currently exercisable
stock options.
(15) Includes 50,000 shares subject to currently exercisable stock options.
(16) Includes 455,000 shares subject to currently exercisable stock options.
(17)Shares held by various investment funds for which affiliates of FMR Corp.
act as investment advisor. FMR Corp. or its affiliates claim sole power to
vote 1,407,440 of the shares and sole power to dispose of all of the shares.
(18)Shares held by various investment funds for which affiliates of Putnam
Investments, Inc. act as investment advisor. Putnam Investments, Inc. or its
affiliates claim sole power to vote 2,070,760 of the shares and sole power
to dispose of all of the shares.
(19)Includes 24,215,544 shares subject to currently exercisable stock options
held by executive officers and Directors.
* Less than 1%
CERTAIN TRANSACTIONS
During 1996, the Company paid $12,906,000 for the purchase of new NCR
computer equipment from GG Enterprises, a value-added reseller of computer
equipment which is owned by Grace Scrushy, the mother of Richard M. Scrushy,
Chairman of the Board and Chief Executive Officer of the Company, and Gerald P.
Scrushy, Senior Vice President -- Physical Resources of the Company. Such
purchases were made in the ordinary course of the Company's business. The price
paid for this equipment was more favorable to the Company than that which could
have been obtained from an independent third party seller.
During 1996, the Company paid $429,247 to MedPartners, Inc., a
publicly-traded physician practice management company, for management services
rendered to certain physician practices owned by the Company. Richard M.
Scrushy, Chairman of the Board and Chief Executive Officer of the Company, and
Larry R. House, a Director of the Company, are directors of MedPartners, Inc.
Mr. House also serves as Chairman of the Board, President and Chief Executive
Officer of MedPartners, Inc., a position which has been his principal occupation
since August 1993. At March 1, 1997, Mr. Scrushy beneficially owns approximately
0.48%, Mr. House beneficially owns approximately 0.71%, and the Company owns
approximately 0.67% of the issued and outstanding Common Stock of MedPartners,
Inc. The Company believes that the price paid for such services was no less
favorable to the Company than that which could have been obtained from an
independent third-party provider.
In June 1994, the Company sold selected properties, including six ancillary
hospital facilities, three outpatient rehabilitation facilities, two outpatient
surgery centers, one uncompleted medical office building and one research
facility to Capstone Capital Corporation ("Capstone"), a publicly-traded real
estate investment trust. The net proceeds of the Company as a result of the
transaction were approximately $58,425,000. The net book value of the properties
was approximately $50,735,000. The Company leases back substantially all these
properties from Capstone and guarantees the associated operating leases,
payments under which aggregate approximately $6,900,000 annually. In addition,
in 1995 Capstone acquired ownership of the Company's Erie, Pennsylvania
inpatient rehabilitation facility, which had been leased by the Company from an
unrelated lessor. The Company's annual lease payment under that lease is
$1,700,000. In 1996 Capstone also acquired ownership of the Company's Altoona
and Mechanicsburg, Pennsylvania inpatient rehabilitation facilities, which had
been leased by the Company from unrelated lessors. The Company's annual lease
payments under such leases aggregate $2,818,000.
21
<PAGE>
Richard M. Scrushy, Chairman of the Board and Chief Executive Officer of the
Company, and Michael D. Martin, Executive Vice President and Treasurer of the
Company, were among the founders of Capstone and serve on its Board of
Directors. At March 1, 1997, Mr. Scrushy owned approximately 2.9% of the issued
and outstanding capital stock of Capstone, and Mr. Martin owned approximately
0.8% of the issued and outstanding capital stock of Capstone. In addition, the
Company owned approximately 0.8% of the issued and outstanding capital stock of
Capstone at March 1, 1997. The Company believes that all transactions involving
Capstone were effected on terms no less favorable than those which could have
been obtained in transactions with independent third parties.
In order to enhance equity ownership by senior management, the Company has
adopted a program of making loans to officers holding the position of Group Vice
President and above to facilitate the exercise of stock options held by such
persons. See "Executive Compensation -- Executive Loans".
At various times, the Company has made loans to executive officers to assist
them in meeting financial obligations at certain times when they were requested
by the Company to refrain from selling Common Stock in the open market. At
January 1, 1996, loans in the following original principal amounts were
outstanding: $460,000 to Larry R. House, a Director and a former executive
officer, and $140,000 to William T. Owens, Senior Vice President and Controller.
Outstanding principal balances at December 31, 1996 were $414,000 for Mr. House
and $126,000 for Mr. Owens. In addition, during 1995, the Company made an
additional loan of $350,000 to Mr. Owens and $500,000 to Aaron Beam, Jr.,
Executive Vice President and Chief Financial Officer of the Company, which loans
were outstanding in full at December 31, 1996. Such loans bear interest at the
rate of 1-1/4% per annum below the prime rate of AmSouth Bank of Alabama,
Birmingham, Alabama, and are payable on demand.
RELATIONSHIP WITH
INDEPENDENT PUBLIC ACCOUNTANTS
Ernst & Young LLP, Birmingham, Alabama, has been engaged by the Board of
Directors of the Company as independent public accountants for the Company and
its subsidiaries for the fiscal year 1996 and it is expected that such firm will
serve in that capacity for the 1997 fiscal year. Management expects that a
representative of Ernst & Young LLP will be present at the Annual Meeting to
make a statement if he or she desires to do so and to be available to answer
appropriate questions posed by stockholders.
FINANCIAL STATEMENTS
The Company's audited financial statements for the fiscal year ended
December 31, 1996, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and other selected information are included in
Appendix B to this Proxy Statement.
22
<PAGE>
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors of the Company
does not know of any business which will be presented for consideration at the
Annual Meeting other than that specified herein and in the Notice of Annual
Meeting of Stockholders, but if other matters are presented, it is the intention
of the persons designated as proxies to vote in accordance with their judgment
on such matters.
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1996, INCLUDING THE FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES THERETO, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, WILL BE
FURNISHED WITHOUT CHARGE TO ANY STOCKHOLDER OF THE COMPANY WHOSE PROXY IS
SOLICITED BY THE FOREGOING PROXY STATEMENT, UPON THE WRITTEN REQUEST OF ANY SUCH
PERSON ADDRESSED TO ANTHONY J. TANNER, SECRETARY, HEALTHSOUTH Corporation, ONE
HEALTHSOUTH PARKWAY, BIRMINGHAM, ALABAMA 35243. SUCH A REQUEST FROM A BENEFICIAL
OWNER OF THE COMPANY'S COMMON STOCK MUST CONTAIN A GOOD-FAITH REPRESENTATION BY
SUCH PERSON THAT, AS OF MARCH 27, 1997, HE WAS A BENEFICIAL OWNER OF THE
COMPANY'S COMMON STOCK.
Please SIGN and RETURN the enclosed Proxy promptly.
By Order of the Board of Directors:
ANTHONY J. TANNER
Secretary
April 9, 1997
23
<PAGE>
APPENDIX A
HEALTHSOUTH CORPORATION
1997 STOCK OPTION PLAN
1. PURPOSE OF THE PLAN. The purpose of the 1997 Stock Option Plan
(hereinafter called the "Plan") of HEALTHSOUTH Corporation, a Delaware
corporation (hereinafter called the "Corporation"), is to provide incentive for
future endeavor and to advance the interests of the Corporation and its
stockholders by encouraging ownership of the Common Stock, par value $.01 per
share (hereinafter called the "Common Stock"), of the Corporation by its
Directors, executives and other key employees, upon whose judgment, interest and
continuing special efforts the Corporation is largely dependent for the
successful conduct of its operations, and to enable the Corporation to compete
effectively with other enterprises for the services of such new Directors,
executives and employees as may be needed for the continued improvement of the
Corporation's business, through the grant of options to purchase shares of the
Common Stock. It is intended that certain Options issued under the Plan and so
designated pursuant to Section 6(c) hereof by the Committee (as defined in
Section 5 hereof) shall qualify as "incentive stock options" (hereinafter called
"ISOs") under Section 422(b) of the Internal Revenue Code of 1986, as amended
from time to time (hereinafter called the "Code"), and, where applicable, the
terms of the Plan shall be interpreted in accordance with such intention. Other
Options may be issued under the Plan and designated by the Committee as
non-qualified stock options (hereinafter called "NQSOs"). Any Option issued
under the Plan and not expressly designated as an ISO shall be conclusively
deemed to be an NQSO.
2. PARTICIPANTS. Options may be granted under the Plan to Directors of the
Corporation and to such executives and key employees of the Corporation and its
subsidiaries as shall be determined by the Committee appointed by the Board of
Directors as set forth in Section 5 of the Plan; provided, however, that no
Option may be granted to any person if such grant would cause the Plan to cease
to be an "employee benefit plan" as defined in Rule 405 of Regulation C
promulgated under the Securities Act of 1933; and provided further that no ISO
may be granted to any person ineligible to be granted ISOs under Section 422(b)
of the Code.
3. TERM OF THE PLAN. The Plan shall become effective as of May 1, 1997,
subject to the approval by the holders of a majority of the shares of issued and
outstanding Common Stock of the Corporation at the 1997 Annual Meeting of
Stockholders of the Corporation. The Plan shall terminate on the earliest of (a)
April 30, 2007, (b) such time as all shares of Common Stock reserved for
issuance under the Plan have been acquired through the exercise of Options
granted under the Plan, or (c) such earlier time as the Board of Directors of
the Corporation may determine. Any Option outstanding under the Plan at the time
of its termination shall remain in effect in accordance with its terms and
conditions and those of the Plan. No Option shall be granted under the Plan
after April 30, 2007.
4. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 13, the
aggregate number of shares of Common Stock for which Options may be granted
under the Plan shall not exceed 5,000,000 shares, and the maximum number of
shares of Common Stock for which any individual may be granted Options under the
Plan during any calendar year is 1,000,000. If, on or prior to the termination
of the Plan as provided in Section 3, an Option granted under the Plan shall
have expired or terminated for any reason without having been exercised in full,
the unpurchased shares covered thereby shall again become available for the
grant of Options under the Plan. Shares covered by Options surrendered in
connection with the exercise of other Options pursuant to Section 9(e) shall be
deemed, for purposes of this Section 4, to have been exercised, and such shares
shall not again become available for the grant of Options under the Plan.
The shares to be delivered upon exercise of Options under the Plan shall be
made available, at the discretion of the Board of Directors, either from
authorized but previously unissued shares as permitted by the Certificate of
Incorporation of the Corporation or from shares re-acquired by the Corporation,
including shares of Common Stock purchased in the open market, and shares held
in the treasury of the Corporation.
A-1
<PAGE>
5. ADMINISTRATION OF THE PLAN. With respect to the participation of
executives and key employees of the Corporation and its subsidiaries who are not
also Directors of the Corporation, the Plan shall be administered by the Audit
and Compensation Committee of the Board of Directors of the Corporation
(hereinafter called the "Committee"). The acts of a majority of the Committee,
at any meeting thereof at which a quorum is present, or acts reduced to or
approved in writing by a majority of the members of the Committee, shall be the
valid acts of the Committee. The Committee shall determine the executives and
key employees of the Corporation and its subsidiaries who shall be granted
Options and the number of shares of Common Stock to be subject to each Option.
With respect to the participation of non-employee Directors of the
Corporation, each non-employee Director shall receive, as an annual grant, an
NQSO to purchase 25,000 shares of Common Stock on the date of approval of the
Plan by the stockholders of the Corporation and in each year thereafter, such
Option to be granted as of the first business day in January of each calendar
year, commencing with January 1998. The purchase price of the shares of Common
Stock covered by each such NQSO granted to a non-employee Director shall be 100%
of the fair market value (but in no event less than the par value) of such
shares at the time the Option is granted, determined in accordance with Section
7(c) hereof. Grants to any non-employee Director shall be in lieu of any grants
under other stock option plans of the Corporation.
The interpretation and construction of any provision of the Plan or of any
Option granted under it by the Committee shall be final, conclusive and binding
upon all parties, including the Corporation, its stockholders and Directors, and
the executives and employees of the Corporation and its subsidiaries. No member
of the Board of Directors or the Committee shall be liable to the Corporation,
any stockholder, any optionholder or any employee of the Corporation or its
subsidiaries for any action or determination made in good faith with respect to
the Plan or any Option granted under it. No member of the Board of Directors may
vote on any Option to be granted to him.
The expenses of administering the Plan shall be borne by the Corporation.
6. GRANT OF OPTIONS. (a) Options may be granted under the Plan by the
Committee in accordance with the provisions of Section 5 at any time prior to
the termination of the Plan. In making any determination as to Directors,
executives and key employees to whom Options shall be granted and as to the
number of shares to be covered by such Options, the Committee shall take into
account the duties of the respective Directors, executives and key employees,
their present and potential contribution to the success of the Corporation, and
such other factors as the Committee shall deem relevant in connection with the
accomplishment of the purposes of the Plan.
(b) Each Option granted under the Plan shall be granted pursuant to and
subject to the terms and conditions of a stock option agreement to be entered
into between the Corporation and the optionholder at the time of such grant.
Each such stock option agreement shall be in a form from time-to-time adopted
for use under the Plan by the Committee (such form being hereinafter called a
"Stock Option Agreement"). Any such Stock Option Agreement shall incorporate by
reference all of the terms and provisions of the Plan as in effect at the time
of grant and may contain such other terms and provisions as shall be approved
and adopted by the Committee.
(c) At the time of the grant of each Option under this Plan, the Committee
shall determine whether such Option is to be designated as an ISO. If an Option
is to be designated as an ISO, then the provisions of Sections 6(d), 7(b) and
8(b) shall apply to such Options. The Stock Option Agreement relating to the
grant of any option designated as an ISO shall reflect such designation.
(d) Notwithstanding any contrary provision contained in this Agreement, the
aggregate fair market value (determined as of the time each ISO is granted) of
the shares of Common Stock with respect to which ISOs issued to any one person
hereunder are exercisable for the first time during any calendar year shall not
exceed $100,000.
7. OPTION PRICE. (a) The purchase price of the shares of Common Stock covered
by each Option granted under the Plan shall be at least 100% of the fair market
value (but in no event less than the par value) of such shares at the time the
Option is granted, or such higher purchase price as shall be determined by the
Committee.
A-2
<PAGE>
(b) Notwithstanding any contrary provision contained in Section 7(a) hereof,
no Option granted to any person who, at the time of such grant, owns, taking
into account the attribution rules of Section 424(d) of the Code, stock
possessing more than 10% of the total combined voting power of all classes of
the Corporation's stock or of the stock of any of its corporate subsidiaries,
may be designated as an ISO unless at the time of such grant the purchase price
of the shares of Common Stock covered by such Option is at least 110% of the
fair market value (but in no event less than the par value) of such shares.
(c) If the Common Stock is not listed upon a national securities exchange or
exchanges, such fair market value shall be as determined by the Board of
Directors of the Corporation (which determination shall be conclusive and
binding for all purposes) or, if applicable, shall be deemed to be the last
reported sale price for the Common Stock as quoted by brokers and dealers
trading in the Common Stock in the over-the-counter market (or if the Common
Stock shall be quoted by the National Association of Securities Dealers
Automated Quotation system, then such NASDAQ quote) immediately prior to the
commencement of the meeting of the Committee at which the Option is granted. If
the Common Stock is listed upon a national securities exchange or exchanges,
such fair market value shall be deemed to be the last reported sale price at
which the shares of Common Stock were traded on such securities exchange or
exchanges immediately prior to the commencement of the meeting of the Committee
at which the Option is granted, or if no sale of the Common Stock was made on
any national securities exchange on such date, then the closing price per share
of the Common Stock on such securities exchange or exchanges on the next
preceding day on which there was a sale of the Common Stock.
(d) The exercise price of any outstanding Options shall not be reduced during
the term of such Options except by reason of an adjustment pursuant to Section
13 hereof, nor shall the Committee or the Board of Directors cancel outstanding
Options and reissue new Options at a lower exercise price in substitution for
the canceled Options.
8. TERM OF OPTIONS. (a) The expiration date of an Option granted under the
Plan shall be as determined by the Committee at the time of grant, provided that
each such Option shall expire not more than ten years after the date such Option
was granted.
(b) Notwithstanding any contrary provision contained in Section 8(a) hereof,
no Option granted to any person who, at the time of such grant, owns, taking
into account the attribution rules of Section 424(d) of the Code, stock
possessing more than 10% of the total combined voting power of all classes of
the Corporation's stock or of the stock of any of its corporate subsidiaries,
may be designated as an ISO unless by its terms each such Option shall expire
not more than five years after the date such Option was granted.
9. EXERCISE OF OPTIONS. (a) Each Option shall become exercisable in whole or
in part or in installments at such time or times as the Committee may prescribe
at the time the Option is granted and specify in the Stock Option Agreement. No
Option shall be exercisable after the expiration of ten years from the date on
which it was granted.
