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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997; OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission File Number 1-10315
HEALTHSOUTH CORPORATION
--------------------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 63-0860407
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(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
ONE HEALTHSOUTH PARKWAY
BIRMINGHAM, ALABAMA 35243
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(Address of Principal Executive (Zip Code)
Offices)
Registrant's Telephone Number, Including Area Code: (205) 967-7116
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
- - --------------------------------------- ------------------------
COMMON STOCK, PAR VALUE NEW YORK STOCK EXCHANGE
$.01 per share
9.5% SENIOR SUBORDINATED NEW YORK STOCK EXCHANGE
NOTES DUE 2001
Securities Registered Pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all Reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such Reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 13, 1998:
Common Stock, par value $.01 per share -- $11,890,990,000
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at March 13, 1998
- - ------------------------------------ ------------------------------
COMMON STOCK, PAR VALUE
$.01 PER SHARE 398,285,974 SHARES
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into this Annual Report on Form 10-K.
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PART I
ITEM 1. BUSINESS.
GENERAL
HEALTHSOUTH Corporation ("HEALTHSOUTH" or the "Company") is the nation's
largest provider of outpatient surgery and rehabilitative healthcare services.
The Company provides these services through its national network of outpatient
and inpatient rehabilitation facilities, outpatient surgery centers, diagnostic
centers, occupational medicine centers, medical centers and other healthcare
facilities. The Company believes that it provides patients, physicians and
payors with high-quality healthcare services at significantly lower costs than
traditional inpatient hospitals. Additionally, the Company's national network,
reputation for quality and focus on outcomes has enabled it to secure contracts
with national and regional managed care payors. At December 31, 1997, the
Company had over 1,750 patient care locations in 50 states, the United Kingdom
and Australia.
In its outpatient and inpatient rehabilitation facilities, the Company
provides interdisciplinary programs for the rehabilitation of patients
experiencing disability due to a wide variety of physical conditions, such as
stroke, head injury, orthopaedic problems, neuromuscular disease and
sports-related injuries. The Company's rehabilitation services include physical
therapy, sports medicine, work hardening, neurorehabilitation, occupational
therapy, respiratory therapy, speech-language pathology and rehabilitation
nursing. Independent studies have shown that rehabilitation services like those
provided by the Company can save money for payors and employers.
In addition to its rehabilitation facilities, the Company operates the
largest network of freestanding outpatient surgery centers in the United States.
The Company's outpatient surgery centers provide the facilities and medical
support staff necessary for physicians to perform non-emergency surgical
procedures. While outpatient surgery is widely recognized as generally less
expensive than surgery performed in a hospital, the Company believes that
outpatient surgery performed at a freestanding outpatient surgery center is
generally less expensive than hospital-based outpatient surgery. Over 80% of the
Company's surgery center facilities are located in markets served by its
rehabilitative service facilities, enabling the Company to pursue opportunities
for cross-referrals.
The Company is also among the largest operators of outpatient diagnostic
centers and occupational medicine centers in the United States. Most of the
Company's diagnostic centers and occupational medicine centers operate in
markets where the Company also provides rehabilitative healthcare and outpatient
surgery services. The Company believes that its ability to offer a comprehensive
range of its services in a particular geographic market makes the Company more
attractive to both patients and payors in such market.
Over the last three years, the Company has completed several significant
acquisitions in the rehabilitation business and has expanded into the surgery
center, diagnostic and occupational medicine businesses. The Company believes
that these acquisitions complement its historical operations and enhance its
market position. The Company further believes that its expansion into the
outpatient surgery, diagnostic and occupational medicine businesses provides it
with platforms for future growth. The Company is continually evaluating
potential acquisitions in the outpatient and rehabilitative healthcare services
industry.
The Company was organized as a Delaware corporation in February 1984. The
Company's principal executive offices are located at One HealthSouth Parkway,
Birmingham, Alabama 35243, and its telephone number is (205) 967-7116.
COMPANY STRATEGY
The Company's principal objective is to be the provider of choice for
patients, physicians and payors alike for outpatient surgery and rehabilitative
healthcare services throughout the United States. The Company's growth strategy
is based upon four primary elements: (i) the implementation of the
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Company's integrated service model in appropriate markets, (ii) successful
marketing to managed care organizations and other payors, (iii) the provision of
high-quality, cost-effective healthcare services, and (iv) the expansion of its
national network.
o Integrated Service Model. The Company seeks, where appropriate, to provide an
integrated system of healthcare services, including outpatient rehabilitation
services, inpatient rehabilitation services, ambulatory surgery services and
outpatient diagnostic services. The Company believes that its integrated
system offers payors the convenience of dealing with a single provider for
multiple services. Additionally, it believes that its facilities can provide
extensive cross-referral opportunities. For example, the Company estimates
that approximately one-third of its outpatient rehabilitation patients have
had outpatient surgery, virtually all inpatient rehabilitation patients will
require some form of outpatient rehabilitation, and virtually all inpatient
rehabilitation patients have had some type of diagnostic procedure. The
Company has implemented its Integrated Service Model in certain of its
markets, and intends to expand the model into other appropriate markets.
o Marketing to Managed Care Organizations and Other Payors. Since the late
1980s, the Company has focused on the development of contractual
relationships with managed care organizations, major insurance companies,
large regional and national employer groups and provider alliances and
networks. The Company's documented outcomes and experience with several
hundred thousand patients in delivering quality healthcare services at
reasonable prices has enhanced its attractiveness to such entities and has
given the Company a competitive advantage over smaller and regional
competitors. These relationships have increased patient flow to the Company's
facilities and contributed to the Company's same-store growth.
o Cost-Effective Services. The Company's goal is to provide high-quality
healthcare services in cost-effective settings. To that end, the Company has
developed standardized clinical protocols for the treatment of its patients.
This results in "best practices" techniques being utilized at all of the
Company's facilities, allowing the consistent achievement of demonstrable,
cost-effective clinical outcomes. The Company's reputation for its clinical
programs is enhanced through its relationships with major universities
throughout the nation, and its support of clinical research in its facilities.
Further, independent studies estimate that, for every dollar spent on
rehabilitation, $11 to $35 is saved. Finally, surgical procedures typically
are less expensive in outpatient surgery centers than in hospital settings.
The Company believes that outpatient and rehabilitative healthcare services
will assume increasing importance in the healthcare environment as payors
continue to seek to reduce overall costs by shifting patients to more
cost-effective treatment settings.
o Expansion of National Network. As the largest provider of outpatient surgery
and rehabilitative healthcare services in the United States, the Company is
able to realize economies of scale and compete successfully for national
contracts with large payors and employers while retaining the flexibility to
respond to particular needs of local markets. The national network affords
the Company the opportunity to offer large national and regional employers
and payors the convenience of dealing with a single provider, to utilize
greater buying power through centralized purchasing, to achieve more
efficient costs of capital and labor and to more effectively recruit and
retain clinicians. The Company believes that its recent acquisitions in the
outpatient surgery, diagnostic imaging and occupational medicine fields will
further enhance its national presence by broadening the scope of its existing
services and providing new opportunities for growth. These national benefits
are realized without sacrificing local market responsiveness. The Company's
objective is to provide those outpatient and rehabilitative healthcare
services needed within each local market by tailoring its services and
facilities to that market's needs, thus bringing the benefits of nationally
recognized expertise and quality into the local setting.
GROWTH THROUGH ACQUISITIONS
Beginning in 1994, the Company has consummated a series of significant
acquisitions. During 1995, the Company consummated pooling-of-interests mergers
with Surgical Health Corporation ("SHC"; 36 outpatient surgery centers in 11
states) and Sutter Surgery Centers, Inc. ("SSCI"; 12 outpatient surgery centers
in three states), as well as stock purchase acquisitions of the rehabilitation
hospitals division of
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NovaCare, Inc. ("NovaCare"; 11 inpatient rehabilitation facilities, 12 other
healthcare facilities and two Certificates of Need in eight states) and Caremark
Orthopedic Services Inc. ("Caremark"; 120 outpatient rehabilitation facilities
in 13 states). During 1996, the Company acquired Surgical Care Affiliates, Inc.
("SCA"; 67 outpatient surgery centers in 24 states), Advantage Health
Corporation ("Advantage Health"; approximately 136 inpatient and outpatient
rehabilitation facilities in 11 states), Professional Sports Care Management,
Inc. ("PSCM"; 36 outpatient rehabilitation facilities in New York, New Jersey
and Connecticut) and ReadiCare, Inc. ("ReadiCare"; 37 occupational medicine
centers in California and Washington) in pooling-of-interests transactions.
During 1997, the Company acquired Health Images, Inc. ("Health Images"; 55
diagnostic imaging centers in 13 states and the United Kingdom), ASC Network
Corporation ("ASC"; 29 surgery centers in eight states), Horizon/CMS Healthcare
Corporation ("Horizon/CMS"; 30 inpatient rehabilitation facilities and
approximately 275 outpatient rehabilitation centers in 24 states) and National
Imaging Affiliates, Inc. ("NIA"; eight diagnostic imaging centers in six
states). On December 31, 1997, the Company sold the long-term care assets of
Horizon/CMS, consisting of 139 long-term care facilities, 12 specialty
hospitals, 35 institutional pharmacy locations and over 1,000 rehabilitation
therapy contracts with long-term care facilities, to Integrated Health Services,
Inc. ("IHS"). The NovaCare, Caremark, Advantage Health, PSCM and Horizon/CMS
transactions have further enhanced the Company's position as the nation's
largest provider of inpatient and outpatient rehabilitative services, while the
SHC, SSCI, SCA and ASC transactions have made the Company the largest provider
of outpatient surgery services in freestanding centers in the nation and the
ReadiCare, Health Images and NIA transactions have broadened the Company's
services in occupational medicine and diagnostic imaging. The Company believes
that the geographic dispersion of the more than 1,750 locations now operated by
the Company makes it more attractive to managed care networks, major insurance
companies, regional and national employers and regional provider alliances and
enhances the Company's ability to implement its Integrated Service Model in
additional markets. See Item 7, "Management's Discussion and Analysis of
Financial Conditions and Results of Operations".
INDUSTRY BACKGROUND
In 1996, there were an estimated 3,500,000 inpatient hospital discharges in
the United States involving impairments requiring rehabilitative healthcare
services. "Rehabilitative healthcare services" refers to the range of skilled
services provided to individuals in order to minimize physical and cognitive
impairments, maximize functional ability and restore lost functional capacity.
The focus of rehabilitative healthcare is to ameliorate physical and cognitive
impairments resulting from illness or injury, and to restore or improve
functional ability so that individuals can return to work and lead independent
and fulfilling lives. Typically, rehabilitative healthcare services are provided
by a variety of healthcare professionals including physiatrists, rehabilitation
nurses, physical therapists, occupational therapists, speech- language
pathologists, respiratory therapists, recreation therapists, social workers,
psychologists, rehabilitation counselors and others. Over 80% of those receiving
rehabilitative healthcare services return to their homes, work, schools or
active retirement.
Demand for rehabilitative healthcare services continues to be driven by
advances in medical technologies, an aging population and the recognition on the
part of the payor community (insurers, self-insured companies, managed care
organizations and federal, state and local governments) that appropriately
administered rehabilitative services can improve quality of life as well as
lower overall healthcare costs. Studies conducted by insurance companies
demonstrate the ability of rehabilitation to significantly reduce the cost of
future care. Estimates of the savings range from $11 to $35 per dollar spent on
rehabilitation. Further, reimbursement changes have encouraged the rapid
discharge of patients from acute-care hospitals while they remain in need of
rehabilitative healthcare services.
The Company also believes that there is a growing trend toward the
provision of other healthcare services on an outpatient basis, fueled by
advances in technology, demands for cost-effective care and concerns for patient
comfort and convenience. An industry study indicates that there has been a 75%
increase in the number of treatments in all ambulatory settings from 1986 to
1996, with two-thirds of the total number of surgeries in the United States in
1996 being performed on an outpatient basis. The Company believes that these
trends will continue to foster demand for the delivery of healthcare services on
an outpatient basis.
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PATIENT CARE SERVICES
The Company began its operations in 1984 with a focus on providing
comprehensive orthopaedic and musculoskeletal rehabilitation services on an
outpatient basis. Over the succeeding 14 years, the Company has consistently
sought and implemented opportunities to expand its services through acquisitions
and de novo development activities that complement its historic focus on
orthopaedic, sports medicine and occupational medicine services and that provide
independent platforms for growth. The Company's acquisitions and internal growth
have enabled it to become the largest provider of rehabilitative healthcare
services, both inpatient and outpatient, in the United States, as well as the
largest operator of freestanding outpatient surgery centers. In addition, the
Company has added diagnostic imaging services, occupational medicine services
and other outpatient services which provide natural enhancements to its
rehabilitative healthcare locations and facilitate the implementation of its
Integrated Service Model. The Company believes that these additional businesses
also provide opportunities for growth in other areas not directly related to the
rehabilitative business, and the Company intends to pursue further expansion in
those businesses.
Rehabilitative Services: General
When a patient is referred to one of the Company's rehabilitation
facilities, the patient undergoes an initial evaluation and assessment process
that results in the development of a rehabilitation care plan designed
specifically for that patient. Depending upon the patient's disability, this
evaluation process may involve the services of a single discipline, such as
physical therapy for a knee injury, or of multiple disciplines, as in the case
of a complicated stroke patient. HEALTHSOUTH has developed numerous
rehabilitation programs, which include stroke, head injury, spinal cord injury,
neuromuscular and work injury, that combine certain services to address the
needs of patients with similar disabilities. In this way, all of the facilities'
patients, regardless of the severity and complexity of their disabilities, can
receive the level and intensity of those services necessary for them to be
restored to as productive, active and independent a lifestyle as possible.
Outpatient Rehabilitation Services
The Company operates the largest group of affiliated proprietary outpatient
rehabilitation facilities in the United States. The Company's outpatient
rehabilitation centers offer a comprehensive range of rehabilitative healthcare
services, including physical therapy and occupational therapy, that are tailored
to the individual patient's needs, focusing predominantly on orthopaedic
injuries, sports injuries, work injuries, hand and upper extremity injuries,
back injuries, and various neurological/neuromuscular conditions. As of December
31, 1997, the Company provided outpatient rehabilitative healthcare services
through approximately 1,150 outpatient locations, including freestanding
outpatient centers and their satellites, outpatient satellites of inpatient
facilities and outpatient facilities managed under contract.
Continuing emphasis on containing increases in healthcare costs, as
evidenced by Medicare's prospective payment system, the growth in managed care
and the various alternative healthcare reform proposals, has resulted in earlier
discharge of patients from acute-care facilities. As a result, many hospital
patients do not receive the intensity of services that may be necessary for them
to achieve a full recovery from their diseases, disorders or traumatic
conditions. The Company's outpatient rehabilitation services play a significant
role in the continuum of care because they provide hospital-level services, in
terms of intensity, quality and frequency, in a more cost-efficient setting.
Patients treated at the Company's outpatient centers will undergo varying
courses of therapy depending upon their individual needs. Some patients may only
require a few hours of therapy per week for a few weeks, while others may spend
up to five hours per day in therapy for six months or more, depending on the
nature, severity and complexity of their injuries.
In general, the Company initially establishes an outpatient center in a
given market, either by acquiring an existing private therapy practice or
through de novo development, and institutes its clinical protocols and programs
in response to the community's general need for services. The Company will then
establish satellite clinics that are dependent upon the main facility for
management and adminis-
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trative services. These satellite clinics generally provide a specific
evaluative or specialty service/program, such as hand therapy or foot and ankle
therapy, in response to specific market demands. The Company's outpatient
rehabilitation facilities range in size from 1,200 square feet for specialty
clinics to 20,000 square feet for large, full-service facilities. Currently, the
typical outpatient facility configuration ranges in size from 2,000 to 5,000
square feet and costs less than $500,000 to build out and equip.
Patient utilization of the Company's outpatient rehabilitation facilities
cannot be measured in the conventional manner applied to acute-care hospitals,
nursing homes and other healthcare providers which have a fixed number of
licensed beds and serve patients on a 24-hour basis. Utilization patterns in
outpatient rehabilitation facilities will be affected by the market to be
served, the types of injuries treated, the patient mix and the number of
available therapists, among other factors. Moreover, because of variations in
size, location, hours of operation, referring physician base and services
provided and other differences among each of the Company's outpatient
facilities, it is not possible to accurately assess patient utilization against
a norm.
Inpatient Services
INPATIENT REHABILITATION FACILITIES. At December 31, 1997, the Company
operated 132 inpatient rehabilitation facilities with 7,682 beds in the United
States, representing the largest group of affiliated proprietary inpatient
rehabilitation facilities in the nation, as well as a 71-bed rehabilitation
hospital in Australia. The Company's inpatient rehabilitation facilities provide
high-quality comprehensive services to patients who require intensive
institutional rehabilitation care.
Inpatient rehabilitation patients are typically those who are experiencing
significant physical disabilities due to various conditions, such as head
injury, spinal cord injury, stroke, certain orthopaedic problems and
neuromuscular disease. The Company's inpatient rehabilitation facilities provide
the medical, nursing, therapy and ancillary services required to comply with
local, state and federal regulations as well as accreditation standards of the
Joint Commission on Accreditation of Healthcare Organizations (the "JCAHO") and
the Commission on Accreditation of Rehabilitation Facilities ("CARF").
All of the Company's inpatient rehabilitation facilities utilize an
interdisciplinary team approach to the rehabilitation process and involve the
patient and family, as well as the payor, in the determination of the goals for
the patient. Internal case managers monitor each patient's progress and provide
documentation of patient status, achievement of goals, functional outcomes and
efficiency.
In certain markets the Company's rehabilitation hospitals may provide
outpatient rehabilitation services as a complement to their inpatient services.
Typically, this opportunity arises when patients complete their inpatient course
of treatment but remain in need of additional therapy that can be accomplished
on an outpatient basis. Depending upon the demand for outpatient services and
physical space constraints, the rehabilitation hospital may establish the
services either within its building or in a satellite location. In either case,
the clinical protocols and programs developed for use in the freestanding
outpatient centers will be utilized by these facilities.
A number of the Company's rehabilitation hospitals, including its
Nashville, Tennessee (Vanderbilt University), Memphis, Tennessee (Methodist
Hospitals), Dothan, Alabama (Southeast Alabama Medical Center), Charleston,
South Carolina (North Trident Regional Medical Center) and Columbia, Missouri
(University of Missouri) hospital facilities, have been developed in conjunction
with local tertiary-care facilities. This strategy of developing effective
referral and service networks prior to opening results in improved operating
efficiencies for the new facilities. The Company is utilizing this same concept
in the rehabilitation hospital under development with the University of Virginia
and has entered into or is pursuing similar affiliations with a number of its
existing rehabilitation hospitals.
MEDICAL CENTERS. At December 31, 1997, the Company operated four medical
centers with 800 licensed beds in four distinct markets. These facilities
provide general and specialty medical and surgical healthcare services,
emphasizing orthopaedics, sports medicine and rehabilitation.
The Company acquired its medical centers as outgrowths of its
rehabilitative healthcare services. Often, patients require medical and surgical
interventions prior to the initiation of their rehabilitative care. In each of
the markets in which the Company has acquired a medical center, the Company had
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well-established relationships with the medical communities serving each
facility. In addition, each of the facilities enjoyed well-established
reputations in orthopaedics and/or sports medicine prior to their acquisition by
the Company. Following the acquisition of each of its medical centers, the
Company has provided the resources to improve upon the physical plant and expand
services through the introduction of new technology. The Company has also
developed additional relationships between these facilities and certain
university facilities, including the University of Miami, Auburn University and
the University of Alabama at Birmingham. Through these relationships, the influx
of celebrity athletes and personalities and the acquisition of new technology,
all of the Company's medical centers have improved their operating efficiencies
and enhanced census.
Each of the Company's medical center facilities is licensed as an
acute-care hospital, is accredited by the JCAHO and participates in the Medicare
prospective payment system. See this Item, "Business -- Regulation".
INPATIENT FACILITY UTILIZATION. In measuring patient utilization of the
Company's inpatient facilities, various factors must be considered. Due to
market demand, demographics, start-up status, renovation, patient mix and other
factors, the Company may not treat all licensed beds in a particular facility as
available beds, which sometimes results in a material variance between licensed
beds and beds actually available for utilization at any specific time. The
Company is in a position to increase the number of available beds at such
facilities as market conditions dictate. During the year ended December 31,
1997, the Company's inpatient facilities achieved an overall utilization, based
on patient days and available beds, of 74.66%.
Surgery Centers
The Company is currently the largest operator of outpatient surgery centers
in the United States. At December 31, 1997, it operated 172 freestanding surgery
centers, including five mobile lithotripsy units, in 35 states. Over 80% of
these facilities are located in markets served by the Company's outpatient and
rehabilitative service facilities, enabling the Company to pursue opportunities
for cross-referrals between surgery and rehabilitative facilities as well as to
centralize administrative functions. The Company's surgery centers provide the
facilities and medical support staff necessary for physicians to perform
non-emergency surgical procedures. Its typical surgery center is a freestanding
facility with three to six fully equipped operating and procedure rooms and
ancillary areas for reception, preparation, recovery and administration. Each of
the Company's surgery centers is available for use only by licensed physicians,
oral surgeons and podiatrists, and the centers do not perform surgery on an
emergency basis.
Outpatient surgery centers, unlike hospitals, have not historically
provided overnight accommodations, food services or other ancillary services.
Over the past several years, states have increasingly permitted the use of
extended-stay recovery facilities by outpatient surgery centers. As a result,
many outpatient surgery centers are adding extended recovery care capabilities
where permitted. Most of the Company's surgery centers currently provide for
extended recovery stays. The Company's ability to develop such recovery care
facilities is dependent upon state regulatory environments in the particular
states where its centers are located.
The Company's outpatient surgery centers implement quality control
procedures to evaluate the level of care provided the centers. Each center has a
medical advisory committee of three to ten physicians which reviews the
professional credentials of physicians applying for medical staff privileges at
the center.
Diagnostic Centers
At December 31, 1997, the Company operated 101 diagnostic centers in 21
states and the United Kingdom. These centers provide outpatient diagnostic
imaging services, including magnetic resonance imaging ("MRI"), computerized
tomography ("CT") services, X-ray services, ultrasound services, mammography
services, nuclear medicine services and fluoroscopy. Not all services are
provided at all sites; however, most of the Company's diagnostic centers are
multi-modality centers.
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The Company's diagnostic centers provide outpatient diagnostic procedures
performed by experienced radiological technicians. After the diagnostic
procedure is completed, the images are reviewed by radiologists who have
contracted with the Company. Such radiologists prepare a report of the test and
their findings, which are then delivered to the referring physician. The
Company's diagnostic centers are open at such hours as are appropriate for the
local medical community.
Because many patients at the Company's rehabilitative healthcare and
outpatient surgery facilities require diagnostic procedures of the type
performed at the Company's diagnostic centers, the Company believes that its
diagnostic operations are a natural complement to its other services and enhance
its ability to market those services to patients and payors.
Occupational Medicine Services
At December 31, 1997, the Company operated 93 occupational medicine centers
in 22 states. These centers provide cost-effective, outpatient primary medical
care and rehabilitation services to individuals for the treatment of
work-related medical problems.
The Company's occupational medicine centers market their services to large
and small employers, workers' compensation and health insurers and managed care
organizations. The services provided at the Company's occupational medicine
centers include outpatient primary medical care for work-related injuries and
illnesses, work-related physical examinations, physical therapy services and
workers' compensation medical services, as well as other services primarily
aimed at work-related injuries or illnesses. Medical services at the centers are
provided by licensed physicians who are employed by or under contract with the
Company or affiliated medical practices. These centers also employ nurses,
therapists and other licensed professional staff as necessary for the services
provided. The Company believes that occupational medicine primary care services
are a strategic component of its business, and that the physicians in its
occupational medicine centers can, in many cases, serve as "gatekeepers"
providing access to the other services offered by the Company.
Other Patient Care Services
In certain of its markets, the Company provides other patient care
services, including home healthcare, physician services and contract management
of hospital-based rehabilitative healthcare services. The Company evaluates
market opportunities on a case-by-case basis in determining whether to provide
additional services of these types, which may be complementary to facility-based
services provided by the Company or stand-alone businesses.
MARKETING OF FACILITIES AND SERVICES
The Company markets its facilities, and their services and programs, on
local, regional and national levels. Local and regional marketing activities are
typically coordinated by facility-based marketing personnel, whereas large-scale
regional and national efforts are coordinated by corporate-based personnel.
In general, the Company develops a marketing plan for each facility based
on a variety of factors, including population characteristics, physician
characteristics and incidence of disability statistics, in order to identify
specific service opportunities. Facility-oriented marketing programs are focused
on increasing the volume of patient referrals to the specific facility and
involve the development of ongoing relationships with area schools, businesses
and industries as well as physicians, health maintenance organizations and
preferred provider organizations.
The Company's larger-scale marketing activities are focused more broadly on
efforts to generate patient referrals to multiple facilities and the creation of
new business opportunities. Such activities include the development and
maintenance of contractual relationships or national pricing agreements with
large third-party payors, such as CIGNA, United Healthcare or other national
insurance companies, with national HMO/PPO companies, such as
Healthcare-COMPARE/AFFORDABLE, Hospital Network of America and Multiplan, with
national case management companies, such as INTRACORP
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and Crawford & Co., and with national employers, such as Wal-Mart,
Georgia-Pacific Corporation, Dillard Department Stores, Goodyear Tire & Rubber
and Winn-Dixie. In addition, since many of the facilities acquired by the
Company during the past three years had very limited contractual relationships
with payors, managed care providers, employers and others, the Company is
expanding its existing payor relationships to include these facilities.
The Company carries out broader programs designed to further enhance its
public image. Among these is the HEALTHSOUTH Sports Medicine Council, headed by
Bo Jackson and involving other well-known professional and amateur athletes and
sports medicine specialists, which is dedicated to developing educational
programs focused on athletics for use in high schools. The Company has ongoing
relationships with the Ladies Professional Golf Association, the Southeastern
Conference, the U.S. Decathlon Team, USA Hockey, USA Wrestling, USA Volleyball
and more than 125 universities and colleges and 1,000 high schools to provide
sports medicine coverage of events and rehabilitative healthcare services for
injured athletes. In addition, the Company has established relationships with or
provided treatment services for athletes from some 40-50 professional sports
teams, as well as providing sports medicine services for Olympic and amateur
athletes. In 1996, the Company and the United States Olympic Committee
established the Richard M. Scrushy/HEALTHSOUTH Sports Medicine and Sport Science
Center at the USOC's Colorado Springs campus.
The Company is a national sponsor of the United Cerebral Palsy Association
and the National Arthritis Foundation and supports many other charitable
organizations on national and local levels. Through these endeavors, the Company
provides its employees with opportunities to support their communities.
SOURCES OF REVENUES
Private pay revenue sources represent the majority of the Company's
revenues. The following table sets forth the percentages of the Company's
revenues from various sources for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
SOURCE DECEMBER 31, 1996 DECEMBER 31, 1997
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<S> <C> <C>
Medicare ...................... 37.8% 36.9%
Commercial (1) ................ 34.9 35.1
Workers' Compensation ......... 11.3 11.1
All Other Payors (2) .......... 16.0 16.9
----- -----
100.0% 100.0%
</TABLE>
- - ----------
(1) Includes commercial insurance, HMOs, PPOs and other managed care plans.
(2) Medicaid is included in this category, but is insignificant in amount.
The above table does not reflect the SCA, Advantage Health, PSCM, ReadiCare
or Health Images facilities for periods or portions thereof prior to the
effective date of the acquisitions. Comparable information for those facilities
is not available.
See this Item "Business -- Regulation -- Medicare Participation and
Reimbursement" for a description of certain of the reimbursement regulations
applicable to the Company's facilities.
COMPETITION
The Company competes in the geographic markets in which its facilities are
located. In addition, the Company's rehabilitation facilities compete on a
regional and national basis with other providers of specialized services such as
sports medicine and work hardening, and specific concentrations such as head
injury rehabilitation and orthopaedic surgery. The competition faced in each of
these markets is similar, with variations arising from the number of healthcare
providers in the given metropolitan area. The primary competitive factors in the
rehabilitation services business are quality of services, projected patient
outcomes, charges for services, responsiveness to the needs of the patients,
community and
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physicians, and ability to tailor programs and services to meet specific needs
of the patients. Competitors and potential competitors include hospitals,
private practice therapists, rehabilitation agencies and others. Some of these
competitors may have greater patient referral support and financial and
personnel resources in particular markets than the Company. Management believes
that the Company competes successfully within the marketplace based upon its
reputation for quality, competitive prices, positive rehabilitation outcomes,
innovative programs, clean and bright facilities and responsiveness to needs.
The Company's surgery centers compete primarily with hospitals and other
operators of freestanding surgery centers in attracting physicians and patients,
and in developing new centers and in acquiring existing centers. The primary
competitive factors in the outpatient surgery business are convenience, cost,
quality of service, physician loyalty and reputation. Hospitals have many
competitive advantages in attracting physicians and patients, including
established standing in a community, historical physician loyalty and
convenience for physicians making rounds or performing inpatient surgery in the
hospital. However, the Company believes that its national market system and its
historical presence in certain of the markets where its surgery centers are
located will enhance the Company's ability to operate these facilities
successfully.
The Company's diagnostic centers compete with local hospitals, other
multi-center imaging companies, local independent diagnostic centers and imaging
centers owned by local physician groups. The Company believes that the principal
competitive factors in the diagnostic services are price, quality of service,
ability to establish and maintain relationships with managed care payors and
referring physicians, reputation of interpreting physicians, facility location
and convenience of scheduling. Management believes that the Company's diagnostic
facilities compete successfully within their respective markets, taking into
account these factors.
The Company's medical centers are located in four urban areas of the
country, all with well established healthcare services provided by a number of
proprietary, not-for-profit, and municipal hospital facilities. The Company's
facilities compete directly with these local hospitals as well as various
nationally recognized centers of excellence in orthopaedics, sports medicine and
other specialties. Because the Company's facilities enjoy a national and
international reputation for orthopaedic surgery and sports medicine, the
Company believes that its medical centers' level of service and continuum of
care enable them to compete successfully, both locally and nationally.
The Company potentially faces competition any time it initiates a
Certificate of Need ("CON") project or seeks to acquire an existing facility or
CON. See this Item, "Business -- Regulation". This competition may arise either
from competing companies, national or regional, or from local hospitals which
file competing applications or oppose the proposed CON project. The necessity
for these approvals serves as a barrier to entry and has the potential to limit
competition by creating a franchise to provide services to a given area. The
Company has generally been successful in obtaining CONs or similar approvals
when required, although there can be no assurance that it will achieve similar
success in the future.
REGULATION
The healthcare industry is subject to regulation by federal, state and
local governments. The various levels of regulatory activity affect the
Company's business activities by controlling its growth, requiring licensure or
certification of its facilities, regulating the use of its properties and
controlling the reimbursement to the Company for services provided.
Licensure, Certification and Certificate of Need Regulations
Capital expenditures for the construction of new facilities, the addition
of beds or the acquisition of existing facilities may be reviewable by state
regulators under a statutory scheme which is sometimes referred to as a CON
program. States with CON programs place limits on the construction and
acquisition of healthcare facilities and the expansion of existing facilities
and services. In such states, approvals are required for capital expenditures
exceeding certain amounts which involve inpatient rehabilitation facilities or
services. Outpatient rehabilitation facilities and services do not require such
approvals in a majority of states.
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<PAGE>
State CON statutes generally provide that, prior to the addition of new
beds, the construction of new facilities or the introduction of new services, a
state health planning designated agency (a "SHPDA") must determine that a need
exists for those beds, facilities or services. The CON process is intended to
promote comprehensive healthcare planning, assist in providing high quality
healthcare at the lowest possible cost and avoid unnecessary duplication by
ensuring that only those healthcare facilities that are needed will be built.
Typically, the provider of services submits an application to the
appropriate SHPDA with information concerning the area and population to be
served, the anticipated demand for the facility or service to be provided, the
amount of capital expenditure, the estimated annual operating costs, the
relationship of the proposed facility or service to the overall state health
plan and the cost per patient day for the type of care contemplated. Whether the
CON is granted is based upon a finding of need by the SHPDA in accordance with
criteria set forth in CON statutes and state and regional health facilities
plans. If the proposed facility or service is found to be necessary and the
applicant to be the appropriate provider, the SHPDA will issue a CON containing
a maximum amount of expenditure and a specific time period for the holder of the
CON to implement the approved project.
Licensure and certification are separate, but related, regulatory
activities. The former is usually a state or local requirement and the latter is
a federal requirement. In almost all instances, licensure and certification will
follow specific standards and requirements that are set forth in readily
available public documents. Compliance with the requirements is monitored by
annual on-site inspections by representatives of various government agencies.
All of the Company's inpatient rehabilitation facilities and medical centers and
substantially all of the Company's surgery centers are currently required to be
licensed, but only the outpatient rehabilitation facilities located in Alabama,
Arizona, Kentucky, Maryland, Massachusetts, New Hampshire, New Mexico and Rhode
Island currently must satisfy such a licensing requirement.
Medicare Participation and Reimbursement
In order to participate in the Medicare program and receive Medicare
reimbursement, each facility must comply with the applicable regulations of the
United States Department of Health and Human Services relating to, among other
things, the type of facility, its equipment, its personnel and its standards of
medical care, as well as compliance with all state and local laws and
regulations. All of the Company's inpatient facilities, except for the St. Louis
head injury center, participate in the Medicare program. Approximately 444 of
the Company's outpatient rehabilitation facilities currently participate in, or
are awaiting the assignment of a provider number to participate in, the Medicare
program. All of the Company's surgery centers and diagnostic centers are
certified (or awaiting certification) under the Medicare program. Its
Medicare-certified facilities, inpatient and outpatient, undergo annual on-site
Medicare certification surveys in order to maintain their certification status.
Failure to comply with the program's conditions of participation may result in
loss of program reimbursement or other governmental sanctions. All such
facilities have been deemed to be in satisfactory compliance on all applicable
surveys. The Company has developed its operational systems to assure compliance
with the various standards and requirements of the Medicare program and has
established ongoing quality assurance activities to monitor compliance. The
Company believes that all of such facilities currently meet all applicable
Medicare requirements.
As a result of the Social Security Act Amendments of 1983, Congress adopted
a prospective payment system ("PPS") to cover the routine and ancillary
operating costs of most Medicare inpatient hospital services. Under this system,
the Secretary of Health and Human Services has established fixed payment amounts
per discharge based on diagnosis-related groups ("DRGs"). With limited
exceptions, a hospital's payment for Medicare inpatients is limited to the DRG
rate, regardless of the number of services provided to the patient or the length
of the patient's hospital stay. Under PPS, a hospital may retain the difference,
if any, between its DRG rate and its operating costs incurred in furnishing
inpatient services, and is at risk for any operating costs that exceed its DRG
rate. The Company's medical center facilities are generally subject to PPS with
respect to Medicare inpatient services.
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The PPS program has been beneficial for the rehabilitation segment of the
healthcare industry because of the economic pressure on acute-care hospitals to
discharge patients as soon as possible. The result has been increased demand for
rehabilitation services for those patients discharged early from acute-care
hospitals. Outpatient rehabilitation services and freestanding inpatient
rehabilitation facilities are currently exempt from PPS, and inpatient
rehabilitation units within acute-care hospitals are eligible to obtain an
exemption from PPS upon satisfaction of certain federal criteria.
Currently, 12 of the Company's outpatient centers are Medicare-certified
Comprehensive Outpatient Rehabilitation Facilities ("CORFs") and 432 are
Medicare-certified rehabilitation agencies. CORFs have been designated
cost-reimbursed Medicare providers since 1982. Under the regulations, CORFs are
reimbursed reasonable costs (subject to certain limits) for services provided to
Medicare beneficiaries. Outpatient rehabilitation facilities certified by
Medicare as rehabilitation agencies are reimbursed on the basis of the lower of
reasonable costs for services provided to Medicare beneficiaries or charges for
such services. Outpatient rehabilitation facilities which are physician-directed
clinics, as well as outpatient surgery centers, are reimbursed by Medicare on a
fee screen basis; that is, they receive a fixed fee, which is determined by the
geographical area in which the facility is located, for each procedure
performed. The Company's outpatient rehabilitation facilities submit monthly
bills to their fiscal intermediaries for services provided to Medicare
beneficiaries, and the Company files annual cost reports with the intermediaries
for each such facility. Adjustments are then made if costs have exceeded
payments from the fiscal intermediary or vice versa.
The Company's inpatient facilities (other than the medical center
facilities) either are not currently covered by PPS or are exempt from PPS, and
are also cost-reimbursed, receiving the lower of reasonable costs or charges.
Typically, the fiscal intermediary pays a set rate based on the prior year's
costs for each facility. As with outpatient facilities subject to cost-based
reimbursement, annual cost reports are filed with the Company's fiscal
intermediary and payment adjustments are made, if necessary.
As part of the Balanced Budget Act of 1997, Congress directed the United
States Department of Health and Human Services to develop regulations that would
subject inpatient rehabilitation hospital to a PPS. The prospective rates are to
be phased in beginning October 1, 2000, and are to be fully implemented on
October 1, 2002. The Act requires that the rates must equal 98% of the amount of
payments that would have been made if the PPS had not been adopted. In addition,
the Act requires the establishment of a PPS for hospital outpatient department
services, effective for services furnished beginning in 1999. Since the drafting
of the regulations covering these initiatives is in very early stages, the
Company cannot predict at this time the effect that any such changes may have on
its operations.
Over the past several years an increasing number of healthcare providers
have been accused of violating the federal False Claims Act. That Act prohibits
the knowing presentation of a false claim to the United States government.
Because the Company performs thousands of similar procedures a year for which it
is reimbursed by Medicare and there is a relatively long statute of limitations,
a billing error could result in significant civil penalties. The Company does
not believe that it is or has been in violation of the False Claims Act.
Relationships with Physicians and Other Providers
Various state and federal laws regulate relationships among providers of
healthcare services, including employment or service contracts and investment
relationships. These restrictions include a federal criminal law prohibiting (i)
the offer, payment, solicitation or receipt of remuneration by individuals or
entities, to induce referrals of patients for services reimbursed under the
Medicare or Medicaid programs or (ii) the leasing, purchasing, ordering,
arranging for or recommending the lease, purchase or order of any item, good,
facility or service covered by such programs (the "Fraud and Abuse Law"). In
addition to federal criminal sanctions, violators of the Fraud and Abuse Law may
be subject to significant civil sanctions, including fines and/or exclusion from
the Medicare and/or Medicaid programs.
In 1991, the Office of the Inspector General ("OIG") of the United States
Department of Health and Human Services promulgated regulations describing
compensation arrangements which are not viewed as illegal remuneration under
the Fraud and Abuse Law (the "Safe Harbor Rules"). The Safe
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Harbor Rules create certain standards ("Safe Harbors") for identified types of
compensation arrangements which, if fully complied with, assure participants in
the particular arrangement that the OIG will not treat such participation as a
criminal offense under the Fraud and Abuse Law or as the basis for an exclusion
from the Medicare and Medicaid programs or an imposition of civil sanctions. The
OIG closely scrutinizes healthcare joint ventures involving physicians and other
referral sources. In 1989, the OIG published a Fraud Alert that outlined
questionable features of "suspect" joint ventures.
In 1992, regulations were published in the Federal Register implementing
the OIG sanction and civil money penalty provisions established in the Fraud and
Abuse Law. The regulations (the "Exclusion Regulations") provide that the OIG
may exclude a Medicare provider from participation in the Medicare Program for a
five-year period upon a finding that the Fraud and Abuse Law has been violated.
The regulations expressly incorporate a test adopted by three federal circuit
courts providing that if one purpose of remuneration that is offered, paid,
solicited or received is to induce referrals, then the statute is violated. The
regulations also provide that after the OIG establishes a factual basis for
excluding a provider from the program, the burden of proof shifts to the
provider to prove that the Fraud and Abuse Law has not been violated.
The Company currently operates 22 of its rehabilitation hospitals and many
of its outpatient rehabilitation facilities as limited partnerships or limited
liability companies (collectively, "partnerships") with third-party investors.
Seven of the rehabilitation hospital partnerships involve physician investors,
13 of the rehabilitation hospital partnerships involve other institutional
healthcare providers and two of the rehabilitation hospital partnerships involve
both institutional providers and other investors, some of whom are physicians.
Seven of the outpatient partnerships currently have a total of 20 physician
limited partners, some of whom refer patients to the partnerships. Those
partnerships which are providers of services under the Medicare program, and
their limited partners, are subject to the Fraud and Abuse Law. A number of the
relationships established by the Company with physicians and other healthcare
providers do not fit within any of the Safe Harbors. The Safe Harbor Rules do
not expand the scope of activities that the Fraud and Abuse Law prohibits, nor
do they provide that failure to fall within a Safe Harbor constitutes a
violation of the Fraud and Abuse Law; however, the OIG has informally indicated
that failure to fall within a Safe Harbor may subject an arrangement to
increased scrutiny.
Most of the Company's surgery centers are owned by partnerships, which
include as partners physicians who perform surgical procedures at such centers.
Subsequent to the promulgation of the Safe Harbor Rules in 1991, the Department
of Health and Human Services issued for public comment additional proposed Safe
Harbors, one of which specifically addresses surgeon ownership interests in
ambulatory surgery centers (the "Proposed ASC Safe Harbor"). As proposed, the
Proposed ASC Safe Harbor would protect payments to be made to surgeons as a
return on investment interest in a surgery center if, among other conditions,
all the investors are surgeons who are in a position to refer patients directly
to the center and perform surgery on such referred patients. Since a subsidiary
of the Company is an investor in each limited partnership which owns a surgery
center, the Company's arrangements with physician investors do not fit within
the Proposed ASC Safe Harbor as currently proposed. The Company is unable at
this time to predict whether the Proposed ASC Safe Harbor will become final, and
if so, whether the language and requirements will remain as currently proposed,
or whether changes will be made prior to becoming final. There can be no
assurance that the Company will ever meet the criteria under the Proposed ASC
Safe Harbor as proposed or as it may be adopted in final form. The Company
believes, however, that its arrangements with physicians with respect to its
surgery center facilities should not fall within the activities prohibited by
the Fraud and Abuse Law.
Certain of the Company's diagnostic centers are owned or operated by
partnerships which include radiologists as partners. While such ownership
interests are not directly covered by the Safe Harbor Rules, the Company does
not believe that such arrangements violate the Fraud and Abuse Law because
radiologists are typically not in a position to make or induce referrals to
diagnostic centers. In addition, the Company's mobile lithotripsy operations are
conducted by partnerships in which urologists are limited partners. Because such
urologists are in a position to, and do, perform lithotripsy procedures
utilizing the Company's lithotripsy equipment, the Company believes that the
same analysis underlying the Proposed ASC Safe Harbor should apply to ownership
interests in lithotripsy equipment held by
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urologists. In addition, the Company believes that the nature of lithotripsy
services (i.e., lithotripsy is only prescribed and utilized when a condition for
which lithotripsy is the treatment of choice has been diagnosed) makes the risk
of overutilization unlikely. There can be no assurance, however, that the Fraud
and Abuse Law will not be interpreted in a manner contrary to the Company's
beliefs with respect to diagnostic and lithotripsy services.
While several federal court decisions have aggressively applied the
restrictions of the Fraud and Abuse Law, they provide little guidance as to the
application of the Fraud and Abuse Law to the Company's partnerships. The
Company believes that it is in compliance with the current requirements of
applicable federal and state law, but no assurances can be given that a federal
or state agency charged with enforcement of the Fraud and Abuse Law and similar
laws might not assert a contrary position or that new federal or state laws, or
new interpretations of existing laws, might not adversely affect relationships
established by the Company with physicians or other healthcare providers or
result in the imposition of penalties on the Company or certain of its
facilities. Even the assertion of a violation could have a material adverse
effect upon the Company.
The so-called "Stark II" provisions of the Omnibus Budget Reconciliation
Act of 1993 amend the federal Medicare statute to prohibit the making by a
physician of referrals for "designated health services" (including physical
therapy, occupational therapy, radiology services or radiation therapy) to an
entity in which the physician has an investment interest or other financial
relationship, subject to certain exceptions. Such prohibition took effect on
January 1, 1995 and applies to all of the Company's partnerships with physician
partners. On January 9, 1998, the Department of Health and Human Services
published proposed regulations (the "Proposed Stark Regulations") under the
Stark II statute and solicited comments thereon. In addition, a number of states
have passed or are considering statutes which prohibit or limit physician
referrals of patients to facilities in which they have an investment interest.
In response to these regulatory activities, the Company has restructured most of
its partnerships which involve physician investors to the extent required by
applicable law, in order to eliminate physician ownership interests not
permitted by applicable law. The Company intends to take such actions as may be
required to cause the remaining partnerships to be in compliance with applicable
laws and regulations, including, if necessary, the prohibition of physician
partners from referring patients. The Company believes that this restructuring
has not adversely affected and will not adversely affect the operations of its
facilities.
Ambulatory surgery is not identified as a "designated health service" under
Stark II, and the Company does not believe the statute is intended to cover
ambulatory surgery services. The Proposed Stark Regulations would expressly
clarify that the provision of designated health services in an ambulatory
surgery center would be excepted from the referral prohibition of Stark II if
payment for such designated health services is included in the ambulatory
surgery center payment rate.
Lithotripsy facilities operated by the Company frequently operate on
hospital campuses, and it is possible to conclude that such services are
"inpatient and outpatient hospital services" -- a category of designated health
services under Stark II. The legislative history of the Stark II statute
indicates that the statute was not intended to cover the provision of
lithotripsy services by physician-owned lithotripsy providers under contract
with a hospital. In the commentary to the Proposed Stark Regulations, the
Department of Health and Human Services specifically solicited comments as to
whether lithotripsy services should be excluded from the definition of
"inpatient and outpatient hospital services". In the event that lithotripsy
services are not so excluded, the Company believes that the operations of its
lithotripsy partnerships either comply with, or can be restructured to comply
with, certain other exceptions to the Stark II referral prohibitions, and the
Company intends to take such steps as may be required to cause those
partnerships to be in compliance with Stark II if the final regulations so
require. In addition, physicians frequently perform endoscopic procedures in the
procedure rooms of the Company's surgery centers, and it is possible to construe
such services to be "designated health services". While the Company does not
believe that Stark II was intended to apply to such services, if that were
determined to be the case, the Company intends to take steps necessary to cause
the operations of its facilities to comply with the law.
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The Health Insurance Portability and Accountability Act of 1996
In an effort to combat healthcare fraud, Congress included several
anti-fraud measures in the Health Insurance Portability and Accountability Act
of 1996 ("HIPAA"). HIPAA, among other things, amends existing crimes and
criminal penalties for Medicare fraud and enacts new federal healthcare fraud
crimes. HIPAA also expands the Fraud and Abuse Law to apply to all federal
healthcare programs, defined to include any plan or program that provides health
benefits through insurance that is funded by the federal government. Under
HIPAA, the Secretary of the Department of Health and Human Services (the
"Secretary") may exclude from the Medicare program any individual who has a
direct or indirect ownership or control interest in a healthcare entity that has
been convicted of a healthcare fraud crime or that has been excluded from the
Medicare conviction or exclusion of the entity. HIPAA directs the Secretary to
establish a program to collect information on healthcare fraud and abuse to
encourage individuals to report information concerning fraud and abuse against
the Medicare program and provides for payment of a portion of amounts collected
to such individuals. HIPAA mandates the establishment of a Fraud and Abuse
Program, among other programs, to control fraud and abuse with respect to health
plans and to conduct investigations, audits, evaluations, and inspections
relating to the delivery of and payment for healthcare in the United States.
HIPAA prohibits any person or entity from knowingly and willfully
committing a federal healthcare offense relating to a healthcare benefit
program. Under HIPAA, a "health care benefit program" broadly includes any
private plan or contract affecting interstate commerce under which any medical
benefit, item, or service is provided to any individual. Among the "federal
health care offenses" prohibited by HIPAA are healthcare fraud and making false
statements relative to healthcare matters. Any person or entity that knowingly
and willfully defrauds or attempts to defraud a healthcare benefit program or
obtains by means of false or fraudulent pretenses, representations or promises,
any of the money or property of any healthcare benefit program in connection
with the delivery of healthcare services is subject to a fine and/or
imprisonment. In addition, HIPAA provides that any person or entity that
knowingly and willfully falsifies or conceals or covers up a material fact or
makes any materially false or fraudulent statements in connection with the
delivery of or payment of healthcare services by a healthcare benefit plan is
subject to a fine and/or imprisonment.
HIPAA further expands the list of acts which are subject to civil monetary
penalties under federal law and increases the amount of civil penalties which
may be imposed. HIPAA provides for civil fines for individuals who retain an
ownership or control interest in a Medicare or Medicaid participating entity
after such individuals have been excluded from participating in the Medicare or
Medicaid program. HIPAA further provides for civil fines for individuals who
offer inducements to Medicare or Medicaid eligible patients if the individuals
know or should know that their offers will influence the patients to order or
receive items or services from a particular provider, practitioner or supplier.
The Company cannot predict whether other regulatory or statutory provisions
will be enacted by federal or state authorities which would prohibit or
otherwise regulate relationships which the Company has established or may
establish with other healthcare providers or the possibility of materially
adverse effects on its business or revenues arising from such future actions.
Management of the Company believes, however, that the Company will be able to
adjust its operations so as to be in compliance with any regulatory or statutory
provision as may be applicable. See this Item, "Business -- Patient Care
Services" and "Business -- Sources of Revenues".
INSURANCE
Beginning December 1, 1993, the Company became self-insured for
professional liability and comprehensive general liability. The Company
purchased coverage for all claims incurred prior to December 1, 1993. In
addition, the Company purchased underlying insurance which would cover all
claims once established limits have been exceeded. It is the opinion of
management that as of December 31, 1997, the Company had adequate reserves to
cover losses on asserted and unasserted claims.
In connection with the Horizon/CMS acquisition, the Company assumed
Horizon/CMS's open professional and general liability claims. The Company has
entered into an agreement with an insurance
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carrier to assume responsibility for the majority of open claims. Under this
agreement, a "risk transfer" is being conducted which will convert Horizon/CMS's
self-insured claims to insured liabilities consistent with the terms of the
underlying insurance policy.
EMPLOYEES
As of December 31, 1997, the Company employed 56,281 persons, of whom
36,873 were full-time employees and 19,408 were part-time employees. Of the
above employees, 1,070 were employed at the Company's headquarters in
Birmingham, Alabama. Except for approximately 80 employees at one rehabilitation
hospital (about 18% of that facility's workforce), none of the Company's
employees are represented by a labor union. The Company is not aware of any
current activities to organize its employees at other facilities. Management of
the Company considers the relationship between the Company and its employees to
be good.
ITEM 2. PROPERTIES.
The Company's executive offices currently occupy approximately 200,000
square feet in a newly-constructed headquarters building in Birmingham, Alabama.
The headquarters building, which was occupied by the Company in February 1997,
was constructed on a 73-acre parcel of land owned by the Company pursuant to a
tax retention operating lease structured through NationsBanc Leasing
Corporation. Substantially all of the Company's outpatient rehabilitation and
occupational medicine operations are carried out in leased facilities. The
Company owns 37 of its inpatient rehabilitation facilities and leases or
operates under management contracts the remainder of its inpatient
rehabilitation facilities. The Company also owns 48 of its surgery centers and
45 of its diagnostic centers and leases the remainder. The Company constructed
its rehabilitation hospitals in Florence and Columbia, South Carolina, Kingsport
and Nashville, Tennessee, Concord, New Hampshire, Dothan, Alabama, and Columbia,
Missouri and is constructing its Charlottesville, Virginia rehabilitation
hospital, on property leased under long-term ground leases. The property on
which the Company's Memphis, Tennessee rehabilitation hospital is located is
owned in partnership by the Company and Methodist Hospitals of Memphis. The
Company owns its four medical center facilities. The Company currently owns, and
from time to time may acquire, certain other improved and unimproved real
properties in connection with its business. See Notes 5 and 7 of "Notes to
Consolidated Financial Statements" for information with respect to the
properties owned by the Company and certain indebtedness related thereto.
In management's opinion, the Company's physical properties are adequate for
the Company's needs for the foreseeable future, and are consistent with its
expansion plans described elsewhere in this Annual Report on Form 10-K.
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The following table sets forth a listing of the Company's patient care
services locations at December 31, 1997:
<TABLE>
<CAPTION>
OUTPATIENT INPATIENT
REHABILITATION REHABILITATION MEDICAL SURGERY DIAGNOSTIC OTHER
STATE FACILITIES FACILITIES(BEDS)(2) CENTERS(BEDS)(2) CENTERS CENTERS SERVICES
- - --------------------------- --------------------- --------------------- ------------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Alabama ................... 26 7 (336) 1 (219) 5 6 11
Alaska .................... 7 1 1 4
Arizona ................... 24 4 (243) 2 1 6
Arkansas .................. 8 5 (278) 2 5
California ................ 57 1 (60) 35 1 31
Colorado .................. 45 1 (64) 5 7 1
Connecticut ............... 34 1 (30) 5 3
Delaware .................. 5 1
District of Columbia ...... 1 1
Florida ................... 80 12 (735) 1 (285) 18 7 27
Georgia ................... 30 1 (50) 3 10 4
Hawaii .................... 13 1
Idaho ..................... 5 1
Illinois .................. 49 5 3 1
Indiana ................... 18 4 (260) 5 3
Iowa ...................... 3 1
Kansas .................... 6 4 (231) 1
Kentucky .................. 5 2 (80) 3
Louisiana ................. 4 6 (367) 1 2 2
Maine ..................... 7 4 (155) 4
Maryland .................. 27 2 (66) 7 8 1
Massachusetts ............. 27 14 (806) 1 2 12
Michigan .................. 23 1 (30) 1 1
Minnesota ................. 14
Mississippi ............... 7
Missouri .................. 48 2 (86) 10 9
Montana ................... 3
Nebraska .................. 2
Nevada .................... 21 2 (126) 1 2
New Hampshire ............. 10 3 (99)
New Jersey ................ 71 1 (155) 1 2 1
New Mexico ................ 6 1 (61) 1 1
New York .................. 47 1 (27) 1 1
North Carolina ............ 17 3 1
North Dakota .............. 2
Ohio ...................... 38 1 (30) 7 4
Oklahoma .................. 17 3 (183) 1 1
Oregon .................... 29 1
Pennsylvania .............. 52 14 (1,085) 8 6 4
Rhode Island .............. 3
South Carolina ............ 9 4 (235) 2 6 2
South Dakota .............. 2
Tennessee ................. 34 6 (362) 6 5
Texas ..................... 103 19 (1,116) 1 (96) 21 20 41
Utah ...................... 1 1 (86) 1 1
Vermont ................... 1
Virginia .................. 21 1 (40) 1 (200) 3 9
Washington ................ 85 2 1 17
West Virginia ............. 2 4 (200) 1
Wisconsin ................. 3 4
Wyoming ................... 2
</TABLE>
- - ----------
(1) Includes freestanding outpatient centers and their satellites, outpatient
satellites of inpatient rehabilitation facilities and outpatient facilities
managed under contract.
(2) "Beds" refers to the number of beds for which a license or certificate of
need has been granted, which may vary materially from beds available for
use.
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In addition, at December 31, 1997, the Company operated six diagnostic
centers in the United Kingdom and one rehabilitation hospital in Australia.
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of its business, the Company may be subject, from
time to time, to claims and legal actions by patients and others. The Company
does not believe that any such pending actions, if adversely decided, would have
a material adverse effect on its financial condition. See Item 1, "Business --
Insurance" and Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a description of the Company's
insurance coverage arrangements.
From time to time, the Company appeals decisions of various rate-making
authorities with respect to Medicare rates established for the Company's
facilities. These appeals are initiated in the ordinary course of business.
Management believes that adequate reserves have been established for possible
adverse decisions on any pending appeals and that the outcomes of currently
pending appeals, either individually or in the aggregate, will have no material
adverse effect on the Company's operations.
CERTAIN HORIZON/CMS LITIGATION
On October 29, 1997, HEALTHSOUTH acquired Horizon/CMS through the merger of
a wholly owned subsidiary of HEALTHSOUTH with and into Horizon/CMS. Horizon/CMS
is currently a party, or is subject, to certain material litigation matters and
disputes, which are described below, as well as various other litigation matters
and disputes arising in the ordinary course of its business. The Company is not
itself a party to the litigation described below.
SEC and NYSE Investigations
The Division of Enforcement of the SEC is conducting a private
investigation with respect to trading in the securities of Horizon/CMS and
Continental Medical Systems, Inc. ("CMS"), which was acquired by Horizon/CMS in
June 1995. In connection with that investigation, Horizon/CMS produced certain
documents, and Neal M. Elliott, then Chairman of the Board, President and Chief
Executive Officer of Horizon/CMS, and certain other former officers of
Horizon/CMS have given testimony to the SEC. Horizon/CMS has also been informed
that certain of its division office employees and an individual, affiliates of
whom had limited business relationships with Horizon/CMS, have responded to
subpoenas from the SEC. Mr. Elliott also produced certain documents in response
to a subpoena from the SEC. In addition, Horizon/CMS and Mr. Elliott have
responded to separate subpoenas from the SEC pertaining to trading in
Horizon/CMS's common stock and various material press releases issued in 1996 by
Horizon/CMS; Horizon/CMS's February 18, 1997 announcement that the Company would
acquire Horizon/CMS; and any discussions of proposed business combinations
between Horizon/CMS and Medical Innovations and Horizon/CMS and certain other
companies. The investigation is, to the knowledge of the Company and
Horizon/CMS, ongoing, and neither Horizon/CMS nor the Company possesses all the
facts with respect to the matters under investigation. Although neither
Horizon/CMS nor the Company has been advised by the SEC that the SEC has
concluded that any of Horizon/CMS, Mr. Elliott or any other current or former
officer of director of Horizon/CMS has been involved in any violation of the
federal securities laws, there can be no assurance as to the outcome of the
investigation or the time of its conclusion. Both Horizon/CMS and the Company
have, to the extent requested to date, cooperated fully with the SEC in
connection with the investigation.
In March 1995, the New York Stock Exchange informed Horizon/CMS that it had
initiated a review of trading in Hillhaven Corporation common stock prior to the
announcement of Horizon/CMS's proposed acquisition of Hillhaven. In April 1995,
the NYSE extended the review of trading to include all dealings with CMS. On
April 3, 1996, the NYSE notified Horizon/CMS that it had initiated a review of
trading in its common stock preceding Horizon/CMS's March 1, 1996 press release
announcing a revision in Horizon/CMS's third quarter earnings estimate. On
February 20, 1997, the NYSE notified Horizon/CMS that it was reviewing trading
in Horizon/CMS's securities prior to the February 18, 1997 announcement that the
Company would acquire Horizon/CMS. Horizon/CMS has cooperated with the NYSE in
its reviews and, to Horizon/CMS's knowledge, the reviews are ongoing.
17
<PAGE>
In February 1997, the Company received a subpoena from the SEC with respect
to its investigation concerning trading in Horizon/CMS common stock prior to the
February 18, 1997 announcement that the Company would acquire Horizon/CMS and a
request for information from the NYSE in connection with its review of such
trading. The Company responded to such subpoena and request for information and
advised both the SEC and the NYSE that it intended to cooperate fully in any
investigations or reviews relating to such trading. The Company provided certain
additional information to the SEC in April 1997. Since that time, the Company
has had no further inquiries from either the SEC or the NYSE with respect to
such matters, and is unaware of the current status of such investigations or
reviews.
Michigan Attorney General Investigation Into Long-Term Care Facility In
Michigan
Horizon/CMS learned in September 1996 that the Attorney General of the
State of Michigan was investigating one of its skilled nursing facilities. The
facility, in Howell, Michigan, was owned and operated by Horizon/CMS from
February 1994 until December 31, 1997. As widely reported in the press, the
Attorney General seized a number of patient, financial and accounting records
that were located at this facility. By order of a circuit judge in the county in
which the facility is located, the Attorney General was ordered to return
patient records to the facility for copying. Horizon/CMS advised the Michigan
Attorney General that it was willing to cooperate fully in the investigation.
The facility in question was sold by Horizon/CMS to IHS on December 31, 1997.
On February 19, 1998, the State of Michigan filed a criminal complaint
against Horizon/CMS, four former employees of the facility and one former
Horizon/CMS regional manager, alleging various violations in 1995 and 1996 of
certain statutes relating to patient care, patient medical records and the
making of false statements with respect to the condition or operations of the
facility (State of Michigan v. Horizon/CMS Healthcare Corp., et al., Case No.
98-630-FY, State of Michigan District Court 54B). The maximum fines chargeable
against Horizon/CMS under the counts alleged in the complaint (exclusive of
charges against the individual defendants, some of which charges may result in
indemnification obligations for Horizon/CMS) aggregate $69,000. Horizon/CMS
denies the allegations made in the complaint and expects to vigorously defend
against the charges. Because such charges have just been filed, it is not
possible to predict at this time the outcome or effect of this litigation or the
length of time it will take to resolve this litigation.
Stockholder Derivative Actions
Commencing in April and continuing into May 1996, Horizon/CMS was served
with nine complaints alleging a class action derivative action brought by
stockholders of Horizon/CMS for and on behalf of Horizon/CMS in the Court of
Chancery of New Castle County, Delaware, against certain then-current and former
directors of Horizon/CMS. The nine lawsuits have been consolidated into one
action styled In re Horizon/CMS Healthcare Corporation Shareholders Litigation.
The plaintiffs alleged, among other things, that Horizon/CMS's then-current and
former directors breached their fiduciary duties to Horizon/CMS and the
stockholders as a result of (i) the purported failure to supervise adequately
and the purported knowing mismanagement of the operations of Horizon/CMS, and
(ii) the purported misuse of inside information in connection with the sale of
Horizon/CMS's Common Stock by certain of the current and former directors in
January and February 1996. To that end, the plaintiffs sought an accounting from
the directors for profits to themselves and damages suffered by Horizon/CMS as a
result of the transaction complained of in the complaint and attorneys' fees and
costs. On June 21, 1996, the individual defendants filed a motion with the
Chancery Court seeking to dismiss this matter because, among other things, the
plaintiffs failed to make a demand on the board of directors prior to commencing
this litigation.
In April 1996, Horizon/CMS was served with complaint in a stockholder's
derivative lawsuit styled Lind v. Rocco A. Ortenzio, Neal M. Elliott, Klemett L.
Belt, Jr., Robert A. Ortenzio, Russell L. Carson, Bryan C. Cressey, Charles H.
Gonzales, Michael A. Jeffries, Gerard M. Martin, Frank M. McCord, Raymond N.
Noveck, Barry M. Portnoy, LeRoy S. Zimmerman and Horizon/CMS Healthcare
Corporation, No. CIV 96-0538-BB, pending in the United States District Court for
the District of New Mexico.
18
<PAGE>
The claims alleged by the plaintiff, and the relief sought, were substantially
identical to those in the Delaware litigation. Horizon/CMS filed a motion
seeking a stay of this case pending the outcome of the motion to dismiss in the
Delaware derivative lawsuits or, in the alternative, to dismiss this case for
those same reasons.
On February 24, 1998, the plaintiffs in the consolidated Delaware case
voluntarily dismissed their action without prejudice. Horizon/CMS expects that
the plaintiff in the New Mexico case will likewise dismiss his action. If that
does not occur, Horizon/CMS will renew and vigorously prosecute its motion to
dismiss the New Mexico action. If such dismissal does not occur, the Company
cannot currently predict the outcome or the effect of the New Mexico litigation
or the length of time it will take to resolve such litigation.
Lawsuit by Former Shareholders of Communi-Care, Inc. and Pro Rehab, Inc.
On May 28, 1997, CMS was served with a lawsuit styled Kenneth Hubbard and
Lynn Hubbard v. Rocco Ortenzio, Robert A. Ortenzio and Continental Medical
Systems, Inc., No. 3:97 CV294MCK, filed in the United States District Court for
the Western District of North Carolina, Charlotte Division, by the former
shareholders of Communi-Care, Inc. and Pro Rehab, Inc. seeking damages arising
out of certain "earnout" provisions of the definitive purchase agreements under
which CMS purchased the outstanding stock of Communi-Care, Inc. and Pro Rehab,
Inc. from such shareholders. The plaintiffs allege that the manner in which CMS
and the other defendants operated the companies after their acquisition breached
its fiduciary duties to the plaintiffs, constituted fraud, gross negligence and
bad faith and a breach of their employment agreements with the companies. As a
result of such alleged conduct, the plaintiffs assert that they are entitled to
damages in an amount in excess of $27,000,000 from CMS and the other defendants.
Horizon/CMS believes, based upon its evaluation of the legal and factual matters
relating to the plaintiffs' assertions, that it has valid defenses to the
plaintiffs' claims and, as a result, intends to vigorously contest such claims.
Because this litigation remains at an early stage, the Company cannot now
predict the outcome or effect of such litigation or the length of time it will
take to resolve such litigation.
RehabOne Litigation
In March 1997, Horizon/CMS was served with a lawsuit filed in the United
States District Court for the Middle District of Pennsylvania, styled RehabOne,
Inc. v. Horizon/CMS Healthcare Corporation, Continental Medical Systems, Inc.
David Nation and Robert Ortenzio, No. CV-97-0292. In this lawsuit the plaintiff
alleges violations of federal and state securities laws, fraud and negligent
misrepresentation by Horizon/CMS and certain former officers of CMS in
connection with the issuance of a warrant to purchase 500,000 shares of
Horizon/CMS Common Stock (the "Warrant"). The Warrant was issued to the
plaintiff in connection with the settlement of certain prior litigation between
the plaintiff and CMS. The plaintiff's complaint does not state the amount of
damages sought. Horizon/CMS disputes the factual and legal assertions of the
plaintiff in this litigation and intends to vigorously contest the plaintiff's
claims. Because this litigation is at an early stage, the Company cannot predict
the length of time it will take to resolve the litigation or the outcome or
effect of the litigation.
EEOC Litigation
In March 1997, the Equal Employment Opportunity Commission (the "EEOC")
filed a complaint against Horizon/CMS alleging that Horizon/CMS had engaged in
unlawful employment practices in respect of Horizon/CMS's employment policies
related to pregnancies. Specifically, the EEOC asserts that Horizon/CMS's
alleged refusal to provide pregnant employees with light-duty assignments to
accommodate their temporary disabilities caused by pregnancy violates Sections
701(k) and 703(a) of Title VII, 42 U.S.C. (section)(section) 2000e-(k) and
2000e-2(a). In this lawsuit, the EEOC seeks, among other things, to permanently
enjoin Horizon/CMS's employment practices in this regard. Horizon/CMS disputes
the factual and legal assertions of the EEOC in this litigation and intends to
vigorously contest the EEOC's claims. Because this litigation has just
commenced, the Company cannot predict the length of time it will take to resolve
the litigation or the outcome of the litigation.
19
<PAGE>
North Louisiana Rehabilitation Hospital Medicare Billing Investigation
In August 1996, the United States Attorney for the Western District of
Louisiana, without actually initiating litigation, apprised Horizon/CMS of
alleged civil liability under the federal False Claims Act for what the
government believes were false or fraudulent Medicare and other federal program
claims submitted by Horizon/CMS's North Louisiana Rehabilitation Hospital
("NLRH") during the period from 1989 through 1992, including certain claims
submitted by a physician who was a member of the medical staff and under
contract to NLRH during the period. Specifically, the government alleges that
NLRH facilitated the submission of false claims under Part B of the Medicare
program by the physician and that NLRH itself submitted false claims under Part
A of the Medicare program for services that were not medically necessary. In
August 1996, the U.S. Attorney identified allegedly improper Part A and Part B
billings, together with penalty provisions under the False Claims Act, ranging
in the aggregate from approximately $1,700,000 to $2,200,000. The government
does not dispute that the Medicare Part A services were rendered, but only
whether they were medically necessary. Horizon/CMS has vigorously contested the
allegation that any cases of disputed medical necessity in this matter
constitute false or fraudulent claims under the civil False Claims Act.
Moreover, Horizon/CMS denies that NLRH facilitated the submission of false
claims under Medicare Part B.
In late April 1997, Horizon/CMS received administrative subpoenas relating
to the matter and has since then produced extensive materials with respect
thereto. Without conceding liability for either the Medicare Part A or Part B
claims, in May 1997, Horizon commenced preliminary settlement discussions with
the government. In preparation for settlement meetings held in late June and
mid-July 1997, Horizon/CMS and the government developed and then refined their
respective analyses of any losses the government may have incurred in this
regard. Following the July 1997 meetings, the government proposed to Horizon/CMS
that the matter be settled by Horizon/CMS's paying the government $4,900,000
with respect to alleged Medicare Part A overpayments and that Horizon/CMS and
certain individual physicians pay the government $820,000 with respect to
Medicare Part B claims for physician services. In late July, Horizon/CMS
responded by offering to settle the matter for $3,700,000 for alleged Medicare
Part A overpayments and $445,000 for alleged Medicare Part B claims for which
Horizon/CMS potentially could bear any responsibility. The government recently
advised Horizon/CMS that it has accepted the latter's settlement offer in this
regard, and the parties are currently in the process of negotiating and
implementing definitive settlement documentation.
Heritage Western Hills Litigation
Since July 1996, Horizon/CMS has been a defendant in a lawsuit styled Lexa
A. Auld, Administratrix of Martha Hary, Deceased v. Horizon/CMS Healthcare
Corporation and Charles T. Maxvill, D.O., No. 48-165121, 48th Judicial District
Court, Tarrant County, Texas. The case involved injuries allegedly suffered by a
resident of the Heritage Western Hills nursing facility in Fort Worth, Texas.
Horizon/CMS tendered the claim to its insurance carrier, which accepted coverage
with a reservation of rights and provided a defense through the carrier's
selected counsel in Dallas, Texas. The case went to trial on October 29, 1997,
and on November 7, 1997, the jury rendered a verdict in favor of the plaintiff
in the amount of $2,370,000 in compensatory damages and $90,000,000 in punitive
damages. Counsel has advised Horizon/CMS that, under applicable Texas law, the
punitive damages award is, at worst, limited to four times the amount of the
compensatory damages (the "Punitive Damages Cap"), and thus that the maximum
amount of an enforceable judgment in favor of the plaintiff is approximately
$12,000,000. Counsel has also advised Horizon/CMS that there are, potentially,
other and further caps on both the amount of compensatory damages available to
the plaintiff and the amount of punitive damages. Horizon/CMS filed the required
motions with the court to impose the Punitive Damages Cap. On February 20, 1998,
the court reduced the jury's verdict and entered a judgment in the amount of
approximately $11,237,000. Horizon/CMS also vigorously disputes the efficacy of
the jury's verdict and has appealed the judgment.
Horizon/CMS's insurance carrier continues to defend the matter subject to a
reservation of rights. Horizon/CMS based upon an evaluation by its then-current
internal counsel, after reviewing the findings contained in the jury verdict,
the insurance policy at issue and the carrier's handling of the case, believes
20
<PAGE>
that the entirety of any judgment ultimately entered is covered by and payable
from such insurance policy, less Horizon/CMS's self-insured retention of
$250,000. On November 19, 1997, the insurance carrier sent Horizon/CMS a letter
indicating its belief that certain policy exclusions might apply and requesting
additional information which might affect its coverage determination.
Horizon/CMS has retained separate counsel to analyze the coverage issues and
advise Horizon/CMS on its position, and Horizon/CMS expects to continue to
negotiate any coverage issues with its carrier. Settlement negotiations by
Horizon/CMS's insurance carrier, in conjunction with the Company's retained
counsel, continue with the plaintiff. It is not possible at this time to predict
the outcome of any post-trial motions or appeals, the resolution of any coverage
issues, the outcome of any settlement negotiations or the ultimate amount of any
liability which will be borne by Horizon/CMS.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
21
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is listed for trading on the New York Stock
Exchange (Symbol: HRC). The following table sets forth for the fiscal periods
indicated the high and low reported sale prices for the Company's Common Stock
as reported on the NYSE Composite Transactions Tape. All prices shown have been
adjusted for a two-for-one stock split effected in the form of a 100% stock
dividend paid on March 17, 1997.
REPORTED
SALE PRICE
-------------------------
HIGH LOW
----------- -----------
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
1997
First Quarter .......... $ 22.38 $ 17.94
Second Quarter ......... 27.12 17.75
Third Quarter .......... 28.94 23.12
Fourth Quarter ......... 28.31 22.00
- - ----------
The closing price for the Common Stock on the New York Stock Exchange on March
27, 1998, was $27.875.
There were approximately 5,977 holders of record of the Common Stock as of
March 13, 1998, 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
On October 23, 1997, the Company issued an aggregate of 984,189 shares of
its Common Stock in connection with its acquisition of National Imaging
Affiliates, Inc. ("NIA"). The shares were issued to 100 persons and entities who
were, immediately prior to such acquisition, stockholders of NIA and were issued
pursuant to the exemptions provided in Section 4(2) of the Securities Act of
1933, as amended, and Rule 506 of Regulation D promulgated thereunder. The
Company believes that such exemptions are available because (a) the transaction
did not involve a public offering, (b) no more than 35 of the former NIA
stockholders were not "accredited investors", as such term is defined in
Regulation D, and (c) the Company otherwise complied with the requirements of
Rule 506. All such shares were registered for resale pursuant to a Registration
Statement on Form S-3 declared effective by the SEC on December 5, 1997.
22
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
Set forth below is a summary of selected consolidated financial data for
the Company for the years indicated. All amounts have been restated to reflect
the effects of the 1994 acquisition of ReLife, Inc. ("ReLife"), the 1995 SHC and
SSCI acquisitions, the 1996 SCA and Advantage Health acquisitions, and the 1997
Health Images acquisition, each of which was accounted for as a pooling of
interests.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------- ------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues ......................................... $1,055,295 $1,726,321 $2,118,681 $2,568,155 $3,017,269
Operating unit expenses .......................... 715,189 1,207,707 1,441,059 1,667,248 1,888,435
Corporate general and administrative expenses..... 43,378 67,798 65,424 79,354 82,757
Provision for doubtful accounts .................. 22,677 35,740 42,305 58,637 71,468
Depreciation and amortization .................... 75,425 126,148 160,901 207,132 250,010
Merger and acquisition related expenses (1) ...... 333 6,520 19,553 41,515 15,875
Loss on impairment of assets (2) ................. -- 10,500 53,549 37,390 --
Loss on abandonment of computer project .......... -- 4,500 -- -- --
Loss on disposal of surgery centers .............. -- 13,197 -- -- --
NME Selected Hospitals Acquisition
related expense .................................. 49,742 -- -- -- --
Interest expense ................................. 25,884 74,895 105,517 98,751 111,504
Interest income .................................. (6,179) (6,658) (8,009) (6,034) (4,414)
Gain on sale of partnership interest ............. (1,400) -- -- -- --
Gain on sale of MCA Stock ........................ -- (7,727) -- -- --
---------- ---------- ---------- ---------- ----------
925,049 1,532,620 1,880,299 2,183,993 2,415,635
---------- ---------- ---------- ---------- ----------
Income from continuing operations before
income taxes, minority interests and
extraordinary item .............................. 130,246 193,701 238,382 384,162 601,634
Provision for income taxes ....................... 40,450 68,560 86,161 143,929 206,153
---------- ---------- ---------- ---------- ----------
89,796 125,141 152,221 240,233 395,481
Minority interests ............................... 29,549 31,665 43,753 50,369 64,873
---------- ---------- ---------- ---------- ----------
Income from continuing operations before
extraordinary item .............................. 60,247 93,476 108,468 189,864 330,608
Income from discontinued operations .............. 3,986 (6,528) (1,162) -- --
Extraordinary item (2) ........................... -- -- (9,056) -- --
---------- ---------- ---------- ---------- ----------
Net income ...................................... $ 64,233 $ 86,948 $ 98,250 $ 189,864 $ 330,608
========== ========== ========== ========== ==========
Weighted average common shares outstanding
(3)(6) .......................................... 265,502 273,480 289,594 321,367 346,872
========== ========== ========== ========== ==========
Net income per common share: (3)(6)
Continuing operations ........................... $ 0.23 $ 0.34 $ 0.37 $ 0.59 $ 0.95
Discontinued operations ......................... 0.01 (0.02) 0.00 -- --
Extraordinary item .............................. -- -- (0.03) -- --
---------- ---------- ---------- ---------- ----------
$ 0.24 $ 0.32 $ 0.34 $ 0.59 $ 0.95
========== ========== ========== ========== ==========
Weighted average common share outstanding --
assuming dilution(3)(4)(6) ..................... 275,366 300,758 320,018 349,033 365,546
========== ========== ========== ========== ==========
Net income per common share -- assuming
dilution: (3)(4)(6)
Continuing operations ........................... $ 0.22 $ 0.32 $ 0.35 $ 0.55 $ 0.91
Discontinued operations ......................... 0.01 (0.02) 0.00 -- --
Extraordinary item .............................. -- -- (0.03) -- --
---------- ---------- ---------- ---------- ----------
$ 0.23 $ 0.30 $ 0.32 $ 0.55 $ 0.91
========== ========== ========== ========== ==========
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and marketable securities ......... $ 153,011 $ 134,040 $ 159,793 $ 153,831 $ 152,399
Working capital ........................ 300,876 308,770 406,601 564,529 566,751
Total assets ........................... 2,000,566 2,355,920 3,107,808 3,529,706 5,401,053
Long-term debt (5) ..................... 1,028,610 1,164,135 1,453,018 1,560,143 1,601,824
Stockholders' equity ................... 727,737 837,160 1,269,686 1,569,101 3,157,428
</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, the SCA, Advantage Health, PSCM and ReadiCare
Acquisitions in 1996, and the Health Images Acquisition in 1997.
(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) Diluted earnings per share in 1994, 1995, 1996 and 1997 reflect shares
reserved for issuance upon conversion of the Company's 5% Convertible
Subordinated Debentures due 2001. Substantially all of such Debentures were
converted into shares of the Company's Common Stock in 1997.
(5) Includes current portion of long-term debt.
(6) Earnings per share amounts prior to 1997 have been restated as required to
comply with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share". For further discussion, see Note 1 of "Notes to Consolidated
Financial Statements".
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
The following discussion is intended to facilitate the understanding and
assessment of significant changes and trends related to the consolidated 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 consolidated 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 major acquisitions over the last three
years (common share amounts have been adjusted to reflect stock splits effected
in the form of 100% stock dividends paid on April 17, 1995 and March 17, 1997):
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.
24
<PAGE>
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 subacute rehabilitation units, primarily located
in the northern United States.
o On August 20, 1996, the Company acquired Professional Sports Care
Management, Inc. (the "PSCM Acquisition"). A total of 3,622,888 shares of
the Company's Common Stock were issued in the transaction, representing a
value of approximately $59,000,000 at the time of the acquisition. At that
time, PSCM operated a network of 36 outpatient rehabilitation centers in
three states.
o On December 2, 1996, the Company acquired ReadiCare, Inc. (the "ReadiCare
Acquisition"). A total of 4,007,954 shares of the Company's Common Stock
were issued in the transaction, representing a value of approximately
$76,000,000 at the time of the acquisition. At that time, ReadiCare
operated a network of 37 occupational medicine and rehabilitation centers
in two states.
o On March 3, 1997, the Company acquired Health Images, Inc. ("Health
Images"). A total of 10,343,470 shares of the Company's Common Stock were
issued in the transaction, representing a value of approximately
$208,162,000 at the time of the acquisition. At that time, Health Images
operated 49 freestanding diagnostic centers in 13 states and six in the
United Kingdom.
o On September 30, 1997 the Company acquired ASC Network Corporation (the
"ASC Acquisition"). The Company paid approximately $130,827,000 in cash for
all of the issued and outstanding capital stock of ASC and assumed
approximately $61,000,000 in debt. At that time, ASC operated 29 outpatient
surgery centers in eight states.
o On October 23, 1997 the Company acquired National Imaging Affiliates, Inc.
("NIA"). A total of 984,189 shares of the Company's Common Stock were
issued in the transaction, representing a value of approximately
$20,706,000 at the time of the acquisition. At that time, NIA operated
eight diagnostic imaging centers in six states.
o On October 29, 1997, the Company acquired Horizon/CMS Healthcare
Corporation (the "Horizon/CMS Acquisition"). A total of 45,261,000 shares
of the Company's Common Stock were issued in the transaction, representing
a value of approximately $975,824,000 at the time of the acquisition, and
the Company assumed approximately $740,000,000 in debt. At that time,
Horizon/CMS operated 30 inpatient rehabilitation facilities and
approximately 275 outpatient rehabilitation centers, among other strategic
businesses, as well as certain long-term care businesses. On December 31,
1997, the Company sold the long-term care assets of Horizon/CMS, including
139 long-term care facilities, 12 specialty hospitals, 35 institutional
pharmacy locations and over 1,000 rehabilitation therapy contracts with
long-term care facilities, to Integrated Health Services, Inc. ("IHS"). IHS
paid approximately $1,130,000,000 in cash (net of certain adjustments) and
assumed approximately $94,000,000 in debt in the transaction.
Each of the NovaCare Rehabilitation Hospitals Acquisition, the Caremark
Acquisition, the ASC Acquisition, the Horizon/CMS Acquisition and the NIA
Acquisition was 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
SHC Acquisi-
25
<PAGE>
tion, the SSCI Acquisition, the SCA Acquisition, the Advantage Health
Acquisition and the Health Images 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. SHC, SSCI, SCA, Advantage Health and
Health Images 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, a 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 to the
estimated fair market value.
Governmental, commercial and private payors have increasingly recognized
the need to contain their costs for healthcare services. These payors,
accordingly, are turning to closer monitoring of services, prior authorization
requirements, utilization review and increased utilization of outpatient
services. During the periods discussed below, the Company has experienced an
increased effort by these payors to contain costs through negotiated discount
pricing. The Company views these efforts as an opportunity to demonstrate the
effectiveness of its clinical programs and its ability to provide its
rehabilitative healthcare services efficiently. The Company has entered into a
number of contracts with payors to provide services and has realized an
increased volume of patients as a result.
The Company's revenues include net patient service revenues and other
operating revenues. Net patient service revenues are reported at estimated net
realizable amounts from patients, insurance companies, third-party payors
(primarily Medicare and Medicaid) and others for services rendered. Revenues
from third-party payors also include estimated retroactive adjustments under
reimbursement agreements which are subject to final review and settlement by
appropriate authorities. Management determines allowances for doubtful accounts
and contractual adjustments based on historical experience and the terms of
payor contracts. Net accounts receivable include only those amounts estimated by
management to be collectible.
The Company, in many cases, operates more than one site within a market. In
such markets, there is customarily an outpatient center or inpatient facility
with associated satellite outpatient locations. For purposes of the following
discussion and analysis, same store operations are measured on locations within
markets in which similar operations existed at the end of the period and include
the operations of additional locations opened within the same market. New store
operations are measured on locations within new markets.
26
<PAGE>
RESULTS OF OPERATIONS OF THE COMPANY
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, 72 diagnostic centers and five medical centers at December
31, 1996, compared to 95 inpatient rehabilitation facilities, 122 surgery
centers, 69 diagnostic centers and five medical centers at December 31, 1995.
The Company's operations generated revenues of $2,568,155,000 in 1996, an
increase of $449,474,000, or 21.2%, as compared to 1995 revenues. Same store
revenues for the twelve months ended December 31, 1996 were $2,408,294,000, an
increase of $289,613,000, or 13.7%, as compared to the same period in 1995. New
store revenues for 1996 were $159,861,000. New store revenues reflect the
acquisition of one inpatient rehabilitation hospital, the addition of eight new
outpatient surgery centers, and the acquisition of outpatient rehabilitation
operations in 57 new markets (see Note 9 of "Notes to Consolidated Financial
Statements"). The increase in revenues is primarily attributable to the addition
of these operations and increases in patient volume. Revenues generated from
patients under the Medicare and Medicaid programs respectively accounted for
37.8% and 2.9% of total revenues for 1996, compared to 40.0% and 2.5% of total
revenues for 1995. Revenues from any other single third-party payor were not
significant in relation to the Company's total revenues. During 1996, same store
outpatient visits, inpatient days and surgical cases increased 19.9%, 10.8% and
7.3%, respectively. Revenue per outpatient visit, inpatient day and surgical
case for same store operations increased (decreased) by (0.8)%, 3.8% and 1.1%,
respectively.
Operating expenses, at the operating unit level, were $1,667,248,000, or
64.9% of revenues, for 1996, compared to 68.0% of revenues for 1995. The
decrease in operating expenses as a percentage of revenues is primarily
attributable to the 13.7% increase in same store revenues noted above. Same
store operating expenses for 1996 were $1,567,820,000, or 65.1% of related
revenues. New store operating expenses were $99,428,000, or 62.2% of related
revenues. Corporate general and administrative expenses increased from
$65,424,000 in 1995 to $79,354,000 in 1996. As a percentage of revenues,
corporate general and administrative expenses were 3.1% in both 1995 and 1996.
Total operating expenses were $1,746,602,000, or 68.0% of revenues, for 1996,
compared to $1,506,483,000, or 71.1% of revenues, for 1995. The provision for
doubtful accounts was $58,637,000, or 2.3% of revenues, for 1996, compared to
$42,305,000, or 2.0% of revenues, for 1995.
Depreciation and amortization expense was $207,132,000 for 1996, compared
to $160,901,000 for 1995. The increase resulted from the investment in
additional assets by the Company. Interest expense decreased to $98,751,000 in
1996, compared to $105,517,000 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 $6,034,000, compared to
$8,009,000 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
$384,162,000, compared to $238,382,000 for 1995. Minority interests reduced
income before income taxes by $50,369,000 in 1996, compared to $43,753,000 for
1995. The provision for income taxes for 1996 was $143,929,000, compared to
$86,161,000 for 1995, resulting in effective tax rates of 43.1% for 1996 and
44.3% for 1995. Net income for 1996 was $189,864,000.
Twelve-Month Periods Ended December 31, 1996 and 1997
The Company operated approximately 1,150 outpatient rehabilitation
locations at December 31, 1997, compared to 739 outpatient rehabilitation
locations at December 31, 1996. In addition, the Com-
27
<PAGE>
pany operated 138 inpatient rehabilitation facilities, 172 surgery centers, 101
diagnostic centers and four medical centers at December 31, 1997, compared to 96
inpatient rehabilitation facilities, 135 surgery centers, 72 diagnostic centers
and five medical centers at December 31, 1996.
The Company's operations generated revenues of $3,017,269,000 in 1997, an
increase of $449,114,000, or 17.5%, as compared to 1996 revenues. Same store
revenues for the twelve months ended December 31, 1997 were $2,834,528,000, an
increase of $266,373,000, or 10.4%, as compared to the same period in 1996. New
store revenues for 1997 were $182,741,000. New store revenues reflect primarily
the addition of 30 inpatient rehabilitation hospitals and 275 outpatient centers
from the Horizon/CMS Acquisition, the addition of 29 outpatient surgery centers
from the ASC Acquisition, and the acquisition of outpatient rehabilitation
operations in 28 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
36.9% and 2.3% of total revenues for 1997, compared to 37.8% and 2.9% of total
revenues for 1996. Revenues from any other single third-party payor were not
significant in relation to the Company's total revenues. During 1997, same store
outpatient visits, inpatient days, surgical cases and diagnostic cases increased
20.6%, 10.8%, 8.8% and 12.3%, respectively. Revenue per outpatient visit,
inpatient day, surgical case and diagnostic case for same store operations
increased (decreased) by 2.6%, 1.6%, (0.4)% and (0.3) %, respectively.
Operating expenses, at the operating unit level, were $1,888,435,000, or
62.6% of revenues, for 1997, compared to 64.9% of revenues for 1996. The
decrease in operating expenses as a percentage of revenues is primarily
attributable to the 10.4% increase in same store revenues noted above. In same
store operations, the incremental costs associated with increased revenues are
significantly lower as a percentage of those increased revenues. Same store
operating expenses for 1997 were $1,752,208,000, or 61.8% of related revenues.
New store operating expenses were $136,227,000, or 74.5% of related revenues.
New store revenues and operating expenses for 1997 include two months of
operations of the facilities acquired from Horizon/CMS, in which aggregate
operating expenses are significantly higher as a percentage of related revenues
than the Company's other facilities. Corporate general and administrative
expenses increased from $79,354,000 in 1996 to $82,757,000 in 1997. As a
percentage of revenues, corporate general and administrative expenses decreased
from 3.1% in 1996 to 2.7% in 1997. Total operating expenses were $1,971,192,000,
or 65.3% of revenues, for 1997, compared to $1,746,602,000, or 68.0% of
revenues, for 1996. The provision for doubtful accounts was $71,468,000, or 2.4%
of revenues, for 1997, compared to $58,637,000, or 2.3% of revenues, for 1996.
Depreciation and amortization expense was $250,010,000 for 1997, compared
to $207,132,000 for 1996. The increase resulted from the investment in
additional assets by the Company. Interest expense increased to $111,504,000 in
1997, compared to $98,751,000 for 1996, primarily because of the increased
amount outstanding under the Company's revolving credit facility (see "Liquidity
and Capital Resources"). For 1997, interest income was $4,414,000, compared to
$6,034,000 for 1996. The decrease in interest income resulted primarily from a
decrease in the average amount outstanding in interest-bearing investments.
Merger expenses in 1997 of $15,875,000 represent costs incurred or accrued
in connection with completing the Health Images Acquisition. For further
discussion, see Note 2 of "Notes to Consolidated Financial Statements".
Income before minority interests and income taxes for 1997 was
$601,634,000, compared to $384,162,000 for 1996. Minority interests reduced
income before income taxes by $64,873,000 in 1997, compared to $50,369,000 for
1996. The provision for income taxes for 1997 was $206,153,000, compared to
$143,929,000 for 1996, resulting in effective tax rates of 38.4% for 1997 and
43.1% for 1996. Net income for 1997 was $330,608,000.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had working capital of $566,751,000,
including cash and marketable securities of $152,399,000. Working capital at
December 31, 1996 was $564,529,000, including cash and marketable securities of
$153,831,000. For 1997, cash provided by operations was $415,848,000,
28
<PAGE>
compared to $388,345,000 for 1996. For 1997, investing activities provided
$366,514,000, compared to using $485,193,000 for 1996. The change is primarily
due to the proceeds from the sale of the long-term care assets of Horizon/CMS to
IHS in 1997. Additions to property, plant and equipment and acquisitions
accounted for $346,141,000 and $270,218,000, respectively, during 1997. Those
same investing activities accounted for $204,792,000 and $91,391,000,
respectively, in 1996. Financing activities used $784,360,000 and provided
$95,107,000 during 1997 and 1996, respectively. The change is primarily due to
the Company's use of proceeds from the IHS sale to pay down outstanding
indebtedness. Net borrowing (reductions) proceeds for 1997 and 1996 were
$(771,570,000) and $101,366,000, respectively.
Net accounts receivable were $745,994,000 at December 31, 1997, compared to
$540,389,000 at December 31, 1996. The number of days of average annual revenues
in ending receivables was 75.8 at December 31, 1997, compared to 76.8 at
December 31, 1996. The concentration of net accounts receivable from patients,
third-party payors, insurance companies and others at December 31, 1997 was
consistent with the related concentration of revenues for the period then ended.
The Company has a $1,250,000,000 revolving credit facility with
NationsBank, N.A. ("NationsBank") and other participating banks (the "1996
Credit Agreement"). The 1996 Credit Agreement replaced a previous $1,000,000,000
revolving credit agreement, also with NationsBank. Interest is paid based on
LIBOR plus a predetermined margin, a base rate or competitively bid rates from
the participating banks. This credit facility has a maturity date of March 31,
2001. The Company provided a negative pledge on all assets for the 1996 Credit
Agreement. Pursuant to the terms of the 1996 Credit Agreement, the Company has
elected to convert $350,000,000 of the $1,250,000,000 1996 Credit Agreement into
a two-year amortizing term note maturing on December 31, 1999. The Company has
received a $350,000,000 commitment from NationsBank for an additional 364-day
facility (the "Interim Revolving Credit Facility") which is on substantially the
same terms as the 1996 Credit Agreement. The effective interest rate on the
average outstanding balance under the 1996 Credit Agreement was 5.87% for the
twelve months ended December 31, 1997, compared to the average prime rate of
8.44% during the same period. At December 31, 1997, the Company had drawn
$1,175,000,000 under the 1996 Credit Agreement. For further discussion, see Note
7 of "Notes to Consolidated Financial Statements".
In connection with the Horizon/CMS Acquisition, the Company obtained a
$1,250,000,000 Senior Bridge Credit Facility from NationsBank, N.A. and nine
other banks on substantially the same terms as the 1996 Credit Agreement. At the
time of the closing of the Horizon/CMS Acquisition, approximately $1,000,000,000
was drawn under the Senior Bridge Credit Facility, primarily to repay certain
existing indebtedness of Horizon/CMS. The Company repaid all amounts drawn as of
December 31, 1997 under the Senior Bridge Credit Facility upon the closing of
the sale of the Horizon/CMS long-term care assets to IHS, thereby permanently
reducing the amount available thereunder to $500,000,000. The effective interest
rate on the average outstanding balance under the Senior Bridge Credit Facility
was 6.52% for the twelve months ended December 31, 1997 (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 "2001 Debentures"). The Company called the
2001 Debentures for redemption on April 1, 1997. Prior to the redemption date,
the holders of the 2001 Debentures surrendered substantially all of the 2001
Debentures for conversion into approximately 12,226,000 shares of the Company's
Common Stock.
On March 20, 1998, the Company issued $500,000,000 principal amount of
3.25% Convertible Subordinated Debentures due 2003 (the "2003 Debentures").
Proceeds from the sale of the 2003 Debentures were used to pay off all amounts
under the Senior Bridge Credit Facility and reduce outstanding amounts under the
1996 Credit Agreement. Effective with the sale of the Debentures, the Senior
Bridge Credit Facility was terminated.
The Company intends to pursue the acquisition or development of additional
healthcare operations, including 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
29
<PAGE>
next twelve months, it will spend approximately $100,000,000 on maintenance and
expansion of its existing facilities and approximately $300,000,000 on
development of the Integrated Service Model. See Item 1, "Business -- Company
Strategy".
Although the Company is continually considering and evaluating acquisitions
and opportunities for future growth, the Company has not entered into any
agreements with respect to material future acquisitions. The Company believes
that existing cash, cash flow from operations and borrowings under the revolving
line of credit and the interim revolving credit facility will be sufficient to
satisfy the Company's estimated cash requirements for the next twelve months,
and for the reasonably foreseeable future. In addition, the Company expects to
explore other opportunities within the capital markets as a result of its
reduced leverage and investment grade rating.
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.
EXPOSURES TO MARKET RISK
The Company is exposed to market risk related to changes in interest rates.
Because of its favorable borrowing arrangements and current market conditions,
the Company currently does not use derivatives, such as swaps or caps, to alter
the interest characteristics of its debt instruments and investment securities.
The impact on earnings and value of market risk-sensitive financial instruments
(principally marketable security investments and long-term debt) is subject to
change as a result of movements in market rates and prices. The Company uses
sensitivity analysis models to evaluate these impacts.
