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, 1999; OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 1-10315
HEALTHSOUTH CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
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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)
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Registrant's Telephone Number, Including Area Code: (205) 967-7116
Securities Registered Pursuant to Section 12(b) of the Act:
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Name of Each Exchange
Title of Each Class on which Registered
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COMMON STOCK, PAR VALUE NEW YORK STOCK EXCHANGE
$.01 PER SHARE
9.5% SENIOR SUBORDINATED NEW YORK STOCK EXCHANGE
NOTES DUE 2001
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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 24, 2000:
Common Stock, par value $.01 per share -- $2,317,587,426
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
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Class Outstanding at March 24, 2000
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COMMON STOCK, PAR VALUE
$.01 PER SHARE 385,939,143 SHARES
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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 is the nation's largest provider of outpatient
surgery and rehabilitative healthcare services. We provide these services
through our national network of inpatient and outpatient healthcare facilities,
including inpatient and outpatient rehabilitation facilities, outpatient surgery
centers, diagnostic centers, occupational medicine centers, medical centers and
other healthcare facilities. We believe that we provide patients, physicians and
payors with high-quality healthcare services at significantly lower costs than
traditional inpatient hospitals. Additionally, our national network, reputation
for quality and focus on outcomes have enabled us to secure contracts with
national and regional managed care payors. At December 31, 1999, HEALTHSOUTH
operated nearly 2,000 locations in 50 states, Puerto Rico, the United Kingdom
and Australia.
Our healthcare services are provided through inpatient healthcare
facilities and facilities providing other clinical services (including inpatient
rehabilitation facilities and specialty medical centers, as well as associated
physician practices and other services) and outpatient healthcare facilities
(including outpatient rehabilitation centers, outpatient surgery centers,
outpatient diagnostic centers and occupational medicine centers). In our
outpatient and inpatient rehabilitation facilities, we provide 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. Our 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 we provide can save money for payors and
employers.
A patient referred to a HEALTHSOUTH rehabilitation facility 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. We have 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 our
patients, regardless of the severity and complexity of their disabilities, can
receive the level and intensity of services necessary to restore them to as
productive, active and independent a lifestyle as possible.
In addition to our rehabilitation facilities, we operate the largest
network of freestanding outpatient surgery centers in the United States. Our
outpatient surgery centers provide the facilities and medical support staff
necessary for physicians to perform non-emergency surgical procedures.
Outpatient surgery is widely recognized as generally less expensive than surgery
performed in a hospital, and we believe that outpatient surgery performed at a
freestanding outpatient surgery center is generally less expensive than
hospital-based outpatient surgery. Over 80% of our surgery center facilities are
located in markets served by our rehabilitation facilities, enabling us to
pursue opportunities for cross-referrals.
HEALTHSOUTH is also the largest operator of outpatient diagnostic centers
and one of the largest operators of occupational medicine centers in the United
States. Most of our diagnostic centers and occupational medicine centers operate
in markets where we also provide rehabilitative healthcare and outpatient
surgery services. We believe that our ability to offer a comprehensive range of
healthcare services in a particular geographic market makes HEALTHSOUTH more
attractive to both patients and payors in such market. We focus on marketing our
services in an integrated system to patients and payors in such geographic
markets.
Since 1993, we have completed several significant acquisitions in both
inpatient and outpatient rehabilitation services and have expanded into the
outpatient surgery center, diagnostic and occupational medicine businesses. We
believe that these acquisitions complement our historical operations and enhance
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our market position. We further believe that our expansion into the outpatient
surgery, diagnostic and occupational medicine businesses provides us with
additional platforms for future growth. We are continually evaluating potential
acquisitions that complement our existing operations.
HEALTHSOUTH was organized as a Delaware corporation in February 1984. Our
principal executive offices are located at One HealthSouth Parkway, Birmingham,
Alabama 35243, and our telephone number is (205) 967-7116.
COMPANY STRATEGY
HEALTHSOUTH's principal objective is to be the provider of choice
throughout the United States for patients, physicians and payors alike for the
healthcare services that it provides. Our growth strategy has historically been
based upon four primary elements: (i) the implementation of our 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 our national
network.
o Integrated Service Model. HEALTHSOUTH seeks, where appropriate, to provide
an integrated system of healthcare services, including outpatient
rehabilitation services, inpatient rehabilitation and other clinical
services, outpatient surgery services and outpatient diagnostic services.
We believe that our integrated system offers payors the convenience of
dealing with a single provider for multiple services. Additionally, we
believe that our facilities can provide extensive cross-referral
opportunities. For example, we estimate that approximately one-third of our
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. We have implemented our Integrated
Service Model in approximately 150 of our markets, and intend as our
long-term goal to expand the model into the 300 leading markets in the
United States.
o Marketing to Managed Care Organizations and Other Payors. Since the late
1980s, HEALTHSOUTH has focused on the development of contractual
relationships with managed care organizations, major insurance companies,
large regional and national employer groups and provider alliances and
networks. Our documented outcomes and experience with several hundred
thousand patients in delivering quality healthcare services at reasonable
prices has enhanced our attractiveness to such entities and has given us a
competitive advantage over smaller and regional competitors. These
relationships have increased patient flow to HEALTHSOUTH's facilities and
contributed to our same-store growth. These relationships also expose us to
pressure from payors to limit pricing for our services, and we endeavor to
manage and monitor such relationships in an effort to ensure both
competitive pricing and patient volumes for its facilities.
o Cost-Effective Services. HEALTHSOUTH's goal is to provide high-quality
healthcare services in cost-effective settings. To that end, we have
developed standardized clinical protocols for the treatment of our
patients. This results in "best practices" techniques being utilized at all
HEALTHSOUTH facilities, allowing the consistent achievement of
demonstrable, cost-effective clinical outcomes. The reputation of our
clinical programs is enhanced through our relationships with major
universities throughout the nation, and our support of clinical research in
our 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. We believe 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 one of the largest providers of
healthcare services in the United States, HEALTHSOUTH is able to realize
economies of scale and compete successfully for national contracts with
large payors and employers while retaining the flexibility to respond to
particular needs of local markets. We believe that our national network
lets us offer large national and regional employers and payors the
convenience of dealing with a single provider, utilize greater buying power
through centralized purchasing, achieve more efficient costs of capital and
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labor and more effectively recruit and retain clinicians. These national
benefits are realized without sacrificing local market responsiveness. Our
objective is to provide those outpatient and rehabilitative healthcare
services needed within each local market by tailoring our services and
facilities to that market's needs, thus bringing the benefits of nationally
recognized expertise and quality into the local setting.
These strategies have enabled us to make HEALTHSOUTH the only provider of
healthcare services to operate in all 50 states and to expand our operations
overseas. Building on that base, we further intend to leverage the franchise and
brand identity we have created through strategic alliances and, where
appropriate, equity participation with leading e-commerce and Internet-based
companies offering services that we expect will benefit us, both by creating
greater efficiencies and cost savings for our operations and by expanding the
range of services we offer and public awareness of our company. We believe that
our 2,000-facility network, our volume of daily interactions with patients
across the country and our relationships with leading physicians and
institutions offer these companies immediate scale and exposure of a type not
available through other healthcare providers, and we will seek to leverage those
assets through business affiliations which we expect will both benefit our
operations and increase stockholder value through strategic investment
activities.
RISK FACTORS
HEALTHSOUTH's business, operations and financial condition are subject to
various risks. Some of these risks are described below, and readers of this
Annual Report on Form 10-K should take such risks into account in evaluating
HEALTHSOUTH or any investment decision involving HEALTHSOUTH. This section does
not describe all risks applicable to our company, our industry or our business,
and it is intended only as a summary of certain material factors. More detailed
information concerning the factors described below is contained in other
sections of this Annual Report on Form 10-K.
HEALTHSOUTH Depends Upon Reimbursement by Third-Party Payors. Substantially
all of our revenues are derived from private and governmental third-party
payors. In 1999, approximately 33.0% of our revenues were derived from Medicare
and approximately 67.0% from commercial insurers, managed care plans, workers'
compensation payors and other private pay revenue sources. There are increasing
pressures from many payors to control healthcare costs and to reduce or limit
increases in reimbursement rates for medical services. There can be no
assurances that payments from government or private payors will remain at levels
comparable to present levels. In attempts to limit the federal budget deficit,
there have been, and we expect that there will continue to be, a number of
proposals to limit Medicare reimbursement for various services. We cannot now
predict whether any of these pending proposals will be adopted or what effect
the adoption of such proposals would have on HEALTHSOUTH.
HEALTHSOUTH's Operations Are Subject To Extensive Regulation. HEALTHSOUTH
is subject to various other types of regulation by federal and state
governments, including licensure and certification laws, Certificate of Need
laws and laws relating to financial relationships among providers of healthcare
services, Medicare fraud and abuse and physician self-referral.
The operation of our facilities and the provision of healthcare services
are subject to federal, state and local licensure and certification laws. These
facilities and services are subject to periodic inspection by governmental and
other authorities to assure compliance with the various standards established
for continued licensure under state law, certification under the Medicare and
Medicaid programs and participation in other government programs. Additionally,
in many states, Certificates of Need or other similar approvals are required for
expansion of our operations. We could be adversely affected if we cannot obtain
such approvals, by changes in the standards applicable to approvals and by
possible delays and expenses associated with obtaining approvals. Our failure to
obtain, retain or renew any required regulatory approvals, licenses or
certificates could prevent us from being reimbursed for our services or from
offering some of our services, or could adversely affect our results of
operations.
Our business is subject to extensive federal and state regulation with
respect to financial relationships among healthcare providers, physician
self-referral arrangements and other fraud and abuse issues. Penalties for
violation of federal and state laws and regulations include exclusion from
participation in the Medicare
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and Medicaid programs, asset forfeiture, civil penalties and criminal penalties,
any of which could have a material adverse effect on our business, results of
operations or financial condition. The Office of Inspector General of the
Department of Health and Human Services, the Department of Justice and other
federal agencies interpret healthcare fraud and abuse provisions liberally and
enforce them aggressively.
Healthcare Reform Legislation May Affect HEALTHSOUTH's Business. In recent
years, many legislative proposals have been introduced or proposed in Congress
and in some state legislatures that would effect major changes in the healthcare
system, either nationally or at the state level. Among the proposals which are
currently being, or which recently have been, considered are cost controls on
hospitals, insurance market reforms to increase the availability of group health
insurance to small businesses, requirements that all businesses offer health
insurance coverage to their employees and the creation of a single government
health insurance plan that would cover all citizens. The costs of certain
proposals would be funded in significant part by reductions in payment by
governmental programs, including Medicare and Medicaid, to healthcare providers.
There continue to be federal and state proposals that would, and actions that
do, impose more limitations on government and private payments to healthcare
providers such as HEALTHSOUTH and proposals to increase copayments and
deductibles from patients. At the federal level, both Congress and the current
Administration have continued to propose healthcare budgets that substantially
reduce payments under the Medicare and Medicaid programs. In addition, many
states are considering the enactment of initiatives designed to reduce their
Medicaid expenditures, to provide universal coverage or additional levels of
care and/or to impose additional taxes on healthcare providers to help finance
or expand the states' Medicaid systems. There can be no assurance as to the
ultimate content, timing or effect of any healthcare reform legislation, nor is
it possible at this time to estimate the impact of potential legislation on
HEALTHSOUTH. That impact may be material.
HEALTHSOUTH Faces National, Regional and Local Competition. HEALTHSOUTH
operates in a highly competitive industry. Although HEALTHSOUTH is the largest
provider of its range of inpatient and outpatient healthcare services on a
nationwide basis, in any particular market it may encounter competition from
local or national entities with longer operating histories or other superior
competitive advantages. There can be no assurance that such competition, or
other competition which we may encounter in the future, will not adversely
affect our results of operations.
HEALTHSOUTH Is Subject To Material Litigation. HEALTHSOUTH is, and may in
the future be, subject to litigation which, if determined adversely to us, could
have a material adverse affect on our business or financial condition. In
addition, some of the companies and businesses we have acquired have been
subject to such litigation. While we attempt to conduct our operations in such a
way as to reduce the risk that adverse results in litigation could have a
material adverse affect on us, there can be no assurance that pending or future
litigation, whether or not described in this Annual Report on Form 10-K, will
not have such a material adverse affect. See Item 3, "Legal Proceedings".
HEALTHSOUTH's Stock Price May Be Volatile. Healthcare stocks in general,
including HEALTHSOUTH's common stock, are subject to frequent changes in stock
price and trading volume, some of which may be large. These changes may be
influenced by the market's perceptions of the healthcare sector in general, of
other companies believed to be similar to HEALTHSOUTH, or of our results of
operations and future prospects. In addition, these perceptions may be greatly
affected not only by information we provide but also by opinions and reports
created by investment analysts and other third parties which do not necessarily
reflect information provided by us. Adverse movement in HEALTHSOUTH's stock
price, particularly as a result of factors over which we have no control, may
adversely affect our access to capital and the ability to consummate
acquisitions using our stock.
GROWTH THROUGH ACQUISITIONS AND RELATED DIVESTITURES
Beginning in 1994, HEALTHSOUTH has consummated a series of significant
acquisitions. The following paragraphs describe several major acquisitions
consummated during the period covered by the consolidated financial statements
contained in this Annual Report on Form 10-K, as well as related divestitures
and facility closings and consolidations in connection with our strategic plan.
During 1997, we 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
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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, we 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").
During 1998, we acquired National Surgery Centers, Inc. ("NSC"; 40 surgery
centers in 14 states), as well as over 30 surgery centers (including centers
under management arrangements) from Columbia/HCA Healthcare Corporation
("Columbia/HCA"). During 1999, we acquired approximately 160 outpatient
rehabilitation centers from Mariner Post-Acute Network, Inc. ("Mariner"). These
transactions, along with our other significant acquisitions since 1993, have
further enhanced our position as the nation's largest provider of inpatient and
outpatient rehabilitative services, outpatient surgery services and diagnostic
imaging services and our position as one of the largest providers of
occupational medicine services. We believe that the geographic dispersion of the
nearly 2,000 locations we now operate makes HEALTHSOUTH more attractive to
managed care networks, major insurance companies, regional and national
employers and regional provider alliances and enhances our ability to implement
our Integrated Service Model in additional markets.
In the course of our major acquisitions, we have from time to time acquired
ancillary businesses, such as healthcare staffing and home health services,
which are not part of our strategic lines of business, and have also acquired
facilities which may be duplicative of existing facilities or which do not meet
our operating and performance standards. Accordingly, we have from time to time
determined to sell, close or consolidate certain acquired facilities and
businesses in order to focus our resources on those facilities and businesses
which are most consistent with our strategic plan and core operations. Our most
significant divestiture was the divestiture of the long-term care assets of
Horizon/CMS to IHS in 1997, described above. In addition, in the third quarter
of 1998, we adopted a plan to close substantially all of our home health
operations, which had been obtained as minor components of larger strategic
acquisitions, and in the fourth quarter of 1998 we adopted a plan to close,
consolidate or hold for sale certain other non-strategic businesses and
duplicative facilities, as well as facilities which we had determined could not
be brought up to our operating and performance standards without undue
expenditure of resources.
See Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for additional information concerning our
acquisitions, divestitures and plans with respect to facility closings and
consolidations.
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.
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We also believe 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 was a 75% increase in the
number of treatments in all ambulatory settings from 1986 to 1996, with over 70%
of the total number of surgeries in the United States currently being performed
on an outpatient basis. We believe that these trends will continue to foster
demand for the delivery of healthcare services on an outpatient basis.
PATIENT CARE SERVICES
HEALTHSOUTH began its operations in 1984 with a focus on providing
comprehensive orthopaedic and musculoskeletal rehabilitation services on an
outpatient basis. Over the succeeding 16 years, we have consistently sought and
implemented opportunities to expand our services through acquisitions and
start-up development activities that complement our historic focus on
orthopaedic, sports medicine and occupational health services and that provide
independent platforms for growth. Our acquisitions and internal growth have
enabled HEALTHSOUTH to become one of the largest providers of healthcare
services in the United States. The following sections discuss the range of
services we offer in our inpatient and other clinical services and outpatient
services business segments. See Note 14 of "Notes to Consolidated Financial
Statements" for financial information concerning these segments.
Inpatient and Other Clinical Services
HEALTHSOUTH's inpatient and other clinical services business segment
includes the operations of its inpatient rehabilitation facilities and medical
centers, as well as the operations of certain physician practices and other
clinical services which are managerially aligned with our inpatient services.
INPATIENT REHABILITATION FACILITIES. At December 31, 1999, HEALTHSOUTH
operated 118 inpatient rehabilitation facilities with 7,702 licensed beds in the
continental 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 and a 17-bed rehabilitation facility
in Puerto Rico. Our 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. Our 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 HEALTHSOUTH 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, our 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 our freestanding
outpatient centers are utilized by these facilities.
A number of our rehabilitation hospitals were developed in conjunction with
local tertiary-care facilities, including major teaching hospitals such as those
at Vanderbilt University, the University of Missouri and the University of
Virginia. This strategy of developing effective referral and service networks
prior to opening results in improved operating efficiencies for the new
facilities and provides a more coordinated continuum
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of care for the constituencies served by the tertiary-care facilities. In
addition to those facilities so developed by HEALTHSOUTH, we have entered into
or are pursuing similar affiliations with a number of our rehabilitation
hospitals which were obtained through our major acquisitions.
MEDICAL CENTERS. At December 31, 1999, HEALTHSOUTH operated five medical
centers with 1,125 licensed beds in four distinct markets, including one
facility managed under contract. These facilities provide general and specialty
medical and surgical healthcare services, emphasizing orthopaedics, sports
medicine and rehabilitation.
We acquired our medical centers as outgrowths of our 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 we have acquired a medical center, we had well-established relationships
with the medical communities serving each facility. Following the acquisition of
each of our medical centers, we have provided the resources to improve upon the
physical plant and expand services through the introduction of new technology.
We have 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 our medical centers have improved their
operating efficiencies and enhanced census.
Each of our 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 our
inpatient facilities, various factors must be considered. Due to market demand,
demographics, start-up status, renovation, patient mix and other factors, we 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. We are generally in a position
to increase the number of available beds at such facilities as market conditions
dictate. During the year ended December 31, 1999, our inpatient facilities
achieved an overall utilization, based on patient days and available beds, of
78.08%.
Outpatient Services
HEALTHSOUTH's outpatient services business segment includes our outpatient
rehabilitation facilities, our outpatient surgery centers, our outpatient
diagnostic centers and our occupational medicine centers. Since September 1999,
these outpatient services have been managed by local market managers, who are
responsible for all outpatient services in particular local markets, and
regional market leaders, who are responsible for overseeing the market managers
in particular regions.
OUTPATIENT REHABILITATION SERVICES. HEALTHSOUTH operates the largest group
of affiliated proprietary outpatient rehabilitation facilities in the United
States. Our 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, 1999, we provided outpatient rehabilitative
healthcare services through approximately 1,379 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. HEALTHSOUTH'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.
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Patients treated at HEALTHSOUTH 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, we initially establish an outpatient center in a given market,
either by acquiring an existing private therapy practice or through start-up
development, and institute our clinical protocols and programs in response to
the community's general need for services. We will then establish satellite
clinics that are dependent upon the main facility for management and
administrative services. These satellite clinics generally provide a specific
evaluative or specialty service/program, such as hand therapy or foot and ankle
therapy, in response to specific market demands.
Patient utilization of our 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 our outpatient facilities, it is not possible to accurately assess
patient utilization against a norm.
SURGERY CENTERS. HEALTHSOUTH is currently the largest operator of
outpatient surgery centers in the United States. At December 31, 1999, we
operated 230 freestanding surgery centers in 42 states. Over 80% of these
facilities are located in markets served by our rehabilitation facilities,
enabling us to pursue opportunities for cross-referrals between surgery and
rehabilitation facilities as well as to centralize administrative functions.
HEALTHSOUTH surgery centers provide the facilities and medical support staff
necessary for physicians to perform non-emergency surgical procedures. Our
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 HEALTHSOUTH surgery center 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 HEALTHSOUTH surgery centers currently provide for extended
recovery stays. Our ability to develop such recovery care facilities is
dependent upon state regulatory environments in the particular states where its
centers are located.
HEALTHSOUTH outpatient surgery centers implement quality control procedures
to evaluate the level of care provided at 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, 1999, HEALTHSOUTH operated 129
diagnostic centers in 27 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 HEALTHSOUTH diagnostic
centers are multi-modality centers offering multiple types of service.
HEALTHSOUTH 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 us. Those radiologists prepare a report of the test and their
findings, which are then delivered to the referring physician. Our diagnostic
centers are open at hours appropriate for the local medical community.
Because many patients at our rehabilitative healthcare and outpatient
surgery facilities require diagnostic procedures of the type performed at our
diagnostic centers, we believe that our diagnostic operations are a natural
complement to our other services and enhance our ability to market those
services to patients and payors.
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OCCUPATIONAL MEDICINE SERVICES. At December 31, 1999, HEALTHSOUTH operated
124 occupational medicine centers in 29 states. These centers provide
cost-effective, outpatient primary medical care and rehabilitation services to
individuals for the treatment of work-related medical problems.
HEALTHSOUTH occupational medicine centers market their services to large
and small employers, workers' compensation and health insurers and managed care
organizations. The services provided at our 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 HEALTHSOUTH or
affiliated medical practices. These centers also employ nurses, therapists and
other licensed professional staff as necessary for the services provided. We
believe that occupational medicine primary care services are a strategic
component of our business, and that the physicians in our occupational medicine
centers can, in many cases, serve as "gatekeepers" providing access to the other
services we offer.
Other Patient Care Services
In some markets, HEALTHSOUTH provides other patient care services,
including physician services and contract management of hospital-based
rehabilitative healthcare services. We evaluate 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 we provide or
stand-alone businesses. These services are included within our business segment
with which they are most closely aligned in the particular local market.
MARKETING OF FACILITIES AND SERVICES
We market our facilities, and their services and programs, on local,
regional and national levels. Local and regional marketing activities are
typically coordinated by local or area-based marketing personnel, whereas
large-scale regional and national efforts are coordinated by corporate-based
personnel. In Integrated Service Model markets, area marketing activities are
coordinated by an ISM Advisory Committee reflecting our range of services in
each market.
In general, we develop 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.
HEALTHSOUTH'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. These 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 First Health and
Multiplan, with national case management companies, such as INTRACORP and
Crawford & Co., and with national employers, such as Wal-Mart, Georgia-Pacific
Corporation, Federated Department Stores, Goodyear Tire & Rubber and Winn-Dixie.
We also carry out broader programs designed to further enhance our name
recognition and association with amateur and professional athletics. 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. We have ongoing relationships with the
Professional Golfers Association, the Senior Professional Golfers Association,
the Ladies Professional Golf Association, the Southeastern Conference, the
Southwestern Athletic Conference, the U.S. Decathlon Team, USA Hockey, USA
Wrestling, USA Volleyball and more than 125 universities and colleges and
approximately 2,000 high schools to provide sports medicine coverage of events
and rehabilitative healthcare services for injured athletes. In addition, we
have established relationships with or provided treatment services for
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athletes from some 40-50 professional sports teams, as well as providing sports
medicine services for Olympic and amateur athletes. In 1996, HEALTHSOUTH 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.
HEALTHSOUTH maintains a Web site at www.healthsouth.com, which provides
information on the company, health information, links to our Securities and
Exchange Commission filings and press releases, a facility locator and links to
other relevant information. In addition, we have entered into an Alliance
Agreement with Healtheon/WebMD Corporation, one of the largest providers of
healthcare information on the World Wide Web. Under the Alliance Agreement,
HEALTHSOUTH and Healtheon/WebMD are partners in a co-branded Web channel called
"WebMD Sports & Fitness with HEALTHSOUTH", located at
http://my.webmd.com/sports. This Web channel provides consumers with news,
information and discussions on sports and fitness related topics and includes
links to a HEALTHSOUTH facility finder and to a dedicated HEALTHSOUTH channel
located at http://my.webmd.com/partners/healthsouth. We believe that these
activities enhance consumer and physician awareness of our services and
locations, as well as providing a valuable resource for health information
related to the services that we provide. HEALTHSOUTH expects to continue to
develop relationships with leading Internet-related companies in the healthcare
arena.
HEALTHSOUTH 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, HEALTHSOUTH
and its employees are able to support charitable organizations and activities
within their communities.
SOURCES OF REVENUES
Most of our revenues come from non-governmental revenue sources. The
following table sets forth the percentages of our revenues from various sources
for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
SOURCE DECEMBER 31, 1998 DECEMBER 31, 1999
- ---------------------------------------- ------------------- ------------------
<S> <C> <C>
Medicare ...................... 35.9% 33.0%
Commercial (1) ................ 37.0 40.3
Workers' Compensation ......... 10.8 11.5
All Other Payors (2) .......... 16.3 15.2
----- -----
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 NSC facilities for periods or portions
thereof prior to the effective date of the NSC acquisition. 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 our facilities.
COMPETITION
HEALTHSOUTH's rehabilitation facilities compete on a local, 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 components of our inpatient and outpatient business segments are
quality of services, projected patient outcomes, charges for services,
responsiveness to the needs of the patients, community and physicians, and
ability to tailor programs and services to meet specific needs of the patients.
Competitors and potential competitors include hospitals,
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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 we do. We believe that we compete
successfully within the marketplace based upon our reputation for quality,
competitive prices, positive rehabilitation outcomes, innovative programs, clean
and bright facilities and responsiveness to needs.
HEALTHSOUTH'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, we believe that our national market system and our historical
presence in many of the markets where our surgery centers are located enhance
our ability to operate these facilities successfully.
HEALTHSOUTH's diagnostic centers compete with local hospitals, other
multi-center imaging companies, local independent diagnostic centers and imaging
centers owned by local physician groups. We believe that the principal
competitive factors in the diagnostic services business 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. We believe that our diagnostic
facilities compete successfully within their respective markets, taking into
account these factors.
HEALTHSOUTH'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. Our facilities
compete directly with these local hospitals as well as various nationally
recognized centers of excellence in orthopaedics, sports medicine and other
specialties. Because our facilities enjoy a national and international
reputation for orthopaedic surgery and sports medicine, we believe that our
medical centers' level of service and continuum of care enable them to compete
successfully, both locally and nationally.
We potentially face competition any time we initiate a Certificate of Need
project or seek to acquire an existing facility or Certificate of Need. See this
Item, "Business -- Regulation". This competition may arise either from competing
national or regional companies or from local hospitals or other providers which
file competing applications or oppose the proposed Certificate of Need 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. We have generally been successful in obtaining Certificates of Need
or similar approvals when required, although there can be no assurance that we
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 our business
activities by controlling our growth, requiring licensure or certification of
our facilities, regulating the use of its properties and controlling the
reimbursement to HEALTHSOUTH 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
Certificate of Need program. States with Certificate of Need 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 or outpatient surgery centers.
Most states do not require such approvals for outpatient rehabilitation,
occupational health and diagnostic facilities and services.
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State Certificate of Need 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 must determine that a
need exists for those beds, facilities or services. The Certificate of Need
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 agency 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
Certificate of Need is granted is based upon a finding of need by the agency in
accordance with criteria set forth in Certificate of Need 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 agency
will issue a Certificate of Need containing a maximum amount of expenditure and
a specific time period for the holder of the Certificate of Need to implement
the approved project.
Licensure and certification are separate, but related, regulatory
activities. Licensure is usually a state or local requirement, and certification
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 our inpatient rehabilitation facilities and medical centers and
substantially all of our 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. Most states do not require
diagnostic and occupational medicine facilities to be licensed.
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 HEALTHSOUTH inpatient facilities, except for our St. Louis head
injury center, participate in the Medicare program. Approximately 1,093 of our
outpatient rehabilitation facilities currently participate in, or are awaiting
the assignment of a provider number to participate in, the Medicare program. All
of our surgery centers are certified (or awaiting certification) under the
Medicare program. Diagnostic and occupational health facilities are not
certified by the Medicare program. Our 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. We have developed our operational systems to attempt to
assure compliance with the various standards and requirements of the Medicare
program and have established ongoing quality assurance activities to monitor
compliance.
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, reimbursement received by a hospital 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 acute-care 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. Our medical center facilities are
generally subject to acute-care PPS with respect to Medicare inpatient services.
The acute-care 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
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early from acute-care hospitals. 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. As discussed below, freestanding
inpatient rehabilitation facilities and hospital-based inpatient rehabilitation
units are to be placed under a PPS currently required to be phased in beginning
October 1, 2000.
Currently, 17 of our outpatient centers are Medicare-certified
Comprehensive Outpatient Rehabilitation Facilities ("CORFs") and 924 are
Medicare-certified rehabilitation agencies or satellites. Additionally, we have
certification applications pending for three CORF sites and 149 rehabilitation
agency sites (including satellites.) Through December 31, 1998, CORFs were
reimbursed reasonable costs (subject to certain limits) for services provided to
Medicare beneficiaries, and outpatient rehabilitation facilities certified by
Medicare as rehabilitation agencies were 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. From January 1, 1999, CORFs and rehabilitation agencies are
reimbursed on a fee screen basis as well. Our outpatient rehabilitation
facilities submit monthly bills to their fiscal intermediaries for services
provided to Medicare beneficiaries, and we file annual cost reports with the
intermediaries for each such facility.
Our inpatient facilities (other than the medical center facilities) either
are not currently covered by PPS or are currently exempt from PPS, and are
currently 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 our 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 hospitals to a PPS. The Act requires the
prospective payment rates to be phased in beginning October 1, 2000, and to be
fully implemented by 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. Since the proposed regulations implementing inpatient rehabilitation
PPS have not been released, we cannot predict at this time the effect that this
new system may have on our future operations. In addition, the Act requires the
establishment of a PPS for hospital outpatient department services, effective
for services furnished beginning in 1999. Regulations implementing that
requirement have not been issued in final form.
In June 1998, the Health Care Financing Administration issued proposed
rules setting forth new payment classifications which would significantly change
Medicare reimbursement for outpatient surgery centers. However, these proposed
rules have not been promulgated in final form, and we cannot currently predict
when final rules, if any, will be adopted or the content or effect on our
operations of those rules.
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 HEALTHSOUTH 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 or cost reporting error could result in significant civil or
criminal penalties.
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 (a)
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 (b) 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.
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In 1991, the Office of the Inspector General ("OIG") of the United States
Department of Health and Human Services issued regulations describing
compensation arrangements which are not viewed as illegal remuneration under the
Fraud and Abuse Law (the "1991 Safe Harbor Rules"). The 1991 Safe 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 that 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.
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 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 it has not
violated the Fraud and Abuse Law.
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, and has continued to
rely on such Fraud Alert in later pronouncements. We currently operate 23 of our
rehabilitation hospitals and many of our outpatient rehabilitation facilities as
limited partnerships or limited liability companies (collectively,
"partnerships") with third-party investors. Six of the rehabilitation hospital
partnerships involve physician investors and 17 of the rehabilitation hospital
partnerships involve other institutional healthcare providers. Eight of the
outpatient partnerships currently have a total of 21 physician limited partners,
some of whom refer patients to the partnerships. Those partnerships which are
providers of services under the Medicare program, and their limited partners,
are subject to the Fraud and Abuse Law. A number of the relationships we have
established with physicians and other healthcare providers do not fit within any
of the Safe Harbors. The 1991 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 indicated that failure to fall within a Safe
Harbor may subject an arrangement to increased scrutiny.
Most of our surgery centers are owned by partnerships, which include as
partners physicians who perform surgical or other procedures at such centers. On
November 19, 1999, the Department of Health and Human Services promulgated rules
setting forth additional Safe Harbors under the Fraud and Abuse Law (the "1999
Safe Harbors"). Included in the 1999 Safe Harbors is a Safe Harbor which would
protect payments to investors in ambulatory surgery centers who are surgeons who
refer patients directly to the center and perform surgery themselves on referred
patients as an extension of their practices (the "ASC Safe Harbor"). Under the
ASC Safe Harbor, ownership in a freestanding ambulatory surgery center will be
protected if a number of conditions are satisfied. Included in those conditions
is a requirement that each investor be either (a) a surgeon who derived at least
one-third of his medical practice income for the previous fiscal year or
twelve-month period from performing procedures on the list of Medicare-covered
procedures for ambulatory surgery centers or (b) not in a position to make or
influence referrals to the center, nor provide items or services to the center,
nor an employee of the center or of any investor. In addition, if all physician
investors are not members of a single specialty, at least one-third of the
Medicare-eligible ambulatory surgery procedures performed by each physician
investor for the previous fiscal year or previous twelve-month period must be
performed at the center in which the investment is made. Since a subsidiary of
HEALTHSOUTH is an investor in each partnership which owns a surgery center and
provides management and other services to the surgery center, our arrangements
with physician investors do not fit within the specific terms of the ASC Safe
Harbor. In addition, because we do not control the medical practices of our
physician investors or control where they perform surgical procedures, it is
possible that the quantitative tests described above will not be met, or that
other conditions of the ASC Safe Harbor will not be met. Accordingly, while the
ASC Safe Harbor is helpful in establishing the principle that a physician
investor's interest in a surgery center partnership should be considered as an
extension of the physician's practice and not as a prohibited financial
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relationship, there can be no assurance that such ownership interests will not
be challenged under the Fraud and Abuse Law. We believe, however, that our
arrangements with physicians with respect to surgery center facilities should
not fall within the activities prohibited by the Fraud and Abuse Law.
Some of our 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, we do 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, our 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 our lithotripsy equipment,
we believe that the same analysis underlying the ASC Safe Harbor should apply to
ownership interests in lithotripsy equipment held by urologists. In addition, we
believe 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 our 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 our partnerships. We believe that our
operations are 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 we
have established with physicians or other healthcare providers or result in the
imposition of penalties on HEALTHSOUTH or particular HEALTHSOUTH facilities.
Even the assertion of a violation could have a material adverse effect upon our
business, results of operations or financial condition.
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 our 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. The Proposed Stark Regulations would
implement, amplify and clarify the Stark II statute. Final regulations are not
expected to be promulgated until later in 2000. 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, we have restructured most of our
partnerships which involve physician investors to the extent required by
applicable law, in order to eliminate physician ownership interests not
permitted by applicable law. We intend 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. We believe that this restructuring has not adversely
affected and will not adversely affect the operations of our facilities.
Ambulatory surgery is not identified as a "designated health service" under
Stark II, and we do 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.
Our lithotripsy units 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
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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, we
believe that the operations of our lithotripsy partnerships either comply with,
or can be restructured to comply with, certain other exceptions to the Stark II
referral prohibitions, and we intend 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 our surgery centers, and it is possible to
construe such services to be "designated health services". While we do not
believe that Stark II was intended to apply to such services, if that were
determined to be the case, we intend to take steps necessary to cause the
operations of our facilities to comply with the law.
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 program. 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 "health care 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, 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.
We cannot predict whether other regulatory or statutory provisions will be
enacted by federal or state authorities which would prohibit or otherwise
regulate relationships which we have 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. We believe, however, that
we will be able to adjust our operations so as to be in compliance with any
regulatory or statutory provision that may be applicable. See this Item,
"Business -- Patient Care Services" and "Business -- Sources of Revenues".
16
<PAGE>
INSURANCE
Beginning December 1, 1993, we became self-insured for professional
liability and comprehensive general liability. We purchased coverage for all
claims incurred prior to December 1, 1993. In addition, we 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, 1999, we had
adequate reserves to cover losses on asserted and unasserted claims.
In connection with the Horizon/CMS acquisition, HEALTHSOUTH assumed
responsibility for handling Horizon/CMS's open professional and general
liability claims. We have entered into an agreement with an insurance carrier to
assume responsibility for the majority of open claims. Under this agreement, a
"risk transfer" converted Horizon/CMS's self-insured claims to insured
liabilities consistent with the terms of the underlying insurance policy.
EMPLOYEES
As of December 31, 1999, we employed approximately 51,260 persons, of whom
32,378 were full-time employees and 18,882 were part-time or per diem employees.
Of the above employees, 1,140 (including 370 part-time or per diem employees)
were employed at our headquarters in Birmingham, Alabama. Except for
approximately 80 employees at one rehabilitation hospital (about 14.9% of that
facility's workforce), none of our employees are represented by a labor union.
We are not aware of any current activities to organize our employees at other
facilities. Management considers the relationship between HEALTHSOUTH and its
employees to be good.
ITEM 2. PROPERTIES.
HEALTHSOUTH's executive offices occupy a headquarters building of
approximately 200,000 square feet in Birmingham, Alabama. The headquarters
building was constructed on a 73-acre parcel of land owned by HEALTHSOUTH
pursuant to a tax retention operating lease structured through NationsBanc
Leasing Corporation. Substantially all of our outpatient rehabilitation and
occupational medicine operations are carried out in leased facilities. We own 31
of our inpatient rehabilitation facilities and lease or operate under management
contracts the remainder of our inpatient rehabilitation facilities. We also own
62 of our surgery centers and 31 of our diagnostic centers and lease or operate
under management arrangements the remainder. We constructed our rehabilitation
hospitals in Florence and Columbia, South Carolina, Kingsport and Nashville,
Tennessee, Concord, New Hampshire, Dothan, Alabama, Columbia, Missouri, and
Charlottesville, Virginia on property leased under long-term ground leases. The
property on which our Memphis, Tennessee rehabilitation hospital is located is
owned in partnership by HEALTHSOUTH and Methodist Hospitals of Memphis. We own
four of our medical center facilities and manage one under contract. We
currently own, and from time to time may acquire, certain other improved and
unimproved real properties in connection with our business. See Notes 5 and 7 of
"Notes to Consolidated Financial Statements" for information with respect to the
properties we own and certain related indebtedness.
In management's opinion, our physical properties are adequate for our needs
for the foreseeable future, and are consistent with our expansion plans
described elsewhere in this Annual Report on Form 10-K.
17
<PAGE>
The following table sets forth a listing of our primary domestic patient
care services locations (including both facilities owned or leased by
HEALTHSOUTH and facilities under management agreements or similar arrangements)
at December 31, 1999:
<TABLE>
<CAPTION>
INPATIENT
REHABILITATION OCCUPATIONAL OUTPATIENT
FACILITIES MEDICAL MEDICINE REHABILITATION SURGERY DIAGNOSTIC
STATE (BEDS)(1) CENTERS (BEDS)(1) CENTERS CENTERS(2) CENTERS CENTERS
- ------------------------------ --------------- ------------------- -------------- ---------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Alabama ...................... 8 (404) 2 (538) 32 7 5
Alaska ....................... 4 7 1 1
Arizona ...................... 4 (243) 8 29 2 2
Arkansas ..................... 6 (301) 3 22 2
California ................... 1 (60) 27 62 55 3
Colorado ..................... 1 (64) 1 36 5 6
Connecticut .................. 2 32 6
Delaware ..................... 6 1
District of Columbia ......... 1 1
Florida ...................... 10 (661) 1 (281) 6 120 18 6
Georgia ...................... 1 (50) 4 37 4 11
Hawaii ....................... 10 2
Idaho ........................ 3 1
Illinois ..................... 1 59 8 8
Indiana ...................... 3 (200) 2 13 5 1
Iowa ......................... 1 6 2
Kansas ....................... 3 (224) 16
Kentucky ..................... 2 (80) 2 7 6
Louisiana .................... 2 (267) 4 9 2 3
Maine ........................ 2 (125) 1 10
Maryland ..................... 2 (117) 32 5 6
Massachusetts ................ 9 (839) 1 46 1 2
Michigan ..................... 1 (30) 3 13 1
Minnesota .................... 17 2
Mississippi .................. 13 3
Missouri ..................... 2 (160) 1 70 8 2
Montana ...................... 4 1
Nebraska ..................... 1 5
Nevada ....................... 2 (130) 20 3
New Hampshire ................ 3 (98) 8
New Jersey ................... 1 (155) 2 71 3 3
New Mexico ................... 1 (61) 6 1 1
New York ..................... 1 (29) 1 51 1 3
North Carolina ............... 44 10 1
North Dakota ................. 3
Ohio ......................... 1 (31) 3 40 8 1
Oklahoma ..................... 3 (153) 1 19 5 2
Oregon ....................... 30 2
Pennsylvania ................. 13 (1,081) 3 72 6 12
Rhode Island ................. 2 2
South Carolina ............... 4 (238) 15 2 5
South Dakota ................. 4 1
Tennessee .................... 7 (395) 40 7 4
Texas ........................ 18 (1,113) 1 (106) 12 121 20 26
Utah ......................... 1 (89) 2 10 2 2
Vermont ...................... 1 1
Virginia ..................... 2 (90) 1 (200) 6 32 1 5
Washington ................... 17 63 4 1
West Virginia ................ 4 (214) 3 1
Wisconsin .................... 8 4
Wyoming ...................... 2
</TABLE>
- ------------------
(1) "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.
<PAGE>
(2) Includes freestanding outpatient centers and their satellites, outpatient
satellites of inpatient rehabilitation facilities and outpatient facilities
managed under contract.
In addition, at December 31, 1999, we operated six diagnostic centers in
the United Kingdom, one 71-bed rehabilitation hospital in Australia and one
17-bed inpatient rehabilitation facility in Puerto Rico, as well as numerous
locations in various states providing other services.
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of its business, HEALTHSOUTH may be subject, from
time to time, to claims and legal actions by patients and others. We do not
believe that any such pending actions, if adversely decided, would have a
material adverse effect on our 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 our insurance coverage
arrangements.
From time to time, we appeal decisions of various rate-making authorities
with respect to Medicare rates established for HEALTHSOUTH 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
HEALTHSOUTH's operations.
SECURITIES LITIGATION
HEALTHSOUTH was served with various lawsuits filed beginning September 30,
1998 purporting to be class actions under the federal and Alabama securities
laws. Such lawsuits were filed following a decline in our stock price at the end
of the quarter of 1998. Seven such suits were filed in the United States
District Court for the Northern District of Alabama. In January 1999, those
suits were ordered to be consolidated under the case style In re HEALTHSOUTH
Corporation Securities Litigation, Master File No. CV98-O-2634-S. On April 12,
1999, the plaintiffs filed a consolidated amended complaint against HEALTHSOUTH
and certain of our current and former officers and directors alleging that,
during the period April 24, 1997 through September 30, 1998, the defendants
misrepresented or failed to disclose certain material facts concerning our
business and financial condition and the impact of the Balanced Budget Act of
1997 on our operations in order to artificially inflate the price of our common
stock and issued or sold shares of such stock during the purported class period,
all allegedly in violation of Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 thereunder. Certain of the named plaintiffs in the
consolidated amended complaint also claim to represent separate subclasses
consisting of former stockholders of Horizon/CMS and NSC who received shares of
HEALTHSOUTH common stock in connection with our acquisition of those entities
and assert additional claims under Section 11 of the Securities Act of 1933 with
respect to the registration of securities issued in those acquisitions.
Another suit, Peter J. Petrunya v. HEALTHSOUTH Corporation, et al., Civil
Action No. 98-05931, was filed in the Circuit Court for Jefferson County,
Alabama, alleging that during the period July 16, 1996 through September 30,
1998 the defendants misrepresented or failed to disclose certain material facts
concerning our business and financial condition, allegedly in violation of
Sections 8-6-17 and 8-6-19 of the Alabama Securities Act. The Petrunya complaint
was voluntarily dismissed by the plaintiff without prejudice in January 1999.
Additionally, a suit styled Dennis Family Trust v. Richard M. Scrushy, et al.,
Civil Action No. 98-06592, has been filed in the Circuit Court for Jefferson
County, Alabama, purportedly as a derivative action on behalf of HEALTHSOUTH.
That suit largely replicates the allegations originally set forth in the
individual complaints filed in the federal actions described in the preceding
paragraph and alleges that the current directors of HEALTHSOUTH, certain former
directors and certain officers of HEALTHSOUTH breached their fiduciary duties to
HEALTHSOUTH and engaged in other allegedly tortious conduct. The plaintiff in
that case has forborne pursuing its claim thus far pending further developments
in the federal action, and the defendants have not yet been required to file a
responsive pleading in the case.
We filed a motion to dismiss the consolidated amended complaint in the
federal action in late June 1999. The parties have filed various briefs related
to this motion. We cannot predict when the court will
19
<PAGE>
hear arguments or rule on our motion. We believe that all claims asserted in the
above suits are without merit, and expect to vigorously defend against such
claims. Because such suits remain at an early stage, we cannot currently predict
the outcome of any such suits or the magnitude of any potential loss if our
defense is unsuccessful.
CERTAIN HORIZON/CMS LITIGATION
On October 29, 1997, we acquired Horizon/CMS through the merger of a wholly
owned subsidiary of HEALTHSOUTH 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.
Michigan Attorney General Litigation Regarding 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. The litigation continued at the pretrial hearing phase for
over a year, including numerous adjournments, and Horizon/CMS is still awaiting
a decision by the court as to which, if any, charges may be brought to trial.
Because of the preliminary status of this litigation, 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.
Lawsuit by Former Shareholders of Communi-Care, Inc. and Pro Rehab, Inc.
On May 28, 1997, Continental Medical Systems, Inc. ("CMS"), a Horizon/CMS
subsidiary acquired in 1995, 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.
Some of the plaintiffs' claims were dismissed by order of the court in September
1999. 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' remaining claims and, as a result, intends to vigorously contest
such claims. Horizon/CMS has also filed various counterclaims against the
plaintiffs. Because this litigation remains at a procedurally early stage,
HEALTHSOUTH cannot now predict the outcome or effect of such litigation or the
length of time it will take to resolve such litigation.
20
<PAGE>
EEOC Litigation
In March 1997, the Equal Employment Opportunity Commission 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 asserted that
Horizon/CMS's alleged refusal to provide pregnant employees with light-duty
assignments to accommodate their temporary disabilities caused by pregnancy
violated 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 sought, among other things,
to permanently enjoin Horizon/CMS's employment practices in this regard. The
trial court ruled in favor of Horizon/CMS on all counts, and the EEOC has
appealed that decision to the United States Tenth Circuit Court of Appeals. That
appeal remains pending.
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. The judgment was left
unchanged by the intermediate appellate court and is now being appealed to the
Texas Supreme Court.