(b) Notwithstanding any contrary provision contained herein, unless otherwise
expressly provided in the Stock Option Agreement, any Option granted hereunder
which is, by its terms, exercisable in installments shall become immediately
exercisable in full upon the occurrence of a Change in Control of the
Corporation. For purposes of this Section 9(b), "Change in Control" shall mean
(i) the acquisition (other than from the Company) by any person, entity
or "group" (within the meaning of Sections 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, but excluding, for this purpose, the
Corporation or its subsidiaries, or any employee benefit plan of the Company
or its subsidiaries which acquires beneficial ownership of voting securities
of the Company) of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Securities Exchange Act of 1934) of 25% or more of
either the then-outstanding shares of Common Stock or the combined voting
power of the Company's then-outstanding voting securities entitled to vote
generally in the election of Directors; or
(ii) individuals who, as of May 1, 1997, constitute the Board of
Directors of the Corporation (as of such date, the "Incumbent Board") cease
for any reason to constitute at least a majority of the Board of Directors;
provided, however, that any person becoming a Director subsequent to such
A-3
<PAGE>
date whose election, or nomination for election, was approved by a vote of
at least a majority of the Directors then constituting the Incumbent Board
(other than an election or nomination of an individual whose initial
assumption of office is in connection with an actual or threatened election
contest relating to the election of Directors of the Company) shall be, for
purposes of this Section 9(b)(ii), considered as though such person were a
member of the Incumbent Board; or
(iii) approval by the stockholders of the Company of a reorganization,
merger, consolidation or share exchange, in each case with respect to which
persons who were the stockholders of the Company immediately prior to such
reorganization, merger, consolidation or share exchange do not, immediately
thereafter, own more than 75% of the combined voting power entitled to vote
generally in the election of directors of the reorganized, merged,
consolidated or other surviving entity's then-outstanding voting securities,
or a liquidation or dissolution of the Corporation or the sale of all or
substantially all of the assets of the Corporation.
(c) Options may be exercised by giving written notice to the Corporation of
intention to exercise, specifying the number of shares to be purchased pursuant
to such exercise in accordance with the procedures set forth in the Stock Option
Agreement. All shares purchased upon exercise of any Option shall be paid for in
full at the time of purchase in accordance with the procedures set forth in the
Stock Option Agreement. Except as provided in Sections 9(d) and 9(e) hereof,
such payment shall be made in cash or through delivery of shares of Common Stock
or a combination of cash and Common Stock as provided in the Stock Option
Agreement. Any shares so delivered shall be valued at their fair market value
determined as of the date of exercise of the Option under the method set forth
in Section 7(c) hereof.
(d) Payment for shares purchased upon exercise of any such Option may be made
by delivery to the Corporation of a properly executed exercise notice together
with irrevocable instructions to a broker to promptly deliver to the Corporation
an amount of sale or loan proceeds sufficient to pay the exercise price.
Additionally, the Corporation will accept, in payment for shares purchased upon
exercise of any such Option, proceeds of a margin loan obtained by the
exercising optionholder from a broker, provided that the exercising optionholder
has, at the same time as delivery to the Corporation of a properly executed
exercise notice, delivered to the Corporation irrevocable instructions to the
Corporation to deliver share certificates directly to such broker upon payment
for such shares.
(e) With respect to Directors and officers of the Corporation who are subject
to reporting requirements under Section 16(a) of the Securities Exchange Act of
1934, payment for shares purchased upon exercise of any Option granted hereunder
may be made by surrender of outstanding Options issued under this Plan or any
other stock option plan of the Corporation having a Spread (as defined below)
equal to the exercise price of the Options sought to be exercised. For purposes
of this Section 9(e), the "Spread" with respect to any unexercised Option shall
be equal to (i) the average price per share of Common Stock on the date of
exercise, as determined by the Corporation from any commercially available
reporting service reflecting trading of the Common Stock on a national
securities exchange, on the National Association of Securities Dealers Automated
Quotation System, or in the over the counter market, as applicable, less (ii)
the exercise price of the surrender of the Option. All Options so surrendered
will be deemed to have been exercised by the optionholder. Such surrender shall
be evidenced in a form satisfactory to the Secretary of the Corporation.
10. NONTRANSFERABILITY OF OPTIONS. (a) Options granted under the Plan shall
be assignable or transferable only by will or pursuant to the laws of descent
and distribution and shall be exercisable during the optionholder's lifetime
only by him, except to the extent set forth in the following paragraphs.
(b) Upon written notice to the Secretary of the Corporation, an optionholder
may, except as otherwise prohibited by applicable law, transfer options granted
under the Plan to one or more members of such optionholder's immediate family,
to a partnership consisting only of members of such optionholder's immediate
family, or to a trust all of whose beneficiaries are members of the
optionholder's immediate family. For purposes of this section, an optionholder's
"immediate family" shall be deemed to include such optionholder's spouse,
children and grandchildren only.
A-4
<PAGE>
(c) Upon written notice to the Secretary of the Corporation, an optionholder
may transfer options to a charitable, educational or religious entity which has
been determined by the United States Internal Revenue Service to be exempt from
federal income taxation under the provisions of Section 501(c) of the Internal
Revenue Code of 1986, as amended, or any successor statutory provision.
11. STOCKHOLDER RIGHTS OF OPTIONHOLDER. No holder of any Option shall have
any rights to dividends or other rights of a stockholder with respect to shares
subject to an Option prior to the purchase of such shares upon exercise of the
Option.
12. TERMINATION OF OPTION. With respect to any Option which, by its terms, is
not exercisable for one year from the date on which it is granted, if an
optionholder's employment by, or other relationship with, the Corporation or any
of its subsidiaries terminates within one year after the date an unexercised
Option containing such terms is granted under the Plan for any reason other than
death, the Option shall terminate on the date of termination of such employment
or other relationship. With respect to all Options granted under the Plan, if an
optionholder's employment by, or other relationship with, the Corporation is
terminated by reason of his death, the Option shall terminate one year after the
date of death, unless the Option otherwise expires. If an optionholder's
employment by, or other relationship with, the Corporation terminates for any
reason other than as set forth above in this Section 12, the Option shall
terminate three months after the date of termination of such employment or other
relationship unless the Option earlier expires, provided that (a) if the
optionholder dies within such three-month period, the Option shall terminate one
year after the date of his death unless the Option earlier expires; (b) the
Board of Directors may, at any time prior to any termination of such employment
or other relationship under the circumstances covered by this Section 12,
determine in its discretion that the Option shall terminate on the date of
termination of such employment or other relationship with the Corporation; and
(c) the exercise of any Option after termination of such employment or other
relationship with the Corporation shall be subject to satisfaction of the
conditions precedent that the optionholder refrain from engaging, directly or
indirectly, in any activity which is competitive with any activity of the
Corporation or any subsidiary thereof and from otherwise acting, either prior to
or after termination of such employment or other relationship, in any manner
inimical or in any way contrary to the best interests of the Corporation and
that the optionholder furnish to the Corporation such information with respect
to the satisfaction of the foregoing condition precedent as the Board of
Directors shall reasonably request. For purposes of this Section 12, a
"relationship with the Corporation" shall be limited to any relationship that
does not cause the Plan to cease to be an "employee benefit plan" as defined in
Rule 405 of Regulation C under the Securities Act of 1933. The mere ownership of
stock in the Corporation shall not be deemed to be a "relationship with the
Corporation".
Nothing in the Plan or in the Stock Option Agreement shall confer upon any
optionholder the right to continue in the employ of the Corporation or any of
its subsidiaries or in any other relationship thereto or interfere in any way
with the right of the Corporation to terminate such employment or other
relationship at any time.
A holder of an Option under the Plan may make written designation of a
beneficiary on forms prescribed by and filed with the Secretary of the
Corporation. Such beneficiary, or if no such designation of any beneficiary has
been made, the legal representative of such optionholder or such other person
entitled thereto as determined by a court of competent jurisdiction, may
exercise, in accordance with and subject to the provisions of this Section 12,
any unterminated and unexpired Option granted to such optionholder to the same
extent that the optionholder himself could have exercised such Option were he
alive or able; provided, however, that no Option granted under the Plan shall be
exercisable for more shares than the optionholder could have purchased
thereunder on the date his employment by, or other relationship with, the
Corporation and its subsidiaries was terminated.
13. ADJUSTMENT OF AND CHANGES IN CAPITALIZATION. In the event that the
outstanding shares of Common Stock shall be changed in number or class by reason
of split-ups, combinations, mergers, consolidations or recapitalizations, or by
reason of stock dividends, the number or class of shares which thereafter may be
purchased through exercise of Options granted under the Plan, both in the
aggregate and as to any individual, and the number and class of shares then
subject to Options theretofore granted
A-5
<PAGE>
and the price per share payable upon exercise of such Option shall be adjusted
so as to reflect such change, all as determined by the Board of Directors of the
Corporation. In the event there shall be any other change in the number or kind
of the outstanding shares of Common Stock, or of any stock or other securities
into which such Common Stock shall have been changed, or for which it shall have
been exchanged, then if the Board of Directors shall, in its sole discretion,
determine that such change equitably requires an adjustment in any Option
theretofore granted or which may be granted under the Plan, such adjustment
shall be made in accordance with such determination.
Notice of any adjustment shall be given by the Corporation to each holder of
an Option which shall have been so adjusted and such adjustment (whether or not
such notice is given) shall be effective and binding for all purposes of the
Plan.
Fractional shares resulting from any adjustment in Options pursuant to this
Section 13 may be settled in cash or otherwise as the Board of Directors may
determine.
14. SECURITIES ACTS REQUIREMENTS. No Option granted pursuant to the Plan
shall be exercisable in whole or in part, and the Corporation shall not be
obligated to sell any shares of Common Stock subject to any such Option, if such
exercise and sale would, in the opinion of counsel for the Corporation, violate
the Securities Act of 1933 or other Federal or state statutes having similar
requirements, as they may be in effect at that time. Each Option shall be
subject to the further requirement that, at any time that the Board of Directors
or the Committee, as the case may be, shall determine, in their respective
discretion, that the listing, registration or qualification of the shares of
Common Stock subject to such Option under any securities exchange requirements
or under any applicable law, or the consent or approval of any governmental
regulatory body, is necessary or desirable as a condition of, or in connection
with, the granting of such Option or the issuance of shares thereunder, such
Option may not be exercised in whole or in part unless such listing,
registration, qualification, consent or approval shall have been effected or
obtained free of any conditions not acceptable to the Board of Directors or the
Committee, as the case may be.
As a condition to the issuance of any shares upon exercise of an Option under
the Plan, the Board of Directors or the Committee, as the case may be, may
require the optionholder to furnish a written representation that he is
acquiring the shares for investment and not with a view to distribution of the
shares to the public and a written agreement restricting the transferability of
the shares solely to the Corporation, and may affix a restrictive legend or
legends on the face of the certificate representing such shares. Such
representation, agreement and/or legend shall be required only in cases where in
the opinion of the Board of Directors or the Committee, as the case may be, and
counsel for the Corporation, it is necessary to enable the Corporation to comply
with the provisions of the Securities Act of 1933 or other Federal or state
statutes having similar requirements, and any stockholder who gives such
representation and agreement shall be released from it and the legend removed at
such time as the shares to which they applied are registered or qualified
pursuant to the Securities Act of 1933 or other Federal or state statutes having
similar requirements, or at such other time as, in the opinion of the Board of
Directors or the Committee, as the case may be, and counsel for the Corporation,
the representation and agreement and legend cease to be necessary to enable the
Corporation to comply with the provisions of the Securities Act of 1933 or other
Federal or state statutes having similar requirements.
15. AMENDMENT OF THE PLAN. The Plan may, at any time or from time to time, be
terminated, modified or amended by the stockholders of the Corporation by the
affirmative vote of the holders of a majority of the outstanding shares of the
Corporation's Common Stock entitled to vote. The Board of Directors of the
Corporation may, insofar as permitted by law, from time to time with respect to
any shares of Common Stock at the time not subject to Options, suspend or
discontinue the Plan or revise or amend it in any respect whatsoever; provided,
however, that, without approval of the stockholders of the Corporation, no such
revision or amendment shall increase the number of shares subject to the Plan,
decrease the price at which the Options may be granted, permit exercise of
Options unless full payment is made at the time of exercise (except as so
provided in Section 9 hereof), extend the period during which Options may be
exercised, or change the provisions relating to adjustment to be made upon
changes in capitalization.
A-6
<PAGE>
16. CHANGES IN LAW. Subject to the provisions of Section 15, the Board of
Directors shall have the power to amend the Plan and any outstanding Options
granted thereunder in such respects as the Board of Directors shall, in its sole
discretion, deem advisable in order to incorporate in the Plan or any such
Option any new provision or change designed to comply with or take advantage of
requirements or provisions of the Code or any other statute, or Rules or
Regulations of the Internal Revenue Service or any other Federal or state
governmental agency enacted or promulgated after the adoption of the Plan.
17. LEGAL MATTERS. Every right of action by or on behalf of the Corporation
or by any stockholder against any past, present or future member of the Board of
Directors, officer or employee of the Corporation arising out of or in
connection with this Plan shall, irrespective of the place where such action may
be brought and irrespective of the place of residence of any such Director,
officer or employee, cease and be barred by the expiration of three years from
whichever is the later of (a) the date of the act or omission in respect of
which such right of action arises, or (b) the first date upon which there has
been made generally available to stockholders an annual report of the
Corporation and a proxy statement for the Annual Meeting of Stockholders
following the issuance of such annual report, which annual report and proxy
statement alone or together set forth, for the related period, the aggregate
number of shares for which Options were granted; and any and all right of action
by any employee or executive of the Corporation (past, present or future)
against the Corporation arising out of or in connection with this Plan shall,
irrespective of the place where such action may be brought, cease and be barred
by the expiration of three years from the date of the act or omission in respect
of which such right of action arises.
This Plan and all determinations made and actions taken pursuant hereto shall
be governed by the law of Delaware, applied without giving effect to any
conflicts-of-law principles, and construed accordingly.
A-7
<PAGE>
APPENDIX B
NOTE: This Appendix A, together with the foregoing Proxy Statement, contains
the information required to be provided in the Company's annual report to
security holders pursuant to the Rules and Regulations of the Securities and
Exchange Commission. The Company's 1996 Annual Report to Stockholders, which
provides additional information concerning the Company and its performance in
1995, is also included in this mailing.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
-----------
<S> <C>
Business.......................................................................... B-2
Selected Financial Data .......................................................... B-2
Quarterly Results................................................................. B-3
Directors and Executive Officers.................................................. B-4
Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................ B-7
Audited Consolidated Financial Statements of HEALTHSOUTH Corporation and
Subsidiaries
Report of Independent Auditors .................................................. B-13
Consolidated Balance Sheets...................................................... B-14
Consolidated Statements of Income................................................ B-15
Consolidated Statements of Stockholders' Equity.................................. B-16
Consolidated Statements of Cash Flows............................................ B-17
Notes to Consolidated Financial Statements....................................... B-19
Market for the Company's Common Equity and Related Stockholder
Matters.......................................................................... B-38
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure....................................................................... B-38
</TABLE>
B-1
<PAGE>
BUSINESS
HEALTHSOUTH Corporation ("HEALTHSOUTH" or the "Company) is the nation's
largest provider of outpatient and rehabilitative healthcare services. The
Company provides these services through its national network of outpatient and
inpatient rehabilitation facilities, outpatient surgery centers, diagnostic
centers, occupational medicine centers, medical centers and other healthcare
facilities. The Company believes that it provides patients, physicians and
payors with high-quality healthcare services at significantly lower costs than
traditional inpatient hospitals. Additionally, the Company's national network,
reputation for quality and focus on outcomes has enabled it to secure contracts
with national and regional managed care payors. At March 15, 1997, the Company
had over 1,100 patient care locations in 50 states and the United Kingdom.