The Company's investment in marketable securities was $4,326,000 at
December 31, 1997, which represents less than 0.1% of total assets at that date.
These securities are generally short-term, highly-liquid instruments and,
accordingly, their fair value approximates cost. Earnings on investments in
marketable securities are not significant to the Company's results of
operations, and therefore any changes in interest rates would have a minimal
impact on future pre-tax earnings.
With respect to the Company's interest-bearing liabilities, approximately
$1,175,000,000 in long-term debt at December 31, 1997 is subject to variable
rates of interest, while the remaining balance in long-term debt of $426,824,000
is subject to fixed rates of interest (see Note 7 of "Notes to Consolidated
Financial Statements for further description). The fair value of the Company's
total long-term debt, based on discounted cash flow analyses, approximates its
carrying value at December 31, 1997. Based on a hypothetical 1% increase in
interest rates, the potential losses in future pre-tax earnings would be
approximately $11,175,000. The impact of such a change on the carrying value of
long-term debt would not be significant. These amounts are determined
considering the impact of the hypothetical interest rates on the Company's
borrowing cost and long-term debt balances. These analyses do not consider the
effects, if any, of the potential changes in the overall level of economic
activity that could exist in such an environment. Further, in the event of a
change of significant magnitude, management would expect to take actions
intended to further mitigate its exposure to such change. Subsequent to December
31, the Company issued $500,000,000 in principal amount of the 2003 Debentures
(see Note 14 of "Notes to Consolidated Financial Statements"). The proceeds were
used to pay down existing variable-rate indebtedness, which will in effect
further reduce the Company's exposure to market risk related to interest rate
fluctuations.
Foreign operations, and the related market risks associated with foreign
currency, are currently insignificant to the Company's results of operations and
financial position.
COMPUTER TECHNOLOGIES AND YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. Many existing computer
programs use only two digits to identify a year in the date field. The issue is
whether such code exists in the Company's mission-critical applications and if
that code will produce accurate information with relation to date-sensitive
calculations after the turn of the century.
30
<PAGE>
The Company has completed a thorough review of its material computer
applications and determined that such applications contain very few
date-sensitive calculations. The Company's computer applications are divided
into two categories, those maintained internally by the Company's Information
Technology Group and those maintained externally by the applications' vendors.
For internally maintained applications, revisions are currently being made and
are expected to be implemented by the first quarter of 1999. The Company expects
that the total cost associated with these revisions will be less than
$1,000,000. These costs will be primarily incurred during 1998 and be charged to
expense as incurred. For externally maintained systems, the Company has received
written confirmation from the vendors that each system is currently year 2000
compliant or will be made year 2000 compliant during 1998. The cost to be
incurred by the Company related to externally maintained systems is expected to
be minimal.
The Company has initiated a program to determine whether the computer
applications of its significant payors and suppliers will be upgraded in a
timely manner. The Company has not completed this review; however, initial
responses indicate that no significant problems are currently expected to arise.
The Company has also initiated a program to determine whether embedded
applications which control certain medical and other equipment will be affected.
The nature of the Company's business is such that any failure of these type
applications is not expected to have a material adverse effect on its business.
Because of the many uncertainties associated with year 2000 compliance
issues, and because the Company's assessment is necessarily based on information
from third party-vendors, payors and suppliers, there can be no assurance that
the Company's assessment is correct or as to the materiality or effect of any
failure of such assessment to be correct.
FORWARD-LOOKING STATEMENTS
Statements contained in this Annual Report on Form 10-K which are not
historical facts are forward-looking statements. In addition, the Company,
through its senior management, from time to time makes forward-looking public
statements concerning its expected future operations and performance and other
developments. Such forward-looking statements are necessarily estimates
reflecting the Company's best judgment based upon current information and
involve a number of risks and uncertainties, and there can be no assurance that
other factors will not affect the accuracy of such forward-looking statements.
While is impossible to identify all such factors, factors which could cause
actual results to differ materially from those estimated by the Company include,
but are not limited to, changes in the regulation of the healthcare industry at
either or both of the federal and state levels, changes in reimbursement for the
Company's services by governmental or private payors, competitive pressures in
the healthcare industry and the Company's response thereto, the Company's
ability to obtain and retain favorable arrangements with third-party payors,
unanticipated delays in the Company's implementation of its Integrated Service
Model, general conditions in the economy and capital markets, and other factors
which may be identified from time to time in the Company's Securities and
Exchange Commission filings and other public announcements.
31
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated financial statements of the Company meeting the requirements
of Regulation S-X are filed on the succeeding pages of this Item 8 of this
Annual Report on Form 10-K, as listed below:
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Auditors ................................................. 33
Consolidated Balance Sheets as of December 31, 1996 and 1997 ................... 34
Consolidated Statements of Income for the Years Ended December 31, 1995, 1996
and 1997 ..................................................................... 35
Consolidated Statements of Stockholders' Equity for the Years Ended December
31, 1995, 1996 and 1997 ...................................................... 36
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995,
1996 and 1997 ................................................................ 37
Notes to Consolidated Financial Statements ..................................... 38
</TABLE>
Other financial statements and schedules required under Regulation S-X are
listed in Item 14(a)2, and filed under Item 14(d), of this Annual Report on Form
10-K.
QUARTERLY RESULTS (UNAUDITED)
Set forth below is certain summary information with respect to the
Company's operations for the last eight fiscal quarters. All amounts have been
restated to reflect the effects of the 1996 acquisitions of SCA and Advantage
Health and the 1997 acquisition of Health Images, 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 March 17, 1997. Earnings per share amounts for 1996 and the first three
quarters of 1997 have been restated to comply with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share".
<TABLE>
<CAPTION>
1996
-------------------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues ....................... $ 612,149 $ 628,854 $ 651,742 $ 675,410
Net income ..................... 39,681 61,985 63,481 24,717
Net income per common share..... 0.12 0.19 0.20 0.08
Net income per common share
-- assuming dilution .......... 0.12 0.18 0.18 0.07
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues ....................... $ 691,631 $ 723,017 $ 748,370 $ 854,251
Net income ..................... 64,580 81,319 85,919 98,790
Net income per common share..... 0.20 0.24 0.25 0.26
Net income per common share
-- assuming dilution .......... 0.19 0.23 0.24 0.25
</TABLE>
32
<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, 1996 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
HEALTHSOUTH Corporation and Subsidiaries at December 31, 1996 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Birmingham, Alabama
February 25, 1998, except for Note 14,
as to which the date is March 20, 1998
33
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1997
-------------- -------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 3) ........................................ $ 150,071 $ 148,073
Other marketable securities (Note 3) ...................................... 3,760 4,326
Accounts receivable, net of allowances for doubtful
accounts of $75,360,000 in 1996 and $123,545,000 in 1997.................. 540,389 745,994
Inventories ............................................................... 47,408 64,029
Prepaid expenses and other current assets ................................. 128,174 120,776
Deferred income taxes (Note 10) ........................................... 15,238 --
---------- ----------
Total current assets ....................................................... 885,040 1,083,198
Other assets:
Loans to officers ......................................................... 1,396 1,007
Assets held for sale (Note 9) ............................................. -- 60,400
Other (Note 4) ............................................................ 84,016 162,311
---------- ----------
85,412 223,718
Property, plant and equipment, net (Note 5) ................................ 1,464,833 1,850,765
Intangible assets, net (Note 6) ............................................ 1,094,421 2,243,372
---------- ----------
Total assets ............................................................... $3,529,706 $5,401,053
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................... $ 116,451 $ 124,058
Salaries and wages payable ................................................ 67,793 121,768
Accrued interest payable and other liabilities ............................ 75,936 97,506
Income taxes payable ...................................................... 13,242 92,507
Deferred income taxes (Note 10) ........................................... -- 34,119
Current portion of long-term debt (Note 7) ................................ 47,089 46,489
---------- ----------
Total current liabilities .................................................. 320,511 516,447
Long-term debt (Note 7) .................................................... 1,513,054 1,555,335
Deferred income taxes (Note 10) ............................................ 51,790 76,613
Deferred revenue and other long-term liabilities ........................... 3,964 1,538
Minority interests-limited partnerships (Note 1) ........................... 71,286 93,692
Commitments and contingencies (Note 11)
Stockholders' equity (Notes 8 and 12):
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--326,493,000 in 1996 and 395,233,000 in 1997 .................... 3,265 3,952
Additional paid-in capital ................................................ 1,060,012 2,317,821
Retained earnings ......................................................... 525,718 853,641
Treasury stock, at cost (182,000 shares in 1996 and 1997) ................. (323) (323)
Receivable from Employee Stock Ownership Plan ............................. (14,148) (12,247)
Notes receivable from stockholders ........................................ (5,423) (5,416)
---------- ----------
Total stockholders' equity ................................................. 1,569,101 3,157,428
---------- ----------
Total liabilities and stockholders' equity ................................. $3,529,706 $5,401,053
========== ==========
</TABLE>
See accompanying notes.
34
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1995 1996 1997
------------- ------------- -------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues ............................................... $2,118,681 $2,568,155 $3,017,269
Operating unit expenses ................................ 1,441,059 1,667,248 1,888,435
Corporate general and administrative expenses .......... 65,424 79,354 82,757
Provision for doubtful accounts ........................ 42,305 58,637 71,468
Depreciation and amortization .......................... 160,901 207,132 250,010
Merger and acquisition related expenses (Notes 2 and 9). 19,553 41,515 15,875
Loss on impairment of assets (Note 13) ................. 53,549 37,390 --
Interest expense ....................................... 105,517 98,751 111,504
Interest income ........................................ (8,009) (6,034) (4,414)
---------- ---------- ----------
1,880,299 2,183,993 2,415,635
---------- ---------- ----------
Income from continuing operations before income taxes,
minority interests and extraordinary item ............. 238,382 384,162 601,634
Provision for income taxes (Note 10) ................... 86,161 143,929 206,153
---------- ---------- ----------
152,221 240,233 395,481
Minority interests ..................................... 43,753 50,369 64,873
---------- ---------- ----------
Income from continuing operations before extraordinary
item .................................................. 108,468 189,864 330,608
Loss from discontinued operations ...................... (1,162) -- --
Extraordinary item ( Note 2) ........................... (9,056) -- --
---------- ---------- ----------
Net income ............................................. $ 98,250 $ 189,864 $ 330,608
========== ========== ==========
Weighted average common shares outstanding ............. 289,594 321,367 346,872
========== ========== ==========
Net income per common share: ...........................
Continuing operations ................................. $ 0.37 $ 0.59 $ 0.95
Discontinued operations ............................... 0.00 -- --
Extraordinary item .................................... ( 0.03) -- --
---------- ---------- ----------
$ 0.34 $ 0.59 $ 0.95
========== ========== ==========
Weighted average common shares outstanding -
assuming dilution .................................... 320,018 349,033 365,546
========== ========== ==========
Net income per common share - assuming dilution:
Continuing operations ................................. $ 0.35 $ 0.55 $ 0.91
Discontinued operations ............................... 0.00 -- --
Extraordinary item .................................... ( 0.03) -- --
---------- ---------- ----------
$ 0.32 $ 0.55 $ 0.91
========== ========== ==========
</TABLE>
See accompanying notes.
35
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------- PAID-IN
SHARES AMOUNT CAPITAL
----------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at December 31, 1994 ......................................... 145,029 $1,451 $ 607,024
Adjustment for ReLife Merger (Note 2) ................................ 2,732 27 7,114
Proceeds from exercise of options (Note 8) ........................... 1,136 11 10,218
Proceeds from issuance of common shares .............................. 15,232 152 334,896
Income tax benefits related to incentive stock options (Note 8) ...... -- -- 6,653
Reduction in receivable from ESOP .................................... -- -- --
Loans made to stockholders ........................................... -- -- --
Purchase of limited partnership units ................................ -- -- --
Purchases of treasury stock .......................................... -- -- --
Net income ........................................................... -- -- --
Translation adjustment ............................................... -- -- --
Dividends paid ....................................................... -- -- --
------- ------ ----------
Balance at December 31, 1995 ......................................... 164,129 1,641 965,905
Adjustment for Advantage Health Merger (Note 2) ...................... -- -- --
Adjustment for 1996 mergers (Note 2) ................................. 4,047 40 68,785
Proceeds from exercise of options (Note 8) ........................... 3,514 36 34,380
Income tax benefits related to incentive stock options (Note 8) ...... -- -- 23,767
Reduction in receivable from ESOP .................................... -- -- --
Payments received on stockholders' notes receivable .................. -- -- --
Purchase of limited partnership units ................................ -- -- --
Purchase of treasury stock ........................................... -- -- --
Retirement of treasury stock ......................................... (1,835) (18) (31,259)
Net income ........................................................... -- -- --
Translation adjustment ............................................... -- -- --
Dividends paid ....................................................... -- -- --
Stock split .......................................................... 156,638 1,566 (1,566)
------- ------ ----------
Balance at December 31, 1996 ......................................... 326,493 3,265 1,060,012
Common shares issued in connection with acquisitions (Note 9) ........ 46,245 462 996,068
Value of options exchanged in connection with the
Horizon/CMS acquisition (Note 9) ..................................... -- -- 23,191
Common shares issued upon conversion of 5% Convertible Subordi-
nated Debentures due 2001 (Note 7) .................................. 12,226 122 113,050
Proceeds from exercise of options (Note 8) ........................... 10,269 103 58,921
Income tax benefits related to incentive stock options (Note 8) ...... -- -- 66,579
Reduction in receivable from ESOP .................................... -- -- --
Payments received on stockholders' notes receivable .................. -- -- --
Purchase of limited partnership units ................................ -- -- --
Net income ........................................................... -- -- --
Translation adjustment ............................................... -- -- --
------- ------ ----------
Balance at December 31, 1997 ......................................... 395,233 $3,952 $2,317,821
======= ====== ==========
<CAPTION>
TREASURY STOCK
RETAINED ------------------------- RECEIVABLE
EARNINGS SHARES AMOUNT FROM ESOP
------------ ----------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at December 31, 1994 ......................................... $ 273,768 2,482 $ (22,367) $ (17,477)
Adjustment for ReLife Merger (Note 2) ................................ (3,734) -- -- --
Proceeds from exercise of options (Note 8) ........................... -- -- -- --
Proceeds from issuance of common shares .............................. -- -- -- --
Income tax benefits related to incentive stock options (Note 8) ...... -- -- -- --
Reduction in receivable from ESOP .................................... -- -- -- 1,591
Loans made to stockholders ........................................... -- -- -- --
Purchase of limited partnership units ................................ (4,767) -- -- --
Purchases of treasury stock .......................................... -- 588 (8,497) --
Net income ........................................................... 98,250 -- -- --
Translation adjustment ............................................... 247 -- -- --
Dividends paid ....................................................... (8,403) -- -- --
--------- ----- --------- ---------
Balance at December 31, 1995 ......................................... 355,361 3,070 (30,864) (15,886)
Adjustment for Advantage Health Merger (Note 2) ...................... (17,638) -- -- --
Adjustment for 1996 mergers (Note 2) ................................. (1,256) -- -- --
Proceeds from exercise of options (Note 8) ........................... -- -- -- --
Income tax benefits related to incentive stock options (Note 8) ...... -- -- -- --
Reduction in receivable from ESOP .................................... -- -- -- 1,738
Payments received on stockholders' notes receivable .................. -- -- -- --
Purchase of limited partnership units ................................ (83) -- -- --
Purchase of treasury stock ........................................... -- 89 (736) --
Retirement of treasury stock ......................................... -- (3,068) 31,277 --
Net income ........................................................... 189,864 -- -- --
Translation adjustment ............................................... 692 -- -- --
Dividends paid ....................................................... (1,222) -- -- --
Stock split .......................................................... -- 91 -- --
--------- ------ --------- ---------
Balance at December 31, 1996 ......................................... 525,718 182 (323) (14,148)
Common shares issued in connection with acquisitions (Note 9) ........ -- -- -- --
Value of options exchanged in connection with the
Horizon/CMS acquisition (Note 9) ..................................... -- -- -- --
Common shares issued upon conversion of 5% Convertible Subordi-
nated Debentures due 2001 (Note 7) .................................. -- -- -- --
Proceeds from exercise of options (Note 8) ........................... -- -- -- --
Income tax benefits related to incentive stock options (Note 8) ...... -- -- -- --
Reduction in receivable from ESOP .................................... -- -- -- 1,901
Payments received on stockholders' notes receivable .................. -- -- -- --
Purchase of limited partnership units ................................ (2,465) -- -- --
Net income ........................................................... 330,608 -- -- --
Translation adjustment ............................................... (220) -- -- --
--------- ------ --------- ---------
Balance at December 31, 1997 ......................................... $ 853,641 182 $ (323) $ (12,247)
========= ====== ========= =========
<CAPTION>
NOTES
RECEIVABLE TOTAL
FROM STOCKHOLDERS'
STOCKHOLDERS EQUITY
------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Balance at December 31, 1994 ......................................... $ (5,240) $ 837,159
Adjustment for ReLife Merger (Note 2) ................................ -- 3,407
Proceeds from exercise of options (Note 8) ........................... -- 10,229
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 .......................................... -- (8,497)
Net income ........................................................... -- 98,250
Translation adjustment ............................................... -- 247
Dividends paid ....................................................... -- (8,403)
-------- ----------
Balance at December 31, 1995 ......................................... (6,471) 1,269,686
Adjustment for Advantage Health Merger (Note 2) ...................... -- (17,638)
Adjustment for 1996 mergers (Note 2) ................................. -- 67,569
Proceeds from exercise of options (Note 8) ........................... -- 34,416
Income tax benefits related to incentive stock options (Note 8) ...... -- 23,767
Reduction in receivable from ESOP .................................... -- 1,738
Payments received on stockholders' notes receivable .................. 1,048 1,048
Purchase of limited partnership units ................................ -- (83)
Purchase of treasury stock ........................................... -- (736)
Retirement of treasury stock ......................................... -- --
Net income ........................................................... -- 189,864
Translation adjustment ............................................... -- 692
Dividends paid ....................................................... -- (1,222)
Stock split .......................................................... -- --
-------- ----------
Balance at December 31, 1996 ......................................... (5,423) 1,569,101
Common shares issued in connection with acquisitions (Note 9) ........ -- 996,530
Value of options exchanged in connection with the
Horizon/CMS acquisition (Note 9) ..................................... -- 23,191
Common shares issued upon conversion of 5% Convertible Subordi-
nated Debentures due 2001 (Note 7) .................................. -- 113,172
Proceeds from exercise of options (Note 8) ........................... -- 59,024
Income tax benefits related to incentive stock options (Note 8) ...... -- 66,579
Reduction in receivable from ESOP .................................... -- 1,901
Payments received on stockholders' notes receivable .................. 7 7
Purchase of limited partnership units ................................ -- (2,465)
Net income ........................................................... -- 330,608
Translation adjustment ............................................... -- (220)
-------- ----------
Balance at December 31, 1997 ......................................... $ (5,416) $3,157,428
======== ==========
</TABLE>
See accompanying notes.
36
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
------------ ------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ...................................................................... $ 98,250 $ 189,864 $ 330,608
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization .................................................. 160,901 207,132 250,010
Provision for doubtful accounts ................................................ 42,305 58,637 71,468
Provision for losses on impairment of assets ................................... 53,549 37,390 --
Merger and acquisition related expenses ........................................ 19,553 41,515 15,875
Loss on extinguishment of debt ................................................. 14,606 -- --
Income applicable to minority interests of limited partnerships ................ 43,753 50,369 64,873
Provision for deferred income taxes ............................................ 396 14,308 12,520
Provision for deferred revenue ................................................. (1,990) (1,255) (406)
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable ........................................................... (69,754) (141,323) (196,623)
Inventories, prepaid expenses and other current assets ........................ 1,370 (35,084) 20,092
Accounts payable and accrued expenses ......................................... (12,880) (33,208) (152,569)
---------- ---------- ------------
Net cash provided by operating activities ....................................... 350,059 388,345 415,848
INVESTING ACTIVITIES
Purchases of property, plant and equipment ...................................... (183,867) (204,792) (346,141)
Proceeds from sale of property, plant and equipment ............................. 16,026 -- --
Proceeds from sale of non-strategic assets ...................................... -- -- 1,136,571
Additions to intangible assets, net of effects of acquisitions .................. (117,900) (175,380) (61,887)
Assets obtained through acquisitions, net of liabilities assumed ................ (517,773) (91,391) (270,218)
Changes in other assets ......................................................... (6,963) (14,214) (91,245)
Proceeds received on sale of other marketable securities ........................ 22,513 584 773
Investments in other marketable securities ...................................... (11,304) -- (1,339)
---------- ---------- ------------
Net cash (used in) provided by investing activities ............................. (799,268) (485,193) 366,514
FINANCING ACTIVITIES
Proceeds from borrowings ........................................................ 721,973 205,873 1,763,243
Principal payments on long-term debt ............................................ (502,152) (104,507) (2,534,813)
Early retirement of debt ........................................................ (14,606) -- --
Proceeds from exercise of options ............................................... 10,083 34,415 59,024
Proceeds from issuance of common stock .......................................... 330,954 -- --
Purchase of treasury stock ...................................................... (8,497) (736) --
Reduction in receivable from ESOP ............................................... 1,591 1,738 1,901
(Loans made to) payments received from stockholders ............................. (1,231) 1,048 7
Dividends paid .................................................................. (8,403) (1,222) --
Proceeds from investment by minority interests .................................. 1,103 510 2,572
Purchase of limited partnership units ........................................... (10,076) (3,064) (2,685)
Payment of cash distributions to limited partners ............................... (36,697) (38,948) (73,609)
---------- ---------- ------------
Net cash provided by (used in) financing activities ............................. 484,042 95,107 (784,360)
---------- ---------- ------------
Increase (decrease) in cash and cash equivalents ................................ 34,833 (1,741) (1,998)
Cash and cash equivalents at beginning of year (Note 2) ......................... 116,121 155,449 150,071
---------- ---------- ------------
Cash flows related to mergers (Note 2) .......................................... 4,495 (3,637) --
---------- ---------- ------------
Cash and cash equivalents at end of year ........................................ $ 155,449 $ 150,071 $ 148,073
========== ========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for:
Interest ....................................................................... $ 103,973 $ 97,024 $ 112,223
Income taxes ................................................................... 85,714 67,975 137,778
</TABLE>
Non-cash investing activities:
The Company assumed liabilities of $84,820,000, $19,197,000 and $
1,153,825,000 during the years ended December 31, 1995, 1996 and 1997,
respectively, in connection with its acquisitions.
During the year ended December 31, 1996, the Company issued approximately
8,095,000 common shares as consideration for mergers (see Note 2).
During the year ended December 31, 1997, the Company issued 46,245,000 common
shares with a market value of $996,530,000 as consideration for acquisitions
accounted for as purchases.
Non-cash financing activities:
During 1995 and 1997, the Company effected two-for-one stock splits of its
common stock which were effected in the form of 100% stock dividends.
The Company received a tax benefit from the disqualifying disposition of
incentive stock options of $6,653,000, $23,767,000 and $66,579,000 for the
years ended December 31, 1995, 1996 and 1997, respectively.
During 1997, the holders of the Company's $115,000,000 in aggregate principal
amount of 5% Convertible Subordinated Debentures due 2001 surrendered the
Debentures for conversion into approximately 12,226,000 shares of the
Company's Common Stock.
See accompanying notes.
37
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by HEALTHSOUTH Corporation and
its subsidiaries ("the Company") are presented as an integral part of the
consolidated financial statements.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of HEALTHSOUTH
Corporation ("HEALTHSOUTH") and its wholly-owned subsidiaries, as well as its
majority ownership or controlling interest in limited partnerships and limited
liability companies. All significant intercompany accounts and transactions have
been eliminated in consolidation.
HEALTHSOUTH is engaged in the business of providing comprehensive
rehabilitative, clinical, diagnostic and surgical healthcare services on an
inpatient and outpatient basis, primarily in the United States.
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 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. The 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
interest income. Marketable securities and debt securities held by 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's collecting an amount different from the
established rates. Net third-party settlement receivables included in accounts
receivable were $21,138,000 and $36,759,000 at December 31, 1996 and 1997,
respectively. Final determination of the settlement is subject to review by
appropriate authorities. The differences between original estimates made by the
Company and subsequent revisions (including final settlement) were not material
to the operations of the Company. Adequate allowances are provided for doubtful
accounts and contractual adjustments. Uncollectible accounts are written off
against the allowance for doubtful accounts after adequate collection efforts
are made. Net accounts receivable include only those amounts estimated by
management to be collectible.
The concentration of net accounts receivable from third-party contractual
payors and others, as a percentage of total net accounts receivable, was as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
-------- --------
<S> <C> <C>
Medicare ......... 26% 25%
Medicaid ......... 5 4
Other ............ 69 71
-- --
100% 100%
=== ===
</TABLE>
38
<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 are 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 $108,382,000, $102,694,000 and
$113,995,000, of which $2,865,000, $3,943,000 and $2,491,000 was capitalized,
during 1995, 1996 and 1997, respectively.
Depreciation and amortization is computed using the straight-line method
over the estimated useful lives of the assets or the term of the lease, as
appropriate. The estimated useful life of buildings is 30-40 years and the
general range of useful lives for leasehold improvements, furniture, fixtures
and equipment is 10-15 years.
INTANGIBLE ASSETS
Cost in excess of net asset value of purchased facilities is amortized over
20 to 40 years using the straight-line method. Organization and partnership
formation costs are deferred and amortized on a straight-line basis over a
period of 36 months. 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.
Effective July 1, 1997, the Company began expensing amounts reflecting the
costs of implementing its clinical and administrative programs and protocols at
acquired facilities in the period in which such costs are incurred. Previously,
the Company had capitalized such costs and amortized them over 36 months. Such
costs at June 30, 1997 aggregated $64,643,000, net of accumulated amortization.
These capitalized costs will be amortized in accordance with the Company's
existing policy and will be fully amortized by June 2000.
Through June 30, 1997, the Company has assigned value to and capitalized
organization and partnership formation costs which have been incurred by the
Company or obtained by the Company in acquisitions accounted for as purchases.
Effective July 1, 1997, the Company no longer assigned value to organization and
partnership formation costs obtained in acquisitions accounted for as purchases
except to the extent that objective evidence exists that such costs will provide
future economic benefits to the Company after the acquisition. Such organization
and partnership formation costs at June 30, 1997 which were obtained by the
Company in purchase transactions aggregated $8,380,000, net of accumulated
amortization. Such costs at June 30 will be amortized in accordance with the
Company's existing policy and will be fully amortized by June 2000.
MINORITY INTERESTS
The equity of minority investors in limited partnerships and limited
liability companies of the Company is reported on the consolidated balance
sheets as minority interests. Minority interests reported in the consolidated
income statements 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, 1997), the effect of which is
removed from the results of operations of the Company.
39
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
REVENUES
Revenues include net patient service revenues and other operating revenues.
Other operating revenues include cafeteria revenue, gift shop revenue, rental
income, trainer/contract revenue, management and administrative fee revenue
(related to non-consolidated subsidiaries and affiliates) and transcriptionist
fees which are insignificant to total revenues. Net patient service revenues are
reported at the estimated net realizable amounts from patients, third-party
payors and others for services rendered, including estimated retroactive
adjustments under reimbursement agreements with third-party payors.
INCOME PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share". Statement 128 replaced the calculation of primary and
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is similar to the previously reported fully diluted earnings per share.
All earnings per share amounts for all periods have been presented, and where
appropriate, restated to conform to the Statement 128 requirements.
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1995 1996 1997
-------------- -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Numerator:
Income from continuing operations before extraordinary item....... $ 108,468 $ 189,864 $ 330,608
---------- ---------- ----------
Numerator for basic earnings per share--income available to
common stockholders ............................................ 108,468 189,864 330,608
Effect of dilutive securities:
Elimination of interest and amortization on 5% Convertible
Subordinated Debentures due 2001, less the related effect of
the provision for income taxes ................................. 3,826 3,839 968
---------- ---------- ----------
Numerator for diluted earnings per share-income available to
common stockholders after assumed conversion ................... $ 112,294 $ 193,703 $ 331,576
========== ========== ==========
Denominator:
Denominator for basic earnings per share - weighted-average
shares ......................................................... 289,594 321,367 346,872
Effect of dilutive securities:
Net effect of dilutive stock options ........................... 18,198 15,440 15,617
Assumed conversion of 5% Convertible Subordinated De-
bentures due 2001 ............................................. 12,226 12,226 3,057
---------- ---------- ----------
Dilutive potential common shares ............................... 30,424 27,666 18,674
---------- ---------- ----------
Denominator of diluted earnings per share - adjusted
weighted-average shares and assumed conversions ............... 320,018 349,033 365,546
========== ========== ==========
Basic earnings per share .......................................... $ 0.37 $ 0.59 $ 0.95
========== ========== ==========
Diluted earnings per share ........................................ $ 0.35 $ 0.55 $ 0.91
========== ========== ==========
</TABLE>
40
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
IMPAIRMENT OF ASSETS
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.
With respect to the carrying value of the excess of cost over net asset
value of purchased facilities and other intangible assets, the Company
determines on a quarterly basis whether an impairment event has occurred by
considering factors such as the market value of the asset; a significant adverse
change in legal factors or in the business climate; adverse action by a
regulator; a history of operating or cash flow losses; or a projection of
continuing losses associated with an operating entity. The carrying value of
excess cost over net asset value of purchased facilities and other intangible
assets will be evaluated if the facts and circumstances suggest that it has been
impaired. If this evaluation indicates that the value of the asset will not be
recoverable, as determined based on the undiscounted cash flows of the entity
acquired over the remaining amortization period, an impairment loss is
calculated based on the excess of the carrying amount of the asset over the
asset's fair value.
SELF-INSURANCE
The Company is self-insured for professional liability and comprehensive
general liability. Liabilities for asserted and unasserted claims are accrued
based upon specific claims and incidents and the claims history of the Company.
The reserves for estimated liabilities for asserted and unasserted claims, which
are not material in relation to the Company's consolidated financial position at
December 31, 1996 and 1997, are included with accrued interest payable and other
liabilities in the accompanying consolidated balance sheets.
RECLASSIFICATIONS
Certain amounts in 1995 and 1996 financial statements have been
reclassified to conform with the 1997 presentation. Such reclassifications had
no effect on previously reported consolidated financial position and
consolidated net income.
FOREIGN CURRENCY TRANSLATION
The Company translates the assets and liabilities of its foreign
subsidiaries stated in local functional currencies to U.S. dollars at the rates
of exchange in effect at the end of the period. Revenues and expenses are
translated using rates of exchange in effect during the period. Gains and losses
from currency translation are included in stockholders' equity. Currency
transaction gains or losses are recognized in current operations and have not
been significant to the Company's operating results in any period.
41
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED )
2. MERGERS
Effective June 13, 1995, a wholly-owned subsidiary of the Company merged
with Surgical Health Corporation ("SHC") and in connection therewith the Company
issued 17,062,960 shares of its common stock in exchange for all of SHC's common
and preferred stock. Prior to the merger, SHC operated a network of 36
freestanding surgery centers and five mobile lithotripters in eleven states,
with an aggregate of 156 operating and procedure rooms. Costs and expenses of
approximately $4,588,000 incurred by the Company in connection with the SHC
merger have been recorded in operations during 1995 and reported as merger
expenses in the accompanying consolidated statements of income. Fees related to
legal, accounting and financial advisory services accounted for $3,400,000 of
the expense. Costs related to employee separations were approximately
$1,188,000. Also in connection with the SHC Merger, the Company recognized a
$14,606,000 extraordinary loss as a result of the retirement of the SHC Notes
(see Note 7). The extraordinary loss consisted primarily of the associated debt
discount plus premiums and costs associated with the retirement, and is reported
net of income tax benefits of $5,550,000.
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
recorded 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 subacute 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.
Effective March 3, 1997, a wholly-owned subsidiary of the Company merged
with Health Images, Inc. ("Health Images"), and in connection therewith the
Company issued 10,343,470 shares of its common stock in exchange for all of
Health Images' outstanding common stock. Prior to the merger, Health Images
operated 49 freestanding diagnostic imaging centers in 13 states and six in the
United Kingdom. Costs and expenses of approximately $15,875,000, primarily
legal, accounting and financial advisory fees, incurred by the Company in
connection with the Health Images merger have been recorded in operations during
1997 and reported as merger expenses in the accompanying consolidated statements
of income.
42
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED
2. MERGERS - (CONTINUED)
The mergers of the Company with SHC, SSCI, SCA, Advantage Health and Health
Images 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. There were no
material transactions between the Company, SHC, SSCI, SCA, Advantage Health and
Health Images prior to the mergers. The effects of conforming the accounting
policies of the combined companies are not material.
Combined and separate results of the Company and its 1997 merger with
Health Images are as follows (in thousands):
HEALTH
HEALTHSOUTH IMAGES COMBINED
------------- ------------ --------------
Year ended December 31, 1995
Revenues .................. $ 2,003,146 $ 115,535 $ 2,118,681
Net income ................ 92,521 5,729 98,250
Year ended December 31, 1996
Revenues .................. $ 2,436,537 $ 131,618 $ 2,568,155
Net income (loss) ......... 220,818 (30,954) 189,864
Year ended December 31, 1997
Revenues .................. $ 2,995,782 $ 21,487 $ 3,017,269
Net income ................ 327,206 3,402 330,608
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 its December 31 fiscal
year and Advantage Health's results for its recast November 30 fiscal year.
Beginning January 1, 1996, all facilities acquired in the Advantage Health
merger adopted a December 31 fiscal year end; accordingly, all consolidated
financial statements for periods after December 31, 1995 are based on a
consolidation of all of the Company's subsidiaries on a December 31 year end.
Advantage Health's historical results of operations for the one month ended
December 31, 1995 are not included in the Company's consolidated statements of
income or cash flows. An adjustment has been made to stockholders' equity as of
January 1, 1996 to adjust for the effect of excluding Advantage Health's results
of operations for the one month ended December 31, 1995. The following is a
summary of Advantage Health's results of operations and cash flows for the one
month ended December 31, 1995 (in thousands):
Statement of Income Data:
Revenues .............................................. $16,111
Operating unit expenses ............................... 14,394
Corporate general and administrative expenses ......... 1,499
Provision for doubtful accounts ....................... 1,013
Depreciation and amortization ......................... 283
Loss on impairment of assets .......................... 21,111
Interest expense ...................................... 288
Interest income ....................................... (16)
-------
38,572
-------
43
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
2. MERGERS - (CONTINUED)
Loss before income taxes and minority interests ......... (22,461)
Benefit for income taxes ................................ (4,959)
Minority interests ...................................... 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)
=========
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 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.
44
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED )
3. CASH, CASH EQUIVALENTS AND OTHER MARKETABLE SECURITIES
Cash, cash equivalents and other marketable securities consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Cash .................................................... $ 140,278 $ 135,399
Cash equivalents ........................................ 9,793 12,674
--------- ---------
Total cash and cash equivalents ....................... 150,071 148,073
Certificates of deposit ................................. 1,765 1,256
Municipal put bonds ..................................... 495 1,570
Municipal put bond mutual funds ......................... 500 500
Collateralized mortgage obligations ..................... 1,000 1,000
--------- ---------
Total other marketable securities ....................... 3,760 4,326
--------- ---------
Total cash, cash equivalents and other marketable
securities (approximates market value) ................ $ 153,831 $ 152,399
========= =========
</TABLE>
For purposes of the consolidated balance sheets and statements of cash
flows, marketable securities purchased with an original maturity of ninety days
or less are considered cash equivalents.
4. OTHER ASSETS
Other assets consisted of the following:
DECEMBER 31,
-------------------------
1996 1997
----------- -----------
(IN THOUSANDS)
Notes receivable ............................... $ 38,359 $ 70,655
Investment in Caretenders Health Corp. ......... 7,370 7,809
Prepaid long-term lease ........................ 8,397 9,190
Other equity investments ....................... 15,362 37,027
Real estate investments ........................ 10,020 21,911
Trusteed funds ................................. 1,879 921
Other .......................................... 2,629 14,798
-------- ---------
$ 84,016 $ 162,311
======== =========
The Company has a 19% ownership interest in Caretenders Health Corp.
("Caretenders") which 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, 1995, 1996
and 1997 was not material to the Company's consolidated results of operations.
It was not practicable to estimate the fair value of the Company's various
other equity investments (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, 1997 represents the original cost of the investments, which
management believes is not impaired.
45
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED )
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1997
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Land ................................................................. $ 93,631 $ 112,944
Buildings ............................................................ 844,775 1,030,849
Leasehold improvements ............................................... 112,149 186,003
Furniture, fixtures and equipment .................................... 801,443 1,044,374
Construction-in-progress ............................................. 73,815 32,426
---------- ----------
1,925,813 2,406,596
Less accumulated depreciation and amortization ....................... 460,980 555,831
---------- ----------
$1,464,833 $1,850,765
========== ==========
</TABLE>
6. INTANGIBLE ASSETS
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1997
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Organizational, partnership formation and start-up
costs (see Note 1) ................................................ $ 238,126 $ 255,810
Debt issue costs .................................................... 34,905 33,114
Noncompete agreements ............................................... 86,566 121,581
Cost in excess of net asset value of purchased
facilities ........................................................ 947,104 2,103,085
----------- -----------
1,306,701 2,513,590
Less accumulated amortization ....................................... 212,280 270,218
----------- -----------
$ 1,094,421 $ 2,243,372
=========== ===========
</TABLE>
7. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
----------- --------------
(IN THOUSANDS)
<S> <C> <C>
Notes and bonds payable:
Advances under a $1,250,000,000 credit agreement with banks.......... $ 995,000 $ 1,175,000
9.5% Senior Subordinated Notes due 2001 ............................. 250,000 250,000
5.0% Convertible Subordinated Debentures due 2001 ................... 115,000 --
Notes payable to banks and various other notes payable, at interest
rates from 5.5% to 14.9% .......................................... 151,384 114,899
Hospital revenue bonds payable ...................................... 22,503 14,836
Noncompete agreements payable with payments due at intervals
ranging through December 2004 ..................................... 26,256 47,089
---------- -----------
1,560,143 1,601,824
Less amounts due within one year .................................... 47,089 46,489
---------- -----------
$1,513,054 $ 1,555,335
========== ===========
</TABLE>
46
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
7. LONG-TERM DEBT - (CONTINUED)
The fair value of total long-term debt approximates book value at December
31, 1996 and 1997. 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 (see also Note 14). The Company
provided a negative pledge on all assets for 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, 1997, the effective interest rate associated with the 1996 Credit Agreement
was approximately 6.13%.
In connection with the Horizon/CMS acquisition in 1997 (see Note 9), the
Company entered into a Bridge Credit Agreement with NationsBank and other banks
(the "Bridge Credit Agreement") which provided for a $1,250,000,000 Senior
Bridge Loan Facility on substantially the same terms as the 1996 Credit
Agreement. At the time of the closing of Horizon/CMS acquisition, approximately
$1,000,000,000 was drawn under the Senior Bridge Credit Facility, primarily to
repay certain existing indebtedness of Horizon/CMS. The Company repaid all
amounts drawn under the Bridge Credit Agreement upon the closing of the sale of
the Horizon/CMS long-term care assets to Integrated Health Services, Inc. on
December 31, 1997 (see Note 9), thereby permanently reducing the amount
available thereunder to $500,000,000. Any amounts drawn under the Bridge Credit
Agreement are payable in full on October 31, 1998.
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. 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' over allotments. Interest is payable on April 1 and October
1. The Convertible Debentures were 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 in the occurrence of certain events. Substantially all of the
Convertible Debentures were converted into approximately 12,226,000 shares of
the Company's Common Stock on or prior to April 1, 1997.
In June 1994, SHC (see Note 2) issued $75,000,000 principal amount of 11.5%
Senior Subordinated Notes due July 15, 2004 (the "SHC Notes"). The proceeds of
the SHC Notes were used to pay down indebtedness outstanding under other
existing credit facilities. During 1995, the Company purchased $67,500,000 of
the $75,000,000 outstanding principal amount of the SHC Notes in a tender offer
at 115% of the face value of the Notes, and the remaining $7,500,000 balance was
purchased on the open market, using proceeds from the Company's other long-term
credit facilities. The loss on retirement of the SHC Notes totaled approximately
$14,606,000. The loss consists of the premium, write-off of unamortized bond
issue costs and other fees and is reported as an extraordinary loss on early
extinguishment of debt in the accompanying 1995 consolidated statement of income
(see Note 2).
47
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
7. LONG-TERM DEBT - (CONTINUED)
Principal maturities of long-term debt are as follows:
YEAR ENDING DECEMBER 31, (IN THOUSANDS)
- - --------------------------------- ---------------
1998 .......................... $ 46,489
1999 .......................... 378,564
2000 .......................... 20,953
2001 .......................... 1,088,656
2002 .......................... 28,426
After 2002 .................... 38,736
----------
$1,601,824
==========
8. STOCK OPTIONS
The Company has various stockholder-approved stock option plans which
provide for the grant of options to directors, officers and other key employees
to purchase Common Stock at 100% of the fair market value as of the date of
grant. The Audit and Compensation Committee of the Board of Directors
administers the stock option plans. Options may be granted as incentive stock
options or as non-qualified stock options. Incentive stock options vest 25%
annually, commencing upon completion of one year of employment subsequent to the
date of grant. Certain of the non-qualified stock options are not subject to any
vesting provisions, while others vest on the same schedule as the incentive
stock options. The options expire at dates ranging from five to ten years from
the date of grant.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 is effective for fiscal years beginning
after December 15, 1995 and allows for the option of continuing to account for
stock-based compensation under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations, or selecting the fair value method of expense recognition as
described in SFAS 123. The Company has elected to follow APB 25 in accounting
for its employee stock options. The Company follows SFAS 123 in accounting for
its non-employee stock options. The total compensation expense associated with
non-employee stock options granted in 1996 and 1997 was not material.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of SFAS 123. 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,
1996 and 1997, respectively: risk-free interest rates of 5.87%, 6.01% and 6.12%;
dividend yield of 0%; volatility factors of the expected market price of the
Company's common stock of .36, .37 and .37; and a weighted-average expected life
of the options of 4.3 years for 1995 and 1996, and 6.2 years for 1997.
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.
48
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
8. STOCK OPTIONS - (CONTINUED)
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
------------- -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Pro forma net income ......... $ 80,059 $ 162,463 $ 290,517
Pro forma earnings per share:
Basic ....................... 0.28 0.51 0.84
Diluted ..................... 0.26 0.48 0.80
</TABLE>
The effect of compensation expense from stock options on 1995 pro forma net
income reflects only the vesting of 1995 awards. The 1996 pro forma net income
reflects the second year of vesting of the 1995 awards and the first year of
vesting of 1996 awards. The 1997 pro forma net income reflects the third year of
vesting of the 1995 awards, the second year of vesting the 1996 awards and the
first year of vesting of the 1997 awards. Not until 1998 will the full effect of
recognizing compensation expense for stock options be 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>
1995 1996 1997
------------------------ ------------------------ -----------------------
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 ................ 30,150 $ 4 35,068 $ 5 32,806 $ 7
Granted ..................................... 7,639 9 4,769 17 10,485 22
Exercised ................................... (2,237) 4 (6,709) 5 (9,604) 7
Canceled .................................... (484) 5 (322) 6 (995) 20
------ ------ ------
Options outstanding at December 31 ........... 35,068 $ 5 32,806 $ 7 32,692 $12
Options exercisable at December 31 ........... 26,293 $ 5 27,678 $ 6 28,125 $11
Weighted average fair value of options granted
during the year ............................. $ 3.81 $ 7.13 $ 10.59
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- -------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
DECEMBER 31, REMAINING EXCERCISE DECEMBER 31, EXCERCISE
1997 LIFE PRICE 1997 PRICE
---------------- ----------- ----------- --------------- ----------
(IN THOUSANDS) (YEARS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Under $8.40.............. 17,933 5.44 $ 5.29 16,719 $ 5.07
$8.40 -- $20.15.......... 8,580 8.04 16.64 7,238 16.69
$20.16 and above......... 6,179 8.89 23.39 4,168 23.29
</TABLE>
49
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED )
9. ACQUISITIONS
1995 ACQUISITIONS
Effective April 1, 1995, the Company acquired the rehabilitation hospitals
division of NovaCare, Inc. ("NovaCare"), consisting of 11 rehabilitation
hospitals, 12 other facilities and certificates of need to build two other
facilities. The total purchase price for the NovaCare facilities was
approximately $235,000,000 in cash. The cost in excess of net asset value was
approximately $173,000,000. Of this excess, approximately $129,000,000 was
allocated to leasehold value and the remaining $44,000,000 to cost in excess of
net asset value of purchased facilities. As part of the acquisition, the Company
acquired approximately $4,790,000 in deferred tax assets. The Company also
provided approximately $10,000,000 for the write-down of certain assets to net
realizable value as the result of a planned facility consolidation in a market
where the Company's existing services overlapped with those of an acquired
facility. The planned employee separations and facility consolidation were
completed by the end of 1995.
Effective December 1, 1995, the Company acquired Caremark Orthopedic
Services Inc. ("Caremark"). At the time of the acquisition, Caremark owned and
operated approximately 120 outpatient rehabilitation centers in 13 states. The
total purchase price was approximately $127,500,000 in cash.
Also at various dates during 1995, the Company acquired 70 separate
outpatient rehabilitation operations located throughout the United States, three
physical therapy practices, one home health agency, one nursing home, 75
licensed subacute beds, five outpatient surgery centers and 16 outpatient
diagnostic imaging operations. The combined purchase prices of these
acquisitions was approximately $178,393,000. The form of consideration
constituting the combined purchase prices was approximately $152,833,000 in cash
and $25,560,000 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
$81,455,000. The total cost of these acquisitions exceeded the fair value of the
net assets acquired by approximately $224,438,000. 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 the NovaCare
rehabilitation hospitals acquisition, 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.
50
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
9. ACQUISITIONS - (CONTINUED)
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.
1997 ACQUISITIONS
Effective October 29, 1997, the Company acquired Horizon/CMS Healthcare
Corporation ("Horizon/CMS") in a stock-for-stock merger in which the
stockholders of Horizon/CMS received 0.84338 of a share of the Company's common
stock per share of Horizon/CMS common stock. At the time of the acquisition,
Horizon/CMS operated 30 inpatient rehabilitation hospitals and approximately 275
outpatient rehabilitation centers, among other strategic businesses, as well as
certain long-term care businesses. In the transaction, the Company issued
approximately 45,261,000 shares of its common stock, valued at $975,824,000,
exchanged options to acquire 3,313,000 shares of common stock, valued at
$23,191,000, and assumed approximately $740,000,000 in long-term debt.
Effective December 31, 1997, the Company sold certain non-strategic assets
of Horizon/CMS to Integrated Health Services, Inc. ("IHS"). Under the terms of
the sale, the Company sold 139 long-term care facilities, 12 specialty
hospitals, 35 institutional pharmacy locations and over 1,000 rehabilitation
therapy contracts with long-term care facilities. The transaction was valued at
approximately $1,224,000,000, including the payment by IHS of approximately
$1,130,000,000 in cash (net of certain adjustments) and the assumption by IHS of
approximately $94,000,000 in debt.
In accordance with Emerging Issues Task Force Issue 87-11, "Allocation of
Purchase Price to Assets to be Sold" ("EITF 87-11"), the results of operations
of the non-strategic assets sold to IHS from the acquisition date to December
31, 1997, including a net loss of $7,376,000, have been excluded from the
Company's results of operations in the accompanying financial statements. The
gain on the disposition of the assets sold to IHS, totaling $10,996,000, has
been accounted for as an adjustment to the original Horizon/CMS purchase price
allocation.
The following table summarizes the unaudited pro forma combined results of
operations for the Company and Horizon/CMS, assuming the Horizon/CMS acquisition
and subsequent sale of non-strategic assets to IHS had occurred at the beginning
of each of the following periods:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1997
---------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Revenues .................................... $ 3,285,096 $ 3,615,123
Net income .................................. 199,773 292,651
Net income per common share -- assuming dilu-
tion ....................................... 0.52 0.72
</TABLE>
The Company also intends to sell the physician and allied health
professional placement service business it acquired in the Horizon/CMS
acquisition (the "Physician Placement Services Subsidiary"). This sale is
currently expected to be completed by mid-1998. Accordingly, a portion of the
Horizon/CMS
51
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
9. ACQUISITIONS - (CONTINUED)
purchase price has been allocated to the Physician Placement Services Subsidiary
and this amount is classified as assets held for sale in the accompanying
December 31, 1997 consolidated balance sheet. The allocated amount of
$60,400,000 represents the net assets of the Physician Placement Services
Subsidiary, plus anticipated cash flows from (a) operations of the Physician
Placement Services Subsidiary during the holding period and (b) proceeds from
the sale of the Physician Placement Services Subsidiary. The results of
operations of the Physician Placement Services Subsidiary from the acquisition
date to December 31, 1997, including net income of $1,230,000, have been
excluded from the Company's results of operations in the accompanying financial
statement in accordance with EITF 87-11.
Effective September 30, 1997, the Company acquired ASC Network Corporation
("ASC") in a cash-for-stock merger. At the time of the acquisition, ASC operated
29 outpatient surgery centers in eight states. The total purchase price for ASC
was approximately $130,827,000 in cash, plus the assumption of approximately
$61,000,000 in long-term debt.
Effective October 23, 1997, the Company acquired National Imaging
Affiliates, Inc. ("NIA") in a stock-for-stock merger. At the time of the
acquisition, NIA operated eight diagnostic imaging centers in six states and a
radiology management services business. In conjunction with the transaction, NIA
spun off its radiology management services business, which continues to be owned
by the former NIA stockholders. In the transaction, the Company issued
approximately 984,000 shares of its common stock, valued at $20,706,000, in
exchange for all of the outstanding shares of NIA.
At various dates and in separate transactions throughout 1997, the Company
acquired 135 outpatient rehabilitation facilities, four outpatient surgery
centers and eight diagnostic imaging facilities located throughout the United
States. The Company also acquired an inpatient rehabilitation hospital located
in Australia. The total purchase price of the acquired operations was
approximately $136,819,000. The form of consideration constituting the total
purchase prices was $134,519,000 in cash and $2,300,000 in notes payable.
In connection with these transactions, the Company entered into noncompete
agreements with former owners totaling $29,275,000. 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 1997 acquisitions
described above was approximately $233,469,000. The total cost of the 1997
acquisitions exceeded the fair value of the net assets acquired by approximately
$1,053,898,000. 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 1997 acquisitions should be
amortized over a period of twenty-five to forty years on a straight-line basis.
At December 31, 1997 the purchase price allocation associated with the 1997
acquisitions is preliminary in nature. During 1998 the Company will make
adjustments, if necessary, to the purchase price allocation based on revisions
to the fair value of the assets acquired.
All of the 1997 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 the operations acquired
in the Horizon/CMS acquisition (for which pro forma data has been disclosed
above), the results of operations of the acquired businesses were not material
individually or in the aggregate to the Company's consolidated results of
operations and financial position.
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 and limited liability company is allocated to the
limited partners.
52
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
10. INCOME TAXES - (CONTINUED)
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". Deferred income taxes reflect the net effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
CURRENT NONCURRENT TOTAL
--------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Acquired net operating loss .................. $ -- $ 5,283 $ 5,283
Development costs ............................ -- 849 849
Accruals ..................................... 6,634 -- 6,634
Allowance for bad debts ...................... 34,700 -- 34,700
Other ........................................ 2,433 2,597 5,030
------- --------- ---------
Total deferred tax assets ..................... 43,767 8,729 52,496
Deferred tax liabilities:
Depreciation and amortization ................ -- 30,441 30,441
Purchase price accounting .................... -- 4,802 4,802
Non-accrual experience method ................ 17,694 -- 17,694
Contracts .................................... 3,849 -- 3,849
Capitalized costs ............................ 5,013 22,672 27,685
Other ........................................ 1,973 2,604 4,577
------- --------- ---------
Total deferred tax liabilities ................ 28,529 60,519 89,048
------- --------- ---------
Net deferred tax assets (liabilities) ......... $15,238 $ (51,790) $ (36,552)
======= ========= =========
</TABLE>
At December 31, 1997, the Company has net operating loss carryforwards of
approximately $28,755,000 for income tax purposes expiring through the year
2017. Those carryforwards resulted from the Company's acquisitions of Diagnostic
Health Corporation, Renaissance Rehabilitation Center, Inc., Rebound, Inc.,
Health Images and Horizon/CMS.
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
CURRENT NONCURRENT TOTAL
------------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Accruals .............................. $ 19,564 $ -- $ 19,564
Net operating loss .................... -- 11,039 11,039
Other ................................. -- 2,834 2,834
--------- --------- ----------
Total deferred tax assets .............. 19,564 13,873 33,437
Deferred tax liabilities:
Depreciation and amortization ......... -- 90,486 90,486
Capitalized costs ..................... 9,038 -- 9,038
Allowance for bad debts ............... 41,023 -- 41,023
Other ................................. 3,622 -- 3,622
--------- --------- ----------
Total deferred tax liabilities ......... 53,683 90,486 144,169
--------- --------- ----------
Net deferred tax liabilities ........... $ (34,119) $ (76,613) $ (110,732)
========= ========= ==========
</TABLE>
53
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
10. INCOME TAXES - (CONTINUED)
The provision for income taxes was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
---------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Currently payable:
Federal ......... $70,629 $116,023 $166,884
State ........... 9,586 13,598 26,749
------- -------- --------
80,215 129,621 193,633
Deferred expense:
Federal ......... 367 13,281 10,790
State ........... 29 1,027 1,730
------- -------- --------
396 14,308 12,520
------- -------- --------
$80,611 $143,929 $206,153
======= ======== ========
</TABLE>
As part of the acquisitions of Horizon/CMS, ASC and NIA, the Company
acquired approximately $6,729,000 in deferred tax liabilities.
The Company made a retroactive election under Internal Revenue Code Section
475 which allowed it to mark certain assets to fair market value, resulting in
refunded income taxes and an increase to deferred tax liabilities of
approximately $54,931,000.
The difference between the provision for income taxes and the amount
computed by applying the statutory federal income tax rate to income before
taxes was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
------------ ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal taxes at statutory rates ................... $ 78,322 $ 134,457 $ 210,572
Add (deduct):
State income taxes, net of federal tax benefit..... 6,250 9,506 18,511
Minority interests ................................ (15,102) (17,303) (22,705)
Disposal/impairment charges ....................... 9,955 6,563 1,576
Other ............................................. 1,186 10,706 (1,801)
--------- --------- ---------
$ 80,611 $ 143,929 $ 206,153
========= ========= =========
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
The Company is a party to legal proceedings incidental to its business. In
the opinion of management, any ultimate liability with respect to these actions
will not materially affect the consolidated financial position or results of
operations of the Company.
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, 1997 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
54
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
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.
In connection with the Horizon/CMS acquisition, the Company assumed
Horizon/CMS's open professional and general liability claims. The Company has
entered into an agreement with an insurance carrier to assume responsibility for
the majority of open claims. Under this agreement, a "risk transfer" is being
conducted which will convert Horizon/CMS's self-insured claims to insured
liabilities consistent with the terms of the underlying insurance policy.
Horizon/CMS is currently a party, or is subject, to certain litigation
matters and disputes. The Company itself is, in general, not a party to such
litigation. These matters include actions on investigations initiated by the
Securities and Exchange Commission, New York Stock Exchange, various federal and
state regulatory agencies, stockholders of Horizon/CMS and other parties. Both
Horizon/CMS and the Company are working to resolve these matters and cooperating
fully with the various regulatory agencies involved. As of December 31, 1997, it
was not possible for the Company to predict the ultimate outcome or effect of
these matters. In management's opinion, the ultimate resolution of these matters
will not have a material effect on the Company's financial position.
At December 31, 1997, anticipated capital expenditures for the next twelve
months are $400,000,000. 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.
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 $103,308,000,
$131,994,000 and $160,404,000 for the years ended December 31, 1995, 1996 and
1997, 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:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, (IN THOUSANDS)
- - ------------------------------------------------------ ---------------
<S> <C>
1998 ..................................... $179,658
1999 ..................................... 150,855
2000 ..................................... 125,479
2001 ..................................... 98,643
2002 ..................................... 72,600
After 2002 ............................... 313,403
--------
Total minimum payments required .......... $940,638
========
</TABLE>
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 $1,408,000,
$2,420,000 and $2,628,000 in 1995, 1996 and 1997, 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
55
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
12. EMPLOYEE BENEFIT PLANS - (CONTINUED)
in 1991 (the "1991 ESOP Loan") and $10,000,000 in 1992 (the "1992 ESOP Loan").
At December 31, 1997, the combined ESOP Loans had a balance of $12,247,000. 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 $3,524,000, $3,198,000 and $3,249,000 in 1995, 1996 and 1997,
respectively. Interest incurred on the ESOP Loans was approximately $1,460,000,
$1,298,000 and $1,121,000 in 1995, 1996 and 1997, respectively. Approximately
1,508,000 shares owned by the ESOP have been allocated to participants at
December 31, 1997.
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. IMPAIRMENT OF LONG-TERM ASSETS
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 resulting income from future marketing
efforts in the respective locations. The amount of the impairment charge was
determined by discounting the estimates of future cash flows, using an estimated
8.5% incremental borrowing rate which management believes is commensurate with
the risks involved. The resulting net present value of future cash flows was
then compared to the historical net book value of goodwill and other long-lived
assets at each operating location which resulted in an impairment loss relative
to these centers of $47,984,000. The above amounts are included in operations
for 1995 in the accompanying consolidated statement of income.
In 1996, the Company recorded an asset impairment charge of approximately
$37,390,000 relating to tangible assets identifiable with the development and
manufacture of the HI Standard and HI STAR MRI systems. Approximately
$28,665,000 of this charge related to the development and manufacture of the HI
STAR MRI system, while the remaining charge of $8,725,000 related to HI Standard
MRI systems already in service.
56
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
13. IMPAIRMENT OF LONG-TERM ASSETS - (CONTINUED)
During the fourth quarter of 1996 the Company performed an evaluation of
the viability of continued development and manufacture, and the continued use of
mid-field (0.6 Tesla) MRI systems. Both the HI Standard and the HI STAR MRI
systems are mid-field MRI systems. The Company's evaluation revealed that due to
improvements in technology, high-field (1.5 Tesla) MRI systems could be
purchased at significantly lower costs than the production costs of the
Company's mid-field MRI systems. Additionally, it was noted that future
maintenance costs of the high-field MRI systems were significantly less than the
cost currently being incurred for maintenance of the internally developed
mid-field MRI systems. The evaluation also confirmed that procedures could be
performed in the high-field MRI systems in approximately one-third of the time
that the same procedure could be performed in a mid-field MRI system. In
addition, the Company was experiencing pressures from third-party payors and
referring physicians to implement high-field MRI systems due to increased
patient satisfaction from the reduced procedure time and the improved images
derived from such systems. Based on these facts and circumstances the Company
determined that there was a significant decrease in the market value of the
related assets. Accordingly, the Company decided to cease development and
manufacture of the HI STAR MRI system and developed a plan to replace all of its
HI Standard MRI systems during the following eighteen months.
With respect to the $28,665,000 charge related to the development and
manufacture of the HI STAR MRI system, approximately $20,503,000 was
work-in-process, $4,244,000 was a prototype HI STAR MRI system and inventory of
component parts and $3,918,000 was machinery and equipment used in the
development and manufacturing processes. The Company was not able to find any
application or use of these assets within its existing operations. Also, since
the HI STAR MRI system was not fully developed, the Company has not been able to
find a buyer for any of the assets. Therefore, the Company has assigned no fair
value at December 31, 1996 to the assets related to the development and
manufacture of the HI STAR MRI system.
With respect to the $8,725,000 charge related to the HI Standard MRI
systems already in service, the Company explored the market for the sale of
these systems in the open market or through trade with other manufacturers. For
the same reasons that led the Company to develop a plan to replace the HI
Standard MRI systems with high-field MRI systems, no potential purchaser, or
manufacturer willing to trade, has been found. Therefore, the Company has
assigned no fair value at December 31, 1996 to the HI Standard MRI systems to be
disposed of.
14. SUBSEQUENT EVENTS
On March 15, 1998, pursuant to the terms of the 1996 Credit Agreement (see
Note 7), the Company elected to convert $350,000,000 of the $1,250,000,000 1996
Credit Agreement into a two-year amortizing term note maturing on December 31,
1999. In conjunction with this election, the Company has received a $350,000,000
commitment from NationsBank for an additional 364-day facility (the "Interim
Revolving Credit Facility") which is on substantially the same terms as the 1996
Credit Agreement.
On March 20, 1998, the Company issued $500,000,000 in 3.25% Convertible
Subordinated Debentures due 2003 (the "Convertible Debentures due 2003") in a
private offering. The Convertible Debentures due 2003 are convertible into
Common Stock of the Company at the option of the holder at a conversion price of
$36.625 per share, subject to adjustment upon the occurrence of certain events.
The proceeds from this debt offering will be used by the Company to pay off all
amounts drawn subsequent to December 31, 1997 under the Bridge Credit Agreement
(see Note 7) and reduce outstanding amounts under the 1996 Credit Agreement.
Effective with the sale of the Convertible Debentures due 2003, the Bridge
Credit Agreement was terminated.
Because the Company intends to pay off the two-year term portion of the
1996 Credit Agreement with proceeds from the Interim Revolving Credit Facility
or other long-term financing arrangements, all amounts associated with the 1996
Credit Agreement outstanding at December 31, 1997 are classified as non-current.
57
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company has not changed independent accountants within the 24 months
prior to December 31, 1997.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
DIRECTORS
The following table sets forth certain information with respect to the
Company's Directors.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
AND ALL POSITIONS A DIRECTOR
NAME AGE WITH THE COMPANY SINCE
- - ---------------------------------- ----- ------------------------------------------------------- -----------
<S> <C> <C> <C>
Richard M. Scrushy ............... 45 Chairman of the Board and Chief Executive Officer 1984
and Director
James P. Bennett ................. 40 President and Chief Operating Officer and Director 1993
Phillip C. Watkins, M.D. ......... 56 Physician, Birmingham, Alabama, and Director 1984
George H. Strong ................. 71 Private Investor, Locust, New Jersey, and Director 1984
C. Sage Givens ................... 41 General Partner, Acacia Venture Partners and Director 1985
Charles W. Newhall III ........... 53 Partner, New Enterprise Associates Limited Partner- 1985
ships, and Director
Larry R. House ................... 54 Private Investor, Birmingham, Alabama, and Director 1993
Anthony J. Tanner ................ 49 Executive Vice President -- Administration and Sec- 1993
retary and Director
P. Daryl Brown ................... 43 President -- HEALTHSOUTH Outpatient Centers 1995
and Director
John S. Chamberlin ............... 69 Private Investor, Princeton, New Jersey, and Director 1993
Joel C. Gordon ................... 68 Private Investor, Nashville, Tennessee, Consultant to 1996
the Company and Director
Michael D. Martin ................ 37 Executive Vice President, Chief Financial Officer and 1998
Treasurer and Director
</TABLE>
Richard M. Scrushy, one of the Company's management founders, has served as
Chairman of the Board and Chief Executive Officer of the Company since 1984, and
also served as President of the Company from 1984 until March 1995. From 1979 to
1984, Mr. Scrushy was with Lifemark Corporation, a publicly-owned healthcare
corporation, serving in various operational and management positions. Mr.
Scrushy is also Chairman of the Board of MedPartners, Inc., a publicly-traded
physician practice management company for which he also served as Acting Chief
Executive Officer from January 16 through March 18, 1998, 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 and is a principal of 21st Century Health Ventures L.L.C., a
private equity investment fund sponsor.
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.
59
<PAGE>
George H. Strong retired as senior vice president and chief financial
officer of Universal Health Services, Inc. in December 1984, a position he held
for more than six years. Mr. Strong is a private investor and continued to act
as a Director of Universal Health Services, Inc., a publicly-traded hospital
management corporation, until 1993. Mr. Strong is also a director of Core Funds,
a public mutual fund group, Integrated Health Services, Inc., a publicly-traded
healthcare corporation, and AmeriSource, Inc., a large drug wholesaler.
C. Sage Givens is a general partner of Acacia Venture Partners, a private
venture capital fund capitalized at $66,000,000. From 1983 to June 30, 1995, Ms.
Givens was a general partner of First Century Partners, a private venture
capital fund capitalized at $100,000,000. Ms. Givens managed the fund's
healthcare investments. Ms. Givens serves on the boards of directors of PhyCor,
Inc. and UroHealth Systems, Inc., both publicly-traded healthcare corporations,
and several privately-held healthcare companies.
Charles W. Newhall III is a general partner and founder of New Enterprise
Associates Limited Partnerships, Baltimore, Maryland, where he has been engaged
in the venture capital business since 1978. Mr. Newhall is also a director of
Integrated Health Services, Inc., MedPartners, Inc. and Opta Food Ingredients,
Inc., all of which are publicly-traded corporations.
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 served as Chairman of the Board, President and Chief
Executive Officer of MedPartners, Inc. a publicly-traded physician practice
management firm, from August 1993 until January 16, 1998. Mr. House was elected
a Director of the Company in February 1993. At the same time he became President
- - -- HEALTHSOUTH International, Inc. and New Business Ventures, a position which
he held until August 31, 1994, when he terminated his employment with the
Company to concentrate on his duties at MedPartners. Mr. House joined the
Company in September 1985 as Director of Marketing, subsequently served as
Senior Vice President and Chief Operating Officer of the Company, and in June
1992 became President and Chief Operating Officer -- HEALTHSOUTH Medical
Centers. Prior to joining the Company, Mr. House was president and chief
executive officer of a provider of clinical contract management services for
more than ten years.
Anthony J. Tanner, Sc.D., a management founder, serves as Executive Vice
President -- Administration and Secretary of the Company and was elected a
Director in February 1993. From 1980 to 1984, Mr. Tanner was with Lifemark
Corporation in the Shared Services Division as director, clinical and
professional programs (1982-1984) and director, quality assurance and education
(1980-1982), where he was responsible for the development of clinical programs
and marketing programs.
P. Daryl Brown joined the Company in April 1986 and served until June 1992
as Group Vice President -- Outpatient Operations. He became President --
HEALTHSOUTH Outpatient Centers in June 1992, and was elected as a Director in
March 1995. From 1977 to 1986, Mr. Brown served with the American Red Cross,
Alabama Region, in several positions, including Chief Operating Officer,
Administrative Director for Financing and Administration and Controller.
John S. Chamberlin retired in 1988 as president and chief operating officer
of Avon Products, Inc., a position he had held since 1985. From 1976 until 1985,
he served as chairman and chief executive officer of Lenox, Incorporated, after
22 years in various assignments for General Electric. From 1990 to 1991, he
served as chairman and chief executive officer of New Jersey Publishing Co. Mr.
Chamberlin is chairman of the board 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 is a trustee of
the Woodrow Wilson National Fellowship Foundation.
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<PAGE>
Joel C. Gordon served as Chairman of the Board of Directors of SCA from its
founding in 1982 until January 17, 1996, when SCA was acquired by the Company.
Mr. Gordon also served as Chief Executive Officer of SCA from 1987 until January
17, 1996. Mr. Gordon serves on the boards of directors of Genesco, Inc., an
apparel manufacturer, and SunTrust Bank of Nashville, N.A.
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.
In October 1997, he was additionally named Chief Financial Officer of the
Company, and in March 1998, he was named a Director of the Company. From 1983
through September 1989, Mr. Martin specialized in healthcare lending with
AmSouth Bank N.A., Birmingham, Alabama, where he was a Vice President
immediately prior to joining the Company. Mr. Martin is a Director of Capstone
Capital, Inc. and MedPartners, Inc. and is a principal of 21st Century Health
Ventures.
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 ......... 45 Chairman of the Board and Chief Executive Officer 1984
and Director
James P. Bennett ........... 40 President and Chief Operating Officer and Director 1991
Anthony J. Tanner .......... 49 Executive Vice President -- Administration and Sec- 1984
retary and Director
Michael D. Martin .......... 37 Executive Vice President, Chief Financial Officer and 1989
Treasurer and Director
Thomas W. Carman ........... 46 Executive Vice President -- Corporate Development 1985
P. Daryl Brown ............. 43 President -- HEALTHSOUTH Outpatient Centers 1986
and Director
Robert E. Thomson .......... 50 President -- HEALTHSOUTH Inpatient Operations 1987
Patrick A. Foster .......... 51 President -- HEALTHSOUTH Surgery Centers 1994
Russell H. Maddox .......... 57 President -- HEALTHSOUTH Imaging Centers 1995
William T. Owens ........... 39 Group Senior Vice President -- Finance and Controller 1986
William W. Horton .......... 38 Senior Vice President and Corporate Counsel and As- 1994
sistant Secretary
</TABLE>
Biographical information for Messrs. Scrushy, Bennett, Tanner, Brown and
Martin is set forth above under this Item, "Directors and Executive Officers --
Directors".
Thomas W. Carman joined the Company in 1985 as Regional Director --
Corporate Development, and now serves as Executive Vice President -- Corporate
Development. From 1983 to 1985, Mr. Carman was director of development for
Medical Care International. From 1981 to 1983, Mr. Carman was assistant
administrator at the Children's Hospital of Birmingham, Alabama.
Robert E. Thomson joined the Company in August 1985 as administrator of its
Florence, South Carolina inpatient rehabilitation facility, and subsequently
served as Regional Vice President -- Inpatient Operations, Vice President --
Inpatient Operations, Group Vice President -- Inpatient Operations, and Senior
Vice President -- Inpatient Operations. Mr. Thomson was named President --
HEALTHSOUTH Inpatient Operations in February 1996.
61
<PAGE>
Patrick A. Foster joined the Company in February 1994 as Director of
Operations and subsequently served as Group Vice President -- Inpatient
Operations and Senior Vice President -- Inpatient Operations. He was named
President -- HEALTHSOUTH Surgery Centers in October 1997. From August 1992 until
February 1994, he served as Senior Vice President of the Rehabilitation/Medical
Division of The Mediplex Group.
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., Birmingham, Alabama, which was
acquired by Ethyl Corporation in March 1989.
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 Senior
Vice President -- Finance and Controller in February 1994 and Group Senior Vice
President -- Finance and Controller in March 1998. 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 now known
as Haskell Slaughter & Young, L.L.C., where he served as Chairman of the
Healthcare Practice Group.
GENERAL
Directors of the Company hold office until the next Annual Meeting of
Stockholders of the Company and until their successors are elected and
qualified. Executive officers of the Company are elected annually by, and serve
at the discretion of the Board of Directors. There are no arrangements or
understandings known to the Company between any of the Directors, nominees for
Director or executive officers of the Company and any other person pursuant to
which any of such persons was elected as a Director or an executive officer,
except the Employment Agreement between the Company and Richard M. Scrushy (see
Item 11, "Executive Compensation -- Chief Executive Officer Employment
Agreement") and except that the Company agreed to appoint Mr. Gordon to the
Board of Directors in connection with the SCA merger. There are no family
relationships between any Directors, nominees for Director or executive officers
of the Company.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and Directors, and persons who beneficially own more than 10% of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the New York Stock Exchange. Officers, Directors and beneficial owners of
more than 10% of the Company's Common Stock are required by Securities and
Exchange Commission regulations to furnish the Company with copies of all
Section 16(a) forms that they file. Based solely on review of the copies of such
forms furnished to the Company, or written representations that no reports on
Form 5 were required, the Company believes that for the period from January 1,
1997, through December 31, 1997, all of its officers, Directors and
greater-than-10% beneficial owners complied with all Section 16(a) filing
requirements applicable to them, except as set forth below.
Joel C. Gordon, a Director of the Company, failed to timely report three
open market sales aggregating 15,000 shares of the Company's Common Stock in
December 1995, which sales were reported on Form 5 in February 1998. The sales
were made by a trust of which Mr. Gordon is a trustee. George H. Strong, a
Director of the Company, failed to timely report a sale of 40,000 shares of
Common Stock by
62
<PAGE>
a trust of which he is a trustee in September 1997, which sale was reported on
Form 5 in February 1998. Charles W. Newhall III, a Director of the Company,
failed to timely report a sale of 61 shares of Common Stock in February 1996, a
sale of 30,133 shares of Common Stock in March 1996, and a sale of 30,440 shares
of Common Stock in January 1997, each of which sales was reported on Form 4 in
November 1997. The Company has consulted with the foregoing persons concerning
their obligations to comply with Section 16(a).
63
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION -- GENERAL
The following table sets forth compensation paid or awarded to the Chief
Executive Officer and each of the other four most highly compensated executive
officers of the Company (the "Named Executive Officers") for all services
rendered to the Company and its subsidiaries in 1995, 1996 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------------- -------------------------
BONUS/ANNUAL STOCK LONG-TERM ALL
INCENTIVE OPTION INCENTIVE OTHER COM-
NAME AND PRINCIPAL POSITION YEAR SALARY AWARD AWARDS PAYOUTS PENSATION(1)
- - -------------------------------- ------ ------------- -------------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Richard M. Scrushy 1995 $1,748,646 $ 5,000,000 2,000,000 -- $ 650,108
Chairman of the Board 1996 3,391,775 8,000,000 1,500,000 -- 34,286 (2)
and Chief Executive Officer(3) 1997 3,398,999 10,000,000 1,300,000 -- 21,430
James P. Bennett 1995 382,528 600,000 300,000 -- 7,985
President and Chief 1996 496,590 800,000 200,000 -- 32,106 (2)
Operating Officer 1997 639,161 1,500,000 700,000 -- 10,158
Michael D. Martin 1995 176,746 500,000 170,000 -- 7,919
Executive Vice President, 1996 281,644 750,000 120,000 -- 31,586 (2)
Chief Financial Officer 1997 359,672 2,000,000 450,000 -- 9,700
and Treasurer
P. Daryl Brown 1995 274,582 310,000 260,000 -- 8,580
President -- HEALTHSOUTH 1996 335,825 400,000 100,000 -- 11,181
Outpatient Centers 1997 370,673 450,000 250,000 -- 10,737
Anthony J. Tanner 1995 249,438 300,000 200,000 -- 8,728
Executive Vice President -- 1996 298,078 350,000 100,000 -- 7,763
Administration and Secretary 1997 371,114 450,000 450,000 -- 9,817
</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 1995, 1996
and 1997, respectively, of: $292, $708 and $791 to Mr. Scrushy; $900,
$1,425 and $1,425 to Mr. Bennett; $900, $1,371 and $1,324 to Mr. Martin;
$900, $1,897 and $1,319 to Mr. Brown; and $2,044, $1,290 and $1,215 to Mr.
Tanner; (b) awards under the Company's Employee Stock Benefit Plan for
1995, 1996 and 1997, respectively, of $1,626, $3,389 and $2,889 to Mr.
Scrushy; $1,626, $3,387 and $2,889 to Mr. Bennett; $1,626, $3,386 and
$2,889 to Mr. Martin; $1,626, $3,389 and $2,889 to Mr. Brown; and $509,
$1,276 and $2,889 to Mr. Tanner; and (c) split-dollar life insurance
premiums paid in 1995, 1995 and 1997 of $2,190, $2,312 and $11,750 with
respect to Mr. Scrushy; $1,109, $1,217 and $1,644 with respect to Mr.
Bennett; $1,193, $752 and $1,287 with respect to Mr. Martin; $1,854, $1,695
and $2,329 with respect to Mr. Brown; and $1,975, $997 and $1,513 to Mr.
Tanner. See this Item, "Executive Compensation -- Retirement Investment
Plan" and "Executive Compensation -- Employee Stock Benefit Plan".
(2) In addition to the amounts described in the preceding footnote, includes
the conveyance of real property valued at $640,000 to Mr. Scrushy in 1995,
and the forgiveness of loans in the amount of $21,877 each owed by Messrs.
Scrushy, Bennett and Martin in 1996.
(3) Salary amounts for Mr. Scrushy include monthly incentive compensation
amounts payable upon achievement of certain budget targets. See this
Item,"Executive Compensation -- Chief Executive Officer Employment
Agreement".
64
<PAGE>
STOCK OPTION GRANTS IN 1997
<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 600,000 8.9% $ 20.125 2/29/07 $ 6,690,000
700,000 10.47% 23.625 8/14/07 9,163,000
James P. Bennett 350,000 5.2% 20.125 2/28/07 3,902,500
350,000 5.2% 23.625 8/14/07 4,581,500
Michael D. Martin 150,000 2.2% 20.125 2/28/07 1,672,500
300,000 4.5% 23.625 8/14/07 3,927,000
P. Daryl Brown 100,000 1.5% 20.125 2/28/07 1,115,000
150,000 2.2% 23.625 8/14/07 1,963,500
Anthony J. Tanner 150,000 2.2% 20.125 2/28/07 1,672,500
300,000 4.5% 23.625 8/14/07 3,927,000
</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 38%; (ii) the
risk-free rate of return is assumed to be 5.69%; (iii) dividend yield is
assumed to be 0; and (iv) the time of exercise is assumed to be 8.4 years
from the date of grant.
STOCK OPTION EXERCISES IN 1997 AND OPTION VALUES AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER VALUE OF UNEXERCISED
OF SHARES NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED AT DECEMBER 31, 1997 (1) AT DECEMBER 31, 1997 (2)
ON VALUE ----------------------------- -------------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - ---------------------------- ----------- -------------- ------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Richard M. Scrushy ......... 4,000,000 $93,384,947 11,172,524 -- $216,170,768 --
James P. Bennett ........... 250,000 5,369,011 1,310,000 -- 14,730,175 --
Michael D. Martin. ......... 123,000 2,050,069 570,000 60,000 3,757,500 $1,162,500
P. Daryl Brown ............. 147,000 2,882,846 1,038,000 -- 18,262,098 --
Anthony J. Tanner .......... 270,000 6,198,039 940,000 -- 11,960,075 --
</TABLE>
- - ----------
(1) Does not reflect any options granted and/or exercised after December 31,
1997. The net effect of any such grants and exercises is reflected in the
table appearing under Item 12, "Security Ownership of Certain Beneficial
Owners and Management".
(2) Represents the difference between market price of the Company's Common
Stock and the respective exercise prices of the options at December 31,
1997. 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.
STOCK OPTION PLANS
Set forth below is information concerning the various stock option plans of
the Company at December 31, 1997. 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
65
<PAGE>
its terms. As of December 31, 1997, there were outstanding under the ISO Plan
options to purchase 19,702 shares of the Company's Common Stock at prices
ranging from $2.52 to $3.7825 per share. All such options remain in full force
and effect in accordance with their terms and the ISO Plan. Under the ISO Plan,
which was administered by the Board of Directors, key employees could be granted
options to purchase shares of Common Stock at 100% of fair market value on the
date of grant (or 110% of fair market value in the case of a 10% stockholder/
grantee). The outstanding options granted under the ISO Plan must be exercised
within ten years from the date of grant, are cumulatively exercisable with
respect to 25% of the shares covered thereby after the expiration of each of the
first through the fourth years following the date of grant, are nontransferable
except by will or pursuant to the laws of descent and distribution, are
protected against dilution and expire within three months after termination of
employment, unless such termination is by reason of death.
1988 Non-Qualified Stock Option Plan
The Company also has a 1988 Non-Qualified Stock Option Plan (the "NQSO
Plan") covering a maximum of 4,800,000 shares of Common Stock. As of December
31, 1997, there were outstanding under the NQSO Plan options to purchase 57,300
shares of the Company's Common Stock at prices ranging from $8.375 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 expires
on February 28, 1998. 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, 1995 and 1997 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"), a 1995 Stock Option Plan (the "1995 Plan") and a 1997 Stock Option Plan
(the "1997 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, 15,134,463 (to be
increased by 0.9% of the outstanding Common Stock of the Company on each January
1, beginning January 1, 1996) shares and 5,000,000 shares, respectively, of the
Company's Common Stock. As of December 31, 1997, there were outstanding options
to purchase an aggregate of 27,213,453 shares of the Company's Common Stock
under such Plans at exercise prices ranging from $2.52 to $23.625 per share. An
additional 4,783,021 shares were reserved for future grants under such Plans.
Each of the 1989, 1990, 1991, 1992, 1993, 1995 and 1997 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, 1995 and 1997 Plans terminate on the earliest of (a) October 25,
1999, October 15, 2000, June 19, 2001, June 16, 2002, April 19, 2003, June 5,
2005 and April 30, 2007, respectively, (b) such time as all shares of Common
Stock reserved for issuance under the respective Plan have been acquired through
the exercise of options granted thereunder, or (c) such earlier times as the
Board of Directors of the Company may determine. Options granted under these
Plans which are designated as ISOs contain vesting provisions similar to those
contained in options granted under the ISO Plan and have a ten-year term. NQSOs
granted under these Plans have a ten-year term. Options granted under these
Plans are nontransferable except by will or pursuant to the laws of descent and
distribution (except for certain permitted transfers to family members or
charities), are protected against dilution and will expire within three months
of termination of association with the Company as a Director or termination of
employment, unless such termination is by reason of death.
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<PAGE>
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
3,500,000 shares of Common Stock. As of December 31, 1997, there were
outstanding under the 1993 Consultants' Plan options to purchase 1,509,750
shares of Common Stock at prices ranging from $3.375 to $23.625 per share. An
additional 440,000 shares were reserved for grants under such Plans. The 1993
Consultants' Plan, which is administered by the Board of Directors, provides
that certain non-employee consultants who provide significant services to the
Company may be granted options to purchase shares of Common Stock at such prices
as are determined by the Board of Directors or the appropriate committee. The
1993 Consultants' Plan terminates on the earliest of (a) February 25, 2003, (b)
such time as all shares of Common Stock reserved for issuance under the 1993
Consultants' Plan have been acquired through the exercise of options granted
thereunder, or (c) such earlier time as the Board of Directors of the Company
may determine. Options granted under the 1993 Consultants' Plan have a ten-year
term. Options granted under the 1993 Consultants' Plan are nontransferable
except by will or pursuant to the laws of descent and distribution, are
protected against dilution and expire within three months of termination of
association with the Company as a consultant, unless such termination is by
reason of death.
Other Stock Option Plans
In connection with the acquisitions of SHC, SSCI, SCA, PSCM, ReadiCare,
Health Images and Horizon/CMS, 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, 1997, there were outstanding under these assumed
plans options to purchase 3,896,820 shares of the Company's Common Stock at
exercise prices ranging from $1.6363 to $53.8192 per share. No additional
options are being granted under any such assumed plans.
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. See Note
12 of "Notes to Consolidated Financial Statements".
Michael D. Martin, Executive Vice President, Chief Financial Officer and
Treasurer of the Company, and Anthony J. Tanner, Executive Vice President --
Administration and Secretary of the Company, serve as Trustees of the 401(k)
Plan, which is administered by the Company.
EMPLOYEE STOCK BENEFIT PLAN
Effective January 1, 1991, the Company adopted the HEALTHSOUTH
Rehabilitation Corporation and Subsidiaries Employee Stock Benefit Plan (the
"ESOP"), a retirement plan intended to qualify under sections 401(a) and
4975(e)(7) of the Internal Revenue Code of 1986, as amended. The ESOP is open to
all full-time and part-time employees of the Company who are over the age of 21,
have one full year of service with the Company and have at least 1,000 hours of
service in the year in which they begin participation in the ESOP on the next
January 1 or July 1 after the date on which such employee satisfies the
aforementioned conditions.
67
<PAGE>
The ESOP was established with a $10,000,000 loan from the Company, the
proceeds of which were used to purchase 1,655,172 shares of the Company's Common
Stock. In 1992, an additional $10,000,000 loan was made to the ESOP, which was
used to purchase an additional 1,666,664 shares of Common Stock. Under the ESOP,
a Company Common Stock account (a "company stock account") is established and
maintained for each eligible employee who participates in the ESOP. In each plan
year, such account is credited with such employee's allocable share of the
Common Stock held by the ESOP and allocated with respect to such plan year. Each
employee's allocable share for any given plan year is determined according to
the ratio which such employee's compensation for such plan year bears to the
compensation of all eligible participating employees for the same plan year.
Under the ESOP, eligible employees who participate in the ESOP and who have
attained age 55 and have completed 10 years of participation in the ESOP may
elect to diversify the assets in their company stock account by directing the
plan administrator to transfer to the 401(k) Plan a portion of their company
stock account to be invested, as the eligible employee directs, in one or more
of the investment options available under the 401(k) Plan. See Note 12 of "Notes
to Consolidated Financial Statements".
Richard M. Scrushy, Chairman of the Board and Chief Executive Officer of
the Company, Michael D. Martin, Executive Vice President, Chief Financial
Officer and Treasurer 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.
DEFERRED COMPENSATION PLAN
In 1997, the Board of Directors adopted an Executive Deferred Compensation
Plan (the "Deferred Compensation Plan"), which allows senior management
personnel to elect, on an annual basis, to defer receipt of up to 50% of their
base salary and up to 100% of their annual bonus, if any (but not less than an
aggregate of $2,400 per year) for a minimum of five years from the date such
compensation would otherwise have been received. Amounts deferred are held by
the Company pursuant to a "rabbi trust" arrangement, and amounts deferred are
credited with earnings at an annual rate equal to the Moody's Average Corporate
Bond Yield Index (the "Moody's Rate"), as adjusted from time to time, or the
Moody's Rate plus 2% if a participant's employment is terminated by reason of
retirement, disability or death or within 24 months of a change in control of
the Company. Amounts deferred may be withdrawn upon retirement, termination of
employment or death, upon a showing of financial hardship, or voluntarily with
certain penalties. The Deferred Compensation Plan is administered by an
Administrative Committee, currently consisting of Michael D. Martin, Executive
Vice President, Chief Financial Officer and Treasurer of the Company, and
Anthony J. Tanner, Executive Vice President -- Administration and Secretary of
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
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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. Under the Company's existing stock option plans, each
non-employee Director is granted an option covering 25,000 shares of such Common
Stock on the first business day in January of each year. See this Item,
"Executive Compensation -- Stock Option Plans" above.
CHIEF EXECUTIVE OFFICER EMPLOYMENT AGREEMENT
The Company is a party to an Employment Agreement with Richard M. Scrushy,
pursuant to which Mr. Scrushy, a management founder of the Company, is employed
as Chairman of the Board and Chief Executive Officer of the Company for a
five-year term which ends December 31, 2001. 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 1997 and is to receive the same base salary in 1998 and
each year thereafter, with incentive compensation of up to $2,400,000, subject
to annual review by the Board of Directors, and is entitled to participate in
any bonus plan approved by the Board of Directors for the Company's management.
The incentive compensation is earned at $200,000 per month in 1997 and 1998,
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 1997, as all such targets were met. In
addition, Mr. Scrushy was awarded $10,000,000 under the management bonus plan.
Such additional bonus was based on the Committee's assessment of Mr. Scrushy's
contribution to the establishment of the Company as the industry leader in
outpatient and rehabilitative healthcare services, including his role in the
negotiation and consummation of the Health Images, Horizon/CMS and ASC Network
acquisitions and his role in completing the divestiture of the Horizon/ CMS
non-strategic assets within two months after consummation of the Horizon/CMS
acquisition, as well as the Company's success in achieving annual budgeted net
income targets and certain other factors reflecting the Company's growth and
performance. Mr. Scrushy is also provided with a car allowance in the amount of
$500 per month and disability insurance. Under the Agreement, Mr. Scrushy's
employment may be terminated for cause or if he should become disabled.
Termination of Mr. Scrushy's employment under the Agreement will result in
certain severance pay arrangements. In the event that the Company shall be
acquired, merged or reorganized in such a manner as to result in a change of
control of the Company, Mr. Scrushy has the right to terminate his employment
under the Agreement, in which case he will receive a lump sum payment equal to
three years' annual base salary (including the gross incentive portion thereof)
under the Agreement. Mr. Scrushy has agreed not to compete with the Company
during any period to which any such severance pay relates. Mr. Scrushy may
terminate the Agreement at any time upon 180 days' notice, in which case he will
receive one year's base salary as severance pay.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 13, 1998, (a) by each person
who is known by the Company to own beneficially more than 5% of the Company's
Common Stock, (b) by each of the Company's Directors and (c) by the Company's
five most highly compensated executive officers and all executive officers and
Directors as a group.
<TABLE>
<CAPTION>
NAME AND NUMBER OF SHARES PERCENTAGE
ADDRESS OF OWNER BENEFICIALLY OWNED (1) COMMON STOCK
- - ------------------------------------------------------ ------------------------ -------------
<S> <C> <C>
Richard M. Scrushy ................................ 11,776,658(2) 2.88%
John S. Chamberlin ................................ 247,000(3) *
C. Sage Givens .................................... 387,100(4) *
Charles W. Newhall III ............................ 755,846(5) *
George H. Strong .................................. 514,692(6) *
Phillip C. Watkins, M.D. .......................... 609,254(7) *
James P. Bennett .................................. 1,390,500(8) *
Larry R. House .................................... 84,600(9) *
Anthony J. Tanner ................................. 1,061,358(10) *
P. Daryl Brown .................................... 1,069,736(11) *
Joel C. Gordon .................................... 3,553,268(12) *
Michael D. Martin ................................. 632,008(13) *
FMR Corp. ......................................... 39,920,762(14) 10.02%
82 Devonshire Street
Boston, Massachusetts 02109
Putnam Investments, Inc. .......................... 28,339,151(15) 7.12%
One Post Office Square
Boston, Massachusetts 02109
All Executive Officers and Directors as a Group (18
persons) ........................................ 24,716,836(16) 5.90%
</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 11,172,524 shares subject to currently exercisable stock options.
(3) Includes 175,000 shares subject to currently exercisable stock options.
(4) Includes 2,100 shares owned by Ms. Givens's spouse and 385,000 shares
subject to currently exercisable stock options.
(5) Includes 460 shares owned by members of Mr. Newhall's immediate family and
635,000 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 93,373 shares owned by trusts of which Mr. Strong is a trustee and
claims shared voting and investment power and 275,000 shares subject to
currently exercisable stock options.
(7) Includes 465,000 shares subject to currently exercisable stock options.
(8) Includes 1,310,000 shares subject to currently exercisable stock options.
(9) Includes 82,996 shares subject to currently exercisable stock options.
(10) Includes 60,000 shares held in trust by Mr. Tanner for his children and
940,000 shares subject to currently exercisable stock options.
(11) Includes 1,013,000 shares subject to currently exercisable stock options.
(12) Includes 354,340 shares owned by his spouse, 100,988 shares owned by trusts
of which he is a trustee and 409,520 shares subject to currently
exercisable stock options.
(13) Includes 570,000 shares subject to currently exercisable stock options.
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(14) 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 3,327,604 of the shares and sole power to dispose of all of the
shares.
(15) Shares held by various investment funds for which affiliates of Putnam
Investments, Inc. act as investment advisor. Putnam Investments, Inc. or
its affiliates claim shared power to vote 3,338,400 of the shares and
shared power to dispose of all of the shares.
(16) Includes 20,335,344 shares subject to currently exercisable stock options
held by executive officers and Directors.
* Less than 1%
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During 1997, the Company paid $33,909,000 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.
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. In 1997, Capstone also acquired
ownership of the Company's Greater Pittsburgh, Pennsylvania inpatient
rehabilitation facility, which had been leased by the Company from an unrelated
lessor. The Company's annual lease payment under such lease is $1,500,000.
Richard M. Scrushy, Chairman of the Board and Chief Executive Officer of the
Company, and Michael D. Martin, Executive Vice President, Chief Financial
Officer and Treasurer of the Company, were among the founders of Capstone and
serve on its Board of Directors. At March 1, 1998, Mr. Scrushy owned
approximately 1.62% of the issued and outstanding capital stock of Capstone, and
Mr. Martin owned approximately 0.61% of the issued and outstanding capital stock
of Capstone. In addition, the Company owned approximately 0.32% of the issued
and outstanding capital stock of Capstone at March 1, 1998. 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.
Horizon/CMS is party to an agreement with AMI Aviation II, L.L.C. ("AMI")
with respect to the use of an airplane owned by AMI. Neal M. Elliott, who was
Chairman, President and Chief Executive Officer of Horizon/CMS prior to its
acquisition by the Company in October 1997 and who served as a Director of the
Company from October 1997 until his death in February 1998, was Managing Member
of AMI, a position which is now held by a trust of which Mr. Elliott's widow is
a trustee. Mr. Elliott owned, and such trust now owns, a 99% interest in AMI.
Under the use agreement, Horizon/CMS is obligated to pay $43,000 per month
through December 1999 and $57,600 per month from January 2000 through December
2004 for up to 30 hours per month of utilization of the airplane, plus certain
operating expenses of the airplane. The Company has caused Horizon/CMS to
continue to honor such use agreement, and is currently exploring available
options with respect to continued use of the airplane.
In November 1997, the Company agreed to lend up to $10,000,000 to 21st
Century Health Ventures L.L.C. ("21st Century"), an entity formed to sponsor a
private equity investment fund investing in the healthcare industry. Richard M.
Scrushy, Chairman of the Board and Chief Executive Officer of the
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<PAGE>
Company and Michael D. Martin, Executive Vice President, Chief Financial Officer
and a Director of the Company, along with another individual not employed by the
Company, are the principals of 21st Century. The purpose of the loan was to
facilitate certain investments by 21st Century prior to the establishment of its
proposed private equity fund, in which the Company and third party investors are
expected to invest. When established, investment by the Company in such private
equity fund is expected to allow the Company to benefit from the opportunity to
participate in investments in healthcare businesses that are not part of the
Company's core businesses, but which the Company believes provide opportunities
for growth. Amounts outstanding under the loan bear interest at 1% over the
prime rate announced from time to time by AmSouth Bank of Alabama and are
repayable upon demand by the Company. At December 31, 1997, 21st Century had
drawn an aggregate of $1,708,333 under the $10,000,000 commitment, of which
$1,500,000 was used to purchase 576,924 shares of Series B Preferred Convertible
Preferred Stock in Summerville Healthcare Group, Inc. ("Summerville"), a
developer and operator of assisted living facilities, and the remainder of which
was used to provide a loan to Physician Solutions, Inc., a provider of
management services to pathology groups. The Company owns an aggregate of
3,361,539 shares of Series B Convertible Preferred Stock of Summerville, which
it acquired in two transactions in July and November 1997. In connection with
the July transaction, Mr. Scrushy and Mr. Martin were appointed to the Board of
Directors of Summerville.
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, 1997, loans in the following original principal amounts
were outstanding: $460,000 to Larry R. House, a Director and a former executive
officer, $500,000 to Aaron Beam, Jr., then Executive Vice President and Chief
Financial Officer and a Director, and $140,000 and $350,000 to William T. Owens,
Senior Vice President and Controller. Outstanding principal balances at December
31, 1997 were $447,000 for Mr. House, $500,000 for Mr. Beam and an aggregate of
$476,000 for Mr. Owens. In connection with Mr. Beam's retirement, the Company
agreed to forgive his loan over a period of five years in exchange for his
provision of consulting services to the Company over such period. 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.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements, Financial Statement Schedules and Exhibits.
1. Financial Statements.
The consolidated financial statements of the Company and its subsidiaries
filed as a part of this Annual Report on Form 10-K are listed in Item 8 of this
Annual Report on Form 10-K, which listing is hereby incorporated herein by
reference.