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
that the entirety of any judgment ultimately entered is covered by and payable
from that 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 various policy exclusions might apply and requesting
additional information which might affect its coverage determination. Following
negotiations with the insurance carrier over these coverage issues, Horizon/CMS
filed a declaratory judgment action in the United States District Court for the
District of New Mexico seeking a declaration that the insurance carrier was
required to cover the punitive damages component of the judgment in this case
and in similar cases, up to policy limits. That litigation was subsequently
resolved to the satisfaction of all parties. Thus, while it is not possible at
this time to predict the outcome of the appeal of this judgment, Horizon/CMS
expects all liability, less its self-insured retention of $250,000, to be
covered by insurance. See Item 1, "Business -- Insurance".
HEALTH IMAGES/FONAR LITIGATION
On February 2, 1998, Fonar Corporation filed an action against HEALTHSOUTH
in the United States District Court for the Eastern District of New York styled
Fonar Corporation v. HEALTHSOUTH, Inc., Civil Action No. 98-CV-679 (LDW)(ARL).
In the complaint, Fonar alleges that HEALTHSOUTH infringed United States Patent
Number 4,871,966 (the "'966 patent") which pertains to the operation of the
Multi-Angle Oblique ("MAO") feature in MRI machines. The MAO feature enables the
MRI machine to scan multiple differing angles in a single MAO scan. Fonar seeks
damages
21
<PAGE>
in an unspecified amount, along with enhanced damages for alleged willful
infringement. Fonar's allegations of infringement and willful infringement are
based largely on the actions of Health Images prior to its acquisition by
HEALTHSOUTH on March 3, 1997. Health Images, and subsequently HEALTHSOUTH, are
alleged to have infringed the '966 patent through the manufacture and use of MRI
equipment that contains the MAO feature.
HEALTHSOUTH has answered Fonar's complaint denying the allegations of
infringement. At this time, the litigation is in the discovery phase, and we
cannot predict the outcome or effect of this litigation or the length of time it
will take to resolve this litigation. The court has set the matter for a final
pretrial conference on September 15, 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
22
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
HEALTHSOUTH common stock is listed for trading on the New York Stock
Exchange under the symbol "HRC". The following table sets forth for the fiscal
periods indicated the high and low reported sale prices for HEALTHSOUTH common
stock as reported on the NYSE Composite Transactions Tape.
<TABLE>
<CAPTION>
REPORTED
SALE PRICE
-------------------------
HIGH LOW
----------- -----------
<S> <C> <C>
1998
- ----------------
First Quarter .................... $ 30.44 $ 21.69
Second Quarter ................... 30.81 25.75
Third Quarter .................... 30.12 8.88
Fourth Quarter ................... 15.88 7.69
1999
- ----------------
First Quarter .................... $ 17.75 $ 10.38
Second Quarter ................... 16.00 8.94
Third Quarter .................... 15.38 4.56
Fourth Quarter ................... 6.38 4.69
</TABLE>
The closing price per share for HEALTHSOUTH common stock on the New York
Stock Exchange on March 24, 2000, was $6.1875.
There were approximately 6,852 holders of record of HEALTHSOUTH common
stock as of March 24, 2000.
We have never paid cash dividends on our common stock (although certain of
the companies we have acquired in pooling-of-interests transactions had paid
dividends prior to such acquisitions), and we do not anticipate paying cash
dividends in the foreseeable future. We currently anticipate that any future
earnings will be retained to finance our operations.
RECENT SALES OF UNREGISTERED SECURITIES
There were no unregistered sales of equity securities by HEALTHSOUTH in
1999.
23
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
Set forth below is a summary of selected consolidated financial data for
HEALTHSOUTH for the years indicated. All amounts have been restated to reflect
the effects of the 1995 acquisitions of Surgical Health Corporation ("SHC") and
Sutter Surgery Centers, Inc. ("SSCI"), the 1996 acquisitions of Surgical Care
Affiliates, Inc. ("SCA") and Advantage Health Corporation, the 1997 Health
Images acquisition and the 1998 NSC acquisition, each of which was accounted for
as a pooling of interests.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1995 1996 1997 1998 1999
------------- ------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues ................................ $2,173,012 $2,648,188 $3,123,176 $4,006,074 $4,072,107
Operating unit expenses ................. 1,478,208 1,718,108 1,952,189 2,491,914 2,688,849
Corporate general and administrative
expenses .............................. 67,789 82,953 87,512 112,800 149,285
Provision for doubtful accounts ......... 43,471 61,311 74,743 112,202 342,708
Depreciation and amortization ........... 164,482 212,967 257,136 344,591 374,248
Merger and acquisition related
expenses (1) .......................... 19,553 41,515 15,875 25,630 --
Impairment and restructuring charges
(2) ................................... 53,549 37,390 -- 483,455 121,037
Loss on sale of assets (2) .............. -- -- -- 31,232 --
Interest expense ........................ 109,656 101,367 112,529 148,163 176,652
Interest income ......................... (8,287) (6,749) (6,004) (11,286) (10,587)
---------- ---------- ---------- ---------- ----------
1,928,421 2,248,862 2,493,980 3,738,701 3,842,192
---------- ---------- ---------- ---------- ----------
Income from continuing operations
before income taxes, minority
interests and extraordinary item ...... 244,591 399,326 629,196 267,373 229,915
Provision for income taxes .............. 88,142 148,545 213,668 143,347 66,929
---------- ---------- ---------- ---------- ----------
156,449 250,781 415,528 124,026 162,986
Minority interests ...................... 45,135 54,003 72,469 77,468 86,469
---------- ---------- ---------- ---------- ----------
Income from continuing operations
before extraordinary item ............. 111,314 196,778 343,059 46,558 76,517
Income from discontinued operations ..... (1,162) -- -- -- --
Extraordinary item ...................... (9,056) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income .............................. $ 101,096 $ 196,778 $ 343,059 $ 46,558 $ 76,517
========== ========== ========== ========== ==========
Weighted average common shares
outstanding (3) ....................... 298,462 336,603 366,768 421,462 408,195
========== ========== ========== ========== ==========
Net income per common share: (3)
Continuing operations ................... $ 0.37 $ 0.58 $ 0.94 $ 0.11 $ 0.19
Discontinued operations ................. -- -- -- -- --
Extraordinary item ...................... (0.03) -- -- -- --
---------- ---------- ---------- ---------- ----------
$ 0.34 $ 0.58 $ 0.94 $ 0.11 $ 0.19
========== ========== ========== ========== ==========
Weighted average common shares
outstanding -- assuming dilution
(3)(4) ................................ 329,000 365,715 386,211 432,275 414,570
========== ========== ========== ========== ==========
Net income per common share --
assuming dilution: (3)(4) .............
Continuing operations ................... $ 0.35 $ 0.55 $ 0.89 $ 0.11 $ 0.18
Discontinued operations ................. -- -- -- -- --
Extraordinary item ...................... (0.03) -- -- -- --
---------- ---------- ---------- ---------- ----------
$ 0.32 $ 0.55 $ 0.89 $ 0.11 $ 0.18
========== ========== ========== ========== ==========
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and marketable securities ......... $ 182,636 $ 205,166 $ 185,018 $ 142,513 $ 132,882
Working capital ........................ 428,746 624,497 612,917 945,927 852,711
Total assets ........................... 3,190,095 3,671,958 5,566,324 6,762,897 6,832,334
Long-term debt (5) ..................... 1,477,092 1,570,597 1,614,961 2,830,926 3,114,648
Stockholders' equity ................... 1,317,878 1,686,770 3,290,623 3,423,004 3,206,362
</TABLE>
- ----------
(1) Expenses related to the SHC, SSCI and NovaCare Rehabilitation Hospitals
acquisitions in 1995, the SCA, Advantage Health, Professional Sports Care
Management, Inc. and ReadiCare, Inc. acquisitions in 1996, the Health
Images acquisition in 1997 and the NSC acquisition in 1998.
(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 1995, 1996 and 1997 reflect shares reserved
for issuance upon conversion of HEALTHSOUTH's 5% Convertible Subordinated
Debentures due 2001. Substantially all of those Debentures were converted
into shares of HEALTHSOUTH common stock in 1997.
(5) Includes current portion of long-term debt.
25
<PAGE>
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 HEALTHSOUTH, including various factors
related to acquisitions we have made during the periods indicated, the timing
and nature of which have significantly affected our consolidated results of
operations. This discussion and analysis should be read in conjunction with our
consolidated financial statements and notes thereto included elsewhere in this
Annual Report on Form 10-K.
We completed the following major acquisitions over the last three years
(common share amounts have been adjusted to reflect a stock split effected in
the form of a 100% stock dividend paid on March 17, 1997):
o On March 3, 1997, we acquired Health Images, Inc. (the "Health Images
Acquisition"). A total of 10,343,470 shares of HEALTHSOUTH 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, we acquired ASC Network Corporation (the "ASC
Acquisition"). We 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, we acquired National Imaging Affiliates, Inc. (the
"NIA Acquisition"). A total of 984,189 shares of HEALTHSOUTH 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, we acquired Horizon/CMS Healthcare Corporation (the
"Horizon/CMS Acquisition"). A total of 45,261,000 shares of HEALTHSOUTH
common stock were issued in the transaction, representing a value of
approximately $975,824,000 at the time of the acquisition, and we 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, we 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.
o On July 1, 1998, we acquired Columbia/HCA Healthcare Corporation's
interest in (or entered into interim management arrangements with respect
to) 34 outpatient surgery centers located in 13 states (the "Columbia/HCA
Acquisition"). The cash purchase price was approximately $550,402,000.
o On July 22, 1998, we acquired National Surgery Centers, Inc. (the "NSC
Acquisition"). A total of 20,426,261 shares of HEALTHSOUTH common stock
were issued in connection with the transaction, representing a value of
approximately $574,489,000. At that time, NSC operated 40 outpatient
surgery centers in 14 states.
o On June 29, 1999, we acquired from Mariner Post-Acute Network, Inc.
("Mariner") substantially all of the assets of Mariner's American
Rehability Services division (the "Rehability Acquisition"), which
operated approximately 160 outpatient rehabilitation centers in 18 states.
The net cash purchase price was approximately $54,521,000.
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Each of the ASC Acquisition, the Horizon/CMS Acquisition, the NIA
Acquisition, the Columbia/HCA Acquisition and the Rehability Acquisition was
accounted for under the purchase method of accounting and, accordingly, the
acquired operations are included in our consolidated financial statements from
their respective dates of acquisition. Each of the Health Images Acquisition and
the NSC 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. Health Images and NSC did not separately track such
revenues (see Note 2 of "Notes to Consolidated Financial Statements" for further
discussion).
We determine 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. We utilize independent appraisers and
rely on our 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 individual purchased facilities and other intangible assets, we
determine 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, our carrying value of the asset
will be reduced by the estimated shortfall of cash flows to the estimated fair
market value.
In 1998, we adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and
Related Information". SFAS 131 requires an enterprise to report operating
segments based upon the way its operations are managed. This approach defines
operating segments along the lines used by management to assess performance and
make operating and resource allocation decisions. Based on our management and
reporting structure, segment information has been presented for inpatient and
other clinical services and outpatient services.
The inpatient and other clinical services segment includes the operations
of our inpatient rehabilitation facilities and medical centers, as well as the
operations of certain physician practices and other clinical services which are
managerially aligned with our inpatient services. We have aggregated the
financial results of our outpatient rehabilitation facilities, outpatient
surgery centers and outpatient diagnostic centers into the outpatient services
segment. These three types of facilities have common economic characteristics,
provide similar services, serve a similar class of customers, cross-utilize
administrative services and operate in a similar regulatory environment. In
addition, our Integrated Service Model strategy combines these services in a
seamless environment for the delivery of patient care on an episodic basis.
See Note 14 of "Notes to Consolidated Financial Statements" for financial
data for each of our operating segments.
Our 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. We determine allowances for doubtful accounts based on
the specific agings and payor classifications at each facility, and contractual
adjustments based on historical experience and the terms of payor contracts. Net
accounts receivable include only those amounts we estimate to be collectible.
Substantially all of our revenues are derived from private and governmental
third-party payors. Our reimbursement from governmental third-party payors is
based upon cost reports and other
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reimbursement mechanisms which require the application and interpretation of
complex regulations and policies, and such reimbursement is subject to various
levels of review and adjustment by fiscal intermediaries and others, which may
affect the final determination of reimbursement. In addition, there are
increasing pressures from many payor sources to control healthcare costs and to
reduce or limit increases in reimbursement rates for medical services. There can
be no assurance that payments under governmental and third-party payor programs
will remain at levels comparable to present levels. In addition, there have
been, and we expect that there will continue to be, a number of proposals to
limit Medicare reimbursement for certain services. We cannot now predict whether
any of these proposals will be adopted or, if adopted and implemented, what
effect such proposals would have on us. Changes in reimbursement policies or
rates by private or governmental payors could have an adverse effect on our
future results of operations.
In many cases, we operate 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. We may, from time to
time, close or consolidate similar locations in multi-site markets to obtain
efficiencies and respond to changes in demand.
RESULTS OF OPERATIONS
Twelve-Month Periods Ended December 31, 1997 and 1998
Our operations generated revenues of $4,006,074,000 in 1998, an increase of
$882,898,000, or 28.3%, as compared to 1997 revenues. Same store revenues for
the twelve months ended December 31, 1998 were $3,755,413,000, an increase of
$632,237,000, or 20.2%, as compared to the same period in 1997. New store
revenues for 1998 were $250,661,000. Same store revenues reflect the first full
year of operations of the Horizon/CMS facilities and the ASC facilities acquired
in October 1997. New store revenues reflect primarily the addition of facilities
from the Columbia/HCA Acquisition and our single facility acquisitions through
internal development (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
35.9% and 2.7% of total revenues for 1998, compared to 36.9% and 2.3% of total
revenues for 1997. Revenues from any other single third-party payor were not
significant in relation to our total revenues. During 1998, same store inpatient
days, outpatient visits, surgical cases and diagnostic cases increased 32.5%,
27.7%, 20.8% and 18.0%, respectively. Revenue per inpatient day, outpatient
visit, surgical case and diagnostic case for same store operations decreased by
(5.8)%, (0.2)%, (2.8)% and (0.3)%, respectively.
Operating expenses, at the operating unit level, were $2,491,914,000, or
62.2% of revenues, for 1998, compared to 62.5% of revenues for 1997. Included in
operating expenses, at the operating unit level, for the year ended December 31,
1998, is a non-recurring expense item of approximately $27,768,000 related to
our plan to dispose of or otherwise discontinue substantially all of our home
health operations, as described below. Excluding the non-recurring expense,
operating expenses, at the operating unit level, were $2,464,146,000, or 61.5%
of revenues, for the year ended December 31, 1998. The decrease in operating
expenses as a percentage of revenues is primarily attributable to the increase
in same store revenues noted above. Same store operating expenses for 1998,
excluding the non-recurring expense item noted above, were $2,296,802,000, or
61.2% of related revenues. New store operating expenses were $167,344,000, or
66.8% of related revenues. Corporate general and administrative expenses
increased from $87,512,000 in 1997 to $112,800,000 in 1998. As a percentage of
revenues, corporate general and administrative expenses remained constant at
2.8% in 1997 and 1998. Total operating expenses were $2,604,714,000, or 65.0% of
revenues, for 1998, compared to $2,039,701,000, or 65.3% of revenues, for 1997.
The provision for doubtful accounts was $112,202,000, or 2.8% of revenues, for
1998, compared to $74,743,000, or 2.4% of revenues, for 1997. Included in the
provision for doubtful accounts for the year
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ended December 31, 1998, is a non-recurring expense item of approximately
$19,228,000 related to our plan to dispose of or otherwise discontinue
substantially all of our home health operations, as described below. Excluding
the non-recurring item, the provision for doubtful accounts was $92,974,000, or
2.3% of revenues for 1998.
Depreciation and amortization expense was $344,591,000 for 1998, compared
to $257,136,000 for 1997. The increase resulted from our investment in
additional assets. Interest expense increased to $148,163,000 in 1998, compared
to $112,529,000 for 1997, primarily because of the increased amount outstanding
under our credit facilities (see "Liquidity and Capital Resources"). For 1998,
interest income was $11,286,000, compared to $6,004,000 for 1997. The increase
in interest income resulted primarily from an increase in the average amount
outstanding in interest-bearing investments.
Merger expenses in 1998 of $25,630,000 represent costs incurred or accrued
in connection with completing the NSC Acquisition. For further discussion, see
Note 2 of "Notes to Consolidated Financial Statements".
During the third quarter of 1998, we adopted a plan to dispose of or
otherwise discontinue substantially all of our home health operations. The
decision to adopt the plan was prompted in large part by the negative impact of
the 1997 Balanced Budget Act (the "BBA"), which placed reimbursement limits on
home health businesses. The limits were announced in March 1998 and we
thereafter began to see the adverse affect on home health margins. The negative
trends that occurred as a result of the reduction in reimbursement brought about
by the BBA caused us to re-evaluate our view of the home health product line.
The plan was approved by the Board of Directors on September 16, 1998 and all
home health operations covered by the plan were closed by December 31, 1998.
We recorded impairment and restructuring charges of approximately
$72,000,000 related to the home health plan. For a more detailed discussion of
this charge, see Note 13 of "Notes to Consolidated Financial Statements". In
addition, we determined that approximately $27,768,000 in notes receivable and
approximately $19,228,000 in accounts receivable would not be collectible as a
result of the closing of our home health operations. These non-recurring amounts
were recognized in operating unit expenses and the provision for doubtful
accounts, respectively. The total non-recurring charges and expenses included in
the results of operations for the year ended December 31, 1998 related to the
home health plan was approximately $118,996,000.
During the fourth quarter of 1998, we adopted a plan to dispose of or
otherwise substantially discontinue the operations of certain facilities that
did not fit with our Integrated Service Model strategy (see Item 1, "Business --
Company Strategy"), underperforming facilities and facilities not located in
target markets. The Board of Directors approved the plan on December 10, 1998
and as of March 24, 2000, 95% of the identified facilities had been closed. The
remaining 5% are predominantly facilities in which the consent of unaffiliated
partners is required prior to closing. We recorded impairment and restructuring
charges of approximately $404,000,000 related to the fourth quarter
restructuring plan. For a more detailed discussion of this charge, see Note 13
of "Notes to Consolidated Financial Statements".
For 1998, the facilities that were included in the third and fourth quarter
restructuring charges described above recorded revenues of $211,300,000, a
pre-tax loss of $14,100,000, and negative cash flows from operations of
approximately $10,000,000. We do not expect elimination of these revenues, costs
and negative cash flows to have a material impact on future results of
operations.
At December 31, 1998, we had a remaining liability for restructuring
charges of approximately $67,000,000. The majority of this liability,
approximately $49,000,000, represented lease abandonment costs. The timing of
these lease abandonment costs is reflected in the schedule of future minimum
lease payments under all operating leases included in Note 11 of "Notes to
Consolidated Financial Statements". We had incurred $17,000,000 of these lease
abandonment costs through December 31, 1999. Of the remaining $18,000,000
restructuring liability, we had paid out $10,000,000 through December 31, 1999
and the remainder is expected to be paid out ratably over the 12 months ending
December 31, 2000.
In addition, we recorded an impairment charge of approximately $8,000,000
related to a rehabilitation hospital we had previously closed and recorded a
$31,232,000 loss on the sale of our physical therapy staffing business.
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Total non-recurring charges and expenses included in the results of
operations for the year ended December 31, 1998 were approximately $587,000,000.
For further discussion, see Notes 2, 9 and 13 of "Notes to Consolidated
Financial Statements".
Income before minority interests and income taxes for 1998 was
$267,373,000, compared to $629,196,000 for 1997. Minority interests reduced
income before income taxes by $77,468,000 in 1998, compared to $72,469,000 for
1997. The provision for income taxes for 1998 was $143,347,000, compared to
$213,668,000 for 1997. Excluding the tax effects of the impairment and
restructuring charges, the merger costs, and the loss on sale of assets, the
effective tax rate for 1998 was 39.0%, compared to 38.4% for 1997 (see Note 10
of "Notes to Consolidated Financial Statements" for further discussion). Net
income for 1998 was $46,558,000.
Twelve-Month Periods Ended December 31, 1998 and 1999
Our operations generated revenues of $4,072,107,000 in 1999, an increase of
$66,033,000, or 1.6%, as compared to 1998 revenues. Same store revenues for the
twelve months ended December 31, 1999 were $4,023,696,000, an increase of
$97,792,000, or 2.4%, as compared to the same period in 1998, excluding
discontinued home health operations. New store revenues for 1999 were
$48,411,000. The increase in revenues is primarily attributable to the addition
of new operations and increases in patient volume. Revenues generated from
patients under the Medicare and Medicaid programs respectively accounted for
33.0% and 2.2% of total revenues for 1999, compared to 35.9% and 2.7% of total
revenues for 1998. Revenues from any other single third-party payor were not
significant in relation to our total revenues. During 1999, same store inpatient
days, outpatient visits, surgical cases and diagnostic cases increased 6.9%,
10.1%, 13.0% and 10.8%, respectively. Revenue per inpatient day, outpatient
visit, surgical case and diagnostic case for same store operations decreased by
(7.0)%, (1.3)%, (5.1)% and (7.2)%, respectively.
Operating expenses, at the operating unit level, were $2,688,849,000, or
66.0% of revenues, for 1999, compared to 62.2% of revenues for 1998. Included in
operating expenses, at the operating unit level, for the year ended December 31,
1999, is a non-recurring expense item of approximately $40,183,000 which related
primarily to our plan to write off obsolete equipment. Excluding the
non-recurring expense, operating expenses at the operating unit level were
$2,648,666,000, or 65.0% of revenues, for the year ended December 31, 1999. The
increase in operating expenses as a percentage of revenues is primarily
attributable to the decline in same store revenues per inpatient day, outpatient
visit, surgical case and diagnostic case. Same store operating expenses for
1999, excluding the non-recurring expense item noted above, were $2,614,953,000,
or 65.0% of related revenues. New store operating expenses were $33,713,000, or
69.6% of related revenues. Corporate general and administrative expenses
increased from $112,800,000 in 1998 to $149,285,000 in 1999. Included in
corporate general and administrative expenses, for the year ended December 31,
1999, is a non-recurring expense item of approximately $29,798,000. This expense
item included write-offs of investments and notes of $14,603,000, expenses
related to year 2000 remediation of $13,429,000 and expenses related to the
proposed spin-off of our inpatient operations of $1,766,000. Excluding the
non-recurring expense, as a percentage of revenues, corporate general and
administrative expenses increased from 2.8% in 1998 to 2.9% in 1999. Total
operating expenses were $2,838,134,000, or 69.7% of revenues, for 1999, compared
to $2,604,714,000, or 65.0% of revenues, for 1998. The provision for doubtful
accounts was $342,708,000, or 8.4% of revenues, for 1999, compared to
$112,202,000, or 2.8% of revenues, for 1998. Included in the provision for
doubtful accounts is $117,752,000 in expense recognized in the third quarter of
1999 and $139,835,000 in expense recognized in the fourth quarter of 1999. The
third quarter provision includes the charge-off of accounts receivable of
facilities included in the impairment and restructuring charges recognized in
1998. These accounts receivable were determined to be uncollectible by local and
regional operations management personnel who assumed collection responsibilities
in the third quarter of 1999 in connection with the restructuring of our
outpatient regional business offices, which had previously been responsible for
collection activities. The fourth quarter charge reflects management's decision
to adopt a more conservative approach in estimating the allowance for doubtful
accounts. The revision in estimating the allowance for doubtful accounts is due
to management's assessment of the current healthcare payor environment. This
approach focuses more heavily upon the specific agings and payor classifications
at each facility, as opposed to determining an estimate based primarily on
historical write-off rates.
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Depreciation and amortization expense was $374,248,000 for 1999, compared
to $344,591,000 for 1998. The increase resulted from our investment in
additional assets. Interest expense increased to $176,652,000 in 1999, compared
to $148,163,000 for 1998, primarily because of the increased amount outstanding
under our credit facilities (see "Liquidity and Capital Resources"). For 1999,
interest income was $10,587,000, compared to $11,286,000 for 1998.
During the fourth quarter of 1999, we recorded a non-recurring expense item
of $121,037,000 related to the impairment of long-term assets. The charge was
based on a facility-by-facility review of each facility's financial performance
which determined if there were trends that would indicate that the facility's
ability to recover its investment in long-lived assets had been impaired. For
further discussion, see Note 13 of "Notes to Consolidated Financial Statements".
Total unusual and non-recurring charges and expenses included in the
results of operations for the year ended December 31, 1999 were approximately
$448,605,000.
Income before minority interests and income taxes for 1999 was
$229,915,000, compared to $267,373,000 for 1998. Minority interests reduced
income before income taxes by $86,469,000 in 1999, compared to $77,468,000 for
1998. The provision for income taxes for 1999 was $66,929,000, compared to
$143,347,000 for 1998. Excluding the tax effects of the impairment and
restructuring charges in both periods and the merger costs and the loss on sale
of assets in 1998, the effective tax rate for 1999 was 39.5%, compared to 39.0%
for 1998 (see Note 10 of "Notes to Consolidated Financial Statements" for
further discussion). Net income for 1999 was $76,517,000.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, we had working capital of $852,711,000, including
cash and marketable securities of $132,882,000. Working capital at December 31,
1998 was $945,927,000, including cash and marketable securities of $142,513,000.
For 1999, cash provided by operations was $704,511,000, compared to $636,132,000
for 1998. For 1999, investing activities used $614,859,000, compared to using
$1,781,459,000 for 1998. The change is primarily due to a decrease in facility
acquisitions. Additions to property, plant and equipment and acquisitions
accounted for $474,115,000 and $104,304,000, respectively, during 1999. Those
same investing activities accounted for $714,212,000 and $729,440,000,
respectively, in 1998. Financing activities used $99,079,000 and provided
$1,121,162,000 during 1999 and 1998, respectively. The change is primarily due
to reduced borrowings as a result of decreased acquisition activity. Net
borrowing proceeds for 1999 and 1998 were $285,379,000 and $1,177,311,000,
respectively.
Net accounts receivable were $898,529,000 at December 31, 1999, compared to
$897,901,000 at December 31, 1998. The number of days of average quarterly
revenues in ending receivables was 82.6 at December 31, 1999, compared to 79.4
at December 31, 1998. See Note 1 of "Notes to Consolidated Financial Statements"
for the concentration of net accounts receivable from patients, third-party
payors, insurance companies and others at December 31, 1999 and 1998.
We have a $1,750,000,000 revolving credit facility with Bank of America,
N.A. ("Bank of America") and other participating banks (the "1998 Credit
Agreement"). The 1998 Credit Agreement replaced a previous $1,250,000,000
revolving credit agreement, also with Bank of America. Interest on the 1998
Credit Agreement is paid based on LIBOR plus a predetermined margin, a base
rate, or competitively bid rates from the participating banks. We are required
to pay a fee based on the unused portion of the revolving credit facility
ranging from 0.09% to 0.25%, depending on certain defined credit ratings. The
principal amount is payable in full on June 22, 2003. We have provided a
negative pledge on all assets under the 1998 Credit Agreement. The effective
interest rate on the average outstanding balance under the 1998 Credit Agreement
was 5.81% for the twelve months ended December 31, 1999, compared to the average
prime rate of 8.00% during the same period. At December 31, 1999, we had drawn
$1,625,000,000 under the 1998 Credit Agreement. For further discussion, see Note
7 of "Notes to Consolidated Financial Statements".
We also have a Short Term Credit Agreement with Bank of America (the
"Short Term Credit Agreement"), providing for a $250,000,000 short term
revolving credit facility. The terms of the Short Term Credit Agreement are
substantially consistent with those of the 1998 Credit Agreement. Interest
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on the Short Term Credit Agreement is paid based on LIBOR plus a predetermined
margin or a base rate. We are required to pay a fee on the unused portion of the
credit facility ranging from 0.30% to 0.50%, depending on certain defined
ratios. The principal amount is payable in full on December 12, 2000, with an
earlier repayment required in the event that we consummate any public offering
or private placement of debt securities. At December 31, 1999, we had not drawn
down any amounts under the Short Term Credit Agreement.
On March 20, 1998, we issued $500,000,000 in 3.25% Convertible Subordinated
Debentures due 2003 in a private placement. An additional $67,750,000 principal
amount of the 3.25% Convertible Debentures was issued on March 31, 1998 to cover
underwriters' overallotments. Interest is payable on April 1 and October 1. The
3.25% Convertible Debentures are convertible into HEALTHSOUTH common stock at
the option of the holder at a conversion price of $36.625 per share. The
conversion price is subject to adjustment upon the occurrence of (a) a
subdivision, combination or reclassification of outstanding shares of our common
stock, (b) the payment of a stock dividend or stock distribution on any shares
of our capital stock, (c) the issuance of rights or warrants to all holders of
our common stock entitling them to purchase shares of our common stock at less
than the current market price, or (d) the payment of certain other distributions
with respect to our common stock. In addition, we may, from time to time, lower
the conversion price for periods of not less than 20 days, in our discretion. We
used net proceeds from the issuance of the 3.25% Convertible Debentures to pay
down indebtedness outstanding under our then-existing credit facilities.
On June 22, 1998, we issued $250,000,000 in 6.875% Senior Notes due 2005
and $250,000,000 in 7.0% Senior Notes due 2008 (collectively, the "Senior
Notes"). Interest is payable on June 15 and December 15. The Senior Notes are
unsecured, unsubordinated obligations of HEALTHSOUTH. We used the net proceeds
from the issuance of the Senior Notes to pay down indebtedness outstanding under
our then-existing credit facilities.
On February 8, 1999, we announced a plan to repurchase up to 70,000,000
shares of our common stock over the next 36 months through open market
purchases, block trades or privately negotiated transactions. As of December 31,
1999, we had repurchased approximately 36,300,637 shares.
In June 1999, we announced that our Board of Directors had given
preliminary approval to the exploration and development of a plan to divide our
inpatient and outpatient businesses into separate public companies through the
tax-free spin-off of our inpatient operations. On September 9, 1999, we
announced that our Board had indefinitely tabled the spin-off proposal due to a
variety of factors, including the anticipated timeframe to complete the
spin-off, developments in the healthcare capital markets and favorable
developments in the likely structure of the prospective payment system for
inpatient rehabilitation services, among others. We are not currently pursuing
any activities with respect to the spin-off proposal.
We intend 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 other complementary services,
and to expand certain of our existing facilities. While it is not possible to
estimate precisely the amounts which will actually be expended in the foregoing
areas, we anticipate that over the next twelve months, we will spend
approximately $200,000,000 to $250,000,000 on maintenance and expansion of our
existing facilities and approximately $200,000,000 to $250,000,000 on
development activities and Internet and e-commerce initiatives, and on continued
development of the Integrated Service Model. See Item 1, "Business -- Company
Strategy".
Although we are continually considering and evaluating acquisitions and
opportunities for future growth, we have not entered into any agreements with
respect to material future acquisitions. We believe that existing cash, cash
flow from operations and borrowings under existing credit facilities will be
sufficient to satisfy our estimated cash requirements for the next twelve
months, and for the reasonably foreseeable future.
Inflation in recent years has not had a significant effect on our business,
and is not expected to adversely affect us in the future unless it increases
significantly.
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EXPOSURES TO MARKET RISK
We are exposed to market risk related to changes in interest rates. The
impact on earnings and value of market risk-sensitive financial instruments
(principally marketable security investments and long-term debt, as well as the
interest rate swaps described below) is subject to change as a result of
movements in market rates and prices. We use sensitivity analysis models to
evaluate these impacts. We do not hold or issue derivative instruments for
trading purposes and are not a party to any instruments with leverage features.
Our investment in marketable securities was $3,482,000 at December 31,
1999, compared to $3,686,000 at December 31, 1998. The investment represents
less than 1% of total assets at December 31, 1999 and 1998. 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 our results of operations, and therefore any changes in
interest rates would have a minimal impact on future pre-tax earnings.
As described below, a significant portion of our long-term indebtedness is
subject to variable rates of interest, generally equal to LIBOR plus a
predetermined percentage. In October 1999, we entered into three short-term
interest rate swap arrangements intended to hedge our exposure to rising
interest rates resulting from the capital markets' perception of risks
associated with year 2000 issues. Each of these arrangements has a notional
amount of $250,000,000 and matures six months from the date of the original
transaction. The notional amounts are used to measure interest to be paid or
received and do not represent an amount of exposure to credit loss. In each of
these arrangements, we pay the counterparty a fixed rate of interest on the
notional amount, and the counterparty pays us a variable rate of interest equal
to the 90-day LIBOR rate. The variable rate paid to us by the counterparty is
reset once during the term of the swap. Thus, these interest rate swaps have the
effect of fixing the interest rates on an aggregate of $750,000,000 of our
variable-rate debt through their maturity dates. The arrangements mature at
various dates in April 2000. We would be exposed to credit losses if the
counterparties did not perform their obligations under the swap arrangements;
however, the counterparties are major commercial banks whom we believe to be
creditworthy, and we expect them to fully satisfy their obligations. At December
31, 1999, the weighted average interest rate we were obligated to pay under
these interest rate swaps was 6.044%, and the weighted average interest rate we
received was 6.207%.
With respect to our interest-bearing liabilities, approximately
$1,625,000,000 in long-term debt at December 31, 1999 is subject to variable
rates of interest before giving effect to the interest rate swaps above, while
the remaining balance in long-term debt of $1,489,648,000 is subject to fixed
rates of interest. This compares to $1,325,000,000 in long-term debt subject to
variable rates of interest and $1,505,926,000 in long-term debt subject to fixed
rates of interest at December 31, 1998 (see Note 7 of "Notes to Consolidated
Financial Statements" for further description). The fair value of our total
long-term debt, based on discounted cash flow analyses, approximates its
carrying value at December 31, 1999 except for the 3.25% Convertible Debentures,
6.875% Senior Notes and 7.0% Senior Notes. The fair value of the 3.25%
Convertible Debentures at December 31, 1999 was approximately $443,000,000. The
fair value of the 6.875% Senior Notes due 2005 was approximately $216,600,000 at
December 31, 1999. The fair value of the 7% Senior Notes due 2008 was
approximately $207,250,000 at December 31, 1999. Based on a hypothetical 1%
increase in interest rates, the potential losses in future pre-tax earnings
would be approximately $16,250,000. 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 our 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.
Foreign operations, and the related market risks associated with foreign
currency, are currently insignificant to our results of operations and financial
position.
33
<PAGE>
COMPUTER TECHNOLOGIES AND YEAR 2000 COMPLIANCE
In prior years, we discussed the nature and progress of our plans to become
year 2000 ready. In late 1999, we completed our remediation and testing of
systems. As a result of those planning and implementation efforts, we
experienced no significant disruptions in mission-critical information
technology and non-information technology systems and believe those systems
responded to the year 2000 date change. We expensed approximately $14,282,000
during 1999 in connection with remediating our systems and invested
approximately $22,000,000 in new hardware. We are not aware of any material
problems resulting from year 2000 issues, either with our internal systems or
the products and services of third parties. We will continue to monitor our
mission-critical computer applications and those of our suppliers and vendors
throughout the year 2000 to ensure that any latent year 2000 matters that may
arise are addressed promptly.
FORWARD-LOOKING STATEMENTS
Statements contained in this Annual Report on Form 10-K which are not
historical facts are forward-looking statements. Without limiting the generality
of the preceding statement, all statements in this Annual Report on Form 10-K
concerning or relating to estimated and projected earnings, margins, costs,
expenditures, cash flows, growth rates and financial results are forward-looking
statements. In addition, HEALTHSOUTH, through its senior management, from time
to time makes forward-looking public statements concerning its expected future
operations and performance and other developments. Such forward-looking
statements are necessarily estimates reflecting our best judgment based upon
current information, involve a number of risks and uncertainties and are made
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. There can be no assurance that other factors will not affect
the accuracy of such forward-looking statements or that our actual results will
not differ materially from the results anticipated in such forward-looking
statements. While it is impossible to identify all such factors, factors which
could cause actual results to differ materially from those estimated by us
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 or delays in
reimbursement for our services by governmental or private payors, competitive
pressures in the healthcare industry and our response thereto, our ability to
obtain and retain favorable arrangements with third-party payors, unanticipated
delays in the implementation of our Integrated Service Model, general conditions
in the economy and capital markets, and other factors which may be identified
from time to time in our Securities and Exchange Commission filings and other
public announcements.
34
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated financial statements of HEALTHSOUTH meeting the requirements
of Regulation S-X are filed on the following 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 ........................................ 36
Consolidated Balance Sheets as of December 31, 1998 and 1999 .......... 37
Consolidated Statements of Income for the Years Ended December 31,
1997, 1998 and 1999 .................................................. 38
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1998 and 1999 ..................................... 39
Consolidated Statements of Cash Flows for the Years Ended December
31, 1997, 1998 and 1999 .............................................. 40
Notes to Consolidated Financial Statements ............................ 42
</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 summary information with respect to HEALTHSOUTH's
operations for the last eight fiscal quarters. All amounts have been restated to
reflect the 1998 acquisition of NSC, which was accounted for as a pooling of
interests.
<TABLE>
<CAPTION>
1998
---------------------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------------- --------------- ----------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues ..................................... $ 938,779 $ 979,064 $1,047,422 $1,040,809
Net income (loss) ............................ 113,132 121,600 5,670 (193,844)
Net income (loss) per common share ........... 0.27 0.29 0.01 (0.46)
Net income (loss) per common share -- assuming
dilution .................................... 0.26 0.28 0.01 (0.46)
</TABLE>
<TABLE>
<CAPTION>
1999
---------------------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------------- --------------- ----------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues ..................................... $1,030,547 $1,047,632 $ 993,341 $1,000,587
Net income (loss) ............................ 109,905 114,005 (4,330) (143,063)
Net income (loss) per common share ........... 0.26 0.28 (0.01) (0.37)
Net income (loss) per common share -- assuming
dilution .................................... 0.26 0.27 (0.01) (0.37)
</TABLE>
35
<PAGE>
REPORT OF 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, 1998 and 1999, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1998 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. 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
March 19, 2000
36
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1999
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 3) ......................................... $ 138,827 $ 129,400
Other marketable securities (Note 3) ....................................... 3,686 3,482
Accounts receivable, net of allowances for doubtful accounts of
$143,689,000 in 1998 and $303,614,000 in 1999 ............................ 897,901 898,529
Inventories ................................................................ 77,840 85,551
Prepaid expenses and other current assets .................................. 169,899 114,496
Income tax refund receivable ............................................... 58,832 39,438
---------- ----------
Total current assets ........................................................ 1,346,985 1,270,896
Other assets:
Loans to officers .......................................................... 3,263 3,842
Assets held for sale (Note 13) ............................................. 32,966 29,473
Deferred income taxes (Note 10) ............................................ -- 47,550
Other (Note 4) ............................................................. 164,280 149,099
---------- ----------
200,509 229,964
Property, plant and equipment, net (Note 5) ................................ 2,255,493 2,502,967
Intangible assets, net (Note 6) ............................................ 2,959,910 2,828,507
---------- ----------
Total assets ................................................................ $6,762,897 $6,832,334
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................... $ 76,099 $ 76,549
Salaries and wages payable ................................................. 111,243 93,046
Accrued interest payable and other liabilities ............................. 126,110 102,604
Deferred income taxes (Note 10) ............................................ 37,612 108,168
Current portion of long-term debt (Note 7) ................................. 49,994 37,818
---------- ----------
Total current liabilities ................................................... 401,058 418,185
Long-term debt (Note 7) ..................................................... 2,780,932 3,076,830
Deferred income taxes (Note 10) ............................................. 28,856 --
Deferred revenue and other long-term liabilities ............................ 1,829 4,573
Minority interests-limited partnerships (Note 1) ............................ 127,218 126,384
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 -- 600,000,000 shares authorized; issued --
423,178,000 in 1998 and 423,982,000 in 1999 .............................. 4,232 4,240
Additional paid-in capital ................................................. 2,577,647 2,584,572
Retained earnings .......................................................... 878,228 948,385
Treasury stock, at cost (2,042,000 shares in 1998 and 38,342,000 shares in
1999) .................................................................... (21,813) (278,504)
Receivable from Employee Stock Ownership Plan .............................. (10,169) (7,898)
Notes receivable from stockholders, officers and management employees ...... (5,121) (44,433)
---------- ----------
Total stockholders' equity .................................................. 3,423,004 3,206,362
---------- ----------
Total liabilities and stockholders' equity .................................. $6,762,897 $6,832,334
========== ==========
</TABLE>
See accompanying notes.
37
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1998 1999
------------- ------------- -------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues .............................................. $3,123,176 $4,006,074 $4,072,107
Operating unit expenses ............................... 1,952,189 2,491,914 2,688,849
Corporate general and administrative expenses ......... 87,512 112,800 149,285
Provision for doubtful accounts ....................... 74,743 112,202 342,708
Depreciation and amortization ......................... 257,136 344,591 374,248
Merger and acquisition related expenses (Notes 2
and 9) ............................................... 15,875 25,630 --
Loss on sale of assets (Note 9) ....................... -- 31,232 --
Impairment and restructuring charges (Note 13) ........ -- 483,455 121,037
Interest expense ...................................... 112,529 148,163 176,652
Interest income ....................................... (6,004) (11,286) (10,587)
---------- ---------- ----------
2,493,980 3,738,701 3,842,192
---------- ---------- ----------
Income before income taxes and minority interests ..... 629,196 267,373 229,915
Provision for income taxes (Note 10) .................. 213,668 143,347 66,929
---------- ---------- ----------
415,528 124,026 162,986
Minority interests .................................... 72,469 77,468 86,469
---------- ---------- ----------
Net income ............................................ $ 343,059 $ 46,558 $ 76,517
========== ========== ==========
Weighted average common shares outstanding ............ 366,768 421,462 408,195
========== ========== ==========
Net income per common share ........................... $ 0.94 $ 0.11 $ 0.19
========== ========== ==========
Weighted average common shares outstanding --
assuming dilution .................................... 386,211 432,275 414,570
========== ========== ==========
Net income per common share -- assuming dilution ...... $ 0.89 $ 0.11 $ 0.18
========== ========== ==========
</TABLE>
See accompanying notes.
38
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- ADDITIONAL
PAID-IN
SHARES AMOUNT CAPITAL
--------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at December 31, 1996 ......................................... 339,587 $ 3,396 $ 1,210,314
Common shares issued in connection with acquisitions (Note 9) ........ 46,412 464 999,587
Value of options exchanged in connection with the Horizon/CMS
acquisition (Note 9) ................................................ -- -- 23,191
Common shares issued upon conversion of convertible debt ............. 12,324 123 114,390
Proceeds from exercise of options (Note 8) ........................... 10,525 105 60,221
Income tax benefits related to incentive stock options (Note 8) ...... -- -- 67,090
Reduction in receivable from ESOP .................................... -- -- --
Payments received on stockholders' notes receivable .................. -- -- --
Purchase of limited partnership units ................................ -- -- --
Purchase of treasury stock ........................................... -- -- --
Net income ........................................................... -- -- --
Translation adjustment ............................................... -- -- --
Stock dividend ....................................................... 6,689 67 (67)
------- ------- -----------
Balance at December 31, 1997 ......................................... 415,537 4,155 2,474,726
Proceeds from exercise of options (Note 8) ........................... 6,885 69 60,135
Common shares issued in connection with acquisitions (Note 9) ........ 699 7 19,390
Common shares issued in connection with lease buyout ................. 57 1 1,592
Income tax benefits related to incentive stock options (Note 8) ...... -- -- 21,804
Purchase of treasury shares .......................................... -- -- --
Reduction in receivable from ESOP .................................... -- -- --
Payments received on stockholders' notes receivable .................. -- -- --
Purchase of limited partnership units ................................ -- -- --
Net income ........................................................... -- -- --
Translation adjustment ............................................... -- -- --
------- ------- -----------
Balance at December 31, 1998 ......................................... 423,178 4,232 2,577,647
Proceeds from exercise of options (Note 8) ........................... 804 8 4,363
Restricted stock grants issued ....................................... -- -- 2,562
Reduction in receivable from ESOP .................................... -- -- --
Loans made to stockholders ........................................... -- -- --
Payments received on stockholders' notes receivable .................. -- -- --
Purchase of limited partnership units ................................ -- -- --
Purchase of treasury stock ........................................... -- -- --
Net income ........................................................... -- -- --
Translation adjustment ............................................... -- -- --
------- ------- -----------
Balance at December 31, 1999 ......................................... 423,982 $ 4,240 $ 2,584,572
======= ======= ===========
<CAPTION>
TREASURY STOCK
RETAINED ------------------------ RECEIVABLE
EARNINGS SHARES AMOUNT FROM ESOP
------------ -------- --------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at December 31, 1996 ......................................... $ 492,954 182 $ (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 convertible debt ............. -- -- -- --
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) -- -- --
Purchase of treasury stock ........................................... -- 370 (3,600) --
Net income ........................................................... 343,059 -- -- --
Translation adjustment ............................................... (220) -- -- --
Stock dividend ....................................................... -- -- -- --
--------- --- ----------- ----------
Balance at December 31, 1997 ......................................... 833,328 552 (3,923) (12,247)
Proceeds from exercise of options (Note 8) ........................... -- -- -- --
Common shares issued in connection with acquisitions (Note 9) ........ -- -- -- --
Common shares issued in connection with lease buyout ................. -- -- -- --
Income tax benefits related to incentive stock options (Note 8) ...... -- -- -- --
Purchase of treasury shares .......................................... -- 1,490 (17,890) --
Reduction in receivable from ESOP .................................... -- -- -- 2,078
Payments received on stockholders' notes receivable .................. -- -- -- --
Purchase of limited partnership units ................................ (1,634) -- -- --
Net income ........................................................... 46,558 -- -- --
Translation adjustment ............................................... (24) -- -- --
--------- ----- ----------- ----------
Balance at December 31, 1998 ......................................... 878,228 2,042 (21,813) (10,169)
Proceeds from exercise of options (Note 8) ........................... -- -- -- --
Restricted stock grants issued ....................................... -- -- -- --
Reduction in receivable from ESOP .................................... -- -- -- 2,271
Loans made to stockholders ........................................... -- -- -- --
Payments received on stockholders' notes receivable .................. -- -- -- --
Purchase of limited partnership units ................................ (5,998) -- -- --
Purchase of treasury stock ........................................... -- 36,300 (256,691) --
Net income ........................................................... 76,517 -- -- --
Translation adjustment ............................................... (362) -- -- -
--------- ------ ----------- ----------
Balance at December 31, 1999 ......................................... $ 948,385 38,342 $ (278,504) $ (7,898)
========= ====== =========== ==========
<CAPTION>
NOTES
RECEIVABLE TOTAL
FROM STOCKHOLDERS'
STOCKHOLDERS EQUITY
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Balance at December 31, 1996 ......................................... $ (5,423) $ 1,686,770
Common shares issued in connection with acquisitions (Note 9) ........ -- 1,000,051
Value of options exchanged in connection with the Horizon/CMS
acquisition (Note 9) ................................................ -- 23,191
Common shares issued upon conversion of convertible debt ............. -- 114,513
Proceeds from exercise of options (Note 8) ........................... -- 60,326
Income tax benefits related to incentive stock options (Note 8) ...... -- 67,090
Reduction in receivable from ESOP .................................... -- 1,901
Payments received on stockholders' notes receivable .................. 7 7
Purchase of limited partnership units ................................ -- (2,465)
Purchase of treasury stock ........................................... -- (3,600)
Net income ........................................................... -- 343,059
Translation adjustment ............................................... -- (220)
Stock dividend ....................................................... -- --
---------- -----------
Balance at December 31, 1997 ......................................... (5,416) 3,290,623
Proceeds from exercise of options (Note 8) ........................... -- 60,204
Common shares issued in connection with acquisitions (Note 9) ........ -- 19,397
Common shares issued in connection with lease buyout ................. -- 1,593
Income tax benefits related to incentive stock options (Note 8) ...... -- 21,804
Purchase of treasury shares .......................................... -- (17,890)
Reduction in receivable from ESOP .................................... -- 2,078
Payments received on stockholders' notes receivable .................. 295 295
Purchase of limited partnership units ................................ -- (1,634)
Net income ........................................................... -- 46,558
Translation adjustment ............................................... -- (24)
---------- -----------
Balance at December 31, 1998 ......................................... (5,121) 3,423,004
Proceeds from exercise of options (Note 8) ........................... -- 4,371
Restricted stock grants issued ....................................... -- 2,562
Reduction in receivable from ESOP .................................... -- 2,271
Loans made to stockholders ........................................... (39,334) (39,334)
Payments received on stockholders' notes receivable .................. 22 22
Purchase of limited partnership units ................................ -- (5,998)
Purchase of treasury stock ........................................... -- (256,691)
Net income ........................................................... -- 76,517
Translation adjustment ............................................... -- (362)
---------- -----------
Balance at December 31, 1999 ......................................... $ (44,433) $ 3,206,362
========== ===========
</TABLE>
See accompanying notes.