SELECTED FINANCIAL DATA
Set forth below is a summary of selected consolidated financial data for
the Company for the years indicated. All amounts have been restated to reflect
the effects of the 1994 acquisition of ReLife, Inc. ("ReLife"), the 1995
Surgical Health Corporation ("SHC") and Sutter Surgery Centers, Inc. ("SSCI")
acquisitions and the 1996 Surgical Care Affiliates, Inc. ("SCA") and Advantage
Health Corporation ("Advantage Health") acquisitions, each of which was
accounted for as a pooling of interests.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ------------- ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues ........................................... $750,134 $979,206 $1,649,199 $2,003,146 $2,436,537
Operating expenses
Operating units ................................... 521,619 668,201 1,161,758 1,371,740 1,586,003
Corporate general and administrative .............. 25,667 37,043 61,640 56,920 66,807
Provision for doubtful accounts .................... 16,553 20,026 32,904 37,659 54,112
Depreciation and amortization ...................... 42,107 63,572 113,977 143,322 188,966
Interest expense ................................... 18,237 24,200 73,644 101,790 94,553
Interest income .................................... (8,595) (5,903) (6,387) (7,882) (5,912)
Merger and acquisition related expenses(1) ........ -- 333 6,520 34,159 41,515
Gain on sale of equity securities(2) ............... -- -- (7,727) -- --
Loss on impairment of assets(2) .................... -- -- 10,500 53,549 --
Loss on abandonment of computer project(2) ........ -- -- 4,500 -- --
Loss on disposal of surgery centers(2) ............. -- -- 13,197 -- --
NME Selected Hospitals Acquisition related
expense(2) ........................................ -- 49,742 -- -- --
Terminated merger expense .......................... 3,665 -- -- -- --
Loss on extinguishment of debt ..................... 883 -- -- -- --
Gain on sale of partnership interest ............... -- (1,400) -- -- --
----------- ----------- ------------- ------------ -------------
620,136 855,814 1,464,526 1,791,257 2,026,044
----------- ----------- ------------- ------------ -------------
Income before income taxes and minority interests . 129,998 123,392 184,673 211,889 410,493
Provision for income taxes ......................... 38,550 37,993 65,121 76,221 140,238
----------- ----------- ------------- ------------ -------------
91,448 85,399 119,552 135,668 270,255
Minority interests ................................. 25,943 29,377 31,469 43,147 49,437
----------- ----------- ------------- ------------ -------------
Income from continuing operations .................. 65,505 56,022 88,083 92,521 220,818
Income from discontinued operations ................ 3,283 4,452 -- -- --
----------- ----------- ------------- ------------ -------------
Net income ........................................ $ 68,788 $ 60,474 $ 88,083 $ 92,521 $ 220,818
----------- ----------- ------------- ------------ -------------
Weighted average common and common equivalent
shares outstanding(3) ............................. 254,296 264,958 280,854 297,460 326,290
=========== =========== ============= ============ =============
Net income per common and common equivalent
share(3)
Continuing operations ............................ $ 0.26 $ 0.21 $ 0.31 $ 0.31 $ 0.68
Discontinued operations .......................... 0.01 0.02 -- -- --
----------- ----------- ------------- ------------ -------------
<PAGE>
<CAPTION>
(CONTINUED)
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ------------- ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
$0.27 $0.23 $0.31 $0.31 $0.68
=========== =========== ============= ============ =============
Net income per common share -- assuming full
dilution(3)(4) ................................... N/A N/A $0.31 $0.31 $0.66
=========== =========== ============= ============ =============
</TABLE>
B-2
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1992 1993 1994 1995 1996
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and marketable
securities ................... $ 179,725 $ 148,308 $ 129,971 $ 156,321 $ 151,788
Working capital .............. 269,120 284,691 282,667 406,125 543,975
Total assets ................. 1,143,235 1,881,211 2,230,093 2,931,495 3,371,952
Long-term debt(5) ............ 413,656 1,008,429 1,139,087 1,391,664 1,486,029
Stockholders' equity ......... 581,954 646,397 757,583 1,185,898 1,515,924
</TABLE>
- ----------
(1) Expenses related to SHC's Ballas Merger in 1993, the ReLife and Heritage
Acquisitions in 1994, the SHC, SSCI and NovaCare Rehabilitation Hospitals
Acquisitions in 1995 and the SCA, Advantage Health, PSCM and ReadiCare
mergers in 1996.
(2) See "Notes to Consolidated Financial Statements".
(3) Adjusted to reflect a two-for-one stock split effected in the form of a 100%
stock dividend paid on April 17, 1995 and a two-for-one stock split effected
in the form of a 100% stock dividend paid on March 17, 1997.
(4) Fully-diluted earnings per share in 1994, 1995 and 1996 reflect shares
reserved for issuance upon conversion of HEALTHSOUTH's 5% Convertible
Subordinated Debentures due 2001.
(5) Includes current portion of long-term debt.
QUARTERLY RESULTS (UNAUDITED)
Set forth below is certain summary information with respect to the Company's
operations for the last eight fiscal quarters. All amounts have been restated to
reflect the effects of the 1995 acquisitions of SHC and SSCI and the 1996
acquisitions of SCA and Advantage Health, all of which were accounted for as
poolings of interests. All per share amounts have been adjusted to reflect a
two-for-one stock split effected in the form of a 100% stock dividend paid on
April 17, 1995 and a two-for-one stock split effected in the form of a 100%
stock dividend paid on March 17, 1997.
<TABLE>
<CAPTION>
1995
-----------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues ............................................ $451,844 $499,668 $518,537 $533,097
Net income .......................................... 32,922 11,926 41,647 6,026
Net income per common and common equivalent share .. 0.12 0.04 0.14 0.02
Net income per common share -- assuming full
dilution ........................................... 0.11 0.04 0.14 0.02
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues ............................................ $581,234 $595,589 $616,943 $642,771
Net income .......................................... 37,851 59,555 61,044 62,368
Net income per common and common equivalent share .. 0.12 0.18 0.18 0.19
Net income per common share -- assuming full
dilution ........................................... 0.11 0.18 0.18 0.18
</TABLE>
B-3
<PAGE>
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
Company's executive officers:
<TABLE>
<CAPTION>
ALL POSITIONS AN OFFICER
NAME AGE WITH THE COMPANY SINCE
- ------------------- ----- ------------------------------------------------ ------------
<S> <C> <C> <C>
Richard M. Scrushy.. 44 Chairman 0f the Board and Chief Executive 1984
Officer and Director
James P. Bennett.... 39 President and Chief Operating Officer and 1991
Director
Aaron Beam, Jr..... 51 Executive Vice President and Chief Financial 1984
Officer and Director
Anthony J. Tanner.. 38 Executive Vice President -- Administration and 1984
Secretary and Director
Michael D. Martin.. 36 Executive Vice President -- Finance and 1989
Treasurer
Thomas W. Carman .. 45 Executive Vice President -- Corporate 1985
Development
P. Daryl Brown..... 42 President -- HEALTHSOUTH Outpatient Centers and 1986
Director
Robert E. Thomson.. 49 President -- HEALTHSOUTH Inpatient Operations 1987
Russell H. Maddox.. 56 President -- HEALTHSOUTH Imaging Centers 1995
William T. Owens... 38 Senior Vice President -- Finance and Controller 1986
William W. Horton.. 37 Senior Vice President and Corporate Counsel and 1994
Assistant Secretary
</TABLE>
Richard M. Scrushy, one of the Company's management founders, has served as
Chairman of the Board and Chief Executive Officer of the Company since 1984, and
also served as President of the Company from 1984 until March 1995. From 1979 to
1984, Mr. Scrushy was with Lifemark Corporation, a publicly-owned healthcare
corporation, serving in various operational and management positions. Mr.
Scrushy is also a Director of MedPartners, Inc., a publicly-traded physician
practice management company, and Chairman of the Board of Capstone Capital,
Inc., a publicly-traded real estate investment trust. He also serves on the
Boards of Directors of several privately-held healthcare corporations.
James P. Bennett joined the Company in May 1991 as Director of Inpatient
Operations, was promoted to Group Vice President -- Inpatient Rehabilitation
Operations in September 1991, again to President and Chief Operating Officer --
HEALTHSOUTH Rehabilitation Hospitals in June 1992, to President -- HEALTHSOUTH
Inpatient Operations in February 1993, and to President and Chief Operating
Officer of the Company in March 1995. Mr. Bennett was elected a Director in
February 1993. From August 1987 to May 1991, Mr. Bennett was employed by Russ
Pharmaceuticals, Inc., Birmingham, Alabama, as Vice President -- Operations,
Chief Financial Officer, Secretary and Director. Mr. Bennett served as a
Certified Public Accountant on the audit staff of the Birmingham, Alabama office
of Ernst & Whinney (now Ernst & Young LLP) from October 1980 to August 1987.
Aaron Beam, Jr., C.P.A., a management founder, serves as Executive Vice
President and Chief Financial Officer of the Company and was elected a Director
in February 1993. From 1980 to 1984, Mr. Beam was employed by Lifemark
Corporation in several financial and operational management positions for the
Shared Services Division, including Division Controller. Mr. Beam is a Director
of Ramsey Healthcare, Inc., a publicly-traded healthcare corporation.
Anthony J. Tanner, Sc.D., a management founder, serves as Executive Vice
President -- Administration and Secretary of the Company and was elected a
Director in February 1993. From 1980 to 1984,
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Mr. Tanner was with Lifemark Corporation in the Shared Services Division as
Director, Clinical and Professional Programs (1982-1984) and Director, Quality
Assurance and Education (1980-1982), where he was responsible for the
development of clinical programs and marketing programs.
Michael D. Martin joined the Company in October 1989 as Vice President and
Treasurer, and was named Senior Vice President -- Finance and Treasurer in
February 1994 and Executive Vice President -- Finance and Treasurer in May 1996.
From 1983 through September 1989, Mr. Martin specialized in healthcare lending
with AmSouth Bank N.A., Birmingham, Alabama, where he was a Vice President
immediately prior to joining the Company. Mr. Martin serves as a Director of
Capstone Capital, Inc.
Thomas W. Carman joined the Company in 1985 as Regional Director -- Corporate
Development, and now serves as Executive Vice President -- Corporate
Development. From 1983 to 1985, Mr. Carman was Director of development for
Medical Care International. From 1981 to 1983, Mr. Carman was Assistant
Administrator at the Children's Hospital of Birmingham, Alabama.
P. Daryl Brown joined the Company in April 1986 and served until June 1992 as
Group Vice President -- Outpatient Operations. He became President --
HEALTHSOUTH Outpatient Centers in June 1992, and was elected as a Director in
March 1995. From 1977 to 1986, Mr. Brown served with the American Red Cross,
Alabama Region, in several positions, including Chief Operating Officer,
Administrative Director for Financing and Administration and Controller.
Robert E. Thomson joined the Company in August 1985 as Administrator of its
Florence, South Carolina inpatient rehabilitation facility, and subsequently
served as Regional Vice President -- Inpatient Operations, Vice President --
Inpatient Operations, Group Vice President -- Inpatient Operations, and Senior
Vice President -- Inpatient Operations. Mr. Thomson was named President --
HEALTHSOUTH Inpatient Operations in February 1996.
Russell H. Maddox became President -- HEALTHSOUTH Imaging Centers in January
1996. He served as President -- HEALTHSOUTH Surgery & Imaging Centers from June
1995 through January 1996. From January 1992 until May 1995, Mr. Maddox served
as Chairman of the Board, President and Chief Executive Officer of Diagnostic
Health Corporation, an outpatient diagnostic imaging company which became a
wholly-owned subsidiary of the Company in 1996. Mr. Maddox was founder and
President of Russ Pharmaceuticals, Inc., located in Birmingham, Alabama. In
March 1989 Russ Pharmaceuticals was acquired by Ethyl Corporation of Richmond,
Virginia.
William T. Owens, C.P.A., joined the Company in March 1986 as Controller and
was appointed Vice President and Controller in December 1986. He was appointed
Group Vice President -- Finance and Controller in June 1992 and became Senior
Vice President -- Finance and Controller in February 1994. Prior to joining the
Company, Mr. Owens served as a Certified Public Accountant on the audit staff of
the Birmingham, Alabama office of Ernst & Whinney (now Ernst & Young LLP) from
1981 to 1986.
William W. Horton joined the Company in July 1994 as Group Vice President --
Legal Services and was named Senior Vice President and Corporate Counsel in May
1996. From August 1986 through June 1994, Mr. Horton practiced corporate,
securities and healthcare law with the Birmingham, Alabama-based firm of Haskell
Slaughter Young & Johnson, Professional Association, where he served as Chairman
of the Healthcare Practice Group.
See "Election of Directors" in the Proxy Statement to which this Appendix A
is attached for identification of the Directors of the Company.
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MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The following discussion is intended to facilitate the understanding and
assessment of significant changes and trends related to the results of
operations and financial condition of the Company, including certain factors
related to recent acquisitions by the Company, the timing and nature of which
have significantly affected the Company's results of operations. This discussion
and analysis should be read in conjunction with the Company's consolidated
financial statements and notes thereto included elsewhere in this Annual Report
on Form 10-K.
The Company completed the following acquisitions over the last three years
(common share amounts have been adjusted to reflect a two-for-one stock split
effected in the form of a 100% stock dividend paid on March 17, 1997):
o On December 29, 1994, the Company acquired ReLife, Inc. (the "ReLife
Acquisition"). A total of 22,050,580 shares of the Company's Common Stock
were issued in the transaction, representing a value of $180,000,000 at the
time of the acquisition. At that time, ReLife operated 31 inpatient
facilities with an aggregate of 1,102 licensed beds, including nine
free-standing rehabilitation hospitals, nine acute rehabilitation units,
five sub-acute rehabilitation units, seven transitional living units and
one residential facility, and also provided outpatient rehabilitation
services at 12 centers.
o On April 1, 1995, the Company purchased the operations of the
rehabilitation hospital division of NovaCare, Inc. (the "NovaCare
Rehabilitation Hospitals Acquisition"). The purchase price was
approximately $235,000,000. The NovaCare Rehabilitation Hospitals consisted
of 11 rehabilitation hospitals in seven states, 12 other facilities and two
Certificates of Need.
o On June 13, 1995, the Company acquired Surgical Health Corporation (the
"SHC Acquisition"). A total of 17,062,960 shares of the Company's Common
Stock were issued in the transaction, representing a value of $155,000,000
at the time of the acquisition. The Company also purchased SHC's
$75,000,000 aggregate principal amount of 11.5% Senior Subordinated Notes
due 2004 for an aggregate consideration of approximately $86,000,000. At
that time, SHC operated a network of 36 free-standing surgery centers in 11
states, and five mobile lithotripsy units.
o On October 26, 1995, the Company acquired Sutter Surgery Centers, Inc. (the
"SSCI Acquisition"). A total of 3,552,002 shares of the Company's Common
Stock were issued in the transaction, representing a value of $44,444,000
at the time of the acquisition. At that time, SSCI operated a network of 12
freestanding surgery centers in three states.
o On December 1, 1995, the Company acquired Caremark Orthopedic Services Inc.
(the "Caremark Acquisition"). The purchase price was approximately
$127,500,000. At that time Caremark owned and operated approximately 120
outpatient rehabilitation centers in 13 states.
o On January 17, 1996, the Company acquired Surgical Care Affiliates, Inc.
(the "SCA Acquisition"). A total of 91,856,678 shares of the Company's
Common Stock were issued in the transaction, representing a value of
approximately $1,400,000,000 at the time of the acquisition. At that time,
SCA operated a network of 67 freestanding surgery centers in 24 states.
o On March 14, 1996, the Company acquired Advantage Health Corporation (the
"Advantage Health Acquisition"). A total of 18,203,978 shares of the
Company's Common Stock were issued in the transaction, representing a value
of approximately $315,000,000 at the time of the acquisition. At that time,
Advantage Health operated a network of 136 sites of service, including four
freestanding rehabilitation hospitals, one freestanding multi-use hospital,
one nursing home, 68 outpatient rehabilitation facilities, 14 inpatient
managed rehabilitation units, 24 rehabilitation services management
contracts and six managed sub-acute rehabilitation units, primarily located
in the northeastern United States.
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o On August 20, 1996, the Company acquired Professional Sports Care
Management, Inc. (the "PSCM Acquisition"). A total of 3,622,888 shares of
the Company's Common Stock were issued in the transaction, representing a
value of approximately $59,000,000 at the time of the acquisition. At that
time, PSCM operated a network of 36 outpatient rehabilitation centers in
three states.
o On December 2, 1996, the Company acquired ReadiCare, Inc. (the "ReadiCare
Acquisition"). A total of 4,007,954 shares of the Company's Common Stock
were issued in the transaction, representing a value of approximately
$76,000,000 at the time of the acquisition. At that time, ReadiCare
operated a network of 37 outpatient medical and rehabilitation centers in
two states.
The NovaCare Rehabilitation Hospitals Acquisition and the Caremark
Acquisition each were accounted for under the purchase method of accounting and,
accordingly, the acquired operations are included in the Company's consolidated
financial information from their respective dates of acquisition. Each of the
ReLife Acquisition, the SHC Acquisition, the SSCI Acquisition, the SCA
Acquisition and the Advantage Health Acquisition was accounted for as a pooling
of interests and, with the exception of data set forth relating to revenues
derived from Medicare and Medicaid, all amounts shown in the following
discussion have been restated to reflect such acquisitions. ReLife, SHC, SSCI,
SCA and Advantage Health did not separately track such revenues. The PSCM
Acquisition and the ReadiCare Acquisition were also accounted for as poolings of
interests. However, due to the immateriality of PSCM and ReadiCare, the
Company's historical financial statements for all periods prior to the quarters
in which the respective mergers took place have not been restated. Instead,
stockholders' equity has been increased during 1996 to reflect the effects of
the PSCM Acquisition and the ReadiCare Acquisition. The results of operations of
PSCM and ReadiCare are included in the accompanying financial statements and the
following discussion from the date of acquisition forward (see Note 2 of "Notes
to Consolidated Financial Statements" for further discussion).