2. Financial Statement Schedules.
The financial statement schedules required by Regulation S-X are filed
under Item 14(d) of this Annual Report on Form 10-K, as listed below:
Schedules Supporting the Financial Statements
Schedule II Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission have been
omitted because they are not required under the related instructions or are
inapplicable, or because the information has been provided in the Consolidated
Financial Statements or the Notes thereto.
3. Exhibits.
The Exhibits filed as a part of this Annual Report are listed in Item 14(c)
of this Annual Report on Form 10-K, which listing is hereby incorporated herein
by reference.
(b) Reports on Form 8-K.
During the last quarter of the period covered by this Annual Report on Form
10-K, the Company filed (i) a Current Report on Form 8-K dated October 29, 1997,
reporting under Item 2 the consummation of the acquisition of Horizon/CMS
Healthcare Corporation and reporting under Item 7 certain required historical
and pro forma financial information and (ii) a Current Report on Form 8-K dated
December 31, 1997, reporting under Item 2 the sale of the long-term care assets
of Horizon/CMS to Integrated Health Services, Inc. and reporting under Item 7
certain required pro forma financial information.
(c) Exhibits.
The Exhibits required by Regulation S-K are set forth in the following list
and are filed either by incorporation by reference from previous filings with
the Securities and Exchange Commission or by attachment to this Annual Report on
Form 10-K as so indicated in such list.
(2)-1 Amended and Restated Plan and Agreement of Merger, dated as of
September 18, 1994, among HEALTHSOUTH Rehabilitation Corporation, RRS
Acquisitions Company, Inc. and ReLife, Inc., filed as Exhibit (2)-1 to
the Company's Registration Statement on Form S-4 (Registration No.
33-55929), is hereby incorporated by reference.
(2)-2 Amended and Restated Plan and Agreement of Merger, dated as of January
22, 1995, among HEALTHSOUTH Corporation, ASC Atlanta Acquisition
Company, Inc. and Surgical Health Corporation, filed as Exhibit (2)-4
to the Company's Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1994, is hereby incorporated by reference.
(2)-3 Stock Purchase Agreement, dated February 3, 1995, among HEALTHSOUTH
Corporation, NovaCare, Inc. and NC Resources, Inc., filed as Exhibit
(2)-3 to the Company's Annual Report on Form 10-K for the Fiscal Year
Ended December 31, 1994, is hereby incorporated by reference.
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(2)-4 Plan and Agreement of Merger, dated August 23, 1995, among HEALTHSOUTH
Corporation, SSCI Acquisition Corporation and Sutter Surgery Centers,
Inc., filed as Exhibit (2) to the Company's Registration Statement on
Form S-4 (Registration No. 33-63-055) is hereby incorporated by
reference.
(2)-5 Amendment to Plan and Agreement of Merger, dated October 26, 1995,
among HEALTHSOUTH Corporation, SSCI Acquisition Corporation and Sutter
Surgery Centers, Inc., filed as Exhibit (2)-5 to the Company's Annual
Report on Form 10-K for the Fiscal Year Ended December 31, 1995, is
hereby incorporated by reference.
(2)-6 Amended and Restated Plan and Agreement of Merger, dated as of October
9, 1995, among HEALTHSOUTH Corporation, SCA Acquisition Corporation
and Surgical Care Affiliates, Inc., filed as Exhibit (2)-1 to
Amendment No. 1 to the Company's Registration Statement on Form S-4
(Registration No. 33-64935), is hereby incorporated by reference.
(2)-7 Agreement and Plan of Merger, dated December 16, 1995, among
HEALTHSOUTH Corporation, Aladdin Acquisition Corporation and Advantage
Health Corporation, filed as Exhibit (2)-1 to the Company's
Registration Statement on Form S-4 (Registration No. 333-825), is
hereby incorporated by reference.
(2)-8 Plan and Agreement of Merger, dated May 16, 1996, among HEALTHSOUTH
Corporation, Empire Acquisition Corporation and Professional Sports
Care Management, Inc., filed as Exhibit (2)-1 to the Company's
Registration Statement on Form S-4 (Registration No. 333- 08449), is
hereby incorporated by reference.
(2)-9 Plan and Agreement of Merger, dated September 11, 1996, among
HEALTHSOUTH Corporation, Warwick Acquisition Corporation and
ReadiCare, Inc., filed as Exhibit (2)-1 to the Company's Registration
Statement on Form S-4 (Registration No. 333-14697), is hereby
incorporated by reference.
(2)-10 Plan and Agreement of Merger, dated December 2, 1996, among
HEALTHSOUTH Corporation, Hammer Acquisition Corporation and Health
Images, Inc., filed as Exhibit (2)-1 to the Company's Registration
Statement on Form S-4 (Registration No. 333-19439), is hereby
incorporated by reference.
(2)-11 Plan and Agreement of Merger, dated February 17, 1997, among
HEALTHSOUTH Corporation, Reid Acquisition Corporation and Horizon/CMS
Healthcare Corporation, as amended, filed as Exhibit 2 to the
Company's Registration Statement on Form S-4 (Registration No.
333-36419), is hereby incorporated by reference.
(2)-12 Purchase and Sale Agreement, dated November 3, 1997, among HEALTHSOUTH
Corporation, Horizon/CMS Healthcare Corporation and Integrated Health
Services, Inc., filed as Exhibit 2.1 to the Company's Current Report
on Form 8-K, dated December 31, 1997, is hereby incorporated by
reference.
(2)-13 Amendment to Purchase and Sale Agreement, dated December 31, 1997,
among HEALTH- SOUTH Corporation, Horizon/CMS Healthcare Corporation
and Integrated Health Services, Inc., filed as Exhibit 2.2 to the
Company's Current Report on Form 8-K, dated Decem- ber 31, 1997, is
hereby incorporated by reference.
(2)-14 Second Amendment to Purchase and Sale Agreement, dated March 4, 1998,
among HEALTHSOUTH Corporation, Horizon/CMS Healthcare Corporation and
Integrated Health Services, Inc.
(3)-1 Restated Certificate of Incorporation of HEALTHSOUTH Corporation, as
filed in the Office of the Secretary of State of the State of Delaware
on March 13, 1997, filed as Exhibit (3)-1 to the Company's Annual
Report on Form 10-K for the Fiscal Year Ended December 31, 1996, is
hereby incorporated by reference.
(3)-2 Bylaws of HEALTHSOUTH Rehabilitation Corporation, filed as Exhibit
(3)-2 to the Company's Annual Report on Form 10-K for the Fiscal Year
Ended December 31, 1991, are hereby incorporated by reference.
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(4)-1 Indenture, dated March 24, 1994, between HEALTHSOUTH Rehabilitation
Corporation and NationsBank of Georgia, National Association, relating
to the Company's 9.5% Senior Subordinated Notes due 2001, filed as
Exhibit (4)-1 to the Company's Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 1994, is hereby incorporated by
reference.
(4)-2 Subordinated Indenture, dated March 20, 1998, between HEALTHSOUTH
Corporation and The Bank of Nova Scotia Trust Company of New York, as
Trustee.
(4)-3 Officer's Certificate pursuant to Sections 2.3 and 11.5 of the
Subordinated Indenture, dated March 20, 1998, between HEALTHSOUTH
Corporation and The Bank of Nova Scotia Trust Company of New York, as
Trustee, relating to the Company's 3.25% Convertible Subordinated
Debentures due 2003.
(4)-4 Registration Rights Agreement, dated March 17, 1998, among HEALTHSOUTH
Corporation and Smith Barney Inc., Bear, Stearns & Co. Inc., Cowen &
Company, Credit Suisse First Boston Corporation, J.P. Morgan
Securities Inc., Morgan Stanley & Co. Incorporated, NationsBanc
Montgomery Securities LLC and PaineWebber Incorporated, relating to
the Company's 3.25% Convertible Subordinated Debentures due 2003.
(10)-1 1984 Incentive Stock Option Plan, as amended, filed as Exhibit (10)-1
to the Company's Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1987, is hereby incorporated herein by reference.
(10)-2 1988 Non-Qualified Stock Option Plan, filed as Exhibit 4(a) to the
Company's Registration Statement on Form S-8 (Registration No.
33-23642), is hereby incorporated herein by reference.
(10)-3 1989 Stock Option Plan, filed as Exhibit (10)-6 to the Company's
Annual Report on Form 10-K for the Fiscal Year Ended December 31,
1989, is hereby incorporated by reference.
(10)-4 1990 Stock Option Plan, filed as Exhibit (10)-13 to the Company's
Annual Report on Form 10-K for the Fiscal Year ended December 31,
1990, is hereby incorporated by reference.
(10)-5 1991 Stock Option Plan, as amended, filed as Exhibit (10)-15 to the
Company's Annual Report on Form 10-K for the Fiscal Year ended
December 31, 1991, is hereby incorporated herein by reference.
(10)-6 1992 Stock Option Plan, filed as Exhibit (10)-8 to the Company's
Annual Report on Form 10-K for the Fiscal Year Ended December 31,
1992, is hereby incorporated by reference.
(10)-7 1993 Stock Option Plan, filed as Exhibit (10)-10 to the Company's
Annual Report on Form 10-K for the Fiscal Year Ended December 31,
1993, is hereby incorporated by reference.
(10)-8 Amended and Restated 1993 Consultants Stock Option Plan, filed as
Exhibit 4 to the Company's Registration Statement on Form S-8
(Commission File No. 333-42305), is hereby in- corporated by
reference.
(10)-9 1995 Stock Option Plan, filed as Exhibit (10)-14 to the Company's
Annual Report on Form 10-K for the Fiscal Year Ended December 31,
1995, is hereby incorporated by reference.
(10)-10 Employment Agreement, dated July 23, 1986, between HEALTHSOUTH
Rehabilitation Corporation and Richard M. Scrushy, as amended, filed
as Exhibit (10)-16 to the Company's Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 1995, is hereby incorporated by
reference.
(10)-11 Third Amended and Restated Credit Agreement, dated as of April 11,
1996, between HEALTHSOUTH Corporation and NationsBank, N.A., filed as
Exhibit (10)-17 to the Company's Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 1996, is hereby incorporated by
reference.
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(10)-12 Form of Indemnity Agreement entered into between HEALTHSOUTH
Rehabilitation Corporation and each of its Directors, filed as Exhibit
(10)-13 to the Company's Annual Report on Form 10-K for the Fiscal
Year Ended December 31, 1991, is hereby incorporated by reference.
(10)-13 Surgical Health Corporation 1992 Stock Option Plan, filed as Exhibit
10(aa) to Surgical Health Corporation's Registration Statement on Form
S-4 (Commission File No. 33-70582), is hereby incorporated by
reference.
(10)-14 Surgical Health Corporation 1993 Stock Option Plan, filed as Exhibit
10(bb) to Surgical Health Corporation's Registration Statement on Form
S-4 (Commission File No. 33-70582), is hereby incorporated by
reference.
(10)-15 Surgical Health Corporation 1994 Stock Option Plan, filed as Exhibit
10(pp) to Surgical Health Corporation's Quarterly Report on Form 10-Q
for the Quarter Ended September 30, 1994, is hereby incorporated by
reference.
(10)-16 Heritage Surgical Corporation 1992 Stock Option Plan, filed as Exhibit
4(d) to the Company's Registration Statement on Form S-8 (Commission
File No. 33-60231), is hereby incorporated by reference.
(10)-17 Heritage Surgical Corporation 1993 Stock Option Plan, filed as Exhibit
4(e) to the Company's Registration Statement on Form S-8 (Commission
File No. 33-60231), is hereby incorporated by reference.
(10)-18 Sutter Surgery Centers, Inc. 1993 Stock Option Plan, Non-Qualified
Stock Option Plan and Agreement (Saibeni), Non-Qualified Stock Option
Plan and Agreement (Shah), NonQualified Stock Option Plan and
Agreement (Akella), Non-Qualified Stock Option Plan and Agreement
(Kelly) and Non-Qualified Stock Option Plan and Agreement (May), filed
as Exhibits 4(a) -- 4(f) to the Company's Registration Statement on
Form S-8 (Commission File No. 33-64615), are hereby incorporated by
reference.
(10)-19 Surgical Care Affiliates Incentive Stock Plan of 1986, filed as
Exhibit 10(g) to Surgical Care Affiliates Inc.'s Annual Report on Form
10-K for the Fiscal Year Ended December 31, 1993, is hereby
incorporated by reference.
(10)-20 Surgical Care Affiliates 1990 Non-Qualified Stock Option Plan for
Non-Employee Directors, filed as Exhibit 10(i) to Surgical Care
Affiliates, Inc.'s Annual Report on Form 10-K for the Fiscal Year
Ended December 31, 1990, is hereby incorporated by reference.
(10)-21 Professional Sports Care Management, Inc. 1992 Stock Option Plan, as
amended, filed as Exhibits 10.1 -- 10.3 to Professional Sports Care
Management, Inc.'s Registration Statement on Form S-1 (Commission File
No. 33-81654), is hereby incorporated by reference.
(10)-22 Professional Sports Care Management, Inc. 1994 Stock Incentive Plan,
filed as Exhibit 10.4 to Professional Sports Care Management, Inc.'s
Registration Statement on Form S-1 (Commission File No. 33-81654), is
hereby incorporated by reference.
(10)-23 Professional Sports Care Management, Inc. 1994 Directors' Stock Option
Plan, filed as Exhibit 10.5 to Professional Sports Care Management,
Inc.'s Registration Statement on Form S-1 (Commission File No.
33-81654), is hereby incorporated by reference.
(10)-24 ReadiCare, Inc. 1991 Stock Option Plan, filed as an exhibit to
ReadiCare, Inc.'s Annual Report on Form 10-K for the Fiscal Year Ended
February 29, 1992, is hereby incorporated by reference.
(10)-25 ReadiCare, Inc. Stock Option Plan for Non-Employee Directors, as
amended, filed as an exhibit to ReadiCare, Inc's Annual Report on Form
10-K for the Fiscal Year Ended February 29, 1992 and as an exhibit to
ReadiCare, Inc.'s Annual Report on Form 10-K for the Fiscal Year Ended
February 28, 1994, is hereby incorporated by reference.
(10)-26 1997 Stock Option Plan, filed as Exhibit 4 to the Company's
Registration Statement on Form S-8 (Registration No. 333-42307) is
hereby incorporated by reference.
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(10)-27 Bridge Credit Agreement, dated October 22, 1997, between HEALTHSOUTH
Corporation and NationsBank, National Association.
(10)-28 Health Images, Inc. Non-Qualified Stock Option Plan, filed as Exhibit
10(d)(i) to Health Images, Inc.'s Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 1995, is hereby incorporated by
reference.
(10)-29 Amended and Restated Employee Incentive Stock Option Plan, as amended,
of Health Images, Inc., filed as Exhibits 10(c)(i), 10(c)(ii),
10(c)(iii) and 10(c)(iv) to Health Images, Inc.'s Annual Report on
Form 10-K for the Fiscal Year Ended December 31, 1995, is hereby
incorporated herein by reference.
(10)-30 Form of Health Images, Inc. 1995 Formula Stock Option Plan, filed as
Exhibit 10(d)(iv) to Health Images, Inc.'s Annual Report on Form 10-K
for the Fiscal Year Ended December 31, 1995, is hereby incorporated
herein by reference.
(10)-31 1996 Employee Incentive Stock Option Plan of Health Images, Inc.,
filed as Exhibit 4(v) to the Company's Registration Statement on Form
S-8 (Registration No. 333-24429), is hereby incorporated by reference.
(10)-32 Employee Stock Option Plan of Horizon/CMS Healthcare Corporation,
filed as Exhibit 10.5 to Horizon/CMS Healthcare Corporation's Annual
Report on Form 10-K for the Fiscal Year Ended May 31, 1994, is hereby
incorporated by reference.
(10)-33 First Amendment to Employee Stock Option Plan of Horizon/CMS
Healthcare Corporation, filed as Exhibit 10.6 to Horizon/CMS
Healthcare Corporation's Annual Report on Form 10-K for the Fiscal
Year Ended May 31, 1994, is hereby incorporated by reference.
(10)-34 Corrected Second Amendment to Employee Stock Option Plan of
Horizon/CMS Healthcare Corporation, filed as Exhibit 10.7 to
Horizon/CMS Healthcare Corporation's Annual Report on Form 10-K for
the Fiscal Year Ended May 31, 1994, is hereby incorporated by
reference.
(10)-35 Amendment No. 3 to Employee Stock Option Plan of Horizon/CMS
Healthcare Corporation, filed as Exhibit 10.12 to Horizon/CMS
Healthcare Corporation's Annual Report on Form 10-K for the Fiscal
Year Ended May 31, 1995, is hereby incorporated by reference.
(10)-36 Horizon Healthcare Corporation Stock Option Plan for Non-Employee
Directors, filed as Exhibit 10.6 to Horizon/CMS Healthcare
Corporation's Annual Report on Form 10-K for the Fiscal Year Ended May
31, 1994, is hereby incorporated by reference.
(10)-37 Amendment No. 1 to Horizon Healthcare Corporation Stock Option Plan
for Non-Employee Directors, filed as Exhibit 10.14 to Horizon/CMS
Healthcare Corporation's Annual Report on Form 10-K for the Fiscal
Year Ended May 31, 1996, is hereby incorporated by reference.
(10)-38 Horizon/CMS Healthcare Corporation 1995 Incentive Plan, filed as
Exhibit 4.1 to Horizon/ CMS Healthcare Corporation's Registration
Statement on Form S-8 (Registration No. 33- 63199), is hereby
incorporated by reference.
(10)-39 Horizon/CMS Healthcare Corporation 1995 Non-Employee Directors' Stock
Option Plan, filed as Exhibit 4.2 to Horizon/CMS Healthcare
Corporation's Registration Statement on Form S-8 (Registration No.
33-63199), is hereby incorporated by reference.
(10)-40 First Amendment to Horizon Healthcare Corporation Employee Stock
Purchase Plan, filed as Exhibit 10.18 to Horizon/CMS Healthcare
Corporation's Annual Report on Form 10-K for the Fiscal Year Ended May
31, 1996, is hereby incorporated by reference.
(10)-41 Continental Medical Systems, Inc. 1994 Stock Option Plan (as amended
and restated effective December 1, 1991), Amendment No. 1 to
Continental Medical Systems, Inc. 1986 Stock Option Plan and Amendment
No. 2 to Continental Medical Systems, Inc. 1986 Stock Option Plan,
filed as Exhibit 4.1 to Horizon/CMS Healthcare Corporation's
Registration Statement on Form S-8 (Registration No. 33-61697), is
hereby incorporated by reference.
77
<PAGE>
(10)-42 Continental Medical Systems, Inc. 1989 Non-Employee Directors' Stock
Option Plan (as amended and restated effective December 1, 1991),
filed as Exhibit 4.2 to Horizon/CMS Healthcare Corporation's
Registration Statement on Form S-8 (Registration No. 33-61697), is
hereby incorporated by reference.
(10)-43 Continental Medical Systems, Inc. 1992 CEO Stock Option Plan and
Amendment No. 1 to Continental Medical Systems, Inc. 1992 CEO Stock
Option Plan, filed as Exhibit 4.3 to Horizon/CMS Healthcare
Corporation's Registration Statement on Form S-8 (Registration No.
33-61697), is hereby incorporated by reference.
(10)-44 Continental Medical Systems, Inc. 1993 Nonqualified Stock Option Plan,
Amendment No. 1 to Continental Medical Systems, Inc. 1993 Nonqualified
Stock Option Plan and Amendment No. 2 to Continental Medical Systems,
Inc. 1993 Nonqualified Stock Option Plan, filed as Exhibit 4.4 to
Horizon/CMS Healthcare Corporation's Registration Statement on Form
S-8 (Registration No. 33-61697), is hereby incorporated by reference.
(10)-45 Continental Medical Systems, Inc. 1994 Stock Option Plan, filed as
Exhibit 4.5 to Horizon/CMS Healthcare Corporation's Registration
Statement on Form S-8 (Registration No. 33-61697), is hereby
incorporated by reference.
(21) Subsidiaries of HEALTHSOUTH Corporation.
(23) Consent of Ernst & Young LLP.
(27) Financial Data Schedule.
(d) Financial Statement Schedules.
Schedule II: Valuation and Qualifying Accounts
78
<PAGE>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- - --------------------------------------- -------------- ----------------------------------------- ------------------ --------------
BALANCE AT ADDITIONS CHARGED ADDITIONS CHARGED
BEGINNING OF TO COSTS AND TO OTHER ACCOUNTS - DEDUCTIONS - BALANCE AT
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD
- - --------------------------------------- -------------- ------------------- --------------------- ------------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Allowance for doubtful accounts ....... $44,662 $42,305 $ 21,078 (1) $ 47,945 (2) $ 60,100
======= ======= ========= ======== ========
Year ended December 31, 1996:
Allowance for doubtful accounts ....... $60,100 $58,637 $ 13,643 (1) $ 57,020 (2) $ 75,360
======= ======= ========= ========== ========
Year ended December 31, 1997:
Allowance for doubtful accounts ....... $75,360 $71,468 $ 40,496 (1) $ 63,778 (2) $123,545
======= ======= ========= ========== ========
</TABLE>
- - ----------
(1) Allowances of acquisitions in years 1995, 1996 and 1997, respectively.
(2) Write-offs of uncollectible patient accounts receivable.
79
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HEALTHSOUTH CORPORATION
By RICHARD M. SCRUSHY
-----------------------------
Richard M. Scrushy,
Chairman of the Board
and Chief Executive Officer
Date: March 30, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
- - ------------------------------ ------------------------------- --------------
RICHARD M. SCRUSHY Chairman of the Board March 30, 1998
--------------------------- and Chief Executive Officer
Richard M. Scrushy and Director
MICHAEL D. MARTIN Executive Vice President, March 30, 1998
--------------------------- Chief Financial Officer
Michael D. Martin and Treasurer
and Director
WILLIAM T. OWENS Group Senior Vice March 30, 1998
--------------------------- President-Finance
William T. Owens and Controller
(Principal Accounting Officer)
C. SAGE GIVENS March 30, 1998
---------------------------
C. Sage Givens Director
CHARLES W. NEWHALL III March 30, 1998
---------------------------
Charles W. Newhall III Director
GEORGE H. STRONG March 30, 1998
---------------------------
George H. Strong Director
PHILLIP C. WATKINS March 30, 1998
---------------------------
Phillip C. Watkins Director
JOHN S. CHAMBERLIN March 30, 1998
---------------------------
John S. Chamberlin Director
LARRY R. HOUSE March 30, 1998
---------------------------
Larry R. House Director
80
<PAGE>
ANTHONY J. TANNER
- - ---------------------------
Anthony J. Tanner Director March 30, 1998
JAMES P. BENNETT March 30, 1998
---------------------------
James P. Bennett Director
P. DARYL BROWN March 30, 1998
---------------------------
P. Daryl Brown Director
JOEL C. GORDON March 30, 1998
---------------------------
Joel C. Gordon Director
81
<PAGE>
HEALTHSOUTH CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997
EXHIBITS
<PAGE>
INDEX TO EXHIBITS
(2)-1 Amended and Restated Plan and Agreement of Merger, dated as of
September 18, 1994, among HEALTHSOUTH Rehabilitation Corporation, RRS
Acquisitions Company, Inc. and ReLife, Inc., filed as Exhibit (2)-1 to
the Company's Registration Statement on Form S-4 (Registration No.
33-55929), is hereby incorporated by reference.
(2)-2 Amended and Restated Plan and Agreement of Merger, dated as of January
22, 1995, among HEALTHSOUTH Corporation, ASC Atlanta Acquisition
Company, Inc. and Surgical Health Corporation, filed as Exhibit (2)-4
to the Company's Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1994, is hereby incorporated by reference.
(2)-3 Stock Purchase Agreement, dated February 3, 1995, among HEALTHSOUTH
Corporation, NovaCare, Inc. and NC Resources, Inc., filed as Exhibit
(2)-3 to the Company's Annual Report on Form 10-K for the Fiscal Year
Ended December 31, 1994, is hereby incorporated by reference.
(2)-4 Plan and Agreement of Merger, dated August 23, 1995, among HEALTHSOUTH
Corporation, SSCI Acquisition Corporation and Sutter Surgery Centers,
Inc., filed as Exhibit (2) to the Company's Registration Statement on
Form S-4 (Registration No. 33-63-055) is hereby incorporated by
reference.
(2)-5 Amendment to Plan and Agreement of Merger, dated October 26, 1995,
among HEALTHSOUTH Corporation, SSCI Acquisition Corporation and Sutter
Surgery Centers, Inc., filed as Exhibit (2)-5 to the Company's Annual
Report on Form 10-K for the Fiscal Year Ended December 31, 1995, is
hereby incorporated by reference.
(2)-6 Amended and Restated Plan and Agreement of Merger, dated as of October
9, 1995, among HEALTHSOUTH Corporation, SCA Acquisition Corporation
and Surgical Care Affiliates, Inc., filed as Exhibit (2)-1 to
Amendment No. 1 to the Company's Registration Statement on Form S-4
(Registration No. 33-64935), is hereby incorporated by reference.
(2)-7 Agreement and Plan of Merger, dated December 16, 1995, among
HEALTHSOUTH Corporation, Aladdin Acquisition Corporation and Advantage
Health Corporation, filed as Exhibit (2)-1 to the Company's
Registration Statement on Form S-4 (Registration No. 333-825), is
hereby incorporated by reference.
(2)-8 Plan and Agreement of Merger, dated May 16, 1996, among HEALTHSOUTH
Corporation, Empire Acquisition Corporation and Professional Sports
Care Management, Inc., filed as Exhibit (2)-1 to the
<PAGE>
Company's Registration Statement on Form S-4 (Registration No.
333-08449), is hereby incorporated by reference.
(2)-9 Plan and Agreement of Merger, dated September 11, 1996, among
HEALTHSOUTH Corporation, Warwick Acquisition Corporation and
ReadiCare, Inc., filed as Exhibit (2)-1 to the Company's Registration
Statement on Form S-4 (Registration No. 333-14697), is hereby
incorporated by reference.
(2)-10 Plan and Agreement of Merger, dated December 2, 1996, among
HEALTHSOUTH Corporation, Hammer Acquisition Corporation and Health
Images, Inc., filed as Exhibit (2)-1 to the Company's Registration
Statement on Form S-4 (Registration No. 333-19439), is hereby
incorporated by reference.
(2)-11 Plan and Agreement of Merger, dated February 17, 1997, among
HEALTHSOUTH Corporation, Reid Acquisition Corporation and Horizon/CMS
Healthcare Corporation, as amended, filed as Exhibit 2 to the
Company's Registration Statement on Form S-4 (Registration No.
333-36419), is hereby incorporated by reference.
(2)-12 Purchase and Sale Agreement, dated November 3, 1997, among HEALTHSOUTH
Corporation, Horizon/CMS Healthcare Corporation and Integrated Health
Services, Inc., filed as Exhibit 2.1 to the Company's Current Report
on Form 8-K, dated December 31, 1997, is hereby incorporated by
reference.
(2)-13 Amendment to Purchase and Sale Agreement, dated December 31, 1997,
among HEALTHSOUTH Corporation, Horizon/CMS Healthcare Corporation and
Integrated Health Services, Inc., filed as Exhibit 2.2 to the
Company's Current Report on Form 8-K, dated December 31, 1997, is
hereby incorporated by reference.
(2)-14* Second Amendment to Purchase and Sale Agreement, dated March 4, 1998,
among HEALTHSOUTH Corporation, Horizon/CMS Healthcare Corporation and
Integrated Health Services, Inc.
(3)-1 Restated Certificate of Incorporation of HEALTHSOUTH Corporation, as
filed in the Office of the Secretary of State of the State of Delaware
on March 13, 1997, filed as Exhibit (3)-1 to the Company's Annual
Report on Form 10-K for the Fiscal Year Ended December 31, 1996, is
hereby incorporated by reference.
(3)-2 Bylaws of HEALTHSOUTH Rehabilitation Corporation, filed as Exhibit
(3)-2 to the Company's Annual Report on Form 10-K for the Fiscal Year
Ended December 31, 1991, are hereby incorporated by reference.
(4)-1 Indenture, dated March 24, 1994, between HEALTHSOUTH Rehabilitation
Corporation and NationsBank of Georgia, National Association, relating
to the Company's 9.5% Senior Subordinated Notes
<PAGE>
due 2001, filed as Exhibit (4)-1 to the Company's Annual Report on
Form 10-K for the Fiscal Year Ended December 31, 1994, is hereby
incorporated by reference.
(4)-2* Subordinated Indenture, dated March 20, 1998, between HEALTHSOUTH
Corporation and The Bank of Nova Scotia Trust Company of New York, as
Trustee.
(4)-3* Officer's Certificate pursuant to Sections 2.3 and 11.5 of the
Subordinated Indenture, dated March 20, 1998, between HEALTHSOUTH
Corporation and The Bank of Nova Scotia Trust Company of New York, as
Trustee, relating to the Company's 3.25% Convertible Subordinated
Debentures due 2003.
(4)-4* Registration Rights Agreement, dated March 17, 1998, among HEALTHSOUTH
Corporation and Smith Barney Inc., Bear, Stearns & Co. Inc., Cowen &
Company, Credit Suisse First Boston Corporation, J.P. Morgan
Securities Inc., Morgan Stanley & Co. Incorporated, NationsBanc
Montgomery Securities LLC and PaineWebber Incorporated, relating to
the Company's 3.25% Convertible Subordinated Debentures due 2003.
(10)-1 1984 Incentive Stock Option Plan, as amended, filed as Exhibit (10)-1
to the Company's Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1987, is hereby incorporated herein by reference.
(10)-2 1988 Non-Qualified Stock Option Plan, filed as Exhibit 4(a) to the
Company's Registration Statement on Form S-8 (Registration No.
33-23642), is hereby incorporated herein by reference.
(10)-3 1989 Stock Option Plan, filed as Exhibit (10)-6 to the Company's
Annual Report on Form 10-K for the Fiscal Year Ended December 31,
1989, is hereby incorporated by reference.
(10)-4 1990 Stock Option Plan, filed as Exhibit (10)-13 to the Company's
Annual Report on Form 10-K for the Fiscal Year ended December 31,
1990, is hereby incorporated by reference.
(10)-5 1991 Stock Option Plan, as amended, filed as Exhibit (10)-15 to the
Company's Annual Report on Form 10-K for the Fiscal Year ended
December 31, 1991, is hereby incorporated herein by reference.
(10)-6 1992 Stock Option Plan, filed as Exhibit (10)-8 to the Company's
Annual Report on Form 10-K for the Fiscal Year Ended December 31,
1992, is hereby incorporated by reference.
(10)-7 1993 Stock Option Plan, filed as Exhibit (10)-10 to the Company's
Annual Report on Form 10-K for the Fiscal Year Ended December 31,
1993, is hereby incorporated by reference.
<PAGE>
(10)-8 Amended and Restated 1993 Consultants Stock Option Plan, filed as
Exhibit 4 to the Company's Registration Statement on Form S-8
(Commission File No. 333-42305), is hereby incorporated by reference.
(10)-9 1995 Stock Option Plan, filed as Exhibit (10)-14 to the Company's
Annual Report on Form 10-K for the Fiscal Year Ended December 31,
1995, is hereby incorporated by reference.
(10)-10 Employment Agreement, dated July 23, 1986, between HEALTHSOUTH
Rehabilitation Corporation and Richard M. Scrushy, as amended, filed
as Exhibit (10)-16 to the Company's Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 1995, is hereby incorporated by
reference.
(10)-11 Third Amended and Restated Credit Agreement, dated as of April 11,
1996, between HEALTHSOUTH Corporation and NationsBank, N.A., filed as
Exhibit (10)-17 to the Company's Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 1996, is hereby incorporated by
reference.
(10)-12 Form of Indemnity Agreement entered into between HEALTHSOUTH
Rehabilitation Corporation and each of its Directors, filed as Exhibit
(10)-13 to the Company's Annual Report on Form 10-K for the Fiscal
Year Ended December 31, 1991, is hereby incorporated by reference.
(10)-13 Surgical Health Corporation 1992 Stock Option Plan, filed as Exhibit
10(aa) to Surgical Health Corporation's Registration Statement on Form
S-4 (Commission File No. 33-70582), is hereby incorporated by
reference.
(10)-14 Surgical Health Corporation 1993 Stock Option Plan, filed as Exhibit
10(bb) to Surgical Health Corporation's Registration Statement on Form
S-4 (Commission File No. 33-70582), is hereby incorporated by
reference.
(10)-15 Surgical Health Corporation 1994 Stock Option Plan, filed as Exhibit
10(pp) to Surgical Health Corporation's Quarterly Report on Form 10-Q
for the Quarter Ended September 30, 1994, is hereby incorporated by
reference.
(10)-16 Heritage Surgical Corporation 1992 Stock Option Plan, filed as Exhibit
4(d) to the Company's Registration Statement on Form S-8 (Commission
File No. 33-60231), is hereby incorporated by reference.
(10)-17 Heritage Surgical Corporation 1993 Stock Option Plan, filed as Exhibit
4(e) to the Company's Registration Statement on Form S-8 (Commission
File No. 33-60231), is hereby incorporated by reference.
(10)-18 Sutter Surgery Centers, Inc. 1993 Stock Option Plan, Non-Qualified
Stock Option Plan and Agreement (Saibeni), Non-Qualified Stock Option
<PAGE>
Plan and Agreement (Shah), Non-Qualified Stock Option Plan and
Agreement (Akella), Non-Qualified Stock Option Plan and Agreement
(Kelly) and Non-Qualified Stock Option Plan and Agreement (May), filed
as Exhibits 4(a) - 4(f) to the Company's Registration Statement on
Form S-8 (Commission File No. 33-64615), are hereby incorporated by
reference.
(10)-19 Surgical Care Affiliates Incentive Stock Plan of 1986, filed as
Exhibit 10(g) to Surgical Care Affiliates Inc.'s Annual Report on Form
10-K for the Fiscal Year Ended December 31, 1993, is hereby
incorporated by reference.
(10)-20 Surgical Care Affiliates 1990 Non-Qualified Stock Option Plan for Non-
Employee Directors, filed as Exhibit 10(i) to Surgical Care
Affiliates, Inc.'s Annual Report on Form 10-K for the Fiscal Year
Ended December 31, 1990, is hereby incorporated by reference.
(10)-21 Professional Sports Care Management, Inc. 1992 Stock Option Plan, as
amended, filed as Exhibits 10.1 - 10.3 to Professional Sports Care
Management, Inc.'s Registration Statement on Form S-1 (Commission File
No. 33-81654), is hereby incorporated by reference.
(10)-22 Professional Sports Care Management, Inc. 1994 Stock Incentive Plan,
filed as Exhibit 10.4 to Professional Sports Care Management, Inc.'s
Registration Statement on Form S-1 (Commission File No. 33-81654), is
hereby incorporated by reference.
(10)-23 Professional Sports Care Management, Inc. 1994 Directors' Stock Option
Plan, filed as Exhibit 10.5 to Professional Sports Care Management,
Inc.'s Registration Statement on Form S-1 (Commission File No. 33-
81654), is hereby incorporated by reference.
(10)-24 ReadiCare, Inc. 1991 Stock Option Plan, filed as an exhibit to
ReadiCare, Inc.'s Annual Report on Form 10-K for the Fiscal Year Ended
February 29, 1992, is hereby incorporated by reference.
(10)-25 ReadiCare, Inc. Stock Option Plan for Non-Employee Directors, as
amended, filed as an exhibit to ReadiCare, Inc's Annual Report on Form
10-K for the Fiscal Year Ended February 29, 1992 and as an exhibit to
ReadiCare, Inc.'s Annual Report on Form 10-K for the Fiscal Year Ended
February 28, 1994, is hereby incorporated by reference.
(10)-26 1997 Stock Option Plan, filed as Exhibit 4 to the Company's
Registration Statement on Form S-8 (Registration No. 333-42307) is
hereby incorporated by reference.
(10)-27* Bridge Credit Agreement, dated October 22, 1997, between HEALTHSOUTH
Corporation and NationsBank, National Association.
<PAGE>
(10)-28 Health Images, Inc. Non-Qualified Stock Option Plan, filed as Exhibit
10(d)(i) to Health Images, Inc.'s Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 1995, is hereby incorporated by
reference.
(10)-29 Amended and Restated Employee Incentive Stock Option Plan, as amended,
of Health Images, Inc., filed as Exhibits 10(c)(i), 10(c)(ii),
10(c)(iii) and 10(c)(iv) to Health Images, Inc.'s Annual Report on
Form 10-K for the Fiscal Year Ended December 31, 1995, is hereby
incorporated herein by reference.
(10)-30 Form of Health Images, Inc. 1995 Formula Stock Option Plan, filed as
Exhibit 10(d)(iv) to Health Images, Inc.'s Annual Report on Form 10-K
for the Fiscal Year Ended December 31, 1995, is hereby incorporated
herein by reference.
(10)-31 1996 Employee Incentive Stock Option Plan of Health Images, Inc.,
filed as Exhibit 4(v) to the Company's Registration Statement on Form
S-8 (Registration No. 333-24429), is hereby incorporated by reference.
(10)-32 Employee Stock Option Plan of Horizon/CMS Healthcare Corporation,
filed as Exhibit 10.5 to Horizon/CMS Healthcare Corporation's Annual
Report on Form 10-K for the Fiscal Year Ended May 31, 1994, is hereby
incorporated by reference.
(10)-33 First Amendment to Employee Stock Option Plan of Horizon/CMS
Healthcare Corporation, filed as Exhibit 10.6 to Horizon/CMS
Healthcare Corporation's Annual Report on Form 10-K for the Fiscal
Year Ended May 31, 1994, is hereby incorporated by reference.
(10)-34 Corrected Second Amendment to Employee Stock Option Plan of
Horizon/CMS Healthcare Corporation, filed as Exhibit 10.7 to
Horizon/CMS Healthcare Corporation's Annual Report on Form 10-K for
the Fiscal Year Ended May 31, 1994, is hereby incorporated by
reference.
(10)-35 Amendment No. 3 to Employee Stock Option Plan of Horizon/CMS
Healthcare Corporation, filed as Exhibit 10.12 to Horizon/CMS
Healthcare Corporation's Annual Report on Form 10-K for the Fiscal
Year Ended May 31, 1995, is hereby incorporated by reference.
(10)-36 Horizon Healthcare Corporation Stock Option Plan for Non-Employee
Directors, filed as Exhibit 10.6 to Horizon/CMS Healthcare
Corporation's Annual Report on Form 10-K for the Fiscal Year Ended May
31, 1994, is hereby incorporated by reference.
(10)-37 Amendment No. 1 to Horizon Healthcare Corporation Stock Option Plan
for Non-Employee Directors, filed as Exhibit 10.14 to Horizon/CMS
Healthcare Corporation's Annual Report on Form 10-K for the Fiscal
Year Ended May 31, 1996, is hereby incorporated by reference.
<PAGE>
(10)-38 Horizon/CMS Healthcare Corporation 1995 Incentive Plan, filed as
Exhibit 4.1 to Horizon/CMS Healthcare Corporation's Registration
Statement on Form S-8 (Registration No. 33-63199), is hereby
incorporated by reference.
(10)-39 Horiozn/CMS Healthcare Corporation 1995 Non-Employee Directors' Stock
Option Plan, filed as Exhibit 4.2 to Horizon/CMS Healthcare
Corporation's Registration Statement on Form S-8 (Registration No. 33-
63199), is hereby incorporated by reference.
(10)-40 First Amendment to Horizon Healthcare Corporation Employee Stock
Purchase Plan, filed as Exhibit 10.18 to Horizon/CMS Healthcare
Corporation's Annual Report on Form 10-K for the Fiscal Year Ended May
31, 1996, is hereby incorporated by reference.
(10)-41 Continental Medical Systems, Inc. 1994 Stock Option Plan (as amended
and restated effective December 1, 1991), Amendment No. 1 to
Continental Medical Systems, Inc. 1986 Stock Option Plan and Amendment
No. 2 to Continental Medical Systems, Inc. 1986 Stock Option Plan,
filed as Exhibit 4.1 to Horizon/CMS Healthcare Corporation's
Registration Statement on Form S-8 (Registration No. 33- 61697), is
hereby incorporated by reference.
(10)-42 Continental Medical Systems, Inc. 1989 Non-Employee Directors' Stock
Option Plan (as amended and restated effective December 1, 1991),
filed as Exhibit 4.2 to Horizon/CMS Healthcare Corporation's
Registration Statement on Form S-8 (Registration No. 33-61697), is
hereby incorporated by reference.
(10)-43 Continental Medical Systems, Inc. 1992 CEO Stock Option Plan and
Amendment No. 1 to Continental Medical Systems, Inc. 1992 CEO Stock
Option Plan, filed as Exhibit 4.3 to Horizon/CMS Healthcare
Corporation's Registration Statement on Form S-8 (Registration No. 33-
61697), is hereby incorporated by reference.
(10)-44 Continental Medical Systems, Inc. 1993 Nonqualified Stock Option Plan,
Amendment No. 1 to Continental Medical Systems, Inc. 1993 Nonqualified
Stock Option Plan and Amendment No. 2 to Continental Medical Systems,
Inc. 1993 Nonqualified Stock Option Plan, filed as Exhibit 4.4 to
Horizon/CMS Healthcare Corporation's Registration Statement on Form
S-8 (Registration No. 33-61697), is hereby incorporated by reference.
(10)-45 Continental Medical Systems, Inc. 1994 Stock Option Plan, filed as
Exhibit 4.5 to Horizon/CMS Healthcare Corporation's Registration
Statement on Form S-8 (Registration No. 33-61697), is hereby
incorporated by reference.
(21)* Subsidiaries of HEALTHSOUTH Corporation.
<PAGE>
(23)* Consent of Ernst & Young LLP.
(27)* Financial Data Schedule.
* -- Filed herewith.
EXHIBIT (2)-14
SECOND AMENDMENT TO PURCHASE AND SALE AGREEMENT
-----------------------------------------------
THIS SECOND AMENDMENT TO PURCHASE AND SALE AGREEMENT (this "Second
Amendment"), dated as of the 4th day of March, 1998, to that certain Purchase
and Sale Agreement, made and entered into on the 3rd day of November, 1997 (the
"Agreement"), by and between HEALTHSOUTH CORPORATION, a Delaware corporation,
HORIZON/CMS HEALTHCARE CORPORATION, a Delaware corporation, as Seller, and
INTEGRATED HEALTH SERVICES, INC., a Delaware corporation, as Buyer.
WITNESSETH:
-----------
WHEREAS, the parties entered into that certain Amendment to Purchase and
Sale Agreement, dated as of December 31, 1997 (the "First Amendment"), pursuant
to which Schedules to the Agreement were amended and certain agreements
ancillary to the Agreement were entered into;
WHEREAS, the parties hereto have agreed to amend Schedule 3.6 to the First
Amendment;
NOW, THEREFORE, in consideration of the agreements contained herein, and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto, do hereby agree as follows:
ARTICLE 1
DEFINITIONS
Section 1.1 Incorporation of Defined Terms. For purposes of this Second
Amendment, all capitalized terms used in this Second Amendment that are not
defined in this Second Amendment shall have the meanings assigned to them in the
Agreement and the First Amendment.
<PAGE>
ARTICLE 2
MATTERS RELATING TO SCHEDULES TO THE FIRST AMENDMENT
Section 2.1 Amendment and Restatement of Certain Schedules. The Schedules
to the Agreement are hereby amended as follows:
(a) Schedule 2.1(c) is amended to add reference to the facility
lease regarding the following leased facility, reflecting that Buyer has agreed
to accept such lease as a Transferred Asset and to assume the related Assumed
Liabilities:
Facility
Facility Name No. City, State Landlord Name
------------- --- ----------- -------------
Sleep Diagnostics 253 Columbia, W. Roger Witherow
Tennessee Tennessee
(b) Schedule 3.6 attached to the First Amendment shall be amended
and restated as set forth in Schedule 3.6 attached hereto (the "Amended Schedule
3.6"), and the First Amendment shall be amended to replace the original Schedule
3.6 with the Amended Schedule 3.6.
ARTICLE 3
MISCELLANEOUS
Section 3.1 Affirmation of Agreement. The parties hereby affirm to one
another their respective obligations pursuant to the Agreement and affirm the
Agreement, amended as set forth above.
Section 3.2 Representations and Warranties. The parties represent and
warrant to one another that this Second Amendment has been duly authorized by
all corporate action required to be taken on each of their parts, that it has
been duly executed and delivered, that it constitutes the legal, valid and
binding obligations of each of them, except as enforcement may be subject to
bankruptcy, moratorium and similar laws and except as the availability of
equitable remedies may be subject to customary limitations.
Section 3.3 Further Assurances. Each party hereby agrees to perform any
further acts and to execute and deliver any documents which may be reasonably
necessary to carry out the provisions of this Second Amendment.
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Second Amendment on
the date first above written.
HEALTHSOUTH CORPORATION
By /s/WILLIAM W. HORTON
-----------------------------------------
Its Senior Vice President
---------------------------------------
HORIZON/CMS HEALTHCARE CORPORATION
By /s/WILLIAM W. HORTON
-----------------------------------------
Its Vice President
---------------------------------------
INTEGRATED HEALTH SERVICES, INC.
By /s/ELIZABETH B. KELLY
-----------------------------------------
Its Executive Vice President
---------------------------------------
EXHIBIT (4)-2
HEALTHSOUTH CORPORATION
and
THE BANK OF NOVA SCOTIA TRUST COMPANY OF NEW YORK, as Trustee
--------------------
SUBORDINATED INDENTURE
Dated as of March 20, 1998
--------------------
<PAGE>
CROSS REFERENCE SHEET*
Between
Provisions of Trust Indenture Act (as defined herein) and Indenture dated
as of March 20, 1998 between HEALTHSOUTH Corporation and The Bank of Nova Scotia
Trust Company of New York, Trustee:
SECTION OF THE ACT SECTION OF INDENTURE
310(a)(1) and (2)......................................................6.9
310(a)(3) and (4).............................................Inapplicable
310(b)........................................6.8 and 6.10(a), (b) and (d)
310(c)........................................................Inapplicable
311(a)................................................................6.14
311(b)................................................................6.14
311(c)........................................................Inapplicable
312(a).........................................................4.1 and 4.2
312(b).................................................................4.2
312(c).................................................................4.2
313(a).................................................................4.3
313(b)(1).....................................................Inapplicable
313(b)(2)..............................................................4.3
313(c).................................4.3, 5.11, 6.10, 6.11, 8.2 and 12.2
313(d).................................................................4.3
314(a).........................................................3.5 and 4.2
314(b)........................................................Inapplicable
314(c)(1) and (2).....................................................11.5
314(c)(3).....................................................Inapplicable
314(d)........................................................Inapplicable
314(e)................................................................11.5
314(f)........................................................Inapplicable
315(a), (c) and (d)....................................................6.1
315(b)................................................................5.11
315(e)................................................................5.12
316(a)(1).....................................................5.9 and 5.10
316(a)(2).....................................................Not required
316(a) (last sentence).................................................7.4
316(b).................................................................5.7
317(a).................................................................5.2
317(b)......................................................3.4(a) and (b)
318(a)................................................................11.7
*This Cross Reference Sheet is not part of the Indenture.
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1 DEFINITIONS.........................................................1
SECTION 1.1 Certain Terms Defined..........................................1
"Affiliate"..................................................................2
"Authenticating Agent".......................................................2
"Authorized Newspaper".......................................................2
"Board of Directors".........................................................2
"Board Resolution"...........................................................2
"Business Day"...............................................................3
"Capital Stock"..............................................................3
"Commission".................................................................3
"Common Equity"..............................................................3
"Company"....................................................................3
"Company Order"..............................................................3
"Consolidated Tangible Assets"...............................................3
"Corporate Trust Office".....................................................4
"Coupon" ....................................................................4
"Covenant Defeasance"........................................................4
"Depositary".................................................................4
"Dollar" or "$"..............................................................4
"ECU" ....................................................................4
"Event of Default"...........................................................4
"Exchange Act"...............................................................4
"Fair Value".................................................................4
"Foreign Currency"...........................................................4
"Holder," "Holder of Subordinated Securities," "Securityholder"..............4
"IRS" ....................................................................5
"Judgment Currency"..........................................................5
"Maturity"...................................................................5
"Non-U.S. Person"............................................................5
"Officer's Certificate"......................................................5
"144A Global Subordinated Security"..........................................5
"Opinion of Counsel".........................................................5
"Original Issue Date"........................................................5
"Original Issue Discount Subordinated Security"..............................5
"Outstanding"................................................................6
"Paying Agent"...............................................................6
"Periodic Offering"..........................................................6
"Person" ....................................................................7
"PORTAL Market"..............................................................7
"Predecessor Subordinated Security"..........................................7
"principal"..................................................................7
"QIB" or "Qualified Institutional Buyer".....................................7
<PAGE>
"Regular Record Date"........................................................7
"Registered Global Subordinated Security"....................................7
"Registered Subordinated Security"...........................................7
"Regulation S"...............................................................7
"Regulation S Global Subordinated Security"..................................8
"Required Currency"..........................................................8
"Responsible Officer"........................................................8
"Restricted Subordinated Security"...........................................8
"Rule 144"...................................................................8
"Rule 144A"..................................................................8
"Rule 144K"..................................................................8
"Securities Act".............................................................8
"Significant Subsidiary".....................................................8
"Special Record Date"........................................................8
"Stated Maturity"............................................................8
"Subsidiary".................................................................9
"Subordinated Indenture".....................................................9
"Transfer Restriction Termination Date"......................................9
"Trustee"....................................................................9
"Unregistered Subordinated Security".........................................9
"U.S. Government Obligations"................................................9
"Voting Stock"...............................................................9
"Yield to Maturity"........................................................ 10
ARTICLE 2 SUBORDINATED SECURITIES...................................10
SECTION 2.1 Forms Generally...........................................10
SECTION 2.2 Form of Trustee's Certificate
of Authentication.....................................10
SECTION 2.3 Amount Unlimited; Issuable in Series......................11
SECTION 2.4 Authentication and Delivery
of Subordinated Securities............................14
SECTION 2.5 Execution of Subordinated Securities......................18
SECTION 2.6 Certificate of Authentication.............................18
SECTION 2.7 Denomination and Date of Subordinated Securities;
Payments of Interest..................................... 19
SECTION 2.8 Registration, Transfer and Exchange.......................21
SECTION 2.9 Mutilated, Defaced, Destroyed, Lost and
Stolen Subordinated Securities..........................28
SECTION 2.10 Cancellation of Subordinated Securities;
Destruction Thereof.....................................30
SECTION 2.11 Temporary Subordinated Securities.........................30
ARTICLE 3 COVENANTS OF THE COMPANY ..........................................31
SECTION 3.1 Payment of Principal and Interest.........................31
SECTION 3.2 Offices for Payments, Etc.................................32
SECTION 3.3 Appointment to Fill a Vacancy in
Office of Trustee.......................................33
SECTION 3.4 Paying Agents.............................................33
SECTION 3.5 Compliance Certificates...................................35
SECTION 3.6 Corporate Existence.......................................35
<PAGE>
SECTION 3.7 Maintenance of Properties................................35
SECTION 3.8 Payment of Taxes and Other Claims........................36
SECTION 3.9 Luxembourg Publications..................................36
SECTION 3.10 Usury Laws...............................................36
ARTICLE 4 SECURITYHOLDER LISTS AND REPORTS BY THE COMPANY AND THE
TRUSTEE...........................................................37
SECTION 4.1 Company to Furnish Trustee Information as
to Names and Addresses of Securityholders...............37
SECTION 4.2 Preservation of Information;
Communications to Holders...............................37
SECTION 4.3 Reports by Trustee........................................38
SECTION 4.4 Reports by Company........................................38
ARTICLE 5 REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF
DEFAULT...........................................................38
SECTION 5.1 Event of Default Defined, Acceleration of Maturity;
Waiver of Default.......................................38
SECTION 5.2 Acceleration of Maturity; Rescission and Annulment........40
SECTION 5.3 Collection of Indebtedness by Trustee;
Trustee May Prove Debt..................................43
SECTION 5.5 Trustee May Enforce Claims Without
Possession of Subordinated Securities...................45
SECTION 5.6 Application of Proceeds...................................45
SECTION 5.7 Suits for Enforcement.....................................46
SECTION 5.8 Limitations on Suits by Subordinated
Security Holders........................................47
SECTION 5.9 Unconditional Right of Securityholders
to Institute Certain Suits..............................48
SECTION 5.10 Restoration of Rights on Abandonment
of Proceedings..........................................48
SECTION 5.11 Powers and Remedies Cumulative; Delay or
Omission Not Waiver of Default..........................48
SECTION 5.12 Delay or Omission Not Waiver..............................48
SECTION 5.13 Control by Holders of Subordinated Securities.............49
SECTION 5.14 Waiver of Past Defaults...................................49
SECTION 5.15 Trustee to Give Notice of Default, But
May Withhold in Certain Circumstances...................50
SECTION 5.16 Right of Court to Require Filing of
Undertaking to Pay Costs................................50
SECTION 5.17 Waiver of Stay or Extension Laws..........................51
ARTICLE 6 CONCERNING THE TRUSTEE............................................51
SECTION 6.1 Duties and Responsibilities of the Trustee;
During Default; Prior to Default........................51
SECTION 6.2 Certain Rights of the Trustee.............................53
SECTION 6.3 Trustee Not Responsible for Recitals,
Disposition of Subordinated Securities or
Application of Proceeds Thereof.........................54
SECTION 6.4 Trustee and Agents May Hold Subordinated
Securities or Coupons;Collections, Etc..................55
SECTION 6.5 Moneys Held by Trustee....................................55
SECTION 6.6 Compensation and Indemnification of
Trustee and Its Prior Claim.............................55
<PAGE>
SECTION 6.7 Right of Trustee to Rely on
Officer's Certificate, Etc..............................56
SECTION 6.8 Subordinated Indentures Not Creating
Potential Conflicting Interests for
the Trustee.............................................56
SECTION 6.9 Qualification of Trustee:
Conflicting Interests...................................56
SECTION 6.10 Persons Eligible for Appointment as Trustee...............56
SECTION 6.11 Resignation and Removal;
Appointment of Successor Trustee........................57
SECTION 6.12 Acceptance of Appointment by Successor Trustee............59
SECTION 6.13 Merger, Conversion, Consolidation or
Succession to Business of Trustee...................... 60
SECTION 6.14 Preferential Collection of Claims
Against the Company.....................................61
SECTION 6.15 Appointment of Authenticating Agent.......................61
ARTICLE 7 CONCERNING THE SECURITYHOLDERS....................................63
SECTION 7.1 Evidence of Action Taken by Securityholders...............63
SECTION 7.2 Proof of Execution of Instruments and
of Holding of Subordinated Securities.....................63
SECTION 7.3 Holders to be Treated as Owners...........................64
SECTION 7.4 Subordinated Securities Owned by
Company Deemed NotOutstanding...........................64
SECTION 7.5 Right of Revocation of Action Taken.......................65
ARTICLE 8 SUPPLEMENTAL SUBORDINATED INDENTURES......................66
SECTION 8.1 Supplemental Subordinated Indentures
Without Consent of Securityholders......................66
SECTION 8.2 Supplemental Subordinated Indentures
with Consent of Securityholders.........................68
SECTION 8.4 Documents to be Given to Trustee..........................70
SECTION 8.5 Notation on Subordinated Securities in
Respect of Supplemental Subordinated
Indentures..............................................70
ARTICLE 9 CONSOLIDATION, MERGER, SALE OR CONVEYANCE.........................71
SECTION 9.1 Company May Consolidate, Etc..............................71
SECTION 9.2 Successor Corporation Substituted.........................72
ARTICLE 10 SATISFACTION AND DISCHARGE........................................72
SECTION 10.1 Satisfaction and Discharge of
Subordinated Indenture................................. 72
SECTION 10.2 Application by Trustee of Funds Deposited
for Payment of Subordinated Securities..................77
SECTION 10.3 Repayment of Moneys Held by Paying Agent..................77
SECTION 10.4 Return of Moneys Held by Trustee and
Paying Agent Unclaimed for Two Years....................78
SECTION 10.5 Indemnity for U.S. Government of Obligations..............78
ARTICLE 11 MISCELLANEOUS PROVISIONS..........................................78
SECTION 11.1 Incorporators, Stockholders, Officers and
Directors of Company Exempt from Individual
Liability............................................... 78
<PAGE>
SECTION 11.2 Provisions of Subordinated Indenture for
the Sole Benefit of Parties and Holders
of Subordinated Securities and Coupons.....................79
SECTION 11.3 Successors and Assigns of Company Bound by
Subordinated Indenture..................................79
SECTION 11.4 Notices and Demands on Company, Trustee and
Holders of Subordinated Securities and Coupons..........79
SECTION 11.5 Officer's Certificates and Opinions of Counsel;
Statements to be Contained Therein......................80
SECTION 11.6 Payments Due on Saturdays, Sundays and Holidays...........81
SECTION 11.7 Conflict of Any Provision of Subordinated
Indenture with Trust Indenture Act......................82
SECTION 11.8 New York Law to Govern....................................82
SECTION 11.9 Counterparts..............................................82
SECTION 11.10 Effect of Headings....................................... 82
SECTION 11.11 Subordinated Securities in a Foreign
Currency or in ECU......................................82
SECTION 11.12 Judgment Currency.........................................83
ARTICLE 12 REDEMPTION OF SUBORDINATED SECURITIES AND SINKING FUNDS..........84
SECTION 12.1 Applicability of Article..................................84
SECTION 12.2 Notice of Redemption; Partial Redemptions.................84
SECTION 12.3 Payment of Subordinated Securities Called
for Redemption........................... 86
SECTION 12.4 Exclusion of Certain Subordinated Securities
from Eligibility forSelection for Redemption.............87
SECTION 12.5 Mandatory and Optional Sinking Funds......................87
<PAGE>
THIS SUBORDINATED INDENTURE, dated as of March 20, 1998, by and between
HEALTHSOUTH Corporation, a Delaware corporation (the "Company"), and The Bank of
Nova Scotia Trust Company of New York, a New York trust company, as trustee (the
"Trustee"),
W I T N E S S E T H:
WHEREAS, the Company has duly authorized the issuance, sale, execution and
delivery, from time to time, of its unsecured evidences of subordinated
indebtedness (hereinafter referred to as the "Subordinated Securities"), without
limit as to principal amount, issuable in one or more series, the amount and
terms of each such series to be determined as hereinafter provided; and, to
provide the terms and conditions upon which the Subordinated Securities are to
be issued, authenticated and delivered, the Company has duly authorized the
execution of this Subordinated Indenture; and
WHEREAS, all acts and things necessary to make the Subordinated Securities,
when executed by the Company and authenticated and delivered by the Trustee as
in this Subordinated Indenture provided, the valid, binding and legal
subordinated obligations of the Company, and to constitute this Subordinated
Indenture a valid indenture and agreement according to its terms, have been done
and performed, and the execution of this Subordinated Indenture and the issuance
hereunder of the Subordinated Securities have in all respects been duly
authorized; and
WHEREAS, all things necessary to make this Subordinated Indenture a
valid indenture and agreement according to its terms have been done;
NOW, THEREFORE:
In consideration of the premises and the purchases of the Subordinated
Securities by the holders thereof, the Company and the Trustee mutually covenant
and agree for the equal and proportionate benefit of the respective holders from
time to time of the Subordinated Securities and of the coupons, if any,
appertaining thereto as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.1 Certain Terms Defined.
The following terms (except as otherwise expressly provided or unless the
context otherwise clearly requires) for all purposes of this Subordinated
Indenture and of any indenture supplemental hereto shall have the respective
meanings specified in this Section. All other terms used in this Subordinated
Indenture that are defined in the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"), or the definitions of which in the Securities Act of
1933, as amended (the "Securities Act"), are referred to in the Trust Indenture
Act, including terms defined therein by reference to the Securities Act (except
as herein otherwise expressly provided
<PAGE>
or unless the context otherwise requires), shall have the meaning assigned to
such terms in the Trust Indenture Act and in the Securities Act as in effect
from time to time. All accounting terms used herein and not expressly defined
shall have the meanings assigned to such terms in accordance with generally
accepted accounting principles, and the term "generally accepted accounting
principles" means such accounting principles as are generally accepted at the
time of any computation unless a different time shall be specified with respect
to such series of Subordinated Securities as provided for in Section 2.3. The
words "herein," "hereof" and "hereunder" and other words of similar import refer
to this Subordinated Indenture as a whole and not to any particular Article,
Section or other subdivision. The terms defined in this Article have the
meanings assigned to them in this Article and include the plural as well as the
singular.
"Affiliate" has the same meaning as given to that term in Rule 405 of the
Securities Act or any successor provision.
"Authenticating Agent" shall have the meaning set forth in Section 6.15.
"Authorized Newspaper" means a newspaper (which, in the case of The City of
New York, will, if practicable, be The Wall Street Journal (Eastern Edition), in
the case of the United Kingdom of Great Britain and Northern Ireland (the
"United Kingdom"), will, if practicable, be The Financial Times (London Edition)
and, in the case of the Grand Duchy of Luxembourg ("Luxembourg"), will, if
practicable, be the Luxemburger Wort) published in an official or common
language of the county of publication customarily published at least once a day
for at least five days in each calendar week and of general circulation in The
City of New York, the United Kingdom or Luxembourg, as applicable. If it shall
be impractical in the opinion of the Trustee to make any publication of any
notice required hereby in an Authorized Newspaper, any publication or other
notice in lieu thereof which is made or given with the approval of the Trustee
shall constitute a sufficient publication of such notice.
"Board of Directors" means either the Board of Directors of the Company or
any committee of such Board duly authorized to act on its behalf.
"Board Resolution" means a copy of one or more resolutions, certified by
the secretary or an assistant secretary of the Company to have been duly adopted
or consented to by the Board of Directors and to be in full force and effect,
and delivered to the Trustee.
"Business Day" means, with respect to any Subordinated Security, a day
other than any day on which banking institutions in the city (or in any of the
cities, if more than one) in which amounts are payable, as specified in the form
of such Subordinated Security, are authorized or required by any applicable law
or regulation to be closed.
"Capital Stock" of any Person means any and all shares, rights to purchase,
warrants or options (whether or not currently exercisable); participation or
other equivalents of or interest in (however designated) the equity (including
without limitation common stock, preferred stock and partnership and joint
venture interests) of such Person (excluding any debt securities that are
convertible into, or exchangeable for, such equity).
<PAGE>
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Exchange Act, or if at any time after the
execution and delivery of this Subordinated Indenture such Commission is not
existing and performing the duties now assigned to it under the Trust Indenture
Act, then the body performing such duties on such date.
"Common Equity" of any Person means all Capital Stock of such Person that
is generally entitled to (a) vote in the election of directors of such Person or
(b) if such Person is not a corporation, vote or otherwise participate in the
selection of the governing body, partners, managers or others that will control
the management and policies of such Person.
"Company" means the Person named as the "Company" in the first paragraph of
this instrument until a successor Person shall have become such pursuant to the
applicable provisions of this Subordinated Indenture, and thereafter "Company"
shall mean such successor Person.
"Company Order" means a written statement, request or order of the Company
signed in its name by the chairman of the Board of Directors, the president, any
vice president or the treasurer of the Company.
"Consolidated Tangible Assets" of any Person as of any date means the total
assets of such Person and its Subsidiaries (excluding any assets that would be
classified as "intangible assets" under generally accepted accounting principles
("GAAP")) on a consolidated basis at such date, as determined in accordance with
GAAP, less all write-ups subsequent to the date of initial issuance of the
Securities in the book value of any asset owned by such Person or any of its
Subsidiaries.
"Corporate Trust Office" means the office of the Trustee at which the
corporate trust business of the Trustee shall, at any particular time, be
principally administered, which office is, as of the date of this Subordinated
Indenture, located at One Liberty Plaza, 23rd Floor, New York, New York 10006,
Attention: Corporate Trust Administration.
"Coupon" means any interest coupon appertaining to an Unregistered
Subordinated Security.
"Covenant Defeasance" shall have the meaning set forth in Section 10.1(C).
"Defaulted Interest" has the meaning specified in Section 2.7.
"Depositary" means, with respect to the Subordinated Securities of any
series issuable or issued in the form of one or more Registered Global
Subordinated Securities, the Person designated as Depositary by the Company
pursuant to Section 2.3 until a successor Depositary shall have become such
pursuant to the applicable provisions of this Subordinated Indenture, and
thereafter "Depositary" shall mean or include each Person who is then a
Depositary hereunder, and if at any time there is more than one such Person,
"Depositary" as used with respect to the Subordinated Securities of any such
series shall mean the Depositary with respect to the Registered Global
Subordinated Securities of that series.
<PAGE>
"Dollar" or "$" means the coin or currency of the United States of America
as at the time of payment is legal tender for the payment of public and private
debts.
"ECU" means the European Currency Unit as defined and revised from time to
time by the European Monetary System of the European Community.
"Event of Default" means any event or condition specified as such in
Section 5.1.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Value" when used with respect to any Voting Stock means the fair
value as determined in good faith by the Board of Directors of the Company.
"Foreign Currency" means a currency issued by the government of a country
other than the United States of America.
"Holder," "Holder of Subordinated Securities," "Securityholder" or other
similar terms mean (a) in the case of any Registered Subordinated Security, the
person in whose name such Subordinated Security is registered in the Security
Register kept by the Company for that purpose in accordance with the terms
hereof, and (b) in the case of any Unregistered Subordinated Security, the
bearer of such Subordinated Security, or any Coupon appertaining thereto, as the
case may be.
"Interest Payment Date," means the Stated Maturity of an installment of
interest on such Subordinated Security.
"IRS" means the Internal Revenue Service of the United States Department of
the Treasury, or any successor entity.
"Judgment Currency" has the meaning set forth in Section 11.12.
"Maturity", when used with respect to any Subordinated Security, means the
date on which the principal of such Subordinated Security becomes due and
payable as therein or herein provided, whether at the Stated Maturity or by
declaration of acceleration, call for redemption or otherwise.
"Non-U.S. Person" means any person that is not a "U.S. person" as such term
is defined in Rule 902 of the Securities Act.
"Officer's Certificate" means a certificate signed by the chairman of the
Board of Directors, the president or any vice president or the treasurer of the
Company and delivered to the Trustee. Each such certificate shall comply with
Section 314 of the Trust Indenture Act and include the statements provided for
in Section 11.5.
"144A Global Subordinated Security" has the meaning set forth in Section
2.8(b)(i).
<PAGE>
"Opinion of Counsel" means an opinion in writing signed by legal counsel
who may be an employee of the Company or other counsel satisfactory to the
Trustee. Each such opinion shall comply with Section 314 of the Trust Indenture
Act and include the statements provided for in Section 11.5.
"Original Issue Date" of any Subordinated Security (or portion thereof)
means the earlier of (a) the date of such Subordinated Security or (b) the date
of any Subordinated Security (or portion thereof) for which such Subordinated
Security was issued (directly or indirectly) on registration of transfer,
exchange or substitution.
"Original Issue Discount Subordinated Security" means any Subordinated
Security that provides for an amount less than the principal amount thereof to
be due and payable upon a declaration of acceleration of the Maturity thereof
pursuant to Section 5.2.
"Outstanding" (except as otherwise provided in Section 7.4), when used with
reference to Subordinated Securities, means, subject to the provisions of
Section 7.4, as of any particular time, all Subordinated Securities
authenticated and delivered by the Trustee under this Subordinated Indenture,
except
(a) Subordinated Securities theretofore canceled by the Trustee or
delivered to the Trustee for cancellation;
(b) Subordinated Securities, or portions thereof, for the payment or
redemption of which moneys or U.S. Government Obligations (as provided for in
Section 10.1) in the necessary amount shall have been deposited in trust with
the Trustee or with any Paying Agent (other than the Company) or shall have been
set aside, segregated and held in trust by the Company for the Holders of such
Subordinated Securities (if the Company shall act as its own Paying Agent),
provided, that if such Subordinated Securities, or portions thereof, are to be
redeemed prior to the Maturity thereof, notice of such redemption shall have
been given as herein provided, or provisions satisfactory to the Trustee shall
have been made for giving such notice; and
(c) Subordinated Securities which shall have been paid or in substitution
for which other Subordinated Securities shall have been authenticated and
delivered pursuant to the terms of Section 2.9 (except with respect to any such
Subordinated Security as to which proof satisfactory to the Trustee is presented
that such Subordinated Security is held by a person in whose hands such
Subordinated Security is a legal, valid and binding obligation of the Company).
In determining whether the Holders of the requisite principal amount of
Outstanding Subordinated Securities of any or all series have given any request,
demand, authorization, direction, notice, consent or waiver hereunder, the
principal amount of an Original Issue Discount Subordinated Security that shall
be deemed to be Outstanding for such purposes shall be the amount of the
principal thereof that would be due and payable as of the date of such
determination upon a declaration of acceleration of the Maturity thereof
pursuant to Section 5.2.
<PAGE>
"Paying Agent" means any Person authorized by the Company to pay the
principal of (and premium, if any) or interest on any Securities on behalf of
the Company.
"Periodic Offering" means an offering of Subordinated Securities of a
series from time to time, the specific terms of which Subordinated Securities,
including, without limitation, the rate or rates of interest, if any, thereon,
the Stated Maturity or Maturities thereof and the redemption provisions, if any,
with respect thereto, are to be determined by the Company or its agents upon the
issuance of such Subordinated Securities.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint stock company, trust, unincorporated
organization or government or any agency or political subdivision thereof.
"PORTAL Market" means Private Offerings, Resales and Trading through
Automatic Linkages Market.
"Predecessor Subordinated Security" of any particular Subordinated Security
means every previous Subordinated Security evidencing all or a portion of the
same debt as that evidenced by such particular Subordinated Security; and, for
the purposes of this definition, any Subordinated Security authenticated and
delivered under Section 2.4 in exchange for or in lieu of a mutilated,
destroyed, lost or stolen Subordinated Security shall be deemed to evidence the
same debt as the mutilated, destroyed, lost or stolen Subordinated Security.
"principal" whenever used with reference to the Subordinated Securities or
any Subordinated Security or any portion thereof, shall be deemed to include
"and premium, if any," provided, however, that such inclusion of premium, if
any, shall under no circumstances result in the double counting of such premium
for the purpose of any calculation required hereunder.
"QIB" or "Qualified Institutional Buyer" means "Qualified Institutional
Buyer" as such term is defined in Rule 144A under the Securities Act.
"Regular Record Date" for the interest payable on any Interest Payment Date
on the securities of any series means the date specified for that purpose as
contemplated in Section 2.3.
"Registered Global Subordinated Security" means a Subordinated Security
evidencing all or a part of a series of Registered Subordinated Securities,
issued to the Depositary for such series in accordance with Section 2.4, and
bearing the legend prescribed in Section 2.4 and any other legend required by
the Depositary for such series.
"Registered Subordinated Security" means any Subordinated Security
registered on the Subordinated Security Register of the Company.
"Regulation S" means Regulation S under the Securities Act, or any
successor provision.
<PAGE>
"Regulation S Global Subordinated Security" has the meaning set forth in
Section 2.8(b).
"Required Currency" shall have the meaning set forth in Section 11.12 .
"Responsible Officer" when used with respect to the Trustee means the
chairman of the board of directors, any vice chairman of the board of directors,
the chairman of the trust committee, the chairman of the executive committee,
any vice chairman of the executive committee, the president, any vice president
(whether or not designated by numbers or words added before or after the title
"Vice President"), the cashier, the secretary, the treasurer, any trust officer,
any assistant trust officer, any assistant vice president, any assistant
cashier, any assistant secretary, any assistant treasurer, or any other officer
or assistant officer of the Trustee customarily performing functions similar to
those performed by the persons who at the time shall be such officers,
respectively, or to whom any corporate trust matter is referred because of his
or her knowledge of and familiarity with the particular subject.
"Restricted Subordinated Security" has the meaning set forth in Section
2.8(b).
"Rule 144" means Rule 144 under the Securities Act.
"Rule 144A" means Rule 144A under the Securities Act.
"Rule 144K" means Rule 144(k) under the Securities Act.
"Securities Act" means the Securities Act of 1933, as amended.
"Security Register" and "Security Registrar" have the respective meanings
specified in Section 2.9.
"Significant Subsidiary" means a Subsidiary of the Company which at the
time of determination either (i) had tangible assets which, as of the Company's
most recent quarterly consolidated balance sheet, constituted at least 5% of
Consolidated Tangible Assets as of such date, or (ii) had revenues for the
12-month period ending on the date of the Company's most recent quarterly
consolidated statement of income which constituted at least 5% of the Company's
total consolidated revenues for such period.
"Special Record Date" for the payment of any Defaulted Interest means a
date fixed by the Trustee pursuant to Section 2.7.
"Stated Maturity", when used with respect to any Subordinated Security or
any installment of interest thereon, means the date specified in such
Subordinated Security as the fixed date on which the principal of such
Subordinated Security or such installment of interest is due and payable.
"Subsidiary" of any Person means (a) any corporation of which Common Equity
having ordinary voting power to elect a majority of the directors of such
corporation is owned by such
<PAGE>
Person directly or through one or more other subsidiaries of such Person and (b)
any entity other than a corporation in which such Person, directly or
indirectly, owns at least 50% of the Common Equity of such entity and has the
authority to manage such entity on a day-to-day basis.
"Subordinated Indenture" means this instrument as originally executed and
delivered or, if amended or supplemented as herein provided, as so amended or
supplemented or both, and shall include the forms and terms of particular series
of Subordinated Securities established as contemplated hereunder.
"Subordinated Security" or "Subordinated Securities" (except as otherwise
provided in Section 7.4) has the meaning stated in the first recital of this
Subordinated Indenture, or, as the case may be, Subordinated Securities that
have been authenticated and delivered under this Subordinated Indenture.
"Transfer Restriction Termination Date" means the earlier of the first date
on which (i) the Subordinated Securities of a series (other than such
Subordinated Securities acquired by the Company or any Affiliate thereof since
the issue date of such Subordinated Securities) may be sold pursuant to Rule
144K (or any successor provision) and (ii) all such Subordinated Securities have
been exchanged or sold pursuant to an effective registration statement.
"Trustee" means the Person identified as "Trustee" in the first paragraph
hereof and, subject to the provisions of Article 6, shall also include any
successor trustee. "Trustee" shall also mean or include each Person who is then
a trustee hereunder and if at any time there is more than one such Person,
"Trustee" as used with respect to the Subordinated Securities of any series
shall mean the trustee with respect to the Subordinated Securities of such
series.
"Unregistered Subordinated Security" means any Subordinated Security other
than a Registered Subordinated Security.
"U.S. Government Obligations" shall have the meaning set forth in Section
10.1(A).
"Voting Stock" means stock of any class or classes having general voting
power under ordinary circumstances to elect a majority of the board of
directors, managers or trustees of the corporation in question, provided, that,
for the purposes hereof, stock which carries only the right to vote
conditionally on the happening of an event shall not be considered voting stock
whether or not such event shall have happened.
"Yield to Maturity" means the yield to maturity on a series of securities,
calculated at the time of issuance of such series, or, if applicable, at the
most recent redetermination of interest on such series, and calculated in
accordance with accepted financial practice.
<PAGE>
ARTICLE 2
SUBORDINATED SECURITIES
SECTION 2.1 Forms Generally.
The Subordinated Securities of each series and the Coupons, if any, to be
attached thereto shall be substantially in such form (not inconsistent with this
Subordinated Indenture) as shall be established by or pursuant to one or more
Board Resolutions (as set forth in a Board Resolution or, to the extent
established pursuant to but not set forth in a Board Resolution, an Officer's
Certificate detailing such establishment) or in one or more indentures
supplemental hereto, in each case with such appropriate insertions, omissions,
substitutions and other variations as are required or permitted by this
Subordinated Indenture and may have imprinted or otherwise reproduced thereon
such legend or legends or endorsements, not inconsistent with the provisions of
this Subordinated Indenture, as may be required to comply with any law or with
any rules or regulations pursuant thereto, or with any rules of any securities
exchange or to conform to general usage, all as may be determined by the
officers executing such Subordinated Securities and Coupons, if any, as
evidenced by their execution of such Subordinated Securities and Coupons.
The definitive Subordinated Securities and Coupons, if any, shall be
printed, lithographed or engraved on steel engraved borders or may be produced
in any other manner, all as determined by the officers executing such
Subordinated Securities and Coupons, if any, as evidenced by their execution of
such Subordinated Securities and Coupons, if any.
SECTION 2.2 Form of Trustee's Certificate of Authentication.
The Trustee's certificate of authentication on all Subordinated Securities
shall be in substantially the following form:
"This is one of the Subordinated Securities referred to in the
within-mentioned Subordinated Indenture.
[__________________________________]
as Trustee
By_________________________________
Authorized Signatory"
<PAGE>
If at any time there shall be an Authenticating Agent appointed with
respect to any series of Subordinated Securities, then the Trustee's Certificate
of Authentication to be borne by the Subordinated Securities of each such series
shall be substantially as follows:
"This is one of the Subordinated Securities referred to in the
within-mentioned Subordinated Indenture.
[__________________________________]
as Authenticating Agent
By__________________________________
Authorized Signatory"
SECTION 2.3 Amount Unlimited; Issuable in Series.
The aggregate principal amount of Subordinated Securities which may be
authenticated and delivered under this Subordinated Indenture is unlimited.
The Subordinated Securities may be issued in one or more series and each
such series shall be established in or pursuant to one or more Board Resolutions
(and to the extent established pursuant to but not set forth in a Board
Resolution, in an Officer's Certificate detailing such establishment) or
established in one or more indentures supplemental hereto, prior to the initial
issuance of Subordinated Securities of any series,
(1) the designation of the Subordinated Securities of the series, which
shall distinguish the Subordinated Securities of the series from the
Subordinated Securities of all other series, and which may be part of a series
of Subordinated Securities previously issued;
(2) any limit upon the aggregate principal amount of the Subordinated
Securities of the series that may be authenticated and delivered under this
Subordinated Indenture (except for Subordinated Securities authenticated and
delivered upon registration of transfer of, or in exchange for, or in lieu of,
other Subordinated Securities of the series pursuant to Section 2.8, 2.9, 2.11,
8.5 or 12.3);
(3) if other than Dollars, the coin or currency in which the Subordinated
Securities of the series are denominated (including, but not limited to, any
Foreign Currency or ECU);
(4) the date or dates on which the principal of the Subordinated Securities
of the series is payable;
(5) the rate or rates at which the Subordinated Securities of the series
shall bear interest, if any, the date or dates from which such interest shall
accrue, on which such interest shall be payable and (in the case of Registered
Subordinated Securities) on which a
<PAGE>
record shall be taken for the determination of Holders to whom interest is
payable and/or the method by which such rate or rates or date or dates shall be
determined;
(6) the place or places where the principal of and any interest on
Subordinated Securities of the series shall be payable, if other than as
provided in Section 3.2;
(7) the right, if any, of the Company to redeem Subordinated Securities, in
whole or in part, at its option and the period or periods within which, the
price or prices at which and any terms and conditions upon which Subordinated
Securities of the series may be so redeemed, pursuant to any sinking fund or
otherwise;
(8) the obligation, if any, of the Company to redeem, purchase or repay
Subordinated Securities of the series pursuant to any mandatory redemption,
sinking fund or analogous provisions or at the option of a Holder thereof and
the price or prices at which and the period or periods within which and any
terms and conditions upon which Subordinated Securities of the series shall be
redeemed, purchased or repaid, in whole or in part, pursuant to such obligation;
(9) if other than denominations of $1,000 and any integral multiple thereof
in the case of Registered Subordinated Securities, or $1,000 and $5,000 in the
case of Unregistered Subordinated Securities, the denominations in which
Subordinated Securities of the series shall be issuable;
(10) if other than the principal amount thereof, the portion of the
principal amount of Subordinated Securities of the series which shall be payable
upon declaration of acceleration of the Maturity thereof;
(11) if other than the coin or currency in which the Subordinated
Securities of the series are denominated, the coin or currency in which payment
of the principal of or interest on the Subordinated Securities of such series
shall be payable;
(12) if the principal of or interest on the Subordinated Securities of the
series are to be payable, at the election of the Company or a Holder thereof, in
a coin or currency other than that in which the Subordinated Securities are
denominated, the period or periods within which, and the terms and conditions
upon which, such election may be made;
(13) if the amount of payments of principal of and interest on the
Subordinated Securities of the series may be determined with reference to an
index based on a coin or currency other than that in which the Subordinated
Securities of the series are denominated, the manner in which such amounts shall
be determined;
(14) whether the Subordinated Securities of the series will be issuable as
Registered Subordinated Securities (and if so, whether such Subordinated
Securities will be issuable as Registered Global Subordinated Securities) or
Unregistered Subordinated Securities (with or without Coupons), or any
combination of the foregoing, any restrictions applicable to the offer, sale or
delivery of Unregistered Subordinated Securities or the payment of interest
<PAGE>
thereon and, if other than as provided in Section 2.8, the terms upon which
Unregistered Subordinated Securities of any series may be exchanged for
Registered Subordinated Securities of such series and vice versa;
(15) whether and under what circumstances the Company will pay additional
amounts on the Subordinated Securities of the series held by a person who is not
a U.S. person in respect of any tax, assessment or governmental charge withheld
or deducted and, if so, whether the Company will have the option to redeem the
Subordinated Securities of the series rather than pay such additional amounts;
(16) if the Subordinated Securities of the series are to be issuable in
definitive form (whether upon original issue or upon exchange of a temporary
Subordinated Security of such series) only upon receipt of certain certificates
or other documents or satisfaction of other conditions, the form and terms of
such certificates, documents or conditions;
(17) any trustees, depositaries, authenticating or paying agents, transfer
agents or registrars of any other agents with respect to the Subordinated
Securities of such series;
(18) any other events of default or covenants with respect to the
Subordinated Securities of such series;
(19) the terms of subordination applicable to any series of the
Subordinated Securities;
(20) if the Subordinated Securities of the series are to be convertible
into or exchangeable for any other security; and
(21) any other terms of the series (which terms shall not be inconsistent
with the provisions of this Subordinated Indenture).
All Subordinated Securities of any one series and Coupons, if any,
appertaining thereto shall be substantially identical, except in the case of
Registered Subordinated Securities as to denomination and except as may
otherwise be provided by or pursuant to the Board Resolution or Officer's
Certificate referred to above or as set forth in any indenture supplemental
hereto. All Subordinated Securities of any one series need not be issued at the
same time and may be issued from time to time, consistent with the terms of this
Subordinated Indenture, if so provided by or pursuant to such Board Resolution,
such Officer's Certificate or in any indenture supplemental hereto.
SECTION 2.4 Authentication and Delivery of Subordinated Securities.
The Company may deliver Subordinated Securities of any series having
attached thereto appropriate Coupons, if any, executed by the Company to the
Trustee for authentication together with the applicable documents referred to
below in this Section 2.4, and the Trustee shall thereupon authenticate and
deliver such Subordinated Securities and Coupons, if any, to or upon the order
of the Company (contained in the Company Order referred to below in this
Section)
<PAGE>
or pursuant to such procedures acceptable to the Trustee and to such recipients
as may be specified from time to time by a Company Order. The maturity date,
original issue date, interest rate and any other terms of the Subordinated
Securities of such series and Coupons, if any, appertaining thereto shall be
determined by or pursuant to such Company Order and procedures. If provided for
in such procedures, such Company Order may authorize authentication and delivery
pursuant to oral or electronic instructions from the Company or its duly
authorized agent or agents, which instructions, if oral, shall be promptly
confirmed in writing. In authenticating such Subordinated Securities and
accepting the additional responsibilities under this Subordinated Indenture in
relation to such Subordinated Securities, the Trustee shall be entitled to
receive (in the case of subparagraphs (2), (3) and (4) below only at or before
the time of the first request of the Company to the Trustee to authenticate
Subordinated Securities of such series) and (subject to Section 6.1) shall be
fully protected in relying upon, the following enumerated documents unless and
until such documents have been superseded or revoked:
(1) a Company Order requesting such authentication and setting forth
delivery instructions if the Subordinated Securities and Coupons, if any, are
not to be delivered to the Company, provided that, with respect to Subordinated
Securities of a series subject to a Periodic Offering, (a) such Company Order
may be delivered by the Company to the Trustee prior to the delivery to the
Trustee of such Subordinated Securities for authentication and delivery, (b) the
Trustee shall authenticate and deliver Subordinated Securities of such series
for original issue from time to time, in an aggregate principal amount not
exceeding the aggregate principal amount established for such series, pursuant
to a Company Order or pursuant to procedures acceptable to the Trustee as may be
specified from time to time by a Company Order, (c) the maturity date or dates,
original issue date or dates, interest rate or rates and any other terms of
Subordinated Securities of such series shall be determined by a Company Order or
pursuant to such procedures and (d) if provided for in such procedures, such
Company Order may authorize authentication and delivery pursuant to oral or
electronic instructions from the Company or its duly authorized agent or agents,
which instructions, if oral, shall be promptly confirmed in writing;
(2) any Board Resolution, Officer's Certificate and/or executed
supplemental indenture referred to in Section 2.1 and 2.3 by or pursuant to
which the forms and terms of the Subordinated Securities and Coupons, if any,
were established;
(3) an Officer's Certificate setting forth the form or forms and terms of
the Subordinated Securities and Coupons, if any, stating that the form or forms
and terms of the Subordinated Securities and Coupons, if any, have been
established pursuant to Sections 2.1 and 2.3 and comply with this Subordinated
Indenture, and covering such other matters as the Trustee may reasonably
request; and
(4) At the option of the Company, either one or more Opinions of Counsel,
or a letter addressed to the Trustee permitting it to rely on one or more
Opinions of Counsel, substantially to the effect that:
<PAGE>
(a) the form or forms of the Subordinated Securities and Coupons, if
any, have been duly authorized and established in conformity with the
provisions of this Subordinated Indenture;
(b) in the case of an underwritten offering, the terms of the
Subordinated Securities have been duly authorized and established in
conformity with the provisions of this Subordinated Indenture, and, in the
case of an offering that is not underwritten, certain terms of the
Subordinated Securities have been established pursuant to a Board
Resolution, an Officer's Certificate or a supplemental indenture in
accordance with this Subordinated Indenture, and when such other terms as
are to be established pursuant to procedures set forth in a Company Order
shall have been established, all such terms will have been duly authorized
by the Company and will have been established in conformity with the
provisions of this Subordinated Indenture; and
(c) such Subordinated Securities and Coupons, if any, when executed by
the Company and authenticated by the Trustee in accordance with the
provisions of this Subordinated Indenture and delivered to and duly paid
for by the purchasers thereof, and subject to any conditions specified in
such Opinion of Counsel, will have been duly issued under this Subordinated
Indenture, will be entitled to the benefits of this Subordinated Indenture,
and will be valid and binding obligations of the Company, enforceable in
accordance with their respective terms except as the enforceability thereof
may be limited by (i) bankruptcy, insolvency or similar laws affecting
creditors' rights generally, (ii) rights of acceleration, if any, and (iii)
the availability of equitable remedies may be limited by equitable
principles of general applicability and such counsel need express no
opinion with regard to the enforceability of Section 6.6 or of a judgment
denominated in a currency other than Dollars.
In rendering such opinions, any counsel may qualify any opinions as to
enforceability by stating that such enforceability may be limited by bankruptcy,
insolvency, reorganization, liquidation, moratorium, fraudulent transfer and
other similar laws affecting the rights and remedies of creditors and is subject
to general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law). Such counsel may rely upon
opinions of other counsel (copies of which shall be delivered to the Trustee)
reasonably satisfactory to the Trustee, in which case the opinion shall state
that such counsel believes he and the Trustee are entitled so to rely. Such
counsel may also state that, insofar as such opinion involves factual matters,
he has relied, to the extent he deems proper, upon certificates of officers of
the Company and its subsidiaries and certificates of public officials.
The Trustee shall have the right to decline to authenticate and deliver any
Subordinated Securities under this section if the Trustee, being advised by
counsel, determines that such action may not lawfully be taken by the Company or
if the Trustee in good faith by its board of directors or board of trustees,
executive committee or a trust committee of directors or trustees shall
determine that such action would expose the Trustee to personal liability to
existing Holders or would affect the Trustee's own rights, duties or immunities
under the Subordinated Securities, this Subordinated Indenture or otherwise.
<PAGE>
If the Company shall establish pursuant to Section 2.3 that the
Subordinated Securities of a series are to be issued in the form of one or more
Registered Global Subordinated Securities, then the Company shall execute and
the Trustee shall, in accordance with this Section and the Company Order with
respect to such series, authenticate and deliver one or more Registered Global
Subordinated Securities that (i) shall represent and shall be denominated in an
amount equal to the aggregate principal amount of all of the Subordinated
Securities of such series issued and not yet canceled, (ii) shall be registered
in the name of the Depositary for such Registered Global Subordinated Security
or Subordinated Securities or the nominee of such Depositary, (iii) shall be
delivered by the Trustee to such Depositary or delivered or held pursuant to
such Depositary's instructions and (iv) shall bear a legend substantially to the
following effect: "Unless and until it is exchanged in whole or in part for
Subordinated Securities in definitive registered form, this Subordinated
Security may not be transferred except as a whole by the Depositary to the
nominee of the Depositary or by a nominee of the Depositary to the Depositary or
another nominee of the Depositary or by the Depositary or any such nominee to a
successor Depositary or a nominee of such successor Depositary."
Each Depositary designated pursuant to Section 2.3 must, at the time of its
designation and at all times while it serves as Depositary, be a clearing agency
registered under the Exchange Act and any other applicable statute or
regulation.
SECTION 2.5 Execution of Subordinated Securities.
The Subordinated Securities and each Coupon appertaining thereto, if any,
shall be signed on behalf of the Company by the chairman or vice chairman of its
Board of Directors or its president, or any executive (senior or other), a vice
president or its treasurer, under its corporate seal (except in the case of
Coupons) which may, but need not, be attested. Such signatures may be the manual
or facsimile signatures of the present or any future such officers. The seal of
the Company may be in the form of a facsimile thereof and may be impressed,
affixed, imprinted or otherwise reproduced on the Subordinated Securities.
Typographical and other minor errors or defects in any such reproduction of the
seal or any such signature shall not affect the validity or enforceability of
any Subordinated Security that has been duly authenticated and delivered by the
Trustee.
In case any officer of the Company who shall have signed any of the
Subordinated Securities or Coupons, if any, shall cease to be such officer
before the Subordinated Security or Coupon so signed (or the Subordinated
Security to which the Coupon so signed appertains) shall be authenticated and
delivered by the Trustee or disposed of by the Company, such Subordinated
Security or Coupon nevertheless may be authenticated and delivered or disposed
of as though the person who signed such Subordinated Security or Coupon had not
ceased to be such officer of the Company; and any Subordinated Security or
Coupon may be signed on behalf of the Company by such persons as, at the actual
date of the execution of such Subordinated Security or Coupon, shall be the
proper officers of the Company, although at the date of the execution and
delivery of this Subordinated Indenture any such person was not such an officer.
<PAGE>
SECTION 2.6 Certificate of Authentication.
Only such Subordinated Securities as shall bear thereon a certificate of
authentication substantially in the form hereinbefore recited, executed by the
Trustee by the manual signature of one of its authorized officers, shall be
entitled to the benefits of this Subordinated Indenture or be valid or
obligatory for any purpose. No Coupon shall be entitled to the benefits of this
Subordinated Indenture or shall be valid and obligatory for any purpose until
the certificate of authentication on the Subordinated Security to which such
Coupon appertains shall have been duly executed by the Trustee. The execution of
such certificate by the Trustee upon any Subordinated Security executed by the
Company shall be conclusive evidence that the Subordinated Security so
authenticated has been duly authenticated and delivered hereunder and that the
Holder is entitled to the benefits of this Subordinated Indenture.
SECTION 2.7 Denomination and Date of Subordinated Securities; Payments of
Interest.
The Subordinated Securities of each series shall be issuable as Registered
Subordinated Securities or Unregistered Subordinated Securities in denominations
established as contemplated by Section 2.3 or, with respect to the Registered
Subordinated Securities of any series, if not so established, in denominations
of $1,000 and any integral multiple thereof. If denominations of Unregistered
Subordinated Securities of any series are not so established, such Subordinated
Securities shall be issuable in denominations of $1,000 and $5,000. The
Subordinated Securities of each series shall be numbered, lettered or otherwise
distinguished in such manner or in accordance with such plan as the officers of
the Company executing the same may determine with the approval of the Trustee,
as evidenced by the execution and authentication thereof.
Each Registered Subordinated Security shall be dated the date of its
authentication. Each Unregistered Subordinated Security shall be dated as
provided in the Board Resolution referred to in Section 2.3. The Subordinated
Securities of each series shall bear interest, if any, from the date, and such
interest shall be payable on the dates, established as contemplated by Section
2.3.
Interest on any Subordinated Security which is payable, and is punctually paid
or duly provided for, on any Interest Payment Date shall be paid to the Person
in whose name that Subordinated Security (or one or more Predecessor
Subordinated Securities) is registered at the close of business on the Regular
Record Date for such interest. At the option of the Company, interest on any
Subordinated Security may be paid by mailing a check to the address of the
Holder thereof as such address appears in the Subordinated Securities Register.
Any interest on any Subordinated Security which is payable, but is not
punctually paid or duly provided for, on any Interest Payment Date (herein
called "Defaulted Interest") shall forthwith cease to be payable to the Holder
on the relevant Regular Record Date by virtue of having been such Holder, and
such Defaulted Interest may be paid by the Company, at its election in each
case, as provided in clause (1) or (2) below:
(1) The Company may elect to make payment of any Defaulted Interest to the
Persons in whose names the Subordinated Securities (or their respective
Predecessor
<PAGE>
Subordinated Securities) are registered at the close of business on a Special
Record Date for the payment of such Defaulted Interest, which shall be fixed in
the following manner. The Company shall notify the Trustee in writing of the
amount of Defaulted Interest proposed to be paid on each Subordinated Security
and the date of the proposed payment, and at the same time the Company shall
deposit with the Trustee an amount of money equal to the aggregate amount
proposed to be paid in respect of such Defaulted Interest or shall make
arrangements satisfactory to the Trustee for such deposit prior to the date of
the proposed payment, such money when deposited to be held in trust for the
benefit of the Persons entitled to such Defaulted Interest as in this clause
provided. Thereupon the Trustee shall fix a Special Record Date for the payment
of such Defaulted Interest which shall be not more than 15 days and not less
than 10 days prior to the date of the proposed payment and not less than 10 days
after the receipt by the Trustee of the notice of the proposed payment. The
Trustee shall promptly notify the Company of such Special Record Date and, in
the name and at the expense of the Company, shall cause notice of the proposed
payment of such Defaulted Interest and the Special Record Date therefor to be
mailed, first-class postage prepaid, to each Holder at his address as it appears
in the Subordinated Security Register, not less than 10 days prior to such
Special Record Date. Notice of the proposed payment of such Defaulted Interest
and the Special Record Date therefor having been so mailed, such Defaulted
Interest shall be paid to the Persons in whose names the Subordinated Securities
(or their respective Predecessor Subordinated Securities) are registered at the
close of business on such Special Record Date and shall no longer be payable
pursuant to the following clause (2).