39
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1998 1999
--------------- --------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ......................................................... $ 343,059 $ 46,558 $ 76,517
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ..................................... 257,136 344,591 374,248
Provision for doubtful accounts ................................... 74,743 112,202 342,708
Issuance of restricted stock grants ............................... -- -- 2,562
Impairment and restructuring charges .............................. -- 483,455 121,037
Merger and acquisition related expenses ........................... 15,875 25,630 --
Loss on sale of assets ............................................ -- 31,232 --
Income applicable to minority interests of limited
partnerships ..................................................... 72,469 77,468 86,469
Provision (benefit) for deferred income taxes ..................... 15,237 (43,410) (5,850)
Provision for deferred revenue .................................... (406) -- --
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable .............................................. (200,778) (250,468) (332,977)
Inventories, prepaid expenses and other current assets ........... 21,803 (132,280) 67,428
Accounts payable and accrued expenses ............................ (152,201) (58,846) (27,631)
------------ ------------ ----------
Net cash provided by operating activities .......................... 446,937 636,132 704,511
INVESTING ACTIVITIES
Purchases of property, plant and equipment ......................... (349,861) (714,212) (474,115)
Proceeds from sale of non-strategic assets ......................... 1,136,571 34,100 5,693
Additions to intangible assets, net of effects of acquisitions ..... (61,887) (48,415) (33,140)
Assets obtained through acquisitions, net of liabilities
assumed ........................................................... (309,548) (729,440) (104,304)
Payments on purchase accounting accruals ........................... -- (292,949) (22,063)
Changes in other assets ............................................ (108,245) (48,883) 12,866
Proceeds received on sale of other marketable securities ........... 41,087 18,340 1,300
Investments in other marketable securities ......................... (1,339) -- (1,096)
------------ ------------ ----------
Net cash provided by (used in) investing activities ................ 346,778 (1,781,459) (614,859)
FINANCING ACTIVITIES
Proceeds from borrowings ........................................... 1,763,317 3,486,474 756,000
Principal payments on long-term debt ............................... (2,537,620) (2,309,163) (470,621)
Proceeds from exercise of options .................................. 60,326 60,204 4,371
Proceeds from issuance of common stock ............................. 70 -- --
Purchase of treasury stock ......................................... -- (17,890) (256,691)
Reduction in receivable from ESOP .................................. 1,901 2,078 2,271
Decrease (increase) in loans to stockholders ....................... 7 295 (39,312)
Proceeds from investment by minority interests ..................... 4,096 4,471 11,582
Purchase of limited partnership units .............................. (2,685) (1,658) (6,360)
Payment of cash distributions to limited partners .................. (79,927) (103,649) (100,319)
------------ ------------ ----------
Net cash (used in) provided by financing activities ................ (790,515) 1,121,162 (99,079)
------------ ------------ ----------
Increase (decrease) in cash and cash equivalents ................... 3,200 (24,165) (9,427)
Cash and cash equivalents at beginning of year ..................... 159,792 162,992 138,827
------------ ------------ ----------
Cash and cash equivalents at end of year ........................... $ 162,992 $ 138,827 $ 129,400
============ ============ ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest .......................................................... $ 113,241 $ 143,606 $ 159,496
Income taxes ...................................................... 140,715 315,028 88,575
</TABLE>
40
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
Non-cash investing activities:
The Company assumed liabilities of $1,163,913,000, $107,091,000 and
$9,529,000 during the years ended December 31, 1997, 1998 and 1999,
respectively, in connection with its acquisitions.
During the year ended December 31, 1997, the Company issued 46,412,000 common
shares with a market value of $1,000,051,000 as consideration for
acquisitions accounted for as purchases.
During the year ended December 31, 1998, the Company issued 699,000 common
shares with a market value of $19,397,000 as consideration for acquisitions
accounted for as purchases.
Non-cash financing activities:
During 1997, the Company effected a two-for-one stock split of its common
stock which was effected in the form of a 100% stock dividend.
The Company received a tax benefit from the disqualifying disposition of
incentive stock options of $67,090,000 and $21,804,000 for the years ended
December 31, 1997 and 1998, 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 12,324,000 shares of the
Company's Common Stock.
See accompanying notes.
41
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
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.
NATURE OF OPERATIONS
HEALTHSOUTH is engaged in the business of providing healthcare services
through two business segments: inpatient and other clinical services and
outpatient services. Inpatient and other clinical services consist of services
provided through inpatient rehabilitation facilities, specialty medical centers
and certain physician practices and other clinical services. Outpatient services
consist of services provided through outpatient rehabilitation facilities,
outpatient surgery centers and outpatient diagnostic centers.
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 operates a number of its facilities as general and limited
partnerships ("partnerships") or limited liability companies ("LLCs") in which
HEALTHSOUTH serves as the general partner or managing member, as applicable.
HEALTHSOUTH's policy is to consolidate the financial position and results of
operations of these partnerships and LLCs in cases where HEALTHSOUTH owns the
majority interest or in which it has otherwise a controlling interest (see also
"Minority Interests" below in Note 1). Investments in partnerships, LLCs and
other entities that represent less than a majority interest or otherwise
represent a non-controlling interest are accounted for under the equity method
or cost method, as appropriate (see also "Minority Interests" below in Note 1
and Note 4).
OPERATING SEGMENTS
The Company has adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and
Related Information". SFAS 131 requires the utilization of a "management
approach" to define and report the financial results of operating segments. The
management approach defines operating segments along the lines used by
management to assess performance and make operating and resource allocation
decisions. The Company has aggregated the financial results of its outpatient
rehabilitation facilities, outpatient surgery centers and outpatient diagnostic
centers into the outpatient services segment. These three types of facilities
have common economic characteristics, provide similar services, serve a similar
class of customers, cross-utilize administrative services and operate in a
similar regulatory environment. In addition, the Company's integrated service
model strategy combines these services in a seamless environment for the
delivery of patient care on an episodic basis.
The adoption of SFAS 131 did not affect results of operations or financial
position, but did require the disclosure of segment information (see Note 14).
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.
42
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
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 $9,277,000 and $49,631,000 at December 31, 1998 and 1999,
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,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Medicare ................. 21% 26%
Medicaid ................. 4 5
Other .................... 75 69
-- --
100% 100%
=== ===
</TABLE>
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 costs of $115,020,000, $148,793,000
and $178,836,000, of which $2,491,000, $630,000 and $2,184,000 was capitalized,
during 1997, 1998 and 1999, 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.
43
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
INTANGIBLE ASSETS
Cost in excess of net asset value of purchased facilities is amortized over
20 to 40 years using the straight-line method, with the majority of such cost
being amortized over 40 years. 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
policy in effect through June 30, 1997 and will be fully amortized by June 2000.
Through June 30, 1997, the Company had assigned value to and capitalized
organization and partnership formation costs which had 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, 1997 will be amortized in accordance with
the Company's policy in effect through June 30, 1997 and will be fully amortized
by June 2000.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5 requires that the costs of start-up activities be
expensed as incurred. The SOP broadly defines start-up activities as those
one-time activities related to opening a new facility, introducing a new product
or service, conducting business in a new territory, conducting business with a
new class of customer, initiating a new process in an existing facility, or
beginning some new operation. Start-up activities also include organizational
costs. SOP 98-5 is effective for years beginning after December 15, 1998. In
1997, the Company began expensing as incurred all costs related to start-up
activities. Therefore, the adoption of SOP 98-5 did not have a material effect
on the Company's financial statements.
MINORITY INTERESTS
The equity of minority investors in partnerships and LLCs 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, 1999), the effect of which is removed from the results of
operations of the Company.
REVENUES
Revenues include net patient service revenues and other operating revenues.
Other operating revenues include cafeteria revenue, gift shop revenue, rental
income, trainer/contract revenue, management and administrative fee revenue
(related to non-consolidated subsidiaries and affiliates) and transcriptionist
fees which are insignificant to total revenues. Net patient service revenues are
reported at the estimated net realizable amounts from patients, third-party
payors and others for services rendered, including estimated retroactive
adjustments under reimbursement agreements with third-party payors.
44
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1998 1999
-------------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Numerator:
Net income ...................................................... $ 343,059 $ 46,558 $ 76,517
---------- --------- ---------
Numerator for basic earnings per share -- income available
to common stockholders ......................................... 343,059 46,558 76,517
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 .............. 968 -- --
---------- --------- ---------
Numerator for diluted earnings per share--income available to
common stockholders after assumed conversion ................... $ 344,027 $ 46,558 $ 76,517
========== ========= =========
Denominator:
Denominator for basic earnings per share -- weighted-average
shares ......................................................... 366,768 421,462 408,195
Effect of dilutive securities:
Net effect of dilutive stock options ........................... 16,374 10,813 5,525
Restricted shares issued ....................................... -- -- 850
Assumed conversion of 5% Convertible Subordinated
Debentures due 2001 ........................................... 3,057 -- --
Assumed conversion of other dilutive convertible debt .......... 12 -- --
---------- --------- ---------
Dilutive potential common shares ................................ 19,443 10,813 6,375
---------- --------- ---------
Denominator of diluted earnings per share -- adjusted
weighted-average shares and assumed conversions ................ 386,211 432,275 414,570
========== ========= =========
Basic earnings per share ......................................... $ 0.94 $ 0.11 $ 0.19
========== ========= =========
Diluted earnings per share ....................................... $ 0.89 $ 0.11 $ 0.18
========== ========= =========
</TABLE>
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 amount of those assets. In such cases, the
impaired assets are written down to fair value. Fair value is determined based
on the individual facts and circumstances of the impairment event, and the
available information related to it. Such information might include quoted
market prices, prices for comparable assets, estimated future cash flows
discounted at a rate commensurate with the risks involved, and independent
appraisals. For purposes of analyzing impairment, assets are generally grouped
at the individual operational facility level, which is the lowest level for
which there are identifiable cash flows. If the group of assets being tested was
acquired by the Company as part of a purchase business combination, any goodwill
that arose as part of the transaction is included as part of the asset grouping.
With respect to the carrying value of goodwill and other intangible assets,
the Company determines on a quarterly basis whether an impairment event has
occurred by considering factors such as the market
45
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
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 goodwill 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
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
(see Note 13).
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, 1998 and 1999, are included with accrued interest payable and other
liabilities in the accompanying consolidated balance sheets.
RECLASSIFICATIONS
Certain amounts in 1997 and 1998 financial statements have been
reclassified to conform with the 1999 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.
2. MERGERS
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.
Effective July 22, 1998, a wholly-owned subsidiary of the Company merged
with National Surgery Centers, Inc. ("NSC"), and in connection therewith the
Company issued 20,426,261 shares of its common stock in exchange for all of
NSC's outstanding common stock. Prior to the merger, NSC operated 40 outpatient
surgery centers in 14 states. Costs and expenses of approximately $25,630,000,
primarily legal, accounting and financial advisory fees, incurred by the Company
in connection with the NSC merger have been recorded in operations during 1998
and reported as merger expenses in the accompanying consolidated statements of
income.
46
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. MERGERS - (CONTINUED)
The mergers of the Company with Health Images and NSC 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, Health Images and NSC prior to the mergers. The effects of conforming
the accounting policies of the combined companies are not material.
3. CASH, CASH EQUIVALENTS AND OTHER MARKETABLE SECURITIES
Cash, cash equivalents and other marketable securities consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash ........................................ $131,709 $117,912
Cash equivalents ............................ 7,118 11,488
-------- --------
Total cash and cash equivalents ............ 138,827 129,400
Certificates of deposit ..................... 1,256 2,352
Municipal put bonds ......................... 1,430 130
Collateralized mortgage obligations ......... 1,000 1,000
-------- --------
Total other marketable securities .......... 3,686 3,482
-------- --------
Total cash, cash equivalents and other
marketable securities (approximates
market value) .............................. $142,513 $132,882
======== ========
</TABLE>
For purposes of the consolidated balance sheets and statements of cash
flows, marketable securities purchased with an original maturity of ninety days
or less are considered cash equivalents.
4. OTHER ASSETS
Other assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Notes receivable ........................... $ 54,871 $ 48,717
Prepaid long-term lease .................... 7,829 7,084
Investments accounted for on equity method . 16,548 13,320
Investments accounted for at cost .......... 52,004 44,093
Real estate investments .................... 2,820 2,820
Trusteed funds ............................. 4,218 8,255
Deferred loss on leases .................... 22,658 21,263
Other ...................................... 3,332 3,547
--------- ---------
$ 164,280 $ 149,099
========= =========
</TABLE>
The Company has various investments, with ownership percentages ranging
from 24% to 49%, which are accounted for using the equity method of accounting.
The Company's equity in earnings of these investments was not material to the
Company's consolidated results of operations for the years ended 1997, 1998 and
1999. At December 31, 1999, the investment balance on the Company's books was
not materially different than the underlying equity in net assets of the
unconsolidated entities.
47
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. OTHER ASSETS - (CONTINUED)
Investments accounted for at cost consist of investments in companies
involved in operations similar to those of the Company. For those investments
with a quoted market price, the Company's investment balance is not materially
different than the quoted market price. For all other investments in this
category, it was not practicable to estimate the fair value because of the lack
of a quoted market price and the inability to estimate the fair value without
incurring excessive costs. The carrying amount at December 31, 1999 represents
the original cost of the investments, which management believes is not impaired.
During 1998, the Company sold four inpatient rehabilitation hospital
facilities. Because the Company is leasing back all of the properties, the
resulting loss on sale of approximately $19,500,000 has been recorded on the
accompanying consolidated balance sheet in other assets as deferred loss on
leases and will be amortized into expense over the initial lease term of 15
years in accordance with SFAS 98. Aggregate annual lease payments for these
properties total $6,000,000. During 1995, the Company sold another inpatient
rehabilitation hospital property under terms similar to those described above.
Aggregate annual lease payments for this property total $1,700,000. The
resulting loss of approximately $4,000,000 is being amortized to expense over
the initial lease term of 15 years.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1999
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Land ...................................... $ 123,076 $ 126,074
Buildings ................................. 1,114,852 1,233,809
Leasehold improvements .................... 348,205 380,852
Furniture, fixtures and equipment ......... 1,266,185 1,553,159
Construction-in-progress .................. 29,212 28,931
---------- ----------
2,881,530 3,322,825
Less accumulated depreciation and
amortization ............................. 626,037 819,858
---------- ----------
$2,255,493 $2,502,967
========== ==========
</TABLE>
48
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
6. INTANGIBLE ASSETS
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1999
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Organizational, partnership formation
and start-up costs (see Note 1) ......... $ 200,160 $ 117,622
Debt issue costs ......................... 56,068 51,284
Noncompete agreements .................... 130,776 122,545
Cost in excess of net asset value of
purchased facilities .................... 2,919,187 2,920,980
----------- -----------
3,306,191 3,212,431
Less accumulated amortization ............ 346,281 383,924
----------- -----------
$ 2,959,910 $ 2,828,507
=========== ===========
</TABLE>
7. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1999
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Notes and bonds payable:
Advances under a $1,750,000,000
credit agreement with banks .................... $1,325,000 $1,625,000
9.5% Senior Subordinated Notes due
2001 ........................................... 250,000 250,000
3.25% Convertible Subordinated
Debentures due 2003 ............................ 567,750 567,750
6.875% Senior Notes due 2005 .................... 250,000 250,000
7.0% Senior Notes due 2008 ...................... 250,000 250,000
Notes payable to banks and various
other notes payable, at interest rates
from 5.5% to 14.9% ............................. 113,755 117,421
Hospital revenue bonds payable .................. 13,712 15,130
Noncompete agreements payable with
payments due at intervals ranging
through December 2004 ........................... 60,709 39,347
---------- ----------
2,830,926 3,114,648
Less amounts due within one year ................. 49,994 37,818
---------- ----------
$2,780,932 $3,076,830
========== ==========
</TABLE>
The fair value of the total long-term debt approximates book value at
December 31, 1999, except for the 3.25% Convertible Subordinated Debentures due
2003, the 6.875% Senior Notes due 2005 and the 7.0% Senior Notes due 2008. The
fair value of the 3.25% Convertible Subordinated Debentures due 2003 was
approximately $443,000,000 at December 31, 1999. The fair value of the 6.875%
Senior Notes due 2005 was approximately $216,600,000 at December 31, 1999. The
fair value of the 7% Senior Notes due 2008 was approximately $207,250,000 at
December 31, 1999. The fair values of the Company's long-term
49
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. LONG-TERM DEBT - (CONTINUED)
debt are estimated using discounted cash flow analysis, based on the Company's
current incremental borrowing rates for similar types of borrowing arrangements.
The Company has a $1,750,000,000 revolving credit facility with Bank of
America, N.A. ("Bank of America") and other participating banks (the "1998
Credit Agreement"). The 1998 Credit Agreement replaced a previous $1,250,000,000
revolving credit agreement, also with Bank of America. Interest on the 1998
Credit Agreement 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 0.09% to 0.25%, depending on certain defined credit ratings. The
principal amount is payable in full on June 22, 2003. The Company has provided a
negative pledge on all assets under the 1998 Credit Agreement. At December 31,
1999, the effective interest rate associated with the 1998 Credit Agreement was
approximately 6.6%.
The Company also has a Short Term Credit Agreement with Bank of America (as
amended, the "Short Term Credit Agreement"), providing for a $250,000,000 short
term revolving credit facility. The terms of the Short Term Credit Agreement are
substantially consistent with those of the 1998 Credit Agreement. Interest on
the Short Term Credit Agreement is paid based on LIBOR plus a predetermined
margin or a base rate. The Company is required to pay a fee on the unused
portion of the credit facility ranging from 0.30% to 0.50%, depending on certain
defined credit ratings. The principal amount is payable in full on December 12,
2000, with an earlier repayment required in the event that the Company
consummates any public offering or private placement of debt securities. At
December 31, 1999, the Company had not drawn any amounts under the Short Term
Credit Agreement.
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 mature on
April 1, 2001.
On March 20, 1998, the Company issued $500,000,000 in 3.25% Convertible
Subordinated Debentures due 2003 (the "3.25% Convertible Debentures") in a
private placement. An additional $67,750,000 principal amount of the 3.25%
Convertible Debentures was issued on March 31, 1998 to cover underwriters'
overallotments. Interest is payable on April 1 and October 1. The 3.25%
Convertible Debentures are convertible into Common Stock of the Company at the
option of the holder at a conversion price of $36.625 per share. The conversion
price is subject to adjustment upon the occurrence of (a) a subdivision,
combination or reclassification of outstanding shares of Common Stock, (b) the
payment of a stock dividend or stock distribution on any share of the Company's
capital stock, (c) the issuance of rights or warrants to all holders of Common
Stock entitling them to purchase shares of Common Stock at less than the current
market price, or (d) the payment of certain other distributions with respect to
the Company's Common Stock. In addition, the Company may, from time to time,
lower the conversion price for periods of not less than 20 days, in its
discretion. The net proceeds from the issuance of the 3.25% Convertible
Debentures were used by the Company to pay down indebtedness outstanding under
its then-existing credit facilities.
On June 22, 1998, the Company issued $250,000,000 in 6.875% Senior Notes
due 2005 and $250,000,000 in 7.0% Senior Notes due 2008 (collectively, the
"Senior Notes"). Interest is payable on June 15 and December 15 of each year,
commencing on December 15, 1998. The Senior Notes are unsecured, unsubordinated
obligations of the Company. The net proceeds from the issuance of the Senior
Notes were used by the Company to pay down indebtedness outstanding under its
then-existing credit facilities.
In October 1999, the Company entered into three six-month interest rate
swap arrangements with notional amounts of $250,000,000 each. The swaps expire
on various dates in April 2000. These
50
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. LONG-TERM DEBT - (CONTINUED)
arrangements have the effect of converting a portion of the Company's variable
rate debt to a fixed rate. The arrangements did not have a material effect on
the Company's operations.
Principal maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, (IN THOUSANDS)
- ------------------------------ ---------------
<S> <C>
2000 ....................... $ 37,818
2001 ....................... 295,549
2002 ....................... 19,138
2003 ....................... 2,205,240
2004 ....................... 10,407
After 2004 ................. 546,496
----------
$3,114,648
==========
</TABLE>
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 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 1997, 1998 and 1999 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 1997,
1998 and 1999, respectively: risk-free interest rates of 6.12%, 6.10% and 6.21%;
dividend yield of 0%; volatility factors of the expected market price of the
Company's common stock of .37, .76 and .77; and a weighted-average expected life
of the options of 6.2 years, 5.5 years and 5.0 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
51
<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,
--------------------------------------------
1997 1998 1999
-------------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Pro forma net income ......... $ 301,467 $ 31,009 $ 47,149
Pro forma earnings per share:
Basic ....................... 0.82 0.07 0.12
Diluted ..................... 0.78 0.07 0.12
</TABLE>
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 is the full effect of recognizing
compensation expense for stock options representative of the possible effects on
pro forma net income for future years.
A summary of the Company's stock option activity and related information
for the years ended December 31 follows:
<TABLE>
<CAPTION>
1997 1998 1999
------------------------- ------------------------ -----------------------
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 .............. 34,736 $ 7 34,771 $ 12 34,437 $ 12
Granted ................................... 11,286 22 6,020 12 6,589 11
Exercised ................................. (10,075) 7 (5,035) 12 (772) 5
Canceled .................................. (1,176) 19 (1,319) 21 (4,226) 20
------- ---- ------ ---- ------ ----
Options outstanding at December 31 ......... 34,771 $ 12 34,437 $ 12 36,028 $ 11
Options exercisable at December 31 ......... 28,703 $ 11 29,156 $ 11 31,689 $ 11
Weighted average fair value of options
granted during the year ................... $ 10.59 $ 7.50 $ 7.14
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
DECEMBER 31, REMAINING EXERCISE DECEMBER 31, EXERCISE
1999 LIFE PRICE 1999 PRICE
---------------- ----------- ---------- --------------- -----------
(IN THOUSANDS) (YEARS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Under $10.00 ............. 21,591 4.99 $ 6.49 19,746 $ 6.26
$10.00 - $23.63 .......... 14,198 7.32 16.78 11,733 17.71
$23.63 and above ......... 239 7.69 28.65 210 28.83
</TABLE>
9. ACQUISITIONS
The Company evaluates each of its acquisitions independently to determine
the appropriate amortization period for the cost in excess of net asset value of
purchased facilities. Each evaluation includes an analysis of historic and
projected financial performance, evaluation of the estimated useful lives of
buildings and fixed assets acquired, the indefinite lives of certificates of
need and licenses acquired, the competition within local markets, lease terms
where applicable, and the legal term of partnerships where applicable.
52
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. ACQUISITIONS - (CONTINUED)
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 Company also planned 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 was
completed during the fourth quarter of 1998. Accordingly, a portion of the
Horizon/CMS purchase price was allocated to the Physician Placement Services
Subsidiary and this amount was classified as assets held for sale in the
accompanying December 31, 1997 consolidated balance sheet. The allocated amount
of $60,400,000 represented 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 actual net proceeds
realized by the Company upon the sale of the Physician Placement Services
Subsidiary was approximately $34,100,000. The difference between the original
amount allocated and the net proceeds realized by the Company has been accounted
for in 1998 as an adjustment to the Horizon/CMS purchase price allocation. The
results of operations of the Physician Placement Services Subsidiary from the
Horizon/CMS acquisition date to December 31, 1998, including a net loss of
$10,065,000, have been excluded from the Company's results of operations in the
accompanying financial statement in accordance with EITF 87-11.
In connection with the sale of the Physician Placement Services Subsidiary,
the Company also sold its physical therapy staffing business, which had been
acquired by the Company as part of a larger strategic acquisition in 1994. The
loss on the sale of the physical therapy staffing business was $31,232,000 and
was recorded by the Company in the fourth quarter of 1998.
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
53
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. ACQUISITIONS - (CONTINUED)
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, ten 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 $179,749,000. The form of consideration constituting the total
purchase price was $173,519,000 in cash, $2,674,000 in notes payable and the
issuance of approximately 167,000 shares of the Company's common stock, valued
at $3,521,000.
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.
As of December 31, 1997, the Company had estimated the fair value of the
total net assets relating to the 1997 acquisitions described above to be
approximately $237,369,000. During 1998, the Company made certain adjustments to
reduce the fair value of the Horizon/CMS net assets acquired by approximately
$136,065,000. These adjustments relate primarily to the valuation of accounts
and notes receivable acquired, the valuation of fixed assets acquired, final
working capital settlements with IHS and the payment of pre-acquisition
liabilities in excess of amounts accrued in the original purchase price
allocation. After considering the effects of the adjustments recorded in 1998,
the total cost of the 1997 acquisitions exceeded the fair value of the net
assets acquired by approximately $1,228,993,000. 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 25 to 40 years on a
straight-line basis.
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 have 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.
1998 ACQUISITIONS
Effective July 1, 1998, the Company acquired Columbia/HCA Healthcare
Corporation's interests in 33 ambulatory surgery centers (subject to certain
outstanding consents and approvals with respect to three of the centers, as to
which the parties entered into management agreements) in a transaction accounted
for as a purchase. Effective July 31, 1998, the Company entered into certain
other arrangements to acquire substantially all of the economic benefit of
Columbia/HCA's interests in one additional ambulatory surgery center. The
purchase price was approximately $550,402,000 in cash.
At various dates and in separate transactions throughout 1998, the Company
acquired 112 outpatient rehabilitation facilities, four outpatient surgery
centers, one inpatient rehabilitation hospital and 27 diagnostic imaging
centers. The acquired operations are located throughout the United States. The
total purchase price of the acquired operations was approximately $216,305,000.
The form of consideration constituting the total purchase price was
approximately $179,038,000 in cash and $17,870,000 in notes payable and the
issuance of approximately 699,000 shares of the Company's common stock, valued
at $19,397,000.
54
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. ACQUISITIONS - (CONTINUED)
In connection with these transactions, the Company entered into noncompete
agreements with former owners totaling $25,926,000. 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 1998 acquisitions
described above was approximately $15,570,000. The total cost of the 1998
acquisitions exceeded the fair value of the net assets acquired by approximately
$751,137,000. 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 1998 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 1998 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.
1999 ACQUISITIONS
Effective June 29, 1999, the Company acquired from Mariner Post-Acute
Network, Inc. ("Mariner") substantially all of the assets of Mariner's American
Rehability Services division in a transaction accounted for as a purchase. At
the time of the acquisition, Mariner operated approximately 160 outpatient
rehabilitation centers in 18 states. The purchase price was approximately
$54,521,000 in cash.
At various dates and in separate transactions throughout 1999, the Company
acquired ten outpatient rehabilitation facilities, eight outpatient surgery
centers, two inpatient rehabilitation hospitals and four diagnostic imaging
centers. The acquired operations are located throughout the United States. The
total purchase price of the acquired operations was approximately $49,844,000.
The form of consideration constituting the total purchase price was
approximately $49,684,000 in cash and $160,000 in notes payable.
In connection with these transactions, the Company entered into noncompete
agreements with former owners totaling $2,996,000. 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 1999 acquisitions
described above was approximately $23,245,000. The total cost of the 1999
acquisitions exceeded the fair value of the net assets acquired by approximately
$81,120,000. 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 1999 acquisitions should be
amortized over periods ranging from 20 to 40 years on a straight-line basis. No
other identifiable intangible assets were recorded in the acquisitions described
above. At December 31, 1999, the purchase price allocation associated with the
1999 acquisitions is preliminary in nature. During 2000 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 1999 acquisitions described above were accounted for as
purchases and, accordingly, the results of operations of the acquired businesses
(not material individually or in the aggregate) are included in the accompanying
consolidated financial statements from their respective dates of acquisition.
10. INCOME TAXES
HEALTHSOUTH and its subsidiaries file a consolidated federal income tax
return. The partnerships and LLCs 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 LLC is allocated to the other partners.
55
<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 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, 1998 are as follows:
<TABLE>
<CAPTION>
CURRENT NONCURRENT TOTAL
-------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss .................... $ -- $ 3,504 $ 3,504
Accruals .............................. 19,482 -- 19,482
Other ................................. -- 6,470 136,470
--------- ---------- ----------
Total deferred tax assets .............. 19,482 139,974 159,456
Deferred tax liabilities:
Depreciation and amortization ......... -- (90,753) (90,753)
Bad debts ............................. (53,642) -- (53,642)
Capitalized costs ..................... -- (78,077) (78,077)
Other ................................. (3,452) -- (3,452)
--------- ---------- ----------
Total deferred tax liabilities ......... (57,094) (168,830) (225,924)
--------- ---------- ----------
Net deferred tax liabilities ........... $ (37,612) $ (28,856) $ (66,468)
========= ========== ==========
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
CURRENT NONCURRENT TOTAL
-------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss .................... $ -- $ 2,811 $ 2,811
Impairment and restructuring charges .. -- 126,008 126,008
---------- --------- ----------
Total deferred tax assets .............. -- 128,819 128,819
Deferred tax liabilities:
Depreciation and amortization ......... -- (46,017) (46,017)
Bad debts ............................. (91,830) -- (91,830)
Capitalized costs ..................... -- (35,252) (35,252)
Accruals .............................. (7,584) -- (7,584)
Other ................................. (8,754) -- (8,754)
---------- --------- ----------
Total deferred tax liabilities ......... (108,168) (81,269) (189,437)
---------- --------- ----------
Net deferred tax liabilities ........... $ (108,168) $ 47,550 $ (60,618)
========== ========= ==========
</TABLE>
At December 31, 1999, the Company has net operating loss carryforwards of
approximately $7,322,000 for income tax purposes expiring through the year 2015.
Those carryforwards resulted from the Company's acquisitions of Rebound, Inc.,
Horizon/CMS Healthcare Corporation, ASC Network Corporation, The Company Doctor
and National Imaging Affiliates.
56
<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,
-----------------------------------------
1997 1998 1999
----------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Currently payable:
Federal ......... $171,029 $ 162,433 $ 61,156
State ........... 27,402 24,324 11,623
-------- --------- --------
198,431 186,757 72,779
Deferred expense:
Federal ......... 13,186 (37,756) (4,916)
State ........... 2,051 (5,654) (934)
-------- --------- --------
15,237 (43,410) (5,850)
-------- --------- --------
$213,668 $ 143,347 $ 66,929
======== ========= ========
</TABLE>
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,
--------------------------------------------
1997 1998 1999
------------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal taxes at statutory rates ......... $ 220,219 $ 93,581 $ 80,470
Add (deduct):
State income taxes, net of federal tax
benefit ............................... 19,144 12,136 6,948
Minority interests ...................... (25,364) (27,114) (30,264)
Nondeductible goodwill .................. -- 7,630 9,304
Disposal/impairment charges ............. 1,576 57,873 6,128
Other ................................... (1,907) (759) (5,657)
--------- --------- ---------
$ 213,668 $ 143,347 $ 66,929
========= ========= =========
</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, 1999 the Company has 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 carrier to assume responsibility for
the majority of open claims. Under this agreement, a "risk transfer" was
conducted which converted 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
57
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
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, 1999, 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 consolidated financial position.
The Company was served with certain lawsuits filed beginning September 30,
1998, which purport to be class actions under the federal and Alabama securities
laws. Such lawsuits were filed following a decline in the Company's stock price
at the end of the third quarter of 1998. Seven such suits were filed in the
United States District Court for the Northern District of Alabama. In January
1999, those suits were ordered consolidated. In April 1999, the plaintiffs filed
a consolidated amended complaint against the Company and certain of its officers
and directors alleging that, during the period April 24, 1997 through September
30, 1998, the defendants misrepresented or failed to disclose certain material
facts concerning the Company's business and financial condition in order to
artificially inflate the price of the Company's Common Stock and issued or sold
shares of such stock during the purported class period, all allegedly in
violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder. Certain of the named plaintiffs in the consolidated amended
complaint also purport to represent separate subclasses consisting of former
stockholders of corporations acquired by the Company in 1997 and 1998 who
received shares of the Company's Common Stock in connection with such
acquisitions and who assert additional claims under Section 11 of the Securities
Act of 1933.
Additionally, another suit has been filed in the Circuit Court of Jefferson
County, Alabama, purportedly as a derivative action on behalf of the Company.
This suit largely replicates the allegations of the federal actions described in
the preceding paragraph and alleges that the current directors of the Company,
certain former directors and certain officers of the Company breached their
fiduciary duties to the Company and engaged in other allegedly tortious conduct.
The plaintiff in that case has forborne pursuing its claim thus far pending
further progress in the federal actions, and the Company has not yet been
required to file a responsive pleading in the case. Another non-derivative state
court action was voluntarily dismissed by the plaintiff, without prejudice.
The Company filed its motion to discuss the consolidated amended complaint
in the federal action in late June 1999. The Company cannot predict when the
court will hear arguments or rule on this motion. The Company believes that all
claims asserted in the above suits are without merit, and expects to vigorously
defend against such claims. Because such suits remain at an early stage, the
Company cannot predict the outcome of any such suits or the magnitude of any
potential loss if the Company's defense is unsuccessful.
At December 31, 1999, committed capital expenditures for the next twelve
months are $33,822,000.
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 $167,749,000,
$238,937,000 and $233,895,000 for the years ended December 31, 1997, 1998 and
1999, respectively.
The Company has entered into a tax retention operating lease for certain of
its facilities. The Company is required to renegotiate the lease or purchase or
obtain a purchaser for the facilities at its termination in December 2000. The
minimum sales price guarantee is approximately $120,000,000.
58
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
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>
2000 ..................................... $ 203,432
2001 ..................................... 169,129
2002 ..................................... 133,593
2003 ..................................... 103,166
2004 ..................................... 77,301
After 2004 ............................... 381,789
-----------
Total minimum payments required .......... $ 1,068,410
===========
</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 $2,628,000,
$4,121,000 and $4,608,000 in 1997, 1998 and 1999, respectively.
In 1991, the Company established an Employee Stock Ownership Plan ("ESOP")
for the purpose of providing substantially all employees of the Company the
opportunity to save for their retirement and acquire a proprietary interest in
the Company. The ESOP currently owns approximately 3,320,000 shares of the
Company's common stock, which were purchased with funds borrowed from the
Company, $10,000,000 in 1991 (the "1991 ESOP Loan") and $10,000,000 in 1992 (the
"1992 ESOP Loan"). At December 31, 1999, the combined ESOP Loans had a balance
of $7,898,000. 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 $3,249,000, $3,195,000 and $3,197,000 in
1997, 1998 and 1999, respectively. Interest incurred on the ESOP Loans was
approximately $1,121,000, $927,000 and $715,000 in 1997, 1998 and 1999,
respectively. Approximately 2,149,000 shares owned by the ESOP have been
allocated to participants at December 31, 1999.
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 AND RESTRUCTURING CHARGES
During the third quarter of 1998, the Company recorded impairment and
restructuring charges of approximately $72,000,000 related to the Company's
decision to dispose of or otherwise discontinue substantially all of its home
health operations. The decision was prompted in large part by the negative
59
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
13. IMPAIRMENT AND RESTRUCTURING CHARGES - (CONTINUED)
impact of the 1997 Balanced Budget Act, which placed reimbursement limits on
home health businesses. The limits were announced in March 1998, and the Company
began to see the adverse affect on home health margins. Based on this
unfavorable trend, management prepared a plan to exit the home health operations
described above. The plan was approved by the Board of Directors on September
16, 1998. Revenues and losses before income taxes and minority interests for the
home health operations were $71,163,000 and $(4,261,000), respectively. The home
health operations have been included in the inpatient and other clinical
services segment. The home health operations covered by the plan included
approximately 35 locations, all of which were closed by December 31, 1998.
The $72,000,000 third quarter charge consists of the following components:
(i) A $62,748,000 impairment charge was recorded to reduce the carrying amount
of selected long-lived assets to estimated fair value. All of the assets
written down, including fixed assets of $8,363,000 and intangible assets of
$54,385,000, were associated with the discontinued home health operations
and are detailed further in the table below.
(ii) A $4,908,000 charge was recorded to write down other assets, primarily
inventories and prepaid expenses, which were negatively impacted by the
Company's decision to discontinue the home health operations.
(iii) The remaining components of the charge included $2,618,000 in lease
abandonment costs and $1,435,000 in other incremental costs, representing
primarily legal and asset disposal costs.
The Company has developed a strategic plan to provide integrated services
in major markets throughout the United States. In the fourth quarter of 1998,
the Company recorded a restructuring charge of approximately $404,000,000 as a
result of its decision to close certain facilities that did not fit with the
Company's strategic vision, underperforming facilities and facilities not
located in target markets. The Company's Board of Directors approved the
restructuring plan on December 10, 1998. A total of 167 facilities were included
in the plan, including 110 outpatient rehabilitation facilities, 7 inpatient
rehabilitation hospitals, 29 outpatient surgery centers, and 21 diagnostic
centers. Some of these facilities had multiple business units associated with
the operation. The identified facilities contributed $140,087,000 to the
Company's revenue and $(9,907,000) to the Company's income before income taxes
and minority interests during 1998. At March 24, 2000, approximately 95% of the
locations identified in the fourth quarter restructuring plan had been closed.
The $404,000,000 fourth quarter charge consists of the following
components:
(i) A $304,624,000 impairment charge was recorded to reduce the carrying amount
of selected long-lived assets to estimated fair value. All of the assets
written down, including fixed assets of $137,880,000 and intangible assets
of $166,744,000, were associated with the facilities identified in the
fourth quarter restructuring plan. These assets are detailed further in the
table below.
(ii) A $19,857,000 charge was recorded to write down other assets, primarily
inventories and prepaid expenses, which were negatively impacted by the
Company's decision to close the affected facilities.
(iii) Approximately $6,027,000 of the charge related to involuntary severance
packages paid or payable to approximately 7,900 employees. These employees
worked primarily in the Company's discontinued home health operations
described above. The terminations were communicated to the affected
employees during the fourth quarter. Approximately 7,880 of the affected
employees had left the Company as of December 31, 1998. The remaining
employees left the Company during the first half of 1999.
(iv) Approximately $49,476,000 of the charge related to lease abandonment costs
primarily for office and clinical space that was or was to be vacated as a
result of the restructuring plan.
60
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
13. IMPAIRMENT AND RESTRUCTURING CHARGES - (CONTINUED)
(v) The Company recognized $24,089,000 in estimated other incremental costs,
generally representing costs that are a direct result of the restructuring
plan and have no future economic benefit. These costs include primarily (a)
$7,818,000 in legal costs associated with closing the facilities, (b)
$7,275,000 in disposal costs, including costs associated with
de-installation of signage and equipment, moving costs, refurbishing costs
and exit cleaning costs, (c) $2,777,000 in ongoing security costs at
abandoned or closed facilities, (d) $4,591,000 storage rental costs and (e)
$1,628,000 in utility costs incurred at abandoned or closed facilities.
The restructuring activities (shown below in tabular form) primarily relate
to asset write-downs, lease abandonments and the elimination of job
responsibilities resulting in costs incurred to sever employees. Details of the
impairment and restructuring charges, separated by the amounts recorded in the
third and fourth quarter of 1998, respectively, are as follows:
<TABLE>
<CAPTION>
ACTIVITY
------------------------
RESTRUCTURING CASH NON-CASH
DESCRIPTION CHARGE PAYMENTS IMPAIRMENTS
- ----------------------------------------- --------------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Third Quarter 1998 Charge
Property, plant and equipment:
Leasehold improvements ................ $ 820 $ -- $ 820
Furniture, fixtures and equipment ..... 7,543 -- 7,543
--------- -------- ---------
8,363 -- 8,363
Intangible assets:
Goodwill .............................. 53,485 -- 53,485
Noncompete agreements ................. 678 -- 678
Other intangible assets ............... 222 -- 222
--------- -------- ---------
54,385 -- 54,385
Lease abandonment costs ................ 2,618 2,618 --
Other assets ........................... 4,908 -- 4,908
Other incremental costs ................ 1,435 1,020 --
--------- -------- ---------
Total Third Quarter 1998 Charge ......... $ 71,709 $ 3,638 $ 67,656
========= ======== =========
Fourth Quarter 1998 Charge
Property, plant and equipment:
Land and buildings .................... $ 38,741 $ -- $ 38,741
Leasehold improvements ................ 27,187 -- 27,187
Furniture, fixtures and equipment ..... 71,952 -- 71,952
--------- -------- ---------
137,880 -- 137,880
Intangible assets:
Goodwill .............................. 154,840 -- 154,840
Noncompete agreements ................. 10,632 -- 10,632
Other intangible assets ............... 1,272 -- 1,272
--------- -------- ---------
166,744 -- 166,744
Lease abandonment costs ................ 49,476 -- --
Other assets ........................... 19,857 -- 19,857
Severance packages ..................... 6,027 4,753 --
Other incremental costs ................ 24,089 8,100 --
--------- -------- ---------
Total Fourth Quarter 1998 Charge ........ $ 404,073 $ 12,853 $ 324,481
========= ======== =========
</TABLE>
<TABLE>
<CAPTION>
ACTIVITY
------------------------
BALANCE AT CASH NON-CASH BALANCE AT
DESCRIPTION 12/31/98 PAYMENTS IMPAIRMENTS 12/31/99
- ----------------------------------------- ------------ ---------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Third Quarter 1998 Charge
Property, plant and equipment:
Leasehold improvements ................ $ -- $ -- $-- $ --
Furniture, fixtures and equipment ..... -- -- -- --
-------- -------- --- --------
-- -- -- --
Intangible assets:
Goodwill .............................. -- -- -- --
Noncompete agreements ................. -- -- -- --
Other intangible assets ............... -- -- -- --
-------- -------- --- --------
-- -- -- --
Lease abandonment costs ................ -- -- -- --
Other assets ........................... -- -- -- --
Other incremental costs ................ 415 415 -- --
-------- -------- --- --------
Total Third Quarter 1998 Charge ......... $ 415 $ 415 $-- $ --
======== ======== === ========
Fourth Quarter 1998 Charge
Property, plant and equipment:
Land and buildings .................... $ -- $ -- $-- $ --
Leasehold improvements ................ -- -- -- --
Furniture, fixtures and equipment ..... -- -- -- --
-------- -------- --- --------
-- -- -- --
Intangible assets:
Goodwill .............................. -- -- -- --
Noncompete agreements ................. -- -- -- --
Other intangible assets ............... -- -- -- --
-------- -------- --- --------
-- -- -- --
Lease abandonment costs ................ 49,476 17,110 -- 32,366
Other assets ........................... -- -- -- --
Severance packages ..................... 1,274 1,274 -- --
Other incremental costs ................ 15,989 8,978 -- 7,011
-------- -------- --- --------
Total Fourth Quarter 1998 Charge ........ $ 66,739 $ 27,362 $-- $ 39,377
======== ======== === ========
</TABLE>
The remaining balances at December 31, 1998 and 1999, are included in
accrued interest payable and other liabilities in the accompanying consolidated
balance sheet.
In addition to the third and fourth quarter charges described above, the
Company recorded an impairment charge of approximately $8,000,000 in the fourth
quarter of 1998 related to a rehabilitation hospital it had closed. The
write-down was based on a recently obtained independent appraisal, which
61
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
13. IMPAIRMENT AND RESTRUCTURING CHARGES - (CONTINUED)
reflected a decline in valuation since the original closure. The hospital was
closed in 1995 as a result of duplicative services in a single market. At that
time, the hospital was written down to its then-estimated fair value and
classified as assets held for sale.
The Company abandoned certain equipment and sold certain properties and
equipment during 1999, associated with the 1998 closed facilities. The fair
value of assets remaining to be sold is approximately $27,273,000 compared to
$32,966,000 as of December 31, 1998. The Company expects to have all properties
sold by the end of 2000. The effect of suspending depreciation is immaterial.
For assets that will not be abandoned, the fair values were based on independent
appraisals or estimates of recoverability for similar closings.
Goodwill and other related intangible assets included in the third and
fourth quarter 1998 charges were allocated to the impaired assets based on the
relative fair values of those assets at their respective acquisition dates.