The Company determines the amortization period of the cost in excess of net
asset value of purchased facilities based on an evaluation of the facts and
circumstances of each individual purchase transaction. The evaluation includes
an analysis of historic and projected financial performance, an evaluation of
the estimated useful life of the buildings and fixed assets acquired, the
indefinite useful life of certificates of need and licenses acquired, the
competition within local markets, lease terms where applicable, and the legal
terms of partnerships where applicable. The Company utilizes independent
appraisers and relies on its own management expertise in evaluating each of the
factors noted above. With respect to the carrying value of the excess of cost
over net asset value of purchased facilities and other intangible assets, the
Company determines on a quarterly basis whether an impairment event has occurred
by considering factors such as the market value of the asset, a significant
adverse change in legal factors or in the business climate, adverse action by
regulators, history of operating losses or cash flow losses, or a projection of
continuing losses associated with an operating entity. The carrying value of
excess cost over net asset value of purchased facilities and other intangible
assets will be evaluated if the facts and circumstances suggest that it has been
impaired. If this evaluation indicates that the value of the asset will not be
recoverable, as determined based on the undiscounted cash flows of the entity
acquired over the remaining amortization period, the Company's carrying value of
the asset will be reduced by the estimated shortfall of cash flows.
Governmental, commercial and private payors have increasingly recognized the
need to contain their costs for healthcare services. These payors, accordingly,
are turning to closer monitoring of services, prior authorization requirements,
utilization review and increased utilization of outpatient services. During the
periods discussed below, the Company has experienced an increased effort by
these payors to contain costs through negotiated discount pricing. The Company
views these efforts as an opportunity to demonstrate the effectiveness of its
clinical programs and its ability to provide its rehabilitative healthcare
services efficiently. The Company has entered into a number of contracts with
payors to provide services and has realized an increased volume of patients as a
result.
The Company's revenues include net patient service revenues and other
operating revenues. Net patient service revenues are reported at estimated net
realizable amounts from patients, insurance companies, third-party payors
(primarily Medicare and Medicaid) and others for services rendered. Reve
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nues from third-party payors also include estimated retroactive adjustments
under reimbursement agreements which are subject to final review and settlement
by appropriate authorities. Management determines allowances for doubtful
accounts and contractual adjustments based on historical experience and the
terms of payor contracts. Net accounts receivable include only those amounts
estimated by management to be collectible.
The Company, in many cases, operates more than one site within a market. In
such markets, there is customarily an outpatient center or inpatient facility
with associated satellite outpatient locations. For purposes of the following
discussion and analysis, same store operations are measured on locations within
markets in which similar operations existed at the end of the period and include
the operations of additional locations opened within the same market. New store
operations are measured on locations within new markets.
RESULTS OF OPERATIONS OF THE COMPANY
Twelve-Month Periods Ended December 31, 1994 and 1995
The company operated 537 outpatient rehabilitation locations at December 31,
1995, compared to 283 outpatient rehabilitation locations at December 31, 1994.
In addition, the Company operated 95 inpatient rehabilitation facilities, 122
surgery centers and five medical centers at December 31, 1995, compared to 82
inpatient rehabilitation facilities, 112 surgery centers and five medical
centers at December 31, 1994.
The Company's operations generated revenues of $2,003,146,000 in 1995, an
increase of $353,947,000, or 21.5%, as compared to 1994 revenues. Same store
revenues for the twelve months ended December 31, 1995 were $1,817,359,000, an
increase of $168,160,000, or 10.2%, as compared to the same period in 1994. New
store revenues for 1995 were $185,787,000. New store revenues reflect (1) the 11
rehabilitation hospitals and 12 other facilities associated with the NovaCare
Rehabilitation Hospitals Acquisition, (2) the 120 outpatient rehabilitation
centers associated with the Caremark Acquisition, (3) the acquisition of five
surgery centers and one outpatient diagnostic imaging operation, and (4) the
acquisition of outpatient rehabilitation operations in 34 new markets. See Note
9 of "Notes to Consolidated Financial Statements". The increase in revenues is
primarily attributable to the addition of these operations and increases in
patient volume. Revenues generated from patients under the Medicare and Medicaid
programs respectively accounted for 40.0% and 2.5% of total revenues for 1995,
compared to 41.0% and 3.2% of total revenues for 1994. Revenues from any other
single third-party payor were not significant in relation to the Company's total
revenues. During 1995, same store outpatient visits, inpatient days and surgery
center cases increased 21.7%, 10.8% and 4.8%, respectively. Revenue per
outpatient visit, inpatient day and surgery case for same store operations
increased (decreased) by 0.8%, 2.5% and (0.9%), respectively.
Operating expenses, at the operating unit level, were $1,371,740,000, or
68.5% of revenues, for 1995, compared to 70.4% of revenues for 1994. Same store
operating expenses for 1995 were $1,243,508,000, or 68.4% of related revenues.
New store operating expenses were $128,232,000, or 69.0% of related revenues.
Corporate general and administrative expenses decreased from $61,640,000 in 1994
to $56,920,000 in 1995. As a percentage of revenues, corporate general and
administrative expenses decreased from 3.7% in 1994 to 2.8% in 1995. Total
operating expenses were $1,428,660,000, or 71.3% of revenues, for 1995, compared
to $1,223,398,000, or 74.2% of revenues, for 1994. The provision for doubtful
accounts was $37,659,000, or 1.9% of revenues, for 1995, compared to
$32,904,000, or 2.0% of revenues, for 1994.
Depreciation and amortization expense was $143,322,000 for 1995, compared to
$113,977,000 for 1994. The increase represents the investment in additional
assets by the Company. Interest expense increased to $101,790,000 in 1995,
compared to $73,644,000 for 1994, primarily because of the increased average
borrowings during 1995 under the Company's revolving line of credit. For 1995,
interest income was $7,882,000, compared to $6,387,000 for 1994.
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Merger expenses in 1994 of $6,520,000 represent costs incurred or accrued in
connection with completing the ReLife Acquisition ($2,949,000) and SHC's
acquisition of Heritage Surgical Corporation ($3,571,000). For further
discussion, see Note 2 of "Notes to Consolidated Financial Statements".
During 1994, the Company recognized a $10,500,000 loss on impairment of
assets. This amount relates to the termination of a ReLife management contract
and a permanently damaged ReLife facility. The Company determined not to attempt
to reopen such damaged facility because, under its existing licensure, the
facility was not consistent with the Company's plans. Also during 1994, the
Company recognized a $4,500,000 loss on abandonment of a ReLife computer
project. For further discussion, see Note 14 of "Notes to Consolidated Financial
Statements".
During the fourth quarter of 1994, the Company adopted a formal plan to
dispose of three surgery centers and certain other properties during fiscal
1995. Accordingly, a charge of $13,197,000 was made to reflect the expected
losses resulting from the disposal of these centers. The closings of the three
surgery centers were completed by December 31, 1995. For further discussion, see
Note 13 of "Notes to Consolidated Financial Statements".
As a result of the NovaCare and SHC acquisitions, the Company recognized
$29,194,000 in merger and acquisition related expenses during the second quarter
of 1995. Fees related to legal, accounting and financial advisory services
accounted for $3,400,000 of the expense. Costs and expenses related to the
purchase of the SHC Notes (see "Liquidity and Capital Resources" and Note 7 of
"Notes to Consolidated Financial Statements") totaled $14,606,000. Accruals for
employee separations were approximately $1,188,000. In addition, the Company
provided approximately $10,000,000 for the write-down of certain assets to net
realizable value as the result of a facility consolidation in a market where the
Company's existing services overlapped with those of an acquired facility. The
employee separations and facility consolidation were completed by the end of
1995.
In the fourth quarter of 1995, the Company incurred direct costs and expenses
of $4,965,000 in connection with the SSCI Acquisition. These expenses consist
primarily of fees related to legal, accounting and financial advisory services
and are included in merger and acquisition related acquisition expenses for the
year ended December 31, 1995.
Also during 1995, the Company recognized a $53,549,000 loss on impairment of
assets. The impaired assets relate to six SHC facilities and eight SCA
facilities in which the projected undiscounted cash flows did not support the
book value of the long-lived assets of such facilities. See Note 14 of "Notes to
Consolidated Financial Statements".
Income before minority interests and income taxes for 1995 was $211,889,000,
compared to $184,673,000 for 1994. Minority interests reduced income before
income taxes by $43,147,000, compared to $31,469,000 for 1994. The provision for
income taxes for 1995 was $76,221,000, compared to $65,121,000 for 1994,
resulting in effective tax rates of 45.2% for 1995 and 42.5% for 1994. Net
income for 1995 was $92,521,000.
Twelve-Month Periods Ended December 31, 1995 and 1996
The Company operated 739 outpatient rehabilitation locations at December 31,
1996, compared to 537 outpatient rehabilitation locations at December 31, 1995.
In addition, the Company operated 96 inpatient rehabilitation facilities, 135
surgery centers and five medical centers at December 31, 1996, compared to 95
inpatient rehabilitation facilities, 122 surgery centers and five medical
centers at December 31, 1995.
The Company's operations generated revenues of $2,436,537,000 in 1996, an
increase of $433,391,000, or 21.6%, as compared to 1995 revenues. Same store
revenues for the twelve months ended December 31, 1996 were $2,276,676,000, an
increase of $273,530,000, or 13.7%, as compared to the same period in 1995. New
store revenues for 1996 were $159,861,000. New store revenues reflect the
acquisition of one inpatient rehabilitation hospital, the addition of eight new
outpatient surgery centers, and the acquisition of outpatient rehabilitation
operations in 57 new markets. See Note 9 of "Notes to Consolidated Financial
Statements". The increase in revenues is primarily attributable to the addition
of these operations
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and increases in patient volume. Revenues generated from patients under the
Medicare and Medicaid programs respectively accounted for 37.8% and 2.9% of
total revenues for 1996, compared to 40.0% and 2.5% of total revenues for 1995.
Revenues from any other single third-party payor were not significant in
relation to the Company's total revenues. During 1996, same store outpatient
visits, inpatient days and surgery center cases increased 19.9%, 10.8% and 7.3%,
respectively. Revenue per outpatient visit, inpatient day and surgery case for
same store operations increased (decreased) by (0.8)%, 3.8% and 1.1%,
respectively.
Operating expenses, at the operating unit level, were $1,586,003,000, or
65.1% of revenues, for 1996, compared to 68.5% of revenues for 1995. Same store
operating expenses for 1996 were $1,486,575,000, or 65.3% of related revenues.
New store operating expenses were $99,428,000, or 62.2% of related revenues.
Corporate general and administrative expenses increased from $56,920,000 in 1995
to $66,807,000 in 1996. As a percentage of revenues, corporate general and
administrative expenses decreased from 2.8% in 1995 to 2.7% in 1996. Total
operating expenses were $1,652,810,000, or 67.8% of revenues, for 1996, compared
to $1,428,660,000, or 71.3% of revenues, for 1995. The provision for doubtful
accounts was $54,112,000, or 2.2% of revenues, for 1996, compared to
$37,659,000, or 1.9% of revenues, for 1995.
Depreciation and amortization expense was $188,966,000 for 1996, compared to
$143,322,000 for 1995. The increase resulted from the investment in additional
assets by the Company. Interest expense decreased to $94,553,000 in 1996,
compared to $101,790,000 for 1995, primarily because of the favorable interest
rates on the Company's revolving credit facility (see "Liquidity and Capital
Resources"). For 1996, interest income was $5,912,000 compared to $7,882,000 for
1995. The decrease in interest income resulted primarily from a decrease in the
average amount outstanding in interest-bearing investments.
Merger expenses in 1996 of $41,515,000 represent costs incurred or accrued in
connection with completing the SCA Acquisition ($19,727,000), the Advantage
Health Acquisition ($9,212,000), the PSCM Acquisition ($5,513,000) and the
ReadiCare Acquisition ($7,063,000). For further discussion, see Note 2 of "Notes
to Consolidated Financial Statements".
Income before minority interests and income taxes for 1996 was $410,493,000,
compared to $211,889,000 for 1995. Minority interests reduced income before
income taxes by $49,437,000, compared to $43,147,000 for 1995. The provision for
income taxes for 1996 was $140,238,000, compared to $76,221,000 for 1995,
resulting in effective tax rates of 38.8% for 1996 and 45.2% for 1995. Net
income for 1996 was $220,818,000.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had working capital of $543,975,000,
including cash and marketable securities of $151,788,000. Working capital at
December 31, 1995 was $406,125,000, including cash and marketable securities of
$156,321,000. For 1996, cash provided by operations was $367,656,000, compared
to $306,157,000 for 1995. The Company used $451,343,000 for investing activities
during 1996, compared to $764,825,000 for 1995. Additions to property, plant and
equipment and acquisitions accounted for $172,962,000 and $91,391,000,
respectively, during 1996. Those same investing activities accounted for
$172,172,000 and $493,914,000, respectively, in 1995. Financing activities
provided $83,108,000 and $494,100,000 during 1996 and 1995, respectively. Net
borrowing proceeds (borrowings less principal reductions) for 1996 and 1995 were
$88,851,000 and $213,155,000, respectively.
Net accounts receivable were $510,567,000 at December 31, 1996, compared to
$409,150,000 at December 31, 1995. The number of days of average revenues in
average receivables was 66.7 at December 31, 1996, compared to 63.2 at December
31, 1995. The concentration of net accounts receivable from patients,
third-party payors, insurance companies and others at December 31, 1996 was
consistent with the related concentration of revenues for the period then ended.
The Company has a $1,250,000,000 revolving credit facility with NationsBank,
N.A. ("NationsBank") and other participating banks (the "1996 Credit
Agreement"). The 1996 Credit Agreement replaced a previous $1,000,000,000
revolving credit agreement, also with NationsBank. Interest is paid based on
LIBOR plus a predetermined margin, a base rate or competitively bid rates from
the participating
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banks. This credit facility has a maturity date of March 31, 2001. The Company
provided a negative pledge on all assets for the 1996 Credit Agreement. The
effective interest rate on the average outstanding balance under the revolving
credit facility was 5.98% for the twelve months ended December 31, 1996,
compared to the average prime rate of 8.29% during the same period. At December
31, 1996, the Company had drawn $995,000,000 under the 1996 Credit Agreement.
For further discussion, see Note 7 of "Notes to Consolidated Financial
Statements".
In 1994, the Company issued $115,000,000 principal amount of 5% Convertible
Subordinated Debentures due 2001 (the "Debentures"). The Company has called the
Debentures for redemption on April 1, 1997. Because the recent market price of
the Company's Common Stock substantially exceeds the conversion price of the
Debentures, the Company expects that substantially all of the Debentures will be
converted into Common Stock.
On February 17, 1997, the Company entered into a definitive agreement to
acquire Horizon/CMS Healthcare Corporation ("Horizon/CMS") in a stock-for-stock
merger in which the stockholders of Horizon/CMS will receive 0.84338 of a share
of the Company's common stock per share of Horizon/CMS common stock. The
transaction is valued at approximately $1,600,000,000, including the assumption
by the Company of approximately $700,000,000 in Horizon/CMS debt. It is expected
that the transaction will be accounted for as a purchase. Horizon/CMS operates
33 inpatient rehabilitation hospitals, 58 specialty hospitals and subacute units
and 282 outpatient rehabilitation centers. Horizon/CMS also owns, leases or
manages 267 long-term care facilities, a contract therapy business, an
institutional pharmacy business and other healthcare services. Consummation of
the transaction is subject to various regulatory approvals, including clearance
under the Hart-Scott-Rodino Antitrust Improvements Act, and to the satisfaction
of certain other conditions. The Company currently anticipates that the
transaction will be consummated in mid-1997.
On March 3, 1997, the Company consummated the acquisition of Health Images,
Inc. ("Health Images") in a transaction accounted for as a pooling of interests.
In the transaction, Health Images stockholders received approximately 10,400,000
shares of the Company's common stock. Health Images operates 49 freestanding
diagnostic imaging centers in 13 states and six in England. The effects of
conforming the accounting policies of the Company and Health Images are not
expected to be material. For further discussion, see Note 2 of "Notes to
Consolidated Financial Statements".
The Company intends to pursue the acquisition or development of additional
healthcare operations, including comprehensive outpatient rehabilitation
facilities, inpatient rehabilitation facilities, ambulatory surgery centers,
outpatient diagnostic centers and companies engaged in the provision of
rehabilitation-related services, and to expand certain of its existing
facilities. While it is not possible to estimate precisely the amounts which
will actually be expended in the foregoing areas, the Company anticipates that
over the next twelve months, it will spend approximately $50,000,000 on
maintenance and expansion of its existing facilities and approximately
$300,000,000 on development of the Integrated Service Model. See "Business --
Company Strategy".
Although the Company is continually considering and evaluating acquisitions
and opportunities for future growth, the Company has not entered into any
agreements with respect to material future acquisitions other than the
transactions with Horizon/CMS and Health Images. In connection with the pending
acquisition of Horizon/CMS, the Company has obtained a fully-underwritten
commitment from NationsBank, N.A. for a $1,000,000,000 Senior Bridge Loan
Facility on substantially the same terms as the 1996 Credit Agreement. The
Company believes that existing cash, cash flow from operations, and borrowings
under the revolving line of credit and the bridge loan facility will be
sufficient to satisfy the Company's estimated cash requirements for the next
twelve months, and for the reasonably foreseeable future.