(2) The Company may make payment of any Defaulted Interest in any other
lawful manner not inconsistent with the requirements of any securities exchange
on which the Subordinated Securities may be listed, and upon such notice as may
be required by such exchange, if, after notice given by the Company to the
Trustee of the proposed payment pursuant to this clause, such manner of payment
shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section, each Subordinated Security
delivered under this Subordinated Indenture upon registration of transfer of or
in exchange for or in lieu of any other Subordinated Security shall carry the
rights to interest accrued and unpaid, and to accrue, which were carried by such
other Subordinated Security.
In the case of any Subordinated Security which is converted during the period
after any Regular Record Date and on or prior to the next succeeding Interest
Payment Date (other than any Subordinated Security whose Maturity is prior to
such Interest Payment Date), interest whose Stated Maturity is on such Interest
Payment Date shall be payable on such Interest Payment Date notwithstanding such
conversion, and such interest (whether or not punctually paid or duly provided
for) shall be paid to the Person in whose name that Subordinated Security (or
one or more Predecessor Subordinated Securities) is registered at the close of
business on such Regular Record Date; provided, however, that Subordinated
Securities so registered for conversion shall (except in the case of
Subordinated Securities or portions thereof which have been called for
redemption on a Redemption Date within such period) be accompanied by payment in
New York Clearing House Funds or other funds acceptable to the Company of an
amount equal to the interest payable on such Interest Payment Date on the
principal amount being surrendered for conversion. Except as otherwise expressly
provided in the immediately preceding sentence, in
<PAGE>
the case of any Subordinated Security which is converted, interest whose Stated
Maturity is after the date of conversion of such Subordinated Security shall not
be payable.
SECTION 2.8 Registration, Transfer and Exchange.
(a) The Company will keep at each office or agency to be maintained for the
purpose as provided in Section 3.2 for each series of Subordinated Securities a
register or registers (the register maintained in such office and in any other
office or agency of the Company designated pursuant to Section 3.2 being herein
sometimes collectively referred to as the "Security Register") in which, subject
to such reasonable regulations as the Company may prescribe, it will provide for
the registration of Registered Subordinated Securities of such series and the
registration of transfer of Registered Subordinated Securities of such series.
Such Security Register shall be in written form in the English language or in
any other form capable of being converted into such form within a reasonable
time. At all reasonable times such Security Register or registers shall be open
for inspection by the Trustee.
Upon due presentation for registration of transfer of any Registered
Subordinated Security of any series at any such office or agency to be
maintained for the purpose as provided in Section 3.2, the Company shall execute
and the Trustee shall authenticate and deliver in the name of the transferee or
transferees a new Registered Subordinated Security or Registered Subordinated
Securities of the same series, maturity date, interest rate and original issue
date in authorized denominations for a like aggregate principal amount.
Unregistered Subordinated Securities (except for any temporary global
Unregistered Subordinated Securities) and Coupons (except for Coupons attached
to any temporary global Unregistered Subordinated Securities) shall be
transferable by delivery.
At the option of the Holder thereof, Registered Subordinated Securities of
any series (other than a Registered Global Subordinated Security, except as set
forth below) may be exchanged for a Registered Subordinated Security or
Registered Subordinated Securities of such series having authorized
denominations and an equal aggregate principal amount, upon surrender of such
Registered Subordinated Securities to be exchanged at the agency of the Company
that shall be maintained for such purpose in accordance with Section 3.2 and
upon payment, if the Company shall so require, of the charges hereinafter
provided. If the Subordinated Securities of any series are issued in both
registered and unregistered form, at the option of the Holder thereof, except as
otherwise specified pursuant to Section 2.3, Unregistered Subordinated
Securities of any series may be exchanged for Registered Subordinated Securities
of such series having authorized denominations and an equal aggregate principal
amount, upon surrender of such Unregistered Subordinated Securities to be
exchanged at the agency of the Company that shall be maintained for such purpose
in accordance with Section 3.2, with, in the case of Unregistered Subordinated
Securities that have Coupons attached, all unmatured Coupons and all matured
Coupons in default thereto appertaining, and upon payment, if the Company shall
so require, of the charges hereinafter provided. At the option of the Holder
thereof, if Unregistered Subordinated Securities of any series, maturity date,
interest rate and original issue date are issued in more than one authorized
denomination, except as otherwise specified pursuant to Section 2.3, such
Unregistered Subordinated Securities may be exchanged for Unregistered
<PAGE>
Subordinated Securities of such series having authorized denominations and an
equal aggregate principal amount, upon surrender of such Unregistered
Subordinated Securities to be exchanged at the agency of the Company that shall
be maintained for such purpose in accordance with Section 3.2 or as specified
pursuant to Section 2.3, with, in the case of Unregistered Subordinated
Securities that have Coupons attached, all unmatured Coupons and all matured
Coupons in default thereto appertaining, and upon payment, if the Company shall
so require, of the charges hereinafter provided. Registered Subordinated
Securities of any series may not be exchanged for Unregistered Subordinated
Securities of such series unless (1) otherwise specified pursuant to Section 2.3
and (2) the Company has delivered to the Trustee an Opinion of Counsel that (x)
the Company has received from the IRS a ruling or (y) since the date hereof,
there has been a change in the applicable Federal income tax law, in either case
to the effect that the inclusion of terms permitting Registered Subordinated
Securities to be exchanged for Unregistered Subordinated Securities would result
in no Federal income tax effect adverse to the Company or to any Holder.
Whenever any Subordinated Securities are so surrendered for exchange, the
Company shall execute, and the Trustee shall authenticate and deliver, the
Subordinated Securities which the Holder making the exchange is entitled to
receive. All Subordinated Securities and Coupons, if any, surrendered upon any
exchange or transfer provided for in this Subordinated Indenture shall be
promptly canceled and disposed of by the Trustee, and the Trustee shall deliver
a certificate of disposition thereof to the Company.
All Registered Subordinated Securities presented for registration of
transfer, exchange, redemption or payment shall (if so required by the Company
or the Trustee) be duly endorsed, or be accompanied by a written instrument or
instruments of transfer in form satisfactory to the Company and the Trustee duly
executed, by the Holder or his attorney duly authorized in writing.
The Company may require payment of a sum sufficient to cover any tax or
other governmental charge that may be imposed in connection with any exchange or
registration of transfer of Subordinated Securities. No service charge shall be
made for any such transaction.
The Company shall not be required to exchange or register a transfer of (a)
any Subordinated Securities of any series for a period of 15 days preceding the
first mailing of notice of redemption of Subordinated Securities of such series
to be redeemed or (b) any Subordinated Securities selected, called or being
called for redemption, in whole or in part, except, in the case of any
Subordinated Security to be redeemed in part, the portion thereof not so to be
redeemed.
Notwithstanding any other provision of this Section 2.8, unless and until
it is exchanged in whole or in part for Subordinated Securities in definitive
registered form, a Registered Global Subordinated Security representing all or a
portion of the Subordinated Securities of a series may not be transferred except
as a whole by the Depositary for such series to a nominee of such Depositary or
by a nominee of such Depositary to such Depositary or another nominee of such
Depositary or by such Depositary or any such nominee to a successor Depositary
for such series or a nominee of such successor Depositary.
If at any time the Depositary for any Registered Subordinated Securities of
a series represented by one or more Registered Global Subordinated Securities
notifies the Company that
<PAGE>
it is unwilling or unable to continue as Depositary for such Registered
Subordinated Securities or if at any time the Depositary for such Registered
Subordinated Securities shall no longer be eligible under Section 2.4, the
Company shall appoint a successor Depositary eligible under Section 2.4 with
respect to such Registered Subordinated Securities. If a successor Depositary
eligible under Section 2.4 for such Registered Subordinated Securities is not
appointed by the Company within 90 days after the Company receives such notice
or becomes aware of such ineligibility, the Company's election pursuant to
Section 2.3 that such Registered Subordinated Securities be represented by one
or more Registered Global Subordinated Securities shall no longer be effective
and the Company will execute, and the Trustee, upon receipt of an Officer's
Certificate for the authentication and delivery of definitive Subordinated
Securities of such series, will authenticate and deliver, Subordinated
Securities of such series in definitive registered form without coupons, in any
authorized denominations, in an aggregate principal amount equal to the
principal amount of the Registered Global Subordinated Security or Subordinated
Securities representing such Registered Subordinated Securities in exchange for
such Registered Global Subordinated Security or Subordinated Securities.
The Company may at any time and in its sole discretion determine that the
Registered Subordinated Securities of any series issued in the form of one or
more Registered Global Subordinated Securities shall no longer be represented by
a Registered Global Subordinated Security or Subordinated Securities. In such
event the Company will execute, and the Trustee, upon receipt of any Officer's
Certificate for the authentication and delivery of definitive Subordinated
Securities of such series, will authenticate and deliver, Subordinated
Securities of such series in definitive registered form without coupons, in any
authorized denominations, in an aggregate principal amount equal to the
principal amount of the Registered Global Subordinated Security or Subordinated
Securities representing such Registered Subordinated Securities, in exchange for
such Registered Global Subordinated Security or Subordinated Securities.
If specified by the Company pursuant to Section 2.3 with respect to
Subordinated Securities represented by a Registered Global Subordinated
Security, the Depositary for such Registered Global Subordinated Security may
surrender such Registered Global Subordinated Security in exchange in whole or
in part for Subordinated Securities of the same series in definitive registered
form on such terms as are acceptable to the Company and such Depositary.
Thereupon, the Company shall execute, and the Trustee shall authenticate and
deliver, without service charge,
(i) to the Person specified by such Depositary a new Registered
Subordinated Security or Subordinated Securities of the same series, of any
authorized denominations as requested by such Person, in an aggregate principal
amount equal to and in exchange for such Person's beneficial interest in the
Registered Global Subordinated Security; and
(ii) to such Depositary a new Registered Global Subordinated Security in a
denomination equal to the difference, if any, between the principal amount of
the surrendered Registered Global Subordinated Security and the aggregate
principal amount of Registered Subordinated Securities authenticated and
delivered pursuant to clause (i) above.
<PAGE>
Upon the exchange of a Registered Global Subordinated Security for
Subordinated Securities in definitive registered form without coupons, in
authorized denominations, such Registered Global Subordinated Security shall be
canceled by the Trustee or an agent of the Company or the Trustee. Subordinated
Securities in definitive registered form without coupons issued in exchange for
a Registered Global Subordinated Security pursuant to this Section 2.8 shall be
registered in such names and in such authorized denominations as the Depositary
for such Registered Global Subordinated Security, pursuant to instructions from
its direct or indirect participants or otherwise, shall instruct the Trustee or
an agent of the Company or the Trustee. The Trustee or such agent shall deliver
such Subordinated Securities to or as directed by the Persons in whose names
such Subordinated Securities are so registered.
All Subordinated Securities issued upon any transfer or exchange of
Subordinated Securities shall be valid obligations of the Company, evidencing
the same debt, and entitled to the same benefits under this Subordinated
Indenture, as the Subordinated Securities surrendered upon such transfer or
exchange.
Notwithstanding anything herein or in the terms of any series of
Subordinated Securities to the contrary, none of the Company, the Trustee or any
agent of the Company or the Trustee (any of which, other than the Company, shall
rely on an Officer's Certificate and an Opinion of Counsel) shall be required to
exchange any Unregistered Subordinated Security for a Registered Subordinated
Security if such exchange would result in Federal income tax consequences
adverse to the Company (such as, for example, the inability of the Company to
deduct from its income, as computed for Federal income tax purposes, the
interest payable on the Unregistered Subordinated Securities) under then
applicable United States Federal income tax laws.
(b)(i) Subordinated Securities that are distributed to QIBs will be
represented by a global Subordinated Security (the "144A Global Subordinated
Security"). Subordinated Securities that are distributed to Non-U.S. Persons
will be represented by a global Subordinated Security (the "Regulation S Global
Subordinated Security"). Each of the 144A Global Subordinated Security and the
Regulation S Global Subordinated Security shall be referred to herein as a
"Global Subordinated Security." If Global Subordinated Securities are issued,
transfers of interests in the Subordinated Securities between the 144A Global
Subordinated Security and the Regulation S Global Subordinated Security will be
made in accordance with the standing instructions and procedures of the
Depositary and its participants and the Trustee shall make appropriate
endorsements to reflect increases or decreases in the principal amounts of such
Global Subordinated Securities to reflect any such transfers.
Except as provided below, beneficial owners of a Subordinated Security in
global form shall not be entitled to have certificates registered in their
names, will not receive or be entitled to receive physical delivery of
certificates in definitive form and will not be considered Holders of such
Subordinated Securities in global form.
(ii) So long as the Subordinated Securities are eligible for book-entry
settlement, and to the extent that Subordinated Securities are held by QIBs or
Non-U.S. Persons, as the case may be, in a Global Subordinated Security, or
unless otherwise required by law, upon any
<PAGE>
transfer of a definitive Subordinated Security to a QIB in accordance with Rule
144A or to a Non-U.S. Person in accordance with Regulation S, unless otherwise
requested by the transferor, and upon receipt of the definitive Subordinated
Security or Subordinated Securities being so transferred, together with a
certification from the transferor that the transfer is being made in compliance
with Rule 144A or Regulation S, as the case may be (or other evidence
satisfactory to the Trustee), the Trustee shall make an endorsement on any 144A
Global Subordinated Security or any Regulation S Global Subordinated Security,
as the case may be, to reflect an increase in the aggregate principal amount of
the Subordinated Securities represented by such Global Subordinated Security,
and the Trustee shall cancel such definitive Subordinated Security or
Subordinated Securities in accordance with the standing instructions and
procedures of the Depositary, the aggregate principal amount of Subordinated
Securities represented by such Global Subordinated Security to be increased
accordingly; provided that no definitive Subordinated Security, or portion
thereof, in respect of which the Company or an Affiliate of the Company held any
beneficial interest shall be included in such Global Subordinated Security until
such definitive Subordinated Security is freely tradable in accordance with Rule
144K; provided further that the Trustee shall, at the written request of the
Company, issue Subordinated Securities in definitive form upon any transfer of a
beneficial interest in the Global Subordinated Security to the Company or any
Affiliate of the Company.
Any Global Subordinated Security may be endorsed with or have incorporated
in the text thereof such legends or recitals or changes not inconsistent with
the provisions of this Subordinated Indenture as may be required by the
Depositary, by the New York Stock Exchange or by the National Association of
Securities Dealers, Inc. in order for the Subordinated Securities to be tradable
on the PORTAL Market or as may be required for the Subordinated Securities to be
tradable on any other market developed for trading of securities pursuant to
Rule 144A or required to comply with any applicable law or any regulation
thereunder or with the rules and regulations of any securities exchange upon
which the Subordinated Securities may be listed or traded or to conform with any
usage with respect thereto, or to indicate any special limitations or
restrictions to which any particular Subordinated Securities are subject.
(iii) Each Subordinated Security that bears or is required to bear the
legend set forth in this Section 2.8(b) (a "Restricted Subordinated Security")
shall be subject to the restrictions on transfer provided in the legend set
forth in this Section 2.8(b), unless such restrictions on transfer shall be
waived by the written consent of the Company, and the Holder of each Restricted
Subordinated Security, by such Holder's acceptance thereof, agrees to be bound
by such restrictions on transfer. As used in this Section 2.8(b), the term
"transfer" encompasses any sale, pledge, transfer or other disposition of any
Restricted Subordinated Security.
Prior to the Transfer Restriction Termination Date, any certificate
evidencing a Subordinated Security shall bear a legend in substantially the
following form, unless otherwise agreed by the Company (with written notice
thereof to the Trustee):
THE SUBORDINATED SECURITY (THE "SECURITY") EVIDENCED HEREBY HAS NOT BEEN
REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR
TO, OR FOR THE ACCOUNT
<PAGE>
OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY
ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED
INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B)
IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A)(1), (2),
(3) OR (7) UNDER THE SECURITIES ACT) ("INSTITUTIONAL ACCREDITED INVESTOR") OR
(C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THE SECURITY EVIDENCED HEREBY IN AN
OFFSHORE TRANSACTION, (2) AGREES THAT IT WILL NOT PRIOR TO THE EXPIRATION OF THE
HOLDING PERIOD APPLICABLE TO SALES OF THE SECURITY EVIDENCED HEREBY UNDER RULE
144(K) UNDER THE SECURITIES ACT (OR ANY SUCCESSOR PROVISION), RESELL OR
OTHERWISE TRANSFER THE SECURITY EVIDENCED HEREBY EXCEPT (A) TO HEALTHSOUTH
CORPORATION (THE "COMPANY") OR ANY SUBSIDIARY THEREOF, (B) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, (C) TO A QUALIFIED
INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (D)
TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES
TO THE TRUSTEE FOR THE SECURITIES A SIGNED LETTER CONTAINING CERTAIN
REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THE
SECURITY EVIDENCED HEREBY (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM SUCH
TRUSTEE), (E) OUTSIDE THE UNITED STATES IN COMPLIANCE WITH RULE 904 UNDER THE
SECURITIES ACT OR (F) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY
RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE) AND (3) AGREES THAT IT WILL
DELIVER TO EACH PERSON TO WHOM THE SECURITY EVIDENCED HEREBY IS TRANSFERRED A
NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY
TRANSFER OF THE SECURITY EVIDENCED HEREBY PRIOR TO THE EXPIRATION OF THE HOLDING
PERIOD APPLICABLE TO SALES OF THE SECURITY EVIDENCED HEREBY UNDER RULE 144(K)
UNDER THE SECURITIES ACT (OR ANY SUCCESSOR PROVISION), THE HOLDER MUST CHECK THE
APPROPRIATE BOX SET FORTH ON THE REVERSE HEREOF RELATING TO THE MANNER OF SUCH
TRANSFER AND SUBMIT THIS CERTIFICATE TO THE TRUSTEE FOR THE SECURITIES. IF THE
PROPOSED TRANSFEREE IS AN INSTITUTIONAL ACCREDITED INVESTOR OR A PURCHASER WHO
IS NOT A U.S. PERSON, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE
TRUSTEE FOR THE SECURITIES SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER
INFORMATION AS THE COMPANY OR THE TRUSTEE MAY REASONABLY REQUIRE TO CONFIRM THAT
SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION
NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THIS LEGEND
WILL BE REMOVED AFTER THE EXPIRATION OF THE HOLDING PERIOD APPLICABLE TO SALES
OF THE SECURITY EVIDENCED HEREBY UNDER RULE 144(K) UNDER THE SECURITIES ACT. AS
USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON"
HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT.
<PAGE>
Following the Transfer Restriction Termination Date, any Subordinated
Security or security issued in exchange or substitution therefor (other than
Subordinated Securities acquired by the Company or any Affiliate thereof since
the issue date of the Subordinated Securities) may upon surrender of such
Subordinated Security for exchange to the Security Registrar in accordance with
the provisions of this Section 2.8, be exchanged for a new Subordinated Security
or Subordinated Securities, of like tenor and aggregate principal amount, which
shall not bear the restrictive legend required by this Section 2.8(b).
SECTION 2.9 Mutilated, Defaced, Destroyed, Lost and Stolen Subordinated
Securities.
In case any temporary or definitive Subordinated Security or any Coupon
appertaining to any Subordinated Security shall be mutilated, defaced,
destroyed, lost or stolen, the Company in its discretion may execute and, upon
the written request of any officer of the Company, the Trustee shall
authenticate and deliver, a new Subordinated Security of the same series,
maturity date, interest rate and original issue date, bearing a number or other
distinguishing symbol not contemporaneously outstanding, in exchange and
substitution for the mutilated or defaced Subordinated Security, or in lieu of
and in substitution for the Subordinated Security so destroyed, lost or stolen
with Coupons corresponding to the Coupons appertaining to the Subordinated
Securities so mutilated, defaced, destroyed, lost or stolen, or in exchange or
substitution for the Subordinated Security to which such mutilated, defaced,
destroyed, lost or stolen Coupon appertained, with Coupons appertaining thereto
corresponding to the Coupons so mutilated, defaced, destroyed, lost or stolen.
In every case the applicant for a substitute Subordinated Security or Coupon
shall furnish to the Company and to the Trustee and any agent of the Company or
the Trustee such security or indemnity as may be required by them to indemnify
and defend and to save each of them harmless and, in every case of destruction,
loss or theft, evidence to their satisfaction of the destruction, loss or theft
of such Subordinated Security or Coupon and of the ownership thereof, and in the
case of mutilation or defacement shall surrender the Subordinated Security and
related Coupons to the Trustee or such agent.
Upon the issuance of any substitute Subordinated Security or Coupon, the
Company may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) or its agent connected
therewith. In case any Subordinated Security or Coupon which has matured or is
about to mature or has been called for redemption in full shall become mutilated
or defaced or be destroyed, lost or stolen, the Company may instead of issuing a
substitute Subordinated Security, pay or authorize the payment of the same or
the relevant Coupon (without surrender thereof except in the case of a mutilated
or defaced Subordinated Security or Coupon), if the applicant for such payment
shall furnish to the Company and to the Trustee and any agent of the Company or
the Trustee such security or indemnity as any of them may require to save each
of them harmless, and, in every case of destruction, loss or theft, the
applicant shall also furnish to the Company and the Trustee and any agent of the
Company or the Trustee evidence to their satisfaction of the destruction, loss
or theft of such Subordinated Security or Coupons and of the ownership thereof.
Every substitute Subordinated Security or Coupon of any series issued
pursuant to the provisions of this Section by virtue of the fact that any such
Subordinated Security or Coupon
<PAGE>
is destroyed, lost or stolen shall constitute an additional contractual
obligation of the Company, whether or not the destroyed, lost or stolen
Subordinated Security or Coupon shall be at any time enforceable by anyone and
shall be entitled to all the benefits of (but shall be subject to all the
limitations of rights set forth in) this Subordinated Indenture equally and
proportionately with any and all other Subordinated Securities or Coupons of
such series duly authenticated and delivered hereunder. All Subordinated
Securities and Coupons shall be held and owned upon the express condition that,
to the extent permitted by law, the foregoing provisions are exclusive with
respect to the replacement or payment of mutilated, defaced or destroyed, lost
or stolen Subordinated Securities and Coupons and shall preclude any and all
other rights or remedies notwithstanding any law or statute existing or
hereafter enacted to the contrary with respect to the replacement or payment of
negotiable instruments or other securities without their surrender.
SECTION 2.10 Cancellation of Subordinated Securities; Destruction Thereof.
All Subordinated Securities and Coupons surrendered for payment,
redemption, registration of transfer or exchange, or for credit against any
payment in respect of a sinking or analogous fund, if any, if surrendered to the
Company or any agent of the Company or the Trustee or any agent of the Trustee,
shall be delivered to the Trustee or its agent for cancellation or, if
surrendered to the Trustee, shall be canceled by it; and no Subordinated
Securities or Coupons shall be issued in lieu thereof except as expressly
permitted by any of the provisions of this Subordinated Indenture. The Trustee
or its agent shall dispose of canceled Subordinated Securities and Coupons held
by it and deliver a certificate of disposition to the Company. If the Company or
its agent shall acquire any of the Subordinated Securities or Coupons, such
acquisition shall not operate as a redemption or satisfaction of the
indebtedness represented by such Subordinated Securities or Coupons unless and
until the same are delivered to the Trustee or its agent for cancellation.
SECTION 2.11 Temporary Subordinated Securities.
Pending the preparation of definitive Subordinated Securities for any
series, the Company may execute and the Trustee shall authenticate and deliver
temporary Subordinated Securities for such series (printed, lithographed,
typewritten or otherwise reproduced, in each case in form satisfactory to the
Trustee). Temporary Subordinated Securities of any series shall be issuable as
Registered Subordinated Securities without coupons, or as Unregistered
Subordinated Securities with or without coupons attached thereto, of any
authorized denomination, and substantially in the form of the definitive
Subordinated Securities of such series but with such omissions, insertions and
variations as may be appropriate for temporary Subordinated Securities, all as
may be determined by the Company with the concurrence of the Trustee as
evidenced by the execution and authentication thereof. Temporary Subordinated
Securities may contain such references to any provisions of this Subordinated
Indenture as may be appropriate. Every temporary Subordinated Security shall be
executed by the Company and be authenticated by the Trustee upon the same
conditions and in substantially the same manner, and with like effect, as the
definitive Subordinated Securities. Without unreasonable delay the Company shall
execute and shall furnish definitive Subordinated Securities of such series and
thereupon temporary Registered Subordinated Securities of such series may be
surrendered in exchange therefor without charge at each office or agency to be
maintained by the Company for
<PAGE>
that purpose pursuant to Section 3.2 and, in the case of Unregistered
Subordinated Securities, at any agency maintained by the Company for such
purpose as specified pursuant to Section 2.4, and the Trustee shall authenticate
and deliver in exchange for such temporary Subordinated Securities of such
series an equal aggregate principal amount of definitive Subordinated Securities
of the same series having authorized denominations and, in the case of
Unregistered Subordinated Securities, having attached thereto any appropriate
Coupons. Until so exchanged, the temporary Subordinated Securities of any series
shall be entitled to the same benefits under this Subordinated Indenture as
definitive Subordinated Securities of such series, unless otherwise established
pursuant to Section 2.3. The provisions of this Section are subject to any
restrictions or limitations on the issue and delivery of temporary Unregistered
Subordinated Securities of any series that may be established pursuant to
Section 2.4 (including any provision that Unregistered Subordinated Securities
of such series initially be issued in the form of a single global Unregistered
Subordinated Security to be delivered to a depositary or agency located outside
the United States and the procedures pursuant to which definitive or global
Unregistered Subordinated Securities of such series would be issued in exchange
for such temporary global Unregistered Subordinated Security).
ARTICLE 3
COVENANTS OF THE COMPANY
SECTION 3.1 Payment of Principal and Interest.
The Company covenants and agrees for the benefit of each series of
Subordinated Securities that it will duly and punctually pay or cause to be paid
the principal of, and interest on, if any, each of the Subordinated Securities
of such series (together with any additional amounts payable pursuant to the
terms of such Subordinated Securities) at the place or places, at the respective
time or times and in the manner provided in such Subordinated Securities and in
the Coupons, if any, appertaining thereto and in this Subordinated Indenture.
The interest on Subordinated Securities with Coupons attached (together with any
additional amounts payable pursuant to the terms of such Subordinated
Securities) shall be payable only upon presentation and surrender of the several
Coupons for such interest installments as are evidenced thereby as they
severally mature. If any temporary Unregistered Subordinated Security provides
that interest thereon may be paid while such Subordinated Security is in
temporary form, the interest on any such temporary Unregistered Subordinated
Security (together with any additional amounts payable pursuant to the terms of
such Subordinated Security) shall be paid, as to the installments of interest
evidenced by Coupons attached thereto, if any, only upon presentation and
surrender thereof, and, as to the other installments of interest, if any, only
upon presentation of such Subordinated Securities for notation thereon of the
payment of such interest, in each case subject to any restrictions that may be
established pursuant to Section 2.4. The interest, if any, on Registered
Subordinated Securities (together with any additional amounts payable pursuant
to the terms of such Subordinated Securities) shall be payable only to or upon
the written order of the Holders thereof and, at the option of the Company, may
be paid by wire transfer or by mailing checks for such interest payable to or
upon the written order of such Holders at their last addresses as they appear on
the Security Register of the Company.
<PAGE>
SECTION 3.2 Offices for Payments, Etc.
So long as any Registered Subordinated Securities are authorized for
issuance pursuant to this Subordinated Indenture or are outstanding hereunder,
the Company will maintain in the Borough of Manhattan, The City of New York, an
office or agency where the Registered Subordinated Securities of each series may
be presented for payment, where the Subordinated Securities of each series may
be presented for exchange as is provided in this Subordinated Indenture, where
the Subordinated Securities of each series may be surrendered for conversion
and, if applicable, pursuant to Section 2.4 and where the Registered
Subordinated Securities of each series may be presented for registration of
transfer as in this Subordinated Indenture provided.
The Company will maintain one or more offices or agencies in a city or
cities located outside the United States (including any city in which such an
agency is required to be maintained under the rules of any stock exchange on
which the Subordinated Securities of such series are listed) where the
Unregistered Subordinated Securities, if any, of each series and Coupons, if
any, appertaining thereto may be presented for payment. No payment on any
Unregistered Subordinated Security or Coupon will be made upon presentation of
such Unregistered Subordinated Security or Coupon at an agency of the Company
within the United States nor will any payment be made by transfer to an account
in, or by mail to an address in, the United States unless pursuant to applicable
United States laws and regulations then in effect such payment can be made
without tax consequences adverse to the Company. Notwithstanding the foregoing,
payments in Dollars of Unregistered Subordinated Securities of any series and
Coupons appertaining thereto which are payable in Dollars may be made at an
agency of the Company maintained in the Borough of Manhattan, The City of New
York if such payment in Dollars at each agency maintained by the Company outside
the United States for payment on such Unregistered Subordinated Securities is
illegal or effectively precluded by exchange controls or other similar
restrictions.
The Company will maintain in the Borough of Manhattan, The City of New
York, an office or agency where notices and demands to or upon the Company in
respect of the Subordinated Securities of any series, the Coupons appertaining
thereto or this Subordinated Indenture may be served.
The Company will give to the Trustee written notice of the location of each
such office or agency and of any change of location thereof. In case the Company
shall fail to maintain any agency required by this Section to be located in the
Borough of Manhattan, The City of New York, or shall fail to give such notice of
the location or for any change in the location of any of the above agencies,
presentations and demands may be made and notices may be served at the Corporate
Trust Office of the Trustee.
The Company may from time to time designate one or more additional offices
or agencies where the Subordinated Securities of a series and any Coupons
appertaining thereto may be presented for payment, where the Subordinated
Securities of that series may be presented for exchange as provided in this
Subordinated Indenture and pursuant to Section 2.4 and where the Registered
Subordinated Securities of that series may be presented for registration of
transfer
<PAGE>
as in this Subordinated Indenture provided, and the Company may from time to
time rescind any such designation, as the Company may deem desirable or
expedient; provided, that no such designation or rescission shall in any manner
relieve the Company of its obligations to maintain the agencies provided for in
this Section. The Company shall give to the Trustee prompt written notice of any
such designation or rescission thereof.
SECTION 3.3 Appointment to Fill a Vacancy in Office of Trustee.
The Company, whenever necessary to avoid or fill a vacancy in the office of
Trustee, will appoint, in the manner provided in Section 6.10, a Trustee, so
that there shall at all times be a Trustee with respect to each series of
Subordinated Securities hereunder.
SECTION 3.4 Paying Agents.
Whenever the Company shall appoint a Paying Agent other than the Trustee
with respect to the Subordinated Securities of any series, it will cause such
Paying Agent to execute and deliver to the Trustee an instrument in which such
agent shall agree with the Trustee, subject to the provisions of this Section,
(a) that it will hold all sums received by it as such agent for the payment
of the principal of or interest on the Subordinated Securities of such series
(whether such sums have been paid to it by the Company or by any other obligor
on the Subordinated Securities of such series) in trust for the benefit of the
Holders of the Subordinated Securities of such series, or Coupons appertaining
thereto, if any, or of the Trustee;
(b) that it will give the Trustee notice of any failure by the Company (or
by any other obligor on the Subordinated Securities of such series) to make any
payment of the principal of or interest on the Subordinated Securities of such
series when the same shall be due and payable; and
(c) that it will pay any such sums so held in trust by it to the Trustee
upon the Trustee's written request at any time during the continuance of the
failure referred to in the foregoing clause (b).
The Company will, on or prior to each due date of the principal of or
interest on the Subordinated Securities of such series, deposit with the Paying
Agent a sum sufficient to pay such principal or interest so becoming due, and
(unless such Paying Agent is the Trustee) the Company will promptly notify the
Trustee of any failure to take such action.
If the Company shall act as its own Paying Agent with respect to the
Subordinated Securities of any series, it will, on or before each due date of
the principal of or interest on the Subordinated Securities of such series, set
aside, segregate and hold in trust for the benefit of the Holders of the
Subordinated Securities of such series or the Coupons appertaining thereto a sum
sufficient to pay such principal or interest so becoming due. The Company will
promptly notify the Trustee of any failure to take such action.
<PAGE>
Anything in this Section to the contrary notwithstanding, but subject to
Section 10.1, the Company may at any time, for the purpose of obtaining a
satisfaction and discharge with respect to one or more or all series of
Subordinated Securities hereunder, or for any other reason, pay or cause to be
paid to the Trustee all sums held in trust for any such series by the Company or
any Paying Agent hereunder, as required by this Section, such sums to be held by
the Trustee upon the trusts herein contained.
Anything in this Section to the contrary notwithstanding, the agreement to
hold sums in trust as provided in this Section is subject to the provisions of
Sections 10.3 and 10.4.
SECTION 3.5 Compliance Certificates.
The Company will furnish to the Trustee on or before January 31 in each
year (beginning with January 31, 1999) a brief certificate (which need not
comply with Section 11.5) from the principal executive, financial or accounting
officer of the Company stating that in the course of the performance by the
signer of his or her duties as an officer of the Company he or she would
normally have knowledge of any default or non-compliance by the Company in the
performance of any covenants or conditions contained in this Subordinated
Indenture, stating whether or not he or she has knowledge of any such default or
non-compliance and, if so, describing each such default or non- compliance of
which the signer has knowledge and the nature thereof.
SECTION 3.6 Corporate Existence.
Subject to Article 9, the Company will do or cause to be done all things
necessary to preserve and keep in full force and effect its corporate existence
and the rights (charter and statutory), licenses and franchises of the Company
and its Subsidiaries; provided, that the Company shall not be required to
preserve any such right, license or franchise, if, in the judgment of the
Company, the preservation thereof is no longer desirable in the conduct of the
business of the Company and its Subsidiaries taken as a whole and the loss
thereof is not disadvantageous in any material respect to the Securityholders.
SECTION 3.7 Maintenance of Properties.
The Company will cause all properties used in or useful in the conduct of
its business or the business of any Subsidiary to be maintained and kept in good
condition, repair, and working order and supplied with all necessary equipment
and will cause to be made all necessary repairs, renewals, replacements,
betterments and improvements thereof, all as in the judgment of the Company may
be necessary, so that the business carried on in connection therewith may be
properly and advantageously conducted at all time except to the extent that the
Company may be prevented from so doing by circumstances beyond its control;
provided, that nothing in this Section shall prevent the Company from
discontinuing the operation or maintenance of any of such properties, or
disposing of any of them, if such discontinuance or disposal is, in the judgment
of the Company desirable in the conduct of the business of the Company or any
Subsidiary and not disadvantageous in any material respect to the
Securityholders.
<PAGE>
SECTION 3.8 Payment of Taxes and Other Claims.
The Company will pay or discharge or cause to be paid or discharged, before
the same shall become delinquent: (a) all taxes, assessments and governmental
charges levied or imposed upon the Company or any Subsidiary or upon the income,
profits or property of the Company or any Subsidiary; and (b) all lawful claims
for labor, materials, and supplies, which, if unpaid, might by law become a lien
upon the property of the Company or any Subsidiary; provided, that the Company
shall not be required to pay or discharge or cause to be paid or discharged any
such tax, assessment, charge or claim whose amount, applicability or validity is
being contested in good faith by appropriate proceedings; and provided further
that the Company shall not be required to cause to be paid or discharged any
such tax, assessment, charge or claim if the Company shall determine that such
payment is not advantageous to the conduct of the business of the Company and
its Subsidiaries taken as a whole and that the failure so to pay or discharge is
not disadvantageous in any material respect to the Securityholders.
SECTION 3.9 Luxembourg Publications.
In the event of the publication of any notice pursuant to Section 5.15,
6.11(a), 6.12, 8.2, 10.4 or 13.2, the party making such publication in the
Borough of Manhattan, The City of New York and London shall also, to the extent
that notice is required to be given to Holders of Subordinated Securities of any
series by applicable Luxembourg law or stock exchange regulation, as evidenced
by an Officer's Certificate delivered to such party, make a similar publication
in Luxembourg.
SECTION 3.10 Usury Laws.
The Company covenants and agrees: (a) not to insist upon, or plead, or in any
manner whatsoever claim the benefit or the advantage of the usury law of any
jurisdiction against the Trustee or the Holders in connection with any claim,
action or proceeding which may be brought by the Trustee or the Holders in order
to enforce any right or remedy under this Subordinated Indenture; and (b) to
resist any and all efforts to compel the Company to claim the benefit or the
advantage of the usury law of any jurisdiction against the Trustee or the
Holders in connection with any claim, action or proceeding which may be brought
by the Trustee or the Holders in order to enforce any right or remedy under this
Indenture.
ARTICLE 4
SECURITYHOLDER LISTS AND REPORTS BY THE
COMPANY AND THE TRUSTEE
SECTION 4.1 Company to Furnish Trustee Information as to Names and Addresses of
Securityholders.
If and so long as the Trustee shall not be the Security Registrar for the
Subordinated Securities of any series, the Company and any other obligor on the
Subordinated Securities will
<PAGE>
furnish or cause to be furnished to the Trustee a list in such form as the
Trustee may reasonably require of the names and addresses of the Holders of the
Registered Subordinated Securities of such series pursuant to Section 312 of the
Trust Indenture Act:
(a) semi-annually not more than 15 days after each Regular Record Date for
the payment of interest on such Registered Subordinated Securities, as
hereinabove specified, as of such record date and on dates to be determined
pursuant to Section 2.4 for non-interest bearing Registered Subordinated
Securities in each year; and
(b) at such other times as the Trustee may reasonably request in writing,
within thirty days after receipt by the Company of any such request as of a date
not more than 15 days prior to the time such information is furnished.
SECTION 4.2 Preservation of Information; Communications to Holders.
(a) The Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders contained in the most recent
list furnished to the Trustee as provided in Section 4.1 and the names and
addresses of Holders received by the Trustee in its capacity as Subordinated
Security Registrar. The Trustee may destroy any list furnished to it as provided
in Section 4.1 upon receipt of a new list so furnished.
(b) The rights of Holders to communicate with other Holders with respect to
their rights under this Subordinated Indenture or under the Subordinated
Securities, and the corresponding rights and duties of the Trustee, shall be as
provided by the Trust Indenture Act.
(c) Every Holder of Subordinated Securities, by receiving and holding the
same, agrees with the Company and the Trustee that neither the Company nor the
Trustee nor any agent of either of them shall be held accountable by reason of
any disclosure of information as to names and addresses of Holders made pursuant
to the Trust Indenture Act.
SECTION 4.3 Reports by Trustee.
(a) The Trustee shall transmit to Holders such reports concerning the
Trustee and its actions under this Subordinated Indenture as may be required
pursuant to the Trust Indenture Act at the times and in the manner provided
pursuant thereto.
(b) A copy of each such report shall, at the time of such transmission to
Holders, be filed by the Trustee with each stock exchange upon which the
Subordinated Securities are listed, with the Commission and with the Company.
The Company will notify the Trustee when the Subordinated Securities are listed
on any stock exchange.
SECTION 4.4 Reports by Company.
The Company shall file with the Trustee and the Commission, and transmit to
Holders, such information, documents and other reports, and such summaries
thereof, as may be required
<PAGE>
pursuant to the Trust Indenture Act at the times and in the manner provided
pursuant to such Act; provided that any such information, documents or reports
required to be filed with the Commission pursuant to Section 13 or 15(d) of the
Exchange Act, shall be filed with the Trustee within 15 days after the same is
so required to be filed with the Commission.
ARTICLE 5
REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS
ON EVENT OF DEFAULT
SECTION 5.1 Event of Default Defined, Acceleration of Maturity; Waiver of
Default.
"Event of Default" with respect to Subordinated Securities of any series,
wherever used herein, means each one of the following events which shall have
occurred and be continuing (whatever the reason for such Event of Default and
whether it shall be occasioned by the subordination provisions of any series of
Subordinated Securities or be voluntary or involuntary or be effected by
operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body):
(a) default in the payment of any installment of interest upon any of the
Subordinated Securities of such series as and when the same shall become due and
payable, and continuance of such default for a period of 30 days; or
(b) default in the payment of all or any part of the principal, or any
premium, on any of the Subordinated Securities of such series as and when the
same shall become due and payable either at Maturity, upon any redemption, by
declaration or otherwise; or
(c) default in the payment of any sinking fund installment as and when the
same shall become due and payable by the terms of the Subordinated Securities of
such series; or
(d) failure on the part of the Company duly to observe or perform any other
of the covenants or agreements on the part of the Company in the Subordinated
Securities of such series or contained in this Subordinated Indenture (other
than a covenant or agreement included in this Subordinated Indenture solely for
the benefit of a series of Subordinated Securities other than such series) for a
period of 60 days after the date on which written notice specifying such
failure, stating that such notice is a "Notice of Default" hereunder and
demanding that the Company remedy the same, shall have been given by registered
or certified mail, return receipt requested, to the Company by the Trustee, or
to the Company and the Trustee by the holders of at least 25% in aggregate
principal amount of the Outstanding Subordinated Securities of the series to
which such covenant or agreement relates; or
(e) default under any bond, debenture, note or other evidence of
indebtedness for money borrowed by the Company or any Subsidiary or under any
mortgage, indenture or instrument under which there may be issued or by which
there may be secured or evidenced
<PAGE>
any indebtedness for money borrowed by the Company or any Subsidiary, whether
such indebtedness now exists or shall hereafter be created, which default shall
constitute a failure to pay the principal of indebtedness in excess of
$25,000,000 when due and payable after the expiration of any applicable grace
period with respect thereto or shall have resulted in indebtedness in excess of
$25,000,000 becoming or being declared due and payable prior to the date on
which it would otherwise have become due and payable, without such indebtedness
having been discharged, or such acceleration having been rescinded or annulled,
within a period of 10 days after there shall have been given to the Company by
the Trustee or to the Company and the Trustee by the Holders of at 25% in
aggregate principal amount of the Subordinated Securities of each such affected
series then Outstanding hereunder a written notice specifying such default and
requiring the Company to cause such indebtedness to be discharged or cause such
acceleration to be rescinded or annulled; or
(f) a court having jurisdiction in the premises shall enter a decree or
order for relief in respect of the Company or any Significant Subsidiary in an
involuntary case under any applicable bankruptcy, insolvency or other similar
law now or hereafter in effect, or appointing a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or similar official) of the Company or any
Significant Subsidiary for any substantial part of its or their property or
ordering the winding up or liquidation of its or their affairs, and such decree
or order shall remain unstayed and in effect for a period of 60 consecutive
days; or
(g) the Company or any Significant Subsidiary shall commence a voluntary
case under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or consent to the entry of an order for relief in an
involuntary case under any such law, or consent to the appointment or taking
possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator
(or similar official) of the Company or any Significant Subsidiary or for any
substantial part of its or their property, or make any general assignment for
the benefit of creditors; or
(h) any other Event of Default provided in the supplemental indenture,
Board Resolution or Officer's Certificate under which such series of
Subordinated Securities is issued or in the form of Subordinated Security for
such series.
SECTION 5.2 Acceleration of Maturity; Rescission and Annulment.
If an Event of Default described in clause (a), (b), (c), (d), (e) or (h)
of Section 5.1 (if the Event of Default under clause (d) or (h), as the case may
be, is with respect to less than all series of Subordinated Securities then
Outstanding) occurs and is continuing, then, and in each and every such case,
except for any series of Subordinated Securities the principal of which shall
have already become due and payable, either the Trustee or the Holders of not
less than 25% in aggregate principal amount of the Subordinated Securities of
each such affected series then Outstanding hereunder (each such series voting as
a separate class) by notice in writing to the Company (and to the Trustee if
given by Securityholders), may declare the entire principal (or, if the
Subordinated Securities of any such affected series are Original Issue Discount
Subordinated Securities, such portion of the principal amount as may be
specified in the terms of such series) of all Subordinated Securities of all
such affected series, and the interest accrued
<PAGE>
thereon, if any, to be due and payable immediately, and upon any such
declaration, the same shall become immediately due and payable.
If an Event of Default described in clause (d) or (h) of Section 5.1 with
respect to all series of Subordinated Securities then Outstanding, occurs and is
continuing, then, and in each and every such case, unless the principal of all
of the Subordinated Securities shall have already become due and payable, either
the Trustee or the Holders of not less than 25% in aggregate principal amount of
all of the Subordinated Securities then Outstanding hereunder (treated as one
class) by notice in writing to the Company (and to the Trustee if given by
Securityholders), may declare the entire principal (or, if the Subordinated
Securities of any series are Original Issue Discount Subordinated Securities,
such portion of the principal amount as may be specified in the terms of such
series) of all of the Subordinated Securities then Outstanding, and the interest
accrued thereon, if any, to be due and payable immediately, and upon such
declaration, the same shall become immediately due and payable. If an Event of
Default described in clause (f) or (g) of Section 5.1 shall occur, the principal
amount of all outstanding Subordinated Securities shall ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holder.
The foregoing provisions are subject to the condition that if, at any time
after the principal (or, if the Subordinated Securities are Original Issue
Discount Subordinated Securities, such portion of the principal as may be
specified in the terms thereof) of the Subordinated Securities of any series (or
of all the Subordinated Securities, as the case may be) shall have been so
declared due and payable, and before any judgment or decree for the payment of
the moneys due shall have been obtained or entered as hereinafter provided,
(A) the Company shall pay or shall deposit with the Trustee a sum
sufficient to pay
(i) all matured installments of interest upon all the Subordinated
Securities of each such series (or all the Subordinated Securities, as the
case may be); and
(ii) the principal of any and all Subordinated Securities of each such
series (or of all the Subordinated Securities, as the case may be) which
shall have become due otherwise than by acceleration; and
(iii) interest upon such principal and, to the extent that payment of
such interest is enforceable under applicable law, on overdue installments
of interest, at the same rate as the rate of interest or Yield to Maturity
(in the case of Original Issue Discount Subordinated Securities) specified
in the Subordinated Securities of each such series (or at the respective
rates of interest or Yields to Maturity of all the Subordinated Securities,
as the case may be) to the date of such payment or deposit; and
(iv) all amounts payable to the Trustee pursuant to Section 6.6; and
<PAGE>
(B) all Events of Default under the Subordinated Indenture, other than the
non-payment of the principal of Subordinated Securities which shall have become
due by acceleration, shall have been cured, waived or otherwise remedied as
provided herein,
then and in every such case the Holders of a majority in aggregate principal
amount of all the Subordinated Securities of each such series, each such series
voting as a separate class (or of all the Subordinated Securities, as the case
may be, voting as a single class), then Outstanding, by written notice to the
Company and to the Trustee, may waive all defaults with respect to each such
series (or with respect to all the Subordinated Securities, as the case may be)
and rescind and annul such declaration and its consequences, but no such waiver
or rescission and annulment shall extend to or shall affect any subsequent
default or shall impair any right consequent thereon.
For all purposes under this Subordinated Indenture, if a portion of the
principal of any Original Issue Discount Subordinated Securities shall have been
accelerated and declared due and payable pursuant to the provisions hereof,
then, from and after such declaration, unless such declaration has been
rescinded and annulled, the principal amount of such Original Issue Discount
Subordinated Securities shall be deemed, for all purposes hereunder, to be such
portion of the principal thereof as shall be due and payable as a result of such
acceleration, and payment of such portion of the principal thereof as shall be
due and payable as a result of such acceleration, together with interest, if
any, thereon and all other amounts owing thereunder, shall constitute payment in
full of such Original Issue Discount Subordinated Securities.
SECTION 5.3 Collection of Indebtedness by Trustee; Trustee May Prove Debt.
The Company covenants that (a) in case default shall be made in the payment
of any installment of interest on any of the Subordinated Securities of any
series when such interest shall have become due and payable, and such default
shall have continued for a period of 30 days, or (b) in case default shall be
made in the payment of all or any part of the principal of any of the
Subordinated Securities of any series when the same shall have become due and
payable, whether upon Maturity of the Subordinated Securities of such series or
upon any redemption or by declaration or otherwise, then upon demand of the
Trustee, the Company will pay to the Trustee for the benefit of the Holders of
the Subordinated Securities of such series the whole amount that then shall have
become due and payable on all Subordinated Securities of such series, and such
Coupons, for principal and interest, as the case may be (with interest to the
date of such payment upon the overdue principal and, to the extent that payment
of such interest is enforceable under applicable law, on overdue installments of
interest at the same rate as the rate of interest or Yield to Maturity (in the
case of Original Issue Discount Subordinated Securities) specified in the
Subordinated Securities of such series); and in addition thereto, such further
amount as shall be sufficient to cover the costs and expenses of collection, and
such other amount due the Trustee under Section 6.6 in respect of Subordinated
Securities of such series.
Until such demand is made by the Trustee, the Company may pay the principal
of and interest on the Subordinated Securities of any series to the registered
Holders, whether or not the Subordinated Securities of such series be overdue.
<PAGE>
SECTION 5.4 Trustee May File Proofs of Claims.
In case the Company shall fail forthwith to pay such amounts upon such
demand, the Trustee, in its own name as trustee of an express trust, shall be
entitled and empowered to institute any action or proceedings at law or in
equity for the collection of the sums so due and unpaid, and may prosecute any
such action or proceedings to judgment or final decree, and may enforce any such
judgment or final decree against the Company or other obligor upon the
Subordinated Securities and collect in the manner provided by law out of the
property of the Company or other obligor upon the Subordinated Securities,
wherever situated, all the moneys adjudged or decreed to be payable.
In case there shall be pending proceedings relative to the Company or any
other obligor upon the Subordinated Securities under Title 11 of the United
States Code or any other applicable Federal or state bankruptcy, insolvency or
other similar law, or in case a receiver, assignee or trustee in bankruptcy or
reorganization, liquidator, sequestrator or similar official shall have been
appointed for or taken possession of the Company or its property or such other
obligor, or in case of any other comparable judicial proceedings relative to the
Company or other obligor upon the Subordinated Securities, or to the creditors
or property of the Company or such other obligor, the Trustee, irrespective of
whether the principal of the Subordinated Securities shall then be due and
payable as therein expressed or by declaration or otherwise and irrespective of
whether the Trustee shall have made any demand pursuant to the provisions of
this Section, shall be entitled and empowered, by intervention in such
proceedings or otherwise:
(a) to file and prove a claim or claims for the whole amount of principal
and interest (or, if the Subordinated Securities of any series are Original
Issue Discount Subordinated Securities, such portion of the principal amount as
may be specified in the terms of such series) owing and unpaid in respect of the
Subordinated Securities of any series, and to file such other papers or
documents as may be necessary or advisable in order to have the claims of the
Trustee (including any claim for amounts payable to the Trustee under Section
6.6) and of the Securityholders allowed in any judicial proceedings relative to
the Company or other obligor upon the Subordinated Securities, or to the
creditors or property of the Company or such other obligor; and
(b) unless prohibited by applicable law and regulations, to vote on behalf
of the holders of the Subordinated Securities of any series in any election of a
receiver, assignee, trustee or a standby trustee in arrangement, reorganization,
liquidation or other bankruptcy or insolvency proceedings, custodian or other
person performing similar functions in respect of any such proceedings; and
(c) to collect and receive any moneys or other property payable or
deliverable on any such claims, and to distribute all amounts received with
respect to the claims of the Securityholders and of the Trustee on their behalf;
and any trustee, receiver, or liquidator, custodian or other similar official
performing similar functions in respect of any such proceedings is hereby
authorized by each of the Securityholders to make payments to the Trustee, and,
in the event that the Trustee shall consent to the making of payments directly
<PAGE>
to the Securityholders, to pay to the Trustee its costs and expenses of
collection and all other amounts due to it pursuant to Section 6.6.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or vote for or accept or adopt on behalf of any
Securityholder any plan of reorganization, arrangement, adjustment or
composition affecting the Subordinated Securities of any series or the rights of
any Holder thereof, or to authorize the Trustee to vote in respect of the claim
of any Securityholder in any such proceeding, except as aforesaid in clause (b).
SECTION 5.5 Trustee May Enforce Claims Without Possession of Subordinated
Securities.
All rights of action and of asserting claims under this Subordinated
Indenture, or under any of the Subordinated Securities of any series or Coupons
appertaining to such Subordinated Securities, may be enforced by the Trustee
without the possession of any of the Subordinated Securities of such series or
Coupons appertaining to such Subordinated Securities or the production thereof
in any trial or other proceedings relative thereto, and any such action or
proceedings instituted by the Trustee shall be brought in its own name as
trustee of an express trust, and any recovery of judgment shall awarded to the
Trustee for ratable distribution to the Holders of the Subordinated Securities
or Coupons appertaining to such Subordinated Securities in respect of which such
action was taken, after payment of all sums due to the Trustee under Section 6.6
in respect of such Subordinated Securities.
In any proceedings brought by the Trustee (and also any proceedings
involving the interpretation of any provision of this Subordinated Indenture to
which the Trustee shall be a party) the Trustee shall be held to represent all
the Holders of the Subordinated Securities or Coupons appertaining to such
Subordinated Securities in respect to which such action was taken, and it shall
not be necessary to make any Holders of such Subordinated Securities or Coupons
appertaining to such Subordinated Securities parties to any such proceedings.
SECTION 5.6 Application of Proceeds.
Any moneys collected by the Trustee pursuant to this Article in respect of
any series shall be applied in the following order at the date or dates fixed by
the Trustee and, in case of the distribution of such moneys on account of
principal or interest, upon presentation of the several Subordinated Securities
and Coupons appertaining to such Subordinated Securities in respect of which
monies have been collected and stamping (or otherwise noting) thereon the
payment, or issuing Subordinated Securities of such series in reduced principal
amounts in exchange for the presented Subordinated Securities of like series if
only partially paid, or upon surrender thereof if fully paid:
FIRST: To the payment of costs and expenses applicable to such series of
Subordinated Securities in respect of which monies have been collected,
including all amounts due to the Trustee and each predecessor Trustee pursuant
to Section 6.6 in respect to such series of Subordinated Securities;
<PAGE>
SECOND: In case the principal of the Subordinated Securities of such series
in respect of which moneys have been collected shall not have become and be then
due and payable, to the payment of interest on the Subordinated Securities of
such series in default in the order of the Maturity of the installments on such
interest, with interest (to the extent that such interest has been collected by
the Trustee and is permitted by applicable law) upon the overdue installments of
interest at the same rate as the rate of interest or Yield to Maturity (in the
case of Original Issue Discount Subordinated Securities) specified in such
Subordinated Securities, such payments to be made ratably to the persons
entitled thereto, without discrimination or preference;
THIRD: In case the principal of the Subordinated Securities of such series
in respect of which moneys have been collected shall have become and shall be
then due and payable, to the payment of the whole amount then owing and unpaid
upon all the Subordinated Securities of such series for principal and interest,
with interest upon the overdue principal, and (to the extent that such interest
has been collected by the Trustee and is permitted by applicable law) upon the
overdue installations of interest at the same rate as the rate of interest or
Yield to Maturity (in the case of Original Issue Discount Subordinated
Securities) specified in the Subordinated Securities of such series; and in case
such moneys shall be insufficient to pay in full the whole amount so due and
unpaid upon the Subordinated Securities of such series, then to the payment of
such principal and interest or Yield to Maturity, without preference or priority
of principal over interest or Yield to Maturity, or of interest or Yield to
Maturity over principal, or of any installment of interest over any other
installment of interest or of any Subordinated Security of such series over any
other Subordinated Security of such series, ratably to the aggregate of such
principal and accrued and unpaid interest or Yield to Maturity; and
FOURTH: To the payment of the remainder, if any, to the Company or any
other person lawfully entitled thereto.
SECTION 5.7 Suits for Enforcement.
In case an Event of Default has occurred, has not been waived and is
continuing, the Trustee may in its discretion proceed to protect and enforce the
rights vested in it by this Subordinated Indenture by such appropriate judicial
proceedings as the Trustee shall deem most effectual to protect and enforce any
of such rights, either at law or in equity or in bankruptcy or otherwise,
whether for the specific enforcement of any covenant or agreement contained in
this Subordinated Indenture or in aid of the exercise of any power granted in
this Subordinated Indenture or to enforce any other legal or equitable right
vested in the Trustee by this Subordinated Indenture or by law.
SECTION 5.8 Limitations on Suits by Subordinated Security Holders.
No Holder of any Subordinated Security of any series or of any Coupon
appertaining thereto shall have any right by virtue or by availing of any
provision of this Subordinated Indenture to institute any action or proceeding
at law or in equity or in bankruptcy or otherwise upon or under or with respect
to this Subordinated Indenture or such Subordinated Security, or
<PAGE>
for the appointment of a trustee, receiver, liquidator, custodian or other
similar official or for any other remedy hereunder or thereunder, unless (a)
such Holder previously shall have given to the Trustee written notice of an
Event of Default with respect to Subordinated Securities of such series and of
the continuance thereof, as hereinbefore provided, and (b) the Holders of not
less than 25% in aggregate principal amount of the Subordinated Securities of
such affected series then Outstanding (treated as a single class) shall have
made written request upon the Trustee to institute such action or proceedings in
its own name as Trustee hereunder and shall have offered to the Trustee such
reasonable indemnity as it may require against the costs, expenses and
liabilities to be incurred therein or thereby, and (c) the Trustee for 60 days
after its receipt of such notice, request and offer of indemnity shall have
failed to institute any such action or proceeding, and (d) no direction
inconsistent with such written request shall have been given to the Trustee
pursuant to Section 5.13; it being understood and intended, and being expressly
covenanted by the taker and Holder of every Subordinated Security or Coupon with
every other taker and Holder and the Trustee, that no one or more Holders of
Subordinated Securities of any series or Coupons appertaining to such
Subordinated Securities shall have any right in any manner whatever by virtue or
by availing of any provision of this Subordinated Indenture or any Subordinated
Security to affect, disturb or prejudice the rights of any other such taker or
Holder of Subordinated Securities or Coupons appertaining to such Subordinated
Securities, or to obtain or seek to obtain priority over or preference to any
other such taker or Holder or to enforce any right under this Subordinated
Indenture or any Subordinated Security, except in the manner herein provided and
for the equal, ratable and common benefit of all Holders of Subordinated
Securities of the applicable series and Coupons appertaining to such
Subordinated Securities. For the protection and enforcement of the provisions of
this Section, each and every Securityholder and the Trustee shall be entitled to
such relief as can be given either at law or in equity.
SECTION 5.9 Unconditional Right of Securityholders to Institute Certain Suits.
Notwithstanding any other provision in this Subordinated Indenture and any
provision of any Subordinated Security, the right of any Holder of any
Subordinated Security or Coupon to receive payment of the principal of and
interest on such Subordinated Security or Coupon on or after the respective due
dates expressed in such Subordinated Security or Coupon or the applicable
redemption dates provided for in such Subordinated Security, to convert such
Subordinated Securities of any series in accordance with terms that may be
established pursuant to Section 2.3, or to institute suit for the enforcement of
any such payment on or after such respective dates, shall not be impaired or
affected without the consent of such Holder.
SECTION 5.10 Restoration of Rights on Abandonment of Proceedings.
In case the Trustee shall have proceeded to enforce any right under this
Subordinated Indenture and such proceedings shall have been discontinued or
abandoned for any reason, or shall have been determined adversely to the
Trustee, then and in every such case the Company and the Trustee shall be
restored respectively to their former positions and rights hereunder, and all
rights, remedies and powers of the Company, the Trustee and the Securityholders
shall continue as though no such proceedings had been taken.
<PAGE>
SECTION 5.11 Powers and Remedies Cumulative; Delay or Omission Not Waiver of
Default.
Except as provided in Section 5.8, no right or remedy herein conferred upon
or reserved to the Trustee or to the Holders of Subordinated Securities or
Coupons is intended to be exclusive of any other right or remedy and every right
and remedy shall, to the extent permitted by law, be cumulative and in addition
to every other right and remedy given hereunder or now or hereafter existing at
law or in equity or otherwise. The assertion or employment of any right or
remedy hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.
SECTION 5.12 Delay or Omission Not Waiver.
No delay or omission of the Trustee or of any Holder of Subordinated
Securities or Coupons to exercise any right or power accruing upon any Event of
Default occurring and continuing as aforesaid shall impair any such right or
power or shall be construed to be a waiver of any such Event of Default or an
acquiescence therein. Every power and remedy given by this Subordinated
Indenture, any Subordinated Security or law to the Trustee or to the Holders of
Subordinated Securities or Coupons may be exercised from time to time, and as
often as shall be deemed expedient, by the Trustee or, subject to Section 5.8,
by the Holders of Subordinated Securities or Coupons.
SECTION 5.13 Control by Holders of Subordinated Securities.
The Holders of a majority in aggregate principal amount of the Subordinated
Securities of each series affected (with each such series voting as a separate
class) at the time Outstanding shall have the right to direct the time, method,
and place of conducting any proceeding for any remedy available to the Trustee,
or exercising any trust or power conferred on the Trustee with respect to the
Subordinated Securities of such series by this Subordinated Indenture; provided,
that such direction shall not be otherwise than in accordance with law and the
provisions of this Subordinated Indenture and provided, further, that (subject
to the provisions of Section 6.1) the Trustee shall have the right to decline to
follow any such direction if (a) the Trustee, being advised by counsel, shall
determine that the action or proceeding so directed may not lawfully be taken;
or (b) if the Trustee by its board of directors, the executive committee, or a
trust committee of directors or Responsible Officers of the Trustee shall
determine in good faith that the action or proceedings so directed would involve
the Trustee in personal liability; or (c) if the Trustee in good faith shall so
determine that the actions or forbearances specified in or pursuant to such
direction would be unduly prejudicial to the interests of Holders of the
Subordinated Securities of all affected series not joining in the giving of said
direction, it being understood that (subject to Section 6.1) the Trustee shall
have no duty to ascertain whether or not such actions or forbearances are unduly
prejudicial to such Holders.
Nothing in this Subordinated Indenture shall impair the right of the
Trustee in its discretion to take any action deemed proper by the Trustee and
which is not inconsistent with such direction or directions by Securityholders.
<PAGE>
SECTION 5.14 Waiver of Past Defaults.
Prior to the declaration of acceleration of the Maturity of any
Subordinated Securities as provided in Section 5.2, the Holders of a majority in
aggregate principal amount of the Subordinated Securities of such series (each
series voting as a separate class) at the time Outstanding with respect to which
an Event of Default shall have occurred and be continuing (voting as a single
class) may on behalf of the Holders of all such Subordinated Securities waive
any past default or Event of Default described in Section 5.1 and its
consequences, except a default in respect of a covenant or provision hereof
which cannot be modified or amended without the consent of the Holder of each
Subordinated Security affected. In the case of any such waiver, the Company, the
Trustee and the Holders of all such Subordinated Securities shall be restored to
their former positions and rights hereunder, respectively, and such default
shall cease to exist and be deemed to have been cured and not to have occurred
for purposes of this Subordinated Indenture; but no such waiver shall extend to
any subsequent or other default or impair any right consequent thereon.
SECTION 5.15 Trustee to Give Notice of Default, But May Withhold in Certain
Circumstances.
The Trustee shall, within 90 days after the occurrence of a default with
respect to the Subordinated Securities of any series, give notice of all
defaults with respect to that series known to the Trustee (i) if any
Unregistered Subordinated Securities of that series are then Outstanding, to the
Holders thereof, by publication at least once in an Authorized Newspaper in the
Borough of Manhattan, The City of New York and at least once in an Authorized
Newspaper in London (and, if required by Section 3.9, at least once in an
Authorized Newspaper in Luxembourg) and (ii) to all Holders of Subordinated
Securities of such series in the manner and to the extent provided in Section
313(c) of the Trust Indenture Act, unless in each case such defaults shall have
been cured before the mailing or publication of such notice (the term "default"
for the purpose of this Section being hereby defined to mean any event or
condition which is, or with notice or lapse of time or both would become, an
Event of Default); provided, that, except in the case of default in the payment
of the principal of or interest on any of the Subordinated Securities of such
series, or in the payment of any sinking fund installment on such series, the
Trustee shall be protected in withholding such notice if and so long as the
board of directors, the executive committee, or a trust committee of directors
or trustees and/or Responsible Officers of the Trustee in good faith determines
that the withholding of such notice is in the interests of the Securityholders
of such series.
SECTION 5.16 Right of Court to Require Filing of Undertaking to Pay Costs.
All parties to this Subordinated Indenture agree, and each Holder of any
Subordinated Security or Coupon by his acceptance thereof shall be deemed to
have agreed, that any court may in its discretion require, in any suit for the
enforcement of any right or remedy under this Subordinated Indenture or in any
suit against the Trustee for any action taken, suffered or omitted by it as
Trustee, the filing by any party litigant in such suit of an undertaking to pay
the costs of such suit, and that such court may in its discretion assess
reasonable costs, including reasonable attorneys' fees, against any party
litigant in such suit, having due regard to the merits
<PAGE>
and good faith of the claims or defenses made by such party litigant; but the
provisions of this Section shall not apply to any suit instituted by the
Trustee, to any suit instituted by any Securityholder or group of
Securityholders of any series holding in the aggregate more than 10% in
aggregate principal amount of the Subordinated Securities of such series, or, in
the case of any suit relating to or arising under clause (d) or (h) of Section
5.1 (if the suit relates to Subordinated Securities of more than one but less
than all series), 10% in aggregate principal amount of Subordinated Securities
then Outstanding and affected thereby, or in the case of any suit relating to or
arising under clause (d) or (h) (if the suit under clause (d) or (h) relates to
all the Subordinated Securities then Outstanding), (f) or (g) of Section 5.1,
10% in aggregate principal amount of all Subordinated Securities then
Outstanding, or to any suit instituted by any Securityholder for the enforcement
of the payment of the principal of or interest on any Subordinated Security on
or after the due date expressed in such Subordinated Security or any date fixed
for redemption.
SECTION 5.17 Waiver of Stay or Extension Laws.
The Company covenants (to the extent that it may lawfully do so) that it will
not at any time insist upon, or plead, or in any manner whatsoever claim or take
the benefit or advantage of, any stay or extension law wherever enacted, now or
at any time hereafter in force, which may affect the covenants or the
performance of this Subordinated Indenture; and the Company (to the extent that
it may lawfully do so) hereby expressly waives all benefit or advantage of any
such law and covenants that it will not hinder, delay or impede the execution of
any power herein granted to the Trustee, but will suffer and permit the
execution of every such power as though no such law had been enacted.
ARTICLE 6
CONCERNING THE TRUSTEE
SECTION 6.1 Duties and Responsibilities of the Trustee; During Default; Prior to
Default.
Prior to the occurrence of an Event of Default with respect to the
Subordinated Securities of a particular series and after the curing or waiving
of all Events of Default which may have occurred with respect to such series,
the Trustee undertakes to perform such duties and only such duties as are
specifically set forth in this Subordinated Indenture with respect to such
series of Subordinated Securities. In case an Event of Default with respect to
the Subordinated Securities of a series has occurred and has not been cured or
waived, the Trustee shall exercise with respect to such series of Subordinated
Securities such of the rights and powers vested in it by this Subordinated
Indenture with respect to such series of Subordinated Securities, and use the
same degree of care and skill in their exercise, as a prudent man would exercise
or use under the circumstances in the conduct of his own affairs.
No provision of this Subordinated Indenture shall be construed to relieve
the Trustee from liability for its own negligent action, its own negligent
failure to act or its own willful misconduct, except that
<PAGE>
(a) prior to the occurrence of an Event of Default with respect to the
Subordinated Securities of any series and after the curing or waiving of all
such Events of Default with respect to such series which may have occurred:
(i) the duties and obligations of the Trustee with respect to the
Subordinated Securities of any series shall be determined solely by the
express provisions of this Subordinated Indenture, and the Trustee shall
not be liable except for the performance of such duties and obligations as
are specifically set forth in this Subordinated Indenture, and no implied
covenants or obligations shall be read into this Subordinated Indenture
against the Trustee; and
(ii) in the absence of bad faith on the part of the Trustee, the
Trustee may conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon any statements,
certificates or opinions furnished to the Trustee and conforming to the
requirements of this Subordinated Indenture; but in the case of any such
statements, certificates or opinions which by any provision hereof are
specifically required to be furnished to the Trustee, the Trustee shall be
under a duty to examine the same to determine whether or not they conform
to the requirements of this Subordinated Indenture;
(b) the Trustee shall not be liable for any error of judgment made in good
faith by a Responsible Officer or Responsible Officers of the Trustee, unless it
shall be proved that the Trustee was negligent in ascertaining the pertinent
facts; and
(c) the Trustee shall not be liable with respect to any action taken or
omitted to be taken by it in good faith in accordance with the direction of the
Holders pursuant to Section 5.13 relating to the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or exercising
any trust or power conferred upon the Trustee, under this Subordinated
Indenture.
None of the provisions contained in this Subordinated Indenture shall
require the Trustee to expend or risk its own funds or otherwise incur personal
financial liability in the performance of any of its duties or in the exercise
of any of its rights or powers, if there shall be reasonable ground for
believing that the repayment of such funds or adequate indemnity against such
liability is not reasonably assured to it.
The provisions of this Section 6.1 are in furtherance of and subject to
Section 315 of the Trust Indenture Act.
SECTION 6.2 Certain Rights of the Trustee.
In furtherance of and subject to the Trust Indenture Act, and subject to
Section 6.1:
(a) the Trustee may rely and shall be protected in acting or refraining
from acting upon any resolution, Officer's Certificate or any other certificate,
statement, instrument, opinion, report, notice, request, consent, order, bond,
debenture, note, coupon, security or
<PAGE>
other paper or document believed by it to be genuine and to have been signed or
presented by the proper party or parties;
(b) any request, direction, order or demand of the Company mentioned herein
shall be sufficiently evidenced by an Officer's Certificate (unless other
evidence in respect thereof is specifically prescribed herein or in the terms
established in respect of any series); and any resolution of the Board of
Directors may be evidenced to the Trustee by a copy thereof certified by the
secretary or an assistant secretary of the Company;
(c) the Trustee may consult with counsel and any written advice or any
Opinion of Counsel shall be full and complete authorization and protection in
respect of any action taken, suffered or omitted to be taken by it hereunder in
good faith and in reliance thereon in accordance with such advice or Opinion of
Counsel;
(d) the Trustee shall be under no obligation to exercise any of the trusts
or powers vested in it by this Subordinated Indenture at the request, order or
direction of any of the Securityholders pursuant to the provisions of this
Subordinated Indenture, unless such Securityholders shall have offered to the
Trustee reasonable security or indemnity against the costs, expenses and
liabilities which might be incurred therein or thereby;
(e) the Trustee shall not be liable for any action taken or omitted by it
in good faith and believed by it to be authorized or within the discretion,
rights or powers conferred upon it by this Subordinated Indenture;
(f) prior to the occurrence of an Event of Default hereunder and after the
curing or waiving of all Events of Default, the Trustee shall not be bound to
make any investigation into the facts or matters stated in any resolution,
certificate, statement, instrument, opinion, report, notice, request, consent,
order, approval, appraisal, bond, debenture, note, coupon, security, or other
paper or document unless requested in writing so to do by the Holders of not
less than a majority in aggregate principal amount of the Subordinated
Securities of all series affected then Outstanding; provided, that, if the
payment within a reasonable time to the Trustee of the costs, expenses or
liabilities likely to be incurred by it in the making of such investigation is,
in the opinion of the Trustee, not reasonably assured to the Trustee by the
security afforded to it by the terms of this Subordinated Indenture, the Trustee
may require reasonable indemnity against such expenses or liabilities as a
condition to proceeding; the reasonable expenses of every such investigation
shall be paid by the Company or, if paid by the Trustee or any predecessor
trustee, shall be repaid by the Company upon demand; and
(g) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys not regularly in its employ and the Trustee shall not be responsible
for any misconduct or negligence on the part of any such agent or attorney
appointed with due care by it hereunder.
<PAGE>
SECTION 6.3 Trustee Not Responsible for Recitals, Disposition of Subordinated
Securities or Application of Proceeds Thereof.
The recitals contained herein and in the Subordinated Securities, except
the Trustee's certificates of authentication, shall be taken as the statements
of the Company, and the Trustee assumes no responsibility for the correctness of
the same. The Trustee makes no representation as to the validity or sufficiency
of this Subordinated Indenture or of the Subordinated Securities or Coupons. The
Trustee shall not be accountable for the use or application by the Company of
any of the Subordinated Securities or of the proceeds thereof.
SECTION 6.4 Trustee and Agents May Hold Subordinated Securities or Coupons;
Collections, Etc.
The Trustee or any agent of the Company or of the Trustee, in its
individual or any other capacity, may become the owner or pledgee of
Subordinated Securities or Coupons with the same rights it would have if it were
not the Trustee or such agent and may otherwise deal with the Company and
receive, collect, hold and retain collections from the Company with the same
rights it would have if it were not the Trustee or such agent.
SECTION 6.5 Moneys Held by Trustee.
Subject to the provisions of Section 10.4 hereof, all moneys received by
the Trustee shall, until used or applied as herein provided, be held in trust
for the purposes for which they were received, but need not be segregated from
other funds except to the extent required by mandatory provisions of law.
Neither the Trustee nor any agent of the Company or the Trustee shall be under
any liability for interest on any moneys received by it hereunder.
SECTION 6.6 Compensation and Indemnification of Trustee and Its Prior Claim.
The Company covenants and agrees to pay to the Trustee from time to time,
and the Trustee shall be entitled to reasonable compensation (which shall not be
limited by any provision of law in regard to the compensation of a trustee of an
express trust) and the Company covenants and agrees to pay or reimburse the
Trustee and each predecessor trustee upon its request for all reasonable
expense, disbursements and advances incurred or made by or on behalf of it in
accordance with any of the provisions of this Subordinated Indenture (including
the reasonable compensation and the expenses and disbursements of its counsel
and of all agents and other persons not regularly in its employ) except any such
expense, disbursement or advance as may arise from its negligence or bad faith.
The Company also covenants to indemnify the Trustee and each predecessor trustee
for, and to hold it harmless against, any loss, liability or expense incurred
without negligence or bad faith on its part, arising out of or in connection
with the acceptance or administration of this Subordinated Indenture or the
trusts hereunder and its duties hereunder, including the costs and expenses of
defending itself against or investigating any claim of liability in the
premises. The obligations of the Company under this Section to compensate and
indemnify the Trustee and each predecessor trustee and to pay or reimburse the
Trustee and each predecessor trustee for expenses, disbursements and advances
shall constitute additional indebtedness hereunder and shall survive the
satisfaction and discharge of this Subordinated
<PAGE>
Indenture. Such additional indebtedness shall be a senior claim to that of the
Subordinated Securities upon all property and funds held or collected by the
Trustee as such, except funds held in trust for the benefit of the Holders of
particular Subordinated Securities or Coupons, and the Subordinated Securities
are hereby subordinated to such senior claim.
SECTION 6.7 Right of Trustee to Rely on Officer's Certificate, Etc.
Subject to Sections 6.1 and 6.2, whenever in the administration of the
trusts of this Subordinated Indenture the Trustee shall deem it necessary or
desirable that a matter be proved or established prior to taking or suffering or
omitting any action hereunder, such matter (unless other evidence in respect
thereof be herein specifically prescribed) may, in the absence of negligence or
bad faith on the part of the Trustee, be deemed to be conclusively proved and
established by an Officer's Certificate delivered to the Trustee, and such
certificate, in the absence of negligence or bad faith on the part of the
Trustee, shall be full warrant to the Trustee for any action taken, suffered or
omitted by it under the provisions of this Subordinated Indenture upon the faith
thereof.
SECTION 6.8 Subordinated Indentures Not Creating Potential Conflicting Interests
for the Trustee.
The following indentures are hereby specifically described for the purposes
of Section 310(b)(1) of the Trust Indenture Act: this Subordinated Indenture
with respect to the Subordinated Securities of any other series.
SECTION 6.9 Qualification of Trustee: Conflicting Interests.
The Trustee shall comply with Section 310(b) of the Trust Indenture Act.
SECTION 6.10 Persons Eligible for Appointment as Trustee.
The Trustee for each series of Subordinated Securities hereunder shall at
all times be a corporation or banking association organized and doing business
under the laws of the United States of America, any State thereof or the
District of Columbia, that has (or, in the case of a corporation or banking
association included in a bank holding company system, whose related bank
holding company has) a combined capital and surplus of at least $50,000,000, and
which is authorized under such laws to exercise corporate trust powers and is
subject to supervision or examination by Federal, state or District of Columbia
authority. If such corporation publishes reports of condition at least annually,
pursuant to law or to the requirements of the aforesaid supervising or examining
authority, then for the purposes of this Section, the combined capital and
surplus of such corporation shall be deemed to be its combined capital and
surplus as set forth in its most recent report of condition so published. In
case at any time the Trustee shall cease to be eligible in accordance with the
provisions of this Section, the Trustee shall resign immediately in the manner
and with the effect specified in Section 6.11.
The provisions of this Section 6.10 are in furtherance of and subject to
Section 310(a) of the Trust Indenture Act.
<PAGE>
SECTION 6.11 Resignation and Removal; Appointment of Successor Trustee.
(a) The Trustee, or any trustee or trustees hereafter appointed, may at any
time resign with respect to one or more or all series of Subordinated Securities
by giving written notice of resignation to the Company and (i) if any
Unregistered Subordinated Securities of a series affected are then Outstanding,
by giving notice of such resignation to the Holders thereof, by publication at
least once in an Authorized Newspaper in the Borough of Manhattan, The City of
New York, and at least once in an Authorized Newspaper in London (and, if
required by Section 3.9, at least once in an Authorized Newspaper in
Luxembourg), (ii) if any Unregistered Subordinated Securities of a series
affected are then Outstanding, by mailing notice of such resignation to the
Holders thereof who have filed their names and addresses with the Trustee
pursuant to Section 313(c)(2) of the Trust Indenture Act at such addresses as
were so furnished to the Trustee and (iii) by mailing notice of such resignation
to the Holders of then Outstanding Registered Subordinated Securities of each
series affected at their addresses as they shall appear on the registry books.
Upon receiving such notice of resignation, the Company shall promptly appoint a
successor trustee or trustees with respect to the applicable series by written
instrument in duplicate, executed by authority of the Board of Directors, one
copy of which instrument shall be delivered to the resigning Trustee and one
copy to the successor trustee or trustees. If no successor trustee shall have
been so appointed with respect to any series and have accepted appointment
within 30 days after the mailing of such notice of resignation, the resigning
trustee may petition any court of competent jurisdiction for the appointment of
a successor trustee, or any Securityholder who has been a bona fide Holder of a
Subordinated Security or Subordinated Securities of the applicable series for at
least six months may, subject to the provisions of Section 5.12, on behalf of
himself and all others similarly situated, petition any such court for the
appointment of a successor trustee. Such court may thereupon, after such notice,
if any, as it may deem proper and prescribe, appoint a successor trustee.
(b) In case at any time any of the following shall occur:
(i) the Trustee shall fail to comply with the provisions of Section
310(b) of the Trust Indenture Act with respect to any series of
Subordinated Securities after written request therefor by the Company or by
any Securityholder who has been a bona fide Holder of a Subordinated
Security or Subordinated Securities of such series for at least six months;
or
(ii) the Trustee shall cease to be eligible in accordance with the
provisions of Section 6.10 and Section 310(a) of the Trust Indenture Act
and shall fail to resign after written request therefor by the Company or
by any Securityholder; or
(iii) the Trustee shall become incapable of acting with respect to any
series of Subordinated Securities, or shall be adjudged a bankrupt or
insolvent, or a receiver or liquidator of the Trustee or of its property
shall be appointed, or any public officer shall take charge or control of
the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation;
<PAGE>
then, in any such case, the Company may remove the Trustee with respect to the
applicable series of Subordinated Securities and appoint a successor trustee for
such series by written instrument, in duplicate, executed by order of the Board
of Directors of the Company, one copy of which instrument shall be delivered to
the Trustee so removed and one copy to the successor trustee, or, subject to the
provisions of Section 315(e) of the Trust Indenture Act, any Securityholder who
has been a bona fide Holder of a Subordinated Security or Subordinated
Securities of such series for at least six months may on behalf of himself and
all others similarly situated, petition any court of competent jurisdiction for
the removal of the Trustee and the appointment of a successor trustee with
respect to such series. Such court may thereupon, after such notice, if any, as
it may deem proper and prescribe, remove the Trustee and appoint a successor
trustee.
(c) The Holders of a majority in aggregate principal amount of the
Subordinated Securities of each series at the time outstanding may at any time
remove the Trustee with respect to Subordinated Securities of such series and
appoint a successor trustee with respect to the Subordinated Securities of such
series by delivering to the Trustee so removed, to the successor trustee so
appointed and to the Company the evidence provided for in Section 7.1 of the
action in that regard taken by the Securityholders.
(d) Any resignation or removal of the Trustee with respect to any series
and any appointment of a successor trustee with respect to such series pursuant
to any of the provisions of this Section 6.11 shall become effective upon
acceptance of appointment by the successor trustee as provided in Section 6.12.
SECTION 6.12 Acceptance of Appointment by Successor Trustee.
Any successor trustee appointed as provided in Section 6.11 shall execute
and deliver to the Company and to its predecessor trustee an instrument
accepting such appointment hereunder, and thereupon the resignation or removal
of the predecessor trustee with respect to all or any applicable series shall
become effective and such successor trustee, without any further act, deed or
conveyance, shall become vested with all rights, powers, duties and obligations
with respect to such series of its predecessor hereunder, with like effect as if
originally named as trustee for such series hereunder; but, nevertheless, on the
written request of the Company or of the successor trustee, upon payment of its
charges then unpaid, the trustee ceasing to act shall, subject to Section 10.4,
pay over to the successor trustee all moneys at the time held by it hereunder
and shall execute and deliver an instrument transferring to such successor
trustee all such rights, powers, duties and obligations. Upon request of any
such successor trustee, the Company shall execute any and all instruments in
writing for more fully and certainly vesting in and confirming to such successor
trustee all such rights and powers. Any trustee ceasing to act shall,
nevertheless, retain a prior claim upon all property or funds held or collected
by such trustee to secure any amounts then due it pursuant to the provisions of
Section 6.6.
If a successor trustee is appointed with respect to the Subordinated
Securities of one or more (but not all) series, the Company, the predecessor
trustee and each successor trustee with respect to the Subordinated Securities
of any applicable series shall execute and deliver an indenture supplemental
hereto which shall contain such provisions as shall be deemed necessary
<PAGE>
or desirable to confirm that all the rights, powers, trusts and duties of the
predecessor trustee with respect to the Subordinated Securities of any series as
to which the predecessor trustee is not retiring shall continue to be vested in
the predecessor trustee, and shall add to or change any of the provisions of
this Subordinated Indenture as shall be necessary to provide for or facilitate
the administration of the trusts hereunder by more than one trustee, it being
understood that nothing herein or in such supplemental indenture shall
constitute such trustees co-trustees of the same trust and that each such
trustee shall be trustee of a trust or trusts under separate indentures.
No successor trustee with respect to any series of Subordinated Securities
shall accept appointment as provided in this Section 6.12 unless at the time of
such acceptance such successor trustee shall be qualified under Section 310(b)
of the Trust Indenture Act and eligible under the provisions of Section 6.10.
Upon acceptance of appointment by any successor trustee as provided in this
Section 6.12, the Company shall give notice thereof (a) if any Unregistered
Subordinated Securities of a series affected are then Outstanding, to the
Holders thereof, by publication of such notice at least once in an Authorized
Newspaper in the Borough of Manhattan, The City of New York and at least once in
an Authorized Newspaper in London (and, if required by Section 3.9, at least
once in an Authorized Newspaper in Luxembourg), (b) if any Unregistered
Subordinated Securities of a series affected are then Outstanding, to the
Holders thereof who have filed their names and addresses with the Trustee
pursuant to Section 313(c)(2) of the Trust Indenture Act, by mailing such notice
to such Holders at such addresses as were so furnished to the Trustee (and the
Trustee shall make such information available to the Company for such purpose)
and (c) to the Holders of Registered Subordinated Securities of each series
affected, by mailing such notice to such Holders at their addresses as they
shall appear on the registry books. If the acceptance of appointment is
substantially contemporaneous with the resignation, then the notice called for
by the preceding sentence may be combined with the notice called for by Section
6.11. If the Company fails to give such notice within ten days after acceptance
of appointment by the successor trustee, the successor trustee shall cause such
notice to be given at the expense of the Company.
SECTION 6.13 Merger, Conversion, Consolidation or Succession to Business of
Trustee.
Any corporation into which the Trustee may be merged or converted or with
which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to the corporate trust business of the Trustee, shall be
the successor of the Trustee hereunder, provided, that such corporation shall be
qualified under Section 310(b) of the Trust Indenture Act and eligible under the
provisions of Section 6.10, without the execution or filing of any paper or any
further act on the part of any of the parties hereto, anything herein to the
contrary notwithstanding.
In case at the time such successor to the Trustee shall succeed to the
trusts created by this Subordinated Indenture any of the Subordinated Securities
of any series shall have been authenticated but not delivered, any such
successor to the Trustee may adopt the certificate of authentication of any
predecessor trustee and deliver such Subordinated Securities so
<PAGE>
authenticated; and, in case at that time any of the Subordinated Securities of
any series shall not have been authenticated, any successor to the Trustee may
authenticate such Subordinated Securities either in the name of any predecessor
hereunder or in the name of the successor Trustee; and in all such cases such
certificate shall have the full force which it is anywhere in the Subordinated
Securities of such series or in this Subordinated Indenture provided that the
certificate of the Trustee shall have; provided, that the right to adopt the
certificate of authentication of any predecessor trustee or to authenticate
Subordinated Securities of any series in the name of any predecessor trustee
shall apply only to its successor or successors by merger, conversion or
consolidation.
SECTION 6.14 Preferential Collection of Claims Against the Company.
If this Subordinated Indenture is qualified under the Trust Indenture Act,
the Trustee shall comply with Section 311(a) of the Trust Indenture Act,
excluding any creditor relationship listed in Section 311(b) of the Trust
Indenture Act. A Trustee who has resigned or been removed shall be subject to
Section 311(a) of the Trust Indenture Act to the extent indicated.
SECTION 6.15 Appointment of Authenticating Agent.
As long as any Subordinated Securities of a series remain Outstanding, the
Trustee may, by an instrument in writing, appoint with the approval of the
Company an authenticating agent (the "Authenticating Agent") which shall be
authorized to act on behalf of the Trustee to authenticate Subordinated
Securities, including Subordinated Securities issued upon exchange, registration
of transfer, partial redemption or pursuant to Section 2.9. Subordinated
Securities of each such series authenticated by such Authenticating Agent shall
be entitled to the benefits of this Subordinated Indenture and shall be valid
and obligatory for all purposes as if authenticated by the Trustee. Whenever
reference is made in this Subordinated Indenture to the authentication and
delivery of Subordinated Securities of any series by the Trustee or to the
Trustee's Certificate of Authentication, such reference shall be deemed to
include authentication and delivery on behalf of the Trustee by an
Authenticating Agent for such series and a Certificate of Authentication
executed on behalf of the Trustee by such Authenticating Agent. Such
Authenticating Agent shall at all times be a corporation organized and doing
business under the laws of the United States of America or of any State,
authorized under such laws to exercise corporate trust powers, having a combined
capital and surplus of at least $45,000,000 (determined as provided in Section
6.10 with respect to the Trustee) and subject to supervision or examination by
Federal or State authority.
Any corporation into which any Authenticating Agent may be merged or
converted, or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which any Authenticating Agent
shall be a party, or any corporation succeeding to the corporate agency business
of any Authenticating Agent, shall continue to be the authenticating Agent with
respect to all series of Subordinated Securities for which it served as
Authenticating Agent without the execution or filing of any paper or any further
act on the part of the Trustee or such Authenticating Agent. Any Authenticating
Agent may at any time, and if it shall cease to be eligible shall, resign by
giving written notice of resignation to the Trustee and to the Company.
<PAGE>
Upon receiving such a notice of resignation or upon such a termination, or
in case at any time any Authenticating Agent shall cease to be eligible in
accordance with the provisions of this Section 6.15 with respect to one or more
series of Subordinated Securities, the Trustee shall upon receipt of a Company
Order appoint a successor Authenticating Agent and the Company shall provide
notice of such appointment to all Holders of Subordinated Securities of such
series in the manner and to the extent provided in Section 11.4. Any successor
Authenticating Agent upon acceptance of its appointment hereunder shall become
vested with all rights, powers, duties and responsibilities of its predecessor
hereunder, with like effect as if originally named as Authenticating Agent. The
Company agrees to pay to the Authenticating Agent for such series from time to
time reasonable compensation. The Authenticating Agent for the Subordinated
Securities of any series shall have no responsibility or liability for any
action taken by it as such at the direction of the Trustee.
If an appointment is made with respect to one or more series pursuant to this
Section, the Subordinated Securities of such series may have endorsed thereon,
in addition to the Trustee's certificate of authentication, an alternative
certificate of authentication in the following form:
This is one of the Subordinated Securities described in the within-mentioned
Subordinated Indenture.
----------------------------,
As Trustee
By
--------------------------,
As Authenticating Agent
By
--------------------------,
Authorized Officer
Sections 6.2, 6.3, 6.4, 6.6 and 7.3 shall be applicable to any
Authenticating Agent.
ARTICLE 7
CONCERNING THE SECURITYHOLDERS
<PAGE>
SECTION 7.1 Evidence of Action Taken by Securityholders.
Any request, demand, authorization, direction, notice, consent, waiver or
other action provided by this Subordinated Indenture to be given or taken by a
specified percentage in principal amount of the Securityholders of any or all
series may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such specified percentage of
Securityholders in person or by agent duly appointed in writing; and, except as
herein otherwise expressly provided, such action shall become effective when
such instrument or instruments are delivered to the Trustee. Proof of execution
of any instrument or of a writing appointing any such agent shall be sufficient
for any purpose of this Subordinated Indenture and (subject to Sections 6.1 and
6.2) conclusive in favor of the Trustee and the Company, if made in the manner
provided in this Article.
SECTION 7.2 Proof of Execution of Instruments and of Holding of Subordinated
Securities.
Subject to Sections 6.1 and 6.2, the execution of any instrument by a
Securityholder or his agent or proxy may be proved in accordance with such
reasonable rules and regulations as may be prescribed by the Trustee or in such
manner as shall be satisfactory to the Trustee. The holding or Subordinated
Securities shall be proved by the Security Register or by a certificate of the
registrar thereof.
SECTION 7.3 Holders to be Treated as Owners.
The Company, the Trustee and any agent of the Company or the Trustee may
deem and treat the person in whose name any Subordinated Security shall be
registered upon the Security Register for such series as the absolute owner of
such Subordinated Security (whether or not such Subordinated Security shall be
overdue and notwithstanding any notation of ownership or other writing thereon)
for the purpose of receiving payment of or on account of the principal of and,
subject to the provisions of this Subordinated Indenture, interest on such
Subordinated Security and for all other purposes; and neither the Company nor
the Trustee nor any agent of the Company or the Trustee shall be affected by any
notice to the contrary. The Company, the Trustee and any agent of the Company or
the Trustee may treat the Holder of any Unregistered Subordinated Security and
the Holder of any Coupon as the absolute owner of such Unregistered Subordinated
Security or Coupon (whether or not such Unregistered Subordinated Security or
Coupon shall be overdue) for the purpose of receiving payment thereof or on
account thereof and for all other purposes and neither the Company, the Trustee,
nor any agent of the Company or the Trustee shall be affected by any notice to
the contrary. All such payments so made to any such person, or upon his order,
shall be valid, and, to the extent of the sum or sums so paid, effectual to
satisfy and discharge the liability for moneys payable upon any such
Unregistered Subordinated Security or Coupon.
If the Subordinated Securities of any series are issued in the form of one or
more Global Subordinated Securities, the Depository therefor may grant proxies
to Persons having a beneficial ownership in such Global Subordinated Security or
Subordinated Securities for purposes of voting or otherwise responding to any
request for consent, waiver or other action which the Holder of such
Subordinated Security is entitled to grant or take under this
<PAGE>
Subordinated Indenture and the Trustee shall accept such proxies for the
purposes granted; provided that neither the Trustee nor the Company shall have
any obligation with respect to the grant of or solicitation by the Depository of
such proxies.
SECTION 7.4 Subordinated Securities Owned by Company Deemed Not Outstanding.
In determining whether the Holders of the requisite aggregate principal
amount of Outstanding Subordinated Securities of any or all series have
concurred in any request, demand, authorization, direction, notice, consent,
waiver or other action by Securityholders under this Subordinated Indenture,
Subordinated Securities which are owned by the Company or any other obligor on
the Subordinated Securities with respect to which such determination is being
made or by any person directly or indirectly controlling or controlled by or
under direct or indirect common control with the Company or any other obligor on
the Subordinated Securities with respect to which such determination is being
made shall be disregarded and deemed not to be Outstanding for the purpose of
any such determination, except that for the purpose of determining whether the
Trustee shall be protected in relying on any such action only Subordinated
Securities which the Trustee knows are so owned shall be so disregarded.
Subordinated Securities so owned which have been pledged in good faith may be
regarded as Outstanding if the pledgee establishes to the satisfaction of the
Trustee the pledgee's right so to act with respect to such Subordinated
Securities and that the pledgee is not the Company or any other obligor upon the
Subordinated Securities or any person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company or any
other obligor on the Subordinated Securities. In case of a dispute as to such
right, the advice of counsel shall be full protection in respect of any decision
made by the Trustee in accordance with such advice. Upon request of the Trustee,
the Company shall furnish to the Trustee promptly an Officer's Certificate
listing and identifying all Subordinated Securities, if any, known by the
Company to be owned or held by or for the account of any of the above-described
persons; and, subject to Sections 6.1 and 6.2, the Trustee shall be entitled to
accept such Officer's Certificate as conclusive evidence of the facts therein
set forth and of the fact that all Subordinated Securities not listed therein
are Outstanding for the purpose of any such determination.
SECTION 7.5 Right of Revocation of Action Taken.
At any time prior to (but not after) the evidencing to the Trustee, as
provided in Section 7.1, of the taking of any action by the Holders of the
percentage in aggregate principal amount of the Subordinated Securities of any
or all series, as the case may be, specified in this Subordinated Indenture in
connection with such action, any Holder of a Subordinated Security the serial
number of which is shown by the evidence to be included among the serial numbers
of the Subordinated Securities the Holders of which have consented to such
action may, by filing written notice at the Corporate Trust Office and upon
proof of holding as provided in this Article, revoke such action so far as
concerns such Subordinated Security. Except as aforesaid any such action taken
by the Holder of any Subordinated Security shall be conclusive and binding upon
such Holder and upon all future Holders and owners of such Subordinated Security
and of any Subordinated Securities issued in exchange or substitution therefor
or on registration
<PAGE>
of transfer thereof, irrespective of whether or not any notation in regard
thereto is made upon any such Subordinated Security. Any action taken by the
Holders of the percentage in aggregate principal amount of the Subordinated
Securities of any or all series, as the case may be, specified in this
Subordinated Indenture in connection with such action shall be conclusively
binding upon the Company, the Trustee and the Holders of all the Subordinated
Securities affected by such action.