Lease abandonment costs were based on the lease terms remaining, which
range from one to fifteen years, net of any anticipated sublease income, where
applicable.
During the fourth quarter of 1999, in accordance with FASB Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, the Company recorded an asset impairment charge of
$121,037,000. Management evaluated the financial performance of each of its
facilities to determine if there are trends which would indicate that a
facility's ability to recover its investment in its long-lived assets had been
impaired. Based on this evaluation, the Company determined that property, plant
and equipment with a carrying value of $38,050,000 and intangibles with a
carrying value of $95,091,000 were impaired and wrote them down by $25,807,000
and $95,091,000, respectively, to their fair market value. The Company plans to
sell certain property, plant, and equipment with a carrying amount of $2,339,000
in 2000 and has estimated the sales value, net of related costs to sell, at
$2,200,000.
Accordingly, the Company recorded an impairment loss of $139,000 on these
assets, which is included in the 1999 impairment and restructuring charge. See
Note 14 for the impact of impairment losses on operating segments.
14. OPERATING SEGMENTS
The Company adopted SFAS 131 in 1998. Prior years' information has been
restated to present information for the Company's two business segments
described in Note 1.
The accounting policies of the segments are the same as those for the
Company described in Note 1, Significant Accounting Policies. Intrasegment
revenues are not significant. The Company's Chief Operating Decision Maker
evaluates the performance of its segments and allocates resources to them based
on income before minority interests and income taxes and earnings before
interest, income taxes, depreciation and amortization ("EBITDA"). In addition,
certain revenue producing functions are managed directly from the Corporate
office and are not included in operating results for management reporting.
Unallocated assets represent those assets under the direct management of
Corporate office personnel.
62
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
14. OPERATING SEGMENTS - (CONTINUED)
Operating results and other financial data are presented for the principal
operating segments as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1998 1999
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Inpatient and other clinical services ............. $1,661,254 $1,992,359 $1,878,333
Outpatient services ............................... 1,430,599 1,960,055 2,134,590
---------- ---------- ----------
3,091,853 3,952,414 4,012,923
Unallocated corporate office ...................... 31,323 53,660 59,184
---------- ---------- ----------
Consolidated revenues .............................. $3,123,176 $4,006,074 $4,072,107
========== ========== ==========
Income before income taxes and minority interests:
Inpatient and other clinical services ............. $ 363,984 $ 204,447 $ 225,471
Outpatient services ............................... 413,561 295,846 345,940
---------- ---------- ----------
777,545 500,293 571,411
Unallocated corporate office ...................... (148,349) (232,920) (341,496)
---------- ---------- ----------
Consolidated income before income taxes and minority
interests ......................................... $ 629,196 $ 267,373 $ 229,915
========== ========== ==========
Depreciation and amortization:
Inpatient and other clinical services ............. $ 79,605 $ 97,149 $ 107,957
Outpatient services ............................... 119,470 157,511 176,702
---------- ---------- ----------
199,075 254,660 284,659
Unallocated corporate office ...................... 58,061 89,931 89,589
---------- ---------- ----------
Consolidated depreciation and amortization ......... $ 257,136 $ 344,591 $ 374,248
========== ========== ==========
Interest expense:
Inpatient and other clinical services ............. $ 68,390 $ 68,602 $ 52,211
Outpatient services ............................... 3,734 2,174 781
---------- ---------- ----------
72,124 70,776 52,992
Unallocated corporate office ...................... 40,405 77,387 123,660
---------- ---------- ----------
Consolidated interest expense ...................... $ 112,529 $ 148,163 $ 176,652
========== ========== ==========
Interest income:
Inpatient and other clinical services ............. $ 1,149 $ 4,403 $ 3,397
Outpatient services ............................... 3,883 4,141 5,148
---------- ---------- ----------
5,032 8,544 8,545
Unallocated corporate office ...................... 972 2,742 2,042
---------- ---------- ----------
Consolidated interest income ....................... $ 6,004 $ 11,286 $ 10,587
========== ========== ==========
EBITDA:
Inpatient and other clinical services ............. $ 510,827 $ 331,999 $ 382,242
Outpatient services ............................... 532,885 485,186 518,275
---------- ---------- ----------
1,043,712 817,185 900,517
Unallocated corporate office ...................... (50,855) (68,344) (130,289)
---------- ---------- ----------
Consolidated EBITDA ................................ $ 992,857 $ 748,841 $ 770,228
========== ========== ==========
</TABLE>
63
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
14. OPERATING SEGMENTS - (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
--------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Merger and acquisition related expenses, loss on sale of
assets and impairment and restructuring charge:
Inpatient and other clinical services ................... $ -- $224,710 $ 37,072
Outpatient services ..................................... 15,875 303,979 83,965
------- -------- --------
15,875 528,689 121,037
Unallocated corporate office ............................ -- 11,628 --
------- -------- --------
Consolidated merger and acquisition related expenses, loss
on sale of assets and impairment and restructuring charge $15,875 $540,317 $ 121,037
======= ======== ========
</TABLE>
<TABLE>
<S> <C> <C>
Assets:
Inpatient and other clinical services ......... $2,758,851 $2,525,736
Outpatient services ........................... 3,464,540 3,263,397
---------- ----------
6,223,391 5,789,133
Unallocated corporate office .................. 539,506 1,043,201
---------- ----------
Total assets ................................... $6,762,897 $6,832,334
========== ==========
</TABLE>
15. RELATED PARTY
In December 1999, the Company acquired 6,390,583 shares of Series A
Convertible Preferred Stock of medcenterdirect.com, inc., a development-stage
healthcare e-procurement company, in a private placement for a purchase price of
$0.3458 per share. Various persons affiliated or associated with the Company,
including various of the Company's Directors and executive officers, also
purchased shares in the private placement. Under a Stockholders Agreement, the
Company and the other holders of the Series A Convertible Preferred Stock,
substantially all of whom may be deemed to be Company affiliates or associates,
have the right to elect 50% of the directors of medcenterdirect.com. During
2000, the Company expects to enter into a definitive 10-year exclusive agreement
under which medcenterdirect.com will be the Company's exclusive e-procurement
vendor of medical products and supplies. The Company expects that the terms of
such agreement will be no less favorable than those the Company could obtain
from an unrelated vendor.
64
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
HEALTHSOUTH has not changed independent accountants within the 24 months
prior to December 31, 1999.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
DIRECTORS
The following table provides information with respect to HEALTHSOUTH's
Directors.
<TABLE>
<CAPTION>
A
PRINCIPAL OCCUPATION AND ALL POSITIONS DIRECTOR
NAME AGE WITH HEALTHSOUTH SINCE
- ---------------------------------- ----- ------------------------------------------------------- ---------
<S> <C> <C> <C>
Richard M. Scrushy ............... 47 Chairman of the Board and Chief Executive Officer 1984
and Director
James P. Bennett ................. 42 President and Chief Operating Officer and Director 1993
Phillip C. Watkins, M.D. ......... 58 Physician, Birmingham, Alabama,and Director 1984
George H. Strong ................. 73 Private Investor, Locust, New Jersey, and Director 1984
C. Sage Givens ................... 43 General Partner, Acacia Venture Partners and 1985
Director
Charles W. Newhall III ........... 55 Partner, New Enterprise Associates Limited 1985
Partnerships, and Director
P. Daryl Brown ................... 45 President -- HEALTHSOUTH Ambulatory Services 1995
-- East and Director
John S. Chamberlin ............... 71 Private Investor, Princeton, New Jersey, and Director 1993
Joel C. Gordon ................... 70 Chairman, Crofton Capital Corp. Consultant to the 1996
Company and Director
Larry D. Striplin, Jr. ........... 70 Chairman and Chief Executive Officer, 1999
Nelson-Brantley Glass Contractors, Inc., and Director
Jan L. Jones ..................... 51 Executive Director, Nevada Resort Partners, and 1999
Director
</TABLE>
Richard M. Scrushy, one of HEALTHSOUTH's management founders, has served as
Chairman of the Board and Chief Executive Officer of HEALTHSOUTH since 1984, and
also served as President of HEALTHSOUTH from 1984 until March 1995. From 1979 to
1984, Mr. Scrushy was with Lifemark Corporation, a publicly-owned healthcare
corporation, serving in various operational and management positions. Mr.
Scrushy is also a director of CaremarkRx, Inc., a publicly-traded pharmacy
benefits management company, for which he also served as Acting Chief Executive
Officer from January 16 through March 18, 1998 and as Chairman of the Board from
January 16 through December 1, 1998.
Phillip C. Watkins, M.D., FACC, is and has been for more than five years in
the private practice of medicine in Birmingham, Alabama. A graduate of The
Medical College of Alabama, Dr. Watkins is a Diplomate of the American Board of
Internal Medicine. He is also a Fellow of the American College of Cardiology and
the Subspecialty Board of Cardiovascular Disease.
George H. Strong retired as senior vice president and chief financial
officer of Universal Health Services, Inc. in December 1984, a position he held
for more than six years. Mr. Strong is a private investor and continued to act
as a director of Universal Health Services, Inc., a publicly-traded hospital
management corporation, until 1993. Mr. Strong is also a director of Balanced
Care Corporation, a publicly-traded healthcare corporation, and AmeriSource,
Inc., a large drug wholesaler.
65
<PAGE>
C. Sage Givens is a founder and managing general partner of Acacia Venture
Partners, a private venture capital fund. From 1983 to June 30, 1995, Ms.
Givens was a general partner of First Century Partners, also a private venture
capital fund. Ms. Givens managed the fund's healthcare investments. Ms. Givens
also serves on the boards of directors of PhyCor, Inc. a publicly-traded
healthcare corporation, 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
CaremarkRx, Inc.
James P. Bennett joined HEALTHSOUTH in May 1991 as Director of Inpatient
Operations, subsequently served in various senior operations positions,
including President -- HEALTHSOUTH Inpatient Operations, and was named President
and Chief Operating Officer of HEALTHSOUTH in March 1995. Mr. Bennett was
elected a Director in February 1993. From August 1987 to May 1991, Mr. Bennett
was employed by Russ Pharmaceuticals, Inc., Birmingham, Alabama, as Vice
President -- Operations, Chief Financial Officer, Secretary and director. Mr.
Bennett served as a certified public accountant on the audit staff of the
Birmingham, Alabama office of Ernst & Whinney (now Ernst & Young LLP) from
October 1980 to August 1987.
P. Daryl Brown joined HEALTHSOUTH 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. In September 1999, he was named President -- Ambulatory Services --
East. 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 Sports Holding Company and WNS, Inc., and
is a director of Imagyn Medical Technologies, 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.
Joel C. Gordon served as Chairman of the Board of Directors of Surgical
Care Affiliates, Inc. from its founding in 1982 until January 17, 1996, when
SCA was acquired by HEALTHSOUTH. Mr. Gordon also served as Chief Executive
Officer of SCA from 1987 until January 17, 1996. Mr. Gordon is Chairman of
Crofton Capital Corp., a private venture capital firm, and serves on the boards
of directors of Genesco, Inc., an apparel manufacturer, and SunTrust Bank of
Nashville, N.A.
Larry D. Striplin, Jr. has been the Chairman and Chief Executive Officer
of Nelson-Brantley Glass Contractors, Inc. and Chairman and Chief Executive
Officer of Clearview Properties, Inc. since December 1995. Until December 1995,
Mr. Striplin had been Chairman of the Board and Chief Executive Officer of
Circle "S" Industries, Inc., a privately owned bonding wire manufacturer.
Mr. Striplin is a member of the boards of directors of Kulicke & Suffa
Industries, Inc., a publicly traded manufacturer of electronic equipment, The
Banc Corporation and Vesta Insurance Group, Inc.
Jan L. Jones became Executive Director of Nevada Resort Partners, which
provides public relations and communication services for the Nevada gaming
industry, in 1999, following two terms as Mayor of the City of Las Vegas, Nevada
from 1991 through 1999. Previously, Ms. Jones was president of Fletcher Jones
Management Group, which oversaw marketing and administrative functions for 11
car dealerships in the western United States. Ms. Jones is also a director of
Community Bank of Nevada and served from 1995 until 1997 as a director of Bank
of America.
66
<PAGE>
EXECUTIVE OFFICERS
The following table provides information with respect to HEALTHSOUTH's
executive officers.
<TABLE>
<CAPTION>
AN
ALL POSITIONS OFFICER
NAME AGE WITH HEALTHSOUTH SINCE
- ---------------------------- ----- ------------------------------------------------------- --------
<S> <C> <C> <C>
Richard M. Scrushy ......... 47 Chairman of the Board and Chief Executive Officer 1984
and Director
James P. Bennett ........... 42 President and Chief Operating Officer and Director 1991
Michael D. Martin .......... 39 Executive Vice President -- Investments 1989
Thomas W. Carman ........... 48 Executive Vice President -- Corporate Development 1985
William T. Owens ........... 41 Executive Vice President and Chief Financial Officer 1986
P. Daryl Brown ............. 45 President -- Ambulatory Services -- East and Director 1986
Robert E. Thomson .......... 52 President -- Inpatient Operations 1987
Patrick A. Foster .......... 53 President -- Ambulatory Services -- West 1994
William W. Horton .......... 40 Senior Vice President and Corporate Counsel and 1994
Assistant Secretary
Brandon O. Hale ............ 50 Senior Vice President -- Administration and Secretary 1987
Weston L. Smith ............ 39 Senior Vice President -- Finance and Controller 1987
Malcolm E. McVay ........... 38 Senior Vice President -- Finance and Treasurer 1999
</TABLE>
Biographical information for Messrs. Scrushy, Bennett and Brown is set
forth above under this Item, "Directors and Executive Officers -- Directors".
Michael D. Martin joined HEALTHSOUTH 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
HEALTHSOUTH. In February 2000, Mr. Martin was named Executive Vice President -
Investments. He also served as a Director from March 1998 through February 2000.
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 HEALTHSOUTH. Mr. Martin is a director of
CaremarkRx, Inc.
Thomas W. Carman joined HEALTHSOUTH 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.
William T. Owens, C.P.A., joined HEALTHSOUTH in March 1986 as Controller
and was appointed Vice President and Controller in December 1986. He was
appointed Group Vice President -- Finance and Controller, June 1992 and Senior
Vice President -- Finance and Controller in February 1994 and Group Senior Vice
President -- Finance and Controller in March 1998. In February 2000, he was
named Executive Vice President and Chief Financial Officer. Prior to joining
HEALTHSOUTH, 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.
Robert E. Thomson joined HEALTHSOUTH 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 --
Inpatient Operations in February 1996.
Patrick A. Foster joined HEALTHSOUTH 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 and President --
Ambulatory Services --West in September 1999. From August 1992 until February
1994, he served as Senior Vice President of the Rehabilitation/Medical Division
of The Mediplex Group.
67
<PAGE>
William W. Horton joined HEALTHSOUTH 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.
Brandon O. Hale joined HEALTHSOUTH in July 1986 as Director of Human
Resources and subsequently served as Vice President - Human Resources and Group
Vice President - Human Resources. In December 1999, Mr. Hale was named Senior
Vice President - Administration and Secretary of HEALTHSOUTH, and he also serves
as HEALTHSOUTH's Corporate Compliance Officer.
Weston L. Smith, C.P.A., joined HEALTHSOUTH in February 1987 as Director of
Reimbursement and subsequently served as Assistant Vice President - Finance -
Reimbursement, Vice President - Finance - Reimbursement, Group Vice President -
Finance - Reimbursement and Senior Vice President - Finance - Reimbursement. In
March 2000, he was named Senior Vice President - Finance and Controller. Prior
to joining HEALTHSOUTH, Mr. Smith served as a certified public accountant on the
audit staff of the Birmingham, Alabama office of Ernst & Whinney (now Ernst &
Young LLP) from 1982 to 1987.
Malcolm E. McVay joined HEALTHSOUTH in September 1999 as Vice President -
Finance, and was named Senior Vice President - Finance and Treasurer in February
2000. From October 1998 until September 1999, he served as Senior Vice President
of Investor Relations at CaremarkRx, Inc., and from 1996 until October 1998, he
served as Chief Financial Officer, Secretary and Treasurer of Capstone Capital
Corporation, a healthcare real estate investment trust. Prior to 1996, he worked
for ten years in commercial banking, most recently as a Senior Vice President of
SouthTrust Bank.
GENERAL
Directors of HEALTHSOUTH hold office until the next Annual Meeting of
Stockholders of HEALTHSOUTH and until their successors are elected and
qualified. Executive officers are elected annually by, and serve at the
discretion of the Board of Directors. There are no arrangements or
understandings known to us between any of our Directors, nominees for Director
or executive officers and any other person pursuant to which any of those
persons was elected as a Director or an executive officer, except the Employment
Agreements between HEALTHSOUTH and Richard M. Scrushy, James P. Bennett, Michael
D. Martin and P. Daryl Brown (see Item 11, "Executive Compensation -- Chief
Executive Officer Employment Agreement"; " -- Other Executive Employment
Agreements"), and except that we initially agreed to appoint Mr. Gordon to the
Board of Directors in connection with the SCA merger. There are no family
relationships between any Directors or executive officers of HEALTHSOUTH.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our executive
officers and Directors, and persons who beneficially own more than 10% of a
registered class of our equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission and the New
York Stock Exchange. Executive officers, Directors and beneficial owners of more
than 10% of HEALTHSOUTH's common stock are required by Securities and Exchange
Commission regulations to furnish us with copies of all Section 16(a) forms that
they file. Based solely on review of the copies of such forms furnished to us,
or written representations that no reports on Form 5 were required, we believe
that for the period from January 1, 1999, through December 31, 1999, all of our
executive officers, Directors and greater-than-10% beneficial owners complied
with all Section 16(a) filing requirements applicable to them, except that Larry
D. Striplin, Jr., an outside Director, inadvertently failed to timely report an
open market purchase of 10,000 shares of common stock at $9.0375 per share in
April 1999. This transaction was subsequently reported on Form 5.
68
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION -- GENERAL
The following table sets forth compensation paid or awarded to our Chief
Executive Officer and each of our other four most highly compensated executive
officers (the "Named Executive Officers") for all services rendered to
HEALTHSOUTH and its subsidiaries in 1997, 1998 and 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------ ---------------------------------
BONUS/ANNUAL STOCK RESTRICTED ALL
INCENTIVE OPTION STOCK OTHER
NAME AND CURRENT POSITION YEAR SALARY AWARD AWARDS AWARDS COMPENSATION(1)
- ----------------------------------- ------ -------------- -------------- ----------- --------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Richard M. Scrushy 1997 $ 3,398,999 $ 10,000,000 1,300,000 -- $ 21,430
Chairman of the Board 1998 2,777,829 -- 1,500,000 -- 72,352
and Chief Executive Officer(2) 1999 1,634,031 -- 1,050,000 $ 1,293,750 (3) 54,145
James P. Bennett 1997 639,161 1,500,000 700,000 -- 10,158
President and Chief 1998 670,000 -- 300,000 -- 10,092
Operating Officer 1999 589,058 -- 275,000 1,293,750 (3) 4,350
Michael D. Martin 1997 359,672 2,000,000 450,000 -- 9,700
Executive Vice President - 1998 415,826 -- 260,000 -- 9,665
Investments 1999 362,810 -- 200,000 1,293,750 (3) 3,775
P. Daryl Brown 1997 370,673 450,000 250,000 -- 10,737
President -- Ambulatory 1998 386,212 -- 75,000 -- 10,981
Services -- East 1999 336,920 -- 125,000 970,313 (3) 205,001 (4)
Robert E. Thomson 1997 305,376 500,000 250,000 -- 11,189
President -- Inpatient Operations 1998 327,928 -- 150,000 -- 11,341
1999 402,987 -- 125,000 970,313 (3) 4,994
</TABLE>
- ----------
(1) Includes car allowances of $500 per month for Mr. Scrushy and $350 per month
for the other Named Executive Officers in 1997, use of a company-owned
automobile by Mr. Scrushy in 1998, and car allowances of $500 per month for
Mr. Scrushy and $450 per month for the other Named Executive Officers
through September 1998. All such car allowances were discontinued in October
1998. Also includes (a) matching contributions under HEALTHSOUTH's
Retirement Investment Plan for 1997, 1998 and 1999, respectively, of: $791,
$1,450 and $745 to Mr. Scrushy; $1,425, $1,499 and $1,500 to Mr. Bennett;
$1,324, $1,395 and $1,212 to Mr. Martin; $1,319, $1,415 and $1,212 to Mr.
Brown; and $1,001, $1,070 and $736 to Mr. Thomson; (b) awards under
HEALTHSOUTH's Employee Stock Benefit Plan for 1997, 1998 and 1999,
respectively, of $2,889, $2,882 and $1,292 to Mr. Scrushy; $2,889, $2,882
and $1,292 to Mr. Bennett; $2,889, $2,882 and $1,292 to Mr. Martin; $2,889,
$2,882 and $1,292 to Mr. Brown; and $2,889, $2,882 and $1,292 to Mr.
Thomson; and (c) split-dollar life insurance premiums paid in 1997, 1998 and
1999 of $11,750, $45,187 and $52,108 with respect to Mr. Scrushy; $1,644,
$1,661, and $1,558 with respect to Mr. Bennett; $1,287, $1,338 and $1,271
with respect to Mr. Martin; $2,329, $2,634 and $2,497 with respect to Mr.
Brown; and $3,099, $3,339 and $2,966 with respect to Mr. Thomson. See this
Item, "Executive Compensation -- Retirement Investment Plan" and "Executive
Compensation -- Employee Stock Benefit Plan".
(2) Salary amounts for Mr. Scrushy include monthly incentive compensation
amounts payable upon achievement of certain budget targets. Effective
November 1, 1998, Mr. Scrushy voluntarily suspended receipt of his base
salary and monthly incentive compensation through March 31, 1999, and
voluntarily took reduced compensation through January 2, 2000. See this
Item,"Executive Compensation -- Chief Executive Officer Employment
Agreement".
(3) The value of restricted stock awards in 1999 reflects the closing price of
HEALTHSOUTH common stock at the date of the award. The value of these awards
measured at December 31, 1999 was $537,500 for the awards to each of Messrs.
Scrushy, Bennett and Martin (100,000 shares each) and $403,125 for the
awards to Messrs. Brown and Thomson (75,000 shares each). The awards vest
five years from the date of grant, except as otherwise provided in our 1998
Restricted Stock Plan. See this Item, "Executive Compensation - 1998
Restricted Stock Plan".
(4) Includes $200,000 withdrawn by Mr. Brown in 1999 from his deferred
compensation account. See this Item, "Executive Compensation - Deferred
Compensation Plan".
69
<PAGE>
STOCK OPTION GRANTS IN 1999
<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 ......... 850,000 18.5% $11.00 3/14/09 7,165,500
200,000 4.4% 4.94 12/15/09 758,000
James P. Bennett ........... 200,000 4.4% 11.00 3/14/09 1,686,000
75,000 1.6% 4.94 12/15/09 284,250
Michael D. Martin .......... 150,000 3.3% 11.00 3/14/09 1,264,500
50,000 1.1% 4.94 12/15/09 189,500
P. Daryl Brown ............. 75,000 1.6% 11.00 3/14/09 632,250
50,000 1.1% 4.94 12/15/09 189,500
Robert E. Thomson .......... 75,000 1.6% 11.00 3/14/09 632,250
50,000 1.1% 4.94 12/15/09 189,500
</TABLE>
- ----------
(1) Based on the Black-Scholes option pricing model adapted for use in valuing
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 77%; (ii) the risk-free rate of
return is assumed to be 6.2%; (iii) dividend yield is assumed to be 0; and
(iv) the time of exercise is assumed to be 7.4 years from the date of grant.
STOCK OPTION EXERCISES IN 1999 AND OPTION VALUES AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
NUMBER VALUE OF UNEXERCISED
OF SHARES NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED AT DECEMBER 31, 1999 (1) AT DECEMBER 31, 1999 (2)
ON VALUE ------------------------------- ---------------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------- ---------- ---------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Richard M. Scrushy ......... -- -- 13,722,524 -- $10,214,781 --
James P. Bennett ........... -- -- 1,885,000 -- 207,988 --
Michael D. Martin. ......... -- -- 1,090,000 -- 21,875 --
P. Daryl Brown ............. -- -- 1,040,000 -- 563,325 --
Robert E. Thomson .......... -- -- 695,000 -- 21,875 --
</TABLE>
- ----------
(1) Does not reflect any options granted and/or exercised after December 31,
1999. 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 HEALTHSOUTH common stock
and the respective exercise prices of the options at December 31, 1999. 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 our various stock option plans at
December 31, 1999. All share numbers and exercise prices have been adjusted as
necessary to reflect previous stock splits.
1984 Incentive Stock Option Plan
In 1984 we adopted the 1984 Incentive Stock Option Plan. Under this plan,
our Board of Directors, which administered the plan, had discretion to grant to
key employees of HEALTHSOUTH options to purchase shares of HEALTHSOUTH common
stock at the fair market value attributed to shares of HEALTHSOUTH common stock
on the date the option was granted or, in the case of a key employee who was
also a beneficial holder of at least 10% of the total number of shares of
HEALTHSOUTH
70
<PAGE>
common stock that were issued and outstanding at the time of the option grant,
at 110% of such fair market value. The total number of shares of HEALTHSOUTH
common stock covered by this plan was 4,800,000. The plan expired on February
28, 1994, in accordance with its terms. As of December 31, 1999, options granted
under this plan to purchase 15,000 shares of HEALTHSOUTH common stock remained
outstanding at an exercise price of $3.7825 per share. All of these outstanding
options remain valid and in full force and must be held and exercised in
accordance with the terms of the plan. All of the options granted must be
exercised within ten years after they were granted and options granted under the
plan terminate automatically within three months after termination of
employment, unless such termination is by reason of death. In addition, the
options may not be transferred, except pursuant to the terms of a valid will or
applicable laws of descent and distribution, and in the event additional shares
of HEALTHSOUTH common stock are issued they are protected from dilution.
1988 Non-Qualified Stock Option Plan
In 1988 we adopted the 1998 Non-Qualified Stock Option Plan. Under this
plan, the Audit and Compensation Committee of our Board of Directors, which
administered the plan, had discretion to grant to the Directors, officers and
other key employees of HEALTHSOUTH options to purchase shares of HEALTHSOUTH
common stock at the fair market value attributed to shares of HEALTHSOUTH common
stock on the date the option was granted. The total number of shares of
HEALTHSOUTH common stock covered by this plan was 4,800,000. The plan expired on
February 28, 1998, in accordance with its terms. As of December 31, 1999,
options granted under this plan to purchase 7,300 shares of HEALTHSOUTH common
stock remained outstanding at an exercise price of $16.25 per share. All of
these outstanding options remain valid and in full force and must be held and
exercised in accordance with the terms of the plan. All of the options must be
exercised within ten years after they were granted. All of the options granted
under this plan terminate automatically within three months after termination of
association as a Director or of employment, unless such termination is by reason
of death. In addition, the options may not be transferred, except pursuant to
the terms of a valid will or applicable laws of descent and distribution, and in
the event additional shares of HEALTHSOUTH common stock are issued they are
protected from dilution.
1989, 1990, 1991, 1992, 1993, 1995 and 1997 Stock Option Plans
In each of 1989, 1990, 1991, 1992, 1993, 1995 and 1997 we adopted stock
option plans to provide incentives to our Directors, officers and other key
employees. Under each of these plans, the Audit and Compensation Committee of
our Board of Directors, which administers each of the plans, has the discretion
to grant to our Directors, officers and other key employees incentive or
non-qualified options to purchase shares of HEALTHSOUTH common stock at the fair
market value attributed to shares of HEALTHSOUTH common stock on the date the
option is granted. The table below sets forth information regarding each plan,
including the total number of shares of HEALTHSOUTH common stock which may be
purchased under each of the plans, the total number of additional shares of
HEALTHSOUTH common stock which have been reserved for future use under each
plan, the total number of shares of HEALTHSOUTH common stock which may be
purchased under options which have been granted under each plan and which were
outstanding on December 31, 1999 and the price at which shares may be purchased
if the options are exercised.
71
<PAGE>
<TABLE>
<CAPTION>
MAXIMUM NUMBER NUMBER OF
OF SHARES OF ADDITIONAL SHARES OF
HEALTHSOUTH HEALTHSOUTH
COMMON STOCK COMMON STOCK
NAME OF SUBJECT TO PURCHASE RESERVED FOR USE
PLAN UNDER THE PLAN UNDER THE PLAN
- -------------- --------------------- ----------------------
<S> <C> <C>
1989 Stock
Option Plan 2,400,000 None
1990 Stock
Option Plan 3,600,000 None
1991 Stock
Option Plan 11,200,000 None
1992 Stock
Option Plan 5,600,000 None
1993 Stock
Option Plan 5,600,000 None
1995 Stock
Option Plan 21,231,156 (1) 3,636,922
1997 Stock
Option Plan 5,000,000 32,475
<CAPTION>
DATE THE PLAN
TERMINATED OR WILL
NUMBER OF TERMINATE UNLESS
SHARES OF OTHERWISE DETERMINED
HEALTHSOUTH BY OUR BOARD OF
COMMON STOCK RANGE OF PRICES DIRECTORS OR IF ALL OF THE
SUBJECT TO PURCHASE AT WHICH SHARES SHARES OF HEALTHSOUTH
IF ALL OPTIONS MAY BE PURCHASED COMMON STOCK RESERVED FOR
OUTSTANDING SUBJECT TO OPTIONS ISSUANCE UNDER THE PLAN HAVE
NAME OF ON DECEMBER 31, 1999 OUTSTANDING BEEN PURCHASED DUE TO
PLAN ARE EXERCISED ON DECEMBER 31, 1999 OPTIONS BEING EXERCISED
- -------------- ---------------------- ---------------------- -----------------------------
<S> <C> <C> <C>
1989 Stock
Option Plan 205,004 $ 2.52-$8.375 October 25, 1999
1990 Stock
Option Plan 300,504 $ 3.7825-$8.375 October 15, 2000
1991 Stock
Option Plan 3,470,002 $ 3.7825-$16.25 June 19, 2001
1992 Stock
Option Plan 4,100,900 $ 3.7825-23.625 June 16, 2002
1993 Stock
Option Plan 3,237,025 $ 3.375-$23.625 April 19, 2003
1995 Stock
Option Plan 15,569,059 $ 4.9375-$28.0625 June 5, 2005
1997 Stock
Option Plan 3,771,475 $ 4.9375-$28.0625 April 30, 2007
</TABLE>
- ----------
(1) At December 31, 1999; to be increased by 0.9% of the outstanding shares of
HEALTHSOUTH common stock as of January 1 of each calendar year thereafter
until the plan terminates.
Until options granted under each of these plans expire or terminate, they
remain valid and in full force and must be held and exercised in accordance with
the terms of the plan under which they were issued. Each option granted under
each of these plans, whether incentive or non-qualified, must be exercised
within ten years after the date it was granted and each option granted under
these plans, whether incentive or non-qualified, will terminate automatically
within three months after a Director no longer is associated with us or an
officer or key employee is no longer employed with us, except if the termination
of association or employment is by reason of death. In addition, the options may
not be transferred, except pursuant to the terms of a valid will or applicable
laws of descent and distribution (except for various permitted transfers to
family members or charities). In the event additional shares of HEALTHSOUTH
common stock are issued, each option granted under these plans is protected from
dilution.
1993 Consultants' Stock Option Plan
In 1993 we adopted the 1993 Consultants' Stock Option Plan to provide
incentives to non-employee consultants who provide significant services to us.
Under this plan, our Board of Directors, which administers the plan, has the
discretion to grant to these non-employee consultants options to purchase shares
of HEALTHSOUTH common stock at prices to be determined by our Board of Directors
or a committee of our Board of Directors to whom this discretion has been
delegated. The plan will expire on February 25, 2003 unless terminated earlier
at the discretion of our Board of Directors or as a result of all of the shares
of HEALTHSOUTH common stock reserved under this plan having been purchased by
the exercise of options granted under this plan. The total number of shares of
HEALTHSOUTH common stock covered by this plan is 3,500,000. As of December 31,
1999, options granted under this plan to purchase 1,589,633 shares of
HEALTHSOUTH common stock remained outstanding at exercise prices ranging from
$3.375 to $28.00 per share, and 125,000 shares remain available for the grant of
options under this plan. All of these options remain valid and in full force and
must be held and exercised in accordance with the terms of the plan. All of
these options must be exercised within ten years after they were granted,
although they may be exercised at any time during this ten year period. All of
these options terminate automatically within three months after termination of
association with us, unless such termination is by reason of death. In addition,
the options may not be transferred, except pursuant to the terms of a valid will
or applicable laws of descent and distribution, and in the event additional
shares of HEALTHSOUTH common stock are issued the options are protected from
dilution.
72
<PAGE>
1999 Exchange Stock Option Plan
In 1999, we adopted our 1999 Exchange Stock Option Plan (the "Exchange
Plan") under which NQSOs could be granted, covering a maximum of 2,750,000
shares of common stock. The Exchange Plan was approved by our stockholders on
May 20, 1999. The Exchange Plan was adopted after a protracted period of
depression in the price of HEALTHSOUTH common stock, and provided that
HEALTHSOUTH employees (other than Directors and executive officers, who were
eligible to participate) who held outstanding stock options with an exercise
price equal to or greater than $16.00 could exchange such options for NQSOs
issued under the Exchange Plan. Options granted under the Exchange Plan would
have an exercise price equal to the closing price per share of our common stock
on the New York Stock Exchange Composite Transactions Tape on May 20, 1999,
would be deemed to have been granted on May 20, 1999, and would have durations
and vesting restrictions identical to those affecting the options surrendered.
Eligible options with an exercise price between $16.00 and $22.00 per share
could be surrendered in exchange for an option under the Exchange Plan covering
two shares of common stock for each three shares of common stock covered by the
surrendered options, and eligible options having an exercise price of $22.00 per
share or greater could be surrendered in exchange for an option under the
Exchange Plan covering three shares of common stock for each four shares of
common stock covered by the surrendered option. Each optionholder surrendering
options was required to retain eligible options covering 10% of the aggregate
number of shares covered by the options eligible for surrender. The Exchange
Plan expired on September 30, 1999, at which time options covering 1,716,707
shares of common stock had been issued under the Exchange Plan at an exercise
price of $13.3125 per share. Options covering 1,628,013 shares remained
outstanding at December 31, 1999. Options granted under the Exchange Plan 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 expire within three months of
termination of employment, unless such termination is by reason of death.
Other Stock Option Plans
In connection with some of our major acquisitions, we assumed 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 in accordance with the exchange ratios
applicable to such mergers. At December 31, 1999, there were outstanding under
these assumed plans options to purchase 2,134,051 shares of HEALTHSOUTH common
stock at exercise prices ranging from $4.6392 to $40.7042 per share. No
additional options are being granted under any such assumed plans.
1998 RESTRICTED STOCK PLAN
In 1998, we adopted the 1998 Restricted Stock Plan (the "Restricted Stock
Plan"), covering a maximum of 3,000,000 shares of HEALTHSOUTH common stock. The
Restricted Stock Plan, which is administered by the Audit and Compensation
Committee of our Board of Directors, provides that executives and other key
employees of HEALTHSOUTH and its subsidiaries may be granted restricted stock
awards vesting over a period of not less than one year and no more than ten
years, as determined by the Committee. The Restricted Stock Plan terminates on
the earliest of (a) May 28, 2008, (b) the date on which awards covering all
shares of common stock reserved for issuance thereunder have been granted and
are fully vested thereunder, or (c) such earlier time as the Board of Directors
may determine. Awards under the Restricted Stock Plan are nontransferable except
by will or pursuant to the laws of descent and distribution (except for certain
permitted transfers to family members), are protected against dilution and are
forfeitable upon termination of a participant's employment to the extent not
vested. On May 17, 1999, the Audit and Compensation Committee of the Board of
Directors granted restricted stock awards covering 850,000 shares of HEALTHSOUTH
common stock to various executive officers of HEALTHSOUTH. These shares vest in
full upon the earliest to occur of (a) five years from the date of the award,
(b) a Change in Control (as defined) of HEALTHSOUTH, or (c) unless the Audit and
Compensation Committee otherwise determines, upon the recipient's termination of
employment by reason of death, disability or retirement.
73
<PAGE>
RETIREMENT INVESTMENT PLAN
Effective January 1, 1990, we adopted the HEALTHSOUTH Retirement Investment
Plan (the "401(k) Plan"), a retirement plan intended to qualify under Section
401(k) of the Code. The 401(k) Plan is open to all full-time and part-time
employees of HEALTHSOUTH who are over the age of 21, have one full year of
service with HEALTHSOUTH 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 15% of their
annual compensation (subject to nondiscrimination rules under the 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. HEALTHSOUTH will match a minimum of 15% 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".
William T. Owens, Executive Vice President and Chief Financial Officer, and
Brandon O. Hale, Senior Vice President -- Administration and Secretary, serve as
Trustees of the 401(k) Plan, which is administered by HEALTHSOUTH.
EMPLOYEE STOCK BENEFIT PLAN
Effective January 1, 1991, we 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
Code. The ESOP is open to all full-time and part-time employees of HEALTHSOUTH
who are over the age of 21, have one full year of service with HEALTHSOUTH 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 conditions mentioned above.
The ESOP was established with a $10,000,000 loan from HEALTHSOUTH, the
proceeds of which were used to purchase 1,655,172 shares of HEALTHSOUTH 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 stock account is established and maintained for each eligible employee
who participates in the ESOP. In each plan year, this account is credited with
such employee's allocable share of the common stock held by the ESOP and
allocated with respect to that 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.
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,
William T. Owens, Executive Vice President and Chief Financial Officer, and
Brandon O. Hale, Senior Vice President -- Administration and Secretary, serve as
Trustees of the ESOP, which is administered by HEALTHSOUTH.
STOCK PURCHASE PLAN
In order to further encourage employees to obtain equity ownership in
HEALTHSOUTH, the Board of Directors adopted an Employee 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
HEALTHSOUTH 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, we currently provide a 20%
74
<PAGE>
matching contribution to be applied to purchases under the Stock Purchase Plan.
We also pay 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 HEALTHSOUTH.
DEFERRED COMPENSATION PLAN
In 1997, the Board of Directors adopted an Executive 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 HEALTHSOUTH 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 HEALTHSOUTH. 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 William T. Owens, Executive Vice President and Chief Financial
Officer, and Brandon O. Hale, Senior Vice President -- Administration and
Secretary.
1999 EXECUTIVE EQUITY LOAN PLAN
In order to provide its executive officers and other key employees with
additional incentive for future endeavor and to align the interests of our
management and our stockholders by providing a mechanism to enhance ownership of
HEALTHSOUTH common stock by executives and key employees, we adopted the 1999
Executive Equity Loan Plan (the "Loan Plan"), which was approved by our
stockholders on May 20, 1999. Under the Loan Plan, the Audit and Compensation
Committee of the Board of Directors may approve loans to executive and key
employees of HEALTHSOUTH to be used for purchases of HEALTHSOUTH common stock.
The maximum aggregate principal amount of loans outstanding under the Loan Plan
may not exceed $50,000,000. Loans under the Loan Plan have a maturity date of
seven years from the date of the loan, subject to acceleration and termination
as provided in the Loan Plan. The maturity date may be extended for up to one
additional year by the Audit and Compensation Committee, acting in its
discretion. The unpaid principal balance of each loan bears interest at a rate
equal to the effective interest rate on the average outstanding balance under
HEALTHSOUTH's principal credit agreement for each calendar quarter, adjustable
as of the end of each calendar quarter. Interest compounds annually. Each loan
is secured by a pledge of all the shares of HEALTHSOUTH common stock purchased
with the proceeds of the loan. The pledged shares may not be sold for one year
after the date on which they were acquired. Thereafter, one-third of the
aggregate number of shares may be sold during each of the second, third and
fourth years after the date of acquisitions, with any unsold portion carrying
forward from year to year. The proceeds from any such sale must be used to repay
a corresponding percentage of the principal amount of the loan. In addition,
HEALTHSOUTH may, but is not required to, repurchase the shares of a participant
at such participant's original acquisition cost if the participant's employment
is terminated, voluntarily or involuntarily or by reason of death or disability,
within the first three years after the acquisition date, all as more fully
described in the Loan Plan. Loans under the Loan Plan are made with full
recourse, and each participant is required to repay all principal and accrued
but unpaid interest upon the maturity of the loan, or its earlier acceleration
or termination, irrespective of whether the participant has sold the underlying
shares or whether the proceeds of such sale were sufficient to repay all
principal and interest with respect to the loan. The Loan Plan terminates on the
earlier of May 19, 2009 or such earlier time as the Board of Directors may
determine.
75
<PAGE>
On September 10, 1999, loans aggregating $39,334,104 were made under the
Loan Plan. Included in this amount were loans in the following amounts to
executive officers:
<TABLE>
<CAPTION>
NAME PRINCIPAL AMOUNT
- ------------------------------------ -------------------
<S> <C>
Richard M. Scrushy .......... $ 25,218,114.87
James P. Bennett ............ 5,043,622.97
Michael D. Martin ........... 1,513,086.89
P. Daryl Brown .............. 1,008,506.87
Robert E. Thomson ........... 1,008,506.87
Patrick A. Foster ........... 1,008,506.87
Malcolm E. McVay ............ 100,850.69
William W. Horton ........... 88,914.00
</TABLE>
BOARD COMPENSATION
Directors who are not also employed by HEALTHSOUTH are paid Directors' fees
of $10,000 per year, plus $3,000 for each meeting of the Board of Directors and
$1,000 for each Committee meeting attended. In addition, Directors are
reimbursed for all out-of-pocket expenses incurred in connection with their
duties as Directors. Our Directors, including employee Directors, have been
granted non-qualified stock options to purchase shares of HEALTHSOUTH common
stock. Under our existing stock option plans, each non-employee Director is
granted an option covering 25,000 shares of 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
We have an Amended and Restated Employment Agreement, dated April 1, 1998,
with Richard M. Scrushy, under which Mr. Scrushy, a management founder, is
employed as Chairman of the Board and Chief Executive Officer for a five-year
term initially expiring on April 1, 2003. This term is automatically extended
for an additional year on each April 1 unless the Agreement is terminated as
provided therein. In addition, we have agreed to use our best efforts to cause
Mr. Scrushy to be elected as a Director during the term of the Agreement. The
Agreement provides for Mr. Scrushy to receive an annual base salary of at least
$1,200,000, as well as an "Annual Target Bonus" equal to at least $2,400,000,
based upon our success in meeting certain monthly and annual performance
standards determined by the Audit and Compensation Committee of the Board of
Directors. The Annual Target Bonus is earned at the rate of $200,000 per month
if the monthly performance standards are met, provided that if any monthly
performance standards are not met but the annual performance standards are met,
Mr. Scrushy will be entitled to any payments which were withheld as a result of
failure to meet the monthly performance standards. The Agreement further
provides that Mr. Scrushy is eligible for participation in all other management
bonus or incentive plans and stock option, stock purchase or equity-based
incentive compensation plans in which other senior executives of HEALTHSOUTH are
eligible to participate. Under the Agreement, Mr. Scrushy is entitled to receive
long-term disability insurance coverage, a non-qualified retirement plan
providing for annual retirement benefits equal to 60% of his base compensation,
use of a company-owned automobile, certain personal security services, and
various other retirement, insurance and fringe benefits, as well as to generally
participate in all employee benefit programs we maintain.
The Agreement may be terminated by Mr. Scrushy for "Good Reason" (as
defined), by the Company for "Cause" (as defined), upon Mr. Scrushy's
"Disability" (as defined) or death, or by either party at any time subject to
the consequences of such termination as described in the Agreement. If the
Agreement is terminated by Mr. Scrushy for Good Reason, we are required to pay
him a lump-sum severance payment equal to the discounted value of the sum of his
then-current base salary and Annual Target Bonus over the remaining term of the
Agreement and to continue certain employee and fringe benefits for the remaining
term of the Agreement. If the Agreement is terminated by Mr. Scrushy otherwise
than for Good Reason, we are required to pay him a lump-sum severance amount
equal to the
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<PAGE>
discounted value of two times the sum of his then-current base salary and Annual
Target Bonus. If the Agreement is terminated by HEALTHSOUTH for Cause, Mr.
Scrushy is not entitled to any severance or continuation of benefits. If the
Agreement is terminated by reason of Mr. Scrushy's Disability, we are required
to continue the payment of his then-current base salary and Annual Target Bonus
for three years as if all relevant performance standards had been met, and if
the Agreement is terminated by Mr. Scrushy's death, we are required to pay his
representatives or estate a lump-sum payment equal to his then-current base
salary and Annual Target Bonus. In the event of a voluntary termination by Mr.
Scrushy following a Change in Control (as defined) of HEALTHSOUTH, other than
for Cause, we are required to pay Mr. Scrushy an additional lump-sum severance
payment equal to his then-current base salary and Annual Target Bonus. The
Agreement provides for us to indemnify Mr. Scrushy against certain "parachute
payment" excise taxes which may be imposed upon payments under the Agreement.
The Agreement restricts Mr. Scrushy from engaging in certain activities
competitive with our business during, and for 24 months after termination of,
his employment with HEALTHSOUTH, unless such termination occurs after a Change
in Control.
As a result of the impact of the Balanced Budget Act of 1997 on
HEALTHSOUTH's reimbursement and the increased pressure from managed care payors,
HEALTHSOUTH reduced overhead and otherwise managed expenses. In order to lead by
example Mr. Scrushy voluntarily chose to forgo receipt of his base salary and
Annual Target Bonus after October 31, 1998. Through that date, all monthly
performance standards required to be met for payment of monthly installments of
his Annual Target Bonus had been met. Mr. Scrushy resumed receipt of a portion
of his base salary at the rate of $900,000 annually and a portion of his Annual
Target Bonus at the rate of $900,000 annually on April 1, 1999, and resumed
taking his full base salary and Annual Target Bonus effective January 1, 2000.
OTHER EXECUTIVE EMPLOYMENT AGREEMENTS
We also have Employment Agreements, dated April 1, 1998, with James P.
Bennett, President and Chief Operating Officer, Michael D. Martin, Executive
Vice President -- Investments, Thomas W. Carman, Executive Vice President --
Corporate Development, Robert E. Thomson, President -- Inpatient Operations, P.