Inflation in recent years has not had a significant effect on the Company's
business, and is not expected to adversely affect the Company in the future
unless it increases significantly.
Statements contained in this Annual Report on Form 10-K which are not
historical facts are forward-looking statements. In addition, the Company,
through its senior management, from time to time makes forward-looking public
statements concerning its expected future operations and perfor-
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mance and other developments. Such forward- looking statements are necessarily
estimates reflecting the Company's best judgment based upon current information
and involve a number of risks and uncertainties, and there can be no assurance
that other factors will not affect the accuracy of such forward-looking
statements. While is impossible to identify all such factors, factors which
could cause actual results to differ materially from those estimated by the
Company include, but are not limited to, changes in the regulation of the
healthcare industry at either or both of the federal and state levels, changes
in reimbursement for the Company's services by governmental or private payors,
competitive pressures in the healthcare industry and the Company's response
thereto, the Company's ability to obtain and retain favorable arrangements with
third-party payors, unanticipated delays in the Company's implementation of its
Integrated Service Model, general conditions in the economy and capital markets,
and other factors which may be identified from time to time in the Company's
Securities and Exchange Commission filings and other public announcements.
B-12
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
HEALTHSOUTH Corporation
We have audited the accompanying consolidated balance sheets of HEALTHSOUTH
Corporation and Subsidiaries as of December 31, 1995 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
HEALTHSOUTH Corporation and Subsidiaries at December 31, 1995 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Birmingham, Alabama
February 24, 1997
Except for the first paragraph of Note 15, as to
which the date is March 12, 1997
B-13
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1996
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 3) ............................................... $ 152,244 $ 148,028
Other marketable securities (Note 3) ............................................. 4,077 3,760
Accounts receivable, net of allowances for doubtful accounts and contractual
adjustments of $235,175,000 in 1995 and $307,781,000 in 1996 .................... 409,150 510,567
Inventories ...................................................................... 39,239 47,107
Prepaid expenses and other current assets ........................................ 76,844 126,197
Deferred income taxes (Note 10) .................................................. 21,977 11,852
------------- -------------
Total current assets .............................................................. 703,531 847,511
Other assets:
Loans to officers ................................................................ 1,625 1,396
Other (Note 4) ................................................................... 68,868 82,514
------------- -------------
70,493 83,910
Property, plant and equipment, net (Note 5) ....................................... 1,283,560 1,390,873
Intangible assets, net (Note 6) ................................................... 873,911 1,049,658
------------- -------------
Total assets ...................................................................... $2,931,495 $3,371,952
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................. $ 107,018 $ 110,265
Salaries and wages payable ....................................................... 67,905 66,455
Accrued interest payable and other liabilities ................................... 87,308 91,407
Current portion of long-term debt (Note 7) ....................................... 35,175 35,409
------------- -------------
Total current liabilities ......................................................... 297,406 303,536
Long-term debt (Note 7) ........................................................... 1,356,489 1,450,620
Deferred income taxes (Note 10) ................................................... 23,733 28,797
Other long-term liabilities (Note 14) ............................................. 8,459 3,558
Deferred revenue .................................................................. 1,525 255
Minority interests - limited partnerships (Note 1) ................................ 57,985 69,262
Commitments and contingencies (Note 11)
Stockholders' equity (Notes 8, 12 and 15):
Preferred stock, $.10 par value-1,500,000 shares authorized; issued and
outstanding-none ................................................................ -- --
Common stock, $.01 par value-500,000,000 shares authorized; issued-152,193,000 in
1995 and 319,020,000 in 1996 .................................................... 1,522 3,190
Additional paid-in capital ....................................................... 888,216 996,205
Retained earnings ................................................................ 334,582 536,423
Treasury stock, at cost (1,324,000 shares in 1995 and 182,000 shares in 1996) .... (16,065) (323)
Receivable from Employee Stock Ownership Plan .................................... (15,886) (14,148)
Notes receivable from stockholders ............................................... (6,471) (5,423)
------------- -------------
Total stockholders' equity ........................................................ 1,185,898 1,515,924
------------- -------------
Total liabilities and stockholders' equity ........................................ $2,931,495 $3,371,952
============= =============
</TABLE>
See accompanying notes.
B-14
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1994 1995 1996
------------- ------------- -------------
(IN THOUSANDS, EXCEPT FOR PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Revenues .............................................. $1,649,199 $2,003,146 $2,436,537
Operating expenses:
Operating units ...................................... 1,161,758 1,371,740 1,586,003
Corporate general and administrative ................. 61,640 56,920 66,807
Provision for doubtful accounts ....................... 32,904 37,659 54,112
Depreciation and amortization ......................... 113,977 143,322 188,966
Interest expense ...................................... 73,644 101,790 94,553
Interest income ....................................... (6,387) (7,882) (5,912)
Merger and acquisition related expenses (Notes 2 and
9) ................................................... 6,520 34,159 41,515
Loss on impairment of assets (Note 14) ................ 10,500 53,549 --
Loss on abandonment of computer project (Note 14) .... 4,500 -- --
Loss on disposal of surgery centers (Note 13) ........ 13,197 -- --
Gain on sale of equity securities (Note 1) ............ (7,727) -- --
------------- ------------- -------------
1,464,526 1,791,257 2,026,044
------------- ------------- -------------
Income before income taxes and minority interests .... 184,673 211,889 410,493
Provision for income taxes (Note 10) .................. 65,121 76,221 140,238
------------- ------------- -------------
119,552 135,668 270,255
Minority interests .................................... 31,469 43,147 49,437
------------- ------------- -------------
Net income ............................................ $ 88,083 $ 92,521 $ 220,818
============= ============= =============
Weighted average common and common equivalent shares
outstanding .......................................... 280,854 297,460 326,290
============= ============= =============
Net income per common and common equivalent share .... $ 0.31 $ 0.31 $ 0.68
============= ============= =============
Net income per common share-assuming full dilution ... $ 0.31 $ 0.31 $ 0.66
============= ============= =============
</TABLE>
See accompanying notes.
B-15
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
PAID-IN RETAINED RECEIVABLES
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT FROM ESOP
------ ------ ------- -------- ------ ------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 .................. 129,946 $1,300 $493,663 $177,979 318 $ (2,123) $(18,932)
Proceeds from exercise of options (Note 8) ... 2,296 23 16,341 -- -- -- --
Common shares exchanged in the exercise of
options ...................................... (22) -- (321) -- -- -- --
Proceeds from issuance of common shares ...... 908 9 13,543 -- -- -- --
Income tax benefits related to incentive stock
options (Note 8) .............................. -- -- 6,470 -- -- -- --
Reduction in receivable from ESOP ............. -- -- -- -- -- -- 1,455
Payments received on stockholders' notes
receivable.................................... -- -- -- -- -- -- --
Purchase of limited partnership units ........ -- -- -- (1,838) -- -- --
Purchase of treasury stock .................... -- -- -- -- 601 (6,592) --
Net income .................................... -- -- -- 88,083 -- -- --
Dividends paid ................................ -- -- -- (6,237) -- -- --
-------- ------- ---------- --------- -------- --------- -----------
Balance at December 31, 1994 .................. 133,128 1,332 529,696 257,987 919 (8,715) (17,477)
Adjustment for ReLife Merger (Note 2) ........ 2,732 27 7,114 (3,734) -- -- --
Proceeds from exercise of options (Note 8) ... 1,101 11 9,857 -- -- -- --
Proceeds from issuance of common shares ...... 15,232 152 334,896 -- -- -- --
Income tax benefits related to incentive stock
options (Note 8) ............................. -- -- 6,653 -- -- -- --
Reduction in receivable from ESOP ............. -- -- -- -- -- -- 1,591
Loans made to stockholders .................... -- -- -- -- -- -- --
Purchase of limited partnership units ........ -- -- -- (4,767) -- -- --
Purchases of treasury stock ................... -- -- -- -- 405 (7,350) --
Net income .................................... -- -- -- 92,521 -- -- --
Dividends paid ................................ -- -- -- (7,425) -- -- --
-------- ------- ---------- --------- -------- --------- -----------
Balance at December 31, 1995 .................. 152,193 1,522 888,216 334,582 1,324 (16,065) (15,886)
Adjustment for Advantage Merger ............... -- -- -- (17,638) -- -- --
Adjustment for 1997 mergers (Note 2) ......... 4,047 40 68,785 (1,256) -- -- --
Proceeds from exercise of options (Note 8) ... 3,270 33 32,774 -- -- -- --
Income tax benefits related to incentive stock
options (Note 8) .............................. -- -- 23,767 -- -- -- --
Reduction in receivable from ESOP ............. -- -- -- -- -- -- 1,738
Loans made to stockholders .................... -- -- -- -- -- -- --
Purchase of limited partnership units ........ -- -- -- (83) -- -- --
Retirement of treasury stock .................. -- -- (15,742) -- (1,233) 15,742 --
Net income .................................... -- -- -- 220,818 -- -- --
Stock split (Note 15) ......................... 159,510 1,595 (1,595) -- 91 -- --
-------- ------- ---------- --------- -------- --------- -----------
Balance at December 31, 1996 .................. 319,020 $3,190 $996,205 $536,423 182 $ (323) $(14,148)
======== ======= ========== ========= ======== ========= ===========
</TABLE>
NOTES
RECEIVABLE TOTAL
FROM STOCKHOLDERS'
STOCKHOLDERS EQUITY
------------ -------
Balance at December 31, 1993 .................. $(5,490) $ 646,397
Proceeds from exercise of options (Note 8) ... -- 16,364
Common shares exchanged in the exercise of
options ...................................... -- (321)
Proceeds from issuance of common shares ...... -- 13,552
Income tax benefits related to incentive stock
options (Note 8) .............................. -- 6,470
Reduction in receivable from ESOP ............. -- 1,455
Payments received on stockholders' notes
receivable.................................... 250 250
Purchase of limited partnership units ........ -- (1,838)
Purchase of treasury stock .................... -- (6,592)
Net income .................................... -- 88,083
Dividends paid ................................ -- (6,237)
------------ -------------
Balance at December 31, 1994 .................. (5,240) 757,583
Adjustment for ReLife Merger (Note 2) ........ -- 3,407
Proceeds from exercise of options (Note 8) ... -- 9,868
Proceeds from issuance of common shares ...... -- 335,048
Income tax benefits related to incentive stock
options (Note 8) ............................. -- 6,653
Reduction in receivable from ESOP ............. -- 1,591
Loans made to stockholders .................... (1,231) (1,231)
Purchase of limited partnership units ........ -- (4,767)
Purchases of treasury stock ................... -- (7,350)
Net income .................................... -- 92,521
Dividends paid ................................ -- (7,425)
------------ -------------
Balance at December 31, 1995 .................. (6,471) 1,185,898
Adjustment for Advantage Merger ............... -- (17,638)
Adjustment for 1997 mergers (Note 2) ......... -- 67,569
Proceeds from exercise of options (Note 8) ... -- 32,807
Income tax benefits related to incentive stock
options (Note 8) .............................. -- 23,767
Reduction in receivable from ESOP ............. -- 1,738
Loans made to stockholders .................... 1,048 1,048
Purchase of limited partnership units ........ -- (83)
Retirement of treasury stock .................. -- --
Net income .................................... -- 220,818
Stock split (Note 15) ......................... -- --
------------ -------------
Balance at December 31, 1996 .................. $(5,423) $1,515,924
=========== =============
See accompanying notes
B-16
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1994 1995 1996
------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................ $ 88,083 $ 92,521 $ 220,818
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .......................... 113,977 143,322 188,966
Provision for doubtful accounts ........................ 32,904 37,659 54,112
Provision for losses on impairment of assets ........... 10,500 53,549 --
Provision for losses on abandonment of computer project 4,500 -- --
Merger and acquisition related expenses ................ 6,520 34,159 41,515
Loss on disposal of surgery center ..................... 13,197 -- --
Income applicable to minority interests of limited
partnerships .......................................... 31,469 43,147 49,437
(Benefit) provision for deferred income taxes .......... (15,882) 380 13,525
Provision for deferred revenue ......................... (164) (1,990) (1,270)
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable .................................. (97,167) (65,382) (131,514)
Inventories, prepaid expenses and other current assets (15,251) 732 (36,751)
Accounts payable and accrued expenses ................ 86,209 (31,940) (31,182)
------------- ------------ ------------
Net cash provided by operating activities ................ 258,895 306,157 367,656
INVESTING ACTIVITIES
Purchases of property, plant and equipment ............... (195,920) (172,172) (172,962)
Proceeds from sale of property, plant and equipment ..... 68,330 14,541 --
Additions to intangible assets, net of effects of
acquisitions ............................................ (69,119) (117,552) (174,446)
Assets obtained through acquisitions, net of liabilities
assumed ................................................. (116,650) (493,914) (91,391)
Changes in other assets .................................. (21,962) (6,963) (12,861)
Proceeds received on sale of other marketable securities 18,948 22,161 317
Investments in other marketable securities ............... (9,126) (10,926) --
------------- ------------ ------------
Net cash used in investing activities .................... (325,499) (764,825) (451,343)
B-17
<PAGE>
YEAR ENDED DECEMBER 31,
---------------------------------------
1994 1995 1996
------------- ------------ ------------
(IN THOUSANDS)
FINANCING ACTIVITIES
Proceeds from borrowings ................................. $1,058,479 $ 685,816 $ 193,113
Principal payments on long-term debt ..................... (970,462) (472,661) (104,262)
Proceeds from exercise of options ........................ 14,727 9,868 32,807
Proceeds from issuance of common stock ................... 1,136 330,954 --
Purchase of treasury stock ............................... (6,592) (7,350) --
Reduction in receivable from ESOP ........................ 1,455 1,591 1,738
Payments received on (loans made to) stockholders ....... 250 (1,231) 1,048
Dividends paid ........................................... (6,237) (7,425) --
Proceeds from investment by minority interests .......... 2,268 1,103 510
Purchase of limited partnership interests ................ (1,698) (10,076) (3,064)
Payment of cash distributions to limited partners ....... (34,351) (36,489) (38,782)
------------- ------------ ------------
Net cash provided by financing activities ................ 58,975 494,100 83,108
------------- ------------ ------------
(Decrease) increase in cash and cash equivalents ........ (7,629) 35,432 (579)
Cash and cash equivalents at beginning of year (Note 2) . 119,946 112,317 152,244
Cash flows related to mergers (Note 2) ................... -- 4,495 (3,637)
----------- ------------ ------------
Cash and cash equivalents at end of year ................. $ 112,317 $ 152,244 $ 148,028
============= ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest ................................................ $ 59,833 $ 100,189 $ 91,560
Income taxes ............................................ 60,166 83,059 62,515
</TABLE>
NON-CASH INVESTING ACTIVITIES:
The Company assumed liabilities of $32,027,000, $55,828,000 and $19,197,000
during the years ended December 31, 1994, 1995 and 1996, respectively, in
conjunction with its acquisitions.
During the year ended December 31, 1994, the Company issued 1,248,000 common
shares with a market value of $9,923,000 as consideration for acquisitions
accounted for as purchases (see Note 9).
During the year ended December 31, 1996, the Company issued 8,095,000 common
shares as consideration for mergers (see Note 2).
NON-CASH FINANCING ACTIVITIES:
During 1995 and 1997, the Company had a two-for-one stock split on its common
stock, which was effected in the form of a one hundred percent stock dividend.
The Company received a tax benefit from the disqualifying disposition of
incentive stock options of $6,470,000, $6,653,000 and $23,767,000 for the years
ended December 31, 1994, 1995 and 1996, respectively.
During the year ended December 31, 1994, 22,000 common shares were exchanged
in the exercise of options. The shares exchanged had a market value on the date
of exchange of $321,000.
See accompanying notes.
B-18
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by HEALTHSOUTH Corporation and
its subsidiaries ("the Company") are presented as an integral part of the
consolidated financial statements.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of HEALTHSOUTH
Corporation ("HEALTHSOUTH") and its wholly-owned subsidiaries, as well as its
limited partnerships. All significant intercompany accounts and transactions
have been eliminated in consolidation.
HEALTHSOUTH Corporation is engaged in the business of providing comprehensive
rehabilitative, clinical, diagnostic and surgical healthcare services on an
inpatient and outpatient basis.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the accompanying consolidated financial
statements and notes. Actual results could differ from those estimates.
MARKETABLE SECURITIES
Marketable equity securities and debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, if material, reported as a separate
component of stockholders' equity, net of tax. During 1994, marketable
securities consisting of $13,360,507 of common stock were sold and the resulting
gain was recognized in the consolidated statement of income. The adjusted cost
of the specific security sold method is used to compute gain or loss on the sale
of securities. Interest and dividends on securities classified as
available-for-sale are included in investment income. Marketable equity
securities and debt securities of the Company have maturities of less than one
year.
ACCOUNTS RECEIVABLE AND THIRD-PARTY REIMBURSEMENT ACTIVITIES
Receivables from patients, insurance companies and third-party contractual
insured accounts (Medicare and Medicaid) are based on payment agreements which
generally result in the Company collecting an amount different from the
established rates. Final determination of the settlement is subject to review by
appropriate authorities. Adequate allowances are provided for doubtful accounts
and contractual adjustments. Uncollectible accounts are written off against the
allowance for doubtful accounts after adequate collection efforts are made. Net
accounts receivable include only those amounts estimated by management to be
collectible.