ARTICLE 8
SUPPLEMENTAL SUBORDINATED INDENTURES
SECTION 8.1 Supplemental Subordinated Indentures Without Consent of
Securityholders.
The Company, when authorized by a resolution of its Board of Directors
(which resolution may provide general terms or parameters for such action and
may provide that the specific terms of such action may be determined in
accordance with or pursuant to a Company Order), and the Trustee may from time
to time and at any time enter into an indenture or indentures supplemental
hereto for one or more of the following purposes:
(a) to cause the Subordinated Indenture to be qualified under the Trust
Indenture Act; or
(b) to evidence the succession of another Person to the Company and the
assumption by any such successor of the covenants of the Company herein and in
the Subordinated Securities; or
(c) to add to the covenants of the Company for the benefit of the Holders
of all or any series of Subordinated Securities (and if such covenants are to be
for the benefit of less than all series of Subordinated Securities, stating that
such covenants are expressly being included solely for the benefit of such
series) or to surrender any right or power herein conferred upon the Company; or
(d) to add any additional Events of Default for the benefit of the Holders
of all or any series of Subordinated Securities (and if such additional Events
of Default are to be for the benefit of less than all series of Subordinated
Securities, stating that such additional Events of Default are expressly being
included solely for the benefit of such series); or
(e) to add to or change any of the provisions of this Subordinated
Indenture to such extent as shall be necessary to permit or facilitate the
issuance of Subordinated Securities in bearer form, registrable or not
registrable as to principal, and with or without interest coupons, or to permit
or facilitate the issuance of Subordinated Securities in uncertificated form; or
(f) to add to, change or eliminate any of the provisions of this
Subordinated Indenture in respect of one or more series of Subordinated
Securities, provided that any such addition, change or elimination (A) shall
neither (i) apply to any Subordinated Security of any
<PAGE>
series created prior to the execution of such supplemental indenture and
entitled to the benefit of such provision nor (ii) modify the rights of the
Holder of any such Subordinated Security with respect to such provision or (B)
shall become effective only when there is no such Subordinated Security
Outstanding; or
(g) to secure the Subordinated Securities; or
(h) to establish the form or terms of Subordinated Securities of any series
as permitted by Sections 2.1 and 2.3; or
(i) to evidence and provide for the acceptance of appointment hereunder by
a successor Trustee with respect to the Subordinated Securities of one or more
series and to add to or change any of the provisions of this Subordinated
Indenture as shall be necessary to provide for or facilitate the administration
of the trusts hereunder by more than one Trustee, pursuant to the requirements
of Section 6.11; or
(j) to cure any ambiguity, to correct or supplement any provision herein
which may be defective or inconsistent with any other provision herein, or to
make any other provisions with respect to matters or questions arising under
this Subordinated Indenture, provided that such action pursuant to this Clause
(j) shall not adversely affect the interests of the Holders of Subordinated
Securities of any series in any material respect; or
(k) to make provision with respect to the conversion rights of Holders in
the event of a consolidation, merger or sale of assets involving the Company, as
required in this Subordinated Indenture; or
(l) to supplement any of the provisions of the Subordinated Indenture to
such extent as shall be necessary to permit or facilitate the defeasance and
discharge of any series of Subordinated Securities pursuant to Article 10,
provided that any such action shall not adversely affect the interests of the
Holders of Subordinated Securities of such series or any other series of
Subordinated Securities in any material respect.
SECTION 8.2 Supplemental Subordinated Indentures with Consent of
Securityholders.
With the consent of the Holders of a majority in principal amount of the
Outstanding Subordinated Securities of each series affected by such supplemental
indenture, by act of said Holders delivered to the Company and the Trustee, the
Company, when authorized by a Board Resolution, and the Trustee may enter into
an indenture or indentures supplemental hereto for the purpose of adding any
provisions to or changing in any manner eliminating any of the provisions of
this Subordinated Indenture or of modifying in any manner the rights of the
Holders of Subordinated Securities of such series under this Subordinated
Indenture; provided, however, that no such supplemental indenture shall, without
the consent of the Holder of each Outstanding Subordinated Security affected
thereby,
<PAGE>
(a) change the Stated Maturity of the principal of, or any installment of
principal of or interest on, any Subordinated Security, or reduce the principal
amount thereof or the rate of interest thereon or any premium payable upon the
redemption thereof, or reduce the amount of the principal of an Original Issue
Discount Subordinated Security or any other Subordinated Security which would be
due and payable upon a declaration of acceleration of the Maturity thereof
pursuant to Section 5.2, or change any place of payment where, or the coin or
currency in which, any Subordinated Security or any premium or interest thereon
is payable, or impair the right to institute suit for the enforcement of any
such payment on or after the Stated Maturity thereof (or, in the case of
redemption, on or after the Redemption Date), or modify the provisions of this
Subordinated Indenture with respect to the subordination of the Subordinated
Securities in a manner adverse to the Holders, or
(b) reduce the percentage in principal amount of the Outstanding
Subordinated Securities of any series, the consent of whose Holders is required
for any such supplemental indenture, or the consent of whose Holders is required
for any waiver (of compliance with certain provisions of this Subordinated
Indenture or certain defaults hereunder and their consequences) provided for in
this Subordinated Indenture, or
(c) modify any of the provisions of this Section 8.2 or Section 5.14,
except to increase any such percentage or to provide that certain other
provisions of this Subordinated Indenture cannot be modified or waived without
the consent of the Holder of each Outstanding Subordinated Security affected
thereby; provided, however, that this clause shall not be deemed to require the
consent of any Holder with respect to changes in the references to "the Trustee"
and concomitant changes in this Section 8.2, or the deletion of this proviso, in
accordance with the requirements of Sections 6.11 and 8.1(i).
A supplemental indenture which changes or eliminates any covenant or other
provision of this Subordinated Indenture which has expressly been included
solely for the benefit of one or more particular series of Subordinated
Securities, or which modifies the rights of Holders of Subordinated Securities
of such series, or of Coupons appertaining to such Subordinated Securities, with
respect to such covenant or provision, shall be deemed not to affect the rights
under this Subordinated Indenture of the Holders of Subordinated Securities of
any other series or of the Coupons appertaining to such Subordinated Securities.
Upon the request of the Company, accompanied by a copy of a resolution of
the Board of Directors (which resolution may provide general terms or parameters
for such action and may provide that the specific terms of such action may be
determined in accordance with or pursuant to a Company Order) certified by the
secretary or an assistant secretary of the Company authorizing the execution of
any such supplemental indenture, and upon the filing with the Trustee of
evidence of the consent of the Holders of the Subordinated Securities as
aforesaid and other documents, if any, required by Section 7.1, the Trustee
shall join with the Company in the execution of such supplemental indenture
unless such supplemental indenture affects the Trustee's own rights, duties or
immunities under this Subordinated Indenture or otherwise, in which case the
Trustee may in its discretion, but shall not be obligated to, enter into such
supplemental indenture.
<PAGE>
It shall not be necessary for the consent of the Securityholders under this
Section to approve the particular form of any proposed supplemental indenture,
but it shall be sufficient if such consent shall approve the substance thereof.
Promptly after the execution by the Company and the Trustee of any
supplemental indenture pursuant to the provisions of this Section, the Trustee
shall give notice thereof (i) to the Holders of then Outstanding Registered
Subordinated Securities of each series affected thereby, by mailing a notice
thereof by first-class mail to such Holders at their addresses as they shall
appear on the Security Register, (ii) if any Unregistered Subordinated
Securities of a series affected thereby are then Outstanding, to the Holders
thereof who have filed their names and addresses with the Trustee pursuant to
Section 313(c)(2) of the Trust Indenture Act, by mailing a notice thereof by
first-class mail to such Holders at such addresses as were so furnished to the
Trustee and (iii) if any Unregistered Subordinated Securities of a series
affected thereby are then Outstanding, to all Holders thereof, by publication of
a notice thereof at least once in an Authorized Newspaper in the Borough of
Manhattan, The City of New York and at least once in an Authorized Newspaper in
London (and, if required by Section 3.9, at least once in an Authorized
Newspaper in Luxembourg), and in each case such notice shall set forth in
general terms the substance of such supplemental indenture. Any failure of the
Company to give such notice, or any defect therein, shall not, however, in any
way impair or affect the validity of any such supplemental indenture.
SECTION 8.3 Effect of Supplemental Subordinated Indenture.
Upon the execution of any supplemental indenture pursuant to the provisions
hereof, this Subordinated Indenture shall be and be deemed to be modified and
amended in accordance therewith and the respective rights, limitations of
rights, obligations, duties and immunities under this Subordinated Indenture of
the Trustee, the Company and the Holders of Subordinated Securities of each
series affected thereby shall thereafter be determined, exercised and enforced
hereunder subject in all respects to such modifications and amendments, and all
the terms and conditions of any such supplemental indenture shall be and be
deemed to be part of the terms and conditions of this Subordinated Indenture for
any and all purposes.
SECTION 8.4 Documents to be Given to Trustee.
The Trustee, subject to the provisions of Sections 6.1 and 6.2, may receive
an Officer's Certificate and an Opinion of Counsel as conclusive evidence that
any supplemental indenture executed pursuant to this Article 8 complies with the
applicable provisions of this Subordinated Indenture.
SECTION 8.5 Notation on Subordinated Securities in Respect of Supplemental
Subordinated Indentures.
Subordinated Securities of any series authenticated and delivered after the
execution of any supplemental indenture pursuant to the provisions of this
Article may bear a notation in form approved by the Trustee for such series as
to any matter provided for by such supplemental indenture or as to any action
taken by Securityholders. If the Company or the Trustee shall so
<PAGE>
determine, new Subordinated Securities of any series so modified as to conform,
in the opinion of the Trustee and the Board of Directors, to any modification of
this Subordinated Indenture contained in any such supplemental indenture may be
prepared by the Company, authenticated by the Trustee and delivered in exchange
for the Subordinated Securities of such series then Outstanding.
ARTICLE 9
CONSOLIDATION, MERGER, SALE OR CONVEYANCE
SECTION 9.1 Company May Consolidate, Etc., Only on Certain Terms.
The Company shall not consolidate with or merge into any other Person, or
convey, transfer or lease its properties and assets substantially as an entirety
to any other Person, and the Company shall not permit any other Person to
consolidate with or merge into the Company or convey, transfer or lease its
properties and assets substantially as an entirety to the Company, unless:
(a) in case the Company shall consolidate with or merge into another Person
or convey, transfer or lease its properties and assets substantially as an
entirety to any Person, the Person formed by such consolidation or into which
the Company is merged or the Person which acquires by conveyance or transfer, or
which leases, the properties and assets of the Company substantially as an
entirety shall be a corporation, partnership or trust, shall be organized and
validly existing under the laws of the United States of America, any State
thereof or the District of Columbia and shall expressly assume, by an indenture
supplemental hereto, executed and delivered to the Trustee, in form satisfactory
to the Trustee, the due and punctual payment of the principal of and any premium
and interest on all the Subordinated Securities and the performance or
observance of every covenant of this Subordinated Indenture on the part of the
Company to be performed or observed and any conversion rights shall be provided
for in accordance with the terms that may be established pursuant to Section
2.3, if applicable, or as otherwise specified pursuant to Section 2.3, by
supplemental indenture satisfactory in form to the Trustee, executed and
delivered to the Trustee, by the Person (if other than the Company) formed by
such consolidation or into which the Company shall have been merged or by the
Person which shall have acquired the Company's assets;
(b) immediately after giving effect to such consolidation, merger,
conveyance, transfer or lease, no Event of Default, and no event which, after
notice or lapse of time or both, would become an Event of Default, shall have
happened and be continuing;
(c) such consolidation, merger, conveyance, transfer or lease does not
adversely affect the validity or enforceability of the Subordinated Securities;
and
(d) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger, conveyance, transfer or lease and, if a supplemental indenture is
required in connection with such transaction, such
<PAGE>
supplemental indenture (if any), comply with this Subordinated Indenture and the
Subordinated Securities and that all conditions precedent herein provided for
relating to such transaction have been satisfied.
SECTION 9.2 Successor Corporation Substituted.
The successor corporation formed by such consolidation or into which the
Company is merged or to which such conveyance, transfer or lease is made shall
succeed to and be substituted for, and may exercise every right and power of,
the Company under this Subordinated Indenture with the same effect as if such
successor corporation had been named as the Company herein, and thereafter
(except in the case of a lease to another Person) the predecessor corporation
shall be relieved of all obligations and covenants under the Subordinated
Indenture and the Subordinated Securities and, in the event of such conveyance
or transfer, any such predecessor corporation may be dissolved and liquidated.
ARTICLE 10
SATISFACTION AND DISCHARGE
SECTION 10.1 Satisfaction and Discharge of Subordinated Indenture.
(A) If at any time (i) the Company shall have paid or caused to be paid the
principal of and interest on all the Subordinated Securities of any series
Outstanding hereunder and all unmatured Coupons appertaining thereto (other than
Subordinated Securities of such series and Coupons appertaining thereto which
have been destroyed, lost or stolen and which have been replaced or paid as
provided in Section 2.9) as and when the same shall have become due and payable,
or (ii) the Company shall have delivered to the Trustee for cancellation all
Subordinated Securities of any series theretofore authenticated and all
unmatured Coupons appertaining thereto (other than any Subordinated Securities
of such series and Coupons appertaining thereto which shall have been destroyed,
lost or stolen and which shall have been replaced or paid as provided in Section
2.9) or (iii) in the case of any series of Subordinated Securities where the
exact amount (including the currency of payment) of principal of and interest
due on which can be determined at the time of making the deposit referred to in
clause (b) below, (a) all the Subordinated Securities of such series and all
unmatured Coupons appertaining thereto not theretofore delivered to the Trustee
for cancellation shall have become due and payable, or are by their terms to
become due and payable within one year or are to be called for redemption within
one year under arrangements satisfactory to the Trustee for the giving of notice
of redemption, and (b) the Company shall have irrevocably deposited or caused to
be deposited with the Trustee as trust funds in trust the entire amount in (i)
cash (other than moneys repaid by the Trustee or any Paying Agent to the Company
in accordance with Section 10.4), (ii) in the case of any series of Subordinated
Securities the payments on which may only be made in Dollars, direct obligations
of the United States of America, backed by its full faith and credit ("U.S.
Government Obligations"), maturing as to principal and interest at such times
and in such amounts as will insure the availability of cash sufficient to pay at
such Maturity or upon such redemption, as the case may be, or (iii) a
combination thereof, sufficient, in the opinion of a
<PAGE>
nationally recognized firm of independent public accountants expressed in a
written certification thereof delivered to the Trustee, to pay (a) the principal
and interest on all Subordinated Securities of such series and Coupons
appertaining thereto on each date that such principal or interest is due and
payable and (b) any mandatory sinking fund payments on the dates on which such
payments are due and payable in accordance with the terms of the Subordinated
Indenture and the Subordinated Securities of such series; (x) the principal and
interest on all Subordinated Securities of such series and Coupons appertaining
thereto on each date that such principal or interest is due and payable and (y)
any mandatory sinking fund payments on the dates on which such payments are due
and payable in accordance with the terms of the Subordinated Indenture and the
Subordinated Securities of such series; and if, in any such case, the Company
shall also pay or cause to be paid all other sums payable hereunder by the
Company, then this Subordinated Indenture shall cease to be of further effect
(except as to (i) rights of registration of transfer and exchange of
Subordinated Securities of such Series and of Coupons appertaining thereto and
the Company's right of optional redemption, if any, (ii) substitution of
mutilated, defaced, destroyed, lost or stolen Subordinated Securities or
Coupons, (iii) rights of holders of Subordinated Securities and Coupons
appertaining thereto to receive payments of principal thereof and interest
thereon, upon the original stated due dates therefor (but not upon
acceleration), and remaining rights of the Holders to receive mandatory sinking
fund payments, if any, (iv) any optional redemption rights of such series of
Subordinated Securities to the extent to be exercised to make such call for
redemption within one year, (v) the rights, obligations, duties and immunities
of the Trustee hereunder, including those under Section 6.6, (vi) the rights of
the Holders of securities of such series and Coupons appertaining thereto as
beneficiaries hereof with respect to the property so deposited with the Trustee
payable to all or any of them, and (vii) the obligations of the Company under
Section 3.2 and the Trustee, on demand of the Company accompanied by an
Officer's Certificate and an Opinion of Counsel and at the cost and expense of
the Company, shall execute proper instruments acknowledging such satisfaction of
and discharging this Subordinated Indenture; provided, that the rights of
Holders of the Subordinated Securities and Coupons to receive amounts in respect
of principal of and interest on the Subordinated Securities and Coupons held by
them shall not be delayed longer than required by then applicable mandatory
rules or policies of any securities exchange upon which the Subordinated
Securities are listed. The Company agrees to reimburse the Trustee for any costs
or expenses thereafter reasonably and properly incurred and to compensate the
Trustee for any services thereafter reasonably and properly rendered by the
Trustee in connection with this Subordinated Indenture or the Subordinated
Securities of such series.
(B) The following provisions shall apply to the Subordinated Securities of
each series unless specifically otherwise provided in a Board Resolution,
Officer's Certificate or indenture supplemental hereto provided pursuant to
Section 2.3. In addition to discharge of the Subordinated Indenture pursuant to
the next preceding paragraph, in the case of any series of Subordinated
Securities the exact amounts (including the currency of payment) of principal of
and interest due on which can be determined at the time of making the deposit
referred to in clause (a) below, the Company shall be deemed to have paid and
discharged the entire indebtedness on all the Subordinated Securities of such a
series and the Coupons appertaining thereto on the date of the deposit referred
to in subparagraph (a) below, and the provisions of this Subordinated Indenture
with respect to the Subordinated Securities of such series and Coupons
appertaining thereto shall no longer be in effect (except as to (i) rights of
registration
<PAGE>
of transfer and exchange of Subordinated Securities of such series and of
Coupons appertaining thereto and the Company's right of optional redemption, if
any, (ii) substitution of mutilated, defaced, destroyed, lost or stolen
Subordinated Securities or Coupons, (iii) rights of Holders of Subordinated
Securities and Coupons appertaining thereto to receive payments of principal
thereof and interest thereon, upon the original stated due dates therefor (but
not upon acceleration), and remaining rights of the Holders to receive mandatory
sinking fund payments, if any, (iv) any optional redemption rights of such
series of Subordinated Securities to the extent to be exercised to make such
call for redemption within one year, (v) the rights, obligations, duties and
immunities of the Trustee hereunder, (vi) the rights of the Holders of
Subordinated Securities of such series and Coupons appertaining thereto as
beneficiaries hereof with respect to the property so deposited with the Trustee
payable to all or any of them and (vii) the obligations of the Company under
Section 3.2 and the Trustee, at the expense of the Company, shall at the
Company's request, execute proper instruments acknowledging the same, if
(a) with reference to this provision the Company has irrevocably deposited
or caused to be irrevocably deposited with the Trustee as trust funds in trust,
specifically pledged as security for, and dedicated solely to, the benefit of
the Holders of the Subordinated Securities of such series and Coupons
appertaining thereto (i) cash in an amount, or (ii) in the case of any series of
Subordinated Securities the payments on which may only be made in Dollars, U.S.
Government Obligations, maturing as to principal and interest at such times and
in such amounts as will insure the availability of cash or (iii) a combination
thereof, sufficient, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee, to pay (a) the principal and interest on all
Subordinated Securities of such series and Coupons appertaining thereto on each
date that such principal or interest is due and payable and (b) any mandatory
sinking fund payments on the dates on which such payments are due and payable in
accordance with the terms of the Subordinated Indenture and the Subordinated
Securities of such series;
(b) such deposit will not result in a breach or violation of, or constitute
a default under, any agreement or instrument to which the Company is a party or
by which it is bound;
(c) the Company has delivered to the Trustee an Opinion of Counsel based on
the fact that (x) the Company has received from, or there has been published by,
the IRS a ruling or (y) since the date hereof, there has been a change in the
applicable Federal income tax law, in either case to the effect that, and such
opinion shall confirm that, the Holders of the Subordinated Securities of such
series and Coupons appertaining thereto will not recognize income, gain or loss
for United States Federal income tax purposes as a result of such deposit,
defeasance and discharge and will be subject to United States Federal income tax
on the same amount and in the same manner and at the same times, as would have
been the case if such deposit, defeasance and discharge had not occurred; and
(d) the Company has delivered to the Trustee an Officer's Certificate and
an Opinion of Counsel, each stating that all conditions precedent provided for
relating to the defeasance contemplated by this provision have been complied
with.
<PAGE>
(C) The Company shall be released from its obligations under Sections 3.6
and 9.1 and unless otherwise provided for in the Board Resolution, Officer's
Certificate or Subordinated Indenture supplemental hereto establishing such
series of Subordinated Securities, from all covenants and other obligations
referred to in Section 2.3(18) or 2.3(20) with respect to such series of
Subordinated Securities, and any Coupons appertaining thereto, outstanding on
and after the date the conditions set forth below are satisfied (hereinafter,
"covenant defeasance"). For this purpose, such covenant defeasance means that,
with respect to the Outstanding Subordinated Securities of any series, the
Company may omit to comply with and shall have no liability in respect of any
term, condition or limitation set forth in such Section, whether directly or
indirectly by reason of any reference elsewhere herein to such Section or by
reason of any reference in such Section to any other provision herein or in any
other document and such omission to comply shall not constitute an Event of
Default under Section 5.1, but the remainder of this Subordinated Indenture and
such Subordinated Securities and Coupons shall be unaffected thereby. The
following shall be the conditions to application of this subsection C of this
Section 10.1:
(a) The Company has irrevocably deposited or caused to be deposited with
the Trustee as trust funds in trust for the purpose of making the following
payments, specifically pledged as security for, and dedicated solely to, the
benefit of the holders of the Subordinated Securities of such series and coupons
appertaining thereto, (i) cash in an amount, or (ii) in the case of any series
of Subordinated Securities the payments on which may only be made in Dollars,
U.S. Government Obligations maturing as to principal and interest at such times
and in such amounts as will insure the availability of cash or (iii) a
combination thereof, sufficient, in the opinion of a nationally recognized firm
of independent public accountants expressed in a written certification thereof
delivered to the Trustee, to pay (a) the principal and interest on all
Subordinated Securities of such series and Coupons appertaining thereof and (b)
any mandatory sinking fund payments on the day on which such payments are due
and payable in accordance with the terms of the Subordinated Indenture and the
Subordinated Securities of such series;
(b) No Event of Default or event which with notice or lapse of time or both
would become an Event of Default with respect to the Subordinated Securities
shall have occurred and be continuing on the date of such deposit;
(c) Such covenant defeasance shall not cause the Trustee to have a
conflicting interest as defined in Section 6.9 and for purposes of the Trust
Indenture Act with respect to any securities of the Company;
(d) Such covenant defeasance shall not result in a breach or violation of,
or constitute a default under, this Subordinated Indenture or any other
agreement or instrument to which the Company is a party or by which it is bound;
(e) Such covenant defeasance shall not cause any Subordinated Securities
then listed on any registered national securities exchange under the Exchange
Act to be delisted;
<PAGE>
(f) The Company shall have delivered to the Trustee an Officer's
Certificate and Opinion of Counsel to the effect that the Holders of the
Subordinated Securities of such series and Coupons appertaining thereto will not
recognize income, gain or loss for United States Federal income tax purposes as
a result of such covenant defeasance and will be subject to United States
Federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such covenant defeasance had not occurred; and
(g) The Company shall have delivered to the Trustee an Officer's
Certificate and an Opinion of Counsel, each stating that all conditions
precedent provided for relating to the covenant defeasance contemplated by this
provision have been complied with.
SECTION 10.2 Application by Trustee of Funds Deposited for Payment of
Subordinated Securities.
Subject to Section 10.4, all moneys deposited with the Trustee (for other
trustee) pursuant to Section 10.1 shall be held in trust and applied by it to
the payment, either directly or through any Paying Agent (including the Company
acting as its own Paying Agent), to the Holders of the particular Subordinated
Securities of such series and of Coupons appertaining thereto for the payment or
redemption of which such moneys have been deposited with the Trustee, of all
sums due and to become due thereon for principal and interest; but such money
need not be segregated from other funds except to the extent required by law.
SECTION 10.3 Repayment of Moneys Held by Paying Agent.
In connection with the satisfaction and discharge of this Subordinated
Indenture with respect to Subordinated Securities of any series, all moneys then
held by any Paying Agent under the provisions of this Subordinated Indenture
with respect to such series of Subordinated Securities shall, upon demand of the
Company, be repaid to it or paid to the Trustee and thereupon such Paying Agent
shall be released from all further liability with respect to such moneys.
SECTION 10.4 Return of Moneys Held by Trustee and Paying Agent Unclaimed for Two
Years.
Any moneys deposited with or paid to the Trustee or any Paying Agent for
the payment of the principal of and any premium and interest on any Subordinated
Security and any series of Coupons attached thereto and not so applied but
remaining unclaimed under applicable law shall be transferred by the Trustee to
the appropriate Persons in accordance with applicable laws, and the Holder of
such Subordinated Security of such series and of any Coupons appertaining
thereto shall thereafter look only to such Persons for any payment which such
Holder may be entitled to collect and all liability of the Trustee and such
Paying Agent with respect to such moneys shall thereupon cease.
<PAGE>
SECTION 10.5 Indemnity for U.S. Government of Obligations.
The Company shall pay and indemnify the Trustee against any tax, fee or
other charge imposed on or assessed against the U.S. Government Obligations
deposited pursuant to Section 10.1 or the principal or interest received in
respect of such obligations.
ARTICLE 11
MISCELLANEOUS PROVISIONS
SECTION 11.1 Incorporators, Stockholders, Officers and Directors of Company
Exempt from Individual Liability.
No recourse under or upon any obligation, covenant or agreement contained
in this Subordinated Indenture, or in any Subordinated Security, or because of
any indebtedness evidenced thereby, shall be had against any incorporator, as
such or against any past, present or future stockholder, officer or director, as
such, of the Company or of any successor, either directly or through the Company
or any successor, under any rule of law, statute or constitutional provision or
by the enforcement of any assessment or by any legal or equitable proceeding or
otherwise, all such liability being expressly waived and released by the
acceptance of the Subordinated Securities and the Coupons, if any, appertaining
thereto by the Holders thereof and as part of the consideration for the issue of
the Subordinated Securities and the Coupons appertaining thereto.
SECTION 11.2 Provisions of Subordinated Indenture for the Sole Benefit of
Parties and Holders of Subordinated Securities and Coupons.
Nothing in this Subordinated Indenture, in the Subordinated Securities or
in the Coupons appertaining thereto, expressed or implied, shall give or be
construed to give to any person, firm or corporation, other than the parties
thereto and their successors and the Holders of the Subordinated Securities or
Coupons, if any, any legal or equitable right, remedy or claim under this
Subordinated Indenture or under any covenant or provision herein contained, all
such covenants and provisions being for the sole benefit of the parties hereto
and their successors and of the Holders of the Subordinated Securities or
Coupons, if any.
SECTION 11.3 Successors and Assigns of Company Bound by Subordinated Indenture.
All the covenants, stipulations, promises and agreements in this
Subordinated Indenture contained by or in behalf of the Company shall bind its
successors and assigns, whether so expressed or not.
<PAGE>
SECTION 11.4 Notices and Demands on Company, Trustee and Holders of Subordinated
Securities and Coupons.
Any notice or demand which by any provision of this Subordinated Indenture
is required or permitted to be given or served by the Trustee or by the Holders
of Subordinated Securities or Coupons, if any, to or on the Company may be given
or served by being deposited postage prepaid, first-class mail (except as
otherwise specifically provided herein) addressed (until another address of the
Company is filed by the Company with the Trustee) to HEALTHSOUTH Corporation,
One HealthSouth Parkway, Birmingham, Alabama 35243, Attention: Secretary. Any
notice, direction, request or demand by the Company or any Holder of
Subordinated Securities or Coupons, if any, to or upon the Trustee shall be
deemed to have been sufficiently given or served by being deposited postage
prepaid, first-class mail (except as otherwise specifically provided herein)
addressed (until another address of the Trustee is filed by the Trustee with the
Company) to One Liberty Plaza, 23rd Floor, New York, New York 10006, Attention:
Mr. George E. Timmes.
Where this Subordinated Indenture provides for notice to Holders of
Registered Subordinated Securities, such notice shall be sufficiently given
(unless otherwise herein expressly provided) if in writing and mailed,
first-class mail, postage prepaid, to each Holder entitled thereto, at his last
address as it appears in the Security Register. In any case where notice to such
Holders is given by mail, neither the failure to mail such notice, nor any
defect in any notice so mailed, to any particular Holder shall affect the
sufficiency of such notice with respect to other Holders. Where this
Subordinated Indenture provides for notice in any manner, such notice may be
waived in writing by the person entitled to receive such notice, either before
or after the event, and such waiver shall be the equivalent of such notice.
Waivers of notice by Holders shall be filed with the Trustee, but such filing
shall not be a condition precedent to the validity of any action taken in
reliance upon such waiver.
In case, by reason of the suspension of or irregularities in regular mail
service, it shall be impracticable to mail notice to the Company when such
notice is required to the given pursuant to any provision of this Subordinated
Indenture, then any manner of giving such notice as shall be reasonably
satisfactory to the Trustee shall be deemed to be a sufficient giving of such
notice.
SECTION 11.5 Officer's Certificates and Opinions of Counsel; Statements to be
Contained Therein.
Upon any application or demand by the Company to the Trustee to take any
action under any of the provisions of this Subordinated Indenture, the Company
shall furnish to the Trustee an Officer's Certificate stating that all
conditions precedent provided for in this Subordinated Indenture relating to the
proposed action have been complied with and an Opinion of Counsel stating that
in the opinion of such counsel all such conditions precedent have been complied
with, except that in the case of any such application or demand as to which the
furnishing of such documents is specifically required by any provision of this
Subordinated Indenture relating to such particular application or demand, no
additional certificate or opinion need be furnished.
<PAGE>
Each certificate or opinion provided for in this Subordinated Indenture and
delivered to the Trustee with respect to compliance with a condition or covenant
provided for in this Subordinated Indenture shall include (a) a statement that
the person making such certificate or opinion has read such covenant or
condition, (b) a brief statement as to the nature and scope of the examination
or investigation upon which the statements or opinions contained in such
certificate or opinion are based, (c) a statement that, in the opinion of such
person, he has made such examination or investigation as is necessary to enable
him to express an informed opinion as to whether or not such covenant or
condition has been complied with and (d) a statement as to whether or not, in
the opinion of such person, such condition or covenant has been complied with.
Any certificate, statement or opinion of an officer of the Company may be
based, insofar as it relates to legal matters, upon a certificate or opinion of
or representations by counsel, unless such officer knows that the certificate or
opinion or representations with respect to the matters upon which his
certificate, statement or opinion may be based as aforesaid are erroneous, or in
the exercise of reasonable care should know that the same are erroneous. Any
certificate, statement or opinion of counsel may be based, insofar as it relates
to factual matters or information with respect to which is in the possession of
the Company, upon the certificate, statement or opinion of or representations by
an officer of officers of the Company, unless such counsel knows that the
certificate, statement or opinion or representations with respect to the matters
upon which his certificate, statement or opinion may be based as aforesaid are
erroneous, or in the exercise of reasonable care should know that the same are
erroneous.
Any certificate, statement or opinion of an officer of the Company or of
counsel may be based, insofar as it relates to accounting matters, upon a
certificate or opinion of or representations by an accountant or firm of
accountants in the employ of the Company, unless such officer or counsel, as the
case may be, knows that the certificate or opinion of or representations with
respect to the accounting matters upon which his certificate, statement or
opinion may be based as aforesaid are erroneous, or in the exercise of
reasonable care should know that the same are erroneous.
Any certificate or opinion of any independent firm of public accountants
filed with and directed to the Trustee shall contain a statement that such firm
is independent.
SECTION 11.6 Payments Due on Saturdays, Sundays and Holidays.
If the date of Maturity of interest on or principal of the Subordinated
Securities of any series or any Coupons appertaining thereto or the date fixed
for redemption or repayment of any such Subordinated Security or Coupon shall
not be a Business Day, then payment of interest or principal need not be made on
such date, but may be made on the next succeeding Business Day with the same
force and effect as if made on the date of Maturity or the date fixed for
redemption, and no interest shall accrue for the period after such date.
<PAGE>
SECTION 11.7 Conflict of Any Provision of Subordinated Indenture with Trust
Indenture Act.
If and to the extent that any provision of this Subordinated Indenture
limits, qualifies or conflicts with duties imposed by, or with another provision
(an "incorporated provision") included in this Subordinated Indenture by
operation of Sections 310 to 318, inclusive, of the Trust Indenture Act, such
imposed duties or incorporated provision shall control.
SECTION 11.8 New York Law to Govern.
THIS SUBORDINATED INDENTURE AND EACH SUBORDINATED SECURITY AND COUPON SHALL
BE DEEMED TO BE A CONTRACT UNDER THE LAWS OF THE STATE OF NEW YORK, AND FOR ALL
PURPOSES SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF SUCH STATE, WITHOUT
REGARD TO THE CONFLICTS OF LAW PRINCIPLES THEREOF.
SECTION 11.9 Counterparts.
This Subordinated Indenture may be executed in any number of counterparts,
each of which shall be an original; but such counterparts shall together
constitute but one and the same instrument.
SECTION 11.10 Effect of Headings.
The Article and Section headings herein and the Table of Contents are for
convenience only and shall not affect the construction hereof.
SECTION 11.11 Subordinated Securities in a Foreign Currency or in ECU.
Unless otherwise specified in an Officer's Certificate delivered pursuant
to Section 2.3 of this Subordinated Indenture with respect to a particular
series of Subordinated Securities, whenever for purposes of this Subordinated
Indenture any action may be taken by the Holders of a specified percentage in
aggregate principal amount of Subordinated Securities of all series or all
series affected by a particular action at the time Outstanding and, at such
time, there are Outstanding Subordinated Securities of any series which are
denominated in a coin or currency other than Dollars (including ECUs), then the
principal amount of Subordinated Securities of such series which shall be deemed
to be Outstanding for the purpose of taking such action shall be that amount of
Dollars that could be obtained for such amount at the Market Exchange Rate. For
purposes of this Section 11.11, Market Exchange Rate shall mean the noon Dollar
buying rate in The New York City for cable transfers of that currency as
published by the Federal Reserve Bank of New York; provided, in the case of
ECUs, Market Exchange Rate shall mean the rate of exchange determined by the
Commission of the European Communities (or any successor thereto) as published
in the Official Journal of the European Communities (such publication or any
successor publication, the "Journal"). If such Market Exchange Rate is not
available for any reason with respect to such currency, the Trustee shall use,
in its sole discretion and without liability on its part, such quotation of the
Federal Reserve Bank of New
<PAGE>
York or, in the case of ECUs, the rate of exchange as published in the Journal,
as of the most recent available date, or quotations or, in the case of ECUs,
rates of exchange from one or more major banks in The City of New York or in the
country of issue of the currency in question, which for purposes of the ECU
shall be Brussels, Belgium, or such other quotations or, in the case of ECU,
rates of exchange as the Trustee shall deem appropriate. The provisions of this
paragraph shall apply in determining the equivalent principal amount in respect
of Subordinated Securities of a series denominated in a currency other than
Dollars in connection with any action taken by Holders of Subordinated
Securities pursuant to the terms of this Subordinated Indenture.
All decisions and determinations of the Trustee regarding the Market
Exchange Rate or any alternative determination provided for in the preceding
paragraph shall be in its sole discretion and shall, in the absence of manifest
error, be conclusive to the extent permitted by law for all purposes and
irrevocably binding upon the Company and all Holders.
SECTION 11.12 Judgment Currency.
The Company agrees, to the fullest extent that it may effectively do so
under applicable law, that (a) if for the purpose of obtaining judgment in any
court it is necessary to convert the sum due in respect of the principal of or
interest on the Subordinated Securities of any series (the "Required Currency")
into a currency in which a judgment will be rendered (the "Judgment Currency"),
the rate of exchange used shall be the rate at which in accordance with normal
banking procedures the Trustee could purchase in The City of New York the
Required Currency with the Judgment Currency on the day on which final
unappealable judgment is entered, unless such day is not a New York Banking Day,
then, to the extent permitted by applicable law, the rate of exchange used shall
be the rate at which in accordance with normal banking procedures the Trustee
could purchase in The City of New York the Required Currency with the Judgment
Currency on the New York Banking Day preceding the day on which final
unappealable judgment is entered and (b) its obligations under this Subordinated
Indenture to make payments in the Required Currency (i) shall not be discharged
or satisfied by any tender, or any recovery pursuant to any judgment (whether or
not entered in accordance with subsection (a)), in any currency other than the
Required Currency, except to the extent that such tender or recovery shall
result in the actual receipt, by the payee, of the full amount of the Required
Currency expressed to be payable in respect of such payments, (ii) shall be
enforceable as an alternative or additional cause of action for the purpose of
recovering in the Required Currency the amount, if any, by which such actual
receipt shall fall short of the full amount of the Required Currency so
expressed to be payable and (iii) shall not be affected by judgment being
obtained for any other sum due under this Subordinated Indenture. For purposes
of the foregoing, "New York Banking Day" means any day except a Saturday, Sunday
or a legal holiday in The City of New York or a day on which banking
institutions in The City of New York are authorized or required by law or
executive order to close.
<PAGE>
ARTICLE 12
REDEMPTION OF SUBORDINATED SECURITIES AND SINKING FUNDS
SECTION 12.1 Applicability of Article.
The provisions of this Article shall be applicable to the Subordinated
Securities of any series which are redeemable before their Maturity or to any
sinking fund for the retirement of Subordinated Securities of a series except as
otherwise specified as contemplated by Section 2.3 for Subordinated Securities
of such series.
SECTION 12.2 Notice of Redemption; Partial Redemptions.
Notice of redemption to the Holders of Registered Subordinated Securities
of any series to be redeemed as a whole or in part at the option of the Company
shall be given by mailing notice of such redemption by first class mail, postage
prepaid, at least 30 days and not more than 60 days prior to the date fixed for
redemption to such Holders of Subordinated Securities of such series at their
last addresses as they shall appear upon the registry books. Notice of
redemption to the Holders of Unregistered Subordinated Securities to be redeemed
as a whole or in part, who have filed their names and addresses with the Trustee
pursuant to Section 313(c)(2) of the Trust Indenture Act shall be given by
mailing notice of such redemption, by first class mail, postage prepaid, at
least 30 days and not more than 60 prior to the date fixed for redemption, to
such Holders at such addresses as were so furnished to the Trustee (and, in the
case of any such notice given by the Company, the Trustee shall make such
information available to the Company for such purpose). Notice of redemption to
all other Holders of Unregistered Subordinated Securities shall be published in
an Authorized Newspaper in the Borough of Manhattan, The City of New York and in
an Authorized Newspaper in London (and, if required by Section 3.9, in an
Authorized Newspaper in Luxembourg), in each case, once in each of three
successive calendar weeks, the first publication to be not less than 30 nor more
than 60 days prior to the date fixed for redemption. Any notice which is mailed
in the manner herein provided shall be conclusively presumed to have been duly
given, whether or not the Holder receives the notice. Failure to give notice by
mail, or any defect in the notice to the Holder of any Subordinated Security of
a series designated for redemption as a whole or in part shall not affect the
validity of the proceedings for the redemption of such Subordinated Security of
such series.
The notice of redemption to each such Holder shall specify the principal
amount of each Subordinated Security of such series held by such Holder to be
redeemed, the date fixed for redemption, the redemption price, the place or
places of payment, that payment will be made upon presentation and surrender of
such Subordinated Securities and, in the case of Subordinated Securities with
Coupons attached thereto, of all Coupons appertaining thereto maturing after the
date fixed for redemption, that such redemption is pursuant to the mandatory or
optional sinking fund, or both, if such be the case, that interest accrued to
the date fixed for redemption will be paid as specified in such notice and that
on and after said date interest thereon or on the portions thereof to be
redeemed will cease to accrue. In case any Subordinated Security of a series is
to be redeemed in part only the notice of redemption shall state the portion of
the principal
<PAGE>
amount thereof to be redeemed and shall state that on and after the date fixed
for redemption, upon surrender of such Subordinated Security, a new Subordinated
Security or Subordinated Securities of such series in principal amount equal to
the unredeemed portion thereof will be issued.
The notice of redemption of Subordinated Securities of any series to be
redeemed at the option of the Company shall be given by the Company or, at the
Company's request, by the Trustee in the name and at the expense of the Company.
On or before the redemption date specified in the notice of redemption
given as provided in this Section, the Company will deposit with the Trustee or
with one or more Paying Agents (or, if the Company is acting as its own Paying
Agent, set aside, segregate and holder in trust as provided in Section 3.4) an
amount of money sufficient to redeem on the redemption date all the Subordinated
Securities of such series so called for redemption at the appropriate redemption
price, together with accrued interest to the date fixed for redemption. The
Company will deliver to the Trustee at least 70 days prior to the date fixed for
redemption, or such shorter period as shall be acceptable to the Trustee, an
Officer's Certificate stating the aggregate principal amount of Subordinated
Securities to be redeemed. In case of a redemption at the election of the
Company prior to the expiration of any restriction on such redemption, the
Company shall deliver to the Trustee, prior to the giving of any notice of
redemption to Holders pursuant to this Section, an Officer's Certificate stating
that such restriction has been complied with.
If less than all the Subordinated Securities of a series are to be
redeemed, the Trustee shall select, in such manner as it shall deemed
appropriate and fair, in its sole discretion, Subordinated Securities of such
series to be redeemed in whole or in part. Subordinated Securities may be
redeemed in part in multiples equal to the minimum authorized denomination for
Subordinated Securities of such series or any multiple thereof. The Trustee
shall promptly notify the Company in writing of the Subordinated Securities of
such series selected for redemption and, in the case of any Subordinated
Securities of such series selected for partial redemption, the principal amount
thereof to be redeemed. For all purposes of this Subordinated Indenture, unless
the context otherwise requires, all provisions relating to the redemption of
Subordinated Securities of any series shall relate, in the case of any
Subordinated Security redeemed or to be redeemed only in part, to the portion of
the principal amount of such Subordinated Security which has been or is to be
redeemed.
SECTION 12.3 Payment of Subordinated Securities Called for Redemption.
If notice of redemption has been given as above provided, the Subordinated
Securities or portions of Subordinated Securities specified in such notice shall
become due and payable on the date and at the place stated in such notice at the
applicable redemption price, together with interest accrued to the date fixed
for redemption, and on and after said date (unless the Company shall default in
the payment of such Subordinated Securities at the redemption price, together
with interest accrued to said date) interest on the Subordinated Securities or
portions of Subordinated Securities so called for redemption shall cease to
accrue, and the unmatured Coupons, if any, appertaining thereto shall be void,
and, except as provided in Sections 6.5 and
<PAGE>
10.4, such Subordinated Securities shall cease from and after the date fixed for
redemption to be entitled to any benefit or security under this Subordinated
Indenture, and the Holders thereof shall have no right in respect of such
Subordinated Securities except the right to receive the redemption price thereof
and unpaid interest to the date fixed for redemption. On presentation and
surrender of such Subordinated Securities at a place of payment specified in
said notice, together with all Coupons, if any, appertaining thereto maturing
after the date fixed for redemption, said Subordinated Securities or the
specified portions thereof shall be paid and redeemed by the Company at the
applicable redemption price, together with interest accrued thereon to the date
fixed for redemption; provided, that payment of interest becoming due on or
prior to the date fixed for redemption shall be payable in the case of
Subordinated Securities with Coupons attached thereto, to the Holders of the
Coupons for such interest upon surrender thereof, and in the case of Registered
Subordinated Securities, to the Holder of such Registered Subordinated
Securities registered as such on the relevant record date, subject to the terms
and provisions of Section 2.3 and 2.7 hereof.
If any Subordinated Security called for redemption shall not be so paid
upon surrender thereof for redemption, the principal shall, until paid or duly
provided for, bear interest from the date fixed for redemption at the rate of
interest or Yield to Maturity (in the case of an Original Issue Discount
Subordinated Security) borne by such Subordinated Security.
If any Subordinated Security with Coupons attached thereto is surrendered
for redemption and is not accompanied by all appurtenant Coupons maturing after
the date fixed for redemption, the surrender of such missing Coupon or Coupons
may be waived by the Company and the Trustee, if there be furnished to each of
them such security or indemnity as they may require to save each of them
harmless.
Upon presentation of any Subordinated Security redeemed in part only, the
Company shall execute and the Trustee shall authenticate and deliver to or on
the order of the Holder thereof, at the expense of the Company, a new
Subordinated Security or Subordinated Securities of such series, of authorized
denominations, in principal amount equal to the unredeemed portion of the
Subordinated Security so presented.
SECTION 12.4 Exclusion of Certain Subordinated Securities from Eligibility for
Selection for Redemption.
Subordinated Securities shall be excluded from eligibility for selection
for redemption if they are identified by registration and certificate number in
an Officer's Certificate delivered to the Trustee at least 40 days prior to the
last date on which notice of redemption may be given as being owned of record
and beneficially by, and not pledged or hypothecated by, either (a) the Company
or (b) an entity specifically identified in such written statement as directly
or indirectly controlling or controlled by or under direct or indirect common
control with the Company.
SECTION 12.5 Mandatory and Optional Sinking Funds.
The minimum amount of any sinking fund payment provided for by the terms of
the Subordinated Securities of any series is herein referred to as a "mandatory
sinking fund
<PAGE>
payment," and any payment in excess of such minimum amount provided for by the
terms of the Subordinated Securities of any series is herein referred to as an
"optional sinking fund payment." The date on which a sinking fund payment is to
be made is herein referred to as the "sinking fund payment date."
In lieu of making all or any part of any mandatory sinking fund payment
with respect to any series of Subordinated Securities in cash, the Company may
at its option (a) deliver to the Trustee Subordinated Securities of such series
theretofore purchased or otherwise acquired (except upon redemption pursuant to
the mandatory sinking fund) by the Company or receive credit for Subordinated
Securities of such series (not previously so credited) theretofore purchased or
otherwise acquired (except as aforesaid) by the Company and delivered to the
Trustee for cancellation pursuant to Section 2.10, (b) receive credit for
optional sinking fund payments (not previously so credited) made pursuant to
this Section, or (c) receive credit for Subordinated Securities of such series
(not previously so credited) redeemed by the Company through any optional
redemption provision contained in the terms of such series. Subordinated
Securities so delivered or credited shall be received or credited by the Trustee
at the sinking fund redemption price specified in such Subordinated Securities.
On or before the 60th day next preceding each sinking fund payment date for
any series, the Company will deliver to the Trustee an Officer's Certificate
(which need not contain the statements required by Section 11.5) (a) specifying
the portion of the mandatory sinking fund payment to be satisfied by payment of
cash and the portion to be satisfied by credit of Subordinated Securities of
such series and the basis for such credit, (b) stating that none of the
Subordinated Securities of such series has theretofore been so credited, (c)
stating that no defaults in the payment of interest or Events of Default with
respect to such series have occurred (which have not been waived or cured) and
are continuing and (d) stating whether or not the Company intends to exercise
its right to make an optional sinking fund payment with respect to such series
and, if so, specifying the amount of such optional sinking fund payment which
the Company intends to pay on or before the next succeeding sinking fund payment
date. Any Subordinated Securities of such series to be credited and required to
be delivered to the Trustee in order for the Company to be entitled to credit
therefor as aforesaid which have not theretofore been delivered to the Trustee
shall be delivered for cancellation pursuant to Section 2.10 to the Trustee with
such Officer's Certificate (or reasonably promptly thereafter if acceptable to
the Trustee). Such Officer's Certificate shall be irrevocable and upon its
receipt by the Trustee the Company shall become unconditionally obligated to
make all the cash payments or payments therein referred to, if any, on or before
the next succeeding sinking fund payment date. Failure of the Company, on or
before any such 60th day, to deliver such Officer's Certificate and Subordinated
Securities specified in this paragraph, if any, shall not constitute a default
but shall constitute, on and as of such date, the irrevocable election of the
Company (i) that the mandatory sinking fund payment for such series due on the
next succeeding sinking fund payment date shall be paid entirely in cash without
the option to deliver or credit Subordinated Securities of such series in
respect thereof and (ii) that the Company will make no optional sinking fund
payment with respect to such series as provided in this Section.
If the sinking fund payment or payments (mandatory or optional or both) to
be made in cash on the next succeeding sinking fund payment date plus any unused
balance of any
<PAGE>
preceding sinking fund payments made in cash shall exceed $50,000 (or the
equivalent thereof in any Foreign Currency or ECU) or a lesser sum in Dollars
(or the equivalent thereof in any Foreign Currency or ECU) if the Company shall
so request with respect to the Subordinated Securities of any particular series,
such cash shall be applied on the next succeeding sinking fund payment date to
the redemption of Subordinated Securities of such series at the sinking fund
redemption price together with accrued interest to the date fixed for
redemption. If such amount shall be $50,000 (or the equivalent thereof in any
Foreign Currency or ECU) or less and the Company makes no such request then it
shall be carried over until a sum in excess of $50,000 (or the equivalent
thereof in any Foreign Currency or ECU) is available. The Trustee shall select,
in the manner provided in Section 12.2, for redemption on such sinking fund
payment date a sufficient principal amount of Subordinated Securities of such
series to absorb said cash, as nearly as may be, and shall (if requested in
writing by the Company) inform the Company of the serial numbers of the
Subordinated Securities of such series (or portions thereof) so selected.
Subordinated Securities shall be excluded from eligibility for redemption under
this Section if they are identified by registration and certificate number in an
Officer's Certificate delivered to the Trustee at least 60 days prior to the
sinking fund payment date as being owned of record and beneficially by, and not
pledged or hypothecated by, either (a) the Company or (b) an entity specifically
identified in such Officer's Certificate as directly or indirectly controlling
or controlled by or under direct or indirect common control with the Company.
The Trustee, in the name and at the expense of the Company (or the Company, if
it shall so request the Trustee in writing) shall cause notice of redemption of
the Subordinated Securities of such series to be given in substantially the
manner provided in Section 12.2 (and with the effect provided in Section 12.3)
for the redemption of Subordinated Securities of such series in part at the
option of the Company. The amount of any sinking fund payments not so applied or
allocated to the redemption of Subordinated Securities of such series shall be
added to the next cash sinking fund payment for such series and, together with
such payment, shall be applied in accordance with the provisions of this
Section. Any and all sinking fund moneys held on the Stated Maturity date of the
Subordinated Securities of any particular series (or earlier, if such maturity
is accelerated), which are not held for the payment or redemption of particular
Subordinated Securities of such series shall be applied, together with other
moneys, if necessary, sufficient for the purpose, to the payment of the
principal of, and interest on, the Subordinated Securities of such series at
Maturity.
On or before each sinking fund payment date, the Company shall pay to the
Trustee in cash or shall otherwise provide for the payment of all interest
accrued to the date fixed for redemption on Subordinated Securities to be
redeemed on the next following sinking fund payment date.
The Trustee shall not redeem or cause to be redeemed any Subordinated
Securities of a series with sinking fund moneys or give any notice of redemption
of Subordinated Securities for such series by operation of the sinking fund
during the continuance of a default in payment of interest on such Subordinated
Securities or of any Event of Default except that, where the giving of notice of
redemption of any Subordinated Securities shall theretofore have been made, the
Trustee shall redeem or cause to be redeemed such Subordinated Securities,
provided that it shall have received from the Company a sum sufficient for such
redemption. Except as aforesaid, any moneys in the sinking fund for such series
at the time when any such default or
<PAGE>
Event of Default shall occur, and any moneys thereafter paid into the sinking
fund, shall, during the continuance of such default or Event of Default be
deemed to have been collected under Article 5 and held for the payment of all
such Subordinated Securities. In case such Event of Default shall have been
waived as provided in Section 5.14 or the default cured on or before the
sixtieth day preceding the sinking fund payment date in any year, such moneys
shall thereafter be applied on the next succeeding sinking fund payment date in
accordance with this Section to the redemption of such Subordinated Securities.
[Signature page follows]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Subordinated
Indenture to be duly executed and attested as of the date first written above.
HEALTHSOUTH CORPORATION
By: /s/MICHAEL D. MARTIN
_______________________________
Name: Michael D. Martin
Title: Chief Financial Officer
Attest:
By: /s/WILLIAM W. HORTON
__________________________
THE BANK OF NOVA SCOTIA TRUST
COMPANY OF NEW YORK, as Trustee
By: /s/George Timmes
_______________________________
Name: George Timmes
Title: Vice President
Attest:
By: /s/WARREN GOSHINE
_________________________
EXHIBIT (4)-3
HEALTHSOUTH CORPORATION
OFFICERS' CERTIFICATE PURSUANT TO
SECTIONS 2.3 AND 11.5 OF THE SUBORDINATED INDENTURE
Michael D. Martin and William W. Horton do hereby certify that they are the
Executive Vice President, Chief Financial Officer and Treasurer and Senior Vice
President, Corporate Counsel and Assistant Secretary, respectively, of
HEALTHSOUTH Corporation, a Delaware corporation (the "Company") and do further
certify, pursuant to resolutions of the Board of Directors of the Company
adopted on March 6 and 17, 1998 (the "Resolutions"), and in accordance with
Sections 2.3 and 11.5 of the Subordinated Indenture (the Subordinated Indenture
as amended and supplemented by the Resolutions is herein referred to as the
"Subordinated Indenture") dated as of March 20, 1998 between the Company and The
Bank of Nova Scotia Trust Company of New York, as trustee (the "Trustee"), as
follows:
(1) A series of subordinated securities to be issued under the Subordinated
Indenture and designated as the Company's 3.25% Convertible Subordinated
Debentures due 2003 (the "Debentures") has been authorized. The following terms
shall apply to the Debentures:
(a) The Debentures shall be limited to $575,000,000 in aggregate
principal amount (including any over-allotment option) and shall mature on
April 1, 2003;
(b) The Debentures shall bear interest at the rate of 3.25% per annum
from March 20, 1998, payable semiannually on each April 1 and October 1,
commencing October 1, 1998;
(c) The Debentures shall be issued initially in part as global
debentures in registered form in the name of the Depositary (hereinafter
defined) or its nominee in such denominations otherwise as in the form
attached hereto as Annex A (the "Form of Debenture") with such changes
thereto as may be required in the process of printing or otherwise
producing the Debentures not affecting the substance thereof;
(d) The Depositary for the global Debentures shall be The Depository
Trust Company;
(e) The global Debentures shall be exchangeable for definitive
Debentures in registered form substantially the same as the global
Debentures in denominations of $1,000 or any integral multiple thereof upon
the terms and in accordance with the provisions of the Subordinated
Indenture;
<PAGE>
(f) The Debentures shall be payable (as to both principal and
interest) when and as the same shall become due at the office of the
Trustee, One Liberty Plaza, New York, New York 10006, provided that, as
long as any part of the Debentures are in the form of one or more global
Debentures, payments of interest with respect thereto may be made by wire
transfer and provided further, that with respect to Debentures issued in
definitive form, the Company elects to exercise its option to have interest
payable by check mailed to the registered owners' address as they appear on
the Register, as kept by the Trustee on each Record Date;
(g) The Record Dates for the Debentures shall be March 15 and
September 15, as the case may be, preceding each interest payment date; and
(h) The Debentures shall rank pari passu with the Company's 9.5%
Senior Subordinated Notes due 2001.
(2) The Form of Debenture sets forth certain of the terms required to be
set forth in this certificate pursuant to Section 2.3 of the Subordinated
Indenture, and said terms are incorporated herein by reference. The Debentures
were issued at the initial offering price of 100% of principal amount.
(3) In addition to the covenants set forth in Article 3 of the Subordinated
Indenture, the Debentures shall include the following additional covenant:
"SECTION 3.10 Limitations on Certain Other Subordinated Indebtedness.
The Company shall not create, incur, assume or suffer to exist any
Indebtedness that is subordinate in right of payment to any Senior
Indebtedness unless such indebtedness by its terms or the terms of the
instrument creating or evidencing such indebtedness is subordinate in right
of payment to, or ranks pari passu with, the Debentures."
(4) In addition to the Events of Default set forth in Section 5.1 of the
Subordinated Indenture, the following additional Events of Default, shall apply
with respect to the Debentures and shall be subject to the other provisions of
Article 5 of the Subordinated Indenture:
(i) failure to provide timely notice of a Repurchase Event as required
by the Subordinated Indenture and
(ii) default in the payment of the Repurchase Price in respect of any
Debentures on the Repurchase Date therefore.
(5) In addition to the purposes for which a supplemental indenture may be
entered into without the consent of the Holders of the Debentures, the following
shall be considered a purpose:
<PAGE>
"to make any provision with respect to the conversion rights of
Holders of Debentures pursuant to the requirements of Paragraph 8 herein,
in the event of a consolidation, merger or sale of assets involving the
Company."
(6) In addition to the limitations on supplemental indentures with the
consent of Holders set forth in Section 8.2 of the Subordinated Indenture, the
following limitations, shall apply with respect to the Debentures and shall be
subject to the other provisions of Article 8 of the Subordinated Indenture:
(i) impair the right of Holders of Debentures to require the Company
to repurchase Debentures upon the occurrence of a Repurchase Event.
(ii) make any change that adversely affects the right to convert any
security as provided in Paragraph 8 herein or pursuant to Section 2.3 of
the Subordinated Indenture (except as permitted by Section 8.1 of the
Subordinated Indenture).
(7) The Debentures shall be subordinated in right of payment to Senior
Indebtedness upon the following terms and conditions:
(a) Debentures Subordinate to Senior Indebtedness.
The Company covenants and agrees, and each Holder of a Debenture, by
his acceptance thereof, likewise covenants and agrees, that, to the extent
and in the manner hereinafter set forth in this Paragraph 7 (subject to the
provisions of Article 10 of the Subordinated Indenture), the indebtedness
represented by the Debentures and the payment of the principal of (and
premium, if any) and interest on each and all of the Debentures (including
any repurchases or payments pursuant to Paragraph 9 herein) are hereby
expressly made subordinate and subject in right of payment to the prior
payment in full of all Senior Indebtedness.
(b) Payment Over of Proceeds Upon Dissolution, Etc.
In the event of (1) any insolvency or bankruptcy case or proceeding,
or any receivership, liquidation, reorganization or other similar case or
proceeding in connection therewith, relative to the Company or to its
creditors, as such, or to a substantial part of its assets, or (2) any
liquidation, dissolution or other winding up of the Company, whether
voluntary or involuntary and whether or not involving insolvency or
bankruptcy, or (3) any assignment for the benefit of creditors or any other
marshalling of assets and liabilities of the Company, then and in any such
event specified in (1), (2) or (3) above (each such event, if any, herein
sometimes referred to as a "Proceeding") the holders of Senior Indebtedness
shall be entitled to receive payment in full of all amounts due or to
become due on or in respect of all Senior Indebtedness, or provision shall
be
<PAGE>
made for such payment in cash or cash equivalents or otherwise in a manner
satisfactory to the holders of Senior Indebtedness, before the Holders of
the Debentures are entitled to receive any payment or distribution of any
kind or character, whether in cash, property or securities, on account of
principal of (or premium, if any) or interest on the Debentures or on
account of any purchase (including any repurchase pursuant to Paragraph 9
herein) or other acquisition of Debentures by the Company or any Subsidiary
of the Company (all such payments, distributions, purchases and
acquisitions herein referred to, individually and collectively, as a
"Debentures Payment"), and to that end the holders of all Senior
Indebtedness shall be entitled to receive, for application to the payment
thereof, any Debentures Payment which may be payable or deliverable in
respect of the Debentures in any such Proceeding.
In the event that, notwithstanding the foregoing provisions of this
subparagraph 7.2, the Trustee or the Holder of any Debenture shall have
received any Debentures Payment before all Senior Indebtedness is paid in
full or payment thereof provided for in cash or cash equivalents or
otherwise in a manner satisfactory to the holders of Senior Indebtedness,
and if such fact shall, at or prior to the time of such Debentures Payment,
have been made known to the Trustee pursuant to subparagraph 7.10 or, as
the case may be, such Holder, then and in such event such Debentures
Payment shall be paid over or delivered forthwith to the trustee in
bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or
other Person making payment or distribution of assets of the Company for
application to the payment of all Senior Indebtedness remaining unpaid, to
the extent necessary to pay all Senior Indebtedness in full, after giving
effect to any concurrent payment or distribution to or for the holders of
Senior Indebtedness.
For purposes of this Paragraph 7 only, the words "any payment or
distribution of any kind or character, whether in cash, property or
securities" shall not be deemed to include a payment or distribution of
stock or securities of the Company provided for by a plan of reorganization
or readjustment authorized by an order or decree of a court of competent
jurisdiction in a reorganization proceeding under any applicable bankruptcy
law or of any other corporation provided for by such plan of reorganization
or readjustment, which stock or securities are subordinated in right of
payment to all then outstanding Senior Indebtedness to substantially the
same extent as, or to a greater extent than, the Debentures are so
subordinated as provided in this Paragraph 7. The consolidation of the
Company with, or the merger of the Company into, another Person or the
liquidation or dissolution or the Company following the conveyance or
transfer of all or substantially all of its properties and assets as an
entirety to another Person upon the terms and conditions set forth in
Article 9 of the Subordinated Indenture shall not be deemed a Proceeding
for the purposes of this subparagraph 7.2 if the Person formed by such
consolidation or into which the Company is merged or the Person which
acquires by conveyance or transfer such properties and assets substantially
as an entirety, as the case may
<PAGE>
be, shall, as a part of such consolidation, merger, conveyance or transfer,
comply with the conditions set forth in Article 9 of the Subordinated
Indenture.
(c) Prior Payment to Senior Indebtedness Upon Acceleration of
Debentures.
In the event that any Debentures are declared due and payable before
their Stated Maturity, then and in such event the holders of the Senior
Indebtedness outstanding at the time such Debentures so become due and
payable shall be entitled to receive payment in full of all amounts due or
to become due on or in respect of all Senior Indebtedness, or provision
shall be made for such payment in cash or cash equivalents or otherwise in
a manner satisfactory to the holders of such Senior Indebtedness, before
the Holders of the Debentures are entitled to receive any Debentures
Payment (including any payment which may be payable by reason of the
payment of any other indebtedness of the Company being subordinated to the
payment of the Debentures).
In the event that, notwithstanding the foregoing, the Company shall
make any Debentures Payment to the Trustee or any Holder of Debentures
prohibited by the foregoing provisions of this Paragraph 7, and if such
fact shall, at or prior to the time of such Debentures Payment, have been
made known to the Trustee pursuant to subparagraph 7.10 or, as the case may
be, such Holder, then and in such event such Debentures Payment shall be
paid over and delivered forthwith to the Company.
The provisions of this subparagraph 7.3 shall not apply to any
Debentures Payment with respect to which subparagraph 7.2 would be
applicable.
(d) No Payment in Certain Circumstances.
(a) No payment or distribution of any assets of the Company of any
kind or character shall be made on account of the Debentures or on account
of the purchase, redemption or other acquisition of the Debentures upon the
occurrence of any default in the payment of any Senior Indebtedness in
excess of $5,000,000 beyond any applicable grace period with respect
thereto, unless and until such default is cured or waived or ceases to
exist or such Senior Indebtedness is discharged.
(b) During the continuation of any non-payment event of default with
respect to any Designated Senior Indebtedness pursuant to which the
maturity thereof may be accelerated, no payment or distribution of any
assets of the Company of any kind or character shall be made by the Company
on account of Subordinated Obligations or on account of the purchase,
redemption or other acquisition of the Debentures for the period specified
below (the "Payment Blockage Period"). The Payment Blockage Period shall
commence upon the receipt of notice by the Company or the Trustee from any
representative of a
<PAGE>
holder of Designated Senior Indebtedness and shall end on the earlier of
(i) 179 days thereafter, (ii) the date on which such event is cured or
waived or ceases to exist or on which such Designated Senior Indebtedness
is discharged, (iii) the date on which the maturity of any indebtedness
(other than Senior Indebtedness) shall have been accelerated by virtue of
such event, or (iv) the date on which such Payment Blockage Period shall
have been terminated by notice to the Company or the Trustee from the
representative of holders of the Designated Senior Indebtedness initiating
such Payment Blockage Period, after which the Company shall resume making
any and all required payments in respect of the Debentures, including any
missed payments. Only one Payment Blockage Period may be commenced during
any period of 365 consecutive days. No event of default with respect to
Designated Senior Indebtedness that existed or was continuing on the date
of the commencement of any Payment Blockage Period with respect to the
Designated Senior Indebtedness initiating such Payment Blockage Period will
be, or can be, made the basis for the commencement of a second Payment
Blockage Period whether or not within a period of 365 consecutive days,
unless such event of default has been cured or waived for a period of not
less than 90 consecutive days. In no event may a Payment Blockage Period
extend beyond 179 days.
In the event that, notwithstanding the foregoing, the Company shall
make any Debentures Payment to the Trustee or any Holder of Debentures
prohibited by the foregoing provisions of this subparagraph 7.4, and if
such fact shall, at or prior to the time of such Debentures Payment, have
been made known to the Trustee or, as the case may be, such Holder, then
and in such event such Debentures Payment shall be paid over and delivered
forthwith to the Company.
The Trustee shall give prompt written notice to the Company of any
notice from a holder of Senior Indebtedness received by the Trustee
pursuant to subparagraph 7.10 which would prohibit the making of any
payment to or by the Trustee with respect to any Debentures.
The provisions of this subparagraph 7.4 shall not apply to any
Debentures Payment with respect to which subparagraph 7.2 would be
applicable.
(e) Payment Permitted If No Default.
Nothing contained in this Paragraph 7 or elsewhere in the Subordinated
Indenture or in any of the Debentures shall prevent (1) the Company, at any
time except during the pendency of any Proceeding referred to in
subparagraph 7.2 or under the conditions described in subparagraph 7.3 or
7.4 from making Debentures Payments, or (2) the application by the Trustee
of any money deposited with it hereunder to Debentures Payments or the
retention of such Debentures Payment by Holders of Debentures, if, at the
time of such
<PAGE>
application by the Trustee, it did not have knowledge that such Debentures
Payment would have been prohibited by the provisions of this Paragraph 7.
(f) Subrogation to Rights of Holders of Senior Indebtedness.
Subject to the payment in full of all amounts due or to become due on
or in respect of Senior Indebtedness, or the provision for such payment in
cash or cash equivalents or otherwise in a manner satisfactory to the
holders of Senior Indebtedness, the Holders of Debentures shall be
subrogated to the extent of the payments or distributions made to the
holders of such Senior Indebtedness pursuant to the provisions of this
Paragraph 7 (equally and ratably with the holders of all indebtedness of
the Company which by its express terms is subordinated to indebtedness of
the Company to substantially the same extent as the Debentures are
subordinated and is entitled to like rights of subrogation) to the rights
of the holders of such Senior Indebtedness to receive payments and
distributions of cash, property and securities applicable to the Senior
Indebtedness until the principal of (and premium, if any) and interest on
the Debentures shall be paid in full. For purposes of such subrogation, no
payments or distributions to the holders of the Senior Indebtedness of any
cash, property or securities to which the Holders of Debentures or the
Trustee would be entitled except for the provisions of this Paragraph 7,
and no payments over pursuant to the provisions of this Paragraph 7 to the
holders of Senior Indebtedness by Holders of Debentures or the Trustee,
shall, as among the Company, its creditors other than holders of Senior
Indebtedness and the Holders of the Debentures, be deemed to be a payment
or distribution by the Company to or on account of the Senior Indebtedness.
(g) Provisions Solely to Define Relative Rights.
The provisions of this Paragraph 7 are and are intended solely for the
purpose of defining the relative rights of the Holders of the Debentures on
the one hand and the holders of Senior Indebtedness on the other hand.
Nothing contained in this Paragraph 7 or elsewhere in this Subordinated
Indenture or in the Debentures is intended to or shall (1) impair, as among
the Company, its creditors other than holders of Senior Indebtedness and
the Holders of Debentures, the obligation of the Company, which is absolute
and unconditional, to pay to the Holders of Debentures the principal of
(and premium, if any) and interest on the Debentures, and to make any
repurchases of the Debentures required by Paragraph 9 hereof, as and when
the same shall become due and payable in accordance with the terms hereof;
or (2) affect the relative rights against the Company of the Holders of
Debentures and creditors of the Company other than the holders of Senior
Indebtedness; or (3) prevent the Trustee or the Holder of any Debenture
from exercising all remedies otherwise permitted by applicable law upon
default under the Subordinated Indenture, subject to the rights, if any,
under this Paragraph 7 of the holders of Senior
<PAGE>
Indebtedness to receive cash, property and securities otherwise payable or
deliverable to the Trustee or such Holder.
(h) Trustee to Effectuate Subordination and Payment Provisions.
Each Holder of a Debenture by his acceptance thereof authorizes and
directs the Trustee on his behalf to take such action as may be necessary
or appropriate to effectuate the subordination and payment provisions
provided in this Paragraph 7 and appoints the Trustee his attorney-in-fact
for any and all such purposes.
(i) No Waiver of Subordination Provisions.
No right of any present or future holder of any Senior Indebtedness to
enforce subordination as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the
Company or by any act or failure to act, in good faith, by any such holder,
or by any noncompliance by the Company with the terms, provisions and
covenants of the Subordinated Indenture, regardless of any knowledge
thereof any such holder may have or be otherwise charged with.
Without in any way limiting the generality of the foregoing paragraph,
the holders of Senior Indebtedness may, at any time and from time to time,
without the consent of or notice to the Trustee or the Holders of the
Debentures, without incurring responsibility to the Holders of the
Debentures and without impairing or releasing the subordination provided in
this Paragraph 7 or the obligations hereunder of the Holders of Debentures
to the holders of Senior Indebtedness, do any one or more of the following:
(i) change the manner, place or terms of payment or extend the time of
payment of, or renew or alter, Senior Indebtedness, or otherwise amend or
supplement in any manner Senior Indebtedness or any instrument evidencing
the same or any agreement under which Senior Indebtedness is outstanding;
(ii) sell, exchange, release or otherwise deal with any property pledged,
mortgaged or otherwise securing Senior Indebtedness; (iii) release any
Person liable in any manner for the collection of Senior Indebtedness; and
(iv) exercise or refrain from exercising any rights against the Company and
any other Person.
(j) Notice to Trustee.
The Company shall give prompt written notice to the Trustee of any
fact known to the Company which would prohibit the making of any payment to
or by the Trustee in respect of the Debentures. Notwithstanding the
provisions of this Paragraph 7 or any other provision of the Subordinated
Indenture, the Trustee shall not be charged with knowledge of the existence
of any facts which would prohibit the making of any payment to or by the
Trustee in respect of the Debentures, unless and until the Trustee shall
have received written notice
<PAGE>
thereof from the Company or a holder of Senior Indebtedness or from any
trustee therefor; and, prior to the receipt of any such written notice, the
Trustee, subject to the provisions of Section 6.1 of the Subordinated
Indenture, shall be entitled in all respects to assume that no such facts
exist; provided, however, that if the Trustee shall not have received the
notice provided for in this subparagraph 7.10 at least three Business Days
prior to the date upon which by the terms hereof any money may become
payable for any purpose (including, without limitation, the payment of the
principal of (and premium, if any) or interest on, or amounts payable upon
redemption or repurchase of, any Debenture), then, anything herein
contained to the contrary notwithstanding, the Trustee shall have full
power and authority to receive such money and to apply the same to the
purpose for which such money was received and shall not be affected by any
notice to the contrary which may be received by it within three Business
Days prior to such date.
Subject to the provisions of Section 6.1 of the Subordinated
Indenture, the Trustee shall be entitled to rely on the delivery to it of a
written notice by a Person representing himself to be a holder of Senior
Indebtedness (or a trustee therefor) to establish that such notice has been
given by a holder of Senior Indebtedness (or a trustee therefor). In the
event that the Trustee determines in good faith that further evidence is
required with respect to the right of any Person as a holder of Senior
Indebtedness to participate in any payment or distribution pursuant to this
Paragraph 7, the Trustee may request such Person to furnish evidence to the
reasonable satisfaction of the Trustee as to the amount of Senior
Indebtedness held by such Person, the extent to which such person is
entitled to participate in such payment or distribution and any other facts
pertinent to the rights of such Person under this Paragraph 7, and if such
evidence is not furnished, the Trustee may defer any payment to such Person
pending judicial determination as to the right of such Person to receive
such payment.
(k) Reliance on Judicial Order or Certificate of Liquidating Agent.
Upon any payment or distribution of assets of the Company referred to
in this Paragraph 7, the Trustee, subject to the provisions of Section 6.1
of the Subordinated Indenture, and the Holders of Debentures shall be
entitled to rely upon any order or decree entered by any court of competent
jurisdiction in which such Proceeding is pending, or a certificate of the
trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee
for the benefit of creditors, agent or other Person making such payment or
distribution, delivered to the Trustee or to the Holders of Debentures, for
the purpose of ascertaining the Persons entitled to participate in such
payment or distribution, the holders of the Senior Indebtedness and other
indebtedness of the Company, the amount thereof or payable thereon, the
amount or amounts paid or distributed thereon and all other facts pertinent
thereto or to this Paragraph 7.
<PAGE>
(l) Trustee Not Fiduciary for Holders of Senior Indebtedness.
The Trustee shall not be deemed to owe any fiduciary duty to the
holders of Senior Indebtedness and shall not be liable to any such holders
if it shall in good faith mistakenly pay over or distribute to Holders of
Debentures or to the Company or to any other Person cash, property or
securities to which any holders of Senior Indebtedness shall be entitled by
virtue of this Paragraph 7 or otherwise.
(m) Rights of Trustee as Holder of Senior Indebtedness; Preservation of
Trustee's Rights.
The Trustee in its individual capacity shall be entitled to all the
rights set forth in this Paragraph 7 with respect to any Senior
Indebtedness which may at any time be held by it, to the same extent as any
other holder of Senior Indebtedness, and nothing in the Subordinated
Indenture shall deprive the Trustee of any of its rights as such holder.
Nothing in this Paragraph 7 shall apply to claims of, or payments to,
the Trustee under or pursuant to Section 6.7 of the Subordinated Indenture.
(n) Paragraph Applicable to Paying Agents.
In case at any time any Paying Agent other than the Trustee shall have
been appointed by the Company and be then acting hereunder, the term
"Trustee" as used in this Paragraph 7 shall in such case (unless the
context otherwise requires) be construed as extending to and including such
Paying Agent within its meaning as fully for all intents and purposes as if
such Paying Agent were named in this Paragraph 7 in addition to or in place
of the Trustee; provided, however, that subparagraph 7.13 shall not apply
to the Company or any Affiliate of the Company if it or such Affiliate acts
as Paying Agent.
(8) The Debentures shall be convertible into shares of Common Stock of the
Company upon the following terms and conditions:
(a) Conversion Privilege and Conversion Price.
Subject to and upon compliance with the provisions of this Paragraph
8, at the option of the Holder thereof, any Debentures or any portion of
the principal amount thereof which is $1,000 or an integral multiple of
$1,000 may be converted at the principal amount thereof, or of such portion
thereof, into fully paid and nonassessable shares (calculated as to each
conversion to the nearest 1/100 of a share) of Common Stock of the Company
at the conversion price, determined as hereinafter provided, in effect at
the time of conversion. Such conversion right shall expire at the close of
business on April 1, 2003. In case a Debentures or portion thereof is
called for redemption at the election of
<PAGE>
the Company, such conversion right in respect of the Debentures shall
expire at the close of business on the second business day preceding the
Redemption Date.
The price at which shares of Common Stock shall be delivered upon
conversion (herein called the "conversion price") shall be initially
$36.625 per share of Common Stock. The conversion price shall be adjusted
in certain instances as provided in this Paragraph 8.
(b) Exercise of Conversion Privilege.
In order to exercise the conversion privilege, the Holder of any
Debenture to be converted shall surrender such Debenture, duly endorsed or
assigned to the Company or in blank, at any office or agency of the Company
maintained for that purpose pursuant to Section 3.2 of the Subordinated
Indenture, accompanied by written notice of conversion in the form provided
on the Debenture (or such other notice as is acceptable to the Company) at
such office or agency that the Holder elects to convert such Debenture or,
if less than the entire principal amount thereof is to be converted, the
portion thereof to be converted. Debentures issued as global Debentures
will be converted in accordance with the standing instructions and
procedures of the Depositary and its participants. Debentures surrendered
for conversion during the period from the close of business on any Regular
Record Date through and including the next Interest Payment Date shall
(except in the case of Debentures or portions thereof which have been
called for redemption on a Redemption Date occurring on or before such
Interest Payment Date) be accompanied by payment in New York Clearing House
funds or other funds acceptable to the Company of an amount equal to the
interest payable on such Interest Payment Date on the principal amount of
Debentures being surrendered for conversion. Subject to the provisions of
Section 2.7 of the Subordinated Indenture relating to the payment of
Defaulted Interest by the Company, the interest payment with respect to a
Debenture called for redemption on a Redemption Date during the period from
the close of business on any Regular Record Date through and including the
next Interest Payment Date shall be payable on such Interest Payment Date
to the Holder of such Debenture at the close of business on such Regular
Record Date notwithstanding the conversion of such Debenture after such
Regular Record Date and on or prior to such Interest Payment Date, and the
Holder converting such Debenture need not include a payment of such
interest payment amount upon surrender of such Debenture for conversion.
Except as provided in the preceding sentence and subject to the final
paragraph of Section 2.7 of the Subordinated Indenture, no payment or
adjustment shall be made upon any conversion on account of any interest
accrued on the Debentures surrendered for conversion or on account of any
dividends on the Common Stock issued upon conversion.
<PAGE>
Debentures shall be deemed to have been converted immediately prior to
the close of business on the day of surrender of such Debentures for
conversion in accordance with the foregoing provisions, and at such time
the rights of the Holders of such Debentures as Holders shall cease, and
the Person or Persons entitled to receive the Common Stock issuable upon
conversion shall be treated for all purposes as the record holder or
holders of such Common Stock at such time. As promptly as practicable on or
after the conversion date, the Company shall issue and shall deliver at
such office or agency a certificate or certificates for the number of full
shares of Common Stock issuable upon conversion, together with payment in
lieu of any fraction of a share, as provided in subparagraph 8.3.
In the case of any Debenture which is converted in part only, upon
such conversion the Company shall execute and the Trustee shall
authenticate and deliver to the Holder thereof, at the expense of the
Company, a new Debenture or Debentures of authorized denominations in
aggregate principal amount equal to the unconverted portion of the
principal amount of such Subordinated Security.
(c) Fractions of Shares.
No fractional shares of Common Stock shall be issued upon conversion
of Debentures. If more than one Debenture shall be surrendered for
conversion at one time by the same Holder, the number of full shares which
shall be issuable upon conversion thereof shall be computed on the basis of
the aggregate principal amount of the Debentures (or specified portions
thereof) so surrendered. Instead of any fractional share of Common Stock
which would otherwise be issuable upon conversion of any Debenture or
Debentures (or specified portions thereof), the Company shall pay a cash
adjustment in respect of such fraction in an amount equal to such fraction
multiplied by the Closing Price per share of Common Stock (consistent with
subparagraph 8.4(h) below) at the close of business on the day of
conversion (or, if such day is not a Trading Day, on the Trading Day
immediately preceding such day).
(d) Adjustment of Conversion Price.
(a) In case the Company shall pay or make a dividend or other
distribution on any class of capital stock of the Company in Common Stock,
the conversion price in effect at the opening of business on the day
following the date fixed for the determination of stockholders entitled to
receive such dividend or other distribution shall be reduced by multiplying
such conversion price by a fraction of which the numerator shall be the
number of shares of Common Stock outstanding at the close of business on
the date fixed for such determination and the denominator shall be the sum
of such number of shares and the total number of shares constituting such
dividend or other distribution, such reduction to become effective
immediately after the opening of business on
<PAGE>
the day following the date fixed for such determination. For the purposes
of this clause (a), the number of shares of Common Stock at any time
outstanding shall not include shares held in the treasury of the Company
but shall include shares issuable in respect of scrip certificates issued
in lieu of fractions of shares of Common Stock. The Company will not pay
any dividend or make any distribution on shares of Common Stock held in the
treasury of the Company.
(b) In case the Company shall issue rights, options or warrants to all
holders of its Common Stock (not being available on an equivalent basis to
Holders of the Debentures upon conversion) entitling them to subscribe for
or purchase shares of Common Stock at a price per share less than the
Current Market Price on the date fixed for the determination of
stockholders entitled to receive such rights, options or warrants, the
conversion price in effect at the opening of business on the day following
the date fixed for such determination shall be reduced by multiplying such
conversion price by a fraction of which the numerator shall be the number
of shares of Common Stock outstanding at the close of business on the date
fixed for such determination plus the number of shares of Common Stock
which the aggregate of the offering price of the total number of shares of
Common Stock so offered for subscription or purchase would purchase at such
Current Market Price and the denominator shall be the number of shares of
Common Stock outstanding at the close of business on the date fixed for
such determination plus the number of shares of Common Stock so offered for
subscription or purchase, such reduction to become effective immediately
after the opening of business on the day following the date fixed for such
determination. For the purposes of this clause (b), the number of shares of
Common Stock at any time outstanding shall not include shares held in the
treasury of the Company but shall include shares issuable in respect of
scrip certificates issued in lieu of fractions of shares of Common Stock.
The Company will not issue any rights, options or warrants in respect of
shares of Common Stock held in the treasury of the Company.
(c) In case outstanding shares of Common Stock shall be subdivided
into a greater number of shares of Common Stock, the conversion price in
effect at the opening of business on the day following the day upon which
such subdivision becomes effective shall be proportionately reduced, and,
conversely, in case outstanding shares of Common Stock shall each be
combined into a smaller number of shares of Common Stock, the conversion
price in effect at the opening of business on the day following the day
upon which such combination becomes effective shall be proportionately
increased, such reduction or increase, as the case may be, to become
effective immediately after the opening of business on the day following
the day upon which such subdivision or combination becomes effective.
(d) In case the Company shall, by dividend or otherwise, distribute to
all holders of its Common Stock evidences of its indebtedness, shares of
any class of its capital stock or other assets (including securities, but
excluding any
<PAGE>
rights, options or warrants referred to in clause (b) of this subparagraph
8.4, any dividend or distribution paid exclusively in cash referred to in
clause (e) of this subparagraph 8.4, any dividend or distribution referred
to in clause (a) of this subparagraph 8.4 and any merger or consolidation
to which subparagraph 8.11 applies), the conversion price shall be adjusted
so that the same shall equal the price determined by multiplying the
conversion price in effect immediately prior to the close of business on
the date fixed for the determination of stockholders entitled to receive
such distribution by a fraction of which the numerator shall be the Current
Market Price on the date fixed for such determination less the then fair
market value (as determined by the Board of Directors, whose determination
shall be conclusive and described in a Board Resolution filed with the
Trustee) of the portion of the assets, shares or evidences of indebtedness
so distributed applicable to one share of Common Stock and the denominator
shall be such Current Market Price, such adjustment to become effective
immediately prior to the opening of business on the day following the date
fixed for the determination of stockholders entitled to receive such
distribution.
(e) In case the Company shall, by dividend or otherwise, distribute to
all holders of its Common Stock cash (excluding any cash that is
distributed upon a merger or consolidation to which Paragraph 9 applies or
as part of a distribution referred to in clause (d) of this subparagraph
8.4) in an aggregate amount that, combined together with (1) the aggregate
amount of any other distributions to all holders of its Common Stock made
exclusively in cash within the 12 months preceding the date of payment of
such distribution and in respect of which no adjustment pursuant to this
clause (e) has been made, and (2) the aggregate of any cash plus the fair
market value (as determined by the Board of Directors, whose determination
shall be conclusive and described in a Board Resolution) of consideration
payable in respect of any tender offer by the Company or any of its
Subsidiaries for all or any portion of the Common Stock concluded within
the 12 months preceding the date of payment of such distribution and in
respect of which no adjustment pursuant to clause (f) of this subparagraph
8.4 has been made, exceeds 12.5% of the product of the Current Market Price
on the date for the determination of holders of shares of Common Stock
entitled to receive such distribution times the number of shares of Common
Stock outstanding on such date, then, and in each such case, immediately
after the close of business on such date for determination, the conversion
price shall be reduced so that the same shall equal the price determined by
multiplying the conversion price in effect immediately prior to the close
of business on the date fixed for determination of the stockholders
entitled to receive such distribution by a fraction (i) the numerator of
which shall be equal to the Current Market Price on the date fixed for such
determination less an amount equal to the quotient of (x) the excess of
such combined amount over such 12.5% and (y) the number of shares of Common
Stock outstanding on such date for determination and (ii) the denominator
of
<PAGE>
which shall be equal to the Current Market Price on such date for
determination.
(f) In case a tender offer made by the Company or any Subsidiary for
all or any portion of the Common Stock shall expire and such tender offer
(as amended upon the expiration thereof) shall require the payment to
stockholders (based on the acceptance (up to any maximum specified in the
terms of the tender offer) of Purchased Shares (as defined below)) of an
aggregate consideration having a fair market value (as determined by the
Board of Directors, whose determination shall be conclusive and described
in a Board Resolution) that combined together with (1) the aggregate of the
cash plus the fair market value (as determined by the Board of Directors,
whose determination shall be conclusive and described in a Board
Resolution), as of the expiration of such tender offer, of consideration
payable in respect of any other tender offer, by the Company or any
Subsidiary for all or any portion of the Common Stock expiring within the
12 months preceding the expiration of such tender offer and in respect of
which no adjustment pursuant to this clause (f) has been made and (2) the
aggregate amount of any distributions to all holders of the Company's
Common Stock made exclusively in cash within 12 months preceding the
expiration of such tender offer and in respect of which no adjustment
pursuant to clause (e) of this Section has been made, exceeds 12.5% of the
product of the Current Market Price as of the last time (the "Expiration
Time") tenders could have been made pursuant to such tender offer (as it
may be amended) times the number of shares of Common Stock outstanding
(including any tendered shares) on the Expiration Time, then, and in each
such case, immediately prior to the opening of business on the day after
the date of the Expiration Time, the conversion price shall be adjusted so
that the same shall equal the price determined by multiplying the
conversion price in effect immediately prior to close of business on the
date of the Expiration Time by a fraction (i) the numerator of which shall
be equal to (A) the product of (I) the current market price per share of
the Common Stock (determined as provided in clause (h) of this subparagraph
8.4) on the date of the Expiration Time and (II) the number of shares of
Common Stock outstanding (including any tendered shares) on the Expiration
Time less (B) the amount of cash plus the fair market value (determined as
aforesaid) of the aggregate consideration payable to stockholders based on
the acceptance (up to any maximum specified in the terms of the tender
offer) of Purchased Shares, and (ii) the denominator of which shall be
equal to the product of (A) the current market price per share of the
Common Stock (determined as provided in clause (h) of this subparagraph
8.4) as of the Expiration Time and (B) the number of shares of Common Stock
outstanding (including any tendered shares) as of the Expiration Time less
the number of all shares validly tendered and not withdrawn as of the
Expiration Time (the shares deemed so accepted up to any such maximum,
being referred to as the "Purchased Shares").
<PAGE>
(g) The reclassification of Common Stock into securities including
securities other than Common Stock (other than any reclassification upon a
consolidation or merger to which subparagraph 8.11 applies) shall be deemed
to involve (i) a distribution of such securities other than Common Stock to
all holders of Common Stock (and the effective date of such
reclassification shall be deemed to be "the date fixed for the
determination of stockholders entitled to receive such distribution" and
the "date fixed for such determination" within the meaning of clause (d) of
this subparagraph 8.4), and (ii) a subdivision or combination, as the case
may be, of the number of shares of Common Stock outstanding immediately
prior to such reclassification into the number of shares of Common Stock
outstanding immediately thereafter (and the effective date of such
reclassification shall be deemed to be "the day upon which such subdivision
becomes effective" or "the day upon which such combination becomes
effective", as the case may be, and "the day upon which such subdivision or
combination becomes effective" within the meaning of clause (c) of this
subparagraph 8.4).
(h) For the purpose of any computation under clauses (b), (d), (e) and
(f) of this subparagraph 8.4, the current market price per share of Common
Stock (the "Current Market Price") on any date shall be deemed to be the
average of the daily Closing Prices for the 5 consecutive Trading Days
selected by the Company commencing not more than 20 Trading Days before,
and ending not later than, the earlier of the day in question and the day
before the "ex" date with respect to the issuance or distribution requiring
such computation. The "Closing Price" for each Trading Day shall be the
reported last sale price regular way or, in case no such reported sale
takes place on such day, the average of the reported closing bid and asked
prices regular way, in either case on the New York Stock Exchange or, if
the Common Stock is not listed or admitted to trading on such Exchange, on
the principal national securities exchange on which the Common Stock is
listed or admitted to trading or, if not listed or admitted to trading on
any national securities exchange, on the National Association of Securities
Dealers Automated Quotations system ("NASDAQ") National Market System
("NASDAQ/NMS") or, if not listed or admitted to trading on NASDAQ/NMS, on
NASDAQ, or, if the Common Stock is not listed or admitted to trading on any
national securities exchange or NASDAQ/NMS or quoted on NASDAQ, the average
of the closing bid and asked prices in the over-the-counter market as
furnished by any New York Stock Exchange member firm selected from time to
time by the Company for that purpose. For purposes of this paragraph, the
term "'ex' date", when used with respect to any issuance or distribution,
shall mean the first date on which the Common Stock trades regular way on
such exchange or in such market without the right to receive such issuance
or distribution.
(i) No adjustment in the conversion price shall be required to be made
until cumulative adjustments (plus any adjustments not previously made by
reason of this paragraph (i)) amount to at least 1% of the conversion
price,
<PAGE>
as last adjusted; provided, however, that any adjustments which by reason
of this subparagraph (i) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All
calculations under this subparagraph (i) shall be made to the nearest cent.
(j) In addition to those required by clauses (a), (b), (c), (d), (e)
and (f) of this subparagraph 8.4, the Company from time to time may make
such reductions in the conversion price by any amount, (i) to the extent
permitted by law for any period of at least 20 days, in which case the
Company shall give 15 days notice of such decrease and (ii) to such extent
as it considers to be advisable in order that any event treated for federal
income tax purposes as a dividend of stock or stock rights will not be
taxable to the holders of shares of Common Stock or, if that is not
possible, to diminish any income taxes that are otherwise payable because
of such event. The Company shall have the power to resolve any ambiguity or
correct any error in this clause (j) and its actions in so doing shall be
final and conclusive.
(e) Notice of Adjustments of Conversion Price.
Whenever the conversion price is adjusted as herein provided:
(a) the Company shall compute the adjusted conversion price in
accordance with subparagraph 8.4 and shall prepare a certificate
signed by the Treasurer of the Company setting forth the adjusted
conversion price and showing in reasonable detail the facts upon which
such adjustment is based, and such certificate shall forthwith be
filed at each office or agency maintained for the purpose of
conversion of Debentures pursuant to Section 3.2 of the Subordinated
Indenture; and
(b) a notice stating that the conversion price has been adjusted
and setting forth the adjusted conversion price shall forthwith be
required, and as soon as practicable after it is required, such notice
shall be mailed by the Company to all Holders of Debentures at their
last addresses as they shall appear in the Security Register.
(f) Notice of Certain Corporate Action.
In case:
(a) the Company shall declare a dividend (or any other
distribution) on its Common Stock payable otherwise than in cash out
of its earned surplus; or
(b) the Company shall authorize the granting to the holders of
its Common Stock of rights or warrants to subscribe for or purchase
any shares of capital stock of any class or of any other rights; or
<PAGE>
(c) of any reclassification of the Common Stock of the Company
(other than a subdivision or combination of its outstanding shares of
Common Stock), or of any consolidation, merger or share exchange to
which the Company is a party and for which approval of any
stockholders of the Company is required, or of the sale or transfer of
all or substantially all of the assets of the Company; or
(d) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company; or
(e) the Company or any Subsidiary shall commence a tender offer
for all or a portion of the Company's outstanding Common Stock (or
shall amend any such tender offer);
then the Company shall cause to be filed at each office or agency
maintained for the purpose of conversion of Debentures pursuant to Section
3.2 of the Subordinated Indenture, and shall cause to be mailed to all
Holders at their last addresses as they shall appear in the Security
Register, at least 20 days (or 10 days in any case specified in clause (a)
or (b) above) prior to the applicable record or effective date hereinafter
specified, a notice stating (x) the date on which a record is to be taken
for the purpose of such dividend, distribution, rights or warrants, or, if
a record is not to be taken, the date as of which the holders of Common
Stock of record to be entitled to such dividend, distribution, rights or
warrants are to be determined, or (y) the date on which such
reclassification, consolidation, merger, share exchange, sale, transfer,
dissolution, liquidation, winding up or tender offer is expected to become
effective, and the date or dates as of which it is expected that holders of
Common Stock of record shall be entitled to exchange their shares of Common
Stock for securities, cash or other property deliverable upon such
reclassification, consolidation, merger, share exchange, sale, transfer,
dissolution, liquidation, winding up or tender offer. Neither the failure
to give such notice nor any defect therein shall affect the legality or
validity of the proceedings described in clauses (a) through (d) of this
subparagraph 8.6. If at the time the Trustee shall not be the conversion
agent, a copy of such notice shall also forthwith be filed by the Company
with the Trustee.
(g) Company to Reserve Common Stock.
The Company shall at all times reserve and keep available out of its
authorized but unissued Common Stock, for the purpose of effecting the
conversion of Debentures, the full number of shares of Common Stock then
issuable upon the conversion of all outstanding Debentures.
<PAGE>
(h) Taxes on Conversions.
The Company will pay any and all taxes that may be payable in respect
of the issue or delivery of shares of Common Stock on conversion of
Debentures pursuant hereto. The Company shall not, however, be required to
pay any tax which may be payable in respect of any transfer involved in the
issue and delivery of shares of Common Stock in a name other than that of
the Holder of the Debenture or Debentures to be converted, and no such
issue or delivery shall be made unless and until the Person requesting such
issue has paid to the Company the amount of any such tax, or has
established to the satisfaction of the Company that such tax has been paid.
(i) Covenant as to Common Stock.
The Company covenants that all shares of Common Stock which may be
issued upon conversion of Debentures will upon issue be fully paid and
nonassessable and, except as provided in subparagraph 8.8, the Company will
pay all taxes, liens and charges with respect to the issue thereof.
(j) Cancellation of Converted Debentures.
All Debentures delivered for conversion shall be delivered to the
Trustee to be canceled by or at the direction of the Trustee, which shall
dispose of the same as provided in Section 2.10 of the Subordinated
Indenture.
(k) Provisions in Case of Consolidation, Merger or Sale of Assets.