Daryl Brown, President -- Ambulatory Services -- East, and Patrick A. Foster,
President -- Ambulatory Services -- West, under which each of these persons is
employed in these capacities for a three-year term expiring on April 1, 2001.
Such terms are automatically extended for an additional year on each April 1
unless the Agreements are terminated in accordance with their terms. In
addition, we have agreed to use our best efforts to cause Messrs. Bennett,
Martin and Brown to be elected as Directors of HEALTHSOUTH during the term of
their respective Agreements. Mr. Martin has subsequently left the Board. The
Agreements currently provide for the payment of an annual base salary of at
least $650,000 to Mr. Bennett, $400,000 to Mr. Martin, $325,000 to Mr. Carman,
$400,000 to Mr. Thomson, $370,000 to Mr. Brown, and $370,000 to Mr. Foster. The
Agreements further provide that each of these officers is eligible for
participation in all management bonus or incentive plans and stock option, stock
purchase or equity-based incentive compensation plans in which other senior
executives of HEALTHSOUTH are eligible to participate, and provide for various
specified fringe benefits, including car allowances of $500 per month.
If the Agreements are terminated by HEALTHSOUTH other than for Cause (as
defined), Disability (as defined) or death, we are required to continue the
officers' base salary in effect for a period of two years (in the case of
Messrs. Bennett, Martin, and Brown) or one year (in each other case) after
termination, as severance compensation. In addition, in the event of a voluntary
termination of employment by the officer within six months after a Change in
Control (as defined), we are also required to continue the officer's salary for
the same period. The Agreements restrict the officers from engaging in
activities competitive with our business during their employment with
HEALTHSOUTH and for any period during which the officer is receiving severance
compensation, unless such termination occurs after a Change in Control.
With the consent of the affected officers, we discontinued payment of the
car allowances in October 1998. In addition, each of the affected officers
voluntarily agreed to a 25% reduction in base salary effective January 1, 1999.
Such officers were restored to their full base salary rates effective May 23,
1999.
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<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership of HEALTHSOUTH common stock as of March 21, 2000, (a) by each person
who is known by us to own beneficially more than 5% of HEALTHSOUTH common stock,
(b) by each of HEALTHSOUTH's Directors, (c) by HEALTHSOUTH's five most highly
compensated executive officers and (d) by all executive officers and Directors
as a group.
<TABLE>
<CAPTION>
NAME AND NUMBER OF SHARES PERCENTAGE OF
ADDRESS OF OWNER BENEFICIALLY OWNED (1) COMMON STOCK
- -------------------------------------------------- ------------------------ --------------
<S> <C> <C>
Richard M. Scrushy ............................ 19,204,955 (2) 4.92%
John S. Chamberlin ............................ 357,000 (3) *
C. Sage Givens ................................ 468,000 (4) *
Charles W. Newhall III ........................ 2,114,627 (5) *
George H. Strong .............................. 515,665 (6) *
Phillip C. Watkins, M.D. ...................... 663,254 (7) *
James P. Bennett .............................. 3,057,959 (8) *
Jan L. Jones .................................. 50,000 (9) *
P. Daryl Brown ................................ 15,574,873 (10) *
Joel C. Gordon ................................ 2,207,787 (11) *
Michael D. Martin ............................. 1,408,746 (12) *
Robert E. Thomson ............................. 1,076,637 (13) *
Larry D. Striplin, Jr. ........................ 95,000 (14) *
FMR Corp. ..................................... 21,056,707 (15) 5.46%
82 Devonshire Street
Boston, Massachusetts 02109
AXA Financial, Inc. ........................... 19,327,588 (16) 5.01%
1290 Avenue of the Americas
New York, New York 10104
All Executive Officers and Directors as a Group
(20 persons) ................................ 36,240,464 (17) 8.82%
</TABLE>
- ----------
(1) The persons named in the table have sole voting and investment power with
respect to all shares of HEALTHSOUTH common stock shown as beneficially
owned by them, except as otherwise indicated.
(2) Includes 9,000 shares held by trusts for Mr. Scrushy's minor children,
31,000 shares held by a charitable foundation of which Mr. Scrushy is an
officer and director and 14,522,524 shares subject to currently exercisable
stock options.
(3) Includes 225,000 shares subject to currently exercisable stock options.
(4) Includes 2,100 shares owned by Ms. Givens's spouse and 432,900 shares
subject to currently exercisable stock options.
(5) Includes 460 shares owned by members of Mr. Newhall's immediate family,
1,508,781 shares owned by New Enterprise Associates VIII, Limited
Partnership, and 485,000 shares subject to currently exercisable stock
options. Mr. Newhall disclaims beneficial ownership of the shares owned by
his family members and New Enterprise Associates VIII, Limited Partnership,
except to the extent of his pecuniary interest therein.
(6) Includes 170,665 shares owned by trusts of which Mr. Strong is a trustee
and claims shared voting and investment power and 325,000 shares subject to
currently exercisable stock options.
(7) Includes 515,000 shares subject to currently exercisable stock options.
(8) Includes 2,005,000 shares subject to currently exercisable stock options.
(9) Includes 25,000 shares subject to currently exercisable stock options.
(10) Includes 1,100,000 shares subject to currently exercisable stock options.
(11) Includes 368,740 shares owned by Mr. Gordon's spouse and 459,520 shares
subject to currently exercisable stock options.
(12) Includes 1,030,000 shares subject to currently exercisable stock options.
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<PAGE>
(13) Includes 755,000 shares subject to currently exercisable stock options.
(14) Includes 35,000 shares subject to currently exercisable stock options.
(15) Shares held by various investment funds for which affiliates of FMR Corp.
act as investment advisor. FMR Corp. or its affiliates claim sole power to
vote 1,315,125 shares and sole power to dispose of all of the shares.
(16) Shares held by various affiliates of AXA Financial, Inc. for investment
purposes or in client discretionary accounts for which such affiliates act
as investment advisor. AXA Financial, Inc. or its affiliates claim sole
power to vote 7,045,560 shares, shared power to vote 12,137,900 shares,
sole power to dispose of 19,323,163 shares and shared power to dispose of
4,425 shares.
(17) Includes 24,860,905 shares subject to currently exercisable stock options
held by executive officers and Directors.
* Less than 1%
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
We purchase computer equipment and related technology and services from a
variety of vendors. In the past, those vendors have included GG Enterprises, a
value-added reseller of NCR computer equipment which is owned by Gerald Scrushy,
the father of Richard M. Scrushy, Chairman of the Board and Chief Executive
Officer of HEALTHSOUTH, and Gerald P. Scrushy, Senior Vice President - Physical
Resources of HEALTHSOUTH. These purchases were made in the ordinary course of
our business, and we believe that the price paid for equipment and services
purchased from GG Enterprises was more favorable to us than that which could
have been obtained for the same equipment and services from an independent
third-party seller. We no longer purchase equipment from GG Enterprises.
However, we paid GG Enterprises approximately $156,000 in 1999, consisting of
reimbursement for taxes owed on equipment we had previously purchased and other
amounts relating to past services.
In November 1997, we 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 HEALTHSOUTH, and Michael D.
Martin, then Executive Vice President and Chief Financial Officer and a Director
of HEALTHSOUTH, along with another individual not then employed by HEALTHSOUTH,
were 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 it was anticipated that HEALTHSOUTH and
third-party investors would invest. Our investment in the private equity fund
was expected to allow us to benefit from the opportunity to participate in
investments in healthcare businesses that were not part of our core businesses,
but which we believed provided opportunities for growth. Amounts outstanding
under the loan bore interest at 1% over the prime rate announced from time to
time by AmSouth Bank of Alabama and were repayable upon demand. During 1997 and
1998, 21st Century drew an aggregate of $2,841,310 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 make an investment in Pathology Partners, Inc., a
provider of management services to pathology groups. We own an aggregate of
3,361,539 shares of Series B Convertible Preferred Stock of Summerville, which
we acquired in two transactions in July and November 1997, as well as 266,667
shares of Series D Convertible Preferred Stock of Summerville which we acquired
in February 2000. In connection with the July 1997 transaction, Mr. Scrushy and
Mr. Martin were appointed to the Board of Directors of Summerville. 21st Century
repaid the principal and the interest allocated to the purchase of the
Summerville stock during 1998. In the first quarter of 1999, 21st Century
determined that, due to adverse changes in the markets for private equity funds
specializing in the healthcare industry, it was advisable to dissolve 21st
Century. In connection with the dissolution of 21st Century, 21st Century
transferred to us 675,005 shares of Series A Cumulative Preferred Stock and
1,440,010 shares of Series B Convertible Preferred Stock of Pathology Partners,
Inc, in satisfaction of the principal and interest allocable to the loan
relating to the Pathology Partners, Inc. investment. We believe that the value
of the stock so received was equal to or greater than the then-remaining
indebtedness of 21st Century to HEALTHSOUTH.
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<PAGE>
In December 1999, we acquired 6,390,583 shares of Series A Convertible
Preferred Stock of medcenterdirect.com, inc., a development-stage healthcare
e-procurement company, in a private placement for a purchase price of $0.3458
per share. Various persons affiliated or associated with us, including various
of our Directors and executive officers, also purchased shares in the private
placement. Under a Stockholders Agreement, we and the other holders of Series A
Convertible Preferred Stock, substantially all of whom may be deemed to be our
affiliates or associates, have the right to elect 50% of the directors of
medcenterdirect.com. During 2000, we expect to enter into a definitive 10-year
exclusive agreement under which medcenterdirect.com will be our exclusive
e-procurement vendor of medical products and supplies. We expect that the terms
of such agreement will be no less favorable than those we could obtain from an
unrelated vendor.
At times, we have made loans to executive officers to assist them in
meeting various financial obligations or for other purposes. At December 31,
1999, loans in the following principal amounts were outstanding to the following
executive officers:
<TABLE>
<CAPTION>
NAME PRINCIPAL AMOUNT
- ---------------------------------- -----------------
<S> <C>
James P. Bennett .......... $ 595,000
P. Daryl Brown ............ 1,370,000
William T. Owens .......... 476,000
</TABLE>
These 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.
See Item 11, "Executive Compensation -- 1999 Executive Equity Loan Plan", for
information concerning loans to executive officers to purchase HEALTHSOUTH
common stock.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements, Financial Statement Schedules and Exhibits.
1. Financial Statements.
The consolidated financial statements of HEALTHSOUTH 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.
HEALTHSOUTH filed no Current Reports on Form 8-K during the three months
ended December 31, 1999.
(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.
<TABLE>
<S> <C>
(2)-1 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 HEALTHSOUTH's Registration
Statement on Form S-4 (Registration No. 333-19439), is hereby
incorporated by reference.
(2)-2 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
HEALTHSOUTH's Registration Statement on Form S-4 (Registration No.
333-36419), is hereby incorporated by reference.
(2)-3 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 HEALTHSOUTH's Current Report
on Form 8-K, dated December 31, 1997, is hereby incorporated by
reference.
(2)-4 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
HEALTHSOUTH's Current Report on Form 8-K, dated December 31, 1997, is
hereby incorporated by reference.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
(2)-5 Second Amendment to Purchase and Sale Agreement, dated March 4, 1998,
among HEALTHSOUTH Corporation, Horizon/CMS Healthcare Corporation and
Integrated Health Services, Inc., filed as Exhibit (2-14) to
HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1997, is hereby incorporated by reference.
(2)-6 Plan and Agreement of Merger, dated May 5, 1998, among HEALTHSOUTH
Corporation, Field Acquisition Corporation and National Surgery
Centers, Inc., filed as Exhibit (2) to HEALTHSOUTH's Registration
Statement on Form S-4 (Registration No. 333-57087), is hereby
incorporated by reference.
(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 May 21, 1998, filed as Exhibit (3)-1 to HEALTHSOUTH's Current
Report on Form 8-K dated May 28, 1998, is hereby incorporated by
reference.
(3)-2 By-laws of HEALTHSOUTH Corporation, filed as Exhibit (3)-2 to
HEALTHSOUTH's Current Report on Form 8-K dated May 28, 1998, are
hereby incorporated by reference.
(4)-1 Indenture, dated March 24, 1994, between HEALTHSOUTH Rehabilitation
Corporation and NationsBank of Georgia, National Association, relating
to the Company's 9.5% Senior Subordinated Notes due 2001, filed as
Exhibit (4)-1 to HEALTHSOUTH'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, filed as Exhibit (4)-2 to HEALTHSOUTH's Annual Report on Form
10-K for the Fiscal Year Ended December 31, 1997, is hereby
incorporated by reference.
(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 HEALTHSOUTH's 3.25% Convertible Subordinated
Debentures due 2003, filed as Exhibit (4)-3 to HEALTHSOUTH's Annual
Report on Form 10-K for the Fiscal Year Ended December 31, 1997, is
hereby incorporated by reference.
(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
HEALTHSOUTH's 3.25% Convertible Subordinated Debentures due 2003,
filed as Exhibit (4)-4 to the Company's Annual Report on Form 10-K for
the Fiscal Year Ended December 31, 1997, is hereby incorporated by
reference.
(4)-5 Indenture, dated June 22, 1998, between HEALTHSOUTH Corporation and
PNC Bank, National Association, as Trustee, filed as Exhibit 4.1 to
HEALTHSOUTH's Quarterly Report on Form 10-Q for the Three Months Ended
June 30, 1998, is hereby incorporated by reference.
(4)-6 Form of Officer's Certificate pursuant to Sections 2.3 and 11.5 of the
Indenture, dated June 22, 1998, between HEALTHSOUTH Corporation and
PNC Bank, National Association, as Trustee, relating to HEALTHSOUTH's
6.875% Senior Notes due 2005 and 7.0% Senior Notes due 2008, filed as
Exhibit (4)-6 to HEALTHSOUTH's Registration Statement on Form S-4
(Registration No. 333-61485), is hereby incorporated by reference.
</TABLE>
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<TABLE>
<S> <C>
(10)-1 1984 Incentive Stock Option Plan, as amended, filed as Exhibit
(10)-1 to HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal
Year Ended December 31, 1987, is hereby incorporated by reference.
(10)-2 1988 Non-Qualified Stock Option Plan, filed as Exhibit 4(a) to
HEALTHSOUTH's Registration Statement on Form S-8 (Registration No.
33-23642), is hereby incorporated by reference.
(10)-3 1989 Stock Option Plan, filed as Exhibit (10)-6 to HEALTHSOUTH'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 HEALTHSOUTH'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
HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year ended
December 31, 1991, is hereby incorporated by reference.
(10)-6 1992 Stock Option Plan, filed as Exhibit (10)-8 to HEALTHSOUTH'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 HEALTHSOUTH'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 HEALTHSOUTH'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 HEALTHSOUTH'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 April 1, 1998, between HEALTHSOUTH
Corporation and Richard M. Scrushy.
(10)-11 Credit Agreement, dated as of June 23, 1998, by and among
HEALTHSOUTH Corporation, NationsBank, National Association, J.P.
Morgan Securities, Inc., Deutsche Bank AG, ScotiaBanc, Inc. and the
Lenders party thereto from time to time, filed as Exhibit 10 to
HEALTHSOUTH's Quarterly Report on Form for the Three Months Ended
June 30, 1998, 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 HEALTHSOUTH'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.
</TABLE>
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<TABLE>
<S> <C>
(10)-16 Heritage Surgical Corporation 1992 Stock Option Plan, filed as
Exhibit 4(d) to HEALTHSOUTH'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 HEALTHSOUTH'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), 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 HEALTHSOUTH'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 HEALTHSOUTH's
Registration Statement on Form S-8 (Registration No. 333-42307) is
hereby incorporated by reference.
(10)-27 1998 Restricted Stock Plan filed as Exhibit (10)-27 to HEALTHSOUTH's
Annual Report on Form 10-K for the Fiscal Year Ended December 31,
1998, is hereby incorporated by reference.
(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 by reference.
</TABLE>
84
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<TABLE>
<S> <C>
(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 by reference.
(10)-31 1996 Employee Incentive Stock Option Plan of Health Images, Inc.,
filed as Exhibit 4(v) to HEALTHSOUTH'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.
(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.
</TABLE>
85
<PAGE>
<TABLE>
<S> <C>
(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.
(10)-46 The Company Doctor Amended and Restated Omnibus Stock Plan of 1995,
filed as Exhibit 4.1 to HEALTHSOUTH's Registration Statement on Form
S-8 (Registration No. 333-59895), is hereby incorporated by
reference.
(10)-47 National Surgery Centers, Inc. Amended and Restated 1992 Stock
Option Plan, filed as Exhibit 4.1 to HEALTHSOUTH's Registration
Statement on Form S-8 (Registration No. 333-59887), is hereby
incorporated by reference.
(10)-48 National Surgery Centers, Inc. 1997 Non-Employee Directors Stock
Option Plan, filed as Exhibit 4.2 to HEALTHSOUTH's Registration
Statement on Form S-8 (Registration No. 333-59887), is hereby
incorporated by reference.
(10)-49 Employment Agreement, dated April 1, 1998, between HEALTHSOUTH
Corporation and James P. Bennett, filed as Exhibit (10)-49 to
HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1998, is hereby incorporated by reference.
(10)-50 Employment Agreement, dated April 1, 1998, between HEALTHSOUTH
Corporation and P. Daryl Brown, filed as Exhibit (10)-50 to
HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1998, is hereby incorporated by reference.
(10)-51 Employment Agreement, dated April 1, 1998, between HEALTHSOUTH
Corporation and Thomas W. Carman, filed as Exhibit (10)-51 to
HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1998, is hereby incorporated by reference.
(10)-52 Employment Agreement, dated April 1, 1998, between HEALTHSOUTH
Corporation and Michael D. Martin, filed as Exhibit (10)-52 to
HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1998, is hereby incorporated by reference.
(10)-53 Employment Agreement, dated April 1, 1999, between HEALTHSOUTH
Corporation and Anthony J. Tanner
(10)-54 Employment Agreement, dated April 1, 1998, between HEALTHSOUTH
Corporation and Patrick A. Foster, filed as Exhibit (10)-54 to
HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1998, is hereby incorporated by reference.
(10)-55 Employment Agreement, dated April 1, 1998, between HEALTHSOUTH
Corporation and Robert E. Thomson, filed as Exhibit (10)-55 to
HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1998, is hereby incorporated by reference.
</TABLE>
86
<PAGE>
<TABLE>
<S> <C>
(10)-56 Lease Agreement, dated December 18, 1998, between First Security
Bank, National Association, as Owner Trustee under the HEALTHSOUTH
Corporation Trust 1998-1, as Lessor, and HEALTHSOUTH Corporation, as
Lessee, filed as Exhibit (10)-56 to HEALTHSOUTH's Annual Report on
Form 10-K for the Fiscal Year Ended December 31, 1998, is hereby
incorporated by reference.
(10)-57 Participation Agreement, dated December 18, 1998, among HEALTHSOUTH
Corporation as Lessee, First Security Bank, National Association, as
Owner Trustee under the HEALTHSOUTH Corporation Trust 1998-1, the
Holders and the Lenders Party Thereto From Time to Time, Deutsche
Bank A.G. New York Branch and NationsBank, N.A., filed as Exhibit
(10)-57 to HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal
Year Ended December 31, 1998, is hereby incorporated by reference
(10)-58 Short Term Credit Agreement, among HEALTHSOUTH Corporation, Bank of
America, N.A., Citicorp USA, Inc. and the Lenders Party Thereto From
Time to Time, dated December 15, 1999.
(10)-59 1999 Exchange Stock Option Plan, filed as Exhibit 3 to HEALTHSOUTH's
Registration Statement on Form S-8 (Registration No. 333-80073), is
hereby incorporated by reference.
(10)-60 1999 Executive Equity Loan Plan.
(21) Subsidiaries of HEALTHSOUTH Corporation.
(23) Consent of Ernst & Young LLP.
(27) Financial Data Schedule.
</TABLE>
(d) Financial Statement Schedules.
Schedule II: Valuation and Qualifying Accounts
87
<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, 1997:
Allowance for doubtful accounts .. $ 77,083 $ 74,743 $ 43,077(1) $ 67,331(2) $127,572
======== ======== =========== ============ ========
Year ended December 31, 1998:
Allowance for doubtful accounts .. $127,572 $112,202 $ 18,524(1) $ 114,609(2) $143,689
======== ======== =========== ============ ========
Year ended December 31, 1999:
Allowance for doubtful accounts .. $143,689 $342,708 $ 16,314(1) $ 199,097(2) $303,614
======== ======== =========== ============ ========
</TABLE>
- ----------
(1) Allowances of acquisitions in years 1997, 1998 and 1999, respectively.
(2) Write-offs of uncollectible patient accounts receivable.
88
<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, 2000
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.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------- ------------------------------------- ---------------
<S> <C> <C>
RICHARD M. SCRUSHY Chairman of the Board March 30, 2000
- ----------------------- and Chief Executive Officer
Richard M. Scrushy and Director
WILLIAM T. OWENS Executive Vice President March 30, 2000
- ----------------------- and Chief Financial Officer
William T. Owens
WESTON L. SMITH Senior Vice President-Finance March 30, 2000
- ----------------------- and Controller (Principal Accounting
Weston L. Smith Officer)
C. SAGE GIVENS Director March 30, 2000
- -----------------------
C. Sage Givens
CHARLES W. NEWHALL III Director March 30, 2000
- -----------------------
Charles W. Newhall III
GEORGE H. STRONG Director March 30, 2000
- -----------------------
George H. Strong
PHILLIP C. WATKINS Director March 30, 2000
- -----------------------
Phillip C. Watkins
JOHN S. CHAMBERLIN Director March 30, 2000
- -----------------------
John S. Chamberlin
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
JAN L. JONES
- -----------------------
Jan L. Jones Director March 30, 2000
JAMES P. BENNETT Director March 30, 2000
- -----------------------
James P. Bennett
P. DARYL BROWN Director March 30, 2000
- -----------------------
P. Daryl Brown
JOEL C. GORDON Director March 30, 2000
- -----------------------
Joel C. Gordon
LARRY D. STRIPLIN, JR. Director March 30, 2000
- -----------------------
Larry D. Striplin, Jr.
</TABLE>
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of April 1, 1998 (this "Agreement"), between
HEALTHSOUTH Corporation, a Delaware corporation (the "Company"), and RICHARD M.
SCRUSHY, a resident of Birmingham, Alabama (the "Executive").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company provides comprehensive rehabilitative, clinical,
diagnostic and surgical healthcare services;
WHEREAS, the Executive is a founder of the Company and serves as Chief
Executive Officer of the Company and as Chairman of its Board of Directors; and
WHEREAS, the Company wishes to assure itself of the continued services of
the Executive so that it will have the continued benefit of his ability,
experience and services, and the Executive is willing to enter into an agreement
to that end, upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of good and valuable consideration the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
covenant and agree as follows:
1. EMPLOYMENT
The Company hereby agrees to continue to employ the Executive, and the
Executive hereby agrees to remain in the employ of the Company, on and subject
to the terms and conditions of this Agreement.
2. TERM
(a) The period of this Agreement (the "Agreement Term") shall commence as
of the date hereof (the "Effective Date") and shall expire on the fifth
anniversary of the Effective Date. The Agreement Term shall be automatically
extended for an additional year on each anniversary of the Effective Date,
unless written notice of non-extension is provided by either party to the other
party at least 90 days prior to such anniversary.
(b) The period of the Executive's employment under this Agreement (the
"Employment Period") shall commence as of the Effective Date and shall expire at
the end of the Agreement Term, unless sooner terminated in accordance with the
terms and conditions of this Agreement.
3. POSITION, DUTIES AND RESPONSIBILITIES
(a) The Executive shall serve as, and with the title, office and authority
of, the Chief Executive Officer of the Company and the Chairman of the Board of
Directors of the Company (the "Board") and shall report directly to the Board.
The Company shall use its best efforts to cause the Executive to be nominated
and elected (or renominated and reelected, as the case may be) during the
Employment Period as a director of the Company.
(b) The Executive shall have effective supervision and control over, and
responsibility for, the strategic direction and general and active day-to-day
leadership and management of the business and affairs of the Company and the
direct and indirect subsidiaries of the Company, subject only to the authority
of the Board, and shall have all of the powers, authority, duties and
responsibilities usually incident to the positions and offices of Chief
Executive Officer and Chairman of the Board of the Company.
<PAGE>
(c) The Executive agrees to devote substantially all of his business time,
efforts and skills to the performance of his duties and responsibilities under
this Agreement; provided, however, that nothing in this Agreement shall preclude
the Executive from devoting reasonable periods required for (i) participating in
professional, educational, philanthropic, public interest, charitable, social or
community activities, (ii) serving as a director or member of an advisory
committee of any corporation or other entity that the Executive is serving on as
of the Effective Date or any other corporation or entity that is not in direct
competition with the Company or (iii) managing his personal investments,
provided that such activities do not materially interfere with the Executive's
regular performance of his duties and responsibilities hereunder.
(d) The foregoing provisions of this Section 3 shall be subject to the
Executive's right to elect to serve the Company solely as the Chairman of the
Board, as provided in Section 22 hereof.
4. PLACE OF PERFORMANCE
The Executive shall perform his duties at the principal offices of the
Company located at One HealthSouth Parkway, Birmingham, Alabama, but from time
to time the Executive may be required to travel to other locations in the proper
conduct of his responsibilities under this Agreement.
5. COMPENSATION AND BENEFITS
In consideration of the services rendered by the Executive during the
Employment Period, the Company shall pay or provide to the Executive the amounts
and benefits set forth below.
(a) Salary. The Company shall pay the Executive an annual base salary (the
"Base Salary") of at least $1,200,000. The Executive's Base Salary shall be paid
in arrears in substantially equal installments at monthly or more frequent
intervals, in accordance with the normal payroll practices of the Company. The
Executive's Base Salary shall be reviewed at least annually by the Compensation
Committee of the Board (the "Compensation Committee") for consideration of
appropriate merit increases and, once established, the Base Salary shall not be
decreased during the Employment Period, except as otherwise contemplated by
Section 22 hereof.
(b) Annual Target Bonus. The Company shall provide the Executive with the
opportunity to earn an annual target bonus (the "Annual Target Bonus") equal to
at least $2,400.000. The amount of the Annual Target Bonus will be reviewed at
least annually by the Compensation Committee for consideration of appropriate
merit increases and, once established at a specified amount, the Annual Target
Bonus shall not be decreased during the Employment Period, except as otherwise
contemplated by Section 22 hereof. The Annual Target Bonus will be payable in
the event that the Company's operations meet the annual performance standard set
forth in the Company's business plan, as approved by the Compensation Committee
in each year of the Employment Period (the "Business Plan"). In the event that
the Company's operations meet the monthly performance standard set forth in the
Business Plan, an amount equal to one-twelfth (1/12) of the Annual Target Bonus
(a "Monthly Target Bonus") shall be payable within five days following the date
the Company's internal monthly financial statements have been completed. In the
event that any Monthly Target Bonus shall not be paid during the course of such
calendar year because the relevant monthly performance standard was not met,
such Monthly Target Bonus shall again become available for payment if the
Company attains its annual performance standard for such calendar year. In the
event that the annual performance standards are not met, Executive shall
nevertheless be entitled to retain all amounts theretofore received in respect
of any Monthly Target Bonuses paid during the course of such calendar year. For
the remainder of the 1998 calendar year following the Effective Date, the
Executive will be paid $200,000 within five days following the date the
Company's internal monthly financial statements have been completed for each
calendar month ending following the Effective Date in which the relevant monthly
performance standard is met and, in the event the Company attains its annual
performance standard for 1998, the Executive shall be paid $200,000 of any
month, dating back to January, 1998, in which the Executive was not paid the
Monthly Target Bonus due to the relevant monthly performance standard not having
been met.
(c) Other Incentive Plans. The Executive shall participate in all other
bonus or incentive plans or arrangements in which other senior executives of the
Company are eligible to participate from time to time, including,
<PAGE>
without limitation, any management bonus pool arrangement. The Executive's
incentive compensation opportunities under such plans and arrangements shall be
determined from time to time by the Compensation Committee upon consultation
with the Executive.
(d) Equity Incentives. The Executive shall be given consideration, at least
annually, by the Compensation Committee for the grant of options to purchase
shares of the common stock of the Company. In addition, the Executive shall be
entitled to receive awards under any stock option, stock purchase or
equity-based incentive compensation plan or arrangement adopted by the Company
from time to time for which senior executives of the Company are eligible to
participate. The Executive's awards under such plans and arrangements shall be
determined from time to time by the Compensation Committee upon consultation
with the Executive.
(e) Employee Benefits. The Executive shall be entitled to participate in
all employee benefit plans, programs, practices or arrangements of the Company
in which other senior executives of the Company are eligible to participate from
time to time, including, without limitation, any qualified or non-qualified
pension, profit sharing and savings plans, any death benefit and disability
benefit plans, and any medical, dental, health and welfare plans. Without
limiting the generality of the foregoing, the Company shall provide the
Executive with the following:
(i) provision of long-term disability insurance coverage paying
benefits equal to at least 100% of the Executive's Base Salary and Annual
Target Bonus for the duration of any permanent and total disability of the
Executive, either through an individual disability insurance policy or
otherwise;
(ii) continued provision of split-dollar life insurance coverage and
payment of premiums pursuant to that certain Split-Dollar Agreement between
the Executive and the Company, dated February 1, 1992, as amended; and
(iii) provision of the pension benefits provided under a non-qualified
retirement plan for the Executive, a summary of the terms of which is
attached hereto as Exhibit A.
(f) Fringe Benefits and Perquisites. The Executive shall be entitled to
continuation of all fringe benefits and perquisites provided to the Executive on
the Effective Date, and to all fringe benefits and perquisites which are
generally made available to senior executives of the Company from time to time.
Without limiting the generality of the foregoing, the Company shall provide the
Executive with the following:
(i) provision of executive offices and secretarial staff;
(ii) six weeks paid vacation during each calendar year;
(iii) provision of an automobile of the Executive's choice (which may
be traded in for a new automobile each year), plus payment of all related
automobile expenses, including gas, maintenance expenses and automobile
insurance;
(iv) payment of initiation fees and annual dues for two country clubs
of the Executive's choice, and payment of dues for any professional
societies and associations of which the Executive is a member in
furtherance of his duties hereunder;
(v) in order to ensure the accessibility and security of the
Executive, use of the Company's aircraft and related facilities for both
business and personal travel and provision of appropriate personal
residence security services, a 24-hour bodyguard service, a
security-trained driver/bodyguard and any other measures prescribed from
time to time by the Company's corporate security advisor and approved by
the Board; and
(vi) reimbursement of all reasonable travel and other business
expenses and disbursements incurred by the Executive in the performance of
his duties under this Agreement, upon proper accounting in accordance with
the Company's normal practices and procedures for
<PAGE>
reimbursement of business expenses.
6. TERMINATION OF EMPLOYMENT
The Employment Period will be terminated upon the happening of any of the
following events:
(a) Resignation for Good Reason. The Executive may voluntarily terminate
his employment hereunder for Good Reason. For purposes of this Agreement, "Good
Reason" shall mean:
(i) the assignment to the Executive of any duties inconsistent with
the Executive's position (including status, offices, titles or reporting
relationships), authority, duties or responsibilities as contemplated by
Section 3 hereof, or any action by the Company that results in a diminution
in such position, authority, duties or responsibilities, but excluding for
these purposes any isolated and insubstantial action not taken in bad faith
and which is remedied by the Company promptly after receipt of notice
thereof given by the Executive;
(ii) any material change in the Executive's reporting
responsibilities;
(iii) any material failure by the Company to honor its obligations
under this Agreement;
(iv) a notice of non-extension of the Agreement Term provided by the
Company to the Executive as set froth in Section 2 hereof;
(v) the relocation of the Company's principal executive offices to a
location more than 40 miles from its current location in Birmingham,
Alabama, or the location of the Executive's own office to other than the
Company's principal executive offices;
(vi) any failure by the Company to obtain an assumption of this
Agreement by a successor corporation as required under Section 14(a)
hereof;
(vii) the failure of the Company to renominate the Executive to the
Board or the failure of the Company's stockholders to reelect the Executive
to the Board; or
(viii) any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Agreement.
However, in no event shall the Executive be considered to have terminated his
employment for "Good Reason" unless and until the Company receives written
notice from the Executive identifying in reasonable detail the acts or omissions
constituting "Good Reason" and the provision of this Agreement relied upon, and
such acts or omissions are not cured by the Company to the reasonable
satisfaction of the Executive within 30 days of the Company's receipt of such
notice.
(b) Resignation other than for Good Reason. The Executive may voluntarily
terminate his employment hereunder for any reason other than Good Reason.
(c) Termination for Cause. The Company may terminate the Executive's
employment hereunder for Cause. For purposes of this Agreement, the Executive
shall be considered to be terminated for "Cause" only if (i) the Executive is
found, by a non-appealable order of a court or competent jurisdiction, to be
guilty of a felony under the laws of the United States or any state thereof or
(ii) the Executive is found, by a non-appealable order of a court of competent
jurisdiction, to have committed a fraud, which has a material adverse effect on
the Company. However, in no event shall the Executive's employment be considered
to have been terminated for "Cause" unless and until the Executive receives a
copy of a resolution duly adopted by the affirmative vote of a majority of the
Board at a meeting called and held for such purpose (after reasonable written
notice is provided to the Executive setting forth in reasonable detail the facts
and circumstances claimed to provide a basis of termination for Cause and the
Executive is given an opportunity, together with counsel, to be heard before the
Board) finding that the Executive is guilty of acts or omissions constituting
Cause.
<PAGE>
(d) Termination other than for Cause. The Board shall have the right to
terminate the Executive's employment hereunder for any reason at any time,
including for any reason that does not constitute Cause, subject to the
consequences of such termination as set forth in this Agreement.
(e) Disability. The Executive's employment hereunder shall terminate upon
his Disability. For purposes of this Agreement, "Disability" shall mean the
inability of the Executive to perform his duties to the Company on account of
physical or mental illness for a period of six consecutive full months, or for a
period of eight full months during any 12-month period. The Executive's
employment shall terminate in such a case on the last day of the applicable
period; provided, however, in no event shall the Executive be terminated by
reason of Disability unless (i) the Executive is eligible for the long-term
disability benefits set forth in Section 5(e)(i) hereof and (ii) the Executive
receives written notice from the Company, at least 30 days in advance of such
termination, stating its intention to terminate the Executive for reason of
Disability and setting forth in reasonable detail the facts and circumstances
claimed to provide a basis for such termination.
(f) Death. The Executive's employment hereunder shall terminate upon his
death.
7. COMPENSATION UPON TERMINATION OF EMPLOYMENT
In the event the Executive's employment by the Company is terminated during
the Agreement Term, the Executive shall be entitled to the severance benefits
set forth below:
(a) Resignation for Good Reason. In the event the Executive voluntarily
terminates his employment hereunder for Good Reason, the Company shall pay the
Executive and provide him with the following:
(i) Accrued Rights. The Company shall pay the Executive a lump-sum
amount equal to the sum of (A) his earned but unpaid Base Salary through
the date of termination, (B) any earned but unpaid Annual Target Bonus for
any completed calendar year, (C) any earned but unpaid Monthly Target Bonus
for any completed month in the calendar year of the Executive's termination
and (D) any unreimbursed business expenses or other amounts due to the
Executive from the Company as of the date of termination. In addition, the
Company shall provide to the Executive all payments, rights and benefits
due as of the date of termination under the terms of the Company's employee
and fringe benefit plans, practices, programs and arrangements referred to
in Sections 5(e) and 5(f) hereof (including, but not limited to, any
retirement benefits set forth on Exhibit A to which Executive is entitled)
(together with the lump-sum payment, the "Accrued Rights").
(ii) Severance Payment. The Company shall pay the Executive a lump-sum
amount equal to the sum of the Executive's then-current Base Salary and
Annual Target Bonus at the time of the Executive's termination, for each
year remaining in the Agreement Term (with pro-rated amounts of such Base
Salary and Annual Target Bonus, on a daily basis, for any partial calendar
years during such remaining Agreement Term), with such lump-sum payment
discounted to present value using an interest rate equal to 100% of the
monthly compounded applicable federal rate (the "Applicable Rate"), as in
effect under Section 1274(d) of the Internal Revenue Code of 1986, as
amended (the "Code"), for the month in which payment is required to be
made. For purposes of determining the portion of the severance payment
based on the Annual Target Bonus to be payable hereunder, the relevant
performance standards for the Company shall be deemed to have been
achieved.
(iii) Continued Benefits. The Company shall pay or provide the
Executive with all employee and fringe benefits referred to in Sections
5(e) and 5(f) hereof for the balance of the Agreement Term; provided,
however, that if and to the extent the Company determines that any such
benefits cannot be paid or provided under the plans in question due to Code
or other restrictions, the Company shall provide payments, coverages or
benefits, which are at least as favorable to the Executive on an after-tax
basis, through other means reasonably satisfactory to the Executive.
(iv) Equity Rights. All stock options and other equity-based rights
held by the Executive
<PAGE>
at the date of termination shall become immediately and fully vested and
exercisable, and the Executive shall retain the right to exercise all
outstanding stock options for the duration of their original full term
(without regard to termination of employment) in accordance with the
Founder Retirement Benefit Program attached hereto as Exhibit B (the
"Founders' Program"). The Company shall forthwith take all necessary steps
to amend any relevant stock option plans of the Company and stock option
agreements to the extent necessary to allow for the foregoing vesting and
term of exercise.
(b) Resignation other than for Good Reason. In the event the Executive
voluntarily terminates his employment hereunder other than for Good Reason, the
Company shall pay the Executive and provide him with the following:
(i) Accrued Rights. The Company shall pay and provide to the Executive
any Accrued Rights.
(ii) Severance Payment. The Company shall pay the Executive a lump-sum
amount equal to two times the sum of the Executive's then-current Base
Salary and Annual Target Bonus at the time of the Executive's termination,
with such lump-sum payment discounted to present value using the Applicable
Rate for the month in which payment is required to be made. For purposes of
determining the portion of the severance payment based on the Annual Target
Bonus to be payable hereunder, the relevant performance standards for the
Company shall be deemed to have been achieved.
(c) Termination for Cause. In the event the Executive's employment
hereunder is terminated by the Company for Cause, the Company shall pay and
provide to the Executive any Accrued Rights.
(d) Termination other than for Cause, Disability or Death. In the event the
Executive's employment hereunder is terminated by the Company for any reason
other than for Cause, Disability or death, the Company shall pay the Executive
and provide him with all severance benefits set forth in Section 7(a) hereof.
(e) Disability. In the event the Executive's employment hereunder is
terminated by reason of the Executive's Disability, the Company shall pay the
Executive and provide him with the following:
(i) Accrued Rights. The Company shall pay and provide to the Executive
any Accrued Rights, including all disability insurance coverage.
(ii) Severance Payment. The Company shall provide the Executive with
continued payment of the Executive's Base Salary and Annual Target Bonus,
as in effect on the date of termination, for a period of three years
following the Executive's termination, payable at the times and in the
manner such Base Salary and Annual Target Bonus would have been paid if the
Executive had continued in the employment of the Company and as if all
relevant performance standards had been achieved during such periods.
(f) Death.
In the event the Executive's employment hereunder is terminated by reason
of the Executive's death, the Company shall pay the Executive's representatives
or estate the following:
(i) Accrued Rights. The Company shall pay and provide to the
Executive's representatives or estate any Accrued Rights, including all
life insurance coverage.
(ii) Severance Payment. The Company shall pay the Executive's
representatives or estate a lump-sum amount equal to the sum of the
Executive's then-current Base Salary and Annual Target Bonus at the time of
the Executive's death, with such lump-sum payment discounted to present
value using the Applicable Rate for the month in which payment is required
to be made. For purposes of determining the portion of the severance
payment based on the Annual Target Bonus to be payable
<PAGE>
hereunder, the relevant performance standards for the Company shall be
deemed to have been achieved.
8. FOUNDERS' BENEFITS
Upon the Executive's termination of employment hereunder for any reason,
and in addition to any severance benefits payable to him under Section 7 hereof,
the Company shall treat such termination as a "retirement" for purposes of the
Founder's Program, and shall provide the Executive with the benefits outlined in
the Founders' Program in recognition of his status as a founder of the Company.
9. CHANGE IN CONTROL
(a) Supplemental termination Rights. In the event of Executive's
termination other than for Cause, Disability or death or in the event a
voluntary termination of employment by the Executive pursuant to either Section
6(a) or Section 6(b) hereof, in either case occurring within two years following
a Change in Control, the Company shall pay to the Executive, in addition to the
severance benefits payable under Section 7(b) hereof, an additional lump-sum
amount equal to the Executive's then-current Base Salary and Annual Target Bonus
at the time of the Executive's termination, with such lump-sum payment
discounted to present value using the Applicable Rate for the month in which
payment is required to be made.
(b) Definition. For purposes of this Agreement, a "Change in Control" shall
be deemed to have occurred by reason of:
(i) the acquisition (other than from the Company) by any person,
entity or "group" (within the meaning of Sections 13(d)(3) or 14(d)(2) of
the Securities Exchange Act of 1934, but excluding, for this purpose, the
Company or its subsidiaries, or any employee benefit plan of the Company or
its subsidiaries which acquires beneficial ownership of voting securities
of the Company) of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Securities Exchange Act of 1934) of 25% or more of
either the then-outstanding shares of the common stock of the Company or
the combined voting power of the Company's then-outstanding voting
securities entitled to vote generally in the election of directors; or
(ii) individuals who, as of the date hereof, constitute the Board (as
of such date, the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, that any person becoming
a director subsequent to such date whose election, or nomination for
election, was approved by a vote of at least a majority of the directors
then constituting the Incumbent Board (other than an election or nomination
of an individual whose initial assumption of office is in connection with
an actual or threatened election contest relating to the election of
directors of the Company) shall be, for purposes of this Section 9(b)(ii),
considered as though such person were a member of the Incumbent Board; or
(iii) approval by the stockholders of the Company of a reorganization,
merger, consolidation or share exchange, in each case with respect to which
persons who were the stockholders of the Company immediately prior to such
reorganization, merger, consolidation or share exchange do not, immediately
thereafter, own more than 75% of the combined voting power entitled to vote
generally in the election of directors of the reorganized, merged,
consolidated or other surviving entity's then-outstanding voting
securities, or a liquidation or dissolution of the Company or the sale of
all or substantially all of the assets of the Company.
10. PARACHUTE TAX INDEMNITY
(a) If it shall be determined that any amount paid, distributed or treated
as paid or distributed by the Company to or for the Executive's benefit (whether
paid or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise, but determined without regard to any additional payments
required under this Section 10) (a "Payment") would be subject to the excise tax
imposed by Section 4999 of the Code or any interest or penalties are
<PAGE>
incurred by the Executive with respect to such excise tax (such excise tax,
together with any such interest and penalties, being hereinafter collectively
referred to as the "Excise Tax"), then the Executive shall be entitled to
receive an additional payment (a "Gross-Up Payment") in an amount such that
after payment by the Executive of all federal, state and local taxes (including
any interest or penalties imposed with respect to such taxes), including without
limitation, any income taxes (and any interest and penalties imposed with
respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive
retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon
the Payments.
(b) All determinations required to be made under this Section 10, including
whether and when a Gross-Up Payment is required and the amount of such Gross-Up
Payment and the assumptions to be utilized in arriving at such determination,
shall be made by a nationally recognized accounting firm as may be designated by
the Executive (the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and the Executive within 15 business days of
the receipt of notice from the Executive that there has been a Payment, or such
earlier time as is requested by the Company. In the event that the Accounting
Firm is serving as accountant or auditor for the individual, entity or group
effecting the Change in Control, the Executive shall appoint another nationally
recognized accounting firm to make the determinations required hereunder (which
accounting firm shall then be referred to as the Accounting Firm hereunder). All
fees and expenses of the Accounting Firm shall be borne by the Company. Any
Gross-Up Payment, as determined pursuant to this Section 10, shall be paid by
the Company to the Executive within five days of the receipt of the Accounting
Firm's determination. Any determination by the Accounting Firm shall be binding
upon the Company and the Executive. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the initial determination
by the Accounting Firm hereunder, it is possible that Gross-Up Payments which
will not have been made by the Company should have been made ("Underpayment"),
consistent with the calculations required to be made hereunder. In the event
that the Company exhausts its remedies pursuant to this Section 10 and the
Executive thereafter is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Underpayment that has occurred
and any such Underpayment shall be promptly paid by the Company to or for the
Executive's benefit.
(c) The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than ten business days after the Executive is informed
in writing of such claim and shall apprise the Company of the nature of such
claim and the date on which such claim is requested to be paid. The Executive
shall not pay such claim prior to the expiration of the 30-day period following
the date on which it gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due).
If the Company notifies the Executive in writing prior to the expiration of such
period that it desires to contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by the
Company relating to such claim;
(ii) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such
claim by an attorney reasonably selected by the Company;
(iii) cooperate with the Company in good faith in order to effectively
contest such claim; and
(iv) permit the Company to participate in any proceeding relating to
such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, from any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expense. Without limitation on the foregoing provisions of
this Section 10, the Company shall control all proceedings taken in connection
with such contest and, at its sole option, may pursue or forego any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may at its sole option, either direct the
Executive to pay the tax claimed and sue for a refund or contest the claim in
any permissible manner, and the Executive agrees to prosecute such contest to a
determination before any administrative
<PAGE>
tribunal, in a court of initial jurisdiction and in one or more appellate courts
as the Company shall determine; provided, however, that if the Company directs
the Executive to pay such claim and sue for a refund, the Company shall advance
the amount of such payment to the Executive, on an interest-free basis, and
shall indemnify and hold the Executive harmless, on an after-tax basis, from any
Excise Tax or income tax (including interest or penalties with respect thereto)
imposed with respect to such advance or with respect to any imputed income with
respect to such advance; and further provided that any extension of the statute
of limitations relating to payment of taxes for the Executive's taxable year
with respect to which such contested amount is claimed to be due is limited
solely to such contested amount. Furthermore, the Company's control of the
contest shall be limited to issues with respect to which a Gross-Up Payment
would be payable hereunder and the Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.