The concentration of net accounts receivable from third-party contractual
payors and others, as a percentage of total net accounts receivable, was as
follows:
DECEMBER 31
--------------
1995 1996
------ -------
Medicare ........................... 24% 26%
Medicaid ........................... 6 5
Other............................... 70 69
---- ----
100% 100%
==== ====
B-19
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market using the specific
identification method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Upon sale or retirement of
property, plant or equipment, the cost and related accumulated depreciation are
eliminated from the respective account and the resulting gain or loss is
included in the results of operations.
Interest cost incurred during the construction of a facility is capitalized.
The Company incurred interest of $76,038,000, $103,731,000 and $97,375,000, of
which $2,394,000, $1,941,000 and $2,822,000 was capitalized, during 1994, 1995
and 1996, respectively.
Depreciation and amortization is computed using the straight-line method over
the estimated useful lives of the assets or the term of the lease, as
appropriate. The estimated useful life of buildings is 30-40 years and the
general range of useful lives for leasehold improvements, furniture, fixtures
and equipment is 10-15 years.
INTANGIBLE ASSETS
Cost in excess of net asset value of purchased facilities is amortized over
20 to 40 years using the straight-line method. Organization and start-up costs
incurred prior to opening a new facility and partnership formation costs are
deferred and amortized on a straight-line basis over a period of 36 months.
Organization, partnership formation and start-up costs for a project that is
subsequently abandoned are charged to operations in that period. Debt issue
costs are amortized over the term of the debt. Noncompete agreements are
amortized using the straight-line method over the term of the agreements.
MINORITY INTERESTS
The equity of minority investors in limited partnerships and limited
liability companies of the Company is reported on the balance sheet as minority
interests. Minority interests reported in the consolidated income statement
reflect the respective interests in the income or loss of the limited
partnerships or limited liability companies attributable to the minority
investors (ranging from 1% to 50% at December 31, 1996), the effect of which is
removed from the results of operations of the Company.
REVENUES
Revenues include net patient service revenues and other operating revenues.
Net patient service revenues are reported at the estimated net realizable
amounts from patients, third-party payors and others for services rendered,
including estimated retroactive adjustments under reimbursement agreements with
third-party payors.
INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Income per common and common equivalent share is computed based on the
weighted average number of common shares and common equivalent shares
outstanding during the periods, as adjusted for the two-for-one stock split
declared in April 1995 and the two-for-one stock split declared in March 1997
(see Note 15). Common equivalent shares include dilutive employees' stock
options, less the number of treasury shares assumed to be purchased from the
proceeds using the average market price of the Company's common stock. Fully
diluted earnings per share (based on 290,298,000, 309,686,000 and 338,516,000
shares in 1994, 1995 and 1996, respectively) assumes conversion of the 5%
Convertible Subordinated Debentures due 2001 (see Note 7).
B-20
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
IMPAIRMENT OF ASSETS
In accordance with FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of, the Company records
impairment losses on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted
cash flows estimated to be generated by those assets are less than the carrying
amounts of those assets. Effective January 1, 1995, the Company adopted FASB 121
to account for long-lived assets.
With respect to the carrying value of the excess of cost over net asset value
of purchased facilities and other intangible assets, the Company determines on a
quarterly basis whether an impairment event has occurred by considering factors
such as: the market value of the asset; a significant adverse change in legal
factors or in the business climate; adverse action by a regulator; a history of
operating or cash flow losses or a projection of continuing losses associated
with an operating entity. The carrying value of excess cost over net asset value
of purchased facilities and other intangible assets will be evaluated if the
facts and circumstances suggest that it has been impaired. If this evaluation
indicates that the value of the asset will not be recoverable, as determined
based on the undiscounted cash flows of the entity acquired over the remaining
amortization period, an impairment loss is calculated based on the excess of the
carrying amount of the asset over the asset's fair value.
RECLASSIFICATIONS
Certain amounts in the 1994 and 1995 financial statements have been
reclassified to conform with the 1996 presentation. Such reclassifications had
no effect on previously reported consolidated net income.
2. MERGERS
Effective December 29, 1994, a wholly-owned subsidiary of the Company merged
with ReLife, Inc. ("ReLife"), and in connection therewith the Company issued
22,050,580 shares of its common stock in exchange for all of ReLife's
outstanding common stock. Prior to the merger, ReLife provided a system of
rehabilitation services and operated 31 inpatient facilities with an aggregate
of approximately 1,100 licensed beds, including nine freestanding rehabilitation
hospitals, nine acute rehabilitation units, five sub-acute rehabilitation units,
seven transitional living units and one residential facility, and provided
outpatient rehabilitation services at twelve outpatient centers. Costs and
expenses of $2,949,000, primarily legal, accounting and financial advisory fees,
incurred by HEALTHSOUTH in connection with the ReLife merger have been recorded
in operations in 1994 and reported as merger expenses in the accompanying
consolidated statements of income.
Effective June 13, 1995, a wholly-owned subsidiary of the Company merged with
Surgical Health Corporation ("SHC"), and in connection therewith the Company
issued 17,062,960 shares of its common stock in exchange for all of SHC's common
and preferred stock. Prior to the merger, SHC operated a network of 36
freestanding surgery centers and five mobile lithotripters in eleven states,
with an aggregate of 156 operating and procedure rooms. Costs and expenses of
approximately $19,194,000 incurred by the Company in connection with the SHC
merger have been recorded in operations during 1995 and reported as merger
expenses in the accompanying consolidated statements of income. Fees related to
legal, accounting and financial advisory services accounted for $3,400,000 of
the expense. Costs and expenses related to the retirement of the SHC Notes (see
Note 7) totaled $14,606,000. Costs related to employee separations were
approximately $1,188,000. SHC merged with Heritage Surgical Corporation on
January 18, 1994 in a transaction accounted for as a pooling of interests. SHC
recorded merger costs of $3,571,000 in connection with this transaction in 1994.
B-21
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. MERGER - (CONTINUED)
Effective October 26, 1995, a wholly-owned subsidiary of the Company merged
with Sutter Surgery Centers, Inc. ("SSCI"), and in connection therewith the
Company issued 3,552,002 shares of its common stock in exchange for all of
SSCI's outstanding common stock. Prior to the merger, SSCI operated a network of
12 freestanding surgery centers in three states, with an aggregate of 54
operating and procedure rooms. Costs and expenses of approximately $4,965,000,
primarily legal, accounting and financial advisory fees, incurred by the Company
in connection with the SSCI merger have been recorded in operations during 1995
and reported as merger expenses in the accompanying consolidated statements of
income.
Effective January 17, 1996, a wholly-owned subsidiary of the Company merged
with Surgical Care Affiliates, Inc. ("SCA"), and in connection therewith the
Company issued 91,856,678 shares of its common stock in exchange for all of
SCA's outstanding common stock. Prior to the merger, SCA operated 67 surgery
centers in 24 states. Costs and expenses of approximately $19,727,000, primarily
legal, accounting and financial advisory fees, incurred by the Company in
connection with the SCA merger have been recorded in operations during 1996 and
reported as merger expenses in the accompanying consolidated statements of
income.
Effective March 14, 1996, a wholly-owned subsidiary of the Company merged
with Advantage Health Corporation ("Advantage Health"), and in connection
therewith the Company issued 18,203,978 shares of its common stock in exchange
for all of Advantage Health's outstanding common stock. Prior to the merger,
Advantage Health operated a network of 136 sites of service, including four
freestanding rehabilitation hospitals, one freestanding multi-use hospital, one
nursing home, 68 outpatient rehabilitation facilities, 14 inpatient managed
rehabilitation units, 24 rehabilitation services management contracts and six
managed sub-acute rehabilitation units. Costs and expenses of approximately
$9,212,000, primarily legal, accounting and financial advisory fees, incurred by
the Company in connection with the Advantage Health merger have been recorded in
operations during 1996 and reported as merger expenses in the accompanying
consolidated statements of income.
The mergers of the Company with ReLife, SHC, SSCI, SCA and Advantage Health
were accounted for as poolings of interests and, accordingly, the Company's
consolidated financial statements have been restated to include the results of
the acquired companies for all periods presented.
Combined and separate results of the Company and its material 1996 mergers,
SCA and Advantage Health, are as follows (in thousands):
<TABLE>
<CAPTION>
ADVANTAGE
HEALTHSOUTH SCA HEALTH COMBINED
------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Year ended
December 31, 1994
Revenues.............. $1,274,365 $239,272 $135,562 $1,649,199
Net income............ 50,493 29,280 8,310 88,083
Year ended
December 31, 1995
Revenues.............. 1,556,687 263,866 182,593 2,003,146
Net income............ 78,949 3,322 10,250 92,521
Year ended
December 31, 1996
Revenues.............. 2,380,587 11,028 44,922 2,436,537
Net income............ 216,654 1,746 2,418 220,818
</TABLE>
B-22
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. MERGERS -- (CONTINUED)
There were no material transactions among the Company, ReLife, SHC, SSCI, SCA
and Advantage Health prior to the mergers. The effects of conforming the
accounting policies of the combined companies are not material.
Prior to its merger with the Company, ReLife reported on a fiscal year ending
on September 30. The restated financial statements for all periods prior to and
including December 31, 1994, are based on a combination of the Company's results
for its December 31 fiscal year and ReLife's results for its September 30 fiscal
year. Beginning January 1, 1995, all facilities acquired in the ReLife merger
adopted a December 31 fiscal year end; accordingly, all consolidated financial
statements for periods after December 31, 1994 are based on a consolidation of
the Company and the former ReLife subsidiaries on a December 31 year-end.
ReLife's historical results of operations for the three months ended December
31, 1994 are not included in the Company's consolidated statements of income or
cash flows. An adjustment has been made to stockholders' equity as of January 1,
1995 to adjust for the effect of excluding ReLife's results of operations for
the three months ended December 31, 1994. The following is a summary of ReLife's
results of operations and cash flows for the three months ended December 31,
1994 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Statement of Income Data:
Revenues...................................................... $ 38,174
Operating expenses:
Operating units.............................................. 31,797
Corporate general and administrative......................... 2,395
Provision for doubtful accounts............................... 541
Depreciation and amortization................................. 1,385
Interest expense.............................................. 858
Interest income............................................... (91)
HEALTHSOUTH merger expense.................................... 3,050
Loss on disposal of fixed assets ............................. 1,000
Loss on abandonment of computer project ...................... 973
-----------
41,908
-----------
Net loss...................................................... $ (3,734)
===========
Statement of Cash Flow Data:
Net cash provided by operating
activities................................................... $ 38,077
Net cash used in investing activities ........................ (9,632)
Net cash used in financing activities ........................ (23,950)
-----------
Net increase in cash.......................................... $ 4,495
===========
</TABLE>
During the three months ended December 31, 1994, ReLife received $7,141,000
in proceeds from the exercise of stock options.
Prior to its merger with the Company, Advantage Health reported on a fiscal
year ending on August 31. Accordingly, the historical financial statements of
Advantage Health have been recast to a November 30 fiscal year-end to more
closely conform to the Company's calendar fiscal year-end. The restated
financial statements for all periods prior to and including December 31, 1995
are based on a combination of the Company's results for their December 31 fiscal
year and Advantage Health's results for its recast November 30 fiscal year.
Beginning January 1, 1996, all facilities acquired in the Advantage Health
merger adopted a December 31 fiscal year-end; accordingly, all consolidated
financial statements for periods after December 31, 1995 are based on a
consolidation of all of the Company's subsidiaries on
B-23
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES -
Notes to Consolidated Financial Statements (Continued)
2. MERGERS -- (Continued)
a December 31 year-end. Advantage Health's historical results of operations for
the one month ended December 31, 1995 are not included in the Company's
consolidated statements of income or cash flows. An adjustment has been made to
stockholders' equity as of January 1, 1996 to adjust for the effect of excluding
Advantage Health's results of operations for the one month ended December 31,
1995. The following is a summary of Advantage Health's results of operations and
cash flows for the one month ended December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Statement of Income Data:
Revenues....................................................... $ 16,111
Operating expenses:
Operating units............................................... 14,394
Corporate general and administrative.......................... 1,499
Provision for doubtful accounts................................ 1,013
Depreciation and amortization.................................. 283
Interest expense............................................... 288
Interest income................................................ (16)
Loss on impairment of assets................................... 21,111
------------
38,572
------------
Loss before income taxes and minority
interests..................................................... (22,461)
Benefit for income taxes....................................... 4,959
Minority interest.............................................. (136)
------------
Net loss....................................................... $(17,638)
============
Statement of Cash Flow Data:
Net cash used in operating activities ......................... $ (2,971)
Net cash provided by investing activities ..................... 105
Net cash used in financing activities ......................... (771)
------------
Net decrease in cash........................................... $ (3,637)
============
</TABLE>
In December 1995, Advantage Health recorded an asset impairment charge of
approximately $21,111,000 relating to goodwill and tangible assets identifiable
with one inpatient rehabilitation hospital, one subacute facility and 32
outpatient rehabilitation centers, all acquired by the Company in the Advantage
Health merger. The Company intends to operate these facilities on an ongoing
basis.
The Company has historically assessed recoverability of goodwill and other
long-lived assets using undiscounted cash flows estimated to be received over
the useful lives of the related assets. In December 1995, certain events
occurred which significantly impacted the Company's estimates of future cash
flows to be received from the facilities described above. Those events primarily
related to a decline in operating results combined with a deterioration in the
reimbursement environment at these facilities. As a result of these events, the
Company revised its estimates of undiscounted cash flows to be received over the
remaining estimated useful lives of these facilities and determined that
goodwill and other long-lived assets (primarily property and equipment) had been
impaired. The Company developed its best estimates of future operating cash
flows at these locations considering future requirements for capital
expenditures as well as the impact of inflation. The projections of cash flows
also took into account estimates of significant one-time expenses as well as
estimates of additional revenues and resulting income from future marketing
efforts in the respective locations. The amount of the impairment charge was
determined by discounting the estimates of future cash flows, using an estimated
8.5% incremental borrowing rate, which management believes is commensurate with
the risks involved. The resulting net
B-24
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. MERGERS -- (CONTINUED)
present value of future cash flows was then compared to the historical net book
value of goodwill and other long-lived assets at each operating location which
resulted in an impairment loss relative to these centers of $21,111,000.
During 1996, wholly-owned subsidiaries of the Company merged with
Professional Sports Care Management, Inc. ("PSCM"), Fort Sutter Surgery Center,
Inc. ("FSSCI") and ReadiCare, Inc. ("ReadiCare"). In connection with these
mergers the Company issued an aggregate of 8,094,598 shares of its common stock.
Costs and expenses of approximately $12,576,000, primarily legal, accounting and
financial advisory fees, incurred by the Company in connection with the mergers
have been recorded in operations during 1996 and reported as merger expenses in
the accompanying consolidated statements of income.
The PSCM and ReadiCare mergers were accounted for as poolings of interests.
However, due to the immateriality of these mergers, the Company's historical
financial statements for all periods prior to the quarters in which the
respective mergers were completed have not been restated. Instead, stockholders'
equity has been increased by $43,230,000 to reflect the effects of the PSCM
merger and $15,431,000 to reflect the effects of the ReadiCare merger. The
results of operations of PSCM and ReadiCare are included in the accompanying
financial statements from the date of acquisition forward. In addition, the
FSSCI merger was a stock-for-stock acquisition. Stockholders' equity has been
increased by $8,908,000 to reflect the effects of the merger.
On December 2, 1996, the Company entered into an agreement to acquire Health
Images, Inc. ("Health Images") in a transaction to be accounted for as a
pooling-of-interests. In the proposed transaction, Health Images stockholders
will receive approximately 10,400,000 shares of the Company's common stock.
Health Images operates 49 freestanding diagnostic imaging centers in 13 states
and six in England. The effects of conforming the accounting policies of the
Company and Health Images are not expected to be material. The effects on the
accompanying financial statements of the pro forma results of operations,
assuming the Health Images acquisition had occurred at the beginning of each of
the three years ended December 31, 1996, are not material. This transaction is
expected to be consummated in March 1997.
3. CASH, CASH EQUIVALENTS AND OTHER MARKETABLE SECURITIES
Cash, cash equivalents and other marketable securities consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1995 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Cash........................................................... $140,476 $138,235
Cash equivalents............................................... 11,768 9,793
---------- -----------
Total cash and cash equivalents............................... 152,244 148,028
Certificates of deposit........................................ 1,962 1,765
Municipal put bonds............................................ 615 495
Municipal put bond mutual funds................................ 500 500
Collateralized mortgage obligations............................ 1,000 1,000
---------- -----------
Total other marketable securities.............................. 4,077 3,760
---------- -----------
Total cash, cash equivalents and other
marketable securities (approximates market value)............. $156,321 $151,788
========== ===========
</TABLE>
For purposes of the consolidated balance sheets and statements of cash flows,
marketable securities purchased with an original maturity of ninety days or less
are considered cash equivalents.