In case of any consolidation of the Company with, or merger of the
Company into, any other Person, any merger of another Person into the
Company (other than a merger which does not result in any reclassification,
conversion, exchange or cancellation of outstanding shares of Common Stock
of the Company) or any sale or transfer of all or substantially all of the
assets of the Company, the Person formed by such consolidation or resulting
from such merger or which acquires such assets, as the case may be, shall
execute and deliver to the Trustee a supplemental indenture providing that
the Holder of each Debenture then outstanding shall have the right
thereafter, during the period such Debenture shall be convertible as
specified in subparagraph 8.1, to convert such Debenture only into the kind
and amount of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer by a holder of the number of shares
of Common Stock of the Company into which such Debenture might have been
converted immediately prior to such consolidation, merger, sale or
transfer, assuming such holder of Common Stock of the Company is not a
Person with which the Company consolidated or into which the Company merged
or which merged into the Company or to which such sale or transfer was
made, as the case may be ("Constituent Person"), or an Affiliate of a
constituent Person, and failed to exercise his rights of election,
<PAGE>
if any, as to the kind or amount of securities, cash and other property
receivable upon such consolidation, merger, sale or transfer (provided that
if the kind or amount of securities, cash and other property receivable
upon such consolidation, merger, sale or transfer is not the same for each
share of Common Stock of the Company held immediately prior to such
consolidation, merger, sale or transfer by others than a constituent Person
or an Affiliate thereof and in respect of which such rights of election
shall not have been exercised ("non-electing share"), then for the purpose
of this Section the kind and amount of securities, cash and other property
receivable upon such consolidation, merger, sale or transfer by each
non-electing share shall be deemed to be the kind and amount so receivable
per share by a plurality of the non-electing shares. Such supplemental
indenture shall provide for adjustments which, for events subsequent to the
effective date of such supplemental indenture, shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Paragraph 8. The above provisions of this Paragraph 8 shall similarly apply
to successive consolidations, mergers, sales or transfers.
(l) Trustee's Disclaimer.
The Trustee has no duty to determine when an adjustment under this
Paragraph 8 should be made, how it should be made or what it should be. The
Trustee makes no representation as to the validity or value of any
securities or assets issued upon conversion of Debentures. The Trustee
shall not be responsible for the Company's failure to comply with this
Paragraph 8.
(9) The Debentures shall be subject to repurchase at the option of the
Holders upon the following terms and conditions:
9.1 Right to Require Repurchase.
In the event that a Repurchase Event (as hereinafter defined) shall
occur after the date of issuance of the Debentures, then each Holder of
Debentures shall have the right, at the Holder's option, to require the
Company to repurchase, and upon the exercise of such right the Company
shall repurchase, all of such Holder's Debentures, or any portion of the
principal amount thereof that is an integral multiple of $1,000, on the
date (the "Repurchase Date") that is 30 days after the date of the Company
Notice (as defined in subparagraph 9.2), for cash at a purchase price (the
"Repurchase Price") equal to 100% of the principal amount of the Debentures
to be repurchased, together with accrued and unpaid interest to the
Repurchase Date. Such right to require the repurchase of the Debentures
shall not continue after a discharge of the Company from its obligations
with respect to the Debentures in accordance with Article 10 of the
Subordinated Indenture, unless a Repurchase Event shall have occurred prior
to such discharge.
<PAGE>
9.2 Notices; Method of Exercising Repurchase Right, Etc.
(a) Unless the Company shall have theretofore called for redemption
all of the Outstanding Debentures, on or before the 15th calendar day after
the occurrence of a Repurchase Event, the Company or, at the request (and
expense) of the Company, the Trustee, shall mail to all Holders of
Debentures a notice (the "Company Notice") of the occurrence of the
Repurchase Event and of the repurchase right set forth herein arising as a
result thereof.
Each notice of a repurchase right shall state:
(1) the Repurchase Date,
(2) the date by which the repurchase right must be exercised,
(3) the Repurchase Price for the Debentures, and
(4) a description of the procedure which a Holder of Debentures
must follow to exercise a repurchase right.
No failure of the Company to give the foregoing notices or defect
therein shall limit any Holder's right to exercise a repurchase right or
affect the validity of the proceedings for the repurchase of Debentures.
If any of the foregoing provisions are inconsistent with applicable
law, such law shall govern.
(b) To exercise a repurchase right, a Holder of Debentures shall
deliver to the Company (or an agent designated by the Company for such
purpose) and to the Trustee on or before the close of business on the
Repurchase Date (i) written notice of the Holder's exercise of such right,
which notice shall set forth the name of the Holder, the principal amount
of the Debentures to be repurchased, a statement that an election to
exercise the repurchase right is being made thereby, and (ii) the
Debentures with respect to which the repurchase right is being exercised,
duly endorsed for transfer to the Company. Such written notice shall be
irrevocable, except that the right of the Holder to convert the Debentures
with respect to which the repurchase right is being exercised shall
continue until the close of business on the Repurchase Date.
(c) In the event a repurchase right shall be exercised in accordance
with the terms hereof, the Company shall pay or cause to be paid the
Repurchase Price in cash to the Holder on the Repurchase Date, together
with accrued and unpaid interest to the Repurchase Date payable with
respect to the Debentures as to which the purchase right has been
exercised; provided, however, that installments of interest that mature on
or prior to the Repurchase Date shall be payable in cash to the Holders of
such Debentures, or one or more
<PAGE>
predecessor Debentures, registered as such at the close of business on the
relevant Regular Record Date according to the terms and provisions of
Article 2 of the Subordinated Indenture.
(d) If any Debenture surrendered for repurchase shall not be so paid
on the Repurchase Date, the principal shall, until paid, bear interest to
the extent permitted by applicable law from the Repurchase Date at the rate
borne by the Debenture and each Debenture shall remain convertible into
Common Stock until the principal of such Debenture shall have been paid or
duly provided for.
(e) Any Debenture which is to be repurchased only in part shall be
surrendered to the Trustee (with, if the Company or the Trustee so
requires, due endorsement by, or a written instrument of transfer in form
satisfactory to the Company and the Trustee duly executed by, the Holder
thereof or his attorney duly authorized in writing), and the Company shall
execute, and the Trustee shall authenticate and deliver to the Holder of
such Debenture without service charge, a new Debenture or Debentures,
containing identical terms and conditions, of any authorized denomination
as requested by such Holder in aggregate principal amount equal to and in
exchange for the unrepurchased portion of the principal of the Debenture so
surrendered.
(f) Prior to the Repurchase Date, the Company shall deposit with the
Trustee or with a Paying Agent (or, if the Company is acting as its own
Paying Agent, segregate and hold in trust as provided in Section 3.4 of the
Subordinated Indenture) an amount of money sufficient to pay the Repurchase
Price of the Debentures that are to be repaid on the Repurchase Date.
9.3 "Change of Control," "Termination of Trading" and "Repurchase Event"
Defined.
(a) A Change of Control or a Termination of Trading shall constitute a
"Repurchase Event" giving rise to the right under this Paragraph 9 on the
part of each Holder of a Debenture to require, at the Holder's option, the
Company to repurchase such Holder's Debentures.
(b) For purposes of this Paragraph 9, "Change of Control" shall occur
when: (i) all or substantially all of the Company's assets are sold as an
entirety to any Person or related group of Persons; (ii) there shall be
consummated any consolidation or merger of the Company (A) in which the
Company is not the continuing or surviving corporation (other than a
consolidation or merger with a wholly owned subsidiary of the Company in
which all shares of Common Stock outstanding immediately prior to the
effectiveness thereof are changed into or exchanged for the same
consideration) or (B) pursuant to which the Common Stock would be converted
into cash, securities or other property, in each case other than a
consolidation or merger of the Company in
<PAGE>
which the holders of the Common Stock immediately prior to the
consolidation or merger have, directly or indirectly, at least a majority
of the total voting power of all classes of capital stock entitled to vote
generally in the election of directors of the continuing or surviving
corporation immediately after such consolidation or merger in substantially
the same proportion as their ownership of Common Stock immediately before
such transaction; (iii) any Person, or any Persons acting together which
would constitute a "group" for purposes of Section 13(d) of the Exchange
Act, together with any affiliates thereof, shall beneficially own (as
defined in Rule 13d-3 under the Exchange Act) at least 50% of the total
voting power of all classes of capital stock of the Company entitled to
vote generally in the election of directors of the Company; (iv) at any
time during any consecutive two-year period, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election by such Board of Directors
or whose nomination for election by the stockholders of the Company was
approved by a vote of 66-2/3% of the directors then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors of the Company then in
office; or (v) the Company is liquidated or dissolved or adopts a plan of
liquidation or dissolution.
(c) For purposes of this Paragraph 9, a "Termination of Trading" shall
occur if the Common Stock (or other common stock into which the Debentures
are then convertible) is neither listed for trading on a U.S. national
securities exchange nor approved for trading on an established automated
over-the-counter trading market in the United States.
(10) In addition to the definitions set forth in Article 1 of the
Subordinated Indenture, the Debentures shall include the following additional
definitions, which, in the event of a conflict with the definitions of terms in
the Subordinated Indenture, shall control:
"Change of Control" shall have the meaning specified in subparagraph 9.3.
"Closing Price" has the meaning specified in subparagraph 8.4(h).
"Common Stock" includes any stock of any class of the Company which has no
preference in respect of dividends or of amounts payable in the event of any
voluntary or involuntary liquidation, dissolution or winding-up of the Company
and which is not subject to redemption by the Company. However, subject to the
provisions of subparagraph 8.11, shares issuable on conversion of Debentures
shall include only shares of the class designated as Common Stock of the Company
at the date of this instrument or shares of any class or classes resulting from
any reclassification or reclassifications thereof and which have no preference
in respect of dividends or of amounts payable in the event of any voluntary or
involuntary liquidation, dissolution or winding-up of the Company and which are
not subject to redemption by the Company; provided that if at any time there
shall be more than one such resulting class, the shares of each such class then
so issuable shall be substantially in the proportion which the
<PAGE>
total number of shares of such class resulting from all such reclassifications
bears to the total number of shares of all such classes resulting from all such
reclassifications.
"Current Market Price" has the meaning specified in subparagraph 8.4(h).
"Designated Senior Indebtedness" means (i) amounts now or hereafter
outstanding under the Company's existing bank credit facilities or indebtedness
incurred to extend, refund or refinance such amounts and (ii) any Senior
Indebtedness which, at the time of determination, has an aggregate principal
amount outstanding of at least $20 million and is specifically designated in the
instrument evidencing such Senior Indebtedness as "Designated Senior
Indebtedness" by the Company.
"NASDAQ" and "NASDAQ/NMS" have the meanings specified in subparagraph
8.4(h).
"Repurchase Date" has the meaning specified in subparagraph 9.1.
"Repurchase Event" has the meaning specified in subparagraph 9.3(d).
"Repurchase Price" has the meaning specified in subparagraph 9.15.
"Senior Indebtedness" means all indebtedness, liabilities or other
obligations of the Company, other than the Debentures, whether existing on the
date of execution of this Indenture or thereafter created, incurred or assumed,
except any such other indebtedness, liabilities or other obligations that by
their terms or by operation of law are subordinated to, or subordinated on a
parity with, the Debentures.
"Debentures Payment" has the meaning specified in subparagraph 7.2.
"Subordinated Obligations" means any principal of, premium, if any, and
interest on the Debentures payable pursuant to the terms of the Debentures or
upon acceleration, including any amounts received upon the exercise of rights of
rescission or other rights of action (including claims for damages) or
otherwise, to the extent relating to the purchase price of the Debentures or
amounts corresponding to such principal, premium, if any, or interest on the
Debentures.
"Termination of Trading" has the meaning specified in subparagraph 9.3(b).
"Trading Day" means each Monday, Tuesday, Wednesday, Thursday and Friday,
other than any day on which securities are not traded on the applicable
securities exchange or in the applicable securities market.
(11) The Debentures shall not be subject to any defeasance pursuant to
Section 10.1 of the Subordinated Indenture.
(12) Each of the undersigned is authorized to approve the form, terms and
conditions of the Debentures pursuant to the Resolutions.
<PAGE>
(13) Attached hereto as Annex B is a true and correct copy of the
Resolutions.
(14) Attached hereto as Annex C are true and correct copies of the letter
addressed to the Trustee entitling the Trustee to rely on the Opinion of Counsel
attached thereto, which Opinion relates to the Debentures and complies with
Section 11.5 of the Subordinated Indenture.
(15) Each of the undersigned has reviewed the provisions of the
Subordinated Indenture, including the covenants and conditions precedent
pertaining to the issuance of the Debentures.
(16) In connection with this certificate each of the undersigned has
examined documents, corporate records and certificates and has spoken with other
officers of the Company.
(17) Each of the undersigned has made such examination and investigation as
is necessary to enable him to express an informed opinion as to whether or not
the covenants and conditions precedent of the Subordinated Indenture pertaining
to the issuance of the Debentures have been satisfied.
(18) In our opinion all of the covenants and conditions precedent provided
for in the Subordinated Indenture for the issuance of the Debentures have been
satisfied.
(19) If and to the extent that any provision of this certificate qualifies
or conflicts with any provision of the Subordinated Indenture, the provisions of
this certificate shall control.
Capitalized terms used herein that are not otherwise defined shall have the
meanings ascribed thereto in the Subordinated Indenture or the Debentures, as
the case may be.
[signature page follows]
<PAGE>
IN WITNESS WHEREOF, each of the undersigned officers has executed this
certificate this 20th day of March 1998.
/s/MICHAEL D. MARTIN
__________________________________
Name: Michael D. Martin
Title: Executive Vice President,
Chief Financial Officer and
Treasurer
/s/WILLIAM W. HORTON
__________________________________
Name: William W. Horton
Title: Senior Vice President,
Corporate Counsel and
Assistant Secretary
EXHIBIT (4)-4
REGISTRATION RIGHTS AGREEMENT
Dated as of March 17, 1998
relating to
$500,000,000 Aggregate Principal Amount
of 3.25% Convertible Subordinated
Debentures due 2003
by and among
HEALTHSOUTH CORPORATION
and
SMITH BARNEY INC.,
BEAR, STEARNS & CO. INC.,
COWEN & COMPANY,
CREDIT SUISSE FIRST BOSTON CORPORATION,
J.P. MORGAN SECURITIES INC.,
MORGAN STANLEY & CO. INCORPORATED,
NATIONSBANC MONTGOMERY SECURITIES LLC
PAINEWEBBER INCORPORATED
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered
into as of March 17, 1998 by and among HEALTHSOUTH CORPORATION, a Delaware
corporation (the "Company") and SMITH BARNEY INC., BEAR, STEARNS & CO. INC.,
COWEN & COMPANY, CREDIT SUISSE FIRST BOSTON CORPORATION, J.P. MORGAN SECURITIES
INC., MORGAN STANLEY & CO. INCORPORATED, NATIONSBANC MONTGOMERY SECURITIES LLC,
and PAINEWEBBER INCORPORATED (together, the "Initial Purchasers"), who have
purchased $500,000,000 aggregate principal amount of 3.25% Convertible
Subordinated Debentures due 2003 (the "Debentures") of the Company pursuant to
the Purchase Agreement (as defined below).
<PAGE>
This Agreement is made pursuant to a Purchase Agreement, dated March 17,
1998 (the "Purchase Agreement"), between the Company and the Initial Purchasers.
In order to induce the Initial Purchasers to enter into the Purchase Agreement,
the Company has agreed to provide the registration rights set forth in this
Agreement. The execution and delivery of this Agreement is a condition to
closing under the Purchase Agreement. All defined terms used but not defined
herein shall have the meanings ascribed to them in the Indenture (as defined
herein).
The parties hereby agree as follows:
13 Definitions. As used in this Agreement, the following capitalized terms
shall have the following meanings:
13.1 Act. The Securities Act of 1933, as amended.
13.2 Closing Date. The date on which all the Debentures are sold by the
Company to the Initial Purchasers.
13.3 Commission. The Securities and Exchange Commission.
13.4 Common Stock. The Common Stock, par value $0.01 per share, of the
Company.
13.5 Damages Payment Date. With respect to the Debentures or the Common
Stock, as applicable, each Interest Payment Date as defined in the Indenture.
13.6 Effectiveness Target Date. As defined in Section 4.
13.7 Exchange Act. The Securities Exchange Act of 1934, as amended.
13.8 Exempt Resales. The transactions in which the Initial Purchasers
propose to sell the Debentures inside the United States to (1) certain
"qualified institutional buyers" (as such term is defined in Rule 144A under the
Act) and (2) certain "accredited investors," as defined in Rule 501 of
Regulation D under the Act, and outside the United States in reliance on
Regulation S under the Act.
13.9 Holders. As defined in Section 2(b) hereof.
13.10 Indenture. The Indenture, dated as of March 20, 1998, between the
Company and The Bank of Nova Scotia Trust Company of New York, as trustee (the
"Trustee"), pursuant to which the Debentures are to be issued, as such Indenture
is amended or supplemented from time to time in accordance with the terms
thereof.
13.11 Interest Payment Date. As defined in the Indenture.
13.12 NASD. National Association of Securities Dealers, Inc.
<PAGE>
13.13 Offering Memorandum. The Offering Memorandum, dated March 17, 1998,
and all amendments and supplements thereto, relating to the Debentures and
prepared by the Company pursuant to the Purchase Agreement.
13.14 Person. An individual, partnership, corporation, trust or
unincorporated organization, or a government or agency or political subdivision
thereof.
13.15 Preliminary Prospectus. As defined in Section 3(g).
13.16 Prospectus. The prospectus included in the Shelf Registration
Statement (as defined herein), as amended or supplemented by any Prospectus
Supplement with respect to the terms of the offering of any portion of the
Transfer Restricted Securities (as defined herein) covered by the Shelf
Registration Statement and by all other amendments and supplements to the
prospectus, including post-effective amendments, and all material which may be
incorporated by reference into such prospectus.
13.17 Prospectus Supplement. As defined in Section 5(b).
13.18 Record Holder. (1) With respect to any Damages Payment Date relating
to the Debentures, each Person who is registered on the books of the Registrar
as the holder of Debentures on the record date with respect to the Interest
Payment Date on which such Damages Payment Date shall occur and (2) with respect
to any Damages Payment Date relating to the Common Stock, each Person who is a
holder of record of such Common Stock fifteen days prior to the Damages Payment
Date.
13.19 Shelf Registration Statement. As defined in Section 3(a) hereof.
13.20 TIA. The Trust Indenture Act of 1939, as amended, as in effect on the
date of the Indenture.
13.21 Transfer Restricted Securities. Each Debenture and share of Common
Stock of the Company issuable upon conversion of a Debenture, until each such
Debenture or share (1) has been effectively registered under the Securities Act
and disposed of in accordance with the Shelf Registration Statement covering it,
(2) is distributed to the public pursuant to Rule 144 or (3) may be sold or
transferred pursuant to Rule 144(k) (or any similar provisions then in force)
under the Securities Act or otherwise.
13.22 Underwriter. Any Underwriter, placement agent, selling broker, dealer
manager, qualified independent Underwriter or similar securities industry
professional.
13.23 Underwritten Registration or Underwritten Offering. An offering in
which securities of the Company are sold to an Underwriter or with the
assistance of such Underwriter for reoffering to the public on a firm commitment
or best efforts basis.
<PAGE>
14 Securities Subject to This Agreement.
14.1 Transfer Restricted Securities. The securities entitled to the
benefits of this Agreement are the Transfer Restricted Securities.
14.2 Holders of Transfer Restricted Securities. A Person is deemed to be a
holder of Transfer Restricted Securities (each, a "Holder") whenever such Person
owns Transfer Restricted Securities.
15 Shelf Registration.
15.1 The Company shall cause to be filed with the Commission on or prior to
60 days after the Closing Date, a shelf registration statement pursuant to Rule
415 under the Act (as may then be amended, the "Shelf Registration Statement")
on Form S-1, or Form S-3 if the use of such form is then available, to cover
resales of Transfer Restricted Securities by the Holders thereof who satisfy
certain conditions relating to the provision of information in connection with
the Shelf Registration Statement. The Holders of such Transfer Restricted
Securities shall have provided the representations required pursuant to Section
3(g) hereof. The Company shall use its reasonable best efforts to cause such
Shelf Registration Statement to be declared effective by the Commission on or
prior to 150 days after the Closing Date. The Company shall use its reasonable
best efforts to keep such Shelf Registration Statement continuously effective
for a period ending two years following the Closing Date or such shorter period
that will terminate when each of the Transfer Restricted Securities covered by
the Shelf Registration Statement shall cease to be a Transfer Restricted
Security. The Company further agrees to use its reasonable best efforts to
prevent the happening of any event that would cause the Shelf Registration
Statement to contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading or to be not effective and usable for resale of the
Transfer Restricted Securities during the period that such Shelf Registration
Statement is required to be effective and usable.
Upon the occurrence of any event that would cause the Shelf Registration
Statement (1) to contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading or (2) to be not effective and usable for
resale of Transfer Restricted Securities during the period that such Shelf
Registration Statement is required to be effective and usable, the Company shall
as promptly as reasonably practicable file an amendment to the Shelf
Registration Statement, in the case of clause (i), correcting any such
misstatement or omission, and in the case of either clause (i) or (ii), use its
reasonable best efforts to cause such amendment to be declared effective and
such Shelf Registration Statement to become usable as soon as reasonably
practicable thereafter.
Notwithstanding anything to the contrary in this Section 3, subject to
compliance with Sections 4 and 5(b), if applicable, the Company may prohibit
offers and sales of Transfer Restricted Securities pursuant to the Shelf
Registration Statement at any time if (A) (i) it is in possession of material
non-public information, (ii) the Board of Directors of the Company
<PAGE>
determines (based on advice of counsel) that such prohibition is necessary in
order to avoid a requirement to disclose such material non-public information
and (iii) the Board of Directors of the Company determines in good faith that
disclosure of such material non-public information would not be in the best
interests of the Company and its shareholders or (B) the Company has made a
public announcement relating to an acquisition or business combination
transaction including the Company and/or one or more of its subsidiaries (i)
that is material to the Company and its subsidiaries taken as a whole and (ii)
the Board of Directors of the Company determines in good faith that offers and
sales of Transfer Restricted Securities pursuant to the Shelf Registration
Statement prior to the consummation of such transaction (or such earlier date as
the Board of Directors shall determine) is not in the best interests of the
Company and its shareholders (the period during which any such prohibition of
offers and sales of Transfer Restricted Securities pursuant to the Shelf
Registration Statement is in effect pursuant to clause (A) or (B) of this
subparagraph (a) is referred to herein as a "Suspension Period"). A Suspension
Period shall commence on and include the date on which the Company provides
written notice pursuant to Section 5(d) hereof to Holders of Transfer Restricted
Securities covered by the Shelf Registration Statement that offers and sales of
Transfer Restricted Securities cannot be made thereunder in accordance with this
Section 3 and shall end on the date on which each Holder of Transfer Restricted
Securities covered by the Shelf Registration Statement either receives copies of
a Prospectus Supplement contemplated by Section 5(b) or is advised in writing by
the Company that offers and sales of Transfer Restricted Securities pursuant to
the Shelf Registration Statement and use of the Prospectus may be resumed.
15.2 None of the Company nor any of its security holders (other than the
Holders of Transfer Restricted Securities in such capacity) shall have the right
to include any of the Company's securities in the Shelf Registration Statement.
15.3 If (1) only Debentures are to be registered in the Shelf Registration
Statement and the Holders of a majority in aggregate principal amount of the
Debentures to be registered in the Shelf Registration Statement so elect, or (2)
any shares of Common Stock issued upon conversion of Debentures are to be
included in the Shelf Registration Statement and the Holders of a majority of
the shares of Common Stock to be registered in the Shelf Registration Statement
so elect, an offering of Transfer Restricted Securities pursuant to the Shelf
Registration Statement may by effected in the form of an Underwritten Offering.
In such event, and if the Underwriter advises the Company and the Holders of
such Transfer Restricted Securities in writing that in their opinion the amount
of Transfer Restricted Securities proposed to be sold in such offering exceeds
the amount of Transfer Restricted Securities which can be sold in such offering,
there shall be included in such Underwritten Offering the amount of such
Transfer Restricted Securities which in the opinion of such Underwriters can be
sold, and such amount or number of shares shall be allocated pro rata among the
Holders of such Transfer Restricted Securities on the basis of the principal
amount or number of shares of Transfer Restricted Securities requested to be
included by such Holders. The Holders of the Transfer Restricted Securities to
be registered shall pay all underwriting discounts and commissions of such
Underwriters.
<PAGE>
15.4 If any of the Transfer Restricted Securities covered by the Shelf
Registration Statement are to be sold in an Underwritten Offering, the
Underwriter(s) that will administer the offering will be selected by the Holders
of a majority of the aggregate principal amount of Debentures included in the
Registration Statement and/or the Holders of a majority of shares of Common
Stock included in the Shelf Registration Statement and issued upon conversion of
the Debentures; provided, however, that such Underwriter(s) shall be reasonably
satisfactory to the Company.
15.5 Each Holder whose Transfer Restricted Securities are covered by a
Shelf Registration Statement filed pursuant to this Section 3 agrees, upon the
request of the Underwriter(s) in any Underwritten Offering, not to effect any
public sale or distribution of securities of the Company of the same class as
the securities included in such Shelf Registration Statement, including a sale
pursuant to Rule 144 under the Act (except as part of such registration), during
the 10-day period prior to, and during the 90-day period beginning on, the
closing date of any such Underwritten Offering made pursuant to such Shelf
Registration Statement, to the extent timely notified in writing by such
Underwriter(s).
The foregoing provisions of this Section 3(e) shall not apply to any Holder
of Transfer Restricted Securities if such Holder is prevented by applicable
statute or regulation from entering into any such agreement; provided, however,
that any such Holder shall undertake, in its request to participate in any such
Underwritten Offering, not to effect any public sale or distribution of any of
its Transfer Restricted Securities commencing on the date of sale of such
Transfer Restricted Securities unless it has provided 90 days prior written
notice of such sale or distribution to the Underwriter(s).
15.6 The Company agrees not to effect any public or private offer, sale or
distribution of Securities of the same quality and nature as the Transfer
Restricted Securities to be registered in an Underwritten Offering, including a
sale pursuant to Regulation D under the Act, during the 10-day period prior to,
and during the 90-day period beginning on, the closing date of each Underwritten
Offering made pursuant to the Shelf Registration Statement, to the extent timely
notified in writing by the Underwriter(s) (except as part of such registration,
if permitted, or pursuant to registrations on Forms S-4 or S-8 or any successor
form to such Forms), unless the Underwriter(s) shall consent in writing to a
shorter period of time; provided, however, that any such agreement shall permit
(a) the issuance by the Company of any shares of Common Stock issued to
employees of the Company or to any other eligible person pursuant to any
employee stock option plan, stock ownership plan, stock bonus plan or stock
compensation plan of the Company in effect on the date of such Underwritten
Offering, (b) the issuance by the Company of Common Stock upon the conversion of
securities, or the exercise of options or warrants, outstanding at the date of
such Underwritten Offering and (c) issuances of Common Stock (or any securities
convertible into or exercisable for Common Stock, in connection with the
acquisition of any related business.
15.7 No Holder of Transfer Restricted Securities may include any of its
Transfer Restricted Securities in any Shelf Registration Statement pursuant to
this Agreement unless such Holder furnishes to the Company in writing, within 10
business days after receipt of a
<PAGE>
request therefor, such information as the Company may reasonably request for use
in connection with any Shelf Registration Statement or Prospectus or preliminary
Prospectus (a "Preliminary Prospectus") included therein.
16 Liquidated Damages. If (1) the Shelf Registration Statement is not filed
with the Commission on or prior to 60 days after the Closing Date, (2) the Shelf
Registration Statement has not been declared effective by the Commission within
150 days after the Closing Date (the "Effectiveness Target Date"), or (3) the
Shelf Registration Statement is filed and declared effective but shall
thereafter cease to be effective (without being succeeded immediately by any
additional Shelf Registration Statement filed and declared effective) or usable
for the offer and sale of Transfer Restricted Securities for a period of time
(including any Suspension Period) which shall exceed 60 days in the aggregate in
any 12-month period during the period beginning on the Closing Date and ending
on or prior to the second anniversary of the Closing Date (each such event
referred to in clauses (i) through (iii), a "Registration Default"), the Company
will pay liquidated damages to each Holder of Transfer Restricted Securities who
has complied with such Holder's obligations under this Agreement, during the
first 90-day period immediately following the occurrence of such Registration
Default in an amount equal to one quarter of one percent (25 basis points) per
annum per $1,000 principal amount of Debentures and, if applicable, $2.50 per
annum per 27.30 shares (subject to adjustment in the event of stock splits,
stock recombinations, stock dividends and the like) of Common Stock constituting
Transfer Restricted Securities held by such Holder. The amount of the liquidated
damages will increase to one half of one percent (50 basis points) per annum per
$1,000 principal amount of Debentures or $5.00 per annum per 27.30 shares
(subject to adjustment as set forth above) of Common Stock constituting Transfer
Restricted Securities for any additional days during which a Registration
Default has occurred and is continuing, it being understood that all
calculations pursuant to this and the preceding sentence shall be carried out to
four decimals. All accrued liquidated damages shall be paid to Record Holders by
wire transfer of immediately available funds or by federal funds check by the
Company on each Damages Payment Date. Following the cure of all Registration
Defaults, liquidated damages will cease to accrue with respect to such
Registration Default.
All of the Company's obligations set forth in the preceding paragraph which
are outstanding with respect to any Transfer Restricted Security at the time
such security ceases to be a Transfer Restricted Security shall survive until
such time as all such obligations with respect to such security shall have been
satisfied in full.
17 Registration Procedures. In connection with the Shelf Registration
Statement, the Company will use its reasonable best efforts to effect such
registration to permit the sale of the Transfer Restricted Securities being sold
in accordance with the intended method or methods of distribution or disposition
thereof, and pursuant thereto the Company will as expeditiously as possible
after the Closing Date:
17.1 prepare and file with the Commission a Shelf Registration Statement
relating to the registration on Form S-1, or Form S-3 if the use of such form is
then available, for the sale of the Transfer Restricted Securities in accordance
with the intended method or methods
<PAGE>
of distribution thereof and shall include all financial statements required to
be included or incorporated by reference therein; cooperate and assist in any
filings required to be made with the NASD and use its reasonable best efforts to
cause such Shelf Registration Statement to become effective and approved by such
governmental agencies or authorities as may be necessary to enable the selling
Holders to consummate the disposition of such Transfer Restricted Securities;
provided, however, that before filing a Shelf Registration Statement or any
Prospectus, or any amendments or supplements thereto, the Company will furnish
to the Holders and the Underwriter(s), if any, copies of all such documents
proposed to be filed (except that the Company shall not be required to furnish
any exhibits to such documents, including those incorporated by reference,
unless so requested by a Holder in writing), and the Company will not file any
Shelf Registration Statement or amendment thereto or any Prospectus or any
supplement thereto to which (1) the Underwriter(s), if any, shall reasonably
object or (2) if there are no Underwriters and if (a) only Debentures are to be
registered in the Shelf Registration Statement and the Holders of a majority in
aggregate principal amount of the Debentures registered in the Shelf
Registration Statement shall reasonably object, or (b) any shares of Common
Stock issued upon conversion of the Debentures are included in the Shelf
Registration Statement and the Holders of a majority of the shares of Common
Stock so registered in the Shelf Registration Statement shall reasonably object,
in each such case within five business days after the receipt thereof. A Holder
or Underwriter, if any, shall be deemed to have reasonably objected to such
filing if the Shelf Registration Statement, amendment, Prospectus or supplement,
as applicable, as proposed to be filed contains any untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading which misstatement or
omission is specifically identified to the Company in writing within such five
business days;
17.2 prepare and file with the Commission such amendments and
post-effective amendments to the Shelf Registration Statement as may be
necessary to keep the Shelf Registration Statement effective for the applicable
period set forth in Section 3(a) hereof, or such shorter period as will
terminate when all Transfer Restricted Securities covered by such Shelf
Registration Statement have been sold; cause the Prospectus to be supplemented
by any required supplement thereto (a "Prospectus Supplement"), and as so
supplemented to be filed pursuant to Rule 424 under the Act, and to comply fully
with the applicable provisions of Rules 424 and 430A under the Act in a timely
manner; and comply with the provisions of the Act with respect to the
disposition of all securities covered by such Shelf Registration Statement
during the applicable period in accordance with the intended method or methods
of distribution by the sellers thereof set forth in such Shelf Registration
Statement, Prospectus or Prospectus Supplement;
17.3 if requested by the Holders of Transfer Restricted Securities, or if
the Transfer Restricted Securities are being sold in an Underwritten Offering,
the Underwriter(s) of such Underwritten Offering, promptly incorporate in the
Prospectus, any Prospectus Supplement or post-effective amendment to the Shelf
Registration Statement such information as the Underwriters and/or the Holders
of Transfer Restricted Securities being sold agree should be included therein
relating to the plan of distribution of the Transfer Restricted Securities,
including, without limitation, information with respect to the principal amount
of Transfer
<PAGE>
Restricted Securities being sold to such Underwriter(s), the purchase price
being paid therefor and any other terms with respect to the offering of the
Transfer Restricted Securities to be sold in such offering; and make all
required filings of such Prospectus, Prospectus Supplement or post-effective
amendment as soon as practicable after the Company is notified of the matters to
be incorporated in such Prospectus, Prospectus Supplement or post-effective
amendment;
17.4 advise the Underwriter(s), if any, and selling Holders promptly and,
if requested by such Persons, to confirm such advice in writing, (1) when the
Prospectus or any Prospectus Supplement or post-effective amendment to the Shelf
Registration Statement has been filed, and, with respect to the Shelf
Registration Statement or any post-effective amendment thereto, when the same
has become effective, (2) of any request by the Commission for amendments to the
Shelf Registration Statement or amendments or supplements to the Prospectus or
for additional information relating thereto, (3) of the issuance by the
Commission of any stop order suspending the effectiveness of the Shelf
Registration Statement under the Act or of the suspension by any state
securities commission of the qualification of the Transfer Restricted Securities
for offering or sale in any jurisdiction, or the initiation of any proceeding
for any of the preceding purposes, (4) if at any time the representations and
warranties of the Company contemplated by paragraph (m)(i) below cease to be
true and correct, and (5) of any Suspension Period or of the existence of any
fact and the happening of any event that makes any statement of a material fact
made in the Shelf Registration Statement, the Prospectus, any amendment or
supplement thereto, or any document incorporated by reference therein untrue, or
that requires the making of any additions to or changes in the Shelf
Registration Statement or the Prospectus in order to make the statements therein
not misleading. If at any time the Commission shall issue any stop order
suspending the effectiveness of the Shelf Registration Statement, or any state
securities commission or other regulatory authority shall issue an order
suspending the qualification or exemption from qualification of the Transfer
Restricted Securities under state securities or Blue Sky laws, the Company shall
its reasonable best efforts to obtain the withdrawal or lifting of such order at
the earliest possible time;
17.5 promptly following the filing of any document that is to be
incorporated by reference into the Shelf Registration Statement or the
Prospectus subsequent to the initial filing of the Shelf Registration Statement,
provide copies of such document (excluding exhibits, unless requested by a
Holder in writing) to the Holders;
17.6 furnish to each Holder and each of the Underwriter(s), if any, without
charge, at least one copy of the Shelf Registration Statement, as first filed
with the Commission, and of each amendment thereto, including all documents
incorporated by reference therein and all exhibits (excluding exhibits to
documents incorporated by reference therein unless requested by such Holder);
17.7 deliver to each selling Holder and each of the Underwriter(s), if any,
without charge, as many copies of any Preliminary Prospectus and the Prospectus
and any amendments or supplements thereto as such Persons may reasonably
request; the Company consents to the use of any Preliminary Prospectus and the
Prospectus and any amendments or
<PAGE>
supplements thereto by each of the selling Holders and each of the
Underwriter(s), if any, in connection with the public offering and the sale of
the Transfer Restricted Securities covered by any Preliminary Prospectus and the
Prospectus or any amendments or supplements thereto;
17.8 prior to any public offering of Transfer Restricted Securities,
cooperate with the selling Holders, the Underwriter(s), if any, and their
respective counsel in connection with the registration and qualification of the
Transfer Restricted Securities under the securities or Blue Sky laws of such
jurisdictions as the selling Holders or Underwriter(s) may request and do any
and all other acts or things necessary or advisable to enable the disposition in
such jurisdiction of the Transfer Restricted Securities covered by the Shelf
Registration Statement; provided, however, that the Company shall not be
required (1) to register or qualify as a foreign corporation where it is not now
so qualified, (2) to take any action that would subject it to the service of
process in suits, other than as to matters and transactions relating to the
Shelf Registration Statement, in any jurisdiction where it is not now so
subject, or (3) to take any action that would subject it to taxation in any
jurisdiction in an amount greater than it would be so subject without having
taken such action;
17.9 cooperate with the selling Holders and the Underwriter(s), if any, to
facilitate the timely preparation and delivery of certificates representing
Transfer Restricted Securities to be sold and not bearing any restrictive
legends; and enable such Transfer Restricted Securities to be in such
denominations and registered in such names as the Holders or the Underwriter(s),
if any, may request at least two business days prior to any sale of Transfer
Restricted Securities;
17.10 use its reasonable best efforts to cause the Transfer Restricted
Securities covered by the Shelf Registration Statement to be registered with or
approved by such other governmental agencies or authorities as may be necessary
to enable the seller or sellers thereof or the Underwriter(s), if any, to
consummate the disposition of such Transfer Restricted Securities, subject to
the proviso contained in clause (h) above;
17.11 if any fact or event contemplated by clause (d)(v) above shall exist
or have occurred, prepare a post-effective amendment or supplement to the Shelf
Registration Statement or related Prospectus or any document incorporated
therein by reference or file any other required document so that, as thereafter
delivered to the purchasers of Transfer Restricted Securities, the Prospectus
will not contain an untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein not misleading;
17.12 provide a CUSIP number for all Transfer Restricted Securities not
later than the effective date of the Shelf Registration Statement and provide
the Trustee under the Indenture and/or the transfer agent for the Common Stock
with printed certificates for the Transfer Restricted Securities which are in a
form eligible for deposit with the Depository Trust Company;
17.13 enter into such agreements (including an underwriting agreement) and
take all such other actions in connection therewith as may reasonably be
required in order to expedite
<PAGE>
or facilitate the disposition of the Transfer Restricted Securities pursuant to
the Shelf Registration Agreement, in connection with an Underwritten
Registration, and (1) make such representations and warranties to the Holders
and the Underwriter(s), in form, substance and scope as they may reasonably
request and as are customarily made by issuers to Underwriters in primary
Underwritten Offerings and covering matters including, but not limited to, those
set forth in the Purchase Agreement; (2) obtain opinions of counsel to the
Company and updates thereof in customary form and covering matters reasonably
requested by the Underwriter(s) of the type customarily covered in legal
opinions to Underwriters in connection with primary Underwritten Offerings
addressed to each selling Holder and the Underwriter requesting the same and
covering the matters as may be reasonably requested by such Holders and
Underwriters; (3) obtain, to the extent permitted by Statement on Auditing
Standards No. 72 or any successor Statement thereto, "cold comfort" letters and
updates thereof from the Company's independent certified public accountants
addressed to the selling Holders of Transfer Restricted Securities and the
Underwriters requesting the same, such letters to be in customary form and
covering matters of the type customarily covered in "cold comfort" letters to
Underwriters in connection with primary Underwritten Offerings; (4) set forth in
full or incorporate by reference in the underwriting agreement the
indemnification provisions and procedures of Section 7 hereof with respect to
all parties to be indemnified pursuant to said Section; and (5) deliver such
documents and certificates as may be reasonably requested by the Holders of the
Transfer Restricted Securities being sold or the Underwriter(s) of such
Underwritten Offering to evidence compliance with clause (i) above and with any
customary conditions contained in the underwriting agreement entered into by the
Company pursuant to this clause (m). The above shall be done at or prior to each
closing under such underwriting agreement, as and to the extent required
thereunder;
17.14 make available at reasonable times and in a reasonable manner for
inspection by a representative of the Holders of the Transfer Restricted
Securities, any Underwriter participating in any disposition pursuant to such
Shelf Registration Statement, and any attorney or accountant retained by such
selling Holders or any of the Underwriters, all financial and other records,
pertinent corporate documents and properties of the Company and cause the
Company's officers, directors and employees to supply all information reasonably
requested by any such Holder, Underwriter, attorney or accountant in connection
with such Shelf Registration Statement prior to its effectiveness, provided,
however, that such representatives, attorneys or accountants shall agree to keep
confidential (which agreement shall be confirmed in writing in advance to the
Company if the Company shall so request) all information, records or documents
made available to such persons which are not otherwise available to the general
public unless disclosure of such records, information or documents is required
by court or administrative order (of which the Company shall have been given
prior notice and an opportunity to defend) after the exhaustion of all appeals
therefrom, and to use such information obtained pursuant to this provision only
in connection with the transaction for which such information was obtained, and
not for any other purpose;
17.15 otherwise use its reasonable best efforts to comply with all
applicable rules and regulations of the Commission, and make generally available
to its security holders, as soon as practicable, a consolidated earnings
statement, which consolidated earnings statement shall satisfy the provisions of
Section 11(a) of the Act, for the twelve-month period
<PAGE>
(1) commencing at the end of any fiscal quarter in which Transfer Restricted
Securities are sold to Underwriters in a firm commitment or best efforts
Underwritten Offering or (2) if not sold to Underwriters in such an offering,
beginning with the first month of the Company's first fiscal quarter commencing
after the effective date of the Shelf Registration Statement;
17.16 cause the Indenture to be qualified under the TIA, and, in connection
therewith, cooperate with the Trustee and the Holders to effect such changes to
the Indenture as may be required for such Indenture to be so qualified in
accordance with the terms of the TIA; and execute and use its best efforts to
cause the Trustee to execute, all documents as may be required to effect such
changes and all other forms and documents required to be filed with the
Commission to enable such Indenture to be so qualified in a timely manner;
17.17 make every reasonable effort to obtain the withdrawal of any order
suspending the effectiveness of the Shelf Registration Statement as promptly as
practicable.
17.18 cause all Transfer Restricted Securities covered by the Shelf
Registration Statement to be listed on each securities exchange or quotation
system on which similar securities issued by the Company are then listed if
requested by the Holders of a majority in aggregate principal amount and/or
number of shares of such Transfer Restricted Securities or the Underwriters, if
any; cause the Debentures covered by the Shelf Registration Statement to be
rated with the appropriate rating agencies, if so requested by the Holders of a
majority in aggregate principal amount of such Debentures or the Underwriters;
and
17.19 cooperate and assist in any filings required to be made with the NASD
and in the performance of any due diligence investigation by any Underwriter
(including any "qualified independent Underwriter" that is required to be
retained in accordance with the rules and regulations of the NASD).
Each Holder as to which any Shelf Registration Statement is being effected
agrees to furnish promptly to the Company all information required to be
disclosed in order to make the information previously furnished to the Company
by such Holder not materially misleading or necessary to cause such Shelf
Registration Statement not to omit a material fact with respect to such Holder
necessary in order to make the statements therein not misleading.
Each Holder agrees by acquisition of such Transfer Restricted Securities
that, upon receipt of any notice from the Company of the existence of any fact
of the kind described in Section 5(d)(v) hereof, such Holder will forthwith
discontinue disposition of Transfer Restricted Securities until such Holder's
receipt of the copies of the supplemented or amended Prospectus contemplated by
Section 5(k) hereof, or until it is advised in writing (the "Advice") by the
Company that the use of the Prospectus may be resumed, and has received copies
of any additional or supplemental filings with respect to the Prospectus. If so
directed by the Company, each Holder will deliver to the Company (at the
Company's expense) all copies, other than permanent file copies then in such
Holder's possession, of the Prospectus covering such Transfer Restricted
Securities current at the time of receipt of such notice. In the event the
Company shall give any such notice, the time period regarding the effectiveness
of Shelf Registration Statement set forth in Section 3(a) hereof shall be
extended by the
<PAGE>
number of days during the period from and including the date of the giving of
such notice pursuant to Section 5(d)(v) hereof to and including the date when
each selling Holder covered by such Shelf Registration Statement shall have
received the copies of the supplemented or amended Prospectus contemplated by
Section 5(k) hereof or shall have received the Advice.
18 Registration Expenses.
18.1 All expenses incident to the Company's performance of or compliance
with this Agreement (the "Registration Expenses") will be borne by the Company,
regardless whether a Shelf Registration Statement becomes effective, including
without limitation:
(1) all registration and filing fees and expenses (including filings
made with the NASD);
(2) fees and expenses of compliance with federal securities or state
blue sky laws;
(3) expenses of printing (including, without limitation, expenses of
printing or engraving certificates for the Transfer Restricted Securities
in a form eligible for deposit with Depository Trust Company and of
printing the Prospectus and any Preliminary Prospectus), messenger and
delivery services and telephone;
(4) reasonable fees and disbursements of counsel for the Company and
for the Holders of the Transfer Restricted Securities (subject to the
provisions of Section 6(b) hereof);
(5) fees and disbursements of all independent certified public
accountants of the Company (including the expenses of any special audit and
"cold comfort" letters required by or incidental to the preparation and
filing of a Shelf Registration Statement and Prospectus and the disposition
of Transfer Restricted Securities);
(6) fees and expenses associated with any NASD filing required to be
made in connection with the Shelf Registration Statement, including, if
applicable, the fees and expenses of any "qualified independent
Underwriter" (and its counsel) that is required to be retained in
accordance with the rules and regulations of the NASD; and
(7) fees and expenses of listing the Transfer Restricted Securities on
any securities exchange or quotation system in accordance with Section 5(r)
hereof.
The Company will, in any event, bear its internal expenses (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expense of any annual audit, rating
agency fees and the fees and
<PAGE>
expenses of any Person, including special experts, retained by the Company. The
Holders of Transfer Restricted Securities shall bear the expense of any broker's
commission or Underwriters' discount or commission.
18.2 In connection with the Shelf Registration Statement, the Company will
reimburse the Holders of Transfer Restricted Securities being registered
pursuant to such Shelf Registration Statement for the fees and disbursements of
not more than one counsel chosen by the Holders of a majority of the principal
amount of the Debentures to be included in the Shelf Registration Statement,
provided, however, that in the case of an Underwritten Offering which includes
shares of Common Stock, such counsel shall be chosen by the Holders of a
majority of the shares of Common Stock to be included in such Underwritten
Offering.
Notwithstanding the provisions of this Section 6(b), each Holder of
Transfer Restricted Securities shall pay all Registration Expenses to the extent
required by applicable law.
19 Indemnification.
19.1 The Company agrees to indemnity and hold harmless each Holder (each
such Holder an "Indemnified Holder"), each agent, employee, officer and director
of any Indemnified Holder and each person that controls each Indemnified Holder
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act,
and agents, employees, officers and directors or any such controlling person of
any Indemnified Holder from and against any and all losses, claims, damages,
judgments, liabilities and expenses (including the reasonable fees and expenses
of counsel and other expenses in connection with investigating, defending or
settling any such action or claim) as they are incurred which arise out of or
based upon any untrue statement or alleged untrue statement of a material fact
contained in the Shelf Registration Statement or the Prospectus or any amendment
or supplement thereto or any Preliminary Prospectus or arising out of or based
upon any omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
except (1) the Company shall not be liable to any Indemnified Holder in any such
case insofar as such losses, claims, damages, judgments, liabilities or expenses
arise out of, or are based upon, any such untrue statement or omission or
alleged untrue statement or omission based upon information relating to such
Indemnified Holder or Indemnified Underwriter furnished in writing by such
Indemnified Holder to the Company expressly for use therein and (2) the Company
shall not be liable to any Indemnified Holder under the indemnity agreement in
this Section 7(a) with respect to any Preliminary Prospectus to the extent that
any such loss, claim, damage, judgment, liability or expense results solely from
the fact that any Indemnified Holder sold Transfer Restricted Securities to a
person to whom there was not sent or given, at or prior to the written
confirmation of such sale, a copy of the Prospectus as then amended or
supplemented, if the Company has previously furnished sufficient copies thereof
to the Indemnified Holder.
19.2 If any action or proceeding (including any governmental or regulatory
investigation or proceeding) shall be brought or asserted against any
Indemnified Holder with
<PAGE>
respect to which indemnity may be sought against the Company pursuant to this
Section 7, such Indemnified Holder shall promptly notify the Company in writing,
and the Company shall have the right to assume the defense thereof, including
the employment of counsel reasonably satisfactory to such Indemnified Holder and
payment of all fees and expenses; provided, however, that the omission so to
notify the Company shall not relieve the Company from any liability that they
may have to any Indemnified Holder (except to the extent that the Company is
materially prejudiced or otherwise forfeits substantive rights or defenses by
reason of such failure). An Indemnified Holder shall have the right to employ
separate counsel in any such action or proceeding and to participate in the
defense thereof, but the fees and expenses of such counsel shall be at the
expense of such Indemnified Holder unless (1) the Company agrees in writing to
pay such fees and expenses, (2) the Company has failed promptly to assume the
defense and employ counsel satisfactory to the Indemnified Holder or (3) the
named parties to any such action or proceeding (including any unpleaded parties)
include both the Indemnified Holder and the Company and such Indemnified Holder
shall have been advised in writing by its counsel that representation of them
and the Company by the same counsel would be inappropriate under applicable
standards of professional conduct (whether or not such representation has been
proposed) due to actual or potential differing interests between them (in which
case the Company shall not have the right to assume the defense of such action
on behalf of such Indemnified Holder). It is understood that the Company shall
not, in connection with any one such action or separate but substantially
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the fees and expenses of
more than one separate firm of attorneys (in addition to any local counsel) at
any time for such Indemnified Holders, which firm shall be designated in writing
by the Holders of the majority of the aggregate principal amount of Debentures
and/or the number of shares of Common Stock on behalf of such Indemnified
Holders, and that all such fees and expenses shall be reimbursed as they are
incurred. The Company shall not be liable for any settlement of any such action
effected without the written consent of the Company, but if settled with the
written consent of the Company, or if there is a final judgment with respect
thereto, the Company agrees to indemnify and hold harmless each Indemnified
Holder from and against any loss or liability by reason of such settlement or
judgment. The Company shall not, without the prior written consent of each
Indemnified Holder affected thereby, effect any settlement of any pending or
threatened proceeding in which such Indemnified Holder has sought indemnity
hereunder, unless such settlement includes an unconditional release of such
Indemnified Holder from all liability arising out of such action, claim,
litigation or proceeding.
19.3 Each Indemnified Holder agrees to indemnify and hold harmless the
Company, its directors, its officers who sign the Registration Statement and any
person controlling the Company within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act (collectively, the "Company Indemnified Parties")
to the same extent as the foregoing indemnity from the Company to any
Indemnified Holder, but only with respect to information relating to each
Indemnified Holder furnished to the Company in writing by each Indemnified
Holder, expressly for use in the Registration Statement, Prospectus (or any
amendment or supplement thereto), or any Preliminary Prospectus. In case any
action shall be brought against any Company Indemnified Party based on the
Registration Statement, Prospectus (or any amendment or supplement thereto), or
any Preliminary Prospectus and in
<PAGE>
respect of which indemnification may be sought against each Indemnified Holder
pursuant to this Section 7(c), each Indemnified Holder shall have the rights and
duties given to the Company by Section 7(a) (except that if the Company shall
have assumed the defense thereof, each Indemnified Holder may, but shall not be
required to, employ separate counsel therein and participate in the defense
thereof and the fees and expenses of such counsel shall be at the expense of the
Indemnified Holder) and the Company Indemnified Parties shall have the rights
and duties given to the Indemnified Holders by Section 7(b).
19.4 If the indemnification provided for in this Section 7 is unavailable
to any party entitled to indemnification pursuant to Section 7(a) or 7(c), then
each indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, judgments, liabilities and expenses (1) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and each Indemnified Holder on the other from the
offering of the Transfer Restricted Securities or (2) if the allocation provided
by clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company on the one hand and each
Indemnified Holder on the other in connection with the statements or omissions
which resulted in such losses, claims, damages, judgments, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
benefits received by the Company on the one hand and each Indemnified Holder on
the other shall be deemed to be in the same proportion as the total net proceeds
from the offering (before deducting expenses) received by the Company bear to
the total net proceeds from the offering (before deducting expenses) received by
each Indemnified Holder, as set forth in the table on the cover page of the
Prospectus. The relative fault of the Company on the one hand and each
Indemnified Holder on the other shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or by the Indemnified Holder on the
other and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
19.5 The Company and each Indemnified Holder agree that it would not be
just and equitable if contribution pursuant to Section 7(d) were determined by
pro rata allocation or by any other method of allocation that does not take
account of the equitable considerations referred to in Section 7(d). The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages, liabilities or expenses referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending any such action or claim. No
person found guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person who
was not found guilty of such fraudulent misrepresentation.
19.6 The Company shall also indemnify each Underwriter participating in the
distribution (as described in such registration statement), their officers and
directors and each person who controls such persons (within the meaning of
Section 15 of the Securities Act or
<PAGE>
Section 20 of the Exchange Act) to the same extent as provided above with
respect to the indemnification of the Holders.
19.7 The indemnity and contribution agreements contained in this Section 7
are in addition to any liability that any indemnifying party may otherwise have
to any indemnified party.
20 Rule 144A. The Company hereby agrees with each Holder, for so long as
any of the Debentures or shares of Common Stock that are Transfer Restricted
Securities remain outstanding or, if earlier, two years from the Closing Date,
and during any such period in which the Company is not subject to Section 13 or
15(d) of the Exchange Act, to make available to the Initial Purchasers or any
beneficial owner of the Debentures or shares of such Common Stock in connection
with any sale thereof and any prospective purchaser of such Debentures or Common
Stock from such Initial Purchasers or beneficial owner, the information required
by Rule 144A(d)(4) under the Act in order to permit resales of such Transfer
Restricted Securities pursuant to Rule 144A.
21 Participation in Underwritten Registrations. No Holder may participate
in any Underwritten Offering hereunder unless such Holder (a) agrees to sell
such Holder's Transfer Restricted Securities on the basis provided in any
underwriting arrangements approved by the Persons entitled hereunder to approve
such arrangements, (b) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents required
under the terms of such underwriting arrangements and (c) furnishes the Company
in writing information in accordance with Section 3(g) and agrees to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement and any person controlling the Company within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act to the extent
contemplated by Section 7(c).
22 Selection of Underwriters. The Holders of Transfer Restricted Securities
covered by the Shelf Registration Statement who desire to do so may sell such
Transfer Restricted Securities in an Underwritten Offering. In any such
Underwritten Offering, the Underwriter(s) that will administer the offering will
be selected by the Holders of the Transfer Restricted Securities included in
such offering in the manner specified in Section 3(c); provided, however, that
such Underwriters must be reasonably satisfactory to the Company.
23 Miscellaneous.
23.1 Remedies. Each Holder of Transfer Restricted Securities, in addition
to being entitled to exercise all rights provided herein, and as provided in the
Purchase Agreement and granted by law, including recovery of damages, will be
entitled to specific performance of such Holder's rights under this Agreement.
The Company agrees that monetary damages would not be adequate compensation for
any loss incurred by reason of a breach by it of the provisions of this
Agreement and hereby agrees to waive the defense in any action for specific
performance that a remedy at law would be adequate.
<PAGE>
23.2 No Inconsistent Agreements. The Company will not on or after the date
of this Agreement enter into any agreement with respect to its securities that
is inconsistent with the rights granted to the Holders of Transfer Restricted
Securities in this Agreement or otherwise conflicts with the provisions hereof.
The rights granted to the Holders of Transfer Restricted Securities hereunder do
not in any way conflict with and are not inconsistent with the rights granted to
the holders of the Company's securities under any other agreements.
23.3 Amendments and Waivers. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof may not be
given unless the Company has obtained the written consent of Holders of a
majority in aggregate principal amount of the Debentures constituting Transfer
Restricted Securities affected by such amendment, modification, supplement,
waiver or departure (provided that, if any such Transfer Restricted Securities
are shares of Common Stock issued upon conversion of Debentures, consents by
Holders of such shares shall be calculated as if such conversions had not taken
place). Notwithstanding the foregoing, a waiver or consent to departure from the
provisions hereof that relates exclusively to the rights of Holders of Transfer
Restricted Securities whose securities are being sold pursuant to such Shelf
Registration Statement and that does not directly or indirectly affect the
rights of other Holders of Transfer Restricted Securities shall be valid only
with the written consent of Holders of at least 66-2/3% of the Transfer
Restricted Securities being sold, in each case calculated in accordance with the
provisions of Section 3(c).
23.4 Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, first-class mail
(registered or certified, return receipt requested), telex, telecopier, or air
courier guaranteeing overnight delivery:
(1) if to a Holder of Transfer Restricted Securities, at the address
set forth on the records of the Registrar under the Indenture, with a copy
to the Registrar; and
(2) if to the Company or an Initial Purchasers, initially at its
address set forth in the Purchase Agreement and thereafter at such other
address, notice of which is given in accordance with the provisions of this
Section.
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five business
days after being deposited in the mail, postage prepaid, if mailed; when
answered back, if telexed; when receipt acknowledged, if telecopied; and on the
next business day, if timely delivered to an air courier guaranteeing overnight
delivery.
Copies of all such notices, demands or other communications shall be
concurrently delivered by the Person giving the same to the Trustee under the
Indenture at the address specified in the Indenture.
<PAGE>
23.5 Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the successors and assigns of each of the parties, including
without limitation and without the need for an express assignment, subsequent
Holders of Transfer Restricted Securities; provided, however, that this
Agreement shall not inure to the benefit of or be binding upon a successor or
assign of a Holder of Transfer Restricted Securities unless and to the extent
such successor or assign acquired Transfer Restricted Securities from such
Holder; and provided further that nothing herein shall be deemed to permit any
assignment, transfer or any disposition of Transfer Restricted Securities in
violation of the terms of the Purchase Agreement. If any transferee of any
Holder shall acquire Transfer Restricted Securities, in any manner, whether by
operation of law or otherwise, such Transfer Restricted Securities shall be held
subject to all of the terms of this Agreement and by taking and holding such
Transfer Restricted Securities such person shall be conclusively deemed to have
agreed to be bound by and to perform all of the terms and provisions of this
Agreement and such Person shall be entitled to receive the benefits hereof.
23.6 Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
23.7 Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
23.8 Governing Law. This agreement shall be governed by and construed in
accordance with the laws of the State of New York applicable to contacts made
and to be performed within the State of New York.
23.9 Severability. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
23.10 Entire Agreement. This Agreement together with the other Operative
Documents (as defined in the Purchase Agreement) is intended by the parties as a
final expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein
with respect to the registration rights granted by the Company with respect to
the securities sold pursuant to the Purchase Agreement. This Agreement
<PAGE>
supersedes all prior agreements and understandings between the parties with
respect to such subject matter.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
HEALTHSOUTH CORPORATION
By /s/MICHAEL D. MARTIN
-------------------------------
Title Chief Financial Officer
----------------------------
SMITH BARNEY INC.
BEAR, STEARNS & CO. INC.
COWEN & COMPANY
CREDIT SUISSE FIRST BOSTON
CORPORATION
J.P. MORGAN SECURITIES INC.
MORGAN STANLEY & CO.
INCORPORATED
NATIONSBANC MONTGOMERY
SECURITIES LLC
PAINEWEBBER INCORPORATED
[[[MARK]]]
By SMITH BARNEY INC.
By /s/WILLIAM C. MCGAHAN
--------------------------------
Title Managing Director
-----------------------------
EXHIBIT (10)-27
--------------------------------------------------------------------
BRIDGE CREDIT AGREEMENT
by and among
HEALTHSOUTH CORPORATION,
as Borrower,
NATIONSBANK, NATIONAL ASSOCIATION,
as Agent
and
THE LENDERS PARTY HERETO FROM TIME TO TIME
October 22, 1997
---------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
Definitions and Terms
1.1. Definitions...........................................................2
1.2. Rules of Interpretation..............................................25
1.3. Types of Loans.......................................................26
ARTICLE II
The Loans
2.1. Bridge Loans.........................................................27
2.2. Payment of Interest..................................................29
2.3. Payment of Principal.................................................29
2.4. Non-Conforming Payments..............................................29
2.5. Notes................................................................30
2.6. Pro Rata Payments....................................................30
2.7. Reductions...........................................................30
2.8. Conversions and Elections of Subsequent Interest Periods.............31
2.9. Unused Fees..........................................................32
2.10. Deficiency Advances..................................................32
2.11. Use of Proceeds......................................................33
ARTICLE III
Letters of Credit
3.1. Letters of Credit....................................................34
3.2. Reimbursement........................................................34
3.3. Letter of Credit Facility Fees.......................................37
3.4. Administrative Fees..................................................38
ARTICLE IV
Termination of Eurodollar Rate and Yield Protection
4.1. Suspension of Loans..................................................39
4.2. Compensation.........................................................40
4.3. Taxes................................................................40
<PAGE>
ARTICLE V
Conditions to Making Loans and Issuing Letters of Credit
5.1. Conditions of Initial Advance........................................43
5.2. Conditions of Loans and Letters of Credit............................44
ARTICLE VI
Representations and Warranties
6.1. Organization and Authority...........................................47
6.2. Loan Documents.......................................................47
6.3. Solvency.............................................................48
6.4. Subsidiaries.........................................................48
6.5. Ownership Interests..................................................48
6.6. Financial Condition..................................................48
6.7. Title to Properties..................................................49
6.8. Taxes................................................................49
6.9. Other Agreements.....................................................49
6.10. Litigation...........................................................50
6.11. Margin Stock.........................................................50
6.12. Investment Company...................................................50
6.13. Patents, Etc.........................................................51
6.14. No Untrue Statement..................................................51
6.15. No Consents, Etc.....................................................51
6.16. ERISA Requirement....................................................51
6.17. No Default...........................................................51
6.18. Hazardous Materials..................................................51
6.19. Employment Matters...................................................52
6.20. RICO.................................................................52
6.21. Reimbursement from Third Party Payors................................52
6.22. Representations and Warranties from the Related Acquisition
Transaction Documents................................................52
ARTICLE VII
Affirmative Covenants
7.1. Financial Statements, Reports, Etc...................................53
7.2. Maintain Properties..................................................54
7.3. Existence, Qualification, Etc........................................54
7.4. Regulations and Taxes................................................55
7.5. Insurance............................................................55
7.6. True Books...........................................................55
7.7. Right of Inspection..................................................55
<PAGE>
7.8. Observe all Laws.....................................................55
7.9. Governmental Licenses................................................55
7.10. Covenants Extending to Other Persons.................................56
7.11. Officer's Knowledge of Default.......................................56
7.12. Suits or Other Proceedings...........................................56
7.13. Notice of Discharge of Hazardous Material or Environmental Complaint.56
7.14. Environmental Compliance.............................................56
7.15. Continuation of Current Business.....................................57
7.16. Management Contracts.................................................57
ARTICLE VIII
Negative Covenants
8.1. Financial Covenants..................................................58
8.2. Investments and Loans................................................58
8.3. Indebtedness.........................................................58
8.4. Existing Facility....................................................59
8.5. Consolidation or Merger..............................................59
8.6. Liens................................................................59
8.7. Dividends and Distributions..........................................59
8.8. Acquisitions.........................................................59
8.9. Restricted Payments..................................................59
8.10. Compliance with ERISA................................................59
8.11. Fiscal Year..........................................................60
8.12. Dissolution, etc.....................................................60
ARTICLE IX
Events of Default and Acceleration
9.1. Events of Default....................................................61
9.2. Agent to Act.........................................................63
9.3. Cumulative Rights....................................................63
9.4. No Waiver............................................................64
9.5. Allocation of Proceeds...............................................64
ARTICLE X
The Agent
10.1. Appointment..........................................................65
10.2. Attorneys-in-fact....................................................65
10.3. Limitation on Liability..............................................65
10.4. Reliance.............................................................65
10.5. Notice of Default....................................................66
<PAGE>
10.6. No Representations...................................................66
10.7. Indemnification......................................................66
10.8. Lender...............................................................67
10.9. Resignation..........................................................67
10.10. Sharing of Payments, etc.............................................67
10.11. Fees.................................................................68
10.12. Independent Agreements...............................................68
ARTICLE XI
Miscellaneous
11.1. Assignments and Participations.......................................69
11.2. Notices..............................................................70
11.3. No Waiver............................................................71
11.4. Setoff...............................................................72
11.5. Survival.............................................................72
11.6. Expenses.............................................................72
11.7. Amendments...........................................................73
11.8. Counterparts.........................................................74
11.9. Waivers by Borrower..................................................74
11.10. Termination..........................................................74
11.11. Governing Law........................................................75
11.12. Indemnification......................................................75
11.13. Agreement Controls...................................................76
11.14. Integration..........................................................76
11.15. Successors and Assigns...............................................76
11.16. Severability.........................................................76
11.17. Usury Savings Clause.................................................76
EXHIBIT A Applicable Commitment Percentages.....................A-1
EXHIBIT B Form of Assignment and Acceptance.....................B-1
EXHIBIT C Notice of Appointment (or Revocation) of Authorized
Representative........................................C-1
EXHIBIT D Form of Borrowing Notice..............................D-1
EXHIBIT E Form of Interest Rate Selection Notice................E-1
EXHIBIT F Form of Bridge Note...................................F-1
EXHIBIT G Investments...........................................G-1
EXHIBIT H Form of Opinion of Borrower's Counsel.................H-1
EXHIBIT I Compliance Certificate................................I-1
EXHIBIT J Executive Officers....................................J-1
Schedule 1.1 Closing Date Prepayable Debt
Schedule 6.4 Subsidiaries
Schedule 6.19 Employment Matters
<PAGE>
Schedule 8.3 Existing Subsidiary Indebtedness
<PAGE>
BRIDGE CREDIT AGREEMENT
THIS BRIDGE CREDIT AGREEMENT dated as of October 22, 1997 (this
"Agreement") is entered into by and among HEALTHSOUTH CORPORATION, a Delaware
corporation (the "Borrower"), the Lenders signatories hereto (the "Lenders") and
NATIONSBANK, N.A., a national banking association, as agent for the Lenders (the
"Agent").
RECITAL:
The Borrower has requested that the Lenders make bridge loans of up to
$1,250,000,000 to the Borrower, the proceeds of which shall be used (i) to repay
existing short-term indebtedness owed to NationsBank, National Association, (ii)
to purchase ASC Network Corporation, (iii) to repay existing indebtedness of
Horizon/CMS Healthcare Corporation, Borrower's Subsidiary, and (iv) for other
general corporate purposes and the Lenders have agreed to make such loans
available to the Borrower on the following terms and conditions:
<PAGE>
ARTICLE XXIV
Definitions and Terms
24.1. Definitions. For the purposes of this Agreement, in addition to the
definitions set forth above, the following terms shall have the respective
meanings set forth below:
"Acquisition" means the acquisition, whether with cash, property,
stock or promise to pay, of all or a portion of a Person or a Facility or
Facilities of a Person, permitted under Section 8.8; provided such Person
or Facilities is in substantially the same line of business engaged in by
Borrower or its Consolidated Entities.
"Actual/360 Basis" shall mean a method of computing interest or other
charges hereunder on the basis of an assumed year of 360 days for actual
number of days elapsed, meaning that interest or other charges accrued for
each day will be computed by multiplying the rate applicable on that day by
the unpaid principal balance (or other relevant sum) on that day and
dividing the result by 360.
"Advance" means a borrowing under the Bridge Facility consisting of
the aggregate principal amount of a Bridge Loan.
"Affiliate" of any specified Person means any other Person (i) which
directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person; or
(ii) which beneficially owns or holds 5% or more of any class of the
outstanding voting stock (or in the case of a Person which is not a
corporation, 5% or more of the equity interest) of such specified Person;
or 5% or more of any class of the outstanding voting stock (or in the case
of a Person which is not a corporation, 5% or more of the equity interest)
of which is beneficially owned or held by such specified Person. The term
"control" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a Person,
whether through ownership of voting stock, by contract or otherwise.
"Applicable Commitment Percentage" means, with respect to each Lender,
that portion of the Total Bridge Commitment allocable to such Lender (a)
with respect to Lenders as of the Closing Date, as set forth on Exhibit A,
and (b) with respect to any Person who becomes a Lender thereafter, as
reflected in each Assignment and Acceptance to which such Lender is a party
assignee; provided that the Applicable Commitment Percentage of each Lender
shall be increased or decreased to reflect any assignments to or by such
Lender effected in accordance with Section 11.1.
"Applicable Margin" means that number of basis points per annum set
forth below determined based upon the more favorable of either (i) the
highest Rating of outstanding senior unsecured Indebtedness of the Borrower
from time to time or (ii) the ratio of Consolidated EBITDA to Consolidated
Interest Expense for the Four-Quarter Period most recently ended as
specified below:
<PAGE>
<TABLE>
<CAPTION>
Ratio of Consolidated Rating Applicable
EBITDA to Consolidated Interest S&P or Moody's Margin
<S> <C> <C> <C>
a) Greater than 7.50 to 1.00 A- A3 25 b.p.
b) Equal to or Less than 7.50
to 1.00 but Greater than
6.50 to 1.00 BBB+ Baa1 30
c) Equal to or Less than 6.50
to 1.00 but Greater than
5.50 to 1.00 BBB Baa2 35
d) Equal to or Less than 5.50
to 1.00 but Greater than
4.50 to 1.00 BBB- Baa3 45
e) Equal to or Less than 4.50
to 1.00 but Greater than
3.50 to 1.00 BB+ Ba1 55
f) Equal to or Less than 3.50
to 1.00 but Greater than
3.00 to 1.00 BB Ba2 62.5
g) Equal to or Less than 3.00
to 1.00 but Greater than BB- Ba3
2.50 to 1.00 or Lower 75
</TABLE>
The Applicable Margin shall be established in the case of a Rating from
time to time based upon the Rating then in effect and, in the case of
the ratio, at the end of each fiscal quarter of the Borrower (the
"Ratio Determination Date"). Any change in the Applicable Margin
following each Ratio Determination Date shall be determined based upon
the computations set forth in the Compliance Certificate, subject to
review and approval of such computations by the Agent, and shall be
effective commencing on the date following the date such certificate is
received until the date following the date on which a new Compliance
Certificate is delivered or is required to be delivered, whichever
shall first occur; provided however, if the Borrower shall fail to
deliver any such certificate within the time period required by Section
7.1, then the Applicable Margin shall be 2% until the appropriate
certificate is so delivered. From the Closing Date to the first Ratio
Determination Date, the Applicable Margin shall be 25 basis points.
"Applicable Unused Fee" means that number of basis points per
annum set forth below, which shall be determined based upon the more
favorable of either (i) the highest Rating of outstanding senior
unsecured Indebtedness of the Borrower from time to time
<PAGE>
or (ii) the ratio of Consolidated EBITDA to Consolidated Interest
Expense for the Four- Quarter Period most recently ended as specified
below:
<TABLE>
<CAPTION>
Ratio of Consolidated Rating
EBITDA to Consolidated Interest S&P or Moody's Applicable Unused Fees
<S> <C> <C>
a) Greater than 7.50 to 1.00 A- A3 9 b.p.
b) Equal to or Less than 7.50
to 1.00 but Greater than
6.50 to 1.00 BBB+ Baa1 10
c) Equal to or Less than 6.50
to 1.00 but Greater than
5.50 to 1.00 BBB Baa2 12.5
d) Equal to or Less than 5.50
to 1.00 but Greater than
4.50 to 1.00 BBB- Baa3 15
e) Equal to or Less than 4.50
to 1.00 but Greater than
3.50 to 1.00 BB+ Ba1 17.5
f) Equal to or Less than 3.50
to 1.00 but Greater than
3.00 to 1.00 BB Ba2 20
g) Equal to or Less than 3.00
to 1.00 but Greater than BB- Ba3
2.50 to 1.00 or Lower 25
</TABLE>
The Applicable Unused Fee shall be established in the case of a Rating
from time to time based upon the Rating then in effect, and in the
case of the ratio, at the end of each fiscal quarter of the Borrower
(the "Ratio Determination Date"). Any change in the Applicable Unused
Fee following each Ratio Determination Date shall be determined based
upon the computations set forth in the Compliance Certificate, subject
to review and approval of such computations by the Agent and shall be
effective commencing on the date following the date such certificate
is received until the date following the date on which a new
Compliance Certificate is delivered or is required to be delivered,
whichever shall first occur; provided however, if the Borrower shall
fail to deliver any such certificate within the time period required
by Section 7.1, then the Applicable Unused Fee shall be 2%. From the
Closing Date to the first Ratio Determination Date, the Applicable
Unused Fee shall be 9 basis points on the Bridge Facility.
"Applications and Agreements for Letters of Credit" means,
collectively, the Applications and Agreements for Letters of Credit,
or similar documentation, executed by the Borrower from time to time
and delivered to the Issuing Bank to support the issuance of Letters
of Credit.
"ASC" means ASC Network Corporation, a Delaware corporation.
<PAGE>
"Assignment and Acceptance" shall mean an Assignment and Acceptance in
the form of Exhibit B (with blanks appropriately filled in) delivered to
the Agent in connection with an assignment of a Lender's interest under
this Agreement pursuant to Section 11.1.
"Authorized Representative" means any of the Executive Officers of the
Borrower or, with respect to financial matters, the Treasurer or the chief
financial officer of the Borrower, or any other Person expressly designated
by the Board of Directors of the Borrower (or the appropriate committee
thereof) as an Authorized Representative of the Borrower, as set forth from
time to time in a certificate in the form of Exhibit C.
"Base Rate" means the per annum rate of interest equal to the greater
of (i) the Prime Rate or (ii) the Federal Funds Effective Rate plus
one-half of one percent (1/2%). Any change in the Base Rate resulting from
a change in the Prime Rate or the Federal Funds Effective Rate shall become
effective as of 12:01 A.M. of the Business Day on which each such change
occurs. The Base Rate is a reference rate used by the Agent in determining
interest rates on certain loans and is not intended to be the lowest rate
of interest charged on any extension of credit to any debtor.
"Base Rate Loan" means a Loan for which the rate of interest is
determined by reference to the Base Rate.
"Base Rate Refunding Loan" means an Advance under the Bridge Facility
which bears interest at a Base Rate made to satisfy Reimbursement
Obligations arising from a drawing under a Letter of Credit.
"Base Rate Segment" means a Segment bearing interest or to bear
interest at the Base Rate.
"Board" means the Board of Governors of the Federal Reserve System (or
any successor body).
"Borrowing Notice" means the notice delivered by an Authorized
Representative in connection with an Advance under the Bridge Facility, in
the form of Exhibit D.
"Bridge Commitment" means, with respect to each Lender, the obligation
of such Lender to make Bridge Loans to the Borrower in a principal amount
equal to such Lender's Applicable Commitment Percentage of the Total Bridge
Commitment.
"Bridge Facility" means the facility described in Section 2.1(a)
providing for Bridge Loans to the Borrower by the Lenders in the original
principal amount of the Total Bridge Commitment.
"Bridge Loan" means a loan made pursuant to the Bridge Facility in
accordance with Section 2.1(a).
<PAGE>
"Bridge Notes" means, collectively, the promissory notes of the
Borrower evidencing Bridge Loans executed and delivered to the Lenders as
provided in Section 2.5 substantially in the form of Exhibit F, with
appropriate insertions as to amounts, dates and names of Lenders.
"Bridge Outstandings" means, as of any date of determination, the
aggregate principal amount of Bridge Loans then outstanding and all
interest accrued thereon.
"Bridge Termination Date" means (i) the Stated Termination Date or
(ii) such earlier date of termination of Lenders' obligations as may be
determined pursuant to Section 9.1 upon the occurrence of an Event of
Default, or (iii) such date as the Borrower may voluntarily and permanently
terminate the Bridge Facility by payment in full of all Bridge Outstandings
and Letter of Credit Outstandings.
"Business Day" means, (i) except in the case of a Eurodollar Loan, any
day which is not a Saturday, Sunday or a day on which banks in the States
of New York and North Carolina are authorized or obligated by law,
executive order or governmental decree to be closed and, (ii) with respect
to any Eurodollar Rate Loan, any day which is a Business Day, as described
above, and on which the relevant international financial markets are open
for the transaction of business contemplated by this Agreement in London,
England, New York, New York and Charlotte, North Carolina.
"Capital Leases" means all leases which have been or should be
capitalized in accordance with GAAP as in effect from time to time
including Statement No. 13 of the Financial Accounting Standards Board and
any successor thereof.
"Capital Stock" of any Person means any and all shares, rights to
purchase, warrants or options (whether or not currently exercisable),
participation or other equivalents of or interest in (however designated)
the equity (including without limitation common stock, preferred stock and
partnership and joint venture interests) of such Person (excluding any debt
securities that are convertible into, or exchangeable for, such equity).
"Change of Control" means, at any time:
(i) any "person" or "group" (each as used in Sections 13(d)(3)
and 14(d)(2) of the Exchange Act), who are not as of the Closing Date
owners of one percent (1%) or more of the Voting Stock of the
Borrower, either (A) becomes the "beneficial owner" (as defined in
Rule 13d-3 of the Exchange Act), directly or indirectly, of Voting
Stock of the Borrower (or securities convertible into or exchangeable
for such Voting Stock) representing 15% or more of the combined voting
power of all Voting Stock of the Borrower (on a fully diluted basis)
or (B) otherwise has the ability, directly or indirectly, to elect a
majority of the board of directors of the Borrower;
(ii) during any period of up to 24 consecutive months, commencing on
the Closing Date, individuals who at the beginning of such period were
directors
<PAGE>
of the Borrower shall cease for any reason (other than the death,
disability or retirement of an officer of the Borrower that is serving as a
director at such time so long as another officer of the Borrower replaces
such Person as a director) to constitute a majority of the board of
directors of the Borrower; or
(iii) any Person or two or more Persons acting in concert shall have
acquired by contract or otherwise, or shall have entered into a contract or
arrangement that, upon consummation thereof, will result in its or their
acquisition, of the power to exercise, directly or indirectly, a
controlling influence on the management or policies of the Borrower.
"Closing Date" means the date as of which this Agreement is executed by the
Borrower, the Lenders and the Agent and on which the conditions set forth in
Section 5.1 have been satisfied.
"Code" means the Internal Revenue Code of 1986, as amended, and any
regulations promulgated thereunder.
"Common Stock" means the common stock, par value $.01 per share, of the
Borrower.
"Compliance Certificate" shall have the meaning attributed to that term in
Section 7.1(c).
"Consistent Basis" in reference to the application of GAAP means the
accounting principles observed in the period referred to are comparable in all
material respects to those applied in the preparation of the audited financial
statements of the Borrower referred to in Section 6.6(a).
"Consolidated Amortization Expense" of the Borrower for any period means
the amortization expense of the Borrower and its Consolidated Entities for such
period (to the extent included in the computation of Consolidated Net Income),
determined on a consolidated basis in accordance with GAAP.
"Consolidated Depreciation Expense" of the Borrower means the depreciation
expense of the Borrower and its Consolidated Entities for such period (to the
extent included in the computation of Consolidated Net Income of the Borrower),
determined on a consolidated basis in accordance with GAAP.
"Consolidated EBITDA" means, with respect to the Borrower and its
Consolidated Entities for any Four-Quarter Period ending on the date of
computation thereof, the sum of, without duplication, (i) Consolidated Net
Income, (ii) Consolidated Interest Expense, (iii) Consolidated Income Tax
Expense, (iv) Consolidated Amortization Expense, (v) Consolidated Depreciation
Expense and (vi) the minority interest of any Person or Persons in Consolidated
Entities, all determined on a consolidated basis in accordance with GAAP applied
on a Consistent Basis.
<PAGE>
"Consolidated Entity" shall mean any Person whose financial statements are
appropriately consolidated with the Borrower's financial statements under GAAP.
"Consolidated Indebtedness" means all Indebtedness of the Borrower and its
Consolidated Entities, all determined on a consolidated basis.
"Consolidated Interest Expense" means, with respect to any Four-Quarter
Period ending on the date of computation thereof, the gross interest expense of
the Borrower and its Consolidated Entities, including without limitation (i) the
current amortized portion of debt discounts to the extent included in gross
interest expense, (ii) the current amortized portion of all fees (including fees
payable in respect of any Rate Hedging Obligation) payable in connection with
the incurrence of Indebtedness to the extent included in gross interest expense,
(iii) the portion of any payments made in connection with Capital Leases
allocable to interest expense, and (iv) lease payments, other than the
Headquarters Obligations, made pursuant to the Headquarters Lease, all
determined on a consolidated basis in accordance with GAAP applied on a
Consistent Basis.
"Consolidated Net Income" of the Borrower for any period means the net
income (or loss) of the Borrower and its Consolidated Entities for such period
determined on a consolidated basis in accordance with GAAP, without giving
effect to dividends on any series of preferred stock of any Consolidated Entity,
whether or not in cash, to the extent such consolidated net income was reduced
thereby; provided that there shall be excluded from such net income (for all
purposes, other than compliance with Section 8.1(a), to the extent otherwise
included therein), without duplication, (i) the net income of any Person (other
than a Consolidated Entity) to the extent that any such income has not actually
been received by the Borrower or a Consolidated Entity in the form of dividends
or similar distributions during such period, but including, in any event, net
income of any Person who becomes a Consolidated Entity whose Acquisition is
accounted for on a "pooling of interests" basis; (ii) except to the extent
includable in the consolidated net income of the Borrower or a Consolidated
Entity pursuant to the foregoing clause (i), the net income of any Person that
accrued prior to the date that (a) such Person becomes a Consolidated Entity or
is merged into or consolidated with a Consolidated Entity or (b) the assets of
such Person are acquired by the Borrower or a Consolidated Entity; (iii) the net
income of any Consolidated Entity to the extent that the declaration or payment
of dividends or similar distributions by such Consolidated Entity of that income
is not permitted by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to that Consolidated Entity during such period; (iv) any gain (or
loss), together with any related provisions for taxes on any such gain, realized
during such period by the Borrower or its Consolidated Entities upon (a) the
acquisition of any securities, or the extinguishment of any Indebtedness, of the
Borrower or its Consolidated Entities or (b) any asset sale by the referent
person or any of its Subsidiaries; (v) any extraordinary gain (or extraordinary
loss), together with any related provision for taxes or tax benefit resulting
from any such extraordinary gain or loss, realized by the Borrower or its
Consolidated Entities during such period; and (vi) in the case of a successor to
any Person by consolidation, merger or transfer of its assets, any earnings of
the successor prior to such merger, consolidation
<PAGE>
or transfer of assets; provided, further, however, that there shall be added
back to net income non-recurring, non-cash expenses and cash transaction costs
relating to professional fees arising in conjunction with an Acquisition
provided such expenses do not exceed 10% of the Cost of Acquisition.
"Consolidated Net Worth" of the Borrower as of any date means the
Consolidated Stockholders' Equity (including any preferred stock that is
classified as equity under GAAP, other than Disqualified Stock) of the Borrower
and its Consolidated Entities (excluding any equity adjustment for foreign
currency translation for any period subsequent to the Closing Date) on a
consolidated basis at such date, as determined in accordance with GAAP, less all
write-ups subsequent to the Closing Date in the book value of any asset owned by
the Borrower or any of its Consolidated Entities.
"Consolidated Stockholders' Equity" shall mean at any time as at which the
amount thereof is to be determined, the sum of the following amounts in respect
of the Borrower and the Consolidated Entities: (i) the par or stated value of
all Capital Stock of the Borrower, (ii) retained earnings, (iii) additional paid
in capital, (iv) capital surplus and (v) earned surplus minus treasury stock.
"Consolidated Tangible Net Worth" means, as of any date on which the amount
thereof is to be determined, Consolidated Stockholders' Equity minus (without
duplication of deductions in respect of items already deducted in arriving at
surplus and retained earnings) (i) all reserves (other than contingency reserves
not allocated to any particular purpose), including without limitation reserves
for depreciation, depletion, amortization, obsolescence, deferred income taxes,
insurance and inventory valuation and (ii) the net book value of all assets
which would be treated as intangible assets, such as (without limitation)
goodwill (whether representing the excess of cost over book value of assets
acquired or otherwise), capitalized expenses, unamortized debt discount and
expense, consignment inventory rights, patents, trademarks, trade names,
copyrights, franchises and licenses, all as determined on a consolidated basis
in accordance with GAAP applied on a Consistent Basis.
"Consolidated Total Assets" means, as of any date on which the amount
thereof is to be determined, the net book value of all assets of the Borrower
and its Consolidated Entities as determined on a consolidated basis in
accordance with GAAP applied on a Consistent Basis.
"Consolidated Total Capital" means, as of any date on which the amount
thereof is to be determined, the sum of Consolidated Indebtedness plus
Consolidated Shareholders' Equity of the Borrower and its Consolidated Entities.
"Contract Provider" means any Person who provides professional health care
services under or pursuant to any contract with the Borrower or any Subsidiary.
"Controlled Partnership" shall mean a general partnership of which the
Borrower or a Subsidiary is a general partner (but not including Alabama World
Football), or a
<PAGE>
limited partnership whose general partners include the Borrower or a Subsidiary
(but not including Vanderbilt), or a limited liability company whose members
include the Borrower or a Subsidiary or another Controlled Partnership, which
partnership, whether general or limited, or limited liability company has assets
with a value in excess of $2,000.00, and with respect to which partnership or
limited liability company the Borrower or a Subsidiary is entitled to receive
not less than 50% of any distributions of cash made to the partners or members
thereof, other than any preferred cash distribution arrangement in existence at
the Closing Date or approved by the Required Lenders in writing, or which is
otherwise a Consolidated Entity.
"Cost of Acquisition" means, in respect of any Acquisition, the sum of (i)
the amount of cash paid by the Borrower and its Consolidated Entities in
connection with such Acquisition, (ii) the Fair Market Value of all Capital
Stock or other ownership interests of the Borrower or any Consolidated Entity
issued or given in connection with such Acquisition, (iii) the amount
(determined by using the face amount or the amount payable at maturity,
whichever is greater) of all Indebtedness incurred, assumed or acquired in
connection with such Acquisition, (iv) all additional purchase price amounts in
the form of earnouts and other contingent obligations that should be recorded on
the financial statements of the Borrower and its Consolidated Entities in
connection with Generally Accepted Accounting Principles, (v) all amounts paid
in respect of covenants not to compete, consulting agreements and other
affiliated contracts in connection with such Acquisition and (vi) the aggregate
fair market value of all other consideration given by the Borrower and its
Consolidated Entities in connection with such Acquisition.
"Default" means any event or condition which, with the giving or receipt of
notice or lapse of time or both, would constitute an Event of Default.
"Default Rate" means (i) with respect to each Eurodollar Rate Loan and
Eurodollar Rate Segment, until the end of the Interest Period applicable
thereto, a rate of two percent (2%) plus the Eurodollar Rate applicable to such
Loan or Segment, and thereafter at a rate of interest per annum which shall be
two percent (2%) plus the Base Rate, (ii) with respect to Base Rate Loans and
Base Rate Segments, at a rate of interest per annum which shall be two percent
(2%) plus the Base Rate and (iii) in any case, the maximum rate permitted by
applicable law, if lower.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the option of the holder thereof, in whole or in part, on or prior to the
Bridge Termination Date.
"Dollars" and the symbol "$" mean dollars constituting legal tender for the
payment of public and private debts in the United States of America.
"Employee Benefit Plan" means any employee benefit plan within the meaning
of Section 3(3) of ERISA which (i) is maintained for employees of the Borrower
or any of
<PAGE>
its ERISA Affiliates or is assumed by the Borrower or any of its ERISA
Affiliates in connection with any Acquisition or (ii) has at any time been
maintained for the employees of the Borrower or any current or former ERISA
Affiliate.
"Environmental Laws" means, collectively, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, the Superfund
Amendments and Reauthorization Act of 1986, the Resource Conservation and
Recovery Act, as amended, the Toxic Substances Control Act, as amended, the
Clean Air Act, as amended, the Clean Water Act, as amended, any other
"Superfund" or "Superlien" law or any other federal, or applicable state or
local statute, law, ordinance, code, rule, regulation, order or decree
regulating, relating to, or imposing liability or standards of conduct
concerning, any Hazardous Material.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and any successor statute and all rules and
regulations promulgated thereunder.
"ERISA Affiliate", as applied to the Borrower, means any Person or trade or
business which is a member of a group which is under common control with the
Borrower, who together with the Borrower, is treated as a single employer within
the meaning of Section 414(b) and (c) of the Code.
"Eurodollar Rate" means the interest rate per annum calculated according to
the following formula:
Eurodollar = Interbank Offered Rate + Applicable
_______________________
Rate 1- Eurodollar Reserve Percentage Margin
"Eurodollar Rate Loan" means a Loan or Segment of a Loan for which the rate
of interest is determined by reference to the Eurodollar Rate.
"Eurodollar Rate Segment" means a Segment bearing interest or to bear
interest at the Eurodollar Rate.
"Eurodollar Reserve Percentage" means, for any day, that percentage
(expressed as a decimal) which is in effect from time to time under Regulation D
or any successor regulation, as the maximum reserve requirement (including any
basic, supplemental, emergency, special, or marginal reserves) applicable with
respect to Eurocurrency liabilities as that term is defined in Regulation D (or
against any other category of liabilities that includes deposits by reference to
which the interest rate on Eurodollar Rate Loans is determined), whether or not
the Agent or any Lender has any Eurocurrency liabilities subject to such
requirements, without benefits of credits or proration, exceptions or offsets
that may be available from time to time to the Agent or any Lender. The
Eurodollar Rate shall be adjusted automatically on and as of the effective date
of any change in the Eurodollar Reserve Percentage.
"Event of Default" means any of the occurrences set forth as such in
Section 9.1.
<PAGE>
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the regulations promulgated thereunder.
"Executive Officer" means any Person who from time to time holds the
offices with Borrower listed on Exhibit M.
"Existing Availability" means that, at any point in time, there shall be
available to the Borrower under the Existing Credit Agreement for borrowing or
issuance of letters of credit an amount of $5,000,000 or more.
"Existing Credit Agreement" means the Third Amended and Restated Credit
Agreement dated April 18, 1996 among the Borrower, NationsBank, National
Association, as Agent and the lenders party thereto from time to time, as
amended, modified or supplemented.
"Facility" shall mean an inpatient or outpatient rehabilitation facility,
certified outpatient rehabilitation facility, skilled nursing facility,
specialty medical center, specialty orthopedic hospital or acute care hospital,
subacute inpatient facility, transitional living center, medical office
building, outpatient surgery center or outpatient diagnostic center with all
buildings and improvements associated therewith, that is owned or leased, in
whole or part, by the Borrower or a Subsidiary or any partnership controlled
directly or indirectly by the Borrower.
"Fair Market Value" shall mean, with respect to any capital stock or other
ownership interests issued or given by the Borrower or any Consolidated Entity
in connection with an Acquisition, (i) in the case of capital stock that is
Common Stock and such Common Stock is then designated as a national market
system security by the National Association of Securities Dealers, Inc. ("NASD")
or is listed on a national securities exchange, the average of the last reported
bid and ask quotations or prices reported thereon for Common Stock or such other
value as may be ascribed to the Common Stock in a definitive merger or
acquisition agreement provided such value is determined according to customary
methods for like transactions and is approved (to the extent required by
Borrower's charter or bylaws) by the Borrower's Board of Directors or (ii) in
the case of capital stock that is not Common Stock or in the event that Common
Stock is not so designated by NASD or listed on such national exchange, or in
the case of any other ownership interests, the determination of the fair market
value thereof in good faith by a majority of disinterested members of the board
of directors of the Borrower or such Consolidated Entity, in each case effective
as of the close of business on the Business Day immediately preceding the
closing date of such Acquisition.
"Federal Funds Effective Rate" means, for any day, the rate per annum
(rounded upward to the nearest 1/100th of 1%) equal to the weighted average of
the rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers on such day, as published by
the Federal Reserve Bank of New York on the Business Day next succeeding such
day, provided that (a) if such day is not a Business Day, the Federal Funds
Effective Rate for such day shall be such rate
<PAGE>
on such transactions on the next preceding Business Day, and (b) if no such rate
is so published on such next succeeding Business Day, the Federal Funds
Effective Rate for such day shall be the average rate quoted to the Agent on
such day on such transaction as determined by the Agent.
"Fiscal Year" means, with respect to the Borrower, the twelve month fiscal
period of the Borrower commencing on January 1 of each calendar year and ending
on December 31 of each calendar year, or with respect to Horizon, the twelve
month fiscal period of Horizon commencing on June 1 of each calendar year and
ending on May 31 of the next succeeding calendar year.
"Four-Quarter Period" means a period of four full consecutive fiscal
quarters of the Borrower and its Subsidiaries, taken together as one accounting
period.
"GAAP" or "Generally Accepted Accounting Principles" means generally
accepted accounting principles, being those principles of accounting set forth
in pronouncements of the Financial Accounting Standards Board or the American
Institute of Certified Public Accountants or which have other substantial
authoritative support and are applicable in the circumstances as of the date of
a report.
"Governmental Authority" shall mean any Federal, state, municipal, national
or other governmental department, commission, board, bureau, court, agency or
instrumentality or political subdivision thereof or any entity or officer
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to any government or any court, in each case whether
associated with a state of the United States, the United States, or a foreign
entity or government.
"Guaranteed Obligations" of any person shall mean all guaranties (including
guaranties of guaranties and guaranties of dividends and other monetary
obligations), endorsements, assumptions and other contingent obligations with
respect to, or to purchase or to otherwise pay or acquire, Indebtedness of
others; provided, however, that such term shall not include obligations under
leases and other contracts initially incurred directly by another Person and
subsequently directly assumed by the Person in question, but such term shall
include obligations that, if the same had been initially incurred directly by
the Person in question, would have constituted Guaranteed Obligations.
"Hazardous Material" means and includes any hazardous, toxic or dangerous
waste, substance or material, the generation, handling, storage, disposal,
treatment or emission of which is subject to any Environmental Law.
"HCFA" means the United States Health Care Financing Administration and any
successor thereto.
"Headquarters Lease" means the Lease Agreement between HEALTHSOUTH
Holdings, Inc., as Lessee, and First Security Bank of Utah, N.A., as Lessor,
dated as of November 16, 1995 providing for the lease to HEALTHSOUTH Holdings,
Inc. of the
<PAGE>
land and improvements thereon located on the property described therein, as such
Lease Agreement may be amended, modified, supplemented or restated in its
entirety from time to time.
"Headquarters Obligations" means all of the Holder Advances and Loans, as
each such term is defined in the Participation Agreement.
"Horizon" means Horizon/CMS Healthcare Corporation, a Delaware corporation.
"Indebtedness" of any Person at any date means, without duplication: (i)
all indebtedness of such Person for borrowed money (whether or not the recourse
of the lender is to the whole of the assets of such Person or only to a portion
thereof); (ii) all obligations of such Person evidenced by bonds, debentures,
notes or other similar instruments; (iii) all obligations (contingent or
otherwise) of such Person in respect of letters of credit or other similar
instruments (or reimbursement obligations with respect thereto); (iv) all
obligations of such Person with respect to Rate Hedging Obligations (other than
those that fix the interest rate on variable rate indebtedness otherwise
permitted hereunder or that protect the Borrower and or its Consolidated
Entities against changes in foreign exchange rates); (v) obligations of such
Person to pay the deferred and unpaid purchase price of property or services,
except trade payables and accrued expenses incurred in the ordinary course of
business; (vi) all Capitalized Lease Obligations of such Person; (vii) all
indebtedness of others secured by a Lien on any assets of such Person, whether
or not such indebtedness is assumed by such Person; (viii) all Guaranteed
Obligations; (ix) the Headquarters Obligations; and (x) all obligations of a
like nature to those described in clauses (i) through (ix) above of a
partnership of which such Person is a general partner. The amount of
Indebtedness of any Person at any date shall be the outstanding balance at such
date of all unconditional obligations as described above, the maximum liability
of such Person for any such contingent obligations at such date and, in the case
of clause (vii), the amount of the Indebtedness secured.