(d) If, after the Executive's receipt of an amount advanced by the Company
pursuant to this Section 10, the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements of this Section 10) promptly pay to the Company
the amount of such refund (together with any interest paid or credited thereon
after taxes applicable thereto). If, after the Executive's receipt of an amount
advanced by the Company pursuant to this Section 10, a determination is made
that the Executive shall not be entitled to any refund with respect to such
claim and the Company does not notify the Executive in writing of its intent to
contest such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
11. NO MITIGATION OR OFFSET
The Executive shall not be required to seek other employment or to reduce
any severance benefit payable to him under Section 7, 8 or 9 hereof, and no such
severance benefit shall be reduced on account of any compensation received by
the Executive from other employment. The Company's obligation to pay severance
benefits under this Agreement shall not be reduced by any amount owed by the
Executive to the Company.
12. TAX WITHHOLDING; METHOD OF PAYMENT
All compensation payable pursuant to this Agreement, shall be subject to
reduction by all applicable withholding, social security and other federal,
state and local taxes and deductions. Any lump-sum payments provided for in
Sections 7 or 9 hereof shall be made in a cash payment, net of any required tax
withholding, no later than the fifth business day following the Executive's date
of termination. Any payment required to be made to the Executive under this
Agreement that is not made in a timely manner shall bear interest at the
Applicable rate until the date of payment.
13. RESTRICTIVE COVENANTS
(a) Confidential Information. During the Employment Period and at all times
thereafter, the Executive agrees that he will not divulge to anyone (other than
the Company or any persons employed or designated by the Company) any knowledge
or information of a confidential nature relating to the business of the Company
or any of its subsidiaries or affiliates, including, without limitation, all
types of trade secrets (unless readily ascertainable from public or published
information or trade sources) and confidential commercial information, and the
Executive further agrees not to disclose, publish or make use of any such
knowledge or information without the consent of the Company.
(b) Noncompetition. During the Employment Period and in the event of a
resignation by the Executive for any reason other than Good Reason, for the 24
month period following the termination of his employment, the Executive shall
not, without the prior written consent of the Company, engage in the
comprehensive rehabilitative and related healthcare services business on behalf
of any person, firm or corporation within any geographical area in which the
Company transacts such business, and the Executive shall not acquire any
financial interest (except for an equity interest in publicly-held companies
that do not exceed 5% of any outstanding class of equity of that company), in
any business that engages in the comprehensive rehabilitative and related
healthcare services business within any geographical area in which the Company
transacts such business. Notwithstanding the foregoing, upon the occurrence of a
Change in
<PAGE>
Control (whether before or after the termination of the Employment Period), the
restrictions of this Section 13(b) shall cease to apply to the Executive for any
period following his termination of employment hereunder.
(c) Enforcement. The Company shall be entitled to seek a restraining order
or injunction in any court of competent jurisdiction to prevent any continuation
of any violation of the provisions of this Section 13.
14. SUCCESSORS
(a) This Agreement shall be binding upon and shall inure to the benefit of
the Company, its successors and assigns and any person, firm, corporation or
other entity which succeeds to all or substantially all of the business, assets
or property of the Company. The Company will require any successor (whether
direct or indirect, by purchase, merger, consolidation, or otherwise) to all or
substantially all of the business, assets or property of the Company, to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform it if no such
succession had taken place. As used in this Agreement, the "Company" shall mean
the Company as hereinbefore defined and any successor to its business, assets or
property as aforesaid which executes and delivers an agreement provided for in
this Section 14 or which otherwise becomes bound by all the terms and provisions
of this Agreement by operation of law.
(b) This Agreement and all rights of the Executive hereunder shall inure to
the benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Executive should die while any amounts are due and
payable to him hereunder, all such amounts, unless otherwise provided herein,
shall be paid to the Executive's designated beneficiary or, if there be no such
designated beneficiary, to the legal representatives of the Executive's estate.
15. NO ASSIGNMENT
Except as to withholding of any tax under the laws of the United States or
any other country, state or locality, neither this Agreement nor any right or
interest hereunder nor any amount payable at any time hereunder shall be subject
in any manner to alienation, sale, transfer, assignment, pledge, attachment, or
other legal process, or encumbrance of any kind by the Executive or the
beneficiaries of the Executive or by his legal representatives without the
Company's prior written consent, nor shall there be any right of set-off or
counterclaim in respect of any debts or liabilities of the Executive, his
beneficiaries or legal representatives; provided, however, that nothing in this
Section shall preclude the Executive from designating a beneficiary to receive
any benefit payable on his death, or the legal representatives of the Executive
from assigning any rights hereunder to the person or persons entitled thereto
under his will or, in case of intestacy, to the person or persons entitled
thereto under the laws of intestacy applicable to his estate.
16. ENTIRE AGREEMENT
This Agreement contains the entire understanding of the parties with
respect to the subject matter hereof and, except as specifically provided
herein, cancels and supersedes any and all other agreements between the parties
with respect to the subject matter hereof, including, without limitation, that
certain employment agreement dated July 23, 1986, as amended. Any amendment or
modification of this Agreement shall not be binding unless in writing and signed
by the Company and the Executive.
17. SEVERABILITY
In the event that any provision of this Agreement is determined to be
invalid or unenforceable, the remaining terms and conditions of this Agreement
shall be unaffected and shall remain in full force and effect, and any such
determination of invalidity or unenforceability shall not affect the validity or
enforceability of any other provision of this Agreement.
18. NOTICES
<PAGE>
All notices which may be necessary or proper for either the Company or the
Executive to give to the other shall be in writing and shall be delivered by
hand or sent by registered or certified mail, return receipt requested, or by
air courier, to the Executive at:
Mr. Richard M. Scrushy
2406 Longleaf Street
Birmingham, Alabama 35243
and shall be sent in the manner described above to the Secretary of the Company
at the Company's principal executives offices at One HealthSouth Parkway,
Birmingham, Alabama 35243, with a copy to the Legal Services Department at the
same address or delivered by hand to the Secretary and to the Legal Services
Department of the Company, and shall be deemed given when sent, provided that
any notice required under Section 6 hereof or notice given pursuant to Section 2
hereof shall be deemed given only when received. Any party may by like notice to
the other party change the address at which he or they are to receive notices
hereunder.
19. GOVERNING LAW
This Agreement shall be governed by and enforceable in accordance with the
laws of the State of Alabama, without giving effect to the principles of
conflict of laws thereof.
20. LEGAL FEES AND EXPENSES
To induce the Executive to execute this Agreement and to provide the
Executive with reasonable assurance that the purposes of this Agreement will not
be frustrated by the cost of its enforcement should the Company fail to perform
its obligations under this Agreement or should the Company or any subsidiary,
affiliate or stockholder of the Company contest the validity or enforceability
of this Agreement, the Company shall pay and be solely responsible for any
attorneys' fees and expenses and courts costs incurred by the Executive as a
result of a claim that the Company has breached or otherwise failed to perform
this Agreement or any provision hereof to be performed by the Company or as a
result of the Company or any subsidiary, affiliate or stockholder of the Company
contesting the validity or enforceability of this Agreement or any provision
hereof to be performed by the Company, in each case regardless of which party,
if any, prevails in the contest.
21. CONVERSION TO CHAIRMAN-ONLY STATUS
The Executive may elect at any time during the Employment Period to resign
his position as Chief Executive Officer and serve the Company solely as the
Chairman of the Board ("Chairman-Only Status") for the remainder of the
Employment Period (as automatically extended in accordance with Section 2(a)
hereof) under the terms and conditions hereof. An election by the Executive to
maintain Chairman-Only Status shall not constitute a violation of the
Executive's obligations under Section 3 hereof, nor shall it constitute a
termination of the Executive's employment for any purpose under Section 6
hereof. As used in this Agreement, the term "employment" and similar terms shall
be deemed to include service to the Company while maintaining Chairman-Only
Status.
<PAGE>
IN WITNESS WHEREOF, the Company and the Executive have executed this
Agreement as of the date first above written.
EXECUTIVE
/s/RICHARD M. SCRUSHY
___________________________________
Richard M. Scrushy
HEALTHSOUTH Corporation
By /s/MICHAEL D. MARTIN
---------------------------------
Michael D. Martin
Executive Vice President and
Chief Financial Officer
<PAGE>
EXHIBIT A
HEALTHSOUTH CORPORATION
EXECUTIVE RETIREMENT PLAN
FOR RICHARD M. SCRUSHY
Summary of Terms(1)
Retirement Benefits: In consideration of Executive's role as Founder,
his service to the HEALTHSOUTH since its formation
and in lieu of the benefits and compensation
offered through full-time employment as Chairman,
Executive shall be entitled to the benefits
described below upon his retirement from the
active employment with HEALTHSOUTH and continuing
until his death (as more specifically set forth
below). In addition, in recognition of the
Executive's founder status, HEALTHSOUTH shall
provide the Executive with suitable office and
secretarial support within the Corporate
headquarters for a period of up to 10 years
following his retirement.
Benefit Formula: Annual retirement benefit equal to 60% of Base
Compensation (defined below) at Normal Retirement
Age
Base Compensation: Average Base Salary and Annual Target Bonus of
Executive in effect as of the date of termination
pursuant to the terms of the Employment Agreement
Vesting: Fully vested at all times, such that all benefits
provided for in this Exhibit A are payable upon
Executive's termination for any reason during the
period from and after the date Executive qualifies
for Early Retirement. There can be no breach of
this retirement plan by the Executive except for
violation of Section 13(b) of the Employment
Agreement. This consideration is fully earned by
the Executive and HEALTHSOUTH has no right under
any circumstances to discontinue any payments or
other benefits under this plan.
Normal Retirement Age: Age 60
Early Retirement: The retirement benefits provided for in this
Exhibit A are fully vested and accrued in the
event of termination for any reason prior to age
60, but earliest benefit commencement date is
January 23, 2000, the date on which Executive will
have completed sixteen consecutive years of
service with HEALTHSOUTH (with actuarial
reduction)
Change in Control: In the event of a Change in Control (as defined in
Section 9 of the Agreement) or in the event
HEALTHSOUTH completes a transaction in which it
sells or otherwise ceases to own a business unit,
subsidiary, or division representing 30% of its
consolidated revenues for the most recently
completed fiscal year, Executive shall thereafter
be entitled to full retirement benefits hereunder
(i.e. 60% of Base Compensation) upon his
- --------
(1) All defined terms shall have the meanings given to them in the
Employment Agreement to which this Exhibit A is a part, and all determinations
shall be made in accordance with the terms and provisions hereof.
<PAGE>
termination for any reason, regardless of age or
length of service, which benefits shall be in
addition to any other benefits to which Executive
is entitled upon such occurrence. While such a
Change in Control gives the Executive the option
to retire early regardless of age or length of
service, the Executive may, at his sole
discretion, choose to continue working for a
period of time before exercising such option.
Payment: Unless Executive chooses one of the alternative
forms of payment listed below, payment of his
retirement benefits will be in accordance with the
normal payroll practices. If HEALTHSOUTH fails to
provide payment in accordance with the selected
schedule and remains delinquent for a period of 10
business days following receipt of written notice
from the Executive (made in accordance with the
provisions of Section 18 of the Employment
Agreement), HEALTHSOUTH shall pay a penalty equal
to three times the amount owed.
Forms of Payment: Executive's choice of alternative forms:
o Single Life Annuity
o Single Life Annuity with 10 year guarantee
o Joint and Survivor Annuity (50% or 100%)
o Lump Sum
o Payment of present value of retirement
benefits in 5 equal annual installments
Death Benefit: For death prior to benefit commencement date and
for death following benefit commencement date,
Executive's estate will receive the annual
retirement benefits payable hereunder (as if
Executive had not died) for a period of 5 years
Actuarial Assumptions: Pre-age 60 commencement and alternative forms of
payment adjusted on an actuarial equivalent basis:
o interest rate - 30 year Treasury rate
o mortality assumption - 1983 GAM Table
Unfunded Status: Plan is an unfunded, unsecured obligation of
HEALTHSOUTH, but HEALTHSOUTH may elect to fund on
a tax-neutral basis to Executive
<PAGE>
EXHIBIT B
FOUNDER RETIREMENT BENEFITS PROGRAM
In recognition of the significant contributions of the management founders
of HEALTHSOUTH Corporation, upon their retirement from the Corporation, the
Corporation shall provide the following benefits to each of them for the
remainder of their natural life or until their written election to cease
receiving them:
o Health Benefits. The Corporation will extend its regular Employee Health
Benefit Program, as it may exist from time to time, to cover the retired
founder, and his spouse, for the remainder of their natural lives, with the
founder continuing to bear the cost of dependent coverage. When the
individuals become eligible for the Medicare program, or any other such
government-funded health benefit, the HEALTHSOUTH benefit program will
become the individual's secondary coverage.
o Insurance. The Corporation will allow the retired founder to continue to
participate in any of the Company's voluntary insurance programs, as they
may exist from time to time, until age 72.
o Split-Dollar Policy. The Corporation will continue to pay the premiums on
the retired founder's existing split-dollar life insurance policies (or any
policies issued in substitution therefor) until such founder reaches age 65
or until the policies are fully paid, whichever comes first.
o Stock Options. The Corporation will waive the normal option termination
period for the retired founder, so that all vested option grants will
continue for the term of the original grant period.
o Travel. The Corporation will allow the retired founder to utilize the
Corporation's travel department to make personal travel arrangements. In
addition, the retired founder will also be able to use the Corporation's
aircraft, at no cost, if the aircraft is already scheduled for the trip and
there are seats available. Otherwise, the retired founder will be allowed
to use the Corporation's aircraft at the standard use rate, including
direct and indirect expenses.
EXHIBIT 10.53
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of April 1, 1998 (this "Agreement"), between
HEALTHSOUTH Corporation, a Delaware corporation (the "Company"), and ANTHONY J.
TANNER, a resident of Birmingham, Alabama (the "Executive").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company provides comprehensive rehabilitative, clinical,
diagnostic and surgical healthcare services;
WHEREAS, the Executive is a founder of the Company and serves as Executive
Vice President-Administration and Secretary of the Company and as a member of
its Board of Directors; and
WHEREAS, the Company wishes to assure itself of the continued services of
the Executive so that it will have the continued benefit of his ability,
experience and services, and the Executive is willing to enter into an agreement
to that end, upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of good and valuable consideration the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
covenant and agree as follows:
1. EMPLOYMENT
The Company hereby agrees to continue to employ the Executive, and the
Executive hereby agrees to remain in the employ of the Company, on and subject
to the terms and conditions of this Agreement.
2. TERM
(a) The period of this Agreement (the "Agreement Term") shall commence as
of the date hereof (the "Effective Date") and shall expire on the third
anniversary of the Effective Date. The Agreement Term shall be automatically
extended for an additional year on each anniversary of the Effective Date,
unless written notice of non-extension is provided by either party to the other
party at least 90 days prior to such anniversary.
(b) The period of the Executive's employment under this Agreement (the
"Employment Period") shall commence as of the Effective Date and shall expire at
the end of the Agreement Term, unless sooner terminated in accordance with the
terms and conditions of this Agreement.
3. POSITION, DUTIES AND RESPONSIBILITIES
(a) The Executive shall serve as, and with the title, office and authority
of, the Executive Vice President-Administration and Secretary of the Company and
as a member of the Board of Directors of the Company (the "Board") and shall
report directly to the Chairman of the Company. The Company shall use its best
efforts to cause the Executive to be nominated and
<PAGE>
elected (or renominated and reelected, as the case may be) during the Employment
Period as a director of the Company.
(b) The Executive shall have all of the powers, authority, duties and
responsibilities usually incident to the positions and offices of Executive Vice
President-Administration and Secretary of the Company.
(c) The Executive agrees to devote substantially all of his business time,
efforts and skills to the performance of his duties and responsibilities under
this Agreement; provided, however, that nothing in this Agreement shall preclude
the Executive from devoting reasonable periods required for (i) participating in
professional, educational, philanthropic, public interest, charitable, social or
community activities, (ii) serving as a director or member of an advisory
committee of any corporation or other entity that the Executive is serving on as
of the Effective Date or any other corporation or entity that is not in direct
competition with the Company or (iii) managing his personal investments,
provided that such activities do not materially interfere with the Executive's
regular performance of his duties and responsibilities hereunder.
4. PLACE OF PERFORMANCE
The Executive shall perform his duties at the principal offices of the
Company located at One HealthSouth Parkway, Birmingham, Alabama, but from time
to time the Executive may be required to travel to other locations in the proper
conduct of his responsibilities under this Agreement.
5. COMPENSATION AND BENEFITS
In consideration of the services rendered by the Executive during the
Employment Period, the Company shall pay or provide to the Executive the amounts
and benefits set forth below.
(a) Salary. The Company shall pay the Executive an annual base salary (the
"Base Salary") of at least $375,000. The Executive's Base Salary shall be paid
in arrears in substantially equal installments at monthly or more frequent
intervals, in accordance with the normal payroll practices of the Company. The
Executive's Base Salary shall be reviewed at least annually by the Compensation
Committee of the Board (the "Compensation Committee") for consideration of
appropriate merit increases and, once established, the Base Salary shall not be
decreased during the Employment Period.
(b) Incentive Plans. The Executive shall participate in all annual and
long-term bonus or incentive plans or arrangements in which other senior
executives of the Company of a comparable level are eligible to participate from
time to time, including, without limitation, any management bonus pool
arrangement. The Executive's incentive compensation opportunities under such
plans and arrangements shall be determined from time to time by the Compensation
Committee.
(c) Equity Incentives. The Executive shall be given consideration, at least
annually, by the Compensation Committee for the grant of options to purchase
shares of the common stock of the Company. In addition, the Executive shall be
entitled to receive awards under any stock option, stock purchase or
equity-based incentive compensation plan or arrangement adopted by the Company
from time to time for which senior executives of the Company of a comparable
level are eligible to participate. The Executive's awards under such plans and
arrangements shall be determined from time to time by the Compensation
Committee.
<PAGE>
(d) Employee Benefits. The Executive shall be entitled to participate in
all employee benefit plans, programs, practices or arrangements of the Company
in which other senior executives of the Company of a comparable level are
eligible to participate from time to time, including, without limitation, any
qualified or non-qualified pension, profit sharing and savings plans, any death
benefit and disability benefit plans, and any medical, dental, health and
welfare plans. Without limiting the generality of the foregoing, the Company
shall provide the Executive with the following:
(i) long-term disability insurance coverage paying benefits equal to
at least 60% of the Executive's Base Salary for the duration of any
permanent and total disability of the Executive;
(ii) continued provision of split-dollar life insurance coverage; and
(iii) provision of the pension benefits provided under a non-qualified
retirement plan for the Executive, a summary of the terms of which is
attached hereto as Exhibit A.
(e) Fringe Benefits and Perquisites. The Executive shall be entitled to
continuation of all fringe benefits and perquisites provided to the Executive on
the Effective Date, and to all fringe benefits and perquisites which are
generally made available to senior executives of the Company of a comparable
level from time to time. Without limiting the generality of the foregoing, the
Company shall provide the Executive with the following:
(i) provision of executive offices and secretarial staff;
(ii) vacation in accordance with the Company's policy for other senior
executives of a comparable level;
(iii) provision of a non-accountable automobile allowance in an amount
to be determined from time to time by the Board of Directors; and
(iv) reimbursement of all reasonable travel and other business
expenses and disbursements incurred by the Executive in the performance of
his duties under this Agreement, upon proper accounting in accordance with
the Company's normal practices and procedures for reimbursement of business
expenses.
6. TERMINATION OF EMPLOYMENT
The Employment Period will be terminated upon the happening of any of the
following events:
(a) Resignation. The Executive may voluntarily terminate his employment
hereunder for any reason at any time.
(b) Termination for Cause. The Company may terminate the Executive's
employment hereunder for Cause. For purposes of this Agreement, the Executive
shall be considered to be terminated for "Cause" only if (i) the Executive is
found, by a non-appealable order of a court or competent jurisdiction, to be
guilty of a felony under the laws of the United States or any state thereof or
(ii) the Executive is found, by a non-appealable order of a court of competent
jurisdiction, to have committed a fraud, which has a material adverse effect on
the Company. However, in no event shall the Executive's employment be considered
to have been terminated for
<PAGE>
"Cause" unless and until the Executive receives a copy of a resolution duly
adopted by the affirmative vote of a majority of the Board at a meeting called
and held for such purpose (after reasonable written notice is provided to the
Executive setting forth in reasonable detail the facts and circumstances claimed
to provide a basis of termination for Cause and the Executive is given an
opportunity, together with counsel, to be heard before the Board) finding that
the Executive is guilty of acts or omissions constituting Cause.
(c) Termination other than for Cause. The Board shall have the right to
terminate the Executive's employment hereunder for any reason at any time,
including for any reason that does not constitute Cause, subject to the
consequences of such termination as set forth in this Agreement.
(d) Disability. The Executive's employment hereunder shall terminate upon
his Disability. For purposes of this Agreement, "Disability" shall mean the
inability of the Executive to perform his duties to the Company on account of
physical or mental illness for a period of six consecutive full months, or for a
period of eight full months during any 12-month period. The Executive's
employment shall terminate in such a case on the last day of the applicable
period; provided, however, in no event shall the Executive be terminated by
reason of Disability unless (i) the Executive is eligible for the long-term
disability benefits set forth in Section 5(d)(i) hereof and (ii) the Executive
receives written notice from the Company, at least 30 days in advance of such
termination, stating its intention to terminate the Executive for reason of
Disability and setting forth in reasonable detail the facts and circumstances
claimed to provide a basis for such termination.
(f) Death. The Executive's employment hereunder shall terminate upon his
death.
7. COMPENSATION UPON TERMINATION OF EMPLOYMENT
In the event the Executive's employment by the Company is terminated during
the Agreement Term, the Executive shall be entitled to the severance benefits
set forth below:
(a) Resignation. In the event the Executive voluntarily terminates his
employment hereunder for any reason, the Company shall pay and provide the
Executive any Accrued Rights (as defined in paragraph (c) below).
(b) Termination for Cause. In the event the Executive's employment
hereunder is terminated by the Company for Cause, the Company shall pay and
provide to the Executive any Accrued Rights (as defined in paragraph (c) below).
(c) Termination other than for Cause, Disability or Death. In the event the
Executive's employment hereunder is terminated by the Company for any reason
other than for Cause, Disability or death, the Company shall pay the Executive
and provide him with the following:
(i) Accrued Rights. The Company shall pay the Executive a lump-sum
amount equal to the sum of (A) his earned but unpaid Base Salary through
the date of termination, (B) any earned but unpaid bonus for any completed
calendar year, (C) pro-rata payment of any bonus (based on the bonus paid
or payable to Executive for the most recently completed calendar year) for
any partial year or period of service through the date of termination and
(D) any unreimbursed business expenses or other amounts due to the
Executive from the Company as of the date of termination. In addition, the
Company shall provide to the Executive all payments, rights and benefits
due as of the date of termination under the terms of the Company's employee
and fringe benefit plans, practices, programs and arrangements referred to
in Sections
<PAGE>
5(d) and 5(e) hereof (including, but not limited to, the retirement
benefits set forth on Exhibit A hereto) (together with the lump-sum
payment, the "Accrued Rights").
(ii) Severance Payment. The Company shall provide the Executive with
continued payment of the Executive's Base Salary, as in effect on the date
of termination, for a period of two years following the Executive's
termination, payable at the times and in the manner such Base Salary would
have been paid if the Executive had continued in the employment of the
Company.
(iii) Equity Rights. All stock options and other equity-based rights
held by the Executive at the date of termination shall become immediately
and fully vested and exercisable, and the Executive shall retain the right
to exercise all outstanding stock options for the duration of their
original full term (without regard to termination of employment) in
accordance with the Founder Retirement Benefit Program attached hereto as
Exhibit B (the "Founders' Program"). The Company shall forthwith take all
necessary steps to amend any relevant stock option plans of the Company and
stock option agreements to the extent necessary to allow for the foregoing
vesting and term of exercise.
(d) Disability. In the event the Executive's employment hereunder is
terminated by reason of the Executive's Disability, the Company shall pay and
provide to the Executive any Accrued Rights, including all disability insurance
coverage.
(e) Death. In the event the Executive's employment hereunder is terminated
by reason of the Executive's death, the Company shall pay and provide to the
Executive's representatives or estate any Accrued Rights, including all life
insurance coverage.
8. FOUNDERS' BENEFITS
Upon the Executive's termination of employment hereunder for any reason,
and in addition to any severance benefits payable to him under Section 7 hereof,
the Company shall treat such termination as a "retirement" for purposes of the
Founder's Program, and shall provide the Executive with the benefits outlined in
the Founders' Program in recognition of his status as a founder of the Company.
9. CHANGE IN CONTROL
(a) Supplemental termination Rights. In the event Executive's termination
other than for Cause, Disability or death or in the event of a voluntary
termination of employment by the Executive pursuant to Section 6(a) hereof, in
either case occurring within one year following a Change in Control, the Company
shall pay to the Executive and provide him with the benefits and rights
described in Section 7(c) hereof.
(b) Definition. For purposes of this Agreement, a "Change in Control" shall
be deemed to have occurred by reason of:
(i) the acquisition (other than from the Company) by any person,
entity or "group" (within the meaning of Sections 13(d)(3) or 14(d)(2) of
the Securities Exchange Act of 1934, but excluding, for this purpose, the
Company or its subsidiaries, or any employee benefit plan of the Company or
its subsidiaries which acquires beneficial ownership of voting securities
of the Company) of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Securities
<PAGE>
Exchange Act of 1934) of 25% or more of either the then-outstanding shares
of the common stock of the Company or the combined voting power of the
Company's then-outstanding voting securities entitled to vote generally in
the election of directors; or
(ii) individuals who, as of the date hereof, constitute the Board (as
of such date, the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, that any person becoming
a director subsequent to such date whose election, or nomination for
election, was approved by a vote of at least a majority of the directors
then constituting the Incumbent Board (other than an election or nomination
of an individual whose initial assumption of office is in connection with
an actual or threatened election contest relating to the election of
directors of the Company) shall be, for purposes of this Section 9(b)(ii),
considered as though such person were a member of the Incumbent Board; or
(iii) approval by the stockholders of the Company of a reorganization,
merger, consolidation or share exchange, in each case with respect to which
persons who were the stockholders of the Company immediately prior to such
reorganization, merger, consolidation or share exchange do not, immediately
thereafter, own more than 75% of the combined voting power entitled to vote
generally in the election of directors of the reorganized, merged,
consolidated or other surviving entity's then-outstanding voting
securities, or a liquidation or dissolution of the Company or the sale of
all or substantially all of the assets of the Company.
10. NO MITIGATION OR OFFSET
The Executive shall not be required to seek other employment or to reduce
any severance benefit payable to him under Section 7, 8 or 9 hereof, and no such
severance benefit shall be reduced on account of any compensation received by
the Executive from other employment. The Company's obligation to pay severance
benefits under this Agreement shall not be reduced by any amount owed by the
Executive to the Company.
11. TAX WITHHOLDING; METHOD OF PAYMENT
All compensation payable pursuant to this Agreement, shall be subject to
reduction by all applicable withholding, social security and other federal,
state and local taxes and deductions. Any lump-sum payments provided for in
Sections 7 or 9 hereof shall be made in a cash payment, net of any required tax
withholding, no later than the fifth business day following the Executive's date
of termination. Any payment required to be made to the Executive under this
Agreement that is not made in a timely manner shall bear interest at a rate
equal to 100% of the monthly compounded applicable federal rate, as in effect
under Section 1274(d) of the Internal Revenue Code of 1986, as amended, for the
month in which payment was required to be made.
12. RESTRICTIVE COVENANTS
(a) Confidential Information. During the Employment Period and at all times
thereafter, the Executive agrees that he will not divulge to anyone (other than
the Company or any persons employed or designated by the Company) any knowledge
or information of a confidential nature relating to the business of the Company
or any of its subsidiaries or affiliates, including, without limitation, all
types of trade secrets (unless readily ascertainable from public or published
information or trade sources) and confidential commercial information, and the
Executive further
<PAGE>
agrees not to disclose, publish or make use of any such knowledge or information
without the consent of the Company.
(b) Noncompetition. During the Employment Period and for any applicable
period the Executive is entitled to severance benefits under Section 7(c) hereof
following the termination of his employment, the Executive shall not, without
the prior written consent of the Company, engage in the comprehensive
rehabilitative and related healthcare services business on behalf of any person,
firm or corporation within any geographical area in which the Company transacts
such business, and the Executive shall not acquire any financial interest
(except for an equity interest in publicly-held companies that do not exceed 5%
of any outstanding class of equity of that company), in any business that
engages in the comprehensive rehabilitative and related healthcare services
business within any geographical area in which the Company transacts such
business. Notwithstanding the foregoing, upon the occurrence of a Change in
Control (whether before or after the termination of the Employment Period), the
restrictions of this Section 12(b) shall cease to apply to the Executive for any
period following his termination of employment hereunder.
(c) Enforcement. The Company shall be entitled to seek a restraining order
or injunction in any court of competent jurisdiction to prevent any continuation
of any violation of the provisions of this Section 12.
13. SUCCESSORS
(a) This Agreement shall be binding upon and shall inure to the benefit of
the Company, its successors and assigns and any person, firm, corporation or
other entity which succeeds to all or substantially all of the business, assets
or property of the Company. The Company will require any successor (whether
direct or indirect, by purchase, merger, consolidation, or otherwise) to all or
substantially all of the business, assets or property of the Company, to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform it if no such
succession had taken place. As used in this Agreement, the "Company" shall mean
the Company as hereinbefore defined and any successor to its business, assets or
property as aforesaid which executes and delivers an agreement provided for in
this Section 13 or which otherwise becomes bound by all the terms and provisions
of this Agreement by operation of law.
(b) This Agreement and all rights of the Executive hereunder shall inure to
the benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Executive should die while any amounts are due and
payable to him hereunder, all such amounts, unless otherwise provided herein,
shall be paid to the Executive's designated beneficiary or, if there be no such
designated beneficiary, to the legal representatives of the Executive's estate.
14. NO ASSIGNMENT
Except as to withholding of any tax under the laws of the United States or
any other country, state or locality, neither this Agreement nor any right or
interest hereunder nor any amount payable at any time hereunder shall be subject
in any manner to alienation, sale, transfer, assignment, pledge, attachment, or
other legal process, or encumbrance of any kind by the Executive or the
beneficiaries of the Executive or by his legal representatives without the
Company's prior written consent, nor shall there be any right of set-off or
counterclaim in respect of any debts or liabilities of the Executive, his
beneficiaries or legal representatives; provided, however, that nothing in this
Section shall preclude the Executive from designating a beneficiary to receive
any benefit payable on his death, or the legal representatives of the Executive
from assigning any rights hereunder to the
<PAGE>
person or persons entitled thereto under his will or, in case of intestacy, to
the person or persons entitled thereto under the laws of intestacy applicable to
his estate.
15. ENTIRE AGREEMENT
This Agreement contains the entire understanding of the parties with
respect to the subject matter hereof and, except as specifically provided
herein, cancels and supersedes any and all other agreements between the parties
with respect to the subject matter hereof. Any amendment or modification of this
Agreement shall not be binding unless in writing and signed by the Company and
the Executive.
16. SEVERABILITY
In the event that any provision of this Agreement is determined to be
invalid or unenforceable, the remaining terms and conditions of this Agreement
shall be unaffected and shall remain in full force and effect, and any such
determination of invalidity or unenforceability shall not affect the validity or
enforceability of any other provision of this Agreement.
17. NOTICES
All notices which may be necessary or proper for either the Company or the
Executive to give to the other shall be in writing and shall be delivered by
hand or sent by registered or certified mail, return receipt requested, or by
air courier, to the Executive at:
Mr. Anthony J. Tanner
2112 Swan Lake Cove
Birmingham, Alabama 35243
and shall be sent in the manner described above to the Chief Executive Officer
of the Company at the Company's principal executives offices at One HealthSouth
Parkway, Birmingham, Alabama 35243, with a copy to the Legal Services Department
at the same address or delivered by hand to the Secretary and the Legal Services
Department of the Company, and shall be deemed given when sent, provided that
any notice required under Section 6 hereof or notice given pursuant to Section 2
hereof shall be deemed given only when received. Any party may by like notice to
the other party change the address at which he or they are to receive notices
hereunder.
18. GOVERNING LAW
This Agreement shall be governed by and enforceable in accordance with the
laws of the State of Alabama, without giving effect to the principles of
conflict of laws thereof.
19. LEGAL FEES AND EXPENSES
To induce the Executive to execute this Agreement and to provide the
Executive with reasonable assurance that the purposes of this Agreement will not
be frustrated by the cost of its enforcement should the Company fail to perform
its obligations under this Agreement or should the Company or any subsidiary,
affiliate or stockholder of the Company contest the validity or enforceability
of this Agreement, the Company shall pay and be solely responsible for any
attorneys' fees and expenses and courts costs incurred by the Executive as a
result of a claim that the Company has breached or otherwise failed to perform
this Agreement or any provision hereof to be performed by the Company or as a
result of the Company or any subsidiary, affiliate or stockholder of the Company
contesting the validity or enforceability of this Agreement or any provision
hereof to be performed by the Company, in each case regardless of which party,
if any, prevails in the contest.
<PAGE>
IN WITNESS WHEREOF, the Company and the Executive have executed this
Agreement as of the date first above written.
EXECUTIVE
/s/ ANTHONY J. TANNER
------------------------------
Anthony J. Tanner
HEALTHSOUTH Corporation
By /s/ RICHARD M. SCRUSHY
---------------------------
Richard M. Scrushy
Chairman of the Board and
Chief Executive Officer
<PAGE>
EXHIBIT A
HEALTHSOUTH CORPORATION
EXECUTIVE RETIREMENT PLAN
FOR ANTHONY J. TANNER
Summary of Terms(2)
-------------------
Retirement Benefits: In consideration of Executive's role as a founder,
his service to HEALTHSOUTH since its formation and
in lieu of the benefits and compensation offered
through full-time employment as Executive Vice
President, Administration and Secretary, Executive
shall be entitled to the benefits described below
upon his retirement from active employment with
HEALTHSOUTH and continuing until he reaches the
age of 72 (as more specifically set forth below).
In addition, in recognition of the Executive's
founder status, HEALTHSOUTH shall provide the
Executive with suitable office and secretarial
support within the corporate headquarters for a
period of up to 10 years following his retirement.
Benefit Formula: Annual retirement benefit equal to 60% of Base
Compensation (defined below) at Normal Retirement
Age
Base Compensation: Average Base Salary and bonus of Executive for the
highest four of the five most recently completed
calendar years of service with HEALTHSOUTH
Vesting: Fully vested at all times, such that all benefits
payable as set forth in this Exhibit A will be
payable upon Executive's termination for any
reason from and after January 23, 1999 (the date
on which Executive will have completed fifteen
consecutive years of service with HEALTHSOUTH).
There can be no breach of this retirement plan by
the Executive except for violation of Section
12(b) of the Employment Agreement. This
consideration is fully earned by the Executive and
HEALTHSOUTH has no right under any circumstances
to discontinue any payments or other benefits
under this plan.
Payment of Benefits: The annual retirement benefits payable hereunder
will be adjusted annually for inflation (based on
the Consumer Price Index) and will be paid until
Executive reaches the age of 65. From and after
the date on which Executive reaches the age of 65
and continuing until he reaches the age of 72,
Executive will be entitled to 40% of Base
Compensation (as adjusted for inflation). If
HEALTHSOUTH fails to provide payment in accordance
with the selected schedule and remains delinquent
for a period of 10 business days following receipt
of written notice from the Executive (made in
accordance with Section 17 of the Employment
Agreement), HEALTHSOUTH shall pay a penalty equal
to three times the amount owed.
- --------
(2) All defined terms shall have the meanings given to them in the
Employment Agreement to which this Exhibit A is a part, and all determinations
shall be made in accordance with the terms and provisions hereof.
<PAGE>
Alternative Forms of Payment: Unless Executive chooses one of the alternative
forms of payment listed below, payment of this
retirement benefit will be in accordance with the
normal payroll practices. Executive may choose one
of the following alternative forms of payment:
o Single Life Annuity
o Single Life Annuity with10 year guarantee
o Joint and Survivor Annuity (50% or 100%)
o Lump Sum
o Payment of present value of retirement
benefits in 5 equal annual installments
Death Benefit: For death prior to reaching age 72, Executive's
estate will continue to receive the annual
retirement benefits payable to Executive hereunder
(as if Executive had not died) for a period of 5
years.
Unfunded Status: Plan is an unfunded, unsecured obligation of
HEALTHSOUTH, but HEALTHSOUTH may elect to fund on
a tax-neutral basis to Executive
<PAGE>
EXHIBIT B
FOUNDER RETIREMENT BENEFITS PROGRAM
In recognition of the significant contributions of the management founders
of HEALTHSOUTH Corporation, upon their retirement from the Corporation, the
Corporation shall provide the following benefits to each of them for the
remainder of their natural life or until their written election to cease
receiving them:
o Health Benefits. The Corporation will extend its regular Employee Health
Benefit Program, as it may exist from time to time, to cover the retired
founder, and his spouse, for the remainder of their natural lives, with the
founder continuing to bear the cost of dependent coverage. When the
individuals become eligible for the Medicare program, or any other such
government-funded health benefit, the HEALTHSOUTH benefit program will
become the individual's secondary coverage.
o Insurance. The Corporation will allow the retired founder to continue to
participate in any of the Company's voluntary insurance programs, as they
may exist from time to time, until age 72.
o Split-Dollar Policy. The Corporation will continue to pay the premiums on
the retired founder's existing split-dollar life insurance policies (or any
policies issued in substitution therefor) until such founder reaches age 65
or until the policies are fully paid, whichever comes first.
o Stock Options. The Corporation will waive the normal option termination
period for the retired founder, so that all vested option grants will
continue for the term of the original grant period.
o Travel. The Corporation will allow the retired founder to utilize the
Corporation's travel department to make personal travel arrangements. In
addition, the retired founder will also be able to use the Corporation's
aircraft, at no cost, if the aircraft is already scheduled for the trip and
there are seats available. Otherwise, the retired founder will be allowed
to use the Corporation's aircraft at the standard use rate, including
direct and indirect expenses.
EXHIBIT 10.58
- ---------------------------------------------------------------------------
SHORT TERM CREDIT AGREEMENT
by and among
HEALTHSOUTH CORPORATION,
as Borrower,
BANK OF AMERICA, N. A.,
as Administrative Agent and as Lender,
and
CITICORP USA, INC.,
as Syndication Agent and as Lender,
and
THE LENDERS PARTY HERETO FROM TIME TO TIME
BANC OF AMERICA SECURITIES LLC,
Lead Arranger and Book Manager
December 15, 1999
- ---------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
Definitions and Terms
1.1. Definitions.............................................................2
1.2. Rules of Interpretation................................................19
1.3. Classes and Types of Loans.............................................21
ARTICLE II
The Loans
2.1. Loans..................................................................22
2.2. Payment of Interest....................................................23
2.3. Payment of Principal...................................................23
2.4. Non-Conforming Payments................................................23
2.5. Notes..................................................................24
2.6. Pro Rata Payments......................................................24
2.7. Reductions.............................................................24
2.8. Conversions and Elections of Subsequent Interest Periods...............25
2.9. Unused Fees and Utilization Fees.......................................25
2.10. Deficiency Advances....................................................25
2.11. Use of Proceeds........................................................26
2.12. Intraday Funding.......................................................26
ARTICLE III
Change in Circumstances
3.1. Increased Cost and Reduced Return. ....................................27
3.2. Limitation on Types of Loans...........................................28
3.3. Illegality.............................................................28
3.4. Treatment of Affected Loans............................................28
3.5. Compensation...........................................................29
3.6. Taxes..................................................................29
ARTICLE IV
Conditions to Making Loans
4.1. Conditions of Initial Advance..........................................32
4.2. Conditions of Loans....................................................33
<PAGE>
ARTICLE V
Representations and Warranties
5.1. Organization and Authority.............................................34
5.2. Loan Documents.........................................................34
5.3. Solvency...............................................................35
5.4. Subsidiaries...........................................................35
5.5. Ownership Interests....................................................35
5.6. Financial Condition....................................................35
5.7. Title to Properties....................................................35
5.8. Taxes..................................................................35
5.9. Other Agreements.......................................................36
5.10. Litigation.............................................................36
5.11. Margin Stock...........................................................36
5.12. Investment Company.....................................................37
5.13. Patents, Etc...........................................................37
5.14. No Untrue Statement....................................................37
5.15. No Consents, Etc.......................................................37
5.16. ERISA Requirement......................................................37
5.17. No Default.............................................................37
5.18. Hazardous Materials....................................................38
5.19. Employment Matters.....................................................38
5.20. RICO...................................................................38
5.21. Reimbursement from Third Party Payors..................................38
5.22. Year 2000 Compliance...................................................38
ARTICLE VI
Affirmative Covenants
6.1. Financial Statements, Reports, Etc.....................................40
6.2. Maintain Properties....................................................41
6.3. Existence, Qualification, Etc..........................................41
6.4. Regulations and Taxes..................................................41
6.5. Insurance..............................................................41
6.6. True Books.............................................................42
6.7. Right of Inspection....................................................42
6.8. Observe all Laws.......................................................42
6.9. Governmental Licenses..................................................42
6.10. Covenants Extending to Other Persons...................................42
6.11. Officer's Knowledge of Default.........................................42
6.12. Suits or Other Proceedings.............................................42
6.13. Notice of Discharge of Hazardous Material or Environmental Complaint...43
6.14. Environmental Compliance...............................................43
6.15. Continuation of Current Business.......................................43
6.16. Management Contracts...................................................43
6.17. Year 2000 Compliance...................................................43
ARTICLE VII
Negative Covenants
7.1. Financial Covenants....................................................44
7.2. Investments and Loans..................................................44
ii
<PAGE>
7.3. Indebtedness...........................................................45
7.4. Disposition of Assets..................................................45
7.5. Consolidation or Merger................................................45
7.6. Liens..................................................................45
7.7. Dividends and Distributions............................................45
7.8. Acquisitions...........................................................45
7.9. Restricted Payments....................................................45
7.10. Compliance with ERISA..................................................45
7.11. Fiscal Year............................................................46
7.12. Dissolution, etc.......................................................46
7.13. Transactions with Affiliates...........................................46
ARTICLE VIII
Events of Default and Acceleration
8.1. Events of Default......................................................47
8.2. Agent to Act...........................................................49
8.3. Cumulative Rights......................................................49
8.4. No Waiver..............................................................49
8.5. Allocation of Proceeds.................................................49
ARTICLE IX
The Agent
9.1. Appointment, Powers, and Immunities....................................51
9.2. Reliance by Agent......................................................51
9.3. Defaults...............................................................51
9.4. Rights as Lender.......................................................52
9.5. Indemnification........................................................52
9.6. Non-Reliance on Agent and Other Lenders................................52
9.7. Resignation of Agent...................................................52
9.8. Fees...................................................................53
9.9. Syndication Agent......................................................53
iii
<PAGE>
ARTICLE X
Miscellaneous
10.1. Assignments and Participations.........................................54
10.2. Notices................................................................55
10.3. No Waiver..............................................................56
10.4. Rights of Setoff; Adjustments..........................................56
10.5. Survival...............................................................56
10.6. Expenses...............................................................57
10.7. Amendments and Waivers.................................................57
10.8. Counterparts...........................................................58
10.9. Waivers by Borrower....................................................58
10.10. Termination............................................................58
10.11. Governing Law..........................................................59
10.12. Indemnification........................................................59
10.13. Agreement Controls.....................................................59
10.14. Integration............................................................60
10.15. Successors and Assigns.................................................60
10.16. Severability...........................................................60
10.17. Usury Savings Clause...................................................60
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 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 5.4 Subsidiaries.................................................S-1
Schedule 5.13 Patent Issue.................................................S-2
Schedule 5.19 Employment Matters...........................................S-3
Schedule 7.3 Existing Subsidiary Indebtedness.............................S-4
iv
<PAGE>
SHORT TERM CREDIT AGREEMENT
THIS SHORT TERM CREDIT AGREEMENT dated as of December 15, 1999 (this
"Agreement") is entered into by and among:
HEALTHSOUTH CORPORATION, a Delaware corporation (the "Borrower"),
BANK OF AMERICA, N.A., a national banking association organized and
existing under the laws of the United States, in its capacity as a Lender ("Bank
of America"), and each other financial institution executing and delivering a
signature page hereto and each other financial institution which may hereafter
execute and deliver an instrument of assignment with respect to this Agreement
pursuant to Section 10.1 (hereinafter such financial institutions may be
referred to individually as a "Lender" or collectively as the "Lenders"),
BANK OF AMERICA, N.A., a national banking association organized and
existing under the laws of the United States, in its capacity as Administrative
Agent for the Lenders (in such capacity, and together with any successor agent
appointed in accordance with the terms of Section 9.7, the "Agent"), and
CITICORP USA, INC., a Delaware corporation, in its capacity as Syndication
Agent.
RECITAL:
The Borrower has requested that the Lenders make a short term revolving
credit facility of up to $250,000,000 to the Borrower, the proceeds of which
shall be used as set forth in Section 2.11, and the Lenders have agreed to make
such short term revolving credit facility available to the Borrower on the
following terms and conditions:
<PAGE>
ARTICLE I
Definitions and Terms
1.1. 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 7.8; 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 Short Term Credit Facility
consisting of the aggregate principal amount of a 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 Short Term Credit 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 10.1.
"Applicable Lending Office" means, for 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
such other office of such Lender (or an affiliate of such Lender) as such
Lender may from time to time specify to the Agent and the Borrower by
written notice in accordance with the terms hereof as the office by which
its Loans of such Type are to be made and maintained.
"Applicable Margin" means that percent per annum set forth below under
the heading "Applicable Margin for Eurodollar Rate Loans" or "Applicable
Margin for Base Rate Loans", as appropriate, opposite the applicable Tier
determined by the highest Rating as in effect at the time of determination:
2
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<TABLE>
<CAPTION>
---------- -------------------------------------- ------------------------------ ----------------------------
Tier Rating Applicable Margin for Applicable Margin for Base
S&P or Moody's Eurodollar Rate Loans Rate Loans
---------- -------------------------------------- ------------------------------ ----------------------------
<S> <C> <C> <C>
I BBB+ Baa1 1.125% 0.000%
or higher or higher
---------- -------------------------------------- ------------------------------ ----------------------------
II BBB Baa2 1.375% 0.375%
---------- -------------------------------------- ------------------------------ ----------------------------
III BBB- Baa3 1.500% 0.500%
---------- -------------------------------------- ------------------------------ ----------------------------
IV Less than Less than 1.750% 0.750%
BBB- Baa3
---------- -------------------------------------- ------------------------------ ----------------------------
</TABLE>
The Applicable Margin shall be established from time to time based upon the
Rating then in effect. Any change in the Applicable Margin due to a change
in any Rating shall be effective on the date of such change in such Rating.