B-25
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. OTHER ASSETS
Other assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1995 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Notes and accounts receivable................... $24,628 $38,359
Investment in Caretenders Health Corp. ......... 7,417 7,370
Prepaid long-term lease......................... 8,888 8,397
Investments in other unconsolidated
subsidiaries.................................... 6,754 15,362
Real estate investments......................... 14,324 10,020
Trusteed funds.................................. 1,879 1,879
Other........................................... 4,978 1,127
--------- ----------
$68,868 $82,514
========= ==========
</TABLE>
The Company has a 19% ownership interest in Caretenders Health Corp.
("Caretenders"); accordingly, the Company's investment is being accounted for
using the equity method of accounting. The investment was initially valued at
$7,250,000. The Company's equity in earnings of Caretenders for the years ended
December 31, 1994, 1995 and 1996 was not material to the Company's results of
operations.
It was not practicable to estimate the fair value of the Company's various
investments in other unconsolidated subsidiaries (involved in operations similar
to those of the Company) because of the lack of a quoted market price and the
inability to estimate fair value without incurring excessive costs. The carrying
amount at December 31, 1996 represents the original cost of the investments,
which management believes is not impaired.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1995 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Land.......................................... $ 76,686 $ 81,089
Buildings..................................... 767,038 802,040
Leasehold improvements........................ 87,216 112,149
Furniture, fixtures and equipment............. 603,985 722,095
Construction-in-progress...................... 33,407 64,417
------------ -------------
1,568,332 1,781,790
Less accumulated depreciation and
amortization.................................. 284,772 390,917
------------ -------------
$1,283,560 $1,390,873
============ =============
</TABLE>
B-26
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. INTANGIBLE ASSETS
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1995 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Organizational, partnership formation and start-up
costs................................................... $ 163,820 $ 230,298
Debt issue costs........................................ 34,973 34,389
Noncompete agreements................................... 70,636 85,894
Cost in excess of net asset value of purchased
facilities.............................................. 736,195 899,788
----------- ------------
1,005,624 1,250,369
Less accumulated amortization........................... 131,713 200,711
----------- ------------
$ 873,911 $1,049,658
=========== ============
</TABLE>
7. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1995 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Notes and bonds payable:
Advances under a $1,000,000,000 credit agreement with
banks..................................................... $ 790,000 $ --
Advances under a $1,250,000,000 credit agreement with
banks..................................................... -- 995,000
9.5% Senior Subordinated Notes due 2001.................... 250,000 250,000
5.0% Convertible Subordinated Debentures due 2001.......... 115,000 115,000
Notes payable to banks and various other notes payable, at
interest rates from 5.5% to 9.75%......................... 180,166 77,270
Hospital revenue bonds payable............................. 32,337 22,503
Noncompete agreements payable with payments due at
intervals ranging through December 2004.................... 24,161 26,256
---------- -----------
1,391,664 1,486,029
Less amounts due within one year............................ 35,175 35,409
---------- -----------
$1,356,489 $1,450,620
========== ===========
</TABLE>
The fair value of total long-term debt approximates book value at December
31, 1995 and 1996. The fair values of the Company's long-term debt are estimated
using discounted cash flow analysis, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
During 1995, the Company entered into a Credit Agreement with NationsBank,
N.A. ("NationsBank") and other participating banks (the "1995 Credit Agreement")
which consisted of a $1,000,000,000 revolving credit facility. On April 18,
1996, the Company amended and restated the 1995 Credit Agreement to increase the
size of the revolving credit facility to $1,250,000,000 (the "1996 Credit
Agreement"). Interest is paid based on LIBOR plus a predetermined margin, a base
rate, or competitively bid rates from the participating banks. The Company is
required to pay a fee on the unused portion of the revolving credit facility
ranging from 0.08% to 0.25%, depending on certain defined ratios. The principal
amount is payable in full on March 31, 2001. The Company provided a negative
pledge on all assets under the 1996 Credit Agreement, and the lenders released
the first priority security interest in all shares of stock of the Company's
subsidiaries and rights and interests in the Company's controlled partnerships
which had been granted under the 1995 Credit Agreement. At December 31, 1996,
the effective interest rate associated with the 1996 Credit Agreement was
approximately 5.87%.
B-27
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. LONG-TERM DEBT -- (CONTINUED)
On March 24, 1994, the Company issued $250,000,000 principal amount of 9.5%
Senior Subordinated Notes due 2001 (the "Notes"). Interest is payable on April 1
and October 1. The Notes are senior subordinated obligations of the Company and
as such are subordinated to all existing and future senior indebtedness of the
Company, and also are effectively subordinated to all existing and future
liabilities of the Company's subsidiaries and partnerships. The Notes rank
senior to all subordinated indebtedness of the Company, including the 5%
Convertible Subordinated Debentures due 2001 described below. The Notes mature
on April 1, 2001.
Also on March 24, 1994, the Company issued $100,000,000 principal amount of
5% Convertible Subordinated Debentures due 2001 (the "Convertible Debentures").
An additional $15,000,000 of Convertible Debentures was issued in April 1994 to
cover underwriters' overallotments. Interest is payable on April 1 and October
1. The Convertible Debentures are convertible into common stock of the Company
at the option of the holder at a conversion price of $9.406 per share, subject
to adjustment upon the occurrence of certain events.
In June 1994, SHC (see Note 2) issued $75,000,000 principal amount of 11.5%
Senior Subordinated Notes due July 15, 2004 (the "SHC Notes"). The proceeds of
the SHC Notes were used to pay down indebtedness outstanding under other
existing credit facilities. During 1995, the Company purchased $67,500,000 of
the $75,000,000 outstanding principal amount of the SHC Notes in a tender offer
at 115% of the face value of the Notes, and the remaining $7,500,000 balance was
purchased on the open market, using proceeds from the Company's other long-term
credit facilities. The loss on retirement of the SHC Notes totaled approximately
$14,606,000. The loss consists of the premium, write-off of unamortized bond
issue costs and other fees and is included in merger and acquisition related
expenses in the accompanying 1995 consolidated statement of income (see Note 2).
Principal maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 (IN THOUSANDS)
- ------------------------ ---------------
<S> <C>
1997.......................................... $ 35,409
1998.......................................... 25,932
1999.......................................... 16,715
2000.......................................... 11,117
2001.......................................... 1,367,788
After 2001.................................... 29,068
---------------
$1,486,029
---------------
</TABLE>
8. STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123"), requires the use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
The Company has various stockholder-approved stock option plans which provide
for the grant of options to directors, officers and other key employees to
purchase common stock at 100% of the fair market value as of the date of grant.
The Audit and Compensation Committee of the Board of Directors administers the
stock option plans. Options may be granted as incentive stock options or as
non-qualified stock
B-28
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. STOCK OPTIONS -- (CONTINUED)
options. Incentive stock options vest 25% annually, commencing upon completion
of one year of employment subsequent to the date of grant. Non-qualified stock
options generally are not subject to any vesting provisions. The options expire
at dates ranging from five to ten years from the date of grant.
Pro forma information regarding net income and earnings per share is required
by Statement 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1995 and 1996, respectively: risk-free interest rates of 5.87%
and 6.01%; dividend yield of 0%; volatility factors of the expected market price
of the Company's common stock of .36 and .37; and a weighted-average expected
life of the options of 4.3 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands, except for per share amounts):
<TABLE>
<CAPTION>
1995 1996
--------- ----------
<S> <C> <C>
Pro forma net income.......................... $74,330 $193,417
Pro forma earnings per share:
Primary...................................... $ 0.25 $ 0.59
Fully diluted................................ $ 0.25 $ 0.58
</TABLE>
The effect of compensation expense from stock options on 1995 pro forma net
income reflects only the vesting of 1995 awards. However, 1996 pro forma net
income reflects the second year of vesting of the 1995 awards and the first year
of vesting of 1996 awards. Not until 1998 is the full effect of recognizing
compensation expense for stock options representative of the possible effects on
pro forma net income for future years.
A summary of the Company's stock option activity and related information for
the years ended December 31 follows:
<TABLE>
<CAPTION>
1994 1995 1996
----------------------- ------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE
(000) PRICE (000) PRICE (000) PRICE
--------- ---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding January 1:................. 30,452 N/A 29,216 $4 33,988 $ 5
Granted....................................... 3,188 N/A 7,310 9 4,557 17
Exercised..................................... (3,856) N/A (2,202) 4 (6,540) 5
Canceled...................................... (568) N/A (336) 5 (255) 6
---------
Options outstanding at December 31............. 29,216 N/A 33,988 $5 31,750 $ 7
Options exercisable at December 31............. 22,466 N/A 26,003 $5 26,992 $ 6
Weighted average fair value of options granted
during the year............................... N/A $ 3.81 $ 7.13
</TABLE>
B-29
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. STOCK OPTIONS -- (CONTINUED)
The weighted average remaining contractual life for options outstanding as of
December 31, 1996 is 6.63 years.
9. ACQUISITIONS
1994 Acquisitions
At various dates during 1994, the Company acquired 53 separate outpatient
operations and a majority equity interest in five outpatient surgery centers
located throughout the United States. The combined purchase price of these
acquired outpatient operations was approximately $80,456,000. The Company also
acquired a specialty medical center in Dallas, Texas, a therapy staffing
service, a diagnostic imaging company, four physical therapy practices and two
home health agencies. The combined purchase price of these operations was
approximately $32,044,000. The form of consideration constituting the total
purchase prices of $112,500,000 was approximately $88,455,000 in cash,
$14,122,000 in notes payable and approximately 624,000 shares of common stock
valued at $9,923,000.
In connection with these transactions, the Company entered into noncompete
agreements with former owners totaling $10,814,000. In general, these noncompete
agreements are payable in monthly or quarterly installments over periods ranging
from five to ten years.
The fair value of the total net assets relating to the 1994 acquisitions
described above was approximately $17,958,000. The total cost for 1994
acquisitions exceeded the fair value of the net assets acquired by approximately
$94,542,000. The Company evaluated each acquisition independently to determine
the appropriate amortization period for the cost in excess of net asset value of
purchased facilities. Each evaluation included an analysis of historic and
projected financial performance, evaluation of the estimated useful lives of
buildings and fixed assets acquired, the indefinite lives of certificates of
need and licenses acquired, the competition within local markets, lease terms
where applicable, and the legal term of partnerships where applicable. Based on
these evaluations, the Company determined that the cost in excess of net asset
value of purchased facilities relating to the 1994 acquisitions should be
amortized over periods ranging from 25 to 40 years on a straight-line basis. No
other identifiable intangible assets were recorded in the acquisitions described
above.
All of the 1994 acquisitions described above were accounted for as purchases
and, accordingly, the results of operations of the acquired businesses (not
material individually or in the aggregate) are included in the accompanying
consolidated financial statements from their respective dates of acquisition.
1995 Acquisitions
Effective April 1, 1995, the Company acquired the rehabilitation hospitals
division of NovaCare, Inc. ("NovaCare"), consisting of 11 rehabilitation
hospitals, 12 other facilities, and certificates of need to build two other
facilities. The total purchase price for the NovaCare facilities was
approximately $235,000,000 in cash. The cost in excess of net asset value was
approximately $173,000,000. Of this excess, approximately $129,000,000 was
allocated to leasehold value and the remaining $44,000,000 to cost in excess of
net asset value of purchased facilities. As part of the acquisition, the Company
acquired approximately $4,790,000 in deferred tax assets. The Company also
provided approximately $10,000,000 for the write-down of certain assets to net
realizable value as the result of a planned facility consolidation in a market
where the Company's existing services overlapped with those of an acquired
facility. The planned employee separations and facility consolidation were
completed by the end of 1995.
Effective December 1, 1995, the Company acquired Caremark Orthopedic Services
Inc. ("Caremark"). At the time of the acquisition, Caremark owned and operated
approximately 120 outpatient rehabilitation centers in 13 states. The total
purchase price was approximately $127,500,000 in cash.
B-30
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. ACQUISITIONS -- (CONTINUED)
Also at various dates during 1995, the Company acquired 70 separate
outpatient rehabilitation operations located throughout the United States, three
physical therapy practices, one home health agency, one nursing home, 75
licensed subacute beds, five outpatient surgery centers and one outpatient
diagnostic imaging operation. The combined purchase prices of these acquisitions
was approximately $136,724,000. The form of consideration constituting the
combined purchase prices was approximately $117,405,000 in cash and $19,319,000
in notes payable.
In connection with these transactions, the Company entered into noncompete
agreements with former owners totaling $16,222,000. In general, these noncompete
agreements are payable in monthly or quarterly installments over periods ranging
from five to ten years.
The fair value of the total net assets relating to the 1995 acquisitions
described above, excluding the NovaCare acquisition, was approximately
$72,844,000. The total cost of these acquisitions exceeded the fair value of the
net assets acquired by approximately $191,380,000. Based on the evaluation of
each acquisition utilizing the criteria described above, the Company determined
that the cost in excess of net asset value of purchased facilities relating to
the 1995 acquisitions should be amortized over periods ranging from 25 to 40
years on a straight-line basis. No other identifiable intangible assets were
recorded in the acquisitions described above.
All of the 1995 acquisitions described above were accounted for as purchases
and, accordingly, the results of operations of the acquired businesses are
included in the accompanying consolidated financial statements from their
respective dates of acquisition. With the exception of NovaCare, none of the
above acquisitions were material individually or in the aggregate.
1996 Acquisitions
At various dates during 1996, the Company acquired 80 outpatient
rehabilitation facilities, three outpatient surgery centers, one inpatient
rehabilitation hospital, and one diagnostic imaging center. The acquired
operations are located throughout the United States. The total purchase price of
the acquired operations was approximately $104,321,000. The form of
consideration constituting the total purchase prices was approximately
$92,319,000 in cash and $12,002,000 in notes payable.
In connection with these transactions, the Company entered into noncompete
agreements with former owners totaling $11,900,000. In general, these noncompete
agreements are payable in monthly or quarterly installments over periods ranging
from five to ten years.
The fair value of the total net assets relating to the 1996 acquisitions
described above was approximately $40,259,000. The total cost of the 1996
acquisitions exceeded the fair value of the net assets acquired by approximately
$64,062,000. Based on the evaluation of each acquisition utilizing the criteria
described above, the Company determined that the cost in excess of net asset
value of purchased facilities relating to the 1996 acquisitions should be
amortized over periods ranging from 25 to 40 years on a straight-line basis. No
other identifiable intangible assets were recorded in the acquisitions described
above.
All of the 1996 acquisitions described above were accounted for as purchases
and, accordingly, the results of operations of the acquired businesses (not
material individually or in the aggregate) are included in the accompanying
consolidated financial statements from their respective dates of acquisition.
B-31
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. INCOME TAXES
HEALTHSOUTH and its subsidiaries file a consolidated federal income tax
return. The limited partnerships and limited liability companies file separate
income tax returns. HEALTHSOUTH's allocable portion of each partnership's income
or loss is included in the taxable income of the Company. The remaining income
or loss of each partnership is allocated to the limited partners.
The Company utilizes the liability method of accounting for income taxes, as
required by Financial Accounting Standards Board (FASB) Statement No. 109,
"Accounting for Income Taxes".
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1995 are as follows:
CURRENT NONCURRENT TOTAL
------- ---------- -----
(IN THOUSANDS)
Deferred tax assets:
Accruals..................................... $ 8,016 $ -- $ 8,016
Disposal of surgery centers................. 2,675 -- 2,675
Impairment of assets........................ 1,309 5,434 6,743
Development costs........................... -- 849 849
Acquired net operating loss................. -- 16,277 16,277
Allowance for bad debts..................... 29,089 -- 29,089
Other....................................... 1,818 5,549 7,367
--------- ------------ ---------
Total deferred tax assets ................... 42,907 28,109 71,016
Deferred tax liabilities:
Depreciation and amortization ............... -- 30,960 30,960
Non-accrual experience method............... 14,559 -- 14,559
Purchase price accounting................... -- 4,802 4,802
Contracts................................... 3,849 -- 3,849
Capitalized costs........................... -- 12,916 12,916
Other....................................... 2,522 3,164 5,686
--------- ----------- -----------
Total deferred tax liabilities .............. 20,930 51,842 72,772
--------- ----------- -----------
Net deferred tax assets (liabilities) $21,977 $(23,733) $(1,756)
========= =========== ===========
At December 31, 1996, the Company has net operating loss carryforwards of
approximately $13,546,000 for income tax purposes expiring through the year
2009. Those carryforwards resulted from the Company's acquisitions of Diagnostic
Health Corporation, Renaissance Rehabilitation Center, Inc. and Rebound, Inc.