"Interbank Offered Rate" means, with respect to any Eurodollar Rate Loan or
Eurodollar Rate Segment or Eurodollar Market Loans for the Interest Period
applicable thereto, the average (rounded upward to the nearest one-sixteenth
(1/16) of one percent) per annum rate of interest determined by the Agent (each
such determination to be conclusive and binding absent manifest error) as of two
Business Days prior to the first day of such Interest Period, as the effective
rate at which deposits in immediately available funds in Dollars are being, have
been, or would be offered or quoted by the Agent to major banks in the
applicable interbank market for Eurodollar deposits at any time during the
Business Day which is the second Business Day immediately preceding the first
day of such Interest Period, for a term comparable to such Interest Period and
in the amount of such Eurodollar Rate Loan or Eurodollar Rate Segment or
Eurodollar Market Loan. If no such offers or quotes are generally available for
such amount, then the Agent shall be entitled to determine the Eurodollar Rate
by estimating in its reasonable judgment the per annum rate (as described above)
that would be applicable if such quote or offers were generally available.
<PAGE>
"Interest Period" shall mean with respect to any Eurodollar Rate Loan, each
period commencing on the date such Eurodollar Rate Loan is made or converted
from a Loan of another Type or the last day of the next preceding Interest
Period for such Loan and ending on the numerically corresponding day in the
first, second, third or sixth calendar month thereafter, as the Borrower may
select as provided in Section 2.2, except that each Interest Period that
commences on the last Business Day of a calendar month (or on any day for which
there is no numerically corresponding day in the appropriate subsequent calendar
month) shall end on the last Business Day of the appropriate subsequent calendar
month. Notwithstanding the foregoing: (i) if any Interest Period for any
Eurodollar Rate Loan would otherwise end after the Bridge Termination Date, such
Interest Period shall end on the Bridge Termination Date; (ii) each Interest
Period that would otherwise end on a day which is not a Business Day shall end
on the next succeeding Business Day (or, in the case of an Interest Period for a
Eurodollar Rate Loan, if such next succeeding Business Day falls in the next
succeeding calendar month, on the next preceding Business Day); and (iii)
notwithstanding clauses (i) and (ii) above, no Interest Period for any Loan
shall have a duration of less than one month (in the case of a Eurodollar Rate
Loan) and, if the Interest Period for any Eurodollar Rate Loan would otherwise
be a shorter period, such Loan shall not be available hereunder for such period.
"Interest Rate Selection Notice" means the written notice delivered by an
Authorized Representative in connection with the election of a subsequent
Interest Period for any Eurodollar Rate Loan or Eurodollar Rate Segment or the
conversion of any Eurodollar Rate Loan or Eurodollar Rate Segment into a Base
Rate Loan or Base Rate Segment or the conversion of any Base Rate Loan or Base
Rate Segment into a Eurodollar Rate Loan or Eurodollar Rate Segment, in the form
of Exhibit E.
"Issuing Bank" means NationsBank as issuer of Letters of Credit under
Article III.
"LC Account Agreement" means the LC Account Agreement dated as of the date
hereof between the Borrower and the Issuing Bank, as amended, modified or
supplemented from time to time.
"Lending Office" means, as to each Lender and for each Type of Loan, the
Lending Office of such Lender (or an Affiliate of such Lender) designated for
such Type of Loan on the signature pages hereof or in an Assignment and
Acceptance or such other office of such Lender (or of an affiliate of such
Lender) as such Lender may from time to time specify to an Authorized
Representative and the Agent as the office by which its Loans are to be made and
maintained.
"Letter of Credit" means a standby letter of credit issued by the Issuing
Bank pursuant to Article IV for the account of the Borrower in favor of a Person
advancing credit or securing an obligation on behalf of the Borrower.
"Letter of Credit Commitment" means, with respect to each Lender, the
obligation of such Lender to acquire Participations in respect of Letters of
Credit and Reimbursement Obligations up to an aggregate amount at any one time
outstanding equal to such Lender's
<PAGE>
Applicable Commitment Percentage of the Total Letter of Credit Commitment as the
same may be increased or decreased from time to time pursuant to this Agreement.
"Letter of Credit Facility" means the facility described in Article III
providing for the issuance by the Issuing Bank for the account of the Borrower
of Letters of Credit in an aggregate stated amount at any time outstanding not
exceeding, together with all Reimbursement Obligations, the Total Letter of
Credit Commitment.
"Letter of Credit Outstandings" means, as of any date of determination, the
aggregate amount remaining undrawn under all Letters of Credit plus
Reimbursement Obligations then outstanding.
"Lien" means any interest in property securing any obligation owed to, or a
claim by, a Person other than the owner of the property, whether such interest
is based on the common law, statute or contract, and including but not limited
to the lien or security interest arising from a mortgage, encumbrance, pledge,
security agreement, conditional sale or trust receipt or a lease, consignment or
bailment for security purposes. For the purposes of this Agreement, the Borrower
and any Subsidiary shall be deemed to be the owner of any property which it has
acquired or holds subject to a conditional sale agreement, financing lease, or
other arrangement pursuant to which title to the property has been retained by
or vested in some other Person for security purposes.
"Line of Business" means, with respect to the Borrower and its
Subsidiaries, any separate and distinguishable type of business carried on by
the Borrower or its Subsidiaries, including (but not limited to) long-term care,
institutional pharmacy services, physician placement and contract therapy
services.
"Loan" or "Loans" means any Bridge Loans and all extensions and renewals
thereof.
"Loan Documents" means this Agreement, the Notes, the LC Account Agreement,
the Applications and Agreements for Letter of Credit and all other instruments
and documents heretofore or hereafter executed or delivered to or in favor of
any Lender or the Agent in connection with the Loans made, Letters of Credit
issued and transactions contemplated under this Agreement, as the same may be
amended, supplemented or replaced from time to time.
"Material Adverse Effect" means a material adverse effect on (i) the
business, properties, operations or condition, financial or otherwise, of the
Borrower and its Consolidated Entities, taken as a whole, (ii) the ability of
the Borrower to pay or perform its obligations, liabilities and indebtedness
under the Loan Documents as such payment or performance becomes due in
accordance with the terms thereof, or (iii) the rights, powers and remedies of
the Agent or any Lender under any Loan Document or the validity, legality or
enforceability thereof (including for purposes of clauses (ii) and (iii) the
imposition of burdensome conditions thereon).
<PAGE>
"Material Group" shall mean, at any time, any group, whether one or more,
or combination of Consolidated Entities (a) whose assets, in the aggregate,
constitute 5% or more of the assets of the Borrower and the Consolidated
Entities on a consolidated basis or (b) whose net revenues, in the aggregate,
constitute 5% or more of the net revenues of the Borrower and the Consolidated
Entities on a consolidated basis.
"Medicaid Certification" means certification by HCFA or a state agency or
entity under contract with HCFA that a health care operation is in compliance
with all the conditions of participation set forth in the Medicaid Regulations.
"Medicaid Provider Agreement" means an agreement entered into between a
state agency or other entity administering the Medicaid program and a health
care operation under which the health care operation agrees to provide services
for Medicaid patients in accordance with the terms of the agreement and Medicaid
Regulations.
"Medicaid Regulations" means, collectively, (i) all federal statutes
(whether set forth in Title XIX of the Social Security Act or elsewhere)
affecting the medical assistance program established by Title XIX of the Social
Security Act and any statutes succeeding thereto; (ii) all applicable provisions
of all federal rules, regulations, manuals and orders of all Governmental
Authorities promulgated pursuant to or in connection with the statutes described
in clause (i) above and all federal administrative, reimbursement and other
guidelines of all Governmental Authorities having the force of law promulgated
pursuant to or in connection with the statutes described in clause (i) above;
(iii) all state statutes and plans for medical assistance enacted in connection
with the statutes and provisions described in clauses (i) and (ii) above; and
(iv) all applicable provisions of all rules, regulations, manuals and orders of
all Governmental Authorities promulgated pursuant to or in connection with the
statutes described in clause (iii) above and all state administrative,
reimbursement and other guidelines of all Governmental Authorities having the
force of law promulgated pursuant to or in connection with the statutes
described in clause (ii) above, in each case as may be amended, supplemented or
otherwise modified from time to time.
"Medicare Certification" means certification by HCFA or a state agency or
entity under contract with HCFA that a health care operation is in compliance
with all the conditions of participation set forth in the Medicare Regulations.
"Medicare Provider Agreement" means an agreement entered into between a
state agency or other entity administering the Medicare program and a health
care operation under which the health care operation agrees to provide services
for Medicare patients in accordance with the terms of the agreement and Medicare
Regulations.
"Medicare Regulations" means, collectively, all federal statutes (whether
set forth in Title XVIII of the Social Security Act or elsewhere) affecting the
health insurance program for the aged and disabled established by Title XVIII of
the Social Security Act and any statutes succeeding thereto; together with all
applicable provisions of all rules, regulations, manuals and orders and
administrative, reimbursement and other guidelines
<PAGE>
having the force of law of all Governmental Authorities (including without
limitation, Health and Human Services ("HHS"), HCFA, the Office of the Inspector
General for HHS, or any Person succeeding to the functions of any of the
foregoing) promulgated pursuant to or in connection with any of the foregoing
having the force of law, as each may be amended, supplemented or otherwise
modified from time to time.
"Moody's" means Moody's Investors Service, Inc.
"Multiemployer Plan" means a "multiemployer plan" as defined in Section
4001(a)(3) of ERISA to which the Borrower or any ERISA Affiliate is making, or
is accruing an obligation to make, contributions or has made, or been obligated
to make, contributions within the preceding six (6) Fiscal Years.
"NationsBank" means NationsBank, National Association.
"Notes" means the Bridge Notes.
"Obligations" means the obligations, liabilities and Indebtedness of the
Borrower with respect to (i) the principal and interest on the Loans as
evidenced by the Notes, (ii) the Reimbursement Obligations and otherwise in
respect of the Letters of Credit, and (iii) the payment and performance of all
other obligations, liabilities and Indebtedness of the Borrower to the Lenders
or the Agent hereunder, under any one or more of the other Loan Documents or
with respect to the Loans.
"Participation" means, with respect to any Lender (other than the Issuing
Bank) and a Letter of Credit, the extension of credit represented by the
participation of such Lender hereunder in the liability of the Issuing Bank in
respect of a Letter of Credit issued by the Issuing Bank in accordance with the
terms hereof.
"Participation Agreement" means the Participation Agreement dated November
16, 1995 among HEALTHSOUTH Corporation, as Construction Agent, HEALTHSOUTH
Holdings, Inc., as Lessee, First Security Bank of Utah, N.A., as Trustee, the
Holders identified therein, the Lenders identified therein, and NationsBank,
National Association, as Agent, as such Participation Agreement may be amended,
modified, supplemented or restated in its entirety from time to time.
"PBGC" means the Pension Benefit Guaranty Corporation and any successor
thereto.
"Pension Plan" means any employee pension benefit plan within the meaning
of Section 3(2) of ERISA, other than a Multiemployer Plan, which is subject to
the provisions of Title IV of ERISA or Section 412 of the Code and which (i) is
maintained for employees of the Borrower or any of its ERISA Affiliates or is
assumed by the Borrower or any of its ERISA Affiliates in connection with any
Acquisition or (ii) has at any time been maintained for the employees of the
Borrower or any current or former ERISA Affiliate.
<PAGE>
"Permitted Encumbrances" shall mean:
(1) liens for taxes, assessments and other governmental charges that are
not delinquent or that are being contested in good faith by appropriate
proceedings duly pursued;
(2) mechanics', materialmen's, contractor's, landlord's or other similar
liens arising in the ordinary course of business, securing obligations that
are not delinquent or that are being contested in good faith by appropriate
proceedings duly pursued;
(3) restrictions, exceptions, reservations, easements, conditions,
limitations and other matters of record other than Liens that do not
materially adversely affect the value or utility of the affected property;
(4) Liens on assets securing Indebtedness the proceeds of which are used to
acquire such assets;
(5) Liens and other matters approved in writing by the Required Lenders;
and
(6) Liens in favor of landlords, the amount secured by which landlords'
Liens, in the aggregate, would not materially adversely affect the Borrower
or a Material Group.
"Permitted Investments" shall mean:
(1) direct obligations of, or obligations the payment of which is
guaranteed by, the United States of America or an interest in any trust or
fund that invests solely in such obligations or repurchase agreements,
properly secured, with respect to such obligations.
(2) direct obligations of agencies or instrumentalities of the United
States of America having a rating of A or higher by S&P or A2 or higher by
Moody's;
(3) a certificate of deposit issued by, or other interest-bearing deposits
with, a bank having its principal place of business in the United States of
America and having equity capital of not less than $250,000,000;
(4) a certificate of deposit issued by, or other interest-bearing deposits
with, any other bank organized under the laws of the United States of
America or any state thereof, provided that such deposit is either (i)
insured by the Federal Deposit Insurance Corporation or (ii) properly
secured by such bank by pledging direct obligations of the United States of
America having a market value not less than the face amount of such
deposits;
<PAGE>
(5) the capital stock of and partnership interests in, and loans made by
the Borrower to, Controlled Partnerships and Subsidiaries;
(6) prime commercial paper maturing within 270 days of the acquisition
thereof and, at the time of acquisition, having a rating of A-1 or higher
by S&P, or P-1 or higher by Moody's;
(7) eligible banker's acceptances, repurchase agreements and tax-exempt
municipal bonds having a maturity of less than one year, in each case
having a rating, or that is the full recourse obligation of a person whose
senior debt is rated, A or higher by S&P or A2 or higher by Moody's;
(8) loans made by the Borrower or a Consolidated Entity in an aggregate
amount of $2,000,000 or less to employees of the Borrower or of a
Consolidated Entity;
(9) loans made by the Borrower or a Controlled Partnership in an aggregate
amount of $1,000,000 or less to limited partners (or potential limited
partners) of Controlled Partnerships for the purpose of enabling such
limited partners to acquire limited partnership interests in Controlled
Partnerships, to operate their practices or to restructure partnership
interests;
(10) loans in an aggregate amount of up to $20,000,000 made by the Borrower
to the HEALTHSOUTH Employee Stock Benefit Plan;
(11) scholarship loans made by the Borrower in an aggregate amount not
exceeding $1,000,000 to individuals who meet certain eligibility
requirements as established by the Borrower from time to time;
(12) up to 100% of the outstanding shares of stock of Caretenders
Healthcorp (formerly known as Senior Services, Inc.) provided that
aggregate costs incurred to purchase such shares shall not exceed
$12,000,000;
(13) other investments of less than $5,000,000 in the aggregate expressly
approved in writing by the Agent and investments of $5,000,000 or greater
expressly approved in writing by the Required Lenders;
(14) any other investment having a rating of A or higher or A-1 or higher
by S&P or A2 or higher or P-1 or higher by Moody's;
(15) loans to health care practitioners and other persons not to exceed in
the aggregate $5,000,000;
(16) investments in Acacia Venture Partners, Wellmark, HEALTHSMART,
MedPartners and Austin Medical Office Building which in the aggregate do
not exceed $5,000,000; and
<PAGE>
(17) additional investments existing on the Closing Date and described in
Exhibit H.
"Person" means an individual, partnership, corporation, limited liability
company, trust, unincorporated organization, association, joint venture or a
government or agency or political subdivision thereof.
"Prepayable Debt" means the Indebtedness described in Schedule
1.1--Prepayable Debt.
"Prime Rate" means the rate of interest per annum announced publicly by the
Agent as its prime rate from time to time.
"Principal Office" means the office of the Agent at NationsBank, National
Association, Independence Center, 15th Floor, NC1 001-15-04, Charlotte, North
Carolina 28255, Attention: Agency Services, or such other office and address as
the Agent may from time to time designate.
"Pro Forma Historical Statements" means (i) the pro forma consolidated
balance sheet as at March 31, 1997 and (ii) the pro forma consolidated income
statements for Fiscal Year ended December 31, 1994, December 31, 1995 and
December 31, 1996 prepared in accordance with GAAP by independent certified
public accountants of national reputation, of the Borrower and its Subsidiaries,
giving historical pro forma effect to the Related Acquisition, which shall be
furnished to the Agent and the Lenders prior to the Closing Date.
"Rate Hedging Obligations" means any and all obligations of the Borrower or
any Consolidated Entity, whether absolute or contingent and howsoever and
whensoever created, arising, evidenced or acquired (including all renewals,
extensions and modifications thereof and substitutions therefor), under (i) any
and all agreements, devices or arrangements designed to protect at least one of
the parties thereto from the fluctuations of interest rates, exchange rates or
forward rates applicable to such party's assets, liabilities or exchange
transactions, including, but not limited to, Dollar-denominated or
cross-currency interest rate exchange agreements, forward currency exchange
agreements, interest rate cap or collar protection agreements, forward rate
currency or interest rate options, puts, warrants and those commonly known as
interest rate "swap" agreements; and (ii) any and all cancellations, buybacks,
reversals, terminations or assignments of any of the foregoing.
"Rating" means the rating of senior unsecured Indebtedness of the Borrower
in effect at any time which rating is made by either of Moody's or S&P.
"Registration Statement" means the Borrower's Registration Statement on
Form S-4 Registration No. 33336419, as filed with the Securities and Exchange
Commission on September 25, 1997, as amended, including all documents
incorporated therein by reference.
<PAGE>
"Regulation D" means Regulation D of the Board as the same may be amended
or supplemented from time to time.
"Reimbursement Obligation" shall mean, at any time, the obligation of the
Borrower with respect to any Letter of Credit to reimburse the Issuing Bank and
the Lenders to the extent of their respective Participations (including by the
receipt by the Issuing Bank of proceeds of Loans pursuant to Section 3.2) for
amounts theretofore paid by the Issuing Bank pursuant to a drawing under such
Letter of Credit.
"Related Acquisition" means the acquisition by the Borrower of Horizon in
accordance with the terms of the Related Acquisition Agreement, as such
transaction is further described in the Registration Statement.
"Related Acquisition Agreement" means that certain Plan and Agreement of
Merger dated as of February 17, 1997 by and among the Borrower, Horizon and Reid
Acquisition Corporation, and all schedules, annexes and exhibits thereto, as the
same may be amended or supplemented in a manner acceptable to the Administrative
Agent and the Required Lenders in their discretion.
"Related Acquisition Transaction Documents" means the Related Acquisition
Agreement and each document, agreement, instrument, opinion or certificate
incorporated therein or delivered in connection therewith, including in each
case all annexes, schedules and exhibits thereto, as any of the same may be
amended or supplemented in a manner acceptable to the Agent and the Required
Lenders in their discretion.
"Required Lenders" means, as of any date, Lenders on such date having
Credit Exposures (as defined below) aggregating at least 51% of the aggregate
Credit Exposures of all the Lenders on such date. For purposes of the preceding
sentence, the amount of the "Credit Exposure" of each Lender shall be equal to
the aggregate principal amount of the Loans, owing to such Lender plus the
aggregate unutilized amounts of such Lender's Bridge Commitment plus the amount
of such Lender's Applicable Commitment Percentage of Letter of Credit
Outstandings; provided that, if any Lender shall have failed to pay to the
Issuing Bank its Applicable Commitment Percentage of any drawing under any
Letter of Credit resulting in an outstanding Reimbursement Obligation, such
Lender's Credit Exposure attributable to Letters of Credit and Reimbursement
Obligations shall be deemed to be held by the Issuing Bank for purposes of this
definition.
"Restricted Payment" means (a) any dividend or other distribution, direct
or indirect, on account of any shares of any class of stock of Borrower or any
of its Consolidated Entities (other than those payable or distributable solely
to the Borrower) now or hereafter outstanding, except a dividend payable solely
in shares of a class of stock to the holders of that class; (b) any redemption,
conversion, exchange, retirement or similar payment, purchase or other
acquisition for value, direct or indirect, of any shares of any class of stock
of the Borrower or any of its Consolidated Entities (other than those payable or
distributable solely to the Borrower) now or hereafter outstanding; (c) any
payment made to retire, or to obtain the surrender of, any outstanding warrants,
options or other rights
<PAGE>
to acquire shares of any class of stock of the Borrower or any of its
Consolidated Entities now or hereafter outstanding; and (d) any issuance and
sale of capital stock of any Consolidated Entity of the Borrower (or any option,
warrant or right to acquire such stock) other than to the Borrower.
"S&P" means Standard & Poor's, a division of The McGraw Hill Companies.
"Segment" means a portion of a Loan (or all thereof) with respect to which
a particular interest rate is (or is proposed to be) applicable.
"Short Term Credit Facility" means the short-term loan of $500,000,000 made
by NationsBank, National Association to the Borrower evidenced by a promissory
note dated September 25, 1997.
"Single Employer Plan" means any employee pension benefit plan covered by
Title IV of ERISA in respect of which the Borrower or any Subsidiary is an
"employer" as described in Section 4001(b) of ERISA and which is not a
Multiemployer Plan.
"Solvent" means, when used with respect to any Person, that at the time of
determination:
(i) the fair value of its assets (both at fair valuation and at
present fair saleable value on an orderly basis) is in excess of the total
amount of its liabilities, including contingent obligations; and
(ii) it is then able and expects to be able to pay its debts as they
mature; and
(iii) it has capital sufficient to carry on its business as conducted
and as proposed to be conducted.
"Stated Termination Date" means October 21, 1998.
"Subordinated Debt" means any unsecured Indebtedness of the Borrower
or any Consolidated Entity (other than inter-company Indebtedness) which is
subordinated in right of payment in all respects to the Obligations in a
manner reasonably acceptable to the Agent.
"Subsidiary" means any corporation or other entity in which more than 50%
of its outstanding voting stock or more than 50% of all equity interests is
owned directly or indirectly by the Borrower and/or by one or more of the
Borrower's Subsidiaries.
"Swap Agreement" means one or more agreements between the Borrower and any
Person with respect to Indebtedness evidenced by any or all of the Notes, on
terms mutually acceptable to Borrower and such Person and approved by each of
the Lenders, which agreements create Rate Hedging Obligations; provided,
however, that no such
<PAGE>
approval of the Lenders shall be required to the extent such agreements are
entered into between the Borrower and any Lender.
"Termination Event" means: (i) a "Reportable Event" described in Section
4043 of ERISA and the regulations issued thereunder (unless the notice
requirement has been waived by applicable regulation); or (ii) the withdrawal of
the Borrower or any ERISA Affiliate from a Pension Plan during a plan year in
which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA
or was deemed such under Section 4068(f) of ERISA; or (iii) the termination of a
Pension Plan, the filing of a notice of intent to terminate a Pension Plan or
the treatment of a Pension Plan amendment as a termination under Section 4041 of
ERISA; or (iv) the institution of proceedings to terminate a Pension Plan by the
PBGC; or (v) any other event or condition which would constitute grounds under
Section 4042(a) of ERISA for the termination of, or the appointment of a trustee
to administer, any Pension Plan; or (vi) the partial or complete withdrawal of
the Borrower or any ERISA Affiliate from a Multiemployer Plan; or (vii) the
imposition of a Lien pursuant to Section 412 of the Code or Section 302 of
ERISA; or (viii) any event or condition which results in the reorganization or
insolvency of a Multiemployer Plan under Section 4241 or Section 4245 of ERISA,
respectively; or (ix) any event or condition which results in the termination of
a Multiemployer Plan under Section 4041A of ERISA or the institution by the PBGC
of proceedings to terminate a Multiemployer Plan under Section 4042 of ERISA.
"Total Letter of Credit Commitment" means an amount not to exceed
$50,000,000.
"Total Bridge Commitment" means a principal amount equal to $1,250,000,000,
as reduced from time to time in accordance with Section 2.1(a) and Section 2.7.
"Type" shall have the meaning assigned to such term in Section 1.3.
"Vanderbilt" shall mean Vanderbilt Stallworth Rehabilitation Hospital,
L.P., the partners of which are the Borrower, Vanderbilt University and
Vanderbilt Health Services.
"Voting Stock" means shares of Capital Stock issued by a corporation, or
equivalent interests in any other Person, the holders of which are ordinarily,
in the absence of contingencies, entitled to vote for the election of directors
(or persons performing similar functions) of such Person, even if the right so
to vote has been suspended by the happening of such a contingency.
24.2. Rules of Interpretation.
(a) All accounting terms not specifically defined herein shall have
the meanings assigned to such terms and shall be interpreted in accordance
with GAAP applied on a Consistent Basis.
<PAGE>
(b) The headings, subheadings and table of contents used herein or in
any other Loan Document are solely for convenience of reference and shall
not constitute a part of any such document or affect the meaning,
construction or effect of any provision thereof.
(c) Except as otherwise expressly provided, references herein to
articles, sections, paragraphs, clauses, annexes, appendices, exhibits and
schedules are references to articles, sections, paragraphs, clauses,
annexes, appendices, exhibits and schedules in or to this Agreement.
(d) All definitions set forth herein or in any other Loan Document
shall apply to the singular as well as the plural form of such defined
term, and all references to the masculine gender shall include reference to
the feminine or neuter gender, and vice versa, as the context may require.
(e) When used herein or in any other Loan Document, words such as
"hereunder", "hereto", "hereof" and "herein" and other words of like import
shall, unless the context clearly indicates to the contrary, refer to the
whole of the applicable document and not to any particular article,
section, subsection, paragraph or clause thereof.
(f) References to "including" means including without limiting the
generality of any description preceding such term, and for purposes hereof
the rule of ejusdem generis shall not be applicable to limit a general
statement, followed by or referable to an enumeration of specific matters,
to matters similar to those specifically mentioned.
(g) All dates and times of day specified herein shall refer to such
dates and times at Charlotte, North Carolina.
(h) Each of the parties to the Loan Documents and their counsel have
reviewed and revised, or requested (or had the opportunity to request)
revisions to, the Loan Documents, and any rule of construction that
ambiguities are to be resolved against the drafting party shall be
inapplicable in the construing and interpretation of the Loan Documents and
all exhibits, schedules and appendices thereto.
(i) Any reference to an officer of the Borrower or any other Person by
reference to the title of such officer shall be deemed to refer to each
other officer of such Person, however titled, exercising the same or
substantially similar functions.
(j) All references to any agreement or document as amended, modified
or supplemented, or words of similar effect, shall mean such document or
agreement, as the case may be, as amended, modified or supplemented from
time to time only as and to the extent permitted therein and in the Loan
Documents.
24.3. Types of Loans. Loans hereunder are distinguished by "Type". The
"Type" of a Loan refers to whether such Loan is a Base Rate Loan or a Eurodollar
Rate Loan, each of which constitutes a Type.
<PAGE>
ARTICLE XXV
The Loans
25.1. Bridge Loans.
(a) Bridge Facility. Subject to the terms and conditions of this Agreement,
each Lender severally agrees to make Advances to the Borrower under the Bridge
Facility from time to time from the Closing Date until the Bridge Termination
Date on a pro rata basis as to the total borrowing requested by the Borrower on
any day determined by such Lender's Applicable Commitment Percentage up to but
not exceeding the Bridge Commitment of such Lender, provided, however, that the
Lenders will not be required and shall have no obligation to make any such
Advance (i) so long as a Default or an Event of Default has occurred and is
continuing or (ii) if the maturity of any of the Notes has been accelerated as a
result of an Event of Default or (iii) if there is Existing Availability;
provided further, however, that immediately after giving effect to each such
Advance, the principal amount of Bridge Outstandings plus Letters of Credit
Outstandings shall not exceed the Total Bridge Commitment. Within such limits,
the Borrower may borrow, repay and reborrow under the Bridge Facility on a
Business Day from the Closing Date until, but (as to borrowings and
reborrowings) not including, the Bridge Termination Date; provided, however,
that (y) no Bridge Loan that is a Eurodollar Rate Loan shall be made which has
an Interest Period that extends beyond the Bridge Termination Date and (z) each
Bridge Loan that is a Eurodollar Rate Loan may, subject to the provisions of
Section 2.3, be repaid only on the last day of the Interest Period with respect
thereto unless such payment is accompanied by the additional payment, if any,
required by Section 4.2.
(b) Amounts. The aggregate unpaid principal amount of the Bridge
Outstandings shall not exceed the Total Bridge Commitment and, in the event
there shall be outstanding any such excess, the Borrower shall immediately make
such payments and prepayments as shall be necessary to comply with this
restriction. Each Bridge Loan hereunder and each conversion under Section 2.8,
shall be in an amount of at least $5,000,000, and, if greater than $5,000,000,
an integral multiple of $1,000,000.
(c) Advances. (i) An Authorized Representative shall give the Agent (1) at
least three (3) Business Days' irrevocable written notice by telefacsimile
transmission of a Borrowing Notice or Interest Rate Selection Notice (as
applicable) with appropriate insertions, effective upon receipt, of each Bridge
Loan that is a Eurodollar Rate Loan (whether representing an additional
borrowing hereunder or the conversion of a borrowing hereunder from Base Rate
Loans to Eurodollar Rate Loans) prior to 10:30 A.M. and (2) irrevocable written
notice by telefacsimile transmission of a Borrowing Notice or Interest Rate
Selection Notice (as applicable) with appropriate insertions, effective upon
receipt, of each Bridge Loan that is a Base Rate Loan (whether representing an
additional borrowing hereunder or the conversion of borrowing hereunder from
Eurodollar Rate Loans to Base Rate Loans) prior to 10:30 A.M. on the day of such
proposed Bridge Loan. Each such notice shall specify the amount of the borrowing
the Type of Loan (Base Rate or Eurodollar Rate), the date of borrowing and, if a
Eurodollar Rate Loan, the Interest Period to be used in the computation of
interest. Notice of receipt of such Borrowing Notice or Interest Rate Selection
Notice, as the case may be, together with the amount
<PAGE>
of each Lender's portion of an Advance requested thereunder, shall be provided
by the Agent to each Lender by telefacsimile transmission with reasonable
promptness, but (provided the Agent shall have received such notice by 10:30
A.M.) not later than 1:00 P.M. on the same day as the Agent's receipt of such
notice.
(ii) Not later than 2:00 P.M. on the date specified for each borrowing
under this Section 2.1, each Lender shall, pursuant to the terms and subject to
the conditions of this Agreement, make the amount of the Loan or Loans to be
made by it on such day available by wire transfer to the Agent in the amount of
its pro rata share, determined according to such Lender's Applicable Commitment
Percentage of the Bridge Loan or Bridge Loans to be made on such day. Such wire
transfer shall be directed to the Agent at the Principal Office and shall be in
the form of Dollars constituting immediately available funds. The amount so
received by the Agent shall, subject to the terms and conditions of this
Agreement, be made available to the Borrower by delivery of the proceeds thereof
as shall be directed in the applicable Borrowing Notice by the Authorized
Representative and reasonably acceptable to the Agent.
(iii) The Borrower shall have the option to elect the duration of the
initial and any subsequent Interest Periods and to convert the Bridge Loans in
accordance with Section 2.8. Eurodollar Rate Loans and Base Rate Loans may be
outstanding at the same time, provided, however, there shall not be outstanding
at any one time Loans having more than eight (8) different Interest Periods. If
the Agent does not receive a Borrowing Notice or an Interest Rate Selection
Notice giving notice of election of the duration of an Interest Period or of
conversion of any Loan to or continuation of a Loan as a Eurodollar Rate Loan by
the time prescribed by Section 2.1(c) or 2.8, the Borrower shall be deemed to
have elected to convert such Segment to (or continue such Segment as) a Base
Rate Loan until the Borrower notifies the Agent in accordance with Section 2.8.
(iv) Notwithstanding the foregoing, if a drawing is made under any Letter
of Credit, such drawing is honored by the Issuing Bank prior to the Bridge
Termination Date, and the Borrower shall not immediately fully reimburse the
Issuing Bank in respect of such drawing, (A) provided that the conditions to
making a Bridge Loan as herein provided shall then be satisfied, the
Reimbursement Obligation arising from such drawing shall be paid to the Issuing
Bank by the Agent without the requirement of notice to or from the Borrower from
immediately available funds which shall be advanced as a Base Rate Refunding
Loan by each Lender under the Bridge Facility in an amount equal to such
Lender's Applicable Commitment Percentage of such Reimbursement Obligation, and
(B) if the conditions to making a Bridge Loan as herein provided shall not then
be satisfied, each of the Lenders shall fund by payment to the Agent (for the
benefit of the Issuing Bank) in immediately available funds the purchase from
the Issuing Bank of their respective Participations in the related Reimbursement
Obligation based on their respective Applicable Commitment Percentages. If a
drawing is presented under any Letter of Credit in accordance with the terms
thereof and the Borrower shall not immediately reimburse the Issuing Bank in
respect thereof, then notice of such drawing or payment shall be provided
promptly by the Issuing Bank to the Agent and the Agent shall provide notice to
each Lender by telephone or telefacsimile transmission. If notice to the Lenders
of a drawing under any Letter of Credit is given by the Agent at or before 12:00
noon on any Business Day, each Lender shall, pursuant to the conditions
specified in this Section 2.1(c)(iv), either make a Base Rate Refunding
<PAGE>
Loan or fund the purchase of its Participation in the amount of such Lender's
Applicable Commitment Percentage of such drawing or payment and shall pay such
amount to the Agent for the account of the Issuing Bank at the Principal Office
in Dollars and in immediately available funds before 2:30 P.M. on the same
Business Day. If notice to the Lenders of a drawing under a Letter of Credit is
given by the Agent after 12:00 noon on any Business Day, each Lender shall,
pursuant to the conditions specified in this Section 2.1(c)(iv), either make a
Base Rate Refunding Loan or fund the purchase of its Participation in the amount
of such Lender's Applicable Commitment Percentage of such drawing or payment and
shall pay such amount to the Agent for the account of the Issuing Bank at the
Principal Office in Dollars and in immediately available funds before 12:00 noon
on the next following Business Day. Any such Base Rate Refunding Loan shall be
advanced as, and shall continue as, a Base Rate Loan unless and until the
Borrower converts such Base Rate Loan in accordance with the terms of Section
2.8.
25.2. Payment of Interest. (a) The Borrower shall pay interest to the Agent
for the account of each Lender on the outstanding and unpaid principal amount of
each Loan made by such Lender for the period commencing on the date of such Loan
until such Loan shall be due at the then applicable Base Rate for Base Rate
Loans or applicable Eurodollar Rate for Eurodollar Rate Loans, as designated by
the Authorized Representative pursuant to Section 2.1; provided, however, that
if any amount payable under this Agreement shall not be paid when due (at
maturity, by acceleration or otherwise, subject to the provisions of Section
9.1(a)), all amounts outstanding hereunder shall bear interest thereafter at the
Default Rate.
(b) Interest on each Loan shall be computed on an Actual/360 Basis.
Interest on each Loan shall be paid (i) quarterly in arrears on the last
Business Day of each March, June, September and December, commencing September
30, 1997, for each Base Rate Loan, (ii) on the last day of the applicable
Interest Period for each Eurodollar Rate Loan and, if such Interest Period
extends for more than three (3) months, at intervals of three (3) months after
the first day of such Interest Period, and (iii) upon the Bridge Termination
Date. Interest payable at the Default Rate shall be payable on demand.
25.3. Payment of Principal. The principal amount of each Bridge Loan shall
be due and payable to the Agent for the benefit of each Lender in full on the
Stated Termination Date, or earlier as specifically provided herein. In
addition, if at any time there shall be any Existing Availability the Borrower
shall promptly reduce the Bridge Outstandings by an amount equal to the
difference between $1,250,000,000 and the amount of outstanding loans and
letters of credit under the Existing Credit Agreement. The principal amount of
any Base Rate Loan may be prepaid in whole or in part at any time. The principal
amount of any Eurodollar Rate Loan may be prepaid only at the end of the
applicable Interest Period unless the Borrower shall pay to the Agent for the
account of the Lenders the additional amount, if any, required under Section
4.2. All prepayments of Bridge Loans made by the Borrower shall be in the amount
of $5,000,000 or such greater amount which is an integral multiple of
$1,000,000, or the amount equal to all Bridge Outstandings, as the case may be,
or such other amount as necessary to comply with Section 2.1(b) or Section 2.8.
<PAGE>
25.4. Non-Conforming Payments. (a) Each payment of principal (including any
prepayment) and payment of interest and fees, and any other amount required to
be paid to the Lenders with respect to the Loans, shall be made to the Agent at
the Principal Office, for the account of each Lender, in Dollars and in
immediately available funds before 10:00 A.M. on the date such payment is due.
The Agent may, but shall not be obligated to, debit the amount of any such
payment which is not made by such time to any ordinary deposit account, if any,
of the Borrower with the Agent. The Agent shall promptly notify the Borrower of
any such debit; however, failure to give such notice shall not affect the
validity of such debit.
(b) The Agent shall deem any payment made by or on behalf of the Borrower
hereunder that is not made both in Dollars and in immediately available funds
and prior to 10:00 A.M. to be a non-conforming payment. Any such payment shall
not be deemed to be received by the Agent until the later of (i) the time such
funds become available funds and (ii) the next Business Day. Any non-conforming
payment may constitute or become a Default or Event of Default. Interest shall
continue to accrue on any principal as to which a non-conforming payment is made
until the later of (x) the date such funds become available funds or (y) the
next Business Day at the Default Rate from the date such amount was due and
payable.
(c) In the event that any payment hereunder or under the Notes becomes due
and payable on a day other than a Business Day, then such due date shall be
extended to the next succeeding Business Day unless provided otherwise under
clause (ii) of the definition of "Interest Period"; provided that interest shall
continue to accrue during the period of any such extension and provided further,
that in no event shall any such due date be extended beyond the Bridge
Termination Date.
25.5. Notes. Bridge Loans made by each Lender shall be evidenced by the
Bridge Note payable to the order of such Lender in the respective amount of its
Applicable Commitment Percentage of the Bridge Commitment, which Bridge Note
shall be dated the Closing Date or a later date pursuant to an Assignment and
Acceptance and shall be duly completed, executed and delivered by the Borrower.
25.6. Pro Rata Payments. Except as otherwise provided herein, (a) each
payment on account of the principal of and interest on the Loans and the fees
described in Section 2.9 shall be made to the Agent for the account of the
Lenders pro rata based on their Applicable Commitment Percentages, (b) all
payments to be made by the Borrower for the account of each of the Lenders on
account of principal, interest and fees, shall be made without diminution,
setoff, recoupment or counterclaim, and (c) the Agent will promptly distribute
to the Lenders in immediately available funds payments received in fully
collected, immediately available funds from the Borrower.
25.7. Reductions. (a) The Borrower shall, by irrevocable notice from an
Authorized Representative, have the right from time to time but not more
frequently than once each calendar month, upon not less than three (3) Business
Days' written notice to the Agent, effective upon receipt, to permanently reduce
the Total Bridge Commitment. The Agent shall give each Lender, within one (1)
Business Day of receipt of such notice, telefacsimile notice, or telephonic
notice (confirmed in writing), of such reduction. Each such reduction shall be
in the aggregate amount
<PAGE>
of $10,000,000 or such greater amount which is in an integral multiple of
$1,000,000, or the entire remaining Total Bridge Commitment, and shall
permanently reduce the Total Bridge Commitment. Each reduction of the Total
Bridge Commitment shall be accompanied by payment of Bridge Loans to the extent
that the principal amount of Bridge Outstandings plus Letter of Credit
Outstanding exceeds the Total Bridge Commitment after giving effect to such
reduction, together with accrued and unpaid interest on the amounts prepaid. If
any such reduction shall result in the payment of any Eurodollar Rate Loan other
than on the last day of the Interest Period of such Eurodollar Rate Loan such
prepayment shall be accompanied by amounts due, if any, under Section 4.2.
(b) The Borrower shall make the following mandatory permanent reductions of
the Total Bridge Commitment, each such payment to be made to the Agent for the
benefit of the Lenders within the time period specified below:
(i) With respect to the sale, lease, transfer or other disposition of
any Line of Business where the sales price for such Line of Business shall
exceed $35,000,000, 100% of the net cash proceeds of the first $500,000,000
derived from all such transactions in the aggregate and 50% of the net cash
proceeds of the next $500,000,000 derived from all such transactions in the
aggregate, less expenses of such sale, any taxes actually paid or payable
as a result of such sale and any secured Indebtedness required to be repaid
in connection with such sale, lease or transfer, if the sales price for
such Line of Business shall exceed $35,000,000, such reduction to be made
within 30 days of the receipt of such proceeds; the Company shall give not
less than five (5) Business Days' prior written notice to the Agent of any
such prepayment resulting as a result of such reduction, which notice shall
include a certificate of an Authorized Representative setting forth in
reasonable detail the calculations utilized in computing the amount of such
prepayment or other reduction; and
(ii) with respect to the issuance and sale for cash of any
Indebtedness or equity securities of the Borrower or (but only if the sales
proceeds shall exceed $5,000,000) any of its Subsidiaries, the principal
amount of any Indebtedness or the cash proceeds of any securities, less any
costs of issuance and any original issue discount, such reduction to be
made within 30 days of the receipt of such proceeds; the Company shall give
the Agent not less than five (5) days written notice of any such prepayment
resulting as a result of such reduction.
25.8. Conversions and Elections of Subsequent Interest Periods. Provided
that no Default or Event of Default shall have occurred and be continuing and
subject to the limitations set forth below and in Article IV, the Borrower may:
(a) upon delivery, effective upon receipt, of a properly completed
Interest Rate Selection Notice to the Agent on or before 10:30 A.M. on any
Business Day, convert all or a part of Eurodollar Rate Loans under the Bridge
Facility to Base Rate Loans on the last day of the Interest Period for such
Eurodollar Rate Loans; and
<PAGE>
(b) upon delivery, effective upon receipt, of a properly completed
Interest Rate Selection Notice to the Agent on or before 10:30 A.M. three (3)
Business Days prior to the date of such election or conversion:
(i) elect a subsequent Interest Period for all or a portion of
Eurodollar Rate Loans under the Bridge Facility to begin on the last
day of the then current Interest Period for such Eurodollar Rate
Loans; and
(ii) convert Base Rate Loans under the Bridge Facility to
Eurodollar Rate Loans on any Business Day.
Each election and conversion pursuant to this Section 2.8 shall be subject
to the limitations on Eurodollar Rate Loans set forth in the definition of
"Interest Period" herein and in Sections 2.1 and 2.3 and Article IV. The Agent
shall give written notice to each Lender of such notice of election or
conversion prior to 3:00 P.M. on the day such notice of election or conversion
is received. All such continuations or conversions of Loans shall be effected
pro rata based on the Applicable Commitment Percentages of the Lenders.
25.9. Unused Fees.
(a) For the period beginning on the Closing Date and ending on the Bridge
Termination Date, the Borrower agrees to pay to the Agent, for the pro rata
benefit of the Lenders based on their Applicable Commitment Percentages, an
unused fee equal to the Applicable Unused Fee multiplied by the average daily
amount by which the Total Bridge Commitment exceeds the aggregate principal
amount of Bridge Outstandings plus Letter of Credit Outstandings. Such fees
shall be due in arrears on the last Business Day of each March, June, September
and December commencing September 30, 1997 to and on the Bridge Termination
Date.
(b) Notwithstanding the foregoing, so long as any Lender fails to make
available any portion of its Bridge Commitment when requested, such Lender shall
not be entitled to receive payment of its pro rata share of such fees until such
Lender shall make available such portion. All fees payable pursuant to this
Section 2.9 shall be calculated on an Actual/360 Basis.
25.10. Deficiency Advances. No Lender shall be responsible for any default
of any other Lender in respect of such other Lender's obligation to make any
Loan or fund its purchase of any Participation hereunder nor shall the Bridge
Commitment of any Lender hereunder be increased as a result of such default of
any other Lender. Without limiting the generality of the foregoing, in the event
any Lender shall fail to advance funds to the Borrower under the Bridge Facility
as herein provided, the Agent may in its discretion, but shall not be obligated
to, advance under the Bridge Note in its favor as a Lender all or any portion of
such amount or amounts (each, a "deficiency advance") and shall thereafter be
entitled to payments of principal of and interest on such deficiency advance in
the same manner and at the same interest rate or rates to which such other
Lender would have been entitled had it made such advance under its Bridge Note;
provided that, upon payment to the Agent from such other Lender of the entire
outstanding amount of each such deficiency advance, together with accrued and
unpaid interest thereon, from the most recent
<PAGE>
date or dates interest was paid to the Agent by the Borrower on each Loan
comprising such deficiency advance at the interest rate per annum for overnight
borrowing by the Agent from the Federal Reserve Bank of Richmond, Virginia, then
such payment shall be credited against the applicable Note of the Agent in full
payment of such deficiency advance and the Borrower shall be deemed to have
borrowed the amount of such deficiency advance from such other Lender as of the
most recent date or dates, as the case may be, upon which any payments of
interest were made by the Borrower thereon.
25.11. Use of Proceeds. The proceeds of the Loans made pursuant to this
Agreement shall be used by the Borrower (i) to repay Prepayable Debt, (ii) pay
in full the Short Term Facility, (iii) to purchase ASC, to provide funding in
connection with the acquisition of Horizon and (iv) to provide for the working
capital needs and other corporate purposes of the Borrower and its Consolidated
Entities.
<PAGE>
ARTICLE XXVI
Letters of Credit
26.1. Letters of Credit. The Issuing Bank agrees, subject to the terms and
conditions of this Agreement, upon request of the Borrower to issue from time to
time for the account of the Borrower Letters of Credit upon delivery to the
Issuing Bank of an Application and Agreement for Letter of Credit relating
thereto in form and content acceptable to the Issuing Bank; provided, that (i)
the Letter of Credit Outstandings shall not exceed the Total Letter of Credit
Commitment, (ii) no Letter of Credit shall be issued so long as a Default or an
Event of Default has occurred or is continuing or if the applicable conditions
set forth in Article V shall not have been satisfied, (iii) no Letter of Credit
shall be issued if, after giving effect thereto, Letter of Credit Outstandings
plus the aggregate principal amount of Bridge Outstandings shall exceed the
Total Bridge Commitment and (iv) no Letter of Credit shall be issued if there is
Existing Availability. No Letter of Credit shall have an expiry date (including
all rights of the Borrower or any beneficiary named in such Letter of Credit to
require renewal) or payment date occurring later than the fifth Business Day
prior to the Revolving Credit Termination Date.
26.2. Reimbursement.
(a) The Borrower hereby unconditionally agrees to pay to the Issuing Bank
immediately on demand at the Principal Office all amounts required to pay all
drafts drawn or purporting to be drawn under the Letters of Credit and all
reasonable expenses incurred by the Issuing Bank in connection with the Letters
of Credit, and in any event and without demand to place in possession of the
Issuing Bank (which shall include Advances under the Bridge Facility if
permitted by Section 2.1(c)) sufficient funds to pay all debts and liabilities
arising in respect of any Letter of Credit. The Issuing Bank agrees to give the
Borrower prompt notice of any request for a draw under a Letter of Credit. The
Issuing Bank may charge any account the Borrower may have with it for any and
all amounts the Issuing Bank pays under a Letter of Credit, plus charges and
reasonable expenses as from time to time agreed to by the Issuing Bank and the
Borrower; provided that to the extent permitted by Section 2.1(c)(iv), amounts
shall be paid pursuant to Advances under the Bridge Facility. The Borrower
agrees to pay the Issuing Bank interest on any Reimbursement Obligations not
paid when due hereunder at the Base Rate plus two percent (2.0%), or the maximum
rate permitted by applicable law, if lower, such rate to be calculated on an
Actual/360 Basis.
(b) In accordance with the provisions of Section 2.1(c), the Issuing Bank
shall notify the Agent of any drawing under any Letter of Credit promptly
following the receipt by the Issuing Bank of such drawing.
(c) Each Lender (other than the Issuing Bank) shall automatically acquire
on the date of issuance thereof a Participation in the liability of the Issuing
Bank in respect of each Letter of Credit in an amount equal to such Lender's
Applicable Commitment Percentage of such liability, and to the extent that the
Borrower is obligated to pay the Issuing Bank under Section 3.2(a), each Lender
(other than the Issuing Bank) thereby shall absolutely, unconditionally and
irrevocably assume, and shall be unconditionally obligated to pay to the Issuing
Bank as
<PAGE>
hereinafter described, its Applicable Commitment Percentage of the liability of
the Issuing Bank under such Letter of Credit.
(i) Each Lender (including the Issuing Bank in its capacity as a
Lender) shall, subject to the terms and conditions of Article II, pay
to the Agent for the account of the Issuing Bank at the Principal
Office in Dollars and in immediately available funds, an amount equal
to its Applicable Commitment Percentage of any drawing under a Letter
of Credit, such funds to be provided in the manner described in
Section 2.1(c)(iv).
(ii) Simultaneously with the making of each payment by a Lender
to the Issuing Bank pursuant to Section 2.1(c)(iv)(B), such Lender
shall, automatically and without any further action on the part of the
Issuing Bank or such Lender, acquire a Participation in an amount
equal to such payment (excluding the portion thereof constituting
interest accrued prior to the date such Lender made its payment) in
the related Reimbursement Obligation of the Borrower. The
Reimbursement Obligations of the Borrower shall be immediately due and
payable whether by Advances made in accordance with Section 2.1(c)(iv)
or otherwise.
(iii) Each Lender's obligation to make payment to the Agent for
the account of the Issuing Bank pursuant to Section 2.1(c)(iv) and
this Section 3.2(c), and the right of the Issuing Bank to receive the
same, shall be absolute and unconditional, shall not be affected by
any circumstance whatsoever and shall be made without any offset,
abatement, withholding or reduction whatsoever. If any Lender is
obligated to pay but does not pay amounts to the Agent for the account
of the Issuing Bank in full upon such request as required by Section
2.1(c)(iv) or this Section 3.2(c), such Lender shall, on demand, pay
to the Agent for the account of the Issuing Bank interest on the
unpaid amount for each day during the period commencing on the date of
notice given to such Lender pursuant to Section 2.1(c) until such
Lender pays such amount to the Agent for the account of the Issuing
Bank in full at the interest rate per annum for overnight borrowing by
the Agent from the Federal Reserve Bank of Richmond, Virginia.
(iv) In the event the Lenders have purchased Participations in
any Reimbursement Obligation as set forth in clause (ii) above, then
at any time payment (in fully collected, immediately available funds)
of such Reimbursement Obligation, in whole or in part, is received by
Issuing Bank from the Borrower, the Issuing Bank shall promptly pay to
each Lender an amount equal to its Applicable Commitment Percentage of
such payment from the Borrower.
(d) Promptly following the end of each calendar quarter, the Issuing Bank
shall deliver to the Agent and the Agent shall deliver to each Lender a notice
describing the aggregate undrawn amount of all Letters of Credit at the end of
such quarter. The Agent shall promptly notify each Lender of the issuance of a
Letter of Credit.
(e) The issuance by the Issuing Bank of each Letter of Credit shall, in
addition to the conditions precedent set forth in Article V, be subject to the
conditions that such Letter of Credit be in such form and contain such terms as
shall be reasonably satisfactory to the Issuing Bank consistent with the then
current practices and procedures of the Issuing Bank with respect
<PAGE>
to similar letters of credit, and the Borrower shall have executed and delivered
such other instruments and agreements relating to such Letters of Credit as the
Issuing Bank shall have reasonably requested consistent with such practices and
procedures and shall not be in conflict with any of the express terms herein
contained. All Letters of Credit shall be issued pursuant to and subject to the
Uniform Customs and Practice for Documentary Credits, 1993 revision,
International Chamber of Commerce Publication No. 500 and all subsequent
amendments and revisions thereto.
(f) The Borrower agrees that Issuing Bank may, in its sole discretion,
accept or pay, as complying with the terms of any Letter of Credit, any drafts
or other documents otherwise in order which may be signed or issued by an
administrator, executor, trustee in bankruptcy, debtor in possession, assignee
for the benefit of creditors, liquidator, receiver, attorney in fact or other
legal representative of a party who is authorized under such Letter of Credit to
draw or issue any drafts or other documents.
(g) Without limiting the generality of the provisions of Section 11.12, the
Borrower hereby agrees to indemnify and hold harmless the Issuing Bank, each
other Lender and the Agent from and against any and all claims and damages,
losses, liabilities, reasonable costs and expenses which the Issuing Bank, such
other Lender or the Agent may incur (or which may be claimed against the Issuing
Bank, such other Lender or the Agent) by any Person by reason of or in
connection with the issuance or transfer of or payment or failure to pay under
any Letter of Credit; provided that the Borrower shall not be required to
indemnify the Issuing Bank, any other Lender or the Agent for any claims,
damages, losses, liabilities, costs or expenses to the extent, but only to the
extent, (i) caused by the willful misconduct or negligence of the party to be
indemnified or (ii) in the case of the Issuing Bank, caused by the failure of
the Issuing Bank to pay under any Letter of Credit after the presentation to it
of a request for payment strictly complying with the terms and conditions of
such Letter of Credit, unless such payment is prohibited by any law, regulation,
court order or decree. The indemnification and hold harmless provisions of this
Section 3.2(g) shall survive repayment of the Obligations, occurrence of the
Bridge Termination Date and expiration or termination of this Agreement.
(h) Without limiting the Borrower's rights as set forth in Section 3.2(g),
the obligation of the Borrower to immediately reimburse the Issuing Bank for
drawings made under Letters of Credit and to repay Loans made under Section
2.1(c) and the Issuing Bank's and each Lender's right to receive such payment
shall be absolute, unconditional and irrevocable, and such obligations of the
Borrower shall be performed strictly in accordance with the terms of this
Agreement and such Letters of Credit and the related Applications and Agreement
for any Letter of Credit, under all circumstances whatsoever, including the
following circumstances:
(i) any lack of validity or enforceability of any Letter of Credit,
the obligation supported by any Letter of Credit or any other agreement or
instrument relating thereto (collectively, the "Related LC Documents");
(ii) any amendment or waiver of or any consent to or departure from
all or any of the Related LC Documents;
<PAGE>
(iii) the existence of any claim, setoff, defense (other than the
defense of payment in accordance with the terms of this Agreement) or other
rights which the Borrower may have at any time against any beneficiary or
any transferee of a Letter of Credit (or any persons or entities for whom
any such beneficiary or any such transferee may be acting), the Agent, the
Lenders or any other Person, whether in connection with the Loan Documents,
the Related LC Documents or any unrelated transaction;
(iv) any breach of contract or other dispute between the Borrower and
any beneficiary or any transferee of a Letter of Credit (or any persons or
entities for whom such beneficiary or any such transferee may be acting),
the Agent, the Lenders or any other Person;
(v) any draft, statement or any other document presented under any
Letter of Credit proving to be forged, fraudulent, invalid or insufficient
in any respect or any statement therein being untrue or inaccurate in any
respect whatsoever;
(vi) any delay, extension of time, renewal, compromise or other
indulgence or modification granted or agreed to by the Agent or the
requisite number of Lenders, with or without notice to or approval by the
Borrower in respect of any of Borrower's Obligations under this Agreement;
or
(vii) any other circumstance or happening whatsoever, whether or not
similar to any of the foregoing; provided, however, that nothing in this
Section 3.2(h) shall give the Issuing Bank any right to reimbursement for
drawings made under a Letter of Credit otherwise than pursuant to a request
for payment strictly complying with the terms and conditions of such Letter
of Credit unless the Borrower has specifically waived such strict
compliance in writing.
26.3. Letter of Credit Facility Fees. (a) The Borrower shall pay to the
Agent, for the pro rata benefit of the Lenders based on their Applicable
Commitment Percentages, a fee on the aggregate amount available to be drawn on
each outstanding Letter of Credit at a rate equal to the Applicable Margin. In
addition, the Borrower agrees to pay to the Agent for the benefit of the Issuing
Bank an issuance fee equal to one-eighth of one percent (1/8%) per annum times
the amount of outstanding Letters of Credit. Such fees shall be due with respect
to each Letter of Credit quarterly in arrears on the last Business Day of each
March, June, September and December, the first such payment to be made on the
first such date occurring after the date of issuance of a Letter of Credit. The
fees described in this Section 3.3 shall be calculated on the basis of a year of
360 days for the actual number of days elapsed.
(b) The Borrower acknowledges that the Issuing Bank as issuer of each
Letter of Credit will be required by applicable rules and regulations of the
Board to maintain reserves for its liability to honor draws made pursuant to a
Letter of Credit notwithstanding the obligation of the Lenders for a
Participation in such liability. The Borrower agrees to promptly reimburse the
Issuing Bank for all additional costs which it may hereafter incur solely by
reason of its acting as issuer of the Letters of Credit and its being required
to reserve for such liability, it being
<PAGE>
understood by the Borrower that other interest and fees payable under this
Agreement do not include compensation of the Issuing Bank for such reserves. The
Issuing Bank shall furnish to the Borrower at the time of its demand for payment
of such additional costs, the computation of such additional cost which shall be
conclusive absent manifest error, provided that such computations are made on a
reasonable basis.
26.4. Administrative Fees. The Borrower shall pay to the Issuing Bank such
administrative fee and other fees, if any, in connection with the Letters of
Credit in such amounts and at such times as the Issuing Bank and the Borrower
shall agree from time to time.
<PAGE>
ARTICLE XXVII
Termination of Eurodollar Rate and Yield Protection
27.1. Suspension of Loans.
(a) If at any time the Agent shall reasonably determine (which
determination, if reasonable, shall be final, conclusive and binding upon all
parties) that:
(i) by reason of any changes arising after the Closing Date affecting
the applicable interbank market or affecting the position of any Lender or
the Agent in such market, adequate and fair means do not exist for
ascertaining the Interbank Offered Rate with respect to a Eurodollar Rate
Loan; or
(ii) the continuation by any Lender of any Eurodollar Rate Loans or
the funding thereof in the applicable interbank market would be unlawful by
reason of any law, governmental rule, regulation, guidelines or order; or
(iii) the continuation by any Lender of any Eurodollar Rate Loans or
the funding thereof in the applicable interbank market would be
impracticable as a result of a contingency occurring after the date of this
Agreement that materially and adversely affects the applicable interbank
market;
then, and in any such event, the Agent shall on such date give notice (by
telephone and confirmed in writing) to the Borrower of such determination. The
obligation of any Lender to make or maintain Eurodollar Rate Segments so
affected or to permit interest to be computed thereon based upon the Interbank
Offered Rate shall be terminated, and interest shall thereafter be computed on
the affected Segment or Segments at the then applicable Base Rate.
(b) It is the intention of the parties that the Eurodollar Rates shall
accurately reflect the cost to each Lender of maintaining any Eurodollar Rate
Segment during any period in which interest accrues thereon at a Eurodollar
Rate. Accordingly:
(i) if by reason of any change after the date hereof in any applicable
law or governmental rule, regulation or order (or any interpretation
thereof and including the introduction of any new law or governmental rule,
regulation or order), including any change in the Eurodollar Reserve
Percentage, the cost to any Lender of maintaining any Eurodollar Rate
Segment or funding the same by means of an interbank market time deposit in
the relevant interbank market shall increase, the Eurodollar Rate
applicable to such Eurodollar Rate Segment shall be adjusted as necessary
to reflect such change in cost to such Lender, effective as of the date on
which such change in any applicable law, governmental rule, regulation or
order becomes effective; and
(ii) If any Lender shall have determined that the adoption after the
date of this Agreement of any law, rule, regulation or guideline regarding
capital adequacy, or any change in any of the foregoing or in the
interpretation or administration of any of the foregoing by any
Governmental Authority, central
<PAGE>
bank or comparable agency charged with the interpretation or administration
thereof, or compliance by any Lender (or any lending office of any Lender)
or such Lender's holding company with any request or directive regarding
capital adequacy (whether or not having the force of law) of any such
authority, central bank or comparable agency, has or would have the effect
of reducing the rate of return on such Lender's capital or on the capital
of such Lender's holding company, as a consequence of such Lender's
obligations under this Agreement or the Advances made by such Lender
pursuant hereto, to a level below that which such Lender or such Lender's
holding company could have achieved but for such adoption, change or
compliance (taking into consideration such Lender's guidelines with respect
to capital adequacy) by an amount reasonably deemed by such Lender to be
material, then from time to time the Borrower shall pay to such Lender such
additional amount or amounts as will compensate such Lender or such
Lender's holding company for any such reduction suffered.
27.2. Compensation. The Borrower shall compensate any Lender for all
reasonable losses, expenses and liabilities (including any interest owed by such
Lender to lenders on funds borrowed by such Lender to make or carry any
Eurodollar Rate Segment and any loss sustained by such Lender in connection with
the re-employment of such funds), that such Lender may sustain: (a) if for any
reason (other than a default by such Lender) following agreement between the
Borrower and the Agent or the Borrower and such Lender, as the case may be, as
to the Eurodollar Rate applicable to a Eurodollar Rate Segment the Borrower
fails to accept such Eurodollar Rate Segment, (b) as a consequence of any
unauthorized action taken or default by the Borrower in the repayment of any
Eurodollar Rate Segment when required by the terms of this Agreement or (c) with
respect to any loss of income incurred by a Lender (as determined in a
reasonable manner by such Lender) associated with the payment of principal other
than the last day of an Interest Period with respect to any Eurodollar Rate
Loan. A certificate as to the amount of any additional amounts payable pursuant
to this Section 4.2 (setting forth in reasonable detail the basis for requesting
such amounts) submitted by such Lender to the Borrower shall be conclusive, in
the absence of manifest error. The Borrower shall pay to such Lender the amount
shown as due on any such certificate delivered by such Lender within 30 days
after the Borrower's receipt of the same.
27.3. Taxes. All payments by the Borrower of principal of, and interest on,
the Loans and all other amounts payable hereunder shall be made free and clear
of and without deduction for any present or future excise, stamp or franchise
taxes or other taxes, whatsoever imposed by any taxing authority, but excluding
franchise taxes and taxes imposed on or measured by any Lender's net income or
receipts (such non-excluded items being called "Taxes"). In the event that any
withholding or deduction from any payment to be made by the Borrower hereunder
is required in respect of any Taxes pursuant to any applicable law, rule or
regulation, then the Borrower will
(a) pay directly to the relevant authority the full amount required to
be so withheld or deducted;
(b) promptly forward to the Agent an official receipt or other
documentation satisfactory to the Agent evidencing such payment to such
authority; and
<PAGE>
(c) pay to the Agent for the account of each affected Lender such
additional amount or amounts as is necessary to ensure that the net amount
actually received by each Lender will equal the full amount such Lender
would have received had no such withholding or deduction been required.
Moreover, if any Taxes are directly asserted against the Agent or any Lender
with respect to any payment received by the Agent or such Lender hereunder, the
Agent or such Lender may pay such Taxes and the Borrower will promptly pay such
additional amounts (including any penalties, interest or expenses) as is
necessary in order that the net amount received by the Agent or such Lender
after the payment of such Taxes (including any Taxes on such additional amount)
shall equal the amount the Agent or such Lender would have received had no such
Taxes been asserted. Upon the request of the Borrower or the Agent, each Lender
and each participant that is organized under the laws of a jurisdiction other
than the United States shall, prior to the due date of any payments hereunder or
under the Notes, execute and deliver to the Borrower and the Agent one or more
(as the Borrower or the Agent may reasonably request) United States Internal
Revenue Service Forms 4224 or Forms 1001 or such other forms or documents (or
successor forms or documents), appropriately completed, as may be applicable (if
any are) to establish the extent, if any, to which a payment to such Lender or
participant is exempt from withholding or deduction of Taxes.
If the Borrower fails to pay any Taxes when due to the appropriate taxing
authority or fails to remit to the Agent, for the account of the respective
Lender, the required amounts, receipts or other required documentary evidence,
the Borrower shall indemnify the Lenders for any incremental Taxes, interest or
penalties that may become payable by any Lender as a result of any such failure.
For purposes of this Section 4.3, a distribution hereunder by the Agent or any
Lender to or for the account of any Lenders shall be deemed a payment by the
Borrower.
If Taxes are incorrectly or illegally paid or assessed, and if any Lender
or the Agent contests the assessment of such Taxes, such Lender or the Agent
shall refund, to the extent of any refund made to such Lender or the Agent, any
amounts paid by the Borrower under this Section in respect of such Taxes (less
the costs and expenses incurred by such Lender in connection with such contest,
including legal fees).
Without prejudice to the survival of any other agreements of the Borrower
hereunder or under any other Loan Document, the agreements of the Borrower
contained in this Section shall survive the payment in full of all its
Obligations and the termination of all Bridge Commitments.
To the extent any Lender shall become liable for the payment of any Taxes
hereunder and shall seek reimbursement therefor pursuant to this Section 4.3,
the Borrower shall be entitled, upon the giving of five Business Days' notice to
the Agent and such Lender, (i) to replace such Lender with a substitute lender,
and (ii) in connection with such substitution, cause the payment in full of the
outstanding Obligation due to the Lender requesting reimbursement without
penalty or payment other than under Section 4.2; provided, all obligations to
such assigning Lender shall be paid in full, no
<PAGE>
assignment fee shall be payable by such assigning Lender but shall be paid by
Borrower and such assigning Lender shall be entitled to the benefits of this
Agreement set forth in Sections 3.2(g), 11.6 and 11.12 and Article IV.
<PAGE>
ARTICLE XXVIII
Conditions to Making Loans and Issuing Letters of Credit
28.1. Conditions of Initial Advance. This Agreement shall not become
effective until the following conditions precedent have been satisfied in the
sole judgment of the Agent:
(a) the Agent shall have received on the Closing Date, in form and
substance satisfactory to the Agent and Lenders, the following:
(i) executed originals of each of this Agreement, the Notes, the
LC Account Agreement and the other Loan Documents, together with all
schedules and exhibits thereto;
(ii) the favorable written opinion or opinions with respect to
the Loan Documents and the transactions contemplated thereby of
counsel to the Borrower dated the Closing Date, addressed to the Agent
and the Lenders and satisfactory to Smith Helms Mulliss & Moore,
L.L.P., special counsel to the Agent, substantially in the form of
Exhibit H;
(iii) resolutions of the board of directors of the Borrower
certified by its secretary or assistant secretary as of the Closing
Date, approving and adopting the Loan Documents to be executed by the
Borrower, and authorizing the execution and delivery and performance
thereof;
(iv) specimen signatures of officers of the Borrower executing
the Loan Documents on behalf of the Borrower, certified by the
secretary or assistant secretary of the Borrower;
(v) the charter documents of the Borrower certified as of a
recent date by the Secretary of State of its state of organization;
(vi) the bylaws of the Borrower certified as of the Closing Date
as true and correct by its secretary or assistant secretary;
(vii) certificates issued as of a recent date by the Secretary of
State of the jurisdiction of formation of the Borrower as to the valid
existence and good standing of the Borrower;
(viii) appropriate certificates of qualification to do business,
good standing and, where appropriate, authority to conduct business
under assumed name, issued in respect of the Borrower as of a recent
date by the Secretary of State or comparable official of each
jurisdiction in which the failure to be qualified to do business or
authorized so to conduct business could have a Material Adverse
Effect;
(ix) notice of appointment of the initial Authorized
Representative(s);
<PAGE>
(x) evidence of all insurance required by the Loan Documents;
(xi) a certificate in the form of Exhibit I completed as of June
30, 1997;
(xii) evidence that all fees payable by the Borrower on the
Closing Date to the Agent and the Lenders have been paid in full;
(xiii) Pro Forma Historical Statement and the financial
statements described in Section 6.6(d) and (e);
(xiv) true copies of the Registration Statement and the Related
Transaction Documents;
(xv) such other documents, instruments, certificates and opinions
as the Agent or any Lender may reasonably request on or prior to the
Closing Date in connection with the consummation of the transactions
contemplated hereby; and
(b) In the good faith judgment of the Agent and the Lenders:
(i) there shall not have occurred or become known to the Agent or
the Lenders any event, condition, situation or status since the date
of the information contained in the financial and business
projections, budgets, pro forma data and forecasts concerning the
Borrower and its Consolidated Entities delivered to the Agent prior to
the Closing Date that has had or could reasonably be expected to
result in a Material Adverse Effect;
(ii) no litigation, action, suit, investigation or other
arbitral, administrative or judicial proceeding shall be pending or
threatened which could reasonably be likely to result in a Material
Adverse Effect; and
(iii) the Borrower and its Consolidated Entities shall have
received all approvals, consents and waivers, and shall have made or
given all necessary filings and notices, as shall be required to
consummate the transactions contemplated hereby without the occurrence
of any default under, conflict with or violation of (A) any applicable
law, rule, regulation, order or decree of any Governmental Authority
or arbitral authority or (B) any agreement, document or instrument to
which any of the Borrower or any Consolidated Entity is a party or by
which any of them or their properties is bound, except for such
approvals, consents, waivers, filings and notices the receipt, making
or giving of which will not have a Material Adverse Effect.
28.2. Conditions of Loans and Letters of Credit. The obligations of the
Lenders to make any Loans, and the Issuing Bank to issue Letters of Credit,
hereunder on or subsequent to the Closing Date, are subject to the satisfaction
of the following conditions:
(a) the Agent shall have received a Borrowing Notice if required by
Article II;
<PAGE>
(b) simultaneously with the making of a second Advance, evidence
satisfactory to the Agent (which may include the appropriate written request or
direction of the Borrower to the Agent delivered as of the Closing Date) of the
use of Advances, together with other funds supplied by the Borrower (if any), to
the repayment in full of the Prepayable Debt, and the making of satisfactory
arrangements for the effective release and termination of all Liens securing any
Prepayable Debt substantially simultaneously with such payment;
(c) the proceeds of the initial Advance shall be used to pay in full the
Short Term Facility and up to $190,000,000 shall be used to acquire ASC;
(d) the representations and warranties of the Borrower and the Subsidiaries
set forth in Article VI and in each of the other Loan Documents shall be true
and correct in all material respects on and as of the date of such Advance
Letter of Credit issuance or renewal, with the same effect as though such
representations and warranties had been made on and as of such date, except to
the extent that such representations and warranties expressly relate to an
earlier date and except that the financial statements referred to in Section
6.6(a) shall be deemed to be those financial statements most recently delivered
to the Agent and the Lenders pursuant to Section 7.1 from the date financial
statements are delivered to the Agent and the Lenders in accordance with such
Section;
(e) in the case of the issuance of a Letter of Credit, the Borrower shall
have executed and delivered to the Issuing Bank an Application and Agreement for
the Letter of Credit in form and content acceptable to the Issuing Bank together
with such other instruments and documents as it shall request;
(f) at the time of (and after giving effect to) each Advance or the
issuance of a Letter of Credit, no Default or Event of Default shall have
occurred and be continuing; and
(g) immediately after giving effect to:
(i) a Bridge Loan, the aggregate principal balance of all outstanding
Bridge Loans for each Lender shall not exceed such Lender's Bridge Commitment;
(ii) a Letter of Credit or renewal thereof, the aggregate principal balance
of all outstanding Participations in Letters of Credit and Reimbursement
Obligations (or in the case of the Issuing Bank, its remaining interest after
deduction of all Participations in Letters of Credit and Reimbursement
Obligations of other Lenders) for each Lender and in the aggregate shall not
exceed, respectively, (X) such Lender's Letter of Credit Commitment or (Y) the
Total Letter of Credit Commitment; and
(iii) a Bridge Loan or a Letter of Credit or renewal thereof, the sum of
Letter of Credit Outstandings plus the aggregate principal amount of Bridge
Outstandings shall not exceed the Total Bridge Commitment.
<PAGE>
Each borrowing hereunder and each issuance of a Letter of Credit hereunder
shall constitute a representation and warranty by the Borrower to the effect
that the conditions set forth in clauses (d) and (f) have been satisfied as of
the date of such borrowing.
<PAGE>
ARTICLE XXIX
Representations and Warranties
The Borrower represents and warrants with respect to itself and (to the
extent expressly set forth below) its Consolidated Entities (which
representations and warranties shall survive the delivery of the documents
mentioned herein and the making of Loans and the issuance of a Letter of
Credit), that:
29.1. Organization and Authority.
(a) The Borrower and each Consolidated Entity is a corporation,
partnership or limited liability company duly organized and validly
existing under the laws of the jurisdiction of its formation;
(b) The Borrower and each Consolidated Entity (x) has the requisite
power and authority to own its properties and assets and to carry on its
business as now being conducted and as contemplated in the Loan Documents,
and (y) is qualified to do business in every jurisdiction in which failure
so to qualify would have a Material Adverse Effect;
(c) The Borrower has the power and authority to execute, deliver and
perform this Agreement and the Notes, and to borrow and obtain other
extensions of credit hereunder, and to execute, deliver and perform each of
the other Loan Documents to which it is a party; and
(d) When executed and delivered, each of the Loan Documents to which
the Borrower is a party will be the legal, valid and binding obligation or
agreement, as the case may be, of the Borrower, enforceable against the
Borrower in accordance with its terms, subject to the effect of any
applicable bankruptcy, moratorium, insolvency, reorganization or other
similar law affecting the enforceability of creditors' rights generally and
to the effect of general principles of equity (whether considered in a
proceeding at law or in equity).
29.2. Loan Documents. The execution, delivery and performance by the
Borrower of each of the Loan Documents and the credit extensions hereunder:
(a) have been duly authorized by all requisite corporate actions
(including any required shareholder approval) of the Borrower required for
the lawful execution, delivery and performance thereof;
(b) do not violate any provisions of (i) applicable law, rule or
regulation, (ii) any judgment, writ, order, determination, decree or
arbitral award of any Governmental Authority or arbitral authority binding
on the Borrower or any Subsidiary or its or any Subsidiary's properties, or
(iii) the charter documents or bylaws of the Borrower;
(c) do not and will not be in conflict with, result in a breach of or
constitute an event of default, or an event which, with notice or lapse of
time or both, would constitute an event of default, under any contract,
indenture, agreement or other instrument or
<PAGE>
document to which Borrower or any Consolidated Entity is a party, or by
which the properties or assets of the Borrower or any Consolidated Entity
are bound; and
(d) do not and will not result in the creation or imposition of any
Lien upon any of the properties or assets of Borrower or any Subsidiary.
29.3. Solvency. The Borrower is Solvent and the Borrower and its
Consolidated Entities taken as a whole are Solvent, in each case after giving
effect to the transactions contemplated by the Loan Documents.
29.4. Subsidiaries. The Borrower has no Subsidiaries other than those
Persons listed as Subsidiaries in Schedule 6.4 and additional Subsidiaries
created or acquired after the Closing Date.
29.5. Ownership Interests. Borrower owns no interest in any Person other
than the Persons listed in Schedule 6.4, equity investments in Persons not
constituting Subsidiaries permitted under Section 7.2 and additional
Subsidiaries created or acquired after the Closing Date.
29.6. Financial Condition.
(a) The Registration Statement incorporates by reference financial
statements of the Borrower and Horizon contained in the periodic reports
descried therein under the caption "INCORPORATION OF CERTAIN INFORMATION BY
REFERENCE". Such financial statements (including the notes thereto) present
fairly the financial condition of (i) the Borrower and its Consolidated
Subsidiaries (before giving effect to the Related Acquisition) and (ii)
Horizon and its Subsidiaries as of the end of the Fiscal Years and three
month periods set forth and results of their operations and the changes in
their stockholders' equity and cash flow for the Fiscal Years and three
month periods then ended, all in conformity with Generally Accepted
Accounting Principles applied on a Consistent Basis;
(b) since June 30, 1997 (in the case of the Borrower) or May 31, 1997
(in the case of Horizon) there has been no material adverse change in the
condition, financial or otherwise, of (i) the Borrower or any of its
Consolidated Subsidiaries (before giving effect to the Related Acquisition)
or (ii) Horizon and its Subsidiaries, or in the businesses, properties,
performance, prospects or operations of (x) the Borrower or any of its
Consolidated Subsidiaries (before giving effect to the Related Acquisition)
or (y) Horizon and its Subsidiaries, nor have such businesses or properties
been materially adversely affected as a result of any fire, explosion,
earthquake, accident, strike, lockout, combination of workers, flood,
embargo or act of God;
(c) except as set forth in the financial statements referred to in
Section 6.6(a) or permitted by Section 8.3, neither Borrower nor any
Subsidiary has incurred, other than in the ordinary course of business, any
material Indebtedness or other commitment or liability which remains
outstanding or unsatisfied;
(d) the Pro Forma Historical Statements provided to the Agent and the
Lenders fairly present in accordance with GAAP the historical pro forma
financial condition and
<PAGE>
results of operations of the Borrower and its Consolidated Subsidiaries for
the respective periods covered thereby, after giving pro forma effect to
the Related Acquisition and making the adjustments described therein;
(e) the pro forma projections of the Borrower and its Consolidated
Subsidiaries giving effect to the Related Acquisition for the Fiscal Years
ending December 31, 1997, December 31, 1998 and December 31, 1999 provided
to the Agent and the Lenders were prepared by the Borrower in good faith
and are based upon assumptions which the Borrower believes to have been
reasonable as of the time of preparation thereof and as of the Closing
Date; and
(f) neither the Borrower nor any Consolidated Entity has any material
Indebtedness, Guaranteed Obligations or other obligations or liabilities,
direct or contingent, in an aggregate amount in excess of $300,000 other
than (a) the liabilities reflected in such balance sheet and the notes
thereto or (b) liabilities incurred in the ordinary course of business.
29.7. Title to Properties. The Borrower and each Consolidated Entity has
good and marketable title to all its real and personal properties, subject to no
transfer restrictions or Liens of any kind, except for the transfer restrictions
and Liens permitted by this Agreement.
29.8. Taxes. The Borrower and each Consolidated Entity have filed or caused
to be filed all federal, state and local tax returns which are required to be
filed by it and, except for taxes and assessments being contested in good faith
by appropriate proceedings diligently conducted and against which reserves
reflected in the financial statements described in Section 6.6(a) and
satisfactory to the Borrower's independent certified public accountants have
been established, have paid or caused to be paid all taxes as shown on said
returns or on any assessment received by it, to the extent that such taxes have
become due.
29.9. Other Agreements. Except as disclosed in or incorporated by reference
in the Registration Statement:
(a) Neither the Borrower nor any Consolidated Entity is a party to or
subject to any judgment, order, decree, agreement, lease or instrument, or
subject to other restrictions, compliance with the terms of which
individually or in the aggregate could reasonably be expected to have a
Material Adverse Effect;
(b) neither the Borrower nor any Consolidated Entity is in default in
the performance, observance or fulfillment of any of the obligations,
covenants or conditions contained in (i) any Medicaid Provider Agreement,
Medicare Provider Agreement or other agreement or instrument to which the
Borrower or any Consolidated Entity is a party, which default has resulted
in, or if not remedied within any applicable grace period could result in,
the revocation, termination, cancellation or suspension of Medicaid
Certification or Medicare Certification of Borrower or any Consolidated
Entity which could have a Material Adverse Effect or (ii) any other
agreement or instrument to which the Borrower or any Consolidated Entity is
a party, which default has, or if not remedied within any applicable grace
period could reasonably be likely to have, a Material Adverse Effect;
<PAGE>
(c) to the knowledge of Borrower's Executive Officers, no Contract
Provider is a party to any judgment, order, decree, agreement or
instrument, or subject to restrictions, compliance with the terms of which
could individually or in the aggregate reasonably be expected to have a
Material Adverse Effect; and
(d) to the knowledge of Borrower's Executive Officers, no Contract
Provider is in default in the performance, observance or fulfillment of any
of the obligations, covenants or conditions contained in any Medicaid
Provider Agreement, Medicare Provider Agreement or other agreement or
instrument to which such Person is a party, which default has resulted in,
or if not remedied within any applicable grace period could result in, the
revocation, termination, cancellation or suspension of Medicaid
Certification or Medicare Certification of such Person, which revocation,
termination, cancellation or suspension could reasonably be likely to have
a Material Adverse Effect.
29.10. Litigation. Except as disclosed in or incorporated by reference in
the Registration Statement, there is no action, suit, investigation or
proceeding at law or in equity or by or before any governmental instrumentality
or agency or arbitral body pending or, to the knowledge of the Borrower,
threatened by or against the Borrower or any Consolidated Entity or, to the
knowledge of the Borrower, pending or threatened by or against any Contract
Provider, or affecting the Borrower or any Consolidated Entity or, to the
knowledge of the Borrower, any Contract Provider or any properties or rights of
the Borrower or any Consolidated Entity or, to the knowledge of the Borrower,
any Contract Provider, which could reasonably be expected (i) to result in the
revocation, termination, cancellation or suspension of Medicaid Certification or
Medicare Certification of such Person, which revocation, termination,
cancellation or suspension could reasonably be likely to have a Material Adverse
Effect, or (ii) to have a Material Adverse Effect.
29.11. Margin Stock. The proceeds of the borrowings and other extensions of
credit made hereunder will be used by the Borrower only for the purposes
expressly authorized herein. None of such proceeds will be used, directly or
indirectly, for the purpose of purchasing or carrying any margin stock or for
the purpose of reducing or retiring any Indebtedness which was originally
incurred to purchase or carry margin stock or for any other purpose which might
constitute any of the Loans or Letters of Credit under this Agreement a "purpose
credit" within the meaning of Regulation U or Regulation X of the Board. Neither
the Borrower nor any agent acting in its behalf has taken or will take any
action which might cause this Agreement or any of the documents or instruments
delivered pursuant hereto to violate any regulation of the Board or to violate
the Exchange Act or the Securities Act of 1933, as amended, or any state
securities laws, in each case as in effect on the date hereof.
29.12. Investment Company. Neither the Borrower nor any Consolidated Entity
is an "investment company," or an "affiliated person" of, or "promoter" or
"principal underwriter" for, an "investment company", as such terms are defined
in the Investment Company Act of 1940, as amended (15 U.S.C. ss. 80a-1, et
seq.). The application of the proceeds of the Loans and repayment thereof by the
Borrower and the issuance of Letters of Credit and the performance by the
Borrower and any Consolidated Entity of the transactions contemplated by the
Loan Documents will not violate any provision of said Act, or any rule,
regulation or order issued by the Securities and Exchange Commission thereunder,
in each case as in effect on the date hereof.
<PAGE>
29.13. Patents, Etc. The Borrower and each Consolidated Entity owns or has
the right to use, under valid license agreements or otherwise, all material
patents, licenses, franchises, trademarks, trademark rights, trade names, trade
name rights, trade secrets, service marks, service mark rights and copyrights
necessary to or used in the conduct of its businesses as now conducted and as
contemplated by the Loan Documents, without known conflict by, or with, any
patent, license, franchise, trademark, trade secret, trade name, service mark,
copyright or other proprietary right of, any other Person.
29.14. No Untrue Statement. Neither (a) this Agreement nor any other Loan
Document or certificate or document executed and delivered by or on behalf of
the Borrower or any Consolidated Entity in accordance with or pursuant to any
Loan Document nor (b) any statement, representation, or warranty provided to the
Agent or any Lender in connection with the negotiation or preparation of the
Loan Documents contains any misrepresentation or untrue statement of material
fact or omits to state a material fact necessary, in light of the circumstance
under which it was made, in order to make any such warranty, representation or
statement contained therein not misleading.
29.15. No Consents, Etc. Neither the respective businesses or properties of
the Borrower or any Consolidated Entity, nor any relationship between the
Borrower or any Consolidated Entity and any other Person, nor any circumstance
in connection with the execution, delivery and performance of the Loan Documents
and the transactions contemplated thereby, is such as to require a consent,
approval or authorization of, or filing, registration or qualification with, any
Governmental Authority or any other Person on the part of the Borrower or any
Consolidated Entity as a condition to the execution, delivery and performance
of, or consummation of the transactions contemplated by, or the validity or
enforceability of, the Loan Documents, which, if not obtained or effected, would
be reasonably likely to have a Material Adverse Effect, or if so, such consent,
approval, authorization, filing, registration or qualification has been duly
obtained or effected, as the case may be;
29.16. ERISA Requirement. (i) The execution and delivery of the Loan
Documents will not involve any prohibited transaction within the meaning of
ERISA, (ii) the Borrower and each ERISA Affiliate has fulfilled its obligations
under the minimum funding standards imposed by ERISA and each is in compliance
in all material respects with the applicable provisions of ERISA, and (iii) no
"Reportable Event," as defined in Section 4043(b) of Title IV of ERISA, has
occurred with respect to any plan maintained by the Borrower or any of its ERISA
Affiliate.
29.17. No Default. As of the date hereof, there does not exist any Default
or Event of Default.
29.18. Hazardous Materials. The Borrower and each Consolidated Entity is in
compliance with all applicable Environmental Laws in all material respects.
Neither the Borrower nor any Consolidated Entity has been notified of any
action, suit, proceeding or investigation which, and neither the Borrower nor
any Consolidated Entity is aware of any facts which, (i) calls into question, or
could reasonably be expected to call into question, compliance in all material
respects by the Borrower or any Consolidated Entity with any Environmental Laws,
(ii) which seeks, or could reasonably be expected to form the basis of a
meritorious proceeding, to suspend, revoke or terminate any material license,
permit or approval necessary for the generation, handling, storage, treatment or
disposal of any Hazardous Material, or (iii) seeks to cause, or could
<PAGE>
reasonably be expected to form the basis of a meritorious proceeding to cause,
any property of the Borrower or any Consolidated Entity to be subject to any
material restrictions on ownership, use, occupancy or transferability under any
Environmental Law.
29.19. Employment Matters. (a) Except as set forth on Schedule 6.19, none
of the employees of the Borrower or any Consolidated Entity is subject to any
collective bargaining agreement and there are no strikes, work stoppages,
election or decertification petitions or proceedings, unfair labor charges,
equal opportunity proceedings, or other material labor/employee related
controversies or proceedings pending or, to the best knowledge of the Borrower,
threatened against the Borrower or any Consolidated Entity or between the
Borrower or any Consolidated Entity and any of its employees, other than
employee grievances, controversies or proceedings arising in the ordinary course
of business which could not reasonably be expected, individually or in the
aggregate, to have a Material Adverse Effect; and
(b) Except to the extent a failure to maintain compliance would not have a
Material Adverse Effect, the Borrower and each Consolidated Entity is in
compliance in all respects with all applicable laws, rules and regulations
pertaining to labor or employment matters, including without limitation those
pertaining to wages, hours, occupational safety and taxation and there is
neither pending nor threatened any litigation, administrative proceeding or, to
the knowledge of the Borrower, any investigation, in respect of such matters
which, if decided adversely, could reasonably be likely, individually or in the
aggregate, to have a Material Adverse Effect.
29.20. RICO. Neither the Borrower nor any Consolidated Entity is engaged in
or has engaged in any course of conduct that could subject any of their
respective properties to any Lien, seizure or other forfeiture under any
criminal law, racketeer influenced and corrupt organizations law, civil or
criminal, or other similar laws.
29.21. Reimbursement from Third Party Payors. The accounts receivable of
the Borrower and each Consolidated Entity and each Contract Provider have been
and will continue to be adjusted to reflect reimbursement policies of third
party payors such as Medicare, Medicaid, Blue Cross/Blue Shield, private
insurance companies, health maintenance organizations, preferred provider
organizations, alternative delivery systems, managed care systems, government
contracting agencies and other third party payors. In particular, accounts
receivable relating to such third party payors do not and shall not exceed
amounts any obligee is entitled to receive under any capitation arrangement, fee
schedule, discount formula, cost-based reimbursement or other adjustment or
limitation to its usual charges.
29.22. Representations and Warranties from the Related Acquisition
Transaction Documents. As of the Closing Date (and immediately prior to giving
effect to the Related Acquisition), each of the representations and warranties
made by the Borrower or any Subsidiary in the Related Acquisition Transaction
Documents are true and correct in all material respects as of the date hereof,
and, except as such representations or warranties are modified by certificates
provided by Horizon at the closing of the Restated Acquisition, the Borrower is
not aware of any facts or circumstances indicating that any of the
representations or warranties of Horizon or any of its Subsidiaries contained in
the Related Acquisition Transaction Documents are not true and correct in all
material respects as of the date hereof.
<PAGE>
ARTICLE XXX
Affirmative Covenants
Until the Bridge Termination Date and termination of this Agreement in
accordance with the terms hereof, unless the Required Lenders shall otherwise
consent in writing, the Borrower will, and where applicable will cause each
Consolidated Entity to:
30.1. Financial Statements, Reports, Etc. The Borrower shall deliver or
cause to be delivered to the Agent and each Lender:
(a) Not later than 50 days after the end of each of the first three
quarters of each Fiscal Year, a balance sheet and a statement of income of
the Borrower and its Consolidated Entities on a consolidated basis and a
statement of cash flow of the Borrower and its Consolidated Entities on a
consolidated basis for such calendar quarter and for the period beginning
on the first day of such Fiscal Year and ending on the last day of such
quarter (in sufficient detail to indicate the Borrower's and each
Consolidated Entity's compliance with the financial covenants set forth in
Section 8.1), together with statements in comparative form for the
corresponding date or period in the preceding Fiscal Year as summarized in
the Borrower's Form 10-Q for the corresponding period, and certified as to
fairness, accuracy and completeness by the chief executive officer, chief
financial officer or Treasurer of the Borrower.
(b) Not later than 100 days after the end of each Fiscal Year,
financial statements (including a balance sheet, a statement of income, a
statement of changes in shareholders' equity and a statement of cash flow)
of the Borrower and its Consolidated Entities on a consolidated basis for
such Fiscal Year (in sufficient detail to indicate the Borrower's and each
Consolidated Entity's compliance with the financial covenants set forth in
Section 8.1), together with statements in comparative form as of the end of
and for the preceding Fiscal Year as summarized in the Borrower's Form 10-K
for the corresponding period, and accompanied by an opinion of certified
public accountants acceptable to the Agent, which opinion shall state in
effect that such financial statements (A) were audited using generally
accepted auditing standards, (B) were prepared in accordance with generally
accepted accounting principles applied on a Consistent Basis, and (C)
present fairly the financial condition and results of operations of the
Borrower and its Consolidated Entities for the periods covered.
(c) Together with the financial statements required by paragraphs (1)
and (2) above a compliance certificate duly executed by the chief executive
officer or chief financial officer or Treasurer of the Borrower in the form
of Exhibit L ("Compliance Certificate").
(d) Contemporaneously with the distribution thereof to the Borrower's
or any Consolidated Entity's stockholders or partners or the filing thereof
with the Securities and Exchange Commission, as the case may be, copies of
all statements, reports, notices and filings distributed by the Borrower or
any Consolidated Entity to its stockholders or partners or filed with the
Securities and Exchange Commission (including reports on SEC Forms 10-K,
10-Q and 8-K).
<PAGE>
(e) Promptly after the Borrower knows or has reason to know of the
occurrence of any "reportable event" under Section 4043 of ERISA applicable
to the Borrower or any ERISA Affiliate, a certificate of the president or
chief financial officer of the Borrower setting forth the details as to
such "reportable event" and the action that the Borrower or the ERISA
Affiliate has taken or will take with respect thereto, and promptly after
the filing or receiving thereof, copies of all reports and notices that the
Borrower and each Consolidated Entity files under ERISA with the Internal
Revenue Service or the PBGC or the United States Department of Labor.
(f) Promptly after the Borrower or any of its Consolidated Entities
becomes aware of the commencement thereof, notice of any investigation,
action, suit or proceeding before any Governmental Authority involving the
condemnation or taking under the power of eminent domain of any of its
property or the revocation or suspension of any permit, license,
certificate of need or other governmental requirement applicable to any
Facility.
(g) Within 10 days of the receipt by the Borrower or any of its
Consolidated Entities, copies of all material deficiency notices,
compliance orders or adverse reports issued by any Governmental Authority
or accreditation commission having jurisdiction over licensing,
accreditation or operation of a Facility or by any Governmental Authority
or private insurance company pursuant to a provider agreement, which, if
not promptly complied with or cured, could result in the suspension or
forfeiture of any license, certification or accreditation necessary in
order for such Facility to carry on its business as then conducted or the
termination of any material insurance or reimbursement program available to
such Facility.
(h) Such other information regarding any Facility or the financial
condition or operations of the Borrower or its Consolidated Entities as the
Agent shall reasonably request from time to time or at any time.
30.2. Maintain Properties. Maintain all properties necessary to its
operations in good working order and condition, make all needed repairs,
replacements and renewals to such properties, and maintain free from Liens all
trademarks, trade names, service marks, patents, copyrights, trade secrets,
know-how, and other intellectual property and proprietary information (or
adequate licenses thereto), in each case as are reasonably necessary to conduct
its business as currently conducted or as contemplated hereby, all in accordance
with customary and prudent business practices.
30.3. Existence, Qualification, Etc. Except as otherwise expressly
permitted under Section 8.4, do or cause to be done all things necessary to
preserve and keep in full force and effect its existence and all material rights
and franchises, and maintain its license or qualification to do business as a
foreign corporation and good standing in each jurisdiction in which its
ownership or lease of property or the nature of its business makes such license
or qualification necessary.
30.4. Regulations and Taxes. Comply in all material respects with or
contest in good faith all statutes and governmental regulations and pay all
taxes, assessments, governmental charges, claims for labor, supplies, rent and
any other obligation which, if unpaid, would become
<PAGE>
a Lien against any of its properties except liabilities being contested in good
faith by appropriate proceedings diligently conducted and against which adequate
reserves acceptable to the Borrower's independent certified public accountants
have been established unless and until any Lien resulting therefrom attaches to
any of its property and becomes enforceable by its creditors.
30.5. Insurance. At all times maintain in force, and pay all premiums and
costs related to, insurance coverages in amounts deemed by the management of the
Borrower to be sufficient in accordance with usual and customary business
practices and any other coverages required under applicable governmental
requirements. The Borrower shall deliver to the Agent annually on or before each
anniversary date of this Agreement, and at such other time or times as the Agent
may request (but not more often than monthly), a certificate of the president or
chief financial officer of the Borrower setting out in such detail as the Agent
may reasonably require a description of all insurance coverages maintained by
the Borrower and each Consolidated Entity. The Agent shall have no obligation to
give the Borrower or any Consolidated Entity notice of any notification received
by the Agent with respect to any insurance policies or take any steps to protect
the Borrower's or any Consolidated Entity's interests under such policies.
30.6. True Books. Keep true books of record and account in which full, true
and correct entries will be made of all of its dealings and transactions, and
set up on its books such reserves as may be required by GAAP with respect to
doubtful accounts and all taxes, assessments, charges, levies and claims and
with respect to its business in general, and include such reserves in interim as
well as year-end financial statements.
30.7. Right of Inspection. Permit any Person designated by the Agent to
visit and inspect any of the properties, corporate books and financial reports
of the Borrower or any Subsidiary and to discuss its affairs, finances and
accounts with its principal officers and independent certified public
accountants, all at reasonable times, at reasonable intervals and with
reasonable prior notice.
30.8. Observe all Laws. Conform to and duly observe, and cause all Contract
Providers to conform to and duly observe, in all material respects all laws,
rules and regulations and all other valid requirements of any regulatory
authority with respect to the conduct of its business, including without
limitation Titles XVIII and XIX of the Social Security Act, Medicare
Regulations, Medicaid Regulations, and all laws, rules and regulations of
Governmental Authorities pertaining to the licensing of professional and other
health care providers, except where the failure to do so could not reasonably be
expected to have a Material Adverse Effect.