In the event (i) of a split Rating where the Ratings are more than one Tier
apart, then the Tier next above the Tier corresponding to the lower Rating
shall apply and, (ii) either Rating is Tier IV, then the Applicable Margin
shall be Tier IV. In the event that the Borrower shall not have a Rating by
either S&P or Moody's, the Applicable Margin shall be mutually agreed to by
the Borrower, the Agent and the Lenders and shall be Tier IV until such
mutual agreement is reached.
"Applicable Unused Fee" means that percent per annum set forth below
under the heading "Applicable Unused Fee" opposite the applicable Tier
determined by the highest Rating as in effect at the time of determination
(subject to the provisions of this definition following the table):
<TABLE>
<CAPTION>
------------------- ----------------------------------------------------- --------------------------
Tier Rating Applicable Unused
S&P or Moody's Fee
------------------- ----------------------------------------------------- --------------------------
<S> <C> <C>
I BBB+ Baa1 0.300%
or higher or higher
------------------- ----------------------------------------------------- --------------------------
II BBB Baa2 0.375%
------------------- ----------------------------------------------------- --------------------------
III BBB- Baa3 0.500%
------------------- ----------------------------------------------------- --------------------------
IV Less than Less than 0.500%
BBB- Baa3
------------------- ----------------------------------------------------- --------------------------
</TABLE>
The Applicable Unused Fee shall be established from time to time based upon
the Rating then in effect. Any change in the Applicable Unused Fee due to a
change in any Rating shall be effective on the date of such change in such
Rating. In the event (i) of a split Rating where the Ratings are more than
one Tier apart, then the Tier next above the Tier corresponding to the
lower Rating shall apply and, (ii) either Rating is Tier IV, then the
Applicable Unused Fee shall be Tier IV. In the event that the Borrower
shall not have a Rating by either S&P or Moody's, the Applicable Unused Fee
shall be mutually agreed to
3
<PAGE>
by the Borrower, the Agent and the Lenders and shall be Tier IV until such
mutual agreement is reached.
"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 10.1.
"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.
"Bank of America" means Bank of America, N.A. and its successors.
"Base Rate" means, for any day, the rate per annum equal to the sum of
(a) higher of (i) the Prime Rate for such day or (ii) the Federal Funds
Rate for such day plus (A) from December 15, 1999 through and including
January 15, 2000, one and one-half percent (1 1/2%) and (B) at all other
times, one-half of one percent (1/2%) plus (b) the Applicable Margin. Any
change in the Base Rate due to a change in the Prime Rate or the Federal
Funds Rate shall be effective on the effective date of such change in the
Prime Rate or Federal Funds Rate.
"Base Rate Loan" means a Loan for which the rate of interest is
determined by reference to 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 Short Term Credit
Facility, in the form of Exhibit D.
"Business Day" means, (i) except as expressly provided in clause (ii),
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 the selection, funding, interest rate, payment and Interest Period of
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:
4
<PAGE>
(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 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 4.1 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 6.1(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 5.6(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.
5
<PAGE>
"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 the income of Consolidated Entities for such period, all
determined on a consolidated basis in accordance with GAAP applied on a
Consistent Basis.
"Consolidated Entity" shall mean any Person whose financial statements
are appropriately consolidated with the Borrower's financial statements
under GAAP.
"Consolidated Income Tax Expense" means, with respect to the Borrower
and its Consolidated Entities for any Four-Quarter Period ending on the
date of computation thereof, the provision for taxes based on income and
profits of the Borrower and its Consolidated Entities to the extent such
income or profits were included in computing Consolidated Net Income for
such period.
"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 7.1(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
6
<PAGE>
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 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 Stockholders' Equity of the Borrower and its Consolidated
Entities.
"Continue", "Continuation", and "Continued" shall refer to the
continuation pursuant to Section 2.8 hereof of a Eurodollar Rate Loan of
one Type as a Eurodollar Rate Loan of the same Type from one Interest
Period to the next Interest Period.
7
<PAGE>
"Convert", "Conversion" and "Converted" shall refer to a conversion
pursuant to Section 2.8 or Article III of one Type of Loan into another
Type of Loan.
"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 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,
until the end of the Interest Period applicable thereto, a rate of two
percent (2%) plus the Eurodollar Rate applicable to such Loan, 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 other amounts
payable hereunder, 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 Short Term Credit 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.
8
<PAGE>
"Eligible Assignee" means (i) a Lender, (ii) an affiliate of a Lender,
and (iii) any other Person approved by the Agent and, unless an Event of
Default has occurred and is continuing at the time any assignment is
effected in accordance with Section 10.1, the Borrower, such approval not
to be unreasonably withheld or delayed by the Borrower or the Agent and
such approval to be deemed given by the Borrower if no objection is
received by the assigning Lender and the Agent from the Borrower within two
Business Days after written notice of such proposed assignment has been
provided by the assigning Lender to the Borrower; provided, however, that
neither the Borrower nor an affiliate of the Borrower shall qualify as an
Eligible Assignee.
"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 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 any federal, state or local statute, law,
ordinance, code, rule, regulation, order, decree, permit or license
regulating, relating to, or imposing liability or standards of conduct
concerning any environmental matters or conditions, environmental
protection or conservation, including without limitation, 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; together with all regulations promulgated thereunder, and any
other "Superfund" or "Superlien" law.
"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- Reserve Requirement Margin
"Eurodollar Rate Loan" means a Loan for which the rate of interest is
determined by reference to the Eurodollar Rate.
"Event of Default" means any of the occurrences set forth as such in
Section 8.1.
"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 J.
9
<PAGE>
"Existing Credit Agreement" means that certain Short Term Credit
Agreement dated as of September 28, 1998 by and among the Borrower, the
Agent and the lenders party thereto.
"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
Controlled Partnership.
"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 Rate" means, for any day, the rate per annum (rounded
upwards, if necessary, 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 Rate for such day shall be such rate on
such transactions on the next preceding Business Day as so published on the
next succeeding Business Day, and (b) if no such rate is so published on
such next succeeding Business Day, the Federal Funds Rate for such day
shall be the average rate charged to the Agent (in its individual capacity)
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.
"Four-Quarter Period" means a period of four full consecutive fiscal
quarters of the Borrower and its Consolidated Entities, 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.
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"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 pollutant, contaminant, or
hazardous, toxic or dangerous waste, substance or material (including
without limitation petroleum products, asbestos-containing materials, and
lead), 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 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.
"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 or of a limited liability company of
which such Person is a member. The amount of Indebtedness of any Person at
any date shall be the outstanding balance at such date of all unconditional
obligations as
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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, for any Eurodollar Rate Loan for the
Interest Period applicable thereto, the rate per annum (rounded upwards, if
necessary, to the nearest one-one hundredth (1/100) of one percent)
appearing on Dow Jones Telerate Page 3750 (or any successor page) as the
London interbank offered rate for deposits in Dollars at approximately
11:00 a.m. (London time) two Business Days prior to the first day of such
Interest Period for a term comparable to such Interest Period. If for any
reason such rate is not available, the term "Interbank Offered Rate" shall
mean, for any Eurodollar Rate Loan for the Interest Period applicable
thereto, the rate per annum (rounded upwards, if necessary, to the nearest
1/100 of 1%) appearing on Reuters Screen LIBO Page as the London interbank
offered rate for deposits in Dollars at approximately 11:00 a.m. (London
time) two Business Days prior to the first day of such Interest Period for
a term comparable to such Interest Period; provided, however, if more than
one rate is specified on Reuters Screen LIBO Page, the applicable rate
shall be the arithmetic mean of all such rates (rounded upwards, if
necessary, to the nearest 1/100 of 1%).
"Interest Period" means, 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) no Interest Period for any Eurodollar Rate Loan shall be
available which would end after the Short Term Credit 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 the Conversion
of any Eurodollar Rate Loan into a Base Rate Loan or the Conversion of any
Base Rate Loan into a Eurodollar Rate Loan, in the form of Exhibit E.
"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.
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"Loan" or "Loans" means any borrowing made pursuant to an Advance
under the Short Term Credit Facility in accordance with Section 2.1(a) and
all extensions and renewals thereof.
"Loan Documents" means this Agreement, the Notes 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
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).
"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.
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"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 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.
"1998 10-K" means the Borrower's Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 1998.
"Notes" means, collectively, the promissory notes of the Borrower
evidencing 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.
"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) all liabilities of the Borrower to any Lender
or affiliate of a Lender which arise under a Swap Agreement, and (iii) the
payment and performance of all other obligations, liabilities and
Indebtedness of the Borrower to the Lenders or the Agent or any of their
affiliates hereunder, under any one or more of the other Loan Documents or
with respect to the Loans.
"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 (predecessor in interest to Bank of
America), 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.
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"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) mechanic's, 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 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;
(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; and
(7) Liens on shares of Capital Stock of the Borrower that are
owned by the Borrower.
"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 which is a Lender or an affiliate of a Lender,
or 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;
(5) the capital stock of and partnership interests in, and loans
made by the Borrower to, Controlled Partnerships and Subsidiaries;
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<PAGE>
(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, HEALTHSMART,
Caremark Rx and Austin Medical Office Building which in the aggregate
do not exceed $5,000,000; and
(17) additional investments existing on the Closing Date and
described in Exhibit G.
"Person" means an individual, partnership, corporation, limited
liability company, trust, unincorporated organization, association, joint
venture or a government or agency or political subdivision thereof.
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"Prime Rate" means the per annum rate of interest established from
time to time by Bank of America as its prime rate, which rate may not be
the lowest rate of interest charged by Bank of America to its customers.
"Principal Office" means the office of the Agent at Bank of America,
N.A., 101 North Tryon Street, 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.
"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 the Borrower or such Consolidated Entity 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, non-credit enhanced
Indebtedness of the Borrower in effect at any time which rating is made by
either of Moody's or S&P.
"Regulation D" means Regulation D of the Board as the same may be
amended or supplemented from time to time.
"Required Lenders" means, as of any date, Lenders on such date having
Credit Exposures (as defined below) aggregating more than 50% 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 (a) so long as there exists no Event of Default, the
aggregate principal amount of the Loans owing to such Lender plus the
aggregate unutilized amounts of such Lender's Short Term Credit Commitment
and (b) following the occurrence and during the continuance of an Event of
Default, the aggregate principal amount of such Lender's Applicable
Commitment Percentage of the Short Term Credit Outstandings; provided that,
for the purpose of this definition only, if any Lender shall have failed to
fund its Applicable Commitment Percentage of any Advance, then the Short
Term Credit Commitment of such Lender shall be deemed reduced by the amount
it so failed to fund for so long as such failure shall continue and such
Lender's Credit Exposure attributable to such failure shall be deemed held
by any Lender making more than its Applicable Commitment Percentage of such
Advance to the extent it covers such failure.
"Reserve Requirement" means, at any time, the maximum rate at which
reserves (including, without limitation, any marginal, special,
supplemental, or emergency reserves) are required to be maintained under
regulations issued from time to time by the Board by member banks of the
Federal Reserve System (or any successor) by member banks of the Federal
Reserve System against "Eurocurrency liabilities" (as such term is used in
Regulation D). Without limiting the effect of the foregoing, the Reserve
Requirement shall reflect any other reserves required to be maintained by
such member banks with respect to (i) any category of liabilities which
includes deposits by reference to which the Eurodollar Rate is to be
determined, or (ii) any category of extensions of credit or other assets
which include
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Eurodollar Rate Loans. The Eurodollar Rate shall be adjusted automatically
on and as of the effective date of any change in the Reserve Requirement.
"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 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 Rating Group, a division of The McGraw
Hill Companies.
"Short Term Credit Commitment" means, with respect to each Lender, the
obligation of such Lender to make Loans to the Borrower up to an aggregate
principal amount at any one time outstanding equal to such Lender's
Applicable Commitment Percentage of the Total Short Term Credit Commitment.
"Short Term Credit Facility" means the facility described in Article
II providing for Loans to the Borrower by the Lenders in the aggregate
principal amount of the Total Short Term Credit Commitment.
"Short Term Credit Outstandings" means, as of any date of
determination, the aggregate principal amount of all Loans then
outstanding.
"Short Term Credit 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 8.1 upon the occurrence of an Event
of Default, or (iii) such date as the Borrower may voluntarily and
permanently terminate the Short Term Credit Facility by payment in full of
all Short Term Credit Outstandings, together with all accrued and unpaid
interest and fees thereon.
"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
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(iii) it has capital sufficient to carry on its business as
conducted and as proposed to be conducted.
"Stated Termination Date" means December 12, 2000.
"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 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 4062(e) 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 Short Term Credit Commitment" means a principal amount equal to
$250,000,000, as reduced from time to time in accordance with Section
2.1(a) and Section 2.7.
"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.
1.2. Rules of Interpretation.
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(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.
(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.
(k) Whenever interest rates or fees are established in whole or in part by
reference to a numerical percentage expressed as "__%", such arithmetic
expression shall be interpreted in accordance with the convention that 1% = 100
basis points.
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1.3. Classes and 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.
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ARTICLE II
The Loans
2.1. Loans.
(a) Commitment. Subject to the terms and conditions of this Agreement, each
Lender severally agrees to make Advances to the Borrower under the Short Term
Credit Facility from time to time from the Closing Date until the Short Term
Credit 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 Short Term Credit 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; provided further,
however, that immediately after giving effect to each such Advance, the
principal amount of Short Term Credit Outstandings shall not exceed the Total
Short Term Credit Commitment. Within such limits, the Borrower may borrow, repay
and reborrow under the Short Term Credit Facility on a Business Day from the
Closing Date until, but (as to borrowings and reborrowings) not including, the
Short Term Credit Termination Date; provided, however, that (y) no Loan that is
a Eurodollar Rate Loan shall be made which has an Interest Period that extends
beyond the Short Term Credit Termination Date and (z) each 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
3.5.
(b) Amounts. The aggregate unpaid principal amount of the Short Term Credit
Outstandings shall not exceed the Total Short Term Credit 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 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 telephonic notice of each Eurodollar
Rate Loan (whether representing an additional borrowing hereunder or the
Conversion of a borrowing hereunder from a Base Rate Loan to a Eurodollar Rate
Loan) prior to 10:30 A.M. and (2) irrevocable telephonic notice of each Base
Rate Loan (whether representing an additional borrowing hereunder or the
Conversion of a borrowing hereunder from a Eurodollar Rate Loan to a Base Rate
Loan) prior to 10:30 A.M. on the day of such proposed Loan. Each such notice
shall be effective upon receipt by the Agent, 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. The Authorized Representative shall provide the Agent
written confirmation of each such telephonic notice in the form of a Borrowing
Notice or Interest Rate Selection Notice (as applicable) with appropriate
insertions, but failure to provide such confimation shall not affect the
validity of such telephonic notice. Notice of receipt of such Borrowing Notice
or Interest Rate Selection Notice, as the case may be, together with the amount
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.
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(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 Loan or 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 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 Loan to (or Continue such Loan as) a Base Rate Loan
until the Borrower notifies the Agent in accordance with Section 2.8.
2.2. 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
8.1(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 December
31, 1999, 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 Short Term Credit
Termination Date. Interest payable at the Default Rate shall be payable on
demand.
2.3. Payment of Principal. The principal amount of each 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. 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
3.5. All prepayments of 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 Short Term Credit Outstandings, as the case may be,
or such other amount as necessary to comply with Section 2.1(b) or Section 2.8.
2.4. 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, without setoff, recoupment, deduction
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or counterclaim 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
accrue at the Default Rate on any principal as to which a non-conforming payment
is made from the date such amount was due and payable until the later of (x) the
date such funds become available funds or (y) the next Business Day.
(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 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 Stated Termination Date.
2.5. Notes. Loans made by each Lender shall be evidenced by the Note
payable to the order of such Lender in the respective amount of its Applicable
Commitment Percentage of the Total Short Term Credit Commitment, which 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.
2.6. 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.
2.7. Reductions. 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 Short Term Credit 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 of $10,000,000 or such greater amount which is
in an integral multiple of $1,000,000, or the entire remaining Total Short Term
Credit Commitment, and shall permanently reduce the Total Short Term Credit
Commitment. Each reduction of the Total Short Term Credit Commitment shall be
accompanied by payment of Loans to the extent that the principal amount of Short
Term Credit Outstandings exceeds the Total Short Term Credit 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 3.5.
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2.8. Conversions and Elections of Subsequent Interest Periods. Subject to
the limitations set forth below and in Article III, the Borrower may:
(a) upon delivery of telephonic notice to the Agent (which shall be
irrevocable) on or before 10:30 A.M. on any Business Day, Convert all or a part
of Eurodollar Rate Loans to Base Rate Loans on the last day of the Interest
Period for such Eurodollar Rate Loans; and
(b) provided that no Default or Event of Default shall have occurred and be
continuing upon delivery of telephonic notice to the Agent (which shall be
irrevocable) 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 to begin on the last day of the then current Interest
Period for such Eurodollar Rate Loans; and
(ii) Convert Base Rate Loans 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 III. 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.
2.9. Unused Fees and Utilization Fees.
(a) For the period beginning on the Closing Date and ending on the Short
Term Credit Termination Date, the Borrower agrees to pay to the Agent, for the
benefit of each Lender, an unused fee equal to the Applicable Unused Fee
multiplied by the average daily amount by which the Total Short Term Credit
Commitment exceeds the aggregate principal amount of Short Term Credit
Outstandings. Such fees shall be due in arrears on the last Business Day of each
March, June, September and December commencing December 31, 1999 to and on the
Short Term Credit Termination Date.
(b) For the period beginning on the Closing Date and ending on the Short
Term Credit Termination Date, the Borrower agrees to pay to the Agent, for the
benefit of each Lender, a utilization fee equal to 0.150% multiplied by the
aggregate principal amount of Short Term Credit Outstandings any time during
which the Short Term Credit Outstandings exceed $125,000,000. Such fees shall be
due in arrears on the last Business Day of each March, June, September and
December commencing December 31, 1999 to and on the Short Term Credit
Termination Date.
(c) Notwithstanding the foregoing, so long as any Lender fails to make
available any portion of its Short Term Credit 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.
2.10. 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 hereunder nor shall the Short Term Credit 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 Short Term Credit Facility as herein
provided, the Agent
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may in its discretion, but shall not be obligated to, advance under the 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 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
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.
2.11. Use of Proceeds. The proceeds of the Loans made pursuant to this
Agreement shall be used by the Borrower for general corporate purposes,
including working capital needs, capital expenditures and permitted share
repurchases.
2.12. Intraday Funding. Without limiting the provisions of Section 2.10,
unless the Borrower or any Lender has notified the Agent not later than 12:00
Noon of the Business Day before the date of any payment (including in the case
of Lenders any Advance) to be made by it is due, that it does not intend to
remit such payment, the Agent may, in its discretion, assume that the Borrower
or each Lender, as the case may be, has timely remitted such payment in the
manner required hereunder and may, in its discretion and in reliance thereon,
make available such payment (or portion thereof) to the Person entitled thereto
as otherwise provided herein. If such payment was not in fact remitted to the
Agent in the manner required hereunder, then:
(a) if the Borrower failed to make such payment, each Lender shall
forthwith on demand repay to the Agent the amount of such assumed payment
made available to such Lender, together with interest thereon in respect of
each day from and including the date such amount was made available by the
Agent to such Lender to the date such amount is repaid to the Agent at the
Federal Funds Rate; and
(b) if any Lender failed to make such payment, the Agent shall be
entitled to recover such corresponding amount forthwith upon the Agent's
demand therefor, the Agent promptly shall notify the Borrower, and the
Borrower shall promptly pay such corresponding amount to the Agent in
immediately available funds upon receipt of such demand. The Agent also
shall be entitled to recover interest on such corresponding amount in
respect of each day from the date such corresponding amount was made
available by the Agent to the Borrower to the date such corresponding
amount is recovered by the Agent, (A) from such Lender at a rate per annum
equal to the daily Federal Funds Rate or (without duplication) (B) from the
Borrower, at a rate per annum equal to the interest rate applicable to the
Loan which includes such corresponding amount. Until the Agent shall
recover such corresponding amount together with interest thereon, such
corresponding amount shall constitute a deficiency advance within the
meaning of Section 2.10. Nothing herein shall be deemed to relieve any
Lender from its obligation to fulfill its commitments hereunder or to
prejudice any rights which the Agent or the Borrower may have against any
Lender as a result of any default by such Lender hereunder.
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ARTICLE III
Change in Circumstances
3.1. Increased Cost and Reduced Return.
(a) If, after the date hereof, the adoption of any applicable law, rule, or
regulation, or any change in any applicable law, rule, or regulation, or any
change in the interpretation or administration thereof by any governmental
authority, central bank, or comparable agency charged with the interpretation or
administration thereof, or compliance by any Lender (or its Applicable Lending
Office) with any request or directive (whether or not having the force of law)
of any such governmental authority, central bank, or comparable agency:
(i) shall subject such Lender (or its Applicable Lending Office) to
any tax, duty, or other charge with respect to any Eurodollar Rate Loans,
its Note, or its obligation to make Eurodollar Rate Loans, or change the
basis of taxation of any amounts payable to such Lender (or its Applicable
Lending Office) under this Agreement or its Note in respect of any
Eurodollar Rate Loans (other than taxes imposed on the overall net income
of such Lender by the jurisdiction in which such Lender has its principal
office or such Applicable Lending Office);
(ii) shall impose, modify, or deem applicable any reserve, special
deposit, assessment, or similar requirement (other than the Reserve
Requirement utilized in the determination of the Eurodollar Rate) relating
to any extensions of credit or other assets of, or any deposits with or
other liabilities or commitments of, such Lender (or its Applicable Lending
Office), including the Short Term Credit Commitment of such Lender
hereunder; or
(iii) shall impose on such Lender (or its Applicable Lending Office)
or on the London interbank market any other condition affecting this
Agreement or its Note or any of such extensions of credit or liabilities or
commitments;
and the result of any of the foregoing is to increase the cost to such Lender
(or its Applicable Lending Office) of making, Converting into, Continuing, or
maintaining any Eurodollar Rate Loans or to reduce any sum received or
receivable by such Lender (or its Applicable Lending Office) under this
Agreement or its Note with respect to any Eurodollar Rate Loans, then the
Borrower shall pay to such Lender on demand such amount or amounts as will
compensate such Lender for such increased cost or reduction; provided that no
Lender will be entitled to any compensation for any such increased cost or
reduction if demand for payment thereof is made by such Lender more than 180
days after the occurrence of the circumstances giving rise to such claim. If any
Lender requests compensation by the Borrower under this Section 3.1(a), the
Borrower may, by notice to such Lender (with a copy to the Agent), suspend the
obligation of such Lender to make or Continue Loans of the Type with respect to
which such compensation is requested, or to Convert Loans of any other Type into
Loans of such Type, until the event or condition giving rise to such request
ceases to be in effect (in which case the provisions of Section 3.4 shall be
applicable); provided that such suspension shall not affect the right of such
Lender to receive the compensation so requested.
(b) If, after the date hereof, any Lender shall have determined that the
adoption of any applicable law, rule, or regulation regarding capital adequacy
or any change therein or in the interpretation or administration thereof by any
governmental authority, central bank, or comparable agency charged with the
interpretation or administration thereof, or any request or directive regarding
capital adequacy (whether or not having the force of law) of any such
governmental
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authority, central bank, or comparable agency, has or would have the effect of
reducing the rate of return on the capital of such Lender or any corporation
controlling such Lender as a consequence of such Lender's obligations hereunder
to a level below that which such Lender or such corporation could have achieved
but for such adoption, change, request, or directive (taking into consideration
its policies with respect to capital adequacy), then from time to time upon
demand the Borrower shall pay to such Lender such additional amount or amounts
as will compensate such Lender for such reduction.
(c) Each Lender shall promptly notify the Borrower and the Agent of any
event of which it has knowledge, occurring after the date hereof, which will
entitle such Lender to compensation pursuant to this Section and will designate
a different Applicable Lending Office if such designation will avoid the need
for, or reduce the amount of, such compensation and will not, in the reasonable
judgment of such Lender, be otherwise disadvantageous to it. Any Lender claiming
compensation under this Section shall furnish to the Borrower and the Agent a
statement setting forth the additional amount or amounts to be paid to it
hereunder which shall be conclusive in the absence of manifest error. In
determining such amount, such Lender may use any reasonable averaging and
attribution methods that such Lender uses for its customers that are similarly
situated to the Borrower.
3.2. Limitation on Types of Loans. If on or prior to the first day of any
Interest Period for any Eurodollar Rate Loan:
(a) the Agent reasonably determines (which determination shall be
conclusive) that by reason of circumstances affecting the relevant market,
adequate and reasonable means do not exist for ascertaining the Eurodollar
Rate for such Interest Period; or
(b) the Required Lenders reasonably determine (which determination
shall be conclusive) and notify the Agent that the Eurodollar Rate will not
adequately and fairly reflect the cost to the Lenders of funding Eurodollar
Rate Loans for such Interest Period;
then the Agent shall give the Borrower prompt notice thereof specifying the
relevant Type of Loans and the relevant amounts or periods, and so long as such
condition remains in effect, the Lenders shall be under no obligation to make
additional Loans of such Type, Continue Loans of such Type, or to Convert Loans
of any other Type into Loans of such Type and the Borrower shall, on the last
day(s) of the then current Interest Period(s) for the outstanding Loans of the
affected Type, either prepay such Loans or Convert such Loans into another Type
of Loan in accordance with the terms of this Agreement.
3.3. Illegality. Notwithstanding any other provision of this Agreement, in
the event that it becomes unlawful for any Lender or its Applicable Lending
Office to make, maintain, or fund Eurodollar Rate Loans hereunder, then such
Lender shall promptly notify the Borrower thereof and such Lender's obligation
to make or Continue Eurodollar Rate Loans and to Convert other Types of Loans
into Eurodollar Rate Loans shall be suspended until such time as such Lender may
again make, maintain, and fund Eurodollar Rate Loans (in which case the
provisions of Section 3.4 shall be applicable).
3.4. Treatment of Affected Loans. If the obligation of any Lender to make a
Eurodollar Rate Loan or to Continue, or to Convert Loans of any other Type into,
Loans of a particular Type shall be suspended pursuant to Section 3.1 or 3.3
hereof (Loans of such Type being herein called "Affected Loans" and such Type
being herein called the "Affected Type"), such Lender's Affected Loans shall be
automatically Converted into Base Rate Loans on the last day(s) of the then
current Interest Period(s) for Affected Loans (or, in the case of a Conversion
required by Section 3.3 hereof,
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on such earlier date as such Lender may specify to the Borrower with a copy to
the Agent) and, unless and until such Lender gives notice as provided below that
the circumstances specified in Section 3.1 or 3.3 hereof that gave rise to such
Conversion no longer exist:
(a) to the extent that such Lender's Affected Loans have been so
Converted, all payments and prepayments of principal that would otherwise
be applied to such Lender's Affected Loans shall be applied instead to its
Base Rate Loans; and
(b) all Loans that would otherwise be made or Continued by such Lender
as Loans of the Affected Type shall be made or Continued instead as Base
Rate Loans, and all Loans of such Lender that would otherwise be Converted
into Loans of the Affected Type shall be Converted instead into (or shall
remain as) Base Rate Loans.
If such Lender gives notice to the Borrower (with a copy to the Agent) that the
circumstances specified in Section 3.1 or 3.3 hereof that gave rise to the
Conversion of such Lender's Affected Loans pursuant to this Section 3.4 no
longer exist (which such Lender agrees to do promptly upon such circumstances
ceasing to exist) at a time when Loans of the Affected Type made by other
Lenders are outstanding, such Lender's Base Rate Loans shall be automatically
Converted, on the first day(s) of the next succeeding Interest Period(s) for
such outstanding Loans of the Affected Type, to the extent necessary so that,
after giving effect thereto, all Loans held by the Lenders holding Loans of the
Affected Type and by such Lender are held pro rata (as to principal amounts,
Types, and Interest Periods) in accordance with their respective Short Term
Credit Commitments.
3.5. Compensation. Upon the request of any Lender, the Borrower shall pay
to such Lender such amount or amounts as shall be sufficient (in the reasonable
opinion of such Lender) to compensate it for any loss, cost, or expense
(including loss of anticipated profits) incurred by it as a result of:
(a) any payment, prepayment, or Conversion of a Eurodollar Rate Loan
for any reason (including, without limitation, the acceleration of the
Loans pursuant to Section 8.1) on a date other than the last day of the
Interest Period for such Loan; or
(b) any failure by the Borrower for any reason (including, without
limitation, the failure of any condition precedent specified in Article IV
to be satisfied) to borrow, Convert, Continue, or prepay an Eurodollar Rate
Loan on the date for such borrowing, Conversion, Continuation, or
prepayment specified in the relevant notice of borrowing, prepayment,
Continuation, or Conversion under this Agreement.
3.6. Taxes. (a) Any and all payments by the Borrower to or for the account
of any Lender or the Agent hereunder or under any other Loan Document shall be
made free and clear of and without deduction for any and all present or future
taxes, duties, levies, imposts, deductions, charges or withholdings, and all
liabilities with respect thereto, excluding, in the case of each Lender and the
Agent, taxes imposed on its income, and franchise taxes imposed on it, by the
jurisdiction under the laws of which such Lender (or its Applicable Lending
Office) or the Agent (as the case may be) is organized or any political
subdivision thereof (all such non-excluded taxes, duties, levies, imposts,
deductions, charges, withholdings, and liabilities being hereinafter referred to
as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from
or in respect of any sum payable under this Agreement or any other Loan Document
to any Lender or the Agent, (i) the sum payable shall be increased as necessary
so that after making all required deductions (including deductions applicable to
additional sums payable under this Section 3.6) such Lender or the Agent
receives an
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amount equal to the sum it would have received had no such deductions been made,
(ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the
full amount deducted to the relevant taxation authority or other authority in
accordance with applicable law, and (iv) the Borrower shall furnish to the
Agent, at its address referred to in Section 10.2, the original or a certified
copy of a receipt evidencing payment thereof.
(b) In addition, the Borrower agrees to pay any and all present or future
stamp or documentary taxes and any other excise or property taxes or charges or
similar levies which arise from any payment made under this Agreement or any
other Loan Document or from the execution or delivery of, or otherwise with
respect to, this Agreement or any other Loan Document (hereinafter referred to
as "Other Taxes").
(c) The Borrower agrees to indemnify each Lender and the Agent for the full
amount of Taxes and Other Taxes (including, without limitation, any Taxes or
Other Taxes imposed or asserted by any jurisdiction on amounts payable under
this Section 3.6) paid by such Lender or the Agent (as the case may be) and any
liability (including penalties, interest, and expenses) arising therefrom or
with respect thereto.
(d) Each Lender organized under the laws of a jurisdiction outside the
United States, on or prior to the date of its execution and delivery of this
Agreement in the case of each Lender listed on the signature pages hereof and on
or prior to the date on which it becomes a Lender in the case of each other
Lender, and from time to time thereafter if requested in writing by the Borrower
or the Agent (but only so long as such Lender remains lawfully able to do so),
shall provide the Borrower and the Agent with (i) Internal Revenue Service Form
1001 or 4224, as appropriate, or any successor form prescribed by the Internal
Revenue Service, certifying that such Lender is entitled to benefits under an
income tax treaty to which the United States is a party which reduces the rate
of withholding tax on payments of interest or certifying that the income
receivable pursuant to this Agreement is effectively connected with the conduct
of a trade or business in the United States, (ii) Internal Revenue Service Form
W-8 or W-9, as appropriate, or any successor form prescribed by the Internal
Revenue Service, and (iii) any other form or certificate required by any taxing
authority (including any certificate required by Sections 871(h) and 881(c) of
the Internal Revenue Code), certifying that such Lender is entitled to an
exemption from or a reduced rate of tax on payments pursuant to this Agreement
or any of the other Loan Documents.
(e) For any period with respect to which a Lender has failed to provide the
Borrower and the Agent with the appropriate form pursuant to Section 3.6(d)
(unless such failure is due to a change in treaty, law, or regulation occurring
subsequent to the date on which a form originally was required to be provided),
such Lender shall not be entitled to indemnification under Section 3.6(a),
3.6(b), or 3.6(c) with respect to Taxes imposed by the United States; provided,
however, that should a Lender, which is otherwise exempt from or subject to a
reduced rate of withholding tax, become subject to Taxes because of its failure
to deliver a form required hereunder, the Borrower shall take such steps as such
Lender shall reasonably request to assist such Lender to recover such Taxes.
(f) If the Borrower is required to pay additional amounts to or for the
account of any Lender pursuant to this Section 3.6, then such Lender will agree
to use reasonable efforts to change the jurisdiction of its Applicable Lending
Office so as to eliminate or reduce any such additional payment which may
thereafter accrue if such change, in the judgment of such Lender, is not
otherwise disadvantageous to such Lender.
(g) Within thirty (30) days after the date of any payment of Taxes, the
Borrower shall furnish to the Agent the original or a certified copy of a
receipt evidencing such payment.
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(h) Without prejudice to the survival of any other agreement of the
Borrower hereunder, the agreements and obligations of the Borrower contained in
this Section 3.6 shall survive the termination of the Short Term Credit
Commitments and the payment in full of the Notes.
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ARTICLE IV
Conditions to Making Loans
4.1. 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 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) evidence of repayment of all Indebtedness owing by the
Borrower under the Existing Credit Agreement and termination of the
Existing Credit Agreement;
(ix) notice of appointment of the initial Authorized
Representative(s);
(x) evidence of all insurance required by the Loan Documents;
(xi) evidence that all fees payable by the Borrower on the
Closing Date to the Agent and the Lenders have been paid in full;
(xiii) 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
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(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 June 30,
1998 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 expected 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.
4.2. Conditions of Loans. The obligations of the Lenders to make any Loans
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;
(b) the representations and warranties of the Borrower and the
Subsidiaries set forth in Article V 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 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 5.6(a) shall be
deemed to be those financial statements most recently delivered to the
Agent and the Lenders pursuant to Section 6.1 from the date financial
statements are delivered to the Agent and the Lenders in accordance with
such Section;
(c) at the time of (and after giving effect to) each Advance no
Default or Event of Default shall have occurred and be continuing; and
(d) immediately after giving effect to a Loan, the aggregate principal
balance of all outstanding Loans for each Lender shall not exceed such
Lender's Short Term Credit Commitment and the aggregate principal amount of
Short Term Credit Outstandings shall not exceed the Total Short Term Credit
Commitment.
Each borrowing hereunder shall constitute a representation and warranty by
the Borrower to the effect that the conditions set forth in clauses (b) and (c)
have been satisfied as of the date of such borrowing.
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ARTICLE V
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), that:
5.1. 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).
5.2. 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 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.
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5.3. 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.
5.4. Subsidiaries. The Borrower has no Subsidiaries other than those
Persons listed as Subsidiaries in Schedule 5.4 and additional Subsidiaries
created or acquired after the Closing Date.
5.5. Ownership Interests. Borrower owns no interest in any Person other
than the Persons listed in Schedule 5.4, equity investments in Persons not
constituting Subsidiaries permitted under Section 7.2 and additional
Subsidiaries created or acquired after the Closing Date.
5.6. Financial Condition.
(a) The Borrower has heretofore furnished to the Agent and each Lender
an audited consolidated balance sheet of the Borrower and its Consolidated
Entities as at December 31, 1998 and the notes thereto and the related
consolidated statements of income, stockholders' equity and cash flows for
the Fiscal Year then ended as examined and certified by Ernst & Young LLP,
and unaudited consoidated interim financial statements of the Borrower and
its Consolidated Entitites consisting of a consolidated balance sheet and
related consolidated statements of income, stockholders' equity and cash
flows, in each case without notes, for and as of the end of the nine month
period ending September 30, 1999. Except as set forth therein, such
financial statements (including the notes thereto) present fairly the
financial condition of the Borrower and its Consolidated Entities as of the
end of such Fiscal Year and nine month period and results of their
operations and the changes in its stockholders' equity for the Fiscal Year
and interim period then ended, all in conformity with GAAP applied on a
Consistent Basis, subject however, in the case of unaudited interim
statements to year end audit adjustments;
(b) since September 30, 1999, there has been no material adverse
change in the condition, financial or otherwise, of the Borrower or any of
its Consolidated Entities, or in the businesses, properties, performance,
prospects or operations of the Borrower or any of its Consolidated
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; and
(c) except as set forth in the financial statements referred to in
Section 5.6(a) or in Schedule 5.6 or permitted by Section 7.3, neither the
Borrower nor any Consolidated Entity has incurred, other than in the
ordinary course of business, any material Indebtedness, Contingent
Obligation or other commitment or liability which remains outstanding or
unsatisfied.
5.7. 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.
5.8. 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 5.6(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.
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5.9. Other Agreements. Except as disclosed in or incorporated by reference
in the 1998 10-K:
(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 likely 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;
(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 likely 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.
5.10. Litigation. Except as disclosed in or incorporated by reference in
the 1998 10-K, 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 likely (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.
5.11. 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;
provided that the Borrower may repurchase its own
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Capital Stock in accordance with the terms of Section 7.9. 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.
5.12. 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.
5.13. Patents, Etc. Except as set forth on Schedule 5.13, 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.
5.14. 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.
5.15. 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;
5.16. 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.
5.17. No Default. As of the date hereof, there does not exist any Default
or Event of Default.
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5.18. 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 reasonably
be expected to form the basis of a meritorious proceeding to cause, any property
of the Borrower or any Consolidated Entity material to the operations of the
Borrower or such Consolidated Entity to be subject to any material restrictions
on ownership, use, occupancy or transferability under any Environmental Law.
5.19. Employment Matters. (a) Except as set forth on Schedule 5.19, 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 likely, 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.
5.20. 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.
5.21. 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.
5.22. Year 2000 Compliance. The Borrower has (i) initiated a review and
assessment of all areas within its and each of its Consolidated Entities'
business and operations (including those affected by suppliers, vendors, and
customers) that could be adversely affected by the "Year 2000 Problem" (that is,
the risk that computer applications used by the Borrower or any of its
Consolidated Entities (or suppliers, vendors and customers) may be unable to
recognize and perform
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properly date-sensitive functions involving certain dates prior to and any date
after December 31, 1999), (ii) developed a plan and timeline for addressing the
Year 2000 Problem on a timely basis, and (iii) to date, implemented that plan in
accordance with that timetable. Based on the foregoing, the Borrower believes
that all computer applications (including those of its suppliers, vendors and
customers) that are material to its or any of its Consolidated Entities'
business and operations are reasonably expected on a timely basis to be able to
perform proper date-sensitive functions for all dates before and after January
1, 2000 (that is, be "Year 2000 compliant"), except to the extent that a failure
to do so could not reasonably be expected to have a Material Adverse Effect.
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ARTICLE VI
Affirmative Covenants
Until the Short Term Credit 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:
6.1. 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 7.1), 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 7.1), 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 subsections (a)
and (b) 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 I ("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).
(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
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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.
6.2. 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.
6.3. Existence, Qualification, Etc. Except as otherwise expressly permitted
under Section 7.4, 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.
6.4. 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 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.
6.5. 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 and each Lender annually
on or before each anniversary date of this Agreement, and at such other time or
times as the Agent or any Lender may request (but not more often than monthly),
a certificate of the president
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or chief financial officer of the Borrower setting out in such detail as the
Agent or any Lender 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.
6.6. 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.
6.7. Right of Inspection. Permit any Person designated by the Agent or any
Lender 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.
6.8. 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
likely to have a Material Adverse Effect.
6.9. 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 likely to have a Material Adverse Effect.
6.10. 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 6.2 through 6.9, 6.15 and 6.16
inclusive.
6.11. 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.
6.12. 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
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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 and each Lender
written notice thereof stating the nature and status of such litigation,
dispute, proceeding, levy, execution or other process.
6.13. Notice of Discharge of Hazardous Material or Environmental Complaint.
Promptly provide to the Agent and each Lender 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.
6.14. 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.
6.15. Continuation of Current Business. Not engage in any business other
than the business now being conducted by the Borrower (including its
Consolidated Entities) and other businesses directly related to such services.
6.16. 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.
6.17. Year 2000 Compliance. The Borrower will promptly notify the Agent and
each Lender in the event the Borrower discovers or determines that any computer
application (including those of its suppliers, vendors, and customers) that is
material to its or any of its Consolidated Entities' business and operations
will not be Year 2000 compliant, except to the extent that such failure could
not reasonably be expected to have a Material Adverse Effect.
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ARTICLE VII
Negative Covenants
Until the Short Term Credit 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 will it permit any
Consolidated Entity to:
7.1. Financial Covenants.
(a) Minimum Net Worth. Permit Consolidated Net Worth to be less than
$3,136,581,000 plus (A) 50% of Consolidated Net Income (if positive and
including for purposes of this Section 7.1(a) only any extraordinary gain),
on an ongoing basis for each fiscal quarter beginning with the fiscal
quarter ended December 31, 1999, 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 0.65 to 1.00.
7.2. 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 7.8; (B) make Permitted Investments; and (C) make other
investments in an amount not exceeding 15% of Consolidated Total Assets.
7.3. 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 7.3.
7.4. Disposition of Assets. Sell, lease or otherwise dispose of assets
(other than shares of Capital Stock of the Borrower owned by the Borrower) in
excess of 15% of Consolidated Total Assets as at the Closing Date plus an amount
equal to 15% of assets acquired following the Closing Date.
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7.5. 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.
7.6. 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.
7.7. 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.
7.8. 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 and each Lender (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.
7.9. 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 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; provided, further that the Borrower may
repurchase not more than $300,000,000 of its Capital Stock (calculated by the
actual purchase price paid therefor and not by reference to prior or subsequent
changes in value) in the Fiscal Year ending December 31, 2000.
7.10. 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
(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
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(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.
7.11. Fiscal Year. Change its Fiscal Year (other than a change to conform
the fiscal year of a Consolidated Entity to that of the Borrower).
7.12. 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 7.5 or where the liquidation or
dissolution of a Consolidated Entity occurs in the ordinary course of business
and does not have a Material Adverse Effect.
7.13. Transactions with Affiliates. Other than transactions permitted under
Sections 7.2 and 7.5, enter into any transaction after the Closing Date,
including, without limitation, the purchase, sale, lease or exchange of
property, real or personal, or the rendering of any service, with any Affiliate
of the Borrower, except (a) that such Persons may render services to the
Borrower for compensation at the same rates generally paid by Persons engaged in
the same or similar businesses for the same or similar services, (b) that the
Borrower may render services to such Persons for compensation at the same rates
generally charged by the Borrower and (c) in either case in the ordinary course
of business and pursuant to the reasonable requirements of the Borrower's
business consistent with past practice of the Borrower and upon fair and
reasonable terms no less favorable to the Borrower than would be obtained in a
comparable arm's-length transaction with a Person not an Affiliate;
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ARTICLE VIII
Events of Default and Acceleration
8.1. 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 (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 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 VI and Article VII), 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 VI or Article VII; 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 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
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(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 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 Medicaid or Medicare programs or accepts assignments of rights to
reimbursement thereunder; provided that any such events described in this
Section 8.1(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;
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 to
make further Loans terminated, whereupon the obligation of each Lender to
make further Loans 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
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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 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 Agent and each of the Lenders shall have all of the rights and
remedies available under the Loan Documents or under any applicable law.
8.2. Agent to Act. In case any one or more Events of Default shall occur
and be continuing and not have been waived, subject to the provisions of Article
IX, the Agent may, and at the direction of the Required Lenders shall, proceed
to protect and enforce their rights and remedies contained herein or in any
other Loan Document, or as may be otherwise available at law or in equity to
enforce the payment of the Obligations or any other legal or equitable right or
remedy.
8.3. 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.
8.4. 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 waiver or preclude
the exercise of any other rights or remedies hereunder or of the same right or
remedy on a future occasion.
8.5. 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 VIII, 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 2.9 or Section
10.6;
(ii) amounts due to the Agent pursuant to Section 9.8;
(iii) payments of interest, to be applied pro rata based on the
proportion which the principal amount of outstanding Loans of each Lender
bears to the total of all outstanding Loans;
(iv) payments of principal, to be applied pro rata based on the
proportion which the principal amount of outstanding Loans of each Lender
bears to the total of all outstanding Loans;
(vi) payments of all other amounts due under this Agreement, if any,
to be applied in accordance with each recipient's pro rata share of all
such other amounts due to all recipients; and
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(vii) any surplus remaining after application as provided for herein,
to the Borrower or otherwise as may be required by applicable law.
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ARTICLE IX
The Agent
9.1. Appointment, Powers, and Immunities. Each Lender hereby irrevocably
appoints and authorizes the Agent to act as its agent under this Agreement and
the other Loan Documents with such powers and discretion as are specifically
delegated to the Agent by the terms of this Agreement and the other Loan
Documents, together with such other powers as are reasonably incidental thereto.
The Agent (which term as used in this sentence and in Section 9.5 and the first
sentence of Section 9.6 hereof shall include its affiliates and its own and its
affiliates' officers, directors, employees, and agents): (a) shall not have any
duties or responsibilities except those expressly set forth in this Agreement
and shall not be a trustee or fiduciary for any Lender; (b) shall not be
responsible to the Lenders for any recital, statement, representation, or
warranty (whether written or oral) made in or in connection with any Loan
Document or any certificate or other document referred to or provided for in, or
received by any of them under, any Loan Document, or for the value, validity,
effectiveness, genuineness, enforceability, or sufficiency of any Loan Document,
or any other document referred to or provided for therein or for any failure by
any Person to perform any of its obligations thereunder; (c) shall not be
responsible for or have any duty to ascertain, inquire into, or verify the
performance or observance of any covenants or agreements by any Person or the
satisfaction of any condition or to inspect the property (including the books
and records) of any Person; (d) shall not be required to initiate or conduct any
litigation or collection proceedings under any Loan Document; and (e) shall not
be responsible for any action taken or omitted to be taken by it under or in
connection with any Loan Document, except for its own negligence or willful
misconduct. The Agent may employ agents and attorneys-in-fact and shall not be
responsible for the negligence or misconduct of any such agents or
attorneys-in-fact selected by it with reasonable care.