B-32
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. INCOME TAXES -- (CONTINUED)
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 1996 are as
follows:
CURRENT NONCURRENT TOTAL
------- ---------- -----
(IN THOUSANDS)
Deferred tax assets:
Acquired net operating loss................. $ -- $5,283 $ 5,283
Development costs........................... -- 849 849
Accruals.................................... 6,626 -- 6,626
Allowance for bad debts..................... 31,704 -- 31,704
Other....................................... 1,915 2,597 4,512
--------- --------- -----------
Total deferred tax assets.................... 40,245 8,729 48,974
Deferred tax liabilities:
Depreciation and amortization............... -- 14,361 14,361
Purchase price accounting................... -- 4,802 4,802
Non-accrual experience method............... 17,694 -- 17,694
Contracts................................... 3,849 -- 3,849
Capitalized costs........................... 5,013 17,436 22,449
Other....................................... 1,837 927 2,764
--------- --------- -----------
Total deferred tax liabilities .............. 28,393 37,526 65,919
--------- --------- -----------
Net deferred tax assets (liabilities). $11,852 $(28,797) $(16,945)
========= ========= ===========
The provision for income taxes was as follows:
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995 1996
---- ---- ----
(IN THOUSANDS)
Currently payable:
Federal.................................... $ 70,641 $ 66,927 $113,262
State...................................... 10,362 8,914 13,451
---------- --------- -----------
81,003 75,841 126,713
Deferred (benefit)expense:
Federal.................................... (14,046) 342 12,138
State ..................................... (1,836) 38 1,387
---------- --------- -----------
(15,882) 380 13,525
---------- --------- -----------
Total provision............................. $ 65,121 $ 76,221 $140,238
========== ========= ===========
As part of the acquisitions of PSCM, Readicare and FSSCI, the Company
acquired approximately $1,664,000 in deferred tax liabilities.
B-33
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. INCOME TAXES -- (CONTINUED)
The difference between the provision for income taxes and the amount computed
by applying the statutory federal income tax rate to income before taxes was as
follows:
YEAR ENDED DECEMBER 31
--------------------------------
1994 1995 1996
---------- ---------- ----------
(IN THOUSANDS)
Federal taxes at statutory rates.............. $ 64,636 $ 74,161 $143,673
Add (deduct):
State income taxes, net of federal tax
benefit.................................... 4,899 5,832 9,645
Minority interests.......................... (11,014) (15,102) (17,303)
Disposal/impairment/merger charges.......... 668 9,955 6,563
Other....................................... 5,932 1,375 (2,340)
---------- ---------- ----------
$ 65,121 $ 76,221 $140,238
========== ========== ==========
11. COMMITMENTS AND CONTINGENCIES
The Company is a party to legal proceedings incidental to its business. In
the opinion of management, any ultimate liability with respect to these actions
will not materially affect the consolidated financial position or results of
operations of the Company.
At December 31, 1996, anticipated capital expenditures for the next twelve
months are $350,000,000. This amount includes expenditures for maintenance and
expansion of the Company's existing facilities as well as development and
integration of the Company's services in selected metropolitan markets.
Beginning December 1, 1993, the Company became self-insured for professional
liability and comprehensive general liability. The Company purchased coverage
for all claims incurred prior to December 1, 1993. In addition, the Company
purchased underlying insurance which would cover all claims once established
limits have been exceeded. It is the opinion of management that at December 31,
1996, the Company has adequate reserves to cover losses on asserted and
unasserted claims.
Prior to consummation of the SCA and Advantage Health mergers (see Note 2),
these companies carried professional malpractice and general liability
insurance. The policies were carried on a claims made basis. The companies had
policies in place to track and monitor incidents of significance. Management is
unaware of any claims that may result in a loss in excess of amounts covered by
existing insurance.
Operating leases generally consist of short-term lease agreements for
buildings where facilities are located. These leases generally have 5-year
terms, with one or more renewal options, with terms to be negotiated at the time
of renewal. Total rental expense for all operating leases was $75,355,000,
$100,183,000 and $127,741,000 for the years ended December 31, 1994, 1995 and
1996, respectively.
The following is a schedule of future minimum lease payments under all
operating leases having initial or remaining non-cancelable lease terms in
excess of one year:
YEAR ENDING DECEMBER 31 (IN THOUSANDS)
- ------------------------ ---------------
1997..................................................... $108,187
1998..................................................... 99,079
1999..................................................... 86,178
2000..................................................... 71,485
2001..................................................... 55,862
After 2001............................................... 249,566
---------------
$670,357
===============
B-34
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) savings plan which matches 15% of the first 4% of
earnings that an employee contributes. All contributions are in the form of
cash. All employees who have completed one year of service with a minimum of
1,000 hours worked are eligible to participate in the plan. Company
contributions are gradually vested over a seven-year service period.
Contributions to the plan by the Company were approximately $1,168,000,
$1,287,000 and $2,087,000 in 1994, 1995 and 1996, respectively.
In 1991, the Company established an Employee Stock Ownership Plan ("ESOP")
for the purpose of providing substantially all employees of the Company the
opportunity to save for their retirement and acquire a proprietary interest in
the Company. The ESOP currently owns approximately 3,320,000 shares of the
Company's common stock, which were purchased with funds borrowed from the
Company, $10,000,000 in 1991 (the "1991 ESOP Loan") and $10,000,000 in 1992 (the
"1992 ESOP Loan"). At December 31, 1996, the combined ESOP Loans had a balance
of $14,148,000. The 1991 ESOP Loan, which bears an interest rate of 10%, is
payable in annual installments covering interest and principal over a ten-year
period beginning in 1992. The 1992 ESOP Loan, which bears an interest rate of
8.5%, is payable in annual installments covering interest and principal over a
ten-year period beginning in 1993. Company contributions to the ESOP began in
1992 and shall at least equal the amount required to make all ESOP loan
amortization payments for each plan year. The Company recognizes compensation
expense based on the shares allocated method. Compensation expense related to
the ESOP recognized by the Company was $3,673,000, $3,524,000 and $3,198,000 in
1994, 1995 and 1996, respectively. Interest incurred on the ESOP Loans was
approximately $1,608,000, $1,460,000 and $1,298,000 in 1994, 1995 and 1996,
respectively. Approximately 1,212,000 shares owned by the ESOP have been
allocated to participants at December 31, 1996.
During 1993, the American Institute of Certified Public Accountants issued
Statement of Position 93-6, "Employers Accounting for Employee Stock Ownership
Plans" ("SOP 93-6"). Among other provisions, SOP 93-6 requires that compensation
expense relating to employee stock ownership plans be measured based on the fair
market value of the shares when allocated to the employees. The provisions of
SOP 93-6 apply only to leveraged ESOPs formed after December 31, 1992, or shares
newly acquired by an existing leveraged ESOP after December 31, 1992. Because
all shares owned by the Company's ESOP were acquired prior to December 31, 1992,
the Company's accounting policies for the shares currently owned by the ESOP are
not affected by SOP 93-6.
13. LOSS ON DISPOSAL OF SURGERY CENTERS
During the fourth quarter of 1994, the Company adopted a formal plan to
dispose of three surgery centers and certain other properties during 1995.
Accordingly, a loss of $13,197,000 was made to reflect the expected losses
resulting from the disposal of these centers. The loss is comprised primarily of
losses on the sale of owned facilities and equipment, write-off of intangible
and other assets, and accrual of future operating lease obligations and
estimated operating losses through the anticipated date of disposal.
B-35
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
13. LOSS ON DISPOSAL OF SURGERY CENTERS -- (CONTINUED)
The following are the major components of the loss (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Write-down of land, buildings and equipment............................................. $ 4,806
Write-off of excess of cost over fair value of net assets acquired and other assets..... 2,762
Estimated operating losses through anticipated date of disposal......................... 1,750
Accrual of future lease commitments and other obligations resulting from disposal....... 3,879
-------
$13,197
=========
</TABLE>
The closings of the three surgery centers were completed by December 31,
1995. An accrual of $929,000 is included in accrued liabilities on the
accompanying December 31, 1995 consolidated balance sheet for the remaining
costs to be incurred relative to the disposal of these surgery centers and the
other properties. The remaining accrual was used in 1996.
14. IMPAIRMENT OF LONG-TERM ASSETS
During 1994, certain events occurred which impaired the value of specific
long-term assets of ReLife (see Note 2). A hospital in Missouri with a distinct
part unit which ReLife was managing was purchased in 1994 by an acute care
provider which terminated the contract with ReLife. Remaining goodwill of
$1,700,000 and costs allocated to the management contract of $1,300,000 were
written off as there is no value remaining for the terminated contract.
A ReLife facility in central Florida incurred tornado damage and has not
operated since September 1993. During 1994, management of ReLife determined that
it was probable that this facility would not reopen. Start-up costs of
$1,600,000 were written off. This facility is leased under an operating lease as
described in Note 11 through the year 2001. An impairment accrual has been
established based on the projected undiscounted net cash flows related to this
non-operating facility for the remainder of the lease term. The accrual totaled
$5,900,000 and consists of $4,700,000 in lease payments and $1,200,000 in fixed
costs and operating expenses, including property taxes, maintenance, security
and other related costs.
During 1994, ReLife entered into a contract for a new information system.
Payments under the contract and related costs were capitalized during the year.
After the agreement to merge with HEALTHSOUTH was entered into, the computer
project was abandoned, resulting in a write-off of capitalized cost of
$4,500,000.
In 1995, the Company recorded an asset impairment charge of approximately
$53,549,000 relating to goodwill and tangible assets identifiable with fourteen
surgery centers. Approximately $47,984,000 of this charge related to ten surgery
centers which the Company intends to operate on an ongoing basis, while the
remaining loss of $5,565,000 is identifiable with four surgery centers which the
Company decided during the fourth quarter of 1995 to close.
With respect to the ten surgery centers the Company intends to continue
operating, certain events occurred in the fourth quarter of 1995 which
significantly impacted the Company's estimates of future cash flows to be
received from these centers. Those events primarily related to a decline in
operating results combined with a deterioration in relationships with key
physicians at certain of those locations. As a result of these events, the
Company revised its estimates of undiscounted cash flows to be received over the
remaining estimated useful lives of these centers and determined that goodwill
and other long-lived assets (primarily property and equipment) had been
impaired. The Company developed its best estimates of future operating cash
flows at these locations considering future requirements for capital
expenditures as well as the impact of inflation. The projections of cash flows
also took into account estimates of significant one-time expenses as well as
estimates of additional revenues and result-
B-36
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
14. IMPAIRMENT OF LONG-TERM ASSETS - (CONTINUED)
ing income from future marketing efforts in the respective locations. The amount
of the impairment charge was determined by discounting the estimates of future
cash flows, using an estimated 8.5% incremental borrowing rate which management
believes is commensurate with the risks involved. The resulting net present
value of future cash flows was then compared to the historical net book value of
goodwill and other long-lived assets at each operating location which resulted
in an impairment loss relative to these centers of $47,984,000.
The remaining impairment charge of $5,565,000 relating to the centers to be
closed was based on the fair value of the related assets less estimated costs to
sell. One of these facilities is expected to be sold by the middle of 1997. The
Company continues to operate the remaining three facilities and is evaluating
its alternatives for their disposition. Assets held for sale having a remaining
net book value of $2,839,000 and $2,309,000 are included in property and
equipment on the accompanying December 31, 1995 and 1996 balance sheets,
respectively.
The above amounts are included in operations for 1995 in the accompanying
consolidated statement of income.
15. SUBSEQUENT EVENTS
On January 18, 1997, the Company's Board of Directors authorized a
two-for-one stock split to be effected in the form of a 100% stock dividend,
subject to the approval by the Company's stockholders of an amendment to its
Certificate of Incorporation increasing the number of authorized shares of
common stock from 250,000,000 to 500,000,000. The Company's stockholders
approved the amendment on March 12, 1997. The stock dividend is payable on March
17, 1997 to holders of record on March 13, 1997. Accordingly, all share and per
share amounts included in the accompanying financial statements have been
restated to give effect to the stock split.
On February 17, 1997, the Company entered into a definitive agreement to
acquire Horizon/CMS Healthcare Corporation ("Horizon/CMS") in a stock-for-stock
merger in which the stockholders of Horizon/CMS will receive .84338 (after
adjustment for the two-for-one stock split) of a share of the Company's common
stock per share of Horizon/CMS common stock. The transaction is valued at
approximately $1,600,000,000, including the assumption by the Company of
approximately $700,000,000 in Horizon/CMS debt. It is expected that the
acquisition will be accounted for as a purchase. Horizon/CMS operates 33
inpatient rehabilitation hospitals, 58 specialty hospitals and subacute units
and 282 outpatient rehabilitation centers. Horizon/CMS also owns, leases or
manages 267 long-term care facilities, a contract therapy business, an
institutional pharmacy business and other healthcare services. Consummation of
the transaction is subject to various regulatory approvals, including clearance
under the Hart-Scott-Rodino Antitrust Improvements Act, and to the satisfaction
of certain other conditions. The Company currently anticipates that the
transaction will be consummated in mid-1997.
B-37
<PAGE>
MARKET FOR THE COMPANY'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed for trading on the New York Stock
Exchange (Symbol: HRC). The following table sets forth for the fiscal periods
indicated the high and low reported sale prices for the Company's Common Stock
as reported on the NYSE Composite Transactions Tape. All prices shown have been
adjusted for a two-for-one stock split effected in the form of a 100% stock
dividend paid on April 17, 1995 and a two-for-one stock split effected in the
form of a 100% stock dividend paid on March 17, 1997.
REPORTED
SALE PRICE
HIGH LOWER
------------ --------
1995
First Quarter........................................... $10.22 $ 9.03
Second Quarter.......................................... 10.82 8.16
Third Quarter........................................... 12.88 8.63
Fourth Quarter.......................................... 16.19 11.25
1996
First Quarter........................................... $19.07 $13.50
Second Quarter.......................................... 19.32 16.16
Third Quarter........................................... 19.32 14.25
Fourth Quarter.......................................... 19.88 17.57
----------
The closing price for the Common Stock on the New York Stock Exchange on
March 27, 1997, was $20.375.
There were approximately 3,671 holders of record of the Common Stock as of
March 27, 1997, excluding those shares held by depository companies for certain
beneficial owners.
The Company has never paid cash dividends on its Common Stock (although
certain of the companies acquired by the Company in poolings-of-interests
transactions had paid dividends prior to such acquisitions) and does not
anticipate the payment of cash dividends in the foreseeable future. The Company
currently anticipates that any future earnings will be retained to finance the
Company's operations.
RECENT SALES OF UNREGISTERED SECURITIES
During the fourth quarter of 1996, the Company issued 52,584 shares of its
Common Stock in a transaction not registered under the Securities Act of 1933,
as amended. Such shares were issued as of November 14, 1996, to five individuals
who were shareholders of a corporation acquired by the Company in a merger
transaction. Such shares were issued to such individuals in exchange for all the
issued and outstanding capital stock of the acquired company. The Company issued
such shares of its Common Stock in reliance upon the exemption contained in
Section 4(2) of the Securities Act of 1933, as amended, inasmuch as the issuance
of such shares did not involve any public offering.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The Company has not changed independent accountants within the 24 months
prior to December 31, 1996.
B-38
<PAGE>
PROXY HEALTHSOUTH CORPORATION
ANNUAL MEETING OF STOCKHOLDERS -- MAY 1, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints RICHARD M. SCRUSHY and AARON BEAM, JR. or
____________________________________, and each of them, with several powers of
substitution, proxies to vote the shares of Common Stock, par value $.01 per
share, of HEALTHSOUTH Corporation which the undersigned could vote if personally
present at the Annual Meeting of Stockholders of HEALTHSOUTH Corporation to be
held at One HealthSouth Parkway, Birmingham, Alabama 35243, on Thursday, May 1,
1997, at 2:00 p.m., C.D.T., and any adjournment thereof:
1. ELECTION OF DIRECTORS
[ ] FOR all nominees listed below [ ] WITHHELD AUTHORITY to vote
(except as marked to the contrary below) for all nominees listed below
INSTRUCTION: To withhold authority to vote for any individual nominee, mark a
line through the nominee's name in the list below.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Richard M. Scrushy C. Sage Givens Anthony J. Tanner Phillip C. Watkins
Richard F. Celeste Larry R. House George H. Strong Charles W. Newhall III
James P. Bennett John S. Chamberlin Aaron Beam, Jr. P. Daryl Brown
Joel C. Gordon
</TABLE>
2. APPROVAL OF THE 1997 STOCK OPTION PLAN
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. In their discretion, to act upon any matters incidental to the foregoing and
such other business as may properly come before the Annual Meeting or any
adjournment thereof.
This Proxy, when properly executed, will be voted in the manner directed
herein by the undersigned stockholder. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR ITEMS 1 AND 2 ABOVE. Any stockholder who wishes to withhold the
discretionary authority referred to in Item 3 above should mark a line through
the entire Item. Any stockholder who wishes to withhold the discretionary
authority referred to in Item 3 above should mark a line through the entire
Item.
DATED , 1997
------------------------
-----------------------------------
Signature(s)
-----------------------------------
(Please sign exactly and as fully
as your name appears on your stock
certificate. If shares are held
jointly, each stockholder should
sign.) PLEASE MARK, SIGN, DATE AND
RETURN PROMPTLY, USING THE ENCLOSED
ENVELOPE. NO POSTAGE IS REQUIRED.