30.9. Governmental Licenses. Obtain and maintain, and use reasonable effort
to cause all Contract Providers to obtain and maintain, all licenses, permits,
certifications and approvals of all applicable Governmental Authorities as are
required for the conduct of its business as currently conducted and herein
contemplated, including without limitation professional licenses, Medicaid
Certifications and Medicare Certifications, except where the failure to do so
could not reasonably be expected to have a Material Adverse Effect.
30.10. Covenants Extending to Other Persons. Cause each of its Consolidated
Entities to do with respect to itself, its business and its assets, each of the
things required of the Borrower in Sections 7.2 through 7.9, 7.15 and 7.16
inclusive.
<PAGE>
30.11. Officer's Knowledge of Default. Upon any Executive Officer of the
Borrower obtaining knowledge of any Default or Event of Default or any default
or event of default under any other obligation of the Borrower or any
Consolidated Entity to any Lender, or any event, development or occurrence which
could reasonably be expected to have a Material Adverse Effect, cause such
Executive Officer or an Authorized Representative to promptly notify the Agent
of the nature thereof, the period of existence thereof, and what action the
Borrower or such Consolidated Entity proposes to take with respect thereto. The
Agent shall notify the Lenders of receipt of such notice.
30.12. Suits or Other Proceedings. Upon any Executive Officer of the
Borrower obtaining knowledge of any litigation or other proceedings being
instituted (i) against the Borrower or any Subsidiary, or any attachment, levy,
execution or other process being instituted against any assets of the Borrower
or any Subsidiary or Controlled Partnership, which if adversely determined could
reasonably be likely to have a Material Adverse Effect or (ii) against the
Borrower, any Subsidiary or any Contract Provider (but only with respect to
services provided to the Borrower or any Consolidated Entity) to suspend, revoke
or terminate any Medicaid Provider Agreement, Medicaid Certification, Medicare
Provider Agreement or Medicare Certification, which suspension, revocation or
termination could reasonably be likely to have a Material Adverse Effect, cause
such Executive Officer or an Authorized Representative to promptly deliver to
the Agent written notice thereof stating the nature and status of such
litigation, dispute, proceeding, levy, execution or other process.
30.13. Notice of Discharge of Hazardous Material or Environmental
Complaint. Promptly provide to the Agent true, accurate and complete copies of
any and all notices, complaints, orders, directives, claims, or citations
received by the Borrower or any Consolidated Entity relating to any of the
following which is likely to have a Material Adverse Effect: (a) violation or
alleged violation by the Borrower or any Consolidated Entity of any applicable
Environmental Law; (b) release or threatened release by the Borrower or any
Consolidated Entity, or at any Facility or property owned or leased or operated
by the Borrower or any Consolidated Entity, of any Hazardous Material, except
where occurring legally; or (c) liability or alleged liability of the Borrower
or any Consolidated Entity for the costs of cleaning up, removing, remediating
or responding to a release of Hazardous Materials.
30.14. Environmental Compliance. If the Borrower or any Consolidated Entity
shall receive any letter, notice, complaint, order, directive, claim or citation
from any Governmental Authority alleging that the Borrower or any Consolidated
Entity has violated any Environmental Law or is liable for the costs of cleaning
up, removing, remediating or responding to a release of Hazardous Materials
within the time period permitted by the applicable Environmental Law or the
Governmental Authority responsible for enforcing such Environmental Law, remove
or remedy, or cause the applicable Consolidated Entity to remove or remedy, such
violation or release or satisfy such liability unless and only during the period
that the applicability of such Environmental Law, the fact of such violation or
liability or what is required to remove or remedy such violation is being
contested by the Borrower or the applicable Consolidated Entity by appropriate
proceedings diligently conducted and all reserves with respect thereto as may be
required under GAAP, if any, have been made, and no Lien in connection therewith
shall have attached to any property of the Borrower or the applicable
Consolidated Entity which shall have become enforceable against creditors of
such Person.
<PAGE>
30.15. Continuation of Current Business. Not engage in any business other
than the business now being conducted by the Borrower and other businesses
directly related to such services.
30.16. Management Contracts. Not enter into any agreement whereby the
management, supervision or control of its business or any Facility shall be
delegated to or placed in any persons other than its governing body and
officers, the Borrower or a Consolidated Entity, except that management of the
Facility owned by Vanderbilt Stallworth Rehabilitation Hospital, L.P. is vested
in part in a Governance Committee and in part in a Subsidiary of the Borrower
pursuant to the applicable limited partnership agreement and a management
agreement.
<PAGE>
ARTICLE XXXI
Negative Covenants
Until the Bridge Termination Date and termination of this Agreement in
accordance with the terms hereof, unless the Required Lenders shall otherwise
consent in writing, the Borrower will not, nor (to the extent expressly set
forth below) will it permit any Consolidated Entity to:
31.1. Financial Covenants.
(a) Minimum Net Worth. Permit Consolidated Net Worth to be less than
$917,711,000 plus (A) 50% of Consolidated Net Income (if positive and
including for purposes of this Section 8.1(a) only any extraordinary gain),
on an ongoing basis for each fiscal quarter beginning with the fiscal
quarter ended March 31, 1996, plus (B) the aggregate amount of all
increases, if any, in its capital accounts resulting from the issuance of
Capital Stock or conversion of debt into Capital Stock or other securities
properly classified as equity in accordance with generally accepted
accounting principles, or from the sale or other disposition of treasury
shares, from the date of this Agreement through the date of determination
plus (c) without duplication, any addition to Consolidated Stockholders'
Equity resulting from an Acquisition after the Closing Date which shall be
accounted for on a pooling-of-interests basis.
(b) Consolidated EBITDA to Consolidated Interest Expense Ratio. Permit
the ratio of Consolidated EBITDA to Consolidated Interest Expense at any
time to be less than or equal to 2.50 to 1.00.
(c) Consolidated Indebtedness to Consolidated Total Capital. Permit
the ratio of Consolidated Indebtedness to Consolidated Total Capital at any
time to equal or exceed .65 to 1.00.
31.2. Investments and Loans. Purchase or otherwise acquire any stock,
security, obligation or evidence of indebtedness of, make any capital
contribution to, own any equity interest in, or make any loan or advance to, any
other Person; provided, however, that the Borrower and its Consolidated Entities
may (A) continue to hold all stock of and own partnership interests in the
Persons that constitute Consolidated Entities on the Closing Date and Persons
that thereafter become Consolidated Entities as a result of Acquisitions
permitted under Section 8.8; (B) make Permitted Investments; and (C) make
investments in an amount not exceeding 15% of Consolidated Total Assets.
31.3. Indebtedness. Permit to exist Indebtedness, howsoever evidenced, of
Subsidiaries and Controlled Partnerships (exclusive of Indebtedness to the
Borrower) in an aggregate amount at any time exceeding the greater of
$70,000,000 or 15% of Consolidated Tangible Net Worth, excluding, however,
Indebtedness of Subsidiaries and Controlled Partnerships existing as of the date
hereof and described on Schedule 8.3.
31.4. Existing Facility. Make any payment of the principal portion of
Indebtedness (other than amounts which are simultaneously reborrowed)
outstanding under the Existing Agreement if there are any Bridge Outstandings.
<PAGE>
31.5. Consolidation or Merger. Merge or consolidate with another Person
unless (i) in the case of a merger or consolidation of the Borrower, the
Borrower is the continuing or surviving entity, (ii) in the case of a merger or
consolidation involving a Consolidated Entity, the continuing or surviving
entity is majority-owned by the Borrower (with such majority ownership
constituting a controlling interest), and (iii) before and after giving effect
to the proposed merger or consolidation, no Default or Event of Default shall
exist.
31.6. Liens. Incur, create, assume or permit to exist any Lien upon any of
its accounts receivable, contract rights, chattel paper, inventory, equipment,
instruments, general intangibles or other personal or real property of any
character, whether now owned or hereafter acquired, other than (i) Liens that
constitute Permitted Encumbrances, and (ii) Liens on assets which at no time
have a book value of greater than 5% of Consolidated Total Assets.
31.7. Dividends and Distributions. Permit any Consolidated Entity to be or
become subject to any restrictions on the ability of such Consolidated Entity to
pay dividends or to make partnership distributions other than as required by
this Agreement or restrictions imposed by applicable law.
31.8. Acquisitions. Enter into any agreement to acquire any Person or
Facility unless (i) the Person or Facility to be acquired is in substantially
the same line of business presently engaged in by the Borrower or its
Consolidated Entities, and (ii) if the Cost of Acquisition exceeds $150,000,000
the Borrower shall have furnished to the Agent (A) pro forma historical
financial statements as of the end of the most recently completed Fiscal Year of
the Borrower and most recent interim fiscal quarter, if applicable, giving
effect to such Acquisition and (B) a Compliance Certificate prepared on an
historical pro forma basis giving effect to such Acquisition, which certificate
shall demonstrate that no Default or Event of Default would exist immediately
after giving effect thereto.
31.9. Restricted Payments. Make any Restricted Payment or apply or set
apart any of their assets therefor or agree to do any of the foregoing;
provided, however, the Borrower may make the Restricted Payments in any Fiscal
Year (on a non-cumulative basis, with the effect that amounts not paid in any
Fiscal Year may not be carried over for payment in a subsequent period) if
immediately prior and immediately after giving effect thereto no Default or
Event of Default shall exist or occur and be continuing.
31.10. Compliance with ERISA. With respect to any Pension Plan, Employee
Benefit Plan or Multiemployer Plan:
(a) permit the occurrence of any Termination Event which would result
in a liability on the part of the Borrower or any ERISA Affiliate to the
PBGC which liability would have a Material Adverse Effect; or
(b) permit the present value of all benefit liabilities under all
Pension Plans to exceed the current value of the assets of such Pension
Plans allocable to such benefit liabilities; or
<PAGE>
(c) permit any accumulated funding deficiency (as defined in Section
302 of ERISA and Section 412 of the Code) with respect to any Pension Plan,
whether or not waived; or
(d) fail to make any contribution or payment to any Multiemployer Plan
which the Borrower or any ERISA Affiliate may be required to make under any
agreement relating to such Multiemployer Plan, or any law pertaining
thereto; or
(e) engage, or permit any Subsidiary or any ERISA Affiliate to engage,
in any prohibited transaction under Section 406 of ERISA or Section 4975 of
the Code for which a civil penalty pursuant to Section 502(I) of ERISA or a
tax pursuant to Section 4975 of the Code may be imposed; or
(f) permit the establishment of any Employee Benefit Plan providing
post-retirement welfare benefits or establish or amend any Employee Benefit
Plan which establishment or amendment could result in liability to the
Borrower or any ERISA Affiliate or increase the obligation of the Borrower
or any ERISA Affiliate to a Multiemployer Plan which liability or increase,
individually or together with all similar liabilities and increases, is in
excess of $5,000,000; or
(g) fail, or permit any Subsidiary or any ERISA Affiliate to fail, to
establish, maintain and operate each Employee Benefit Plan in compliance in
all material respects with the provisions of ERISA, the Code, all
applicable Foreign Benefit Laws and all other applicable laws and the
regulations and interpretations thereof.
31.11. Fiscal Year. Change its Fiscal Year (other than a change to conform
the fiscal year of a Consolidated Entity to that of the Borrower).
31.12. Dissolution, etc. Wind up, liquidate or dissolve (voluntarily or
involuntarily) or commence or suffer any proceedings seeking any such winding
up, liquidation or dissolution, except in connection with a merger or
consolidation permitted pursuant to Section 8.5.
<PAGE>
ARTICLE XXXII
Events of Default and Acceleration
32.1. Events of Default. If any one or more of the following events (herein
called "Events of Default") shall occur for any reason whatsoever (and whether
such occurrence shall be voluntary or involuntary or come about or be effected
by operation of law or pursuant to or in compliance with any judgment, decree or
order of any court or any order, rule or regulation of any Governmental
Authority), that is to say:
(a) the Borrower shall fail to pay (i) when due any principal payable
under the terms of any Note or any Reimbursement Obligation or (ii) not
later than five Business Days of the date when due any interest or fees
payable under the terms of any Note or any other amount payable under this
Agreement or any other of the other Obligations or any other amount owed to
the Agent or any of the Lenders under or in connection with the Loan
Documents; or
(b) The Borrower or any Material Group shall default in the
performance or observance of any other provision of this Agreement (other
than the provisions of Article VII and Article VIII), except as covered by
clause (a) above, and shall not cure such default within thirty days after
the first to occur of (i) the date the Agent or any Lender gives written or
telephonic notice of such default to the Borrower or (ii) the date the
Borrower otherwise has notice thereof; or
(c) the Borrower or any Material Group shall default in the observance
or performance of any provision in Article VII or Article VIII; or
(d) the Agent shall reasonably determine that any statement,
certification, representation or warranty contained herein, or in any of
the other Loan Documents or in any report, financial statement, certificate
or other instrument delivered to the Agent or any Lender by or on behalf of
the Borrower or any Consolidated Entity, was misleading or untrue in any
material respect at the time it was made or deemed made; or
(e) default shall be made (i) in the payment of any Indebtedness
exceeding $5,000,000 (other than the Obligations) of the Borrower or any
Consolidated Entity when due or (ii) in the performance, observance or
fulfillment of any term or covenant contained in any agreement or
instrument under or pursuant to which any such Indebtedness may have been
issued, created, assumed, guaranteed or secured by Borrower or any
Consolidated Entity, if the effect of such default in the performance,
observance or fulfillment is to accelerate the maturity of such
Indebtedness or to permit the holder thereof to cause such Indebtedness to
become due prior to its stated maturity, and such default shall not be
cured within 10 days after the occurrence of such default, and the amount
of the Indebtedness involved exceeds $5,000,000; or
(f) the Borrower or any Material Group shall fail to pay or admit in
writing its inability to pay its or their debts generally as they come due,
or a receiver, trustee, liquidator or other custodian shall be appointed
for the Borrower or any Material Group or for any of the property of the
Borrower or any Material Group or a petition in
<PAGE>
bankruptcy, or under any insolvency law, shall be filed by or against the
Borrower or any Material Group or the Borrower or any Material Group shall
apply for the benefit of, or take advantage of, any law for relief of
debtors, or enter into an arrangement or composition with, or make an
assignment for the benefit of, creditors; or
(g) final judgment for the payment of money in excess of any aggregate
of $500,000 shall be rendered against the Borrower or any Material Group,
and the same shall remain undischarged for a period of 30 days during which
execution shall not be effectively stayed; or
(h) an event of default, as therein defined, shall occur under any
other Loan Document; or
(i) any of the Notes or LC Account Agreement shall be deemed
unenforceable by a court of competent jurisdiction or shall no longer be
effective; or
(j) the Borrower or any Consolidated Entity shall, other than in the
ordinary course of business (as determined by past practices), suspend all
or any part of its operations material to the conduct of the business of
the Borrower and its Consolidated Entities, taken as a whole, for a period
of more than 60 days;
(k) the Borrower or any Consolidated Entity shall breach any of the
material terms or conditions of any agreement under which any Rate Hedging
Obligations are created and such breach shall continue beyond any grace
period, if any, relating thereto pursuant to the terms of such agreement,
or the Borrower or any Consolidated Entity shall disaffirm or seek to
disaffirm any such agreement or any of its obligations thereunder;
(l) there shall occur (i) any cancellation, revocation, suspension or
termination of any Medicare Certification, Medicare Provider Agreement,
Medicaid Certification or Medicaid Provider Agreement affecting the
Borrower, any Subsidiary or any Contract Provider, or (ii) the loss of any
other permits, licenses, authorizations, certifications or approvals from
any federal, state or local Governmental Authority or termination of any
contract with any such authority, in either case which cancellation,
revocation, suspension, termination or loss (X) in the case of any
suspension or temporary loss only, continues for a period greater than 60
days and (Y) results in the suspension or termination of operations of the
Borrower or any Subsidiary or in the failure of the Borrower or any
Subsidiaries or any Contract Provider to be eligible to participate in
Medicare or Medicaid programs or to accept assignments of rights to
reimbursement under Medicaid Regulations or Medicare Regulations, if and
only if such Person, in the ordinary course of business, participates in
the Medicare or Medicare programs or accepts assignments of rights to
reimbursement thereunder; provided that any such events described in this
Section 9.1(l) shall constitute an Event of Default only if such event
shall result either singly or in the aggregate in the termination,
cancellation, suspension or material impairment of operations or rights to
reimbursement which produce 5% or more of the Borrower's gross revenues (on
an annualized basis); or
(m) there shall occur a Change of Control;
<PAGE>
then, and in any such event and at any time thereafter, if such Event of Default
or any other Event of Default shall then be continuing and shall have not been
waived,
(A) either or both of the following actions may be taken: (i) the
Agent, with the consent of the Required Lenders, may, and at the direction
of the Required Lenders shall, declare any obligation of the Lenders and
the Issuing Bank to make further Loans or to issue additional Letters of
Credit terminated, whereupon the obligation of each Lender to make further
Loans and of the Issuing Bank to issue additional Letters of Credit
hereunder shall terminate immediately, and (ii) the Agent shall at the
direction of the Required Lenders, at their option, declare by notice to
the Borrower any or all of the Obligations to be immediately due and
payable, and the same, including all interest accrued thereon and all other
obligations of the Borrower to the Agent and the Lenders, shall forthwith
become immediately due and payable without presentment, demand, protest,
notice or other formality of any kind, all of which are hereby expressly
waived, anything contained herein or in any instrument evidencing the
Obligations to the contrary notwithstanding; provided, however, that
notwithstanding the above, if there shall occur an Event of Default under
clause (f) above, then the obligation of the Lenders to make Loans and of
the Issuing Bank to issue Letters of Credit hereunder shall automatically
terminate and any and all of the Obligations shall be immediately due and
payable without the necessity of any action by the Agent or the Required
Lenders or notice to the Agent or the Lenders; and
(B) the Borrower shall, upon demand of the Agent or the Required
Lenders, deposit cash with the Agent in an amount equal to the aggregate
amount remaining undrawn under all outstanding Letters of Credit, as
collateral security for the repayment of any future drawings or payments
under such Letters of Credit, and such amounts shall be held by the Agent
pursuant to the terms of the LC Account Agreement; and
(C) the Agent and each of the Lenders shall have all of the rights and
remedies available under the Loan Documents or under any applicable law.
32.2. Agent to Act. In case any one or more Events of Default shall occur
and be continuing and not have been waived, the Agent may, and at the direction
of the Required Lenders shall, proceed to protect and enforce their rights or
remedies either by suit in equity or by action at law, or both, whether for the
specific performance of any covenant, agreement or other provision contained
herein or in any other Loan Document, or to enforce the payment of the
Obligations or any other legal or equitable right or remedy.
32.3. Cumulative Rights. No right or remedy herein conferred upon the
Lenders or the Agent is intended to be exclusive of any other rights or remedies
contained herein or in any other Loan Document, and every such right or remedy
shall be cumulative and shall be in addition to every other such right or remedy
contained herein and therein or now or hereafter existing at law or in equity or
by statute, or otherwise.
32.4. No Waiver. No course of dealing between the Borrower and any Lender
or the Agent or any failure or delay on the part of any Lender or the Agent in
exercising any rights or remedies under any Loan Document or otherwise available
to it shall operate as a waiver of any rights or remedies and no single or
partial exercise of any rights or remedies shall operate as a
<PAGE>
waiver or preclude the exercise of any other rights or remedies hereunder or of
the same right or remedy on a future occasion.
32.5. Allocation of Proceeds. If an Event of Default has occurred and not
been waived, and the maturity of the Notes has been accelerated pursuant to this
Article IX, all payments received by the Agent hereunder, in respect of any
principal of or interest on the Obligations or any other amounts payable by the
Borrower hereunder, shall be applied by the Agent in the following order:
(i) amounts due to the Lenders pursuant to Section 2.11 or Section
11.6;
(ii) amounts due to the Agent and the Issuing Bank pursuant to Section
10.11, Section 3.3 and Section 3.4;
(iii) payments of interest, to be applied pro rata based on the
proportion which the principal amount of outstanding Loans and
Reimbursement Obligations of each Lender bears to the total of all
outstanding Loans and Reimbursement Obligations;
(iv) payments of principal, to be applied pro rata based on the
proportion which the principal amount of outstanding Loans and
Reimbursement Obligations of each Lender bears to the total of all
outstanding Loans and Reimbursement Obligations;
(v) payment of cash amounts to the Agent pursuant to Section 9.1;
(vi) payments of all other amounts due under this Agreement, if any,
to be applied in accordance with each Lender's pro rata share of all such
other amounts due to the Lenders; and
(vii) any surplus remaining after application as provided for herein,
to the Borrower or otherwise as may be required by applicable law.
<PAGE>
ARTICLE XXXIII
The Agent
33.1. Appointment. Each Lender hereby irrevocably designates and appoints
NationsBank as the Agent for the Lenders under this Agreement, and each of the
Lenders hereby irrevocably authorizes NationsBank as the Agent for such Lender,
to take such action on its behalf under the provisions of this Agreement and the
other Loan Documents and to exercise such powers as are expressly delegated to
the Agent by the terms of this Agreement and such other Loan Documents, together
with such other powers as are reasonably incidental thereto. The Agent shall not
have any duties or responsibilities, except those expressly set forth herein, or
any fiduciary relationship with any of the Lenders, and no implied covenants,
functions, responsibilities, duties, obligations or liabilities shall be read
into this Agreement or any other Loan Document or otherwise exist against the
Agent.
33.2. Attorneys-in-fact. The Agent may execute any of its duties under the
Loan Documents by or through agents or attorneys-in-fact and shall be entitled
to advice of counsel concerning all matters pertaining to such duties. The Agent
shall not be responsible for the negligence, gross negligence or willful
misconduct of any agents or attorneys-in-fact selected by it with reasonable
care.
33.3. Limitation on Liability. Neither the Agent nor any of its officers,
directors, employees, agents or attorneys-in-fact shall be liable to the Lenders
for any action lawfully taken or omitted to be taken by it or them under or in
connection with the Loan Documents except for its or their own gross negligence
or willful misconduct. Neither the Agent nor any of its Affiliates shall be
responsible in any manner to any of the Lenders for any recitals, statements,
representations or warranties made by the Borrower or any officer or
representative thereof contained in any Loan Document, or in any certificate,
report, statement or other document referred to or provided for in or received
by the Agent under or in connection with any Loan Document, or for the value,
validity, effectiveness, genuineness, enforceability or sufficiency of any Loan
Document, or for any failure of the Borrower to perform its obligations under
any Loan Document, or for any recitals, statements, representations or
warranties made, or for the value, validity, effectiveness, genuineness,
enforceability or sufficiency of any collateral. The Agent shall not be under
any obligation to any of the Lenders to ascertain or to inquire as to the
observance or performance of any of the terms, covenants or conditions of any
Loan Document on the part of the Borrower or to inspect the properties, books or
records of the Borrower or its Subsidiaries.
33.4. Reliance. The Agent shall be entitled to rely, and shall be fully
protected in relying, upon any note, writing, resolution, notice, consent
certificate, affidavit, letter, cablegram, telegram, telefacsimile or telex
message, statement, order or other document or conversation believed by it to be
genuine and correct and to have been signed, sent or made by the proper Person
or Persons and upon advice and statements of legal counsel (including, without
limitation, counsel to the Borrower), independent accountants and other experts
selected by the Agent. The Agent may deem and treat the payee of any Note as the
owner thereof for all purposes unless an Assignment and Acceptance shall have
been filed with and accepted by the Agent. The Agent shall be fully justified in
failing or refusing to take any action under the Loan Documents unless it shall
first receive advice or concurrence of the Lenders or the Required Lenders as
provided
<PAGE>
in this Agreement or it shall first be indemnified to its satisfaction by the
Lenders against any and all liability and expense which may be incurred by it by
reason of taking or continuing to take any such action. The Agent shall in all
cases be fully protected in acting, or in refraining from acting, under the Loan
Documents in accordance with a request of the Required Lenders or all Lenders as
required in this Agreement, and such request and any action taken or failure to
act pursuant thereto shall be binding upon all the Lenders and all present and
future holders of the Notes.
33.5. Notice of Default. The Agent shall not be deemed to have knowledge or
notice of the occurrence of any Default or Event of Default unless the Agent has
received notice from a Lender, an Authorized Representative or the Borrower
referring to this Agreement, describing such Default or Event of Default and
stating that such notice is a "notice of default". In the event that the Agent
receives such a notice, the Agent shall promptly give notice thereof to the
Lenders. The Agent shall take such action with respect to such Default or Event
of Default as shall be reasonably directed by the Required Lenders or all
Lenders as required in this Agreement; provided that, unless and until the Agent
shall have received such directions, the Agent may (but shall not be obligated
to) take such action, or refrain from taking such action, with respect to such
Event of Default as it shall deem advisable in the best interests of the
Lenders.
33.6. No Representations. Each Lender expressly acknowledges that neither
the Agent nor any of its affiliates has made any representations or warranties
to it and that no act by the Agent hereafter taken, including any review of the
affairs of the Borrower or its Consolidated Entities, shall be deemed to
constitute any representation or warranty by the Agent to any Lender. Each
Lender represents to the Agent that it has, independently and without reliance
upon the Agent or any other Lender, and based on such documents and information
as it has deemed appropriate, made its own appraisal of and investigation into
the financial condition, creditworthiness, affairs, status and nature of the
Borrower and each Consolidated Entity and made its own decision to enter into
this Agreement. Each Lender also represents that it will, independently and
without reliance upon the Agent or any other Lender, and based on such documents
and information as it shall deem appropriate at the time, continue to make its
own credit analysis, appraisals and decisions in taking or not taking action
under the Loan Documents and to make such investigation as it deems necessary to
inform itself as to the status and affairs, financial or otherwise, of the
Borrower and its Subsidiaries. Except for notices, reports and other documents
expressly required to be furnished to the Lenders by the Agent hereunder, the
Agent shall not have any duty or responsibility to provide any Lender with any
credit or other information concerning the affairs, financial condition or
business of the Borrower and its Subsidiaries which may come into the possession
of the Agent or any of its affiliates.
33.7. Indemnification. Each of the Lenders agrees to indemnify the Agent in
its capacity as such (to the extent not reimbursed by the Borrower or any of its
Consolidated Entities and without limiting any obligations of the Borrower or
any of its Consolidated Entities to do so), ratably according to the respective
principal amount of the Notes held by them (or, if no Notes are outstanding,
ratably in accordance with their respective Applicable Commitment Percentages as
then in effect) from and against any and all liabilities, obligations, losses
(excluding any losses suffered by the Agent as a result of the Borrower's
failure to pay any fee owing to the Agent), damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind or nature
whatsoever which may at any time (including without limitation at any time
following the payment of the Notes) be imposed on, incurred by or asserted
against the Agent in any way
<PAGE>
relating to or arising out of any Loan Document or any other document
contemplated by or referred to therein or the transactions contemplated thereby
or any action taken or omitted by the Agent under or in connection with any of
the foregoing; provided that no Lender shall be liable for the payment of any
portion of such liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements resulting from the Agent's
gross negligence or willful misconduct. The agreements in this Section 10.7
shall survive the payment of the Obligations and following the Bridge
Termination Date.
33.8. Lender. The Agent and its Affiliates may make loans to, accept
deposits from and generally engage in any kind of business with the Borrower and
its Subsidiaries as though it were not the Agent hereunder. With respect to its
Loans made or renewed by it and any Note issued to it, the Agent shall have the
same rights and powers under this Agreement as any Lender and may exercise the
same as though it were not the Agent, and the terms "Lender" and "Lenders"
shall, unless the context otherwise indicates, include the Agent in its
individual capacity.
33.9. Resignation. If the Agent shall resign as Agent under this Agreement,
then the Required Lenders may appoint, with the consent, so long as there shall
not have occurred and be continuing a Default or Event of Default, of the
Borrower, which consent shall not be unreasonably withheld, a successor Agent
for the Lenders, which successor Agent shall be a commercial bank organized
under the laws of the United States or any state thereof, having a combined
surplus and capital of not less than $500,000,000, whereupon such successor
Agent shall succeed to the rights, powers and duties of the former Agent and the
obligations of the former Agent shall be terminated and canceled, without any
other or further act or deed on the part of such former Agent or any of the
parties to this Agreement; provided, however, that the former Agent's
resignation shall not become effective until such successor Agent has been
appointed and has succeeded of record to all right, title and interest in any
collateral held by the Agent; provided, further, that if the Required Lenders
and, if applicable, the Borrower cannot agree as to a successor Agent within
ninety (90) days after such resignation, the Agent shall appoint a successor
Agent which satisfies the criteria set forth above in this Section 10.9 for a
successor Agent and the parties hereto agree to execute whatever documents are
necessary to effect such action under this Agreement or any other document
executed pursuant to this Agreement; provided, however that in such event all
provisions of the Loan Documents, shall remain in full force and effect. After
any retiring Agent's resignation hereunder as Agent, the provisions of this
Article X shall inure to its benefit as to any actions taken or omitted to be
taken by it while it was Agent under this Agreement.
33.10. Sharing of Payments, etc. Each Lender agrees that if it shall,
through the exercise of a right of banker's lien, set-off, counterclaim or
otherwise, obtain payment with respect to its Obligations (other than pursuant
to Section 2.10 or Article IV) which results in its receiving more than its pro
rata share of the aggregate payments with respect to all of the Obligations
(other than any payment expressly provided hereunder to be distributed on other
than a pro rata basis and payments pursuant to Article IV), then (a) such Lender
shall be deemed to have simultaneously purchased from the other Lenders a share
in their Obligations so that the amount of the Obligations held by each of the
Lenders shall be pro rata and (b) such other adjustments shall be made from time
to time as shall be equitable to insure that the Lenders share such payments
ratably; provided, however, that for purposes of this Section 10.10 the term
"pro rata" shall be determined with respect to the Bridge Commitment of each
Lender and to the Total Bridge Commitment after subtraction in each case of
amounts, if any, by which any such Lender has not
<PAGE>
funded its share of the outstanding Loans and Obligations. If all or any portion
of any such excess payment is thereafter recovered from the Lender which
received the same, the purchase provided in this Section 10.10 shall be
rescinded to the extent of such recovery, without interest. The Borrower
expressly consents to the foregoing arrangements and agrees that each Lender so
purchasing a portion of the other Lenders' Obligations may exercise all rights
of payment (including, without limitation, all rights of set-off, banker's lien
or counterclaim) with respect to such portion as fully as if such Lender were
the direct holder of such portion.
33.11. Fees. The Borrower agrees to pay to the Agent, for its individual
account, in advance a quarterly Agent's fee in such amount as from time to time
agreed to by the Borrower and Agent in writing.
33.12. Independent Agreements. The provisions contained in Sections 10.1
through 10.8 and 10.10 (other than the last sentence thereof) constitute
independent obligations and agreements of the Agent and the Lenders and the
Borrower shall not be deemed a party thereto nor bound thereby. Borrower does
acknowledge the rights of Lenders and Agent under Sections 10.9 and 10.11 and
the last sentence of Section 10.10.
<PAGE>
ARTICLE XXXIV
Miscellaneous
34.1. Assignments and Participations. (a) At any time after the Closing
Date each Lender may, with the prior consent of the Agent and (so long as no
Default or Event of Default shall have occurred and be continuing) the Borrower,
which consents shall not be unreasonably withheld, assign to one or more banks
or financial institutions all or a portion of its rights and obligations under
the Loan Documents (including, without limitation, all or a portion of any Notes
payable to its order); provided, that (i) each such assignment shall be of a
constant and not a varying percentage of all of the assigning Lender's rights
and obligations under the Letter of Credit Facility and the Bridge Facility,
(ii) for each assignment involving the issuance and transfer of Notes, the
assigning Lender shall execute an Assignment and Acceptance and the Borrower
hereby agrees to execute replacement Notes to give effect to such assignment,
(iii) the minimum Bridge Commitment which shall be assigned is (x) $5,000,000,
in the case of an assignment by one existing Lender to another existing Lender,
and (y) $10,000,000 in all other cases, and in multiples of $1,000,000 in excess
thereof (together with which the assigning Lender's applicable portion of
Participations and the Letter of Credit Commitment shall also be assigned), (iv)
such assignee shall have an office located in the United States, and (v) no
consent of the Borrower or the Agent shall be required in connection with any
assignment by a Lender to an affiliate of such Lender. Upon such execution,
delivery, approval and acceptance, from and after the effective date specified
in each Assignment and Acceptance, (x) the assignee thereunder shall be a party
hereto and, to the extent that rights and obligations hereunder or under any
such Notes have been assigned or negotiated to it pursuant to such Assignment
and Acceptance, have the rights and obligations of a Lender hereunder and a
holder of such Notes and (y) the assignor thereunder shall, to the extent that
rights and obligations hereunder or under such Note have been assigned or
negotiated by it pursuant to such Assignment and Acceptance, relinquish its
rights, other than those set forth in Section 3.2(g), Article IV, Section 11.6
and Section 11.12 of this Agreement and be released from its obligations under
this Agreement. Except as otherwise provided herein, any Lender who makes an
assignment shall pay to the Agent a one-time administrative fee of $3,000 which
fee shall not be reimbursed by the Borrower.
(b) By executing and delivering an Assignment and Acceptance, the Lender
assignor thereunder and the assignee thereunder confirm to and agree with each
other and the other parties hereto as follows: (i) the assignment made under
such Assignment and Acceptance is made under such Assignment and Acceptance
without recourse to such assignor; (ii) such assigning Lender makes no
representation or warranty and assumes no responsibility with respect to (x) the
statements, warranties or representations made in or in connection with this
Agreement or any other Loan Document or any other instrument or document
furnished pursuant hereto, (y) the execution, legality, validity,
enforceability, genuineness, sufficiency or value of this Agreement or any of
the other Loan Documents or any other document or instrument furnished pursuant
hereto, or (z) the financial condition of the Borrower or its Subsidiaries or
the performance or observance by the Borrower or any Subsidiary of any of its
obligations under any Loan Document or any other instrument or document
furnished pursuant hereto; (iii) such assignee confirms that it has received a
copy of this Agreement, together with copies of the financial statements
delivered pursuant to Section 6.6(a) or Section 7.1, as the case may be, and
such other Loan Documents and other documents and information as it has deemed
appropriate to make its own credit analysis and decision to enter into such
Assignment and Acceptance; (iv) such
<PAGE>
assignee will, independently and without reliance upon the Agent, such assigning
Lender or any other Lender and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit decisions in
taking or not taking action under any Loan Document; (v) such assignee appoints
and authorizes the Agent to take such action as Agent on its behalf and to
exercise such powers under the Loan Documents as are delegated to the Agent by
the terms hereof and thereof, together with such powers as are reasonably
incidental thereto; and (vi) such assignee agrees that it will perform in
accordance with their terms all of the obligations which by the terms of the
Loan Documents are required to be performed by it as a Lender and a holder of
such Notes.
(c) The Agent shall maintain at its address referred to herein a copy of
each Assignment and Acceptance delivered to and accepted by it.
(d) Upon its receipt of an Assignment and Acceptance executed by an
assigning Lender, the Agent shall give prompt notice thereof to Borrower.
(e) Nothing herein shall prohibit any Lender from pledging or assigning,
without notice to or consent of the Borrower or the Agent and without the
payment of the administrative fee referred to in Section 13.1(a), any Note to
any Federal Reserve Bank in accordance with applicable law.
(f) Each Lender may sell participations at its expense to one or more banks
or other entities as to all or a portion of its rights and obligations under
this Agreement; provided, that (i) such Lender's obligations under this
Agreement shall remain unchanged, (ii) such Lender shall remain solely
responsible to the other parties hereto for the performance of such obligations,
(iii) such Lender shall remain the holder of any Note issued to it for the
purpose of this Agreement, (iv) such participations shall be in a minimum amount
of $5,000,000 and, if greater, an amount which is an integral multiple of
$1,000,000 and shall include an allocable portion of such Lender's
Participations, (v) the Borrower, the Agent and the other Lenders shall continue
to deal solely and directly with such Lender in connection with such Lender's
rights and obligations under this Agreement and with regard to any and all
payments to be made under this Agreement; provided, that the participation
agreement between a Lender and its participants may provide that such Lender
will obtain the approval of such participant prior to such Lender's agreeing to
any amendment or waiver of any provisions of any Loan Document which would (A)
extend the maturity of any Note or scheduled payment of any Obligations, (B)
reduce the interest rates, unused fees or letter of credit facility fees
hereunder or (C) increase or extend the termination date of the Bridge
Commitment of the Lender granting the participation, and (vi) the sale of any
such participations which require Borrower to file a registration statement with
the United States Securities and Exchange Commission or under the securities
regulations or laws of any state shall not be permitted.
(g) The Borrower may not assign any rights, powers, duties or obligations
under this Agreement or the other Loan Documents without the prior written
consent of all the Lenders.
34.2. Notices. Any notice shall be conclusively deemed to have been
received by any party hereto and be effective (i) on the day on which delivered
(including hand delivery by commercial courier service) to such party (against
receipt therefor), (ii) on the date of receipt at such address, telefacsimile
number or telex number as may from time to time be specified by
<PAGE>
such party in written notice to the other parties hereto or otherwise received),
in the case of notice by telegram, telefacsimile or telex, respectively (where
the receipt of such message is verified by return), or (iii) on the fifth
Business Day after the day on which mailed, if sent prepaid by certified or
registered mail, return receipt requested, in each case delivered, transmitted
or mailed, as the case may be, to the address, telex number or telefacsimile
number, as appropriate, set forth below or such other address or number as such
party shall specify by notice hereunder:
(a) if to the Borrower:
Michael D. Martin, Executive Vice President, Chief
Financial Officer and Treasurer
HEALTHSOUTH Corporation
One HealthSouth Parkway
Birmingham, Alabama 35243
with a copy to:
William W. Horton
HEALTHSOUTH Corporation
One HealthSouth Parkway
Birmingham, Alabama 35243
(b) if to the Agent at:
One Independence Center
15th Floor
101 North Tryon Street
Charlotte, North Carolina 28255
Attention: Agency Services
(c) if to NationsBank in its capacity as issuer of the Letters
of Credit:
NationsBank, N.A.
One Independence Center, 15th Floor
101 North Tryon Street
Charlotte, North Carolina 28255
Attention: Letter of Credit Department
(d) if to the Lenders:
At the addresses set forth on the signature pages
hereof and on the signature page of each Assignment
and Acceptance.
34.3. No Waiver. No failure or delay on the part of the Agent, any Lender
or the Borrower in the exercise of any right, power or privilege hereunder shall
operate as a waiver of any such right, power or privilege nor shall any such
failure or delay preclude any other or
<PAGE>
further exercise thereof. The rights and remedies herein provided are cumulative
and not exclusive of any rights or remedies provided by law.
34.4. Setoff. The Borrower agrees that the Agent and each Lender shall have
a lien for all the Obligations of the Borrower upon all deposits or deposit
accounts, of any kind, or any interest in any deposits or deposit accounts
thereof, now or hereafter pledged, mortgaged, transferred or assigned to the
Agent or such Lender or otherwise in the possession or control of the Agent or
such Lender (other than for safekeeping) for any purpose for the account or
benefit of the Borrower and including any balance of any deposit account or of
any credit of the Borrower with the Agent or such Lender, whether now existing
or hereafter established, hereby authorizing the Agent and each Lender at any
time or times from and after the occurrence of a Default or an Event of Default
with or without prior notice to set off against and apply such balances or any
part thereof to such of the Obligations of the Borrower to the Lenders then past
due and in such amounts as they may elect, and whether or not the collateral or
the responsibility of other Persons primarily, secondarily or otherwise liable
may be deemed adequate. For the purposes of this paragraph, all remittances and
property shall be deemed to be in the possession of the Agent or such Lender as
soon as the same may be put in transit to it by mail or carrier or by other
bailee.
34.5. Survival. All covenants, agreements, representations and warranties
made herein shall survive the making by the Lenders of the Loans and the
issuance of the Letters of Credit and the execution and delivery to the Lenders
of this Agreement and the Notes and shall continue in full force and effect so
long as any of Obligations remain outstanding or any Lender has any commitment
hereunder or the Borrower has continuing obligations hereunder unless otherwise
provided herein. Whenever in this Agreement any of the parties hereto is
referred to, such reference shall be deemed to include the successors and
permitted assigns of such party and all covenants, provisions and agreements by
or on behalf of the Borrower which are contained in the Loan Documents shall
inure to the benefit of the successors and permitted assigns of the Lenders or
any of them.
34.6. Expenses. The Borrower agrees (a) to pay or reimburse the Agent for
all its reasonable and customary out-of-pocket costs and expenses incurred in
connection with the preparation, negotiation and execution of, and any
amendment, supplement or modification to, this Agreement or any of the other
Loan Documents, and the consummation of the transactions contemplated hereby and
thereby, including, without limitation, the reasonable and customary fees and
disbursements of counsel to the Agent, (b) to pay or reimburse the Agent and,
after an Event of Default, each Lender for all their reasonable costs and
expenses incurred in connection with the enforcement or preservation of any
rights under this Agreement, including without limitation, the reasonable fees
and disbursements of their counsel, (c) to pay, indemnify and hold harmless the
Agent and each Lender from any and all recording and filing fees and any and all
liabilities with respect to, or resulting from any failure of Borrower to pay or
delay of Borrower in paying, documentary, stamp, excise, withholding and other
similar taxes, if any, which may be payable or determined to be payable in
connection with the execution and delivery of, or consummation of any amendment,
supplement or modification of, or any waiver or consent under or in respect of,
this Agreement, and (d) from and after the occurrence of any Event of Default to
pay, and indemnify and hold harmless the Agent and each Lender from and against,
any and all other liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind or nature
whatsoever with respect to the execution, delivery,
<PAGE>
enforcement, performance and administration of this Agreement or in any respect
relating to the transactions contemplated hereby or thereby, (all the foregoing,
collectively, the "indemnified liabilities"); provided, however, that the
Borrower shall have no obligation hereunder with respect to indemnified
liabilities arising from (i) the willful misconduct or negligence of the party
seeking indemnification, (ii) legal proceedings commenced against the Agent or
any Lender by any security holder or creditor thereof arising out of and based
upon rights afforded any such security holder or creditor solely in its capacity
as such, (iii) any taxes imposed upon the Agent or any Lender other than the
documentary, stamp, excise, withholding and similar taxes described in clause
(c) above or any tax resulting from any change described in Section 4.1, which
tax would be payable to Lenders by Borrower pursuant to Article IV, (iv) taxes
imposed as a result of a transfer or assignment of any Note, participation or
assignment of a portion of its rights, (v) any taxes imposed upon any transferee
of any Note, or (vi) by reason of the failure of the Agent or any Lender to
perform its or their obligations under this Agreement. The agreements in this
subsection shall survive the Bridge Termination Date.
34.7. Amendments. No amendment, modification or waiver of any provision of
this Agreement or any of the other Loan Documents and no consent by the Lenders
to any departure therefrom by the Borrower shall be effective unless such
amendment, modification or waiver shall be in writing and signed by the Agent
and the Borrower, but only upon having received the written consent of the
Required Lenders, and the same shall then be effective only for the period and
on the conditions and for the specific instances and purposes specified in such
writing; provided, however, that no such amendment, modification or waiver
(i) which changes, extends or waives any provision of Section 2.6,
Section 2.9, Section 3.3(a), Section 5.1(a), Section 7.11, Section 10.10,
this Section 11.7 or Section 11.15, the amount of or the due date of any
scheduled installment or other payment of or reduces the rate of interest
or other amounts payable on or with respect to any Obligation, which
changes the definition of Required Lenders, which increases or extends the
Bridge Commitment of any Lender or which increases or extends the Stated
Termination Date (including any extension of the expiry date of a Letter of
Credit beyond the Stated Termination Date) or which waives any condition to
the making of any Loan or the issuance of any Letter of Credit shall be
effective unless in writing and signed by each of the Lenders; provided,
however, the Required Lenders may in their sole discretion waive any
Default or Event of Default (other than any Event of Default under Section
9.1(a) as to which only the Lender which is the payee of a Note may waive
the failure to make a payment of principal or interest due on such Note and
Section 9.1(f) as to which all Lenders must waive such Event of Default);
(ii) which affects the rights, privileges, immunities or indemnities
of the Agent, shall be effective unless in writing and signed by the Agent.
Notwithstanding any provision of the other Loan Documents to the contrary, as
between the Agent and the Lenders, execution by the Agent shall not be deemed
conclusive evidence that the Agent has obtained the written consent of the
Required Lenders; however, the Borrower shall be entitled to rely on the
signature of the Agent as evidence of consent. No notice to or demand on the
Borrower in any case shall entitle the Borrower to any other or further notice
or demand in similar or other circumstances, except as provided by law or as
otherwise expressly provided herein. No delay or omission on any Lender's, the
Agent's or the Borrower's part in exercising
<PAGE>
any right, remedy or option shall operate as a waiver of such or any other
right, remedy or option or of any Default or Event of Default.
34.8. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original, and it shall not be necessary in making proof of this Agreement to
produce or account for more than one such fully- executed counterpart.
34.9. Waivers by Borrower. IN ANY LITIGATION IN ANY COURT WITH RESPECT TO,
IN CONNECTION WITH, OR ARISING OUT OF THIS AGREEMENT, THE LOANS, ANY OF THE
NOTES, ANY OF THE OTHER LOAN DOCUMENTS, THE OBLIGATIONS, OR ANY INSTRUMENT OR
DOCUMENT DELIVERED PURSUANT TO THIS AGREEMENT, OR THE VALIDITY, PROTECTION,
INTERPRETATION, COLLECTION OR ENFORCEMENT THEREOF, OR ANY OTHER CLAIM OR DISPUTE
HOWSOEVER ARISING BETWEEN THE BORROWER AND THE LENDERS OR THE AGENT, THE
BORROWER AND EACH LENDER AND THE AGENT HEREBY WAIVE, TO THE EXTENT PERMITTED BY
LAW, TRIAL BY JURY IN CONNECTION WITH ANY SUCH LITIGATION.
The Borrower, the Agent and the Lenders believe that, inasmuch as this
Agreement and the transactions contemplated hereby have been entered into and
consummated outside the State of Alabama, such transactions constitute
transactions in interstate commerce, so that neither the Agent nor any of the
Lenders is required, solely by entering into this Agreement and consummating the
transactions contemplated hereby, to qualify to do business as a foreign
corporation within the State of Alabama. Notwithstanding the foregoing, however,
the Borrower hereby irrevocably waives all rights that it may have to raise, in
any action brought by any of the Lenders or the Agent to enforce the rights of
the Lenders and the Agent hereunder or under any of the other Loan Documents, or
the obligations of the Borrower hereunder or thereunder, any defense which is
based upon the failure of any of the Lenders or the Agent to qualify to do
business as a foreign corporation in the State of Alabama, including, but not
limited to, any defenses based upon ss. 232 of the Alabama Constitution of 1901,
ss. 10-2B-15.01 of the Code of Alabama (1975) or ss. 40-14-4 of the Code of
Alabama (1975), or any successor provision to any thereof. The foregoing waiver
is made knowingly and voluntarily and is a material inducement for the Agent and
the Lenders to enter into the transactions contemplated by this Agreement or any
of the other Loan Documents.
34.10. Termination. The termination of this Agreement shall not affect any
rights of the Borrower, the Lenders or the Agent or any obligation of the
Borrower, the Lenders or the Agent, arising prior to the effective date of such
termination, and the provisions hereof shall continue to be fully operative
until all transactions entered into or rights created or obligations incurred
prior to such termination have been fully disposed of, concluded or liquidated
and the Obligations arising prior to or after such termination have been
irrevocably paid in full. The rights granted to the Agent for the benefit of the
Lenders hereunder and under the other Loan Documents shall continue in full
force and effect, notwithstanding the termination of this Agreement, until all
of the Obligations have been paid in full after the termination hereof or the
Borrower has furnished the Lenders and the Agent with an indemnification
satisfactory to the Agent and each Lender with respect thereto. All
representations, warranties, covenants, waivers and agreements contained herein
shall survive termination hereof until payment in full of the Obligations unless
otherwise provided herein. Notwithstanding the foregoing, if after receipt of
any payment of all or any part of the Obligations, any Lender is for any reason
compelled to surrender such payment to any Person because such payment is
determined to be void or voidable as a preference,
<PAGE>
impermissible setoff, a diversion of trust funds or for any other reason, this
Agreement shall continue in full force and the Borrower shall be liable to, and
shall indemnify and hold such Lender harmless for, the amount of such payment
surrendered until such Lender shall have been finally and irrevocably paid in
full. The provisions of the foregoing sentence shall be and remain effective
notwithstanding any contrary action which may have been taken by the Lenders in
reliance upon such payment, and any such contrary action so taken shall be
without prejudice to the Lenders' rights under this Agreement and shall be
deemed to have been conditioned upon such payment having become final and
irrevocable.
34.11. Governing Law. ALL DOCUMENTS EXECUTED PURSUANT TO THE TRANSACTIONS
CONTEMPLATED HEREIN, INCLUDING, WITHOUT LIMITATION, THIS AGREEMENT AND EACH OF
THE OTHER LOAN DOCUMENTS SHALL BE DEEMED TO BE CONTRACTS MADE UNDER, AND FOR ALL
PURPOSES SHALL BE CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS AND JUDICIAL
DECISIONS OF THE STATE OF NORTH CAROLINA. THE BORROWER HEREBY SUBMITS TO THE
JURISDICTION AND VENUE OF THE STATE AND FEDERAL COURTS OF NORTH CAROLINA FOR THE
PURPOSES OF RESOLVING DISPUTES HEREUNDER OR ARISING OUT OF THE TRANSACTION
CONTEMPLATED HEREBY OR FOR THE PURPOSES OF COLLECTION.
34.12. Indemnification. In consideration of the execution and delivery of
this Agreement by the Agent and each Lender and the extension of the Bridge
Commitments, and so long as the Agent and Lenders have fulfilled their
obligations hereunder, the Borrower hereby indemnifies, exonerates and holds
free and harmless the Agent and each Lender and each of their respective
officers, directors, employees, affiliates and agents (collectively, the
"Indemnified Parties") from and against any and all actions, causes of action,
claims, suits, losses, costs, liabilities and damages, and expenses incurred in
connection therewith (irrespective of whether any such Indemnified Party is a
party to the action for which indemnification hereunder is sought), including
reasonable attorneys' fees and disbursements (collectively, the "Indemnified
Liabilities"), incurred by the Indemnified Parties or any of them as a result
of, or arising out of, or relating to, any of the following:
(a) any transaction financed or to be financed in whole or in part,
directly or indirectly, with the proceeds of any Loan or supported by any
Letter of Credit;
(b) the entering into and performance of this Agreement and any other
Loan Document by any of the Indemnified Parties;
(c) provided Lenders have no ownership interest in real property of
Borrower, any investigation, litigation or proceeding related to any
environmental cleanup, audit, compliance or other matter relating to the
protection of the environment or the release by the Borrower or any of its
Subsidiaries or Controlled Partnerships of any hazardous waste material; or
(d) provided Lenders have no ownership interest in real property of
Borrower, the presence on or under, or the escape, seepage, leakage,
spillage, discharge, emission, discharging or releases from any real
property owned or operated by the Borrower or any Subsidiary or Controlled
Partnership of any hazardous waste material (including any losses,
liabilities, damages, injuries, costs, expenses or claims asserted or
arising under any environmental laws), regardless of whether caused by, or
within the control of, the Borrower or such Subsidiary or Controlled
Partnerships,
<PAGE>
except for any such Indemnified Liabilities arising for the account of a
particular Indemnified Party by reason of the relevant Indemnified Party's
negligence or willful misconduct, and if and to the extent that the foregoing
undertaking may be unenforceable for any reason, the Borrower hereby agrees to
make the maximum contribution to the payment and satisfaction of each of the
Indemnified Liabilities which is permissible under applicable law. The
agreements in this Section 11.12 shall survive the Bridge Termination Date.
34.13. Agreement Controls. In the event that any term of any of the Loan
Documents other than this Agreement conflicts with any term of this Agreement,
the terms and provisions of this Agreement shall control.
34.14. Integration. This Agreement and the other Loan Documents represent
the final agreement between the parties as to the subject matter hereof or
thereof and may not be contradicted by evidence of prior, contemporaneous, or
subsequent oral agreements of the parties. There are no oral agreements between
the parties.
34.15. Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns; provided, however, that the Borrower may not assign or transfer its
rights or obligations hereunder without the prior written consent of the Agent
and all Lenders. The Agent and the Lenders may assign or transfer their interest
hereunder but only as provided herein.
34.16. Severability. If any provision of this Agreement or the other Loan
Documents shall be determined to be illegal or invalid as to one or more of the
parties hereto, then such provision shall remain in effect with respect to all
parties, if any, as to whom such provision is neither illegal nor invalid, and
in any event all other provisions hereof shall remain effective and binding on
the parties hereto.
34.17. Usury Savings Clause. Notwithstanding any other provision herein,
the aggregate interest rate charged under any of the Notes, including all
charges or fees in connection therewith deemed in the nature of interest under
North Carolina law, shall not exceed the Highest Lawful Rate (as such term is
defined below). If the rate of interest (determined without regard to the
preceding sentence) under this Agreement at any time exceeds the Highest Lawful
Rate (as defined below), the outstanding amount of the Loans made hereunder
shall bear interest at the Highest Lawful Rate until the total amount of
interest due hereunder equals the amount of interest which would have been due
hereunder if the stated rates of interest set forth in this Agreement had at all
times been in effect. In addition, if when the Loans made hereunder are repaid
in full the total interest due hereunder (taking into account the increase
provided for above) is less than the total amount of interest which would have
been due hereunder if the stated rates of interest set forth in this Agreement
had at all times been in effect, then to the extent permitted by law, the
Borrower shall pay to the Agent an amount equal to the difference between the
amount of the interest paid and the amount of interest which would have been
paid if the Highest Lawful Rate had at all times been in effect. Notwithstanding
the foregoing, it is the intention of the Lenders and the Borrower to conform
strictly to any applicable usury laws. Accordingly, if any Lender contracts for,
charges, or receives any consideration which constitutes interest in excess of
the Highest Lawful Rate, then any such excess shall be canceled automatically
and, if previously paid, shall at such Lender's option be applied to the
outstanding amount of the Loans made hereunder or be refunded to the Borrower.
As used in this paragraph, the term "Highest
<PAGE>
Lawful Rate" means, as to any Lender, the maximum lawful interest rate, if any,
that at any time or from time to time may be contracted for, charged, or
received under the laws applicable to such Lender which are presently in effect
or, to the extent allowed by law, under such applicable laws which may hereafter
be in effect and which allow a higher maximum nonusurious interest rate than
applicable laws now allow.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
made, executed and delivered by their duly authorized officers as of the day and
year first above written.
HEALTHSOUTH CORPORATION
WITNESS:
/s/ WILLIAM W. HORTON By: /s/ MICHAEL D. MARTIN
- - ------------------------- --------------------------------
/s/ STACEY S. FLEENOR Name: /s/ Michael D. Martin
- - ------------------------ --------------------------------
Executive Vice President
Title: and Chief Financial Officer
<PAGE>
NATIONSBANK N.A.,
as Agent for the Lenders
By: /s/ SCOTT S. WARD
--------------------------------
Name: Scott S. Ward
------------------------------
Title: Senior Vice President
---------------------------
COMMITMENT: NATIONSBANK, N.A.
$350,000,000
By: /s/ SCOTT S. WARD
--------------------------------
Name: Scott S. Ward
------------------------------
Title: Senior Vice President
----------------------------
Lending Office:
100 South Tryon Street
Charlotte, North Carolina 28255
Wire Transfer Instructions:
NationsBank, N.A.
Charlotte, North Carolina
ABA #053000196
Reference: HEALTHSOUTH Corporation
Attention: Agency Services
<PAGE>
COMMITMENT: SCOTIABANC INC.
$100,000,000
By: /s/ DANA MALONEY
--------------------------
Name: Dana Maloney
--------------------------
Title: Relationship Manager
Lending Office:
600 Peachtree Street, N.E.
Suite 2700
Atlanta, Georgia 30308
Wire Transfer Instructions:
The Bank of Nova Scotia
New York Agency, for further
credit to BNS-Atlanta Agency
New York, New York
ABA #026002532
Account #0606634
Attention: Houston-Atlanta Team
Reference: HEALTHSOUTH
<PAGE>
COMMITMENT: FIRST UNION NATIONAL BANK
$100,000,000
By: /s/ THOMAS L. JAMES
------------------------------
Name: Thomas L. James
----------------------------
Title: Senior Vice President
Lending Office:
One First Union Plaza
Charlotte, North Carolina 28288
Wire Transfer Instructions:
First Union National Bank
Charlotte, North Carolina
ABA #053000219
Account #465906 0001802
Reference: HEALTHSOUTH
Attention: Sue Patterson
<PAGE>
COMMITMENT: WACHOVIA BANK OF GEORGIA, N.A.
$100,000,000
By: /s/ JOHN C. CANTY
----------------------------
Name: John C. Canty
---------------------------
Title: Banking Officer
Lending Office:
191 Peachtree Street, N.E.
Atlanta, Georgia 30303
Wire Transfer Instructions:
Wachovia Bank of Georgia
Atlanta, Georgia
ABA #061000010
Account #18-800-621
Attention: Becky Creel
<PAGE>
COMMITMENT: BANK OF TOKYO-MITSUBISHI TRUST COMPANY
$100,000,000
By: /s/ DOUGLAS J. WEIR
-------------------------------
Name: Douglas J. Weir
-----------------------------
Title: Vice President
Lending Office:
1251 Avenue of the Americas
New York, New York 10029-1104
Wire Transfer Instructions:
The Bank of Tokyo-Mitsubishi, Ltd., NY, NY
Further Credit: Bank of Tokyo-Mitsubishi, Ltd.
ABA #0260-0963
Reference: HEALTHSOUTH Corporation
Attention:
<PAGE>
COMMITMENT: DEUTSCHE BANK AG, NEW YORK AND/OR
$100,000,000 CAYMAN ISLANDS BRANCHES
By: /s/ ANDREAS DIRNAGI
------------------------------
Name: Andreas Dirnagi
-----------------------------
Title: Vice President
By: /s/ SUSAN L. PEARSON
------------------------------
Name: Susan L. Pearson
-------------------------------
Title: Vice President
Lending Office:
31 W. 52nd Street
New York, New York 10019
Wire Transfer Instructions:
Deutsche Bank AG
New York, New York 10019
ABA #026003780
Reference: HEALTHSOUTH
Account #0479733
<PAGE>
COMMITMENT: THE INDUSTRIAL BANK OF JAPAN, LIMITED,
$100,000,000 ATLANTA AGENCY
By: /s/ KAZUO JIDA
----------------------------
Name: Kazuo Jida
--------------------------
Title: General Manager
Lending Office:
Atlanta Agency
One Ninety One Peachtree Tower, Suite 3600
191 Peachtree Street, N.E.
Atlanta, Georgia 30303-1757
Attention: James Masters
Wire Transfer Instructions:
Industrial Bank of
Japan, Limited, New
York Branch ABA
#026008345 For the
account of:
IBJ Atlanta Agency
A/C 2601-21014
Reference: HEALTHSOUTH Corporation
<PAGE>
COMMITMENT: PNC BANK, KENTUCKY, INC.
$100,000,000
By: /s/ BENJAMIN A. WILLINGHAM
---------------------------------
Name: Benjamin A. Willingham
---------------------------------
Title: Vice President
Lending Office:
500 West Jefferson Street
Louisville, Kentucky 40202
Wire Transfer Instructions:
PNC Bank, Kentucky, Inc.
Louisville, Kentucky
ABA #083-000-108
Account #3000990597
Reference: HEALTHSOUTH
Attention: Margie Pate
<PAGE>
COMMITMENT: MELLON BANK, N.A.
$100,000,000
By: /s/ MARSHA WICKER
---------------------------------
Name: Marsha Wicker
--------------------------------
Title: Vice President
Lending Office:
2 Mellon Bank Center
Room 152-0270
Pittsburgh, Pennsylvania 15259
Wire Transfer Instructions:
Mellon Bank, N.A.
Pittsburgh, Pennsylvania 15259
ABA #0430-0026-1
Account #990873800
Attention: Christine Bissell
Reference: HEALTHSOUTH Corp.
<PAGE>
COMMITMENT: BANKERS TRUST COMPANY
$100,000,000
By: /s/ MARY JO JOLLY
--------------------------------
Name: Mary Jo Jolly
------------------------------
Title: Assistant Vice President
Lending Office:
1 Bankers Trust Plaza
130 Liberty Street
New York, New York 10006
Wire Transfer Instructions:
Bankers Trust Company
New York, New York 10006
ABA #021-001-033
Reference: HEALTHSOUTH
Attention: Commercial Loan Division
EXHIBIT 21
SUBSIDIARIES OF
HEALTHSOUTH CORPORATION
(States of Incorporation in Parentheses)
SUBSIDIARIES
Advantage Health Corporation (DE)
Advantage Health Development Corp. (MA)
Advantage Health Harmarville Rehabilitation Corporation (PA)
Advantage Health Nursing Care, Inc. (MA)
Advantage Rehabilitation Clinics, Inc. (MA)
Advantage Beverly Corporation (MA) (51%)
Advantage Health Eastern Rehabilitation Network, Inc. (CT)
Rehabilitation Institute of Western Massachusetts, Inc. (MA)
Baygan Development Corp. (FL)
HRC Services, Inc. (PA)
LH Real Estate Company, Inc. (MA) (99.5%)
New England Home Health Care, Inc. (MA) (96.8%)
Special Care Certified of Massachusetts, Inc. (MA)
Special Care Home Health Services of Connecticut, Inc. (CT)
Special Care Home Health Services of Maine, Inc. (ME)
Special Care Nursing Services, Inc. (MA)
New England Rehabilitation Center of Southern New Hampshire, Inc. (NH)
(91.75%)
New England Rehabilitation Hospital, Inc. (MA)
New England Rehabilitation Hospital of Portland, Inc. (ME)
New England Rehabilitation Management Co., Inc. (NH)
New England Rehabilitation Services of Central Massachusetts,
Inc. (MA) (33-1/3%)
Winchester Gables, Inc. (MA) (51%)
ASC Network Corporation (DE)
Castro Valley Surgery Center, Inc. (CA)
Day SurgiCenters, Inc. (IL)
Diversified Health Centers, Inc. (CA)
Fort Wayne Care Center, Inc. (DE)
Loyola Ambulatory Surgery Center at Oakbrook, Inc. (IL)
Palm Desert Care Center, Inc. (DE)
Premier Ambulatory Surgery of Austin, Inc. (DE)
Premier Ambulatory Surgery of Blackhawk, Inc. (CA)
Premier Ambulatory Surgery of Duncanville, Inc. (DE)
Premier Ambulatory Surgery of Forest Park, Inc. (TX)
Premier Ambulatory Surgery of Garland, Inc. (DE)
Premier Ambulatory Surgery of Mesquite, Inc. (TX)
Premier Ambulatory Surgery of Tri-Valley, Inc. (CA)
Premier Ambulatory Surgery of Walnut Creek, Inc. (CA)
Premier MSO of Texas, Inc. (TX)
<PAGE>
San Diego Outpatient Surgical Center, Inc. (CA)
SunSurgery Corporation (CT)
Bridgeport Surgical Center, Inc. (CT)
Danbury Surgical Center, Inc. (CT)
Frost Street Outpatient Surgical Center, Inc. (CA) (52.44%)
Hartford Surgical Center, Inc. (CT) (81%)
Medical Surgical Centers of America, Inc. (CA) (95.4%)
d/b/a Grossmont Surgery Center
MMDC of New Jersey, Inc. (NJ)
MMDC of Pennsylvania, Inc. (PA)
Pomerado Outpatient Surgical Center, Inc. (CA)
Diagnostic Health Corporation (DE)
Health Images Arlington, Inc. (GA)
Health Images Atlanta North, Inc. (GA)
Health Images Atlanta South, Inc. (GA)
Health Images Augusta, Inc. (GA)
Health Images Aurora North, Inc. (GA)
Health Images Aurora South, Inc. (GA)
Health Images Austin, Inc. (GA)
Health Images Baton Rouge North, Inc. (GA)
Health Images Baton Rouge South, Inc. (GA)
Health Images Beaumont, Inc. (GA)
Health Images Birmingham, Inc. (GA)
Health Images Cape Coral, Inc. (GA)
Health Images Charleston, Inc. (GA)
Health Images Colorado, Inc. (GA)
Health Images Columbia, Inc. (GA)
Health Images Columbus, Inc. (GA)
Health Images Dallas, Inc. (GA)
Health Images Denver, Inc. (GA)
Health Images DuPage, Inc. (GA)
Health Images Effingham, Inc. (GA)
Health Images Ft. Myers, Inc. (GA)
Health Images Ft. Worth, Inc. (GA)
Health Images Greenville, Inc. (GA)
Health Images Hilton Head, Inc. (GA)
Health Images Houston, Inc. (GA)
Health Images Huntsville, Inc. (GA)
Health Images Hurst, Inc. (GA)
Health Images Jacksonville, Inc. (GA)
Health Images Knoxville, Inc. (GA)
Health Images Lebanon, Inc. (GA)
Health Images Memphis, Inc. (GA)
Health Images Nashville, Inc. (GA)
Health Images Orange Park, Inc. (GA)
Health Images Port Arthur, Inc. (GA)
Health Images Reading, Inc. (GA)
Health Images Savannah, Inc. (GA)
<PAGE>
Health Images Stratford, Inc. (GA)
Health Images Tulsa, Inc. (GA)
Health Images Tyler, Inc. (GA)
Health Images (UK) plc (UK)
Health Images Waco, Inc. (GA)
Health Images Warner Robins, Inc. (GA)
Health Images Williamsport, Inc. (GA)
HEALTHSOUTH Diagnostic Centers, Inc. (AK)
Disability and Impairment Evaluation Centers of America, Inc. (DE)
DIECA, Inc. (DE)
Doty-Moore Tower Services, Inc. (TX)
Encinitas Physical Therapy and Sports Rehabilitation, Inc. (CA)
Flatirons Physical Therapy, Inc. (CO)
Health Providers, Inc. (FL)
HEALTHSOUTH Aviation, Inc. (AL)
HEALTHSOUTH Community Re-Entry Center of Dallas, Inc. (DE)
HEALTHSOUTH Doctors' Hospital, Inc. (DE)
Hospital Health Systems, Inc. (FL)
Doctors' Health Service Corporation (FL)
Doctors' Scanning Associates, Inc. (FL)
Doctors' Home Health, Inc. (FL)
Doctors' Medical Equipment Corp. (FL)
HEALTHSOUTH Holdings, Inc. (DE)
Delaware Sportscare/Physical Therapy, Inc. (DE)
Fayette Physical Therapy, Inc. (GA)
Johnson Physical Therapy, Inc. (OH)
Madison Rehabilitation Center, Inc. (CT)
Penn-Mar Rehabilitative Services, Inc. (PA)
Physical Therapy Professionals, Inc. (OK)
Professional Therapy & Rehabilitation, Inc. (OK)
HEALTHSOUTH Home Health Services of Arkansas, prn, Inc. (DE)
HEALTHSOUTH Home Health Services of Connecticut, prn, Inc. (CT)
HEALTHSOUTH Home Health Services of Missouri, prn, Inc. (DE)
HEALTHSOUTH Home Health Services of Texas, prn, Inc. (TX)
HEALTHSOUTH Home Health Services of Utah, prn, Inc. (DE)
HEALTHSOUTH Home Health Services, prn, Inc. (DE)
HEALTHSOUTH IMC Healthcare Centers (CA)
HEALTHSOUTH International, Inc. (DE)
HEALTHSOUTH IMC, Inc. (DE)
HEALTHSOUTH Medical Center, Inc. (AL)
HEALTHSOUTH Medical Clinic, Inc. (DE)
HEALTHSOUTH Network Services, Inc. (DE)
HEALTHSOUTH Occupational Health & Injury
Management of Colorado, Inc. (DE)
HEALTHSOUTH of Altoona, Inc. (DE)
HEALTHSOUTH of Austin, Inc. (DE)
HEALTHSOUTH of Birmingham, Inc. (DE)
HEALTHSOUTH of Charleston, Inc. (DE)
<PAGE>
HEALTHSOUTH of Chesapeake, Inc. (DE)
HEALTHSOUTH of Columbia, Inc. (DE)
HEALTHSOUTH of Dallas, Inc. (DE)
HEALTHSOUTH of Dothan, Inc. (AL)
HEALTHSOUTH of East Tennessee, Inc. (DE)
HEALTHSOUTH of Erie, Inc. (DE)
HEALTHSOUTH of Fort Smith, Inc. (DE)
HEALTHSOUTH of Gadsden, Inc. (DE)
HEALTHSOUTH of Houston, Inc. (DE)
HEALTHSOUTH of Louisiana, Inc. (DE)
HEALTHSOUTH of Mechanicsburg, Inc. (DE)
HEALTHSOUTH of Michigan, Inc. (DE)
HEALTHSOUTH of Middle Tennessee, Inc. (DE)
HEALTHSOUTH of Midland, Inc. (DE)
HEALTHSOUTH of Missouri, Inc. (DE)
HEALTHSOUTH of Montgomery, Inc. (AL)
HEALTHSOUTH of New Hampshire, Inc. (DE)
HEALTHSOUTH of New Mexico, Inc. (NM)
HEALTHSOUTH of Nittany Valley, Inc. (DE)
HEALTHSOUTH of Oklahoma, Inc. (DE)
HEALTHSOUTH of Ontario, Inc. (DE)
HEALTHSOUTH of Pittsburgh, Inc. (DE)
HEALTHSOUTH of Reading, Inc. (DE)
HEALTHSOUTH of Salem, Inc. (DE)
HEALTHSOUTH of San Antonio, Inc. (DE)
HEALTHSOUTH of South Carolina, Inc. (DE)
HEALTHSOUTH of Texarkana, Inc. (DE)
HEALTHSOUTH of Texas, Inc. (TX)
HEALTHSOUTH of Toms River, Inc. (DE)
HEALTHSOUTH of Treasure Coast, Inc. (DE)
HEALTHSOUTH of Utah, Inc. (DE)
HEALTHSOUTH of Virginia, Inc. (DE)
HEALTHSOUTH of Witchita, Inc. (DE)
HEALTHSOUTH of York, Inc. (DE)
HEALTHSOUTH Orthopedic Services, Inc. (DE)
Northwestern Memorial/Caremark, Inc. (IL) (50%)
HEALTHSOUTH Properties Corporation (DE)
HEALTHSOUTH Real Property Holding Corporation (DE)
HEALTHSOUTH Rehabilitation Center, Inc. (SC)
HEALTHSOUTH Specialty Hospital, Inc. (TX)
HEALTHSOUTH Sub-Acute Center of Houston, Inc. (DE)
HEALTHSOUTH Sub-Acute Center of Mechanicsburg, Inc. (DE)
HEALTHSOUTH Surgery Centers-West, Inc. (DE)
HEALTHSOUTH Salt Lake Surgical Center, Inc. (DE)
HEALTHSOUTH Surgical Center of Tuscaloosa, Inc. (AL)
Horizon/CMS Healthcare Corporation (DE)
Continental Medical Systems, Inc. (DE)
Central Arizona Rehabilitation Hospital, Inc. (DE)
<PAGE>
Central Arkansas Outpatient Centers, Inc. (DE)
Chandler Rehabilitation Hospital, Inc. (DE)
Chico Rehabilitation Hospital, Inc. (DE)
Clear Lake Rehabilitation Hospital, Inc. (TX)
CMS Administrative Services, Inc. (DE)
CMS Alexandria Rehabiliation, Inc. (DE)
CMS Baton Rouge Rehabilitation, Inc. (DE)
CMS Beaumont Rehabilitation, Inc. (TX)
CMS Capital Ventures, Inc. (DE)
Baton Rouge Rehab, Inc. (DE)
CHS Therapy Technologies Corp. (DE)
CompHealth, Inc. (DE)
CompHealth Medical Staffing, Inc. (DE)
The Kelton Corporation (MA)
Braintree Rehabilitation Ventures, Inc. (MA)
KBT Corporation (MA)
CMS Denver Rehabilitation, Inc. (DE)
CMS Development and Management Company, Inc. (DE)
CMS Elizabethtown, Inc. (DE)
CMS Fayetteville Rehabilitation, Inc. (DE)
CMS Fort Worth Rehabilitation, Inc. (TX)
CMS Fresno Rehabilitation, Inc. (DE)
CMS Houston Rehabilitation, Inc. (TX)
CMS Jonesboro Rehabilitation, Inc. (DE)
CMS Kansas City Rehabilitation, Inc. (DE)
CMS Outpatient Centers of North Texas, Inc. (DE)
CMS Outpatient Centers of South Texas, Inc. (DE)
CMS Outpatient Rehabilitation Services, Inc. (DE)
CMS Pennsylvania, Inc. (DE)
CMS Physician Services, Inc. (DE)
CMS of Ohio, Inc. (DE)
CMS Rehab Technologies Corp. (DE)
CMS Rehabilitation Center of Hialeah, Inc. (DE)
CMS Ruston Rehabilitation, Inc. (DE)
CMS San Diego Rehab, Inc. (DE)
CMS San Diego Surgical, Inc. (DE)
CMS Sherwood Rehabilitation, Inc. (DE)
CMS South Miami Rehab, Inc. (DE)
CMS Sportsmed Clinic, Inc. (DE)
CMS Topeka Rehabilitation, Inc. (DE)
CMS Tri-Cities Rehabilitation Hospital, Inc. (DE)
CMS Wichita Rehabilitation, Inc. (DE)
CMS WorkAble, Inc. (DE)
CMS WorkAble of Paragould, Inc. (DE)
CMS Worknet of Baton Rouge, Inc. (DE)
CMSI Systems of Texas, Inc. (TX)
Colorado Outpatient Centers, Inc. (DE)
Continental Medical of Arizona, Inc. (DE)
<PAGE>
Continental Medical of Colorado, Inc. (DE)
Continental Medical Systems of Florida, Inc. (FL)
Continental Medical of Kentucky, Inc. (DE)
Continental Medical of Palm Beach, Inc. (DE)
Continental Rehab of W.F., Inc. (TX)
Continental Rehabilitation Hospital of America, Inc. (DE)
Contra Costa Rehab Clinic, Inc. (DE)
Fairland Nursing and Retirement Home, Inc. (DE)
Great Plains Rehabilitation Hospital, Inc. (DE)
HCA Wesley Rehabilitation Clinic of Liberal, Inc. (DE)
HCA Wesley Rehabilitation Hospital, Inc. (DE)
Hialeah Convalescent Centers, Inc. (FL)
Indiana Outpatient Centers, Inc. (DE)
Innovative Health Alliances, Inc. (DE)
K.C. Rehabilitation Hospital, Inc. (DE)
Kansas Outpatient Centers, Inc. (DE)
Kansas Rehabilitation Hospital, Inc. (DE)
Kentfield Hospital Corporation (CA)
Kokomo Rehabilitation Hospital, Inc. (DE)
Lafayette Rehabilitation Hospital, Inc. (DE)
Louisiana Outpatient Centers, Inc. (DE)
The Nursing Home at Chevy Chase, Inc. (DE)
Maryland Rehabilitation Hospital, Inc. (DE)
Medical Management Associates, Inc. (CA)
Mancor Medical Management Company, Inc. (CA)
Mid-America Outpatient Centers, Inc. (DE)
National Physicians Equity Corporation (CA)
Nevada Rehabilitation Hospital, Inc. (DE)
Northern Virginia Rehabilitation Hospital, Inc. (DE)
Palm Springs Rehabilitation Hospital, Inc. (DE)
Park Manor Nursing Home, Inc. (DE)
Pro Therapy of America, Inc. (DE)
Apco Medical Laboratories, Inc. (MI)
Physical Therapy Source, Inc. (DE)
Professional Therapy International, Inc. (FL)
Professional Therapy Staffing, Inc. (MI)
RCM Management Company, Inc. (DE)
Rehab Concepts Corp. (DE)
Rehab Resources, Inc. (DE)
Rehabilitation Hospital of Colorado Springs, Inc. (DE)
Rehabilitation Hospital of Fort Wayne, Inc. (DE)
Rehabilitation Hospital of Nevada - Las Vegas, Inc. (DE)
Rehabilitation Hospital of Plano, Inc. (TX)
Romano Rehabilitation Hospital, Inc. (TX)
SD Acquisition Corporation (DE)
SD Partners, Inc. (DE)
SelectRehab, Inc. (DE)
Sherwood Rehabilitation Hospital, Inc. (DE)
<PAGE>
Sierra Pain and Occupational Rehabilitation Center, Inc. (DE)
Southeast Texas Rehabilitation Hospital, Inc. (TX)
Tarrant County Rehabilitation Hospital, Inc. (TX)
Terre Haute Rehabilitation Hospital, Inc. (DE)
Texas Hospital Partners, Inc. (DE)
Tulsa Rehabilitation Hospital, Inc. (DE)
Tyler Rehabilitation Hospital, Inc. (TX)
Western Neuro Care, Inc. (DE)
Western Neurologic Residential Centers (CA)
Western Neuro Residential, Inc. (DE)
Wichita Falls Rehabilitation Hospital, Inc. (TX)
Wilson Lane Holdings, Inc. (DE)
Desert Corporation (NV)
Eagle Rehab Corporation (DE)
Fankhauser Physical Therapy Orthopedic & Sports
Rehabilitation, Inc. (WA)
Northwestern Sports Clinic, Inc. (WA)
Physical Therapy & Athletic Rehabilitation Associates,Inc.(WA)
Physical Therapy Specialties, Inc. (WA)
Sampson & Delilah, Inc. (WA)
Spokane Associated Physical Therapists, Inc. (WA)
Spokane Sports & Orthopedic Therapy, Inc. (WA)
Pacific Rehabilitation & Sports Medicine, Inc. (DE)
Dade Physical Therapy Rehab, Inc. (FL)
Leeward Back and Neck, Inc. (HI)
Longview Physical Therapy, Inc. (WA)
Pacific Rehab of Alabama, Inc. (AL)
Pacific Rehab of Maryland, Inc. (MD)
Pacific Rehab of Mississippi, Inc. (MS)
PR Acquisition Corporation (CA)
The Rehab Group, Inc. (TN)
The Rehab Clinic Richmond, Inc. (VA)
The Rehab Group - Brunswick, Inc. (TN)
Swanson Sports Training & Physical Therapy, Inc. (TN)
Eagle Rehab Corporation (WA)
Great Eastern Nursing Corp. (TX)
Greenery Securities Corp. (DE)
HHC Acquisition Corp. (DE)
HHC Nursing Facilities, Inc. (DE)
Home Care Management Corp. (NV)
Home Health Associates, Inc. (NV)
Horizon Assisted Living Services, Inc. (DE)
Horizon Facilities Management, Inc. (DE)
Horizon Holding, Inc. (DE)
Horizon Hospice Care, Inc. (DE)
Horizon Management Holding, Inc. (DE)
Horizon Medical Management, Inc. (DE)
Horizon Medical Specialties, Inc. (DE)
Horizon MDS Corporation (DE)
<PAGE>
Horizon Sleep Diagnostics Corporation (DE)
Horizon Therapy Holdings, Inc. (DE)
CMS Therapies Provider, Inc. (NC)
Hospital HomeCare Corporation (TX)
Intra-City Enterprises, Inc. (OH)
Medical Innovations, Inc. (DE)
Medical Innovations (Texas), Inc. (TX)
Medical Innovations of New Jersey, Inc. (DE)
Medical Innovations Hospice, Inc. (TX)
Medical Innovations of Virginia, Inc. (TX)
Midwest Regional Rehabilitation Center, Inc. (DE)
North Louisiana Rehabilitation Center, Inc. (LA)
Northeast Arkansas Rehabilitation Unit, Inc. (AR)
Northeast Oklahoma Rehabilitation Hospital, Inc. (DE)
Nevada Home Care Partners, Inc. (NV)
Northwest Arkansas Physical Therapy, Inc. (TN)
Nurses PRN of Virginia, Inc. (TX)
Nursing Innovations, Inc. (TX)
Orange Rehabilitation Hospital, Inc. (DE)
Physicians Hospital for Extended Care (NV)
Physician's Visiting Nurses Services, Inc. (TX)
PRN Home Health Care, Inc. (NV)
San Jacinto Management Company (TX)
Southern Nevada Hospice, Inc. (NV)
Vegas Valley Convalescent Center, Inc. (NV)
The Hitchcock Groups, Inc. (IN)
Lakeshore System Services of Florida, Inc. (FL)
MCA Sports of Amarillo, Inc. (TX)
National Imaging Affiliates, Inc. (DE)
Heritage Medical Services of South Carolina, Inc. (SC)
National Cancer Treatment Center, Inc. (TN)
National Imaging Affiliates of Fayetteville, Inc. (TN) (80%)
National Imaging Affiliates of Florida, Inc. (TN)
Heritage Medical Services of Florida, Inc. (FL)
National Imaging Affiliates of San Angelo, Inc. (TX)
National Imaging Affiliates of Washington, Inc. (TN)
National Imaging Affiliates Cancer Treatment Center (TN)
National Imaging Equipment Corporation, Inc. (TN)
National Imaging Health Services (TN)
National Imaging Health Services Atlanta (TN)
National Imaging Health Services St. Louis, Inc. (TN)
North Dallas NIA Inc. (TN)
Paces Imaging, Inc. (GA)
NovaCare SMC, Inc. (MD)
Physical Therapeutix, Inc. (MI)
Physician Practice Management Corporation (DE)
Professional Sports Care Management, Inc. (DE)
Ortho Network Services, Inc. (NY)
<PAGE>
Professional Therapy Systems, Inc. (TN)
ReadiCare, Inc. (DE)
CHEC Medical Centers, Inc. (WA)
Rebound, Inc. (DE)
Rehabilitation Hospital Corporation of America, Inc. (DE)
Surgical Care Affiliates, Inc. (DE)
Alaska Surgery Center, Inc. (AK)
All-Care Surgery Center, Inc. (MD)
Aurora-SC, Inc. (CO)
Bakersfield-SC, Inc. (TN)
Camp Hill-SCA Centers, Inc. (PA)
The Center for Day Surgery, Inc. (AR)
Charlotte-SC, Inc. (NC)
Chattanooga-SC, Inc. (TN)
Coral Springs-SC, Inc. (TN)
El Paso-SC, Inc. (TX)
Fort Worth-SC, Inc. (TX)
Glenwood-SC, Inc. (TN)
Golden-SCA, Inc. (CO)
Greenpark Surgery Center, Inc. (TX)
Greenville Surgery Center, Inc. (TX)
HEALTHSOUTH-Montgomery, Inc. (TN)
HEALTHSOUTH Oak Leaf Surgery Center, Inc. (DE)
HEALTHSOUTH of Easton, Inc. (DE)
HEALTHSOUTH of Whitehall, Inc. (TN)
HEALTHSOUTH S.C. of Arrowhead Park, Inc. (DE)
HEALTHSOUTH S.C. of Cape Girardeau, Inc. (DE)
HEALTHSOUTH S.C. of Cleveland, Inc. (DE)
HEALTHSOUTH S.C. of Columbus, Inc. (DE)
HEALTHSOUTH S.C. of Eldersburg, Inc. (DE)
HEALTHSOUTH S.C. of Kendall, Inc. (DE)
HEALTHSOUTH S.C. of Muskogee (DE)
HEALTHSOUTH S.C. of Park City, Inc. (DE)
HEALTHSOUTH S.C. of Riverton, Inc. (DE)
HEALTHSOUTH S.C. of San Angelo, Inc. (DE)
HEALTHSOUTH S.C. of San Marcos, Inc. (DE)
HEALTHSOUTH S.C. of Santa Monica, Inc. (DE)
HEALTHSOUTH S.C. of Scottsdale-Bell Road, Inc. (DE)
HEALTHSOUTH S.C. of Tampa, Inc. (DE)
HEALTHSOUTH Surgery Center of Alamo Heights, Inc. (DE)
HEALTHSOUTH Surgery Center of Baltimore, Inc. (DE)
HEALTHSOUTH Surgery Center of Baton Rouge, Inc. (DE)
HEALTHSOUTH Surgery Center of Clearwater, Inc. (DE)
HEALTHSOUTH Surgery Center of Crestview, Inc. (DE)
HEALTHSOUTH Surgery Center of Dayton, Inc. (DE)
HEALTHSOUTH Surgery Center of Fairfield, Inc. (DE)
HEALTHSOUTH Surgery Center of Kenosha, Inc. (DE)
HEALTHSOUTH Surgery Center of Louisville, Inc. (DE)
<PAGE>
HEALTHSOUTH Surgery Center of Loveland, Inc. (DE)
HEALTHSOUTH Surgery Center of New Jersey, Inc. (DE)
HEALTHSOUTH Surgery Center of Pecan Valley, Inc. (DE)
HEALTHSOUTH Surgery Center of Pinellas Park, Inc. (DE)
HEALTHSOUTH Surgery Center of Reading, Inc. (DE)
HEALTHSOUTH Surgery Center of San Buenaventura, Inc. (DE)
HEALTHSOUTH Surgery Center of Scottsdale, Inc. (DE)
HEALTHSOUTH Surgery Center of Spokane, Inc. (DE)
HEALTHSOUTH Surgery Center of Springfield, Inc. (DE)
HEALTHSOUTH Surgery Center of Summerlin, Inc. (DE)
HEALTHSOUTH Surgery Center of Toledo, Inc. (DE)
HEALTHSOUTH Surgery Center of West Columbus, Inc. (DE)
HEALTHSOUTH Surgery Center of Westerville, Inc. (DE)
HEALTHSOUTH Surgery Center of Westlake, Inc. (DE)
HEALTHSOUTH Surgery Center of Wilmington, Inc. (DE)
Knoxville-SCA Surgery Center, Inc. (TN)
Lancaster Medical Centre, Inc. (PA)
Lancaster Surgical Center, Inc. (PA)
Lexington-SC, Inc. d/b/a Lexington-SC Partners, Ltd. (KY)
Lexington-SC Properties, Inc. (KY)
Little Rock-SC, Inc. (AR)
Louisville-SC Properties, Inc. (KY)
Maryland-SCA Centers, Inc. (MD)
Nashville-SCA Surgery Centers, Inc. (TN)
Oshkosh-SCA Surgery Center, Inc. (WI)
Pueblo-SCA Surgery Center, Inc. (CO)
Redlands-SCA Surgery Centers, Inc. (CA)
San Antonio Surgery Center, Inc. (TX)
San Luis Obispo-SC, Inc. (TN)
SC-Wilson, Inc. (NC)
SCA-Albuquerque, Inc. (NM)
SCA-Albuquerque Surgery Properties, Inc. (NM)
SCA-Arlington Surgery, Inc. (TX)
SCA-Blue Ridge, Inc. (TN)
SCA Cabell Development Corporation (WV)
SCA Cabell, Inc. (WV)
SCA-Charleston, Inc. (SC)
SCA-Citrus, Inc. (TN)
SCA-Colorado Springs, Inc. (CO)
SCA-Conroe, Inc. (TN)
SCA-Dalton, Inc. (TN)
SCA-Development, Inc. (TN)
SCA-Dothan, Inc. (TN)
SCA-Dover, Inc. (DE)
SCA-Eugene, Inc. (TN)
SCA-Evansville, Inc. (IN)
SCA-Florence, Inc. (TN)
SCA-Fort Collins, Inc. (CO)
<PAGE>
SCA-Fort Walton, Inc. (TN)
SCA-Ft. Myers, Inc. (FL)
SCA-Gadsden, Inc. (AL)
Gadsden Surgery Center, Inc. (AL)
SCA-Gainesville, Inc. (TN)
SCA-Green River, Inc. (TN)
SCA-Hamilton Development Corp. (TN)
SCA-HHI, Inc. (TN)
Health Horizons of San Francisco, Inc. (TN)
SCA-Greenville East, Inc. (TN)
SCA-Honolulu, Inc. (TN)
SCA-Indianapolis, Inc. (IN)
SCA Investment Company (NV)
SCA-JV, Inc. (IL)
SCA-Knoxville/St. Mary's, Inc. (TN)
SCA-Lake Forest, Inc. (TN)
SCA-Little Rock Development Corp. (AR)
SCA Management Company (TN)
SCA-Marquette, Inc. (TN)
SCA-Mecklenberg Development Corp. (NC)
SCA-Mobile, Inc. (AL)
SCA-Mobile Properties, Inc. (AL)
SCA-Mt. Pleasant, Inc. (TN)
SCA-North Indianapolis, Inc. (IN)
SCA-Ohio Valley, Inc. (TN)
SCA-Paoli, Inc. (TN)
SCA-Plano, Inc. (TX)
SCA-Roseland, Inc. (NJ)
SCA-San Jose, Inc. (CA)
SCA-San Luis Obispo, Inc. (CA)
SCA-Santa Rosa, Inc. (TN)
SCA-Sarasota, Inc. (FL)
SCA-Shelby Development Corp. (TN)
SCA-South Jersey, Inc. (NJ)
SCA-St. Joseph Missouri, Inc. (TN)
SCA-St. Petersburg, Inc. (FL)
SCA-Tampa, Inc. (FL)
SCA-Ukiah, Inc. (TN)
SCA-Wausau, Inc. (TN)
SCA-Winter Park, Inc. (TN)
SCA-Yuma, Inc. (TN)
Scranton-SC, Inc. (PA)
Shelby Surgery Properties, Inc. (TN)
Springfield-SC, Inc. (MA)
Surgery Center of Louisville, Inc. (KY)
Surgical Services of Sarasota, Inc. (FL)
Wauwatosa Outpatient Surgery Center, Inc. (WI)
Surgical Health Corporation (DE)
<PAGE>
Healthcare Real Estate Holdings II, Inc. (GA)
Heritage Medical Services of Maryland, Inc. (TN)
Heritage Medical Services of Texas, Inc. (TX)
Heritage Surgical Associates of Chula Vista, Inc. (CA)
HSC of Beaumont, Inc. (TN)
HSC of Boca Raton, Inc. (FL)
HSC of Bradenton, Inc. (TN)
HSC of Chesapeake, Inc. (TN)
HSC of Cincinnati, Inc. (TN)
HSC of Clarksville, Inc. (TN)
HSC of Ft. Pierce, Inc. (GA)
HSC of Gulf Coast, Inc. (TN)
HSC of Houston, Inc. (TN)
HSC of Nashville, Inc. (TN)
HSC of Southwest Houston, Inc. (TN)
HSC of Vero Beach, Inc. (TN)
HVPG of California, Inc. (CA)
La Jolla Health Systems, Inc. (CA)
Midwest Anesthesia, Inc. (MO)
Newport Beach Health Systems, Inc. (CA)
North County Outpatient Management, Inc. (GA)
Outpatient Surgery Center, Inc. (MO)
SHC Amarillo, Inc. (GA)
SHC Atlanta, Inc. (GA)
SHC Austin, Inc. (GA)
SHC Boca Raton Laser, Inc. (GA)
SHC Central Florida, Inc. (GA)
SHC Chattanooga, Inc. (GA)
SHC Gwinnett, Inc. (GA)
SHC Hawthorn, Inc. (GA)
SHC Management Corporation (GA)
SHC Melbourne, Inc. (GA)
SHC Midwest City, Inc. (GA)
SHC Naples, Inc. (FL)
SHC North Dade, Inc. (GA)
SHC North Shore, Inc. (GA)
SHC Northlake, Inc. (GA)
SHC Oakwater, Inc. (GA)
SHC Oklahoma City, Inc. (GA)
SHC Palms Wellington, Inc. (GA)
SHC Phoenix, Inc. (GA)
SHC San Diego, Inc. (GA)
SHC Tri-County, Inc. (GA)
SHC West County, Inc. (GA)
South County Outpatient Management, Inc. (MO)
Surgical Health of Orlando, Inc. (FL)
Surgical Health of of San Antonio, Inc. (TX)
Tesson Ferry Anesthesia, Inc. (MO)
<PAGE>
Tesson Ferry Recovery, Inc. (MO)
Tesson Ferry Medical Management, Inc. (MO)
The Woodlands Surgery Systems, Inc. (DE)
Tuckahoe Surgery Center, Inc. (VA)
West Virginia Rehabilitation Hospital, Inc. (WV)
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-13489) pertaining to the 1984 Incentive Stock Option Plan, in
the Registration Statement (Form S-8 No. 33-23642) pertaining to the 1988
Non-Qualified Stock Option Plan, in the Registration Statement (Form S-8 No.
33-34908) pertaining to the 1989 Stock Option Plan, in the Registration
Statement (Form S-8 No. 33-40798) pertaining to the 1990 Stock Option Plan, in
the Registration Statement (Form S-8 No. 33-50440) pertaining to the 1991 Stock
Option Plan, in the Registration Statement (Form S-8 No. 33-64308) pertaining to
the 1992 Stock Option Plan, in the Registration Statement (Form S-8 No.
33-64316) pertaining to the 1993 Consultants' Stock Option Plan, in the
Registration Statement (Form S-8 No. 33-55303) pertaining to the 1993 Stock
Option Plan, in the Registration Statement (Form S-8 No. 333-02221) pertaining
to the 1995 Stock Option Plan in the Registration Statement (Form S-8 No.
33-60231) pertaining to the Surgical Health Corporation and Heritage Surgical
Corporation Stock Option Plans, in the Registration Statement (Form S-8 No.
33-64615) pertaining to the sutter Surgery Centers, Inc. Stock Option Plans, in
the Registration Statement (Form S-8 No. 333-00565) pertaining to the Surgical
Care Affiliates Stock Option Plans, in the Registration Statement (Form S-8 No.
333-12111) pertaining to the Professional Sports Care Management, Inc. Stock
Option Plans, in the Registration Statement (Form S-8 No. 333-18035) pertaining
to the ReadiCare Stock Option Plans, in the Registration Statement (Form S-3 No.
333-25921) pertaining to the stock purchase warrant issued to Robert D. Carl,
III, in the Registration Statement (Form S-8 No. 333-24429) pertaining to the
Health Images, Inc. Stock Option Plans, in the Registration Statement (Form S-3
No. 333-39825) pertaining to the resale of shares of Common Stock issued to
the stockholders of National Imaging Affiliates, Inc., in the Registration
Statement (Form S-8 No. 333-42307) pertaining to the 1997 Stock Option Plan, in
the Registration Statement (Form S-8 No. 333-42305) pertaining to the Amended
and Restated 1993 Consultants' Stock Option Plan, and in the Registration
Statement (Form S-8 No. 333-42301) pertaining to the Horizon/CMS Healthcare
Corporation Stock Option Plans of our report, dated February 25, 1998, except
for Note 14 as to which the date is March 20, 1998, with respect to the
consolidated financial statements and financial statement schedule of
HEALTHSOUTH Corporation and subsidiaries included in the Annual Report (Form
10-K) for the year-ended December 31, 1997.
ERNST & YOUNG LLP
Birmingham, Alabama
March 26, 1998
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