9.2. Reliance by Agent. The Agent shall be entitled to rely upon any
certification, notice, instrument, writing, or other communication (including,
without limitation, any thereof by telephone or telefacsimile) believed by it to
be genuine and correct and to have been signed, sent or made by or on behalf of
the proper Person or Persons, and upon advice and statements of legal counsel,
independent accountants, and other experts selected by the Agent. The Agent may
deem and treat the payee of any Note as the holder thereof for all purposes
hereof unless and until the Agent receives and accepts an Assignment and
Acceptance executed in accordance with Section 10.1 hereof. As to any matters
not expressly provided for by this Agreement, the Agent shall not be required to
exercise any discretion or take any action, but shall be required to act or to
refrain from acting (and shall be fully protected in so acting or refraining
from acting) upon the instructions of the Required Lenders, and such
instructions shall be binding on all of the Lenders; provided, however, that the
Agent shall not be required to take any action that exposes the Agent to
personal liability or that is contrary to any Loan Document or applicable law or
unless 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 any such action.
9.3. Defaults. The Agent shall not be deemed to have knowledge or notice of
the occurrence of a Default or Event of Default unless the Agent has received
written notice from a Lender or the Borrower specifying 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 of the occurrence of a Default or Event of
Default, the Agent shall give prompt notice thereof to the Lenders. The Agent
shall (subject to Section 9.2 hereof) take such action with respect to such
Default or Event of Default as shall reasonably be directed by the Required
Lenders, 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
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from taking such action, with respect to such Default or Event of Default as it
shall deem advisable in the best interest of the Lenders.
9.4. Rights as Lender. With respect to its Short Term Credit Commitment and
the Loans made by it, Bank of America (and any successor acting as Agent) in its
capacity as a Lender hereunder shall have the same rights and powers hereunder
as any other Lender and may exercise the same as though it were not acting as
the Agent, and the term "Lender" or "Lenders" shall, unless the context
otherwise indicates, include the Agent in its individual capacity. Bank of
America (and any successor acting as Agent) and its affiliates may (without
having to account therefor to any Lender) accept deposits from, lend money to,
make investments in, provide services to, and generally engage in any kind of
lending, trust, or other business with the Borrower or any of its Subsidiaries
or affiliates as if it were not acting as Agent, and Bank of America (and any
successor acting as Agent) and its affiliates may accept fees and other
consideration from the Borrower or any of its Subsidiaries or affiliates for
services in connection with this Agreement or otherwise without having to
account for the same to the Lenders.
9.5. Indemnification. The Lenders agree to indemnify the Agent (to the
extent not reimbursed under Section 10.12 hereof, but without limiting the
obligations of the Borrower under such Section) ratably in accordance with their
respective Short Term Credit Commitments, for any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, reasonable
costs and expenses (including attorneys' fees), or disbursements of any kind and
nature whatsoever that may be imposed on, incurred by or asserted against the
Agent (including by any Lender) in any way relating to or arising out of any
Loan Document or the transactions contemplated thereby or any action taken or
omitted by the Agent under any Loan Document; provided that no Lender shall be
liable for any of the foregoing to the extent they arise from the gross
negligence or willful misconduct of the Person to be indemnified. Without
limitation of the foregoing, each Lender agrees to reimburse the Agent promptly
upon demand for its ratable share of any costs or expenses payable by the
Borrower under Section 10.6, to the extent that the Agent is not promptly
reimbursed for such costs and expenses by the Borrower. The agreements contained
in this Section shall survive payment in full of the Loans and all other amounts
payable under this Agreement.
9.6. Non-Reliance on Agent and Other Lenders. Each Lender agrees that it
has, independently and without reliance on the Agent or any other Lender, and
based on such documents and information as it has deemed appropriate, made its
own credit analysis of the Borrower and its Subsidiaries and decision to enter
into this Agreement and 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 analysis and
decisions in taking or not taking action under the Loan Documents. Except for
notices, reports, and other documents and information 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 or any of its Subsidiaries or affiliates that may come into the
possession of the Agent or any of its affiliates.
9.7. Resignation of Agent. The Agent may resign at any time by giving
notice thereof to the Lenders and the Borrower. Upon any such resignation, the
Required Lenders shall have the right to appoint a successor Agent subject to
the approval of the Borrower so long as no Default or Event of Default shall
have occurred and be continuing, such approval not to be unreasonably withheld.
If no successor Agent shall have been so appointed by the Required Lenders and
shall have accepted such appointment within thirty (30) days after the retiring
Agent's giving of notice of resignation, then the retiring Agent may, on behalf
of the Lenders, appoint a successor Agent which shall be a commercial bank
organized under the laws of the United States of America having combined capital
and surplus of at least $100,000,000. Upon the acceptance of any appointment as
Agent hereunder
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by a successor, such successor shall thereupon succeed to and become vested with
all the rights, powers, discretion, privileges, and duties of the retiring
Agent, and the retiring Agent shall be discharged from its duties and
obligations hereunder. After any retiring Agent's resignation hereunder as
Agent, the provisions of this Article IX shall continue in effect for its
benefit in respect of any actions taken or omitted to be taken by it while it
was acting as Agent.
9.8. Fees. The Borrower agrees to pay to the Agent, for its individual
account, an annual Administrative Agent's fee as from time to time agreed to by
the Borrower and Agent in writing.
9.9. Syndication Agent. The Syndication Agent, in its capacity as such,
shall not have any duties or responsibilities under this Agreement other than
its obligations as a Lender.
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ARTICLE X
Miscellaneous
10.1. Assignments and Participations. (a) Each Lender may assign to one or
more Eligible Assignees all or a portion of its rights and obligations under
this Agreement (including, without limitation, all or a portion of its Loans,
its Note, and its Short Term Credit Commitment); provided, however, that
(i) each such assignment shall be to an Eligible Assignee;
(ii) except in the case of an assignment to another Lender or an assignment
of all of a Lender's rights and obligations under this Agreement, any such
partial assignment shall be in an amount at least equal to $5,000,000 or an
integral multiple of $1,000,000 in excess thereof;
(iii) each such assignment by a Lender shall be of a constant, and not
varying, percentage of all of its rights and obligations under this Agreement
and the Note; and
(iv) the parties to such assignment shall execute and deliver to the Agent
for its acceptance an Assignment and Acceptance in the form of Exhibit B hereto,
together with any Note subject to such assignment and a processing fee of
$3,500.
Upon execution, delivery, and acceptance of such Assignment and Acceptance, the
assignee thereunder shall be a party hereto and, to the extent of such
assignment, have the obligations, rights, and benefits of a Lender hereunder and
the assigning Lender shall, to the extent of such assignment, relinquish its
rights and be released from its obligations under this Agreement. Upon the
consummation of any assignment pursuant to this Section, the assignor, the Agent
and the Borrower shall make appropriate arrangements so that, if required, new
Notes are issued to the assignor and the assignee. If the assignee is not
incorporated under the laws of the United States of America or a state thereof,
it shall deliver to the Borrower and the Agent certification as to exemption
from deduction or withholding of Taxes in accordance with Section 3.6.
(b) The Agent shall maintain at its address referred to in Section 10.2 a
copy of each Assignment and Acceptance delivered to and accepted by it and a
register for the recordation of the names and addresses of the Lenders and the
Short Term Credit Commitment of, and principal amount of the Loans owing to,
each Lender from time to time (the "Register"). The entries in the Register
shall be conclusive and binding for all purposes, absent manifest error, and the
Borrower, the Agent and the Lenders may treat each Person whose name is recorded
in the Register as a Lender hereunder for all purposes of this Agreement. The
Register shall be available for inspection by the Borrower or any Lender at any
reasonable time and from time to time upon reasonable prior notice.
(c) Upon its receipt of an Assignment and Acceptance executed by the
parties thereto, together with any Note subject to such assignment and payment
of the processing fee, the Agent shall, if such Assignment and Acceptance has
been completed and is in substantially the form of Exhibit B hereto, (i) accept
such Assignment and Acceptance, (ii) record the information contained therein in
the Register and (iii) give prompt notice thereof to the parties thereto.
(d) Each Lender may sell participations to one or more Persons in all or a
portion of its rights, obligations or rights and obligations under this
Agreement (including all or a portion of its Short Term Credit Commitment or its
Loans); provided, however, that (i) any such participation in a Short Term
Credit Commitment, but not its Loans, shall be in an amount at least equal to
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$5,000,000 or an integral multiple of $1,000,000 in excess thereof, (ii) such
Lender's obligations under this Agreement shall remain unchanged, (iii) such
Lender shall remain solely responsible to the other parties hereto for the
performance of such obligations, (iv) the participant shall be entitled to the
benefit of the yield protection provisions contained in Article III and the
right of set-off contained in Section 10.4, and (v) the Borrower shall continue
to deal solely and directly with such Lender in connection with such Lender's
rights and obligations under this Agreement, and such Lender shall retain the
sole right to enforce the obligations of the Borrower relating to its Loans and
its Note and to approve any amendment, modification, or waiver of any provision
of this Agreement (other than amendments, modifications, or waivers decreasing
the amount of principal of or the rate at which interest is payable on such
Loans or Note, extending any scheduled principal payment date or date fixed for
the payment of interest on such Loans or Note, or extending its Short Term
Credit Commitment).
(e) Notwithstanding any other provision set forth in this Agreement, any
Lender may at any time assign and pledge all or any portion of its Loans and its
Note to any Federal Reserve Bank as collateral security pursuant to Regulation A
and any Operating Circular issued by such Federal Reserve Bank. No such
assignment shall release the assigning Lender from its obligations hereunder.
(f) Any Lender may furnish any information concerning the Borrower or any
of its Subsidiaries in the possession of such Lender from time to time to
assignees and participants (including prospective assignees and participants);
provided, however that such Lender shall (a) take reasonable and customary
measures to safeguard the confidentiality of non-public information, (b) advise
such assignees or participants of the confidentiality of such non-public
information and (c) obtain the agreement of such assignees or participants to
maintain the confidentiality thereof.
10.2. 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 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
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(b) if to the Agent at:
One Independence Center, 15th Floor
101 North Tryon Street
Charlotte, North Carolina 28255
Attention: Agency Services
Reference: HEALTHSOUTH Corporation
(c) if to the Lenders:
At the addresses set forth on the signature pages hereof and on the
signature page of each Assignment and Acceptance.
10.3. 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 further exercise thereof. The rights and
remedies herein provided are cumulative and not exclusive of any rights or
remedies provided by law.
10.4. Rights of Setoff; Adjustments. (a) 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 Person 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.
(b) If any Lender (a "benefited Lender") shall at any time receive any
payment of all or part of the Loans owing to it, or interest thereon, or receive
any collateral in respect thereof (whether voluntarily or involuntarily, by
set-off, or otherwise), in a greater proportion than any such payment to or
collateral received by any other Lender, if any, in respect of such other
Lender's Loans owing to it, or interest thereon, such benefitted Lender shall
purchase for cash from the other Lenders a participating interest in such
portion of each such other Lender's Loans owing to it, or shall provide such
other Lenders with the benefits of any such collateral, or the proceeds thereof,
as shall be necessary to cause such benefitted Lender to share the excess
payment or benefits of such collateral or proceeds ratably with each of the
Lenders; provided, however, that if all or any portion of such excess payment or
benefits is thereafter recovered from such benefitted Lender, such purchase
shall be rescinded, and the purchase price and benefits returned, to the extent
of such recovery, but without interest. The Borrower agrees that any Lender so
purchasing a participation from a Lender pursuant to this Section 10.4 may, to
the fullest extent permitted by law, exercise all of its rights of payment
(including the right of set-off) with respect to such participation as fully as
if such Person were the direct creditor of the Borrower in the amount of such
participation.
10.5. Survival. All covenants, agreements, representations and warranties
made herein shall survive the making by the Lenders of the Loans and the
execution and delivery to the Lenders of this
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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.
10.6. 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, 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 gross 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 3.1, which tax would be payable to Lenders
by Borrower pursuant to Article III, (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 Short Term Credit Termination Date.
10.7. Amendments and Waivers. Any provision of this Agreement or any other
Loan Document may be amended or waived if, but only if, such amendment or waiver
is in writing and is signed by the Borrower and the Required Lenders (and, if
Article IX or the rights or duties of the Agent are affected thereby, by the
Agent); provided that no such amendment or waiver shall, unless signed by all
the Lenders, (i) increase the Short Term Credit Commitments of the Lenders, (ii)
reduce the principal of or rate of interest on any Loan or any fees or other
amounts payable hereunder, (iii) postpone any date fixed for the payment of any
scheduled installment of principal of or interest on any Loan or any fees or
other amounts payable hereunder or for termination of any Short Term Credit
Commitment, (iv) change the percentage of the Short Term Credit Commitments or
of the unpaid principal amount of the Notes, or the percentage of Lenders that
constitute Required Lenders or (v) amend the definition of "Required Lenders" or
amend Section 10.15.
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10.8. 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.
10.9. 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.
10.10. 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, 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.
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10.11. 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.
10.12. Indemnification. In consideration of the execution and delivery of
this Agreement by the Agent and each Lender and the extension of the Short Term
Credit 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;
(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,
except for any such Indemnified Liabilities arising for the account of a
particular Indemnified Party by reason of the relevant Indemnified Party's gross
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 10.12 shall survive the Short Term Credit Termination
Date.
10.13. 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.
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10.14. 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.
10.15. 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.
10.16. 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.
10.17. 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 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.
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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
By: /s/MALCOLM E. McVAY
---------------------------
Name: Malcolm E. McVay
Title: Vice President - Finance
Signature Page 1 of 5
<PAGE>
BANK OF AMERICA, N.A.
as Agent for the Lenders
By: /s/PHILIP S. DURAND
---------------------------
Name: Philip S. Durand
Title: Principal
BANK OF AMERICA, N.A.
By: /s/PHILIP S. DURAND
---------------------------
Name: Philip S. Durand
Title: Principal
Applicable Lending Office:
101 North Tryon Street, 15th Floor
Charlotte, North Carolina 28255
Wire Transfer Instructions:
Bank of America, N.A.
Charlotte, North Carolina
ABA #053000196
Account #136621-2250600
Attention: Credit Services
Reference: HEALTHSOUTH Corporation
Signature Page 2 of 5
<PAGE>
CITICORP USA, INC.
as Lender
By: /s/ JAMES J. McCARTHY
---------------------------
Name: James J. McCarthy
Title: Vice President
Applicable Lending Office:
399 Park Avenue
New York, New York 10043
Wire Transfer Instructions:
Citibank N.A.
New York, New York
ABA # 021-000-089
Account # 38460803
Attention: Alyssa Kawalek
Reference: HEALTHSOUTH Corporation
Signature Page 3 of 5
<PAGE>
THE INDUSTRIAL BANK OF JAPAN, LIMITED
as Lender
By: /s/ MINAMI MIURA
---------------------
Name: Minami Miura
Title: Vice President
Applicable Lending Office:
1251 Avenue of the Americas
New York, New York 10020
Wire Transfer Instructions:
The Industrial Bank of Japan, Limited, New York Branch
New York, New York
ABA # 026-008-345
Attention: Credit Administration
Reference: HEALTHSOUTH Corporation
Signature Page 4 of 5
<PAGE>
UBS AG, STAMFORD BRANCH
as Lender
By: /s/ROBERT H. RILEY III
------------------------
Name: Robert H. Riley III
Title: Executive Director
By: /s/WILFRED SAINT
------------------------
Name: Wilfred Saint
Title: Associate Director
Loan Portfolio Support, US
Applicable Lending Office:
677 Washington Boulevard
Stamford, Connecticut 06901
Wire Transfer Instructions:
UBS AG, Stamford Branch
Stamford, Connecticut
ABA # 026-007-993
Account # 101-WA-894001-001
Attention: Philip M. FitzGerald
Reference: HEALTHSOUTH Corporation
Signature Page 5 of 5
<PAGE>
EXHIBIT A
Applicable Commitment Percentages
<TABLE>
<CAPTION>
Applicable
Short Term Credit Commitment
Lender Commitment Percentage
- ------ ----------------- --------------
<S> <C> <C>
Bank of America, N.A. $ 48,118,867.00 19.247546800%
CitiCorp USA, Inc. $100,000,000.00 40.000000000%
UBS AG, Stamford Branch $ 76,881,133.00 30.752453200%
The Industrial Bank of Japan, Limited $ 25,000,000.00 10.000000000%
--------------- -------------
$250,000,000.00 100%
</TABLE>
A-1
<PAGE>
EXHIBIT B
Form of Assignment and Acceptance
Reference is made to the Short Term Credit Agreement dated as of December 15,
1999 (the "Credit Agreement") among HEALTHSOUTH Corporation, a Delaware
corporation (the "Borrower"), the Lenders (as defined in the Credit Agreement),
Bank of America, N.A., as Administrative Agent for the Lenders (the "Agent") and
the Syndication Agent named therein. Terms defined in the Credit Agreement are
used herein with the same meaning.
The "Assignor" and the "Assignee" referred to on Schedule 1 agree as
follows:
1. The Assignor hereby sells and assigns to the Assignee, without recourse
and without representation or warranty except as expressly set forth herein, and
the Assignee hereby purchases and assumes from the Assignor, an interest in and
to the Assignor's rights and obligations under the Credit Agreement and the
other Loan Documents as of the date hereof equal to the percentage interest
specified on Schedule 1 of all outstanding rights and obligations under the
Credit Agreement and the other Loan Documents. After giving effect to such sale
and assignment, the Assignee's Short Term Credit Commitment and the amount of
the Loans owing to the Assignee will be as set forth on Schedule 1.
2. The Assignor (i) represents and warrants that it is the legal and
beneficial owner of the interest being assigned by it hereunder and that such
interest is free and clear of any adverse claim; (ii) makes no representation or
warranty and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with the Loan Documents
or the execution, legality, validity, enforceability, genuineness, sufficiency
or value of the Loan Documents or any other instrument or document furnished
pursuant thereto; (iii) makes no representation or warranty and assumes no
responsibility with respect to the financial condition of any Loan Party or the
performance or observance by any Loan Party of any of its obligations under the
Loan Documents or any other instrument or document furnished pursuant thereto;
and (iv) attaches the Note held by the Assignor and requests that the Agent
exchange such Note for a new Note payable to the order of the Assignee in an
amount equal to the Short Term Credit Commitment assumed by the Assignee
pursuant hereto and to the Assignor in an amount equal to the Short Term Credit
Commitment retained by the Assignor, if any, as specified on Schedule 1.
3. The Assignee (i) confirms that it has received a copy of the Credit
Agreement, together with copies of the financial statements referred to in
Section 6.1 thereof and such other documents and information as it has deemed
appropriate to make its own credit analysis and decision to enter into this
Assignment and Acceptance; (ii) agrees that it will, independently and without
reliance upon the Agent, the Assignor 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 the Credit
Agreement; (iii) confirms that it is an Eligible Assignee; (iv) appoints and
authorizes the Agent to take such action as agent on its behalf and to exercise
such powers and discretion under the Credit Agreement as are delegated to the
Agent by the terms thereof, together with such powers and discretion as are
reasonably incidental thereto; (v) agrees that it will perform in accordance
with their terms all of the obligations that by the terms of the Credit
Agreement are required to be performed by it as a Lender; and (vi) attaches any
U.S. Internal Revenue Service or other forms required under Section 3.6.
4. Following the execution of this Assignment and Acceptance, it will
be delivered to the Agent for acceptance and recording by the Agent. The
effective date for this Assignment and
B-1
<PAGE>
Acceptance (the "Effective Date") shall be the date of acceptance hereof by the
Agent, unless otherwise specified on Schedule 1.
5. Upon such acceptance and recording by the Agent, as of the Effective
Date, (i) the Assignee shall be a party to the Credit Agreement and, to the
extent provided in this Assignment and Acceptance, have the rights and
obligations of a Lender thereunder and (ii) the Assignor shall, to the extent
provided in this Assignment and Acceptance, relinquish its rights and be
released from its obligations under the Credit Agreement.
6. Upon such acceptance and recording by the Agent, from and after the
Effective Date, the Agent shall make all payments under the Credit Agreement and
the Notes in respect of the interest assigned hereby (including, without
limitation, all payments of principal, interest and commitment fees with respect
thereto) to the Assignee. The Assignor and Assignee shall make all appropriate
adjustments in payments under the Credit Agreement and the Notes for periods
prior to the Effective Date directly between themselves.
7. This Assignment and Acceptance shall be governed by, and construed in
accordance with, the laws of the State of North Carolina.
8. This Assignment and Acceptance may be executed in any number of
counterparts and by different 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. Delivery of an executed
counterpart of Schedule 1 to this Assignment and Acceptance by telefacsimile
shall be effective as delivery of a manually executed counterpart of this
Assignment and Acceptance.
IN WITNESS WHEREOF, the Assignor and the Assignee have caused Schedule 1 to
this Assignment and Acceptance to be executed by their officers thereunto duly
authorized as of the date specified thereon.
B-2
<PAGE>
SCHEDULE 1
to
ASSIGNMENT AND ACCEPTANCE
Percentage interest assigned: ________%
Assignee's Short Term Credit Commitment: $_______
Assignor's Short Term Credit Commitment $_______
Aggregate outstanding principal amount
of Loans assigned: $_______
Aggregate outstanding principal amount
of Loans retained by Assignor: $_______
Principal amount of Note payable
to Assignee: $_______
Principal amount of Note payable
to Assignor: $_______
Effective Date (if other than date
of acceptance by Agent): *_______, 200_
[NAME OF ASSIGNOR], as Assignor
By:_____________________________________
Title:
Dated: ___________________________, 200_
[NAME OF ASSIGNEE], as Assignee
By:_____________________________________
Title:
Applicable Lending Office:
B-3
<PAGE>
* This date should be no earlier than five Business Days after the delivery
of this Assignment and Acceptance to the Agent.
Accepted [and Approved] **
this ___ day of ___________, 20 _
BANK OF AMERICA, N.A.
By:_______________________________
Title:
[Approved this ____ day
of ____________, 200__
HEALTHSOUTH Corporation
By: ____________________]**
Title:
**Required if the Assignee is an Eligible Assignee solely by reason of clause
(iii) of the definition of "Eligible Assignee".
<PAGE>
EXHIBIT C
Notice of Appointment (or Revocation) of Authorized
Representative
Reference is hereby made to the Short Term Credit Agreement dated as of
December 15, 1999, as amended (the "Agreement"), among HEALTHSOUTH Corporation,
a Delaware corporation (the "Borrower"), the Lenders (as defined in the
Agreement), Bank of America, N.A., as Administrative Agent for the Lenders
("Agent") and the Syndication Agent named therein. Capitalized terms used but
not defined herein shall have the respective meanings therefor set forth in the
Agreement.
The Borrower hereby nominates, constitutes and appoints each individual
named below as an Authorized Representative under the Loan Documents, and hereby
represents and warrants that (i) set forth opposite each such individual's name
is a true and correct statement of such individual's office (to which such
individual has been duly elected or appointed), a genuine specimen signature of
such individual and an address for the giving of notice, and (ii) each such
individual has been duly authorized by the Borrower to act as Authorized
Representative under the Loan Documents:
Name and Address Office Specimen Signature
- ----------------- ------------------- -------------------
- -----------------
- -----------------
- ----------------- ------------------- -------------------
- -----------------
- -----------------
- ----------------- ------------------- -------------------
- -----------------
- -----------------
Borrower hereby revokes (effective upon receipt hereof by the Agent) the prior
appointment of ________________ as an Authorized Representative.
This the ___ day of __________________, 20__.
HEALTHSOUTH CORPORATION
By:__________________________
Name:________________________
Title:_______________________
C-1
<PAGE>
EXHIBIT D
Form of Borrowing Notice
To: Bank of America, N.A.,
as Agent
101 North Tryon Street, 15th Floor
NC1-001-15-04
Charlotte, North Carolina 28255
Attention: Agency Services
Telefacsimile: (704) 386-9923
Reference is hereby made to the Short Term Credit Agreement dated as of
December 15, 1999, as amended (the "Agreement"), among HEALTHSOUTH Corporation
(the "Borrower"), the Lenders (as defined in the Agreement), Bank of America,
N.A., as Administrative Agent for the Lenders ("Agent") and the Syndication
Agent named therein. Capitalized terms used but not defined herein shall have
the respective meanings therefor set forth in the Agreement.
The Borrower through its Authorized Representative hereby gives notice to
the Agent that Loans of the Type and amount set forth below be made on the date
indicated:
Type Loan Interest Aggregate
(check one) Period(1) Amount(2) Date of Loan(3)
--------- ------------------- ------------------ ------------
Base Rate
___
Eurodollar
Rate ___
- -----------------------
(1) For any Eurodollar Rate Loan, one, two, three or six months.
(2) Must be $5,000,000 or if greater an integral multiple of $1,000,000.
(3) At least three (3) Business Days later if a Eurodollar Rate Loan;
The Borrower hereby requests that the proceeds of Loans described in this
Borrowing Notice be made available to the Borrower as follows: [insert
transmittal instructions] .
The undersigned hereby certifies that:
1. No Default or Event of Default exists either now or after giving effect
to the borrowing described herein; and
2. All the representations and warranties set forth in Article V of the
Agreement and in the other Loan Documents (other than those expressly stated to
refer to a particular date) are true and correct as of the date hereof except
that the reference to the financial statements in Section 5.6(a) of the
Agreement are to those financial statements most recently delivered to you
pursuant to Section 6.1 of the Agreement (it being understood that any financial
statements delivered pursuant to Section 6.1(b) have not been certified by
independent public accountants).
D-1
<PAGE>
3. All conditions contained in the Agreement to the making of any Loan
requested hereby have been met or satisfied in full .
HEALTHSOUTH CORPORATION
BY: ___________________________________
Authorized Representative
DATE: _________________________________
D-2
<PAGE>
EXHIBIT E
Form of Interest Rate Selection Notice
To: Bank of America, N.A., as Agent
101 North Tryon Street, 15th Floor
NC1-001-15-04
Charlotte, North Carolina 28255
Attention: Agency Services
Telefacsimile: (704) 386-9923
Reference is hereby made to the Short Term Credit Agreement dated as of
December 15, 1999, as amended (the "Agreement"), among HEALTHSOUTH Corporation
(the "Borrower"), the Lenders (as defined in the Agreement), Bank of America,
N.A., as Administrative Agent for the Lenders ("Agent") and the Syndication
Agent named therein. Capitalized terms used but not defined herein shall have
the respective meanings therefor set forth in the Agreement.
The Borrower through its Authorized Representative hereby gives notice
to the Agent of the following selection of a type of Loan and Interest Period:
Type of Loan Interest Aggregate Date of
(check one) Period(1) Amount(2) Conversion(3)
--------- ------ ------ ----------
Loan
Base Rate Loan ___
Eurodollar Rate
Loan ___
- -----------------------
(1) For any Eurodollar Rate Loan one, two, three or six months.
(2) Must be $5,000,000 or if greater an integral multiple of $1,000,000.
(3) At least three (3) Business Days later if a Eurodollar Rate Loan.
HEALTHSOUTH CORPORATION
BY: ________________________
Authorized Representative
DATE: ______________________
E-1
<PAGE>
EXHIBIT F
Form of Note
Promissory Note
$______________ Birmingham, Alabama
December ___ , 1999
FOR VALUE RECEIVED, HEALTHSOUTH Corporation, a Delaware corporation having
its principal place of business located in Birmingham, Alabama (the "Borrower"),
hereby promises to pay to the order of
_______________________________________________ (the "Lender"), in its
individual capacity, at the office of BANK OF AMERICA, N.A., as Administrative
Agent for the Lenders (the "Agent"), located at One Independence Center, 101
North Tryon Street, NC1-001-15-04, Charlotte, North Carolina 28255 (or at such
other place or places as the Agent may designate in writing) at the times set
forth in the Short Term Credit Agreement dated as of December 15, 1999 among the
Borrower, the financial institutions party thereto, as amended (collectively,
the "Lenders"), the Agent and the Syndication Agent named therein (the
"Agreement" -- all capitalized terms not otherwise defined herein shall have the
respective meanings set forth in the Agreement), in lawful money of the United
States of America, in immediately available funds, the principal amount of
________________________________________ DOLLARS ($__________) or, if
less than such principal amount, the aggregate unpaid principal amount of all
Loans made by the Lender to the Borrower pursuant to the Agreement, and to pay
interest from the date hereof on the unpaid principal amount hereof, in like
money, at said office, on the dates and at the rates provided in Article II of
the Agreement. All or any portion of the principal amount of Loans may be
prepaid as provided in the Agreement.
If any amount payable under this Note is not paid when due, the then
remaining principal amount and accrued but unpaid interest shall bear interest
which shall be payable on demand at the rates per annum set forth in the proviso
to Section 2.2(a) of the Agreement. Further, in the event of such acceleration,
this Note shall become immediately due and payable, without presentment, demand,
protest or notice of any kind, all of which are hereby waived by the Borrower.
In the event this Note is not paid when due at any stated or accelerated
maturity, the Borrower agrees to pay, in addition to the principal and interest,
all costs of collection, including reasonable attorneys' fees, and interest due
hereunder thereon at the rates set forth above.
Interest hereunder shall be computed as provided in the Agreement.
This Note is one of the Notes referred to in the Agreement and is issued
pursuant to and entitled to the benefits of the Agreement to which reference is
hereby made for a more complete statement of the terms and conditions upon which
the Loans evidenced hereby were or are made and are to be repaid. This Note is
subject to certain restrictions on transfer or assignment as provided in the
Agreement.
F-1
<PAGE>
All Persons bound on this obligation, whether primarily or secondarily
liable as principals, sureties, guarantors, endorsers or otherwise, hereby waive
to the full extent permitted by law the benefits of all provisions of law for
stay or delay of execution or sale of property or other satisfaction of judgment
against any of them on account of liability hereon until judgment be obtained
and execution issues against any other of them and returned satisfied or until
it can be shown that the maker or any other party hereto had no property
available for the satisfaction of the debt evidenced by this instrument, or
until any other proceedings can be had against any of them, also their right, if
any, to require the holder hereof to hold as security for this Note any
collateral deposited by any of said Persons as security. Protest, notice of
protest, notice of dishonor, diligence, presentment or any other formality are
hereby waived by all parties bound hereon.
IN WITNESS WHEREOF, the Borrower has caused this Note to be made, executed
and delivered by its duly authorized representative as of the date and year
first above written, all pursuant to authority duly granted.
HEALTHSOUTH CORPORATION
By: ___________________________________
Name: _________________________________
Title: ________________________________
F-2
Exhibit 10.60
HEALTHSOUTH Corporation
1999 EXECUTIVE EQUITY LOAN PLAN
1. PURPOSE OF THE PLAN. The purpose of the 1999 Executive Equity Loan Plan
(the "Plan") of HEALTHSOUTH Corporation, a Delaware corporation (the
"Corporation"), is to provide incentive for future endeavor and to align the
interests of the Corporation's management and its stockholders by providing a
mechanism to enhance ownership of the Common Stock, par value $.01 per share
(the "Common Stock"), of the Corporation by its executives and other key
employees, upon whose judgment, interest and continuing special efforts the
Corporation is largely dependent for the successful conduct of its operations,
and to enable the Corporation to compete effectively with other enterprises for
the services of such new executives and employees as may be needed for the
continued improvement of the Corporation's business, through the making of loans
("Loans") to such executives and employees to purchase shares of the Common
Stock.
2. PARTICIPANTS. Loans may be made under the Plan to such executives and
key employees ("Participants") of the Corporation and its subsidiaries as shall
be determined by the Committee (as set forth in Section 5 of the Plan).
3. TERM OF THE PLAN. The Plan shall become effective as of May 20, 1999,
subject to the approval by the holders of a majority of the shares of issued and
outstanding Common Stock of the Corporation present in person or by proxy and
voting at the 1998 Annual Meeting of Stockholders of the Corporation. The Plan
shall terminate on the earlier of (a) May 19, 2009 or (b) such earlier time as
the Board of Directors of the Corporation may determine. Any Loan outstanding
under the Plan at the time of its termination shall remain in effect in
accordance with its terms and conditions and those of the Plan. No Loan shall be
made under the Plan after May 19, 2009.
4. LOANS UNDER THE PLAN. Loans may be made under the Plan in such amounts
are as approved by the Committee, provided that the maximum aggregate principal
amount of Loans outstanding under the Plan at any time shall not exceed
$50,000,000. If, on or prior to the termination of the Plan as provided in
Section 3, the principal amount of any Loan under the Plan shall have been
repaid in whole or in part, the principal amount so repaid shall again become
available for the making of Loans under the Plan, subject to the foregoing
limitation on the maximum aggregate principal amount outstanding at any time.
5. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Audit
and Compensation Committee of the Board of Directors of the Corporation (the
"Committee"). The acts of a majority of the Committee, at any meeting thereof at
which a quorum is present, or acts reduced to or approved in writing by a
majority of the members of the Committee, shall be the valid acts of the
Committee. The Committee shall determine the executives and key employees of the
Corporation and its subsidiaries who shall receive Loans and the principal
amount of each such Loan.
The interpretation and construction of any provision of the Plan or of any
Loan made under it by the Committee shall be final, conclusive and binding upon
all parties, including the Corporation, its stockholders and Directors, and the
executives and employees of the Corporation and its subsidiaries. No member of
the Board of Directors or the Committee shall be liable to the Corporation, any
stockholder or any employee of the Corporation or its subsidiaries for any
action or determination made in good faith with respect to the Plan or any Loan
made under it.
The Committee may delegate responsibility for all or part of the
administration of the Plan to appropriate officers of the Corporation; provided,
however, that no such officers shall have the power or authority to make Loans
under the Plan, amend, waive or modify any provision of the Plan or forgive any
Loans, in whole or in part, without the express approval of the Committee in
each case.
The expenses of administering the Plan shall be borne by the Corporation.
6. LOANS. (a) Loans may be made under the Plan by the Committee in
accordance with the provisions of Section 5 at any time prior to the termination
of the Plan. In making any determination as to executives and key employees to
whom Loans shall be made and as to the principal amount of such Loans, the
Committee shall take into account the duties of the respective executives and
key employees, their present and potential contribution to the success of the
Corporation, and such other factors as the Committee shall deem relevant in
connection with the accomplishment of the purposes of the Plan.
(b) Each Loan made under the Plan shall be granted pursuant to and subject
to the terms and conditions of a loan agreement to be entered into between the
Corporation and the Participant at the time of such grant. Each such loan
agreement shall be in a form from time-to-time adopted for use under the Plan by
the Committee (such form being hereinafter called a "Loan Agreement").
<PAGE>
Any such Loan Agreement shall incorporate by reference all of the terms and
provisions of the Plan as in effect at the time of grant and may contain such
other terms and provisions as shall be approved and adopted by the Committee.
7. CERTAIN CONDITIONS OF LOANS. Loans made under this Plan shall be subject
to the following terms and conditions:
(a) The proceeds of Loans may be used only for purchases of the Common
Stock in open-market transactions, block trades or negotiated transactions. Such
purchases must be effected through a broker approved by the Corporation.
(b) Loans shall have a maturity date of seven years from the date of the
Loan, subject to acceleration and termination as provided herein. Such maturity
date may be extended for up to one additional year by the Committee, acting in
its discretion. The unpaid principal balance of each Loan shall bear interest at
a rate equal to the effective interest rate on the average outstanding balance
under the Corporation's principal credit agreement for each calendar quarter,
adjustable as of the end of each calendar quarter, which effective interest rate
shall be determined by the Controller of the Corporation. Interest shall be
compounded annually. Subject to the terms and conditions set forth below,
repayment of principal and interest may be deferred until final maturity of the
Loan.
(c) Each Loan shall be secured by a pledge of all of the shares of Common
Stock purchased with the proceeds thereof ("Loan Shares"), pursuant to which the
Participant shall grant the Corporation a first priority lien on and security
interest in the Loan Shares. The Loan Shares may not be sold for one year after
the date on which they were acquired (the "Acquisition Date"). Thereafter,
one-third of the aggregate number of Loan Shares may be sold during each of the
second, third and fourth years after the Acquisition Date, with any unsold
portion carrying forward from year to year. The proceeds from any such sale must
be used to repay a percentage of the principal amount of the Loan equal to the
percentage of Loan Shares sold, less any amounts withheld for taxes (the
"Mandatory Prepayment Amount"). Any proceeds in excess of the Mandatory
Prepayment Amount shall be retained by the Participant.
(d) Notwithstanding any contrary provision in the Plan or any Loan
Agreement, a Loan shall immediately mature, and all principal and accrued but
unpaid interest thereon shall be due and payable, within 30 days after the
effective date of any termination of the Participant's employment by the
Corporation, whether voluntary or involuntary, or upon the death or disability
of the Participant. Without limiting the generality of the foregoing, the
Corporation may, but shall not be required to, repurchase the Loan Shares of a
Participant at such Participant's original acquisition cost if the Participant's
employment is terminated, voluntarily or involuntarily or by reason of death or
disability, within the first three years after the Acquisition Date, according
to the following schedule:
Percentage of Loan Shares
Year Beginning On Subject to Repurchase
--------------------- -------------------------
Acquisition Date 100%
First Anniversary of
the Acquisition Date 66 2/3%
Second Anniversary of
the Acquisition Date 33 1/3%
The terms of such repurchase shall be as set forth in the Loan Agreement.
In the event of any such repurchase, the purchase price of the shares so
repurchased shall be credited against the outstanding principal balance and
accrued but unpaid interest on the Loan, and the Participant shall be
responsible for the payment of any deficiency.
(e) Each certificate evidencing Loan Shares shall be registered in the name
of the Participant, and shall bear a legend in substantially the following form:
"The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions of the 1999
Executive Equity Loan Plan of HEALTHSOUTH Corporation and a Loan Agreement
entered into between the registered owner and HEALTHSOUTH Corporation.
Copies of such Plan and Loan Agreement are on file in the offices of the
Secretary of HEALTHSOUTH Corporation."
(f) The Committee may adopt rules which provide that the stock certificates
evidencing Loan Shares may be held in custody by a bank or other institution, or
that the Corporation may itself hold such shares in custody until the
restrictions thereon shall have lapsed, and may require as a condition of any
Loan that the participant shall have delivered a stock power endorsed in blank
relating to the Loan Shares.
(g) Loans shall be made with full recourse, and each Participant shall be
required to repay all principal and accrued but unpaid interest upon the
maturity of the Loan (or its earlier acceleration or termination), irrespective
of whether the Participant
<PAGE>
has sold Loan Shares or whether the proceeds of any such sale were sufficient to
repay all principal and interest with respect to the Loan. If, at any time, the
Committee determines in its reasonable discretion that the value of the Loan
Shares pledged as security for the Loan is less than the indebtedness evidenced
by the Loan, the Committee shall require the Participant to post additional
security (which may be shares of Common Stock or other collateral acceptable to
the Committee, in its reasonable discretion) in an amount sufficient to fully
secure the indebtedness of the Loan.
8. CERTAIN RIGHTS OF PARTICIPANTS. Notwithstanding any contrary provision
of the Plan or any Loan Agreement, a participant holding Loan Shares shall be
entitled to the following rights:
(a) A participant shall have with respect to Loan Shares all of the rights
of a stockholder of the Corporation, including the right to vote such shares and
receive dividends and other distributions thereon.
(b) Unless otherwise expressly provided in the Loan Agreement, any
restrictions on a participant's ability to sell any of the Loan Shares pursuant
to Section 7(c) shall terminate upon the occurrence of a Change in Control of
the Corporation. For purposes of this Section 8(b), "Change in Control" shall
mean
(i) the acquisition (other than from the Corporation) by any person,
entity or "group" (within the meaning of Sections 13(d)(3) or 14(d)(2) of
the Securities Exchange Act of 1934, but excluding, for this purpose, the
Corporation or its subsidiaries, or any employee benefit plan of the
Corporation or its subsidiaries which acquires beneficial ownership of
voting securities of the Corporation) of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Securities Exchange Act of
1934) of 25% or more of either the then-outstanding shares of Common Stock
or the combined voting power of the Corporation's then-outstanding voting
securities entitled to vote generally in the election of Directors; or
(ii) individuals who, as of May 20, 1999, constitute the Board of
Directors of the Corporation (as of such date, the "Incumbent Board") cease
for any reason to constitute at least a majority of the Board of Directors;
provided, however, that any person becoming a Director subsequent to such
date whose election, or nomination for election, was approved by a vote of
at least a majority of the Directors then constituting the Incumbent Board
(other than an election or nomination of an individual whose initial
assumption of office is in connection with an actual or threatened election
contest relating to the election of Directors of the Corporation) shall be,
for purposes of this Section 8(b), considered as though such person were a
member of the Incumbent Board; or
(iii) approval by the stockholders of the Corporation of a
reorganization, merger, consolidation or share exchange, in each case with
respect to which persons who were the stockholders of the Corporation
immediately prior to such reorganization, merger, consolidation or share
exchange do not, immediately thereafter, own more than 75% of the combined
voting power entitled to vote generally in the election of directors of the
reorganized, merged, consolidated or other surviving entity's
then-outstanding voting securities, or a liquidation or dissolution of the
Corporation or the sale of all or substantially all of the assets of the
Corporation.
Notwithstanding the foregoing, however, the pledge of the Loan Shares shall
continue in full force and effect until such time as all principal and accrued
but unpaid interest under the Loan has been repaid.
9. NO RIGHT OF CONTINUED EMPLOYMENT. Nothing in the Plan or in the Loan
Agreement shall confer upon any participant the right to continue in the employ
of the Corporation or any of its subsidiaries or in any other relationship
thereto or interfere in any way with the right of the Corporation to terminate
such employment or other relationship at any time.
10. AMENDMENT OF THE PLAN. The Plan may, at any time or from time to time,
be terminated, modified or amended by the stockholders of the Corporation by the
affirmative vote of the holders of a majority of the outstanding shares of the
Corporation's Common Stock present in person or by proxy and entitled to vote at
a meeting of the Corporation's stockholders duly called and held (or, to the
extent permitted by law, by written consent of the holders of a majority of the
outstanding shares of the Corporation's Common Stock entitled to vote). The
Board of Directors of the Corporation may, insofar as permitted by law, from
time to time suspend or discontinue the Plan or revise or amend it in any
respect whatsoever; provided, however, that, without approval of the
stockholders of the Corporation, no such revision or amendment shall increase
the maximum aggregate principal amount of Loans made under the Plan.
11. CHANGES IN LAW. Subject to the provisions of Section 10, the Board of
Directors shall have the power to amend the Plan and any outstanding Loans
granted thereunder in such respects as the Board of Directors shall, in its sole
discretion, deem advisable in order to incorporate in the Plan or any such Award
any new provision or change designed to comply with or take advantage of
requirements or provisions of the Internal Revenue Code of 1986, as amended, or
any other statute, or Rules or Regulations of the Internal Revenue Service or
any other Federal or state governmental agency enacted or promulgated after the
adoption of the Plan.
<PAGE>
12. LEGAL MATTERS. Every right of action by or on behalf of the Corporation
or by any stockholder against any past, present or future member of the Board of
Directors, officer or employee of the Corporation arising out of or in
connection with this Plan shall, irrespective of the place where such action may
be brought and irrespective of the place of residence of any such Director,
officer or employee, cease and be barred by the expiration of three years from
whichever is the later of (a) the date of the act or omission in respect of
which such right of action arises, or (b) the first date upon which there has
been made generally available to stockholders an annual report of the
Corporation and a proxy statement for the Annual Meeting of Stockholders
following the issuance of such annual report, which annual report and proxy
statement alone or together set forth, for the related period, the aggregate
number of shares for which Awards were granted; and any and all right of action
by any employee or executive of the Corporation (past, present or future)
against the Corporation arising out of or in connection with this Plan shall,
irrespective of the place where such action may be brought, cease and be barred
by the expiration of three years from the date of the act or omission in respect
of which such right of action arises.
This Plan and all determinations made and actions taken pursuant hereto
shall be governed by the law of Delaware, applied without giving effect to any
conflicts-of-law principles, and construed accordingly.
EXHIBIT 21
SUBSIDIARIES OF
HEALTHSOUTH CORPORATION
(State of Incorporation)(States Where Qualified)
Advantage Health Corporation (DE) (CT)(FL)(MA)(ME)(PA)(VT)
Advantage Health Development Corp. (MA)
Advantage Health Harmarville Rehabilitation Corporation (PA)
Advantage Health Nursing Care, Inc. (MA)
Advantage Rehabilitation Clinics, Inc. (MA) (CT)(DE)(ME)(NJ)(NY)
Advantage Beverly Corporation (MA) (51%)
Advantage Health Eastern Rehabilitation Network, Inc. (CT)
PTSMA, 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) (CT) (96.8%)
Special Care Certified of Massachusetts, Inc. (MA) (NH)
Special Care Home Health Services of Connecticut, Inc. (CT)
Special Care Home Health Services of Maine, Inc. (ME)
Special Care Nursing Services, Inc. (MA) (CT)(IL)(KS)(KY)
(ME)(MO)(OH)(OK)(TX)(VT)(WI)
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) (CT)(MA)(ME)(NY)(PA)(VT)
New England Rehabilitation Services of Central Massachusetts, Inc.
(MA) (33-1/3%)
Winchester Gables, Inc. (MA) (51%)
ASC Network Corporation (DE) (AL)(CA)(CT)(FL)(IL)(IN)(NJ)(NY)(PA)(TX)
Castro Valley Surgery Center, Inc. (CA)
Day SurgiCenters, Inc. (IL)
Diversified Health Centers, Inc. (CA)
Fort Wayne Care Center, Inc. (DE) (IN)
Loyola Ambulatory Surgery Center at Oakbrook, Inc. (IL)
Palm Desert Care Center, Inc. (DE) (CA)
Premier Ambulatory Surgery of Blackhawk, Inc. (CA)
Premier Ambulatory Surgery of Duncanville, Inc. (DE) (TX)
Premier Ambulatory Surgery of Forest Park, Inc. (TX)
Premier Ambulatory Surgery of Garland, Inc. (DE) (TX)
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)
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)
<PAGE>
CMS Capital Ventures, Inc. (DE) (CA)(FL) (15% ownership)
Diagnostic Health Corporation (DE) (AL)(AZ)(CA)(CO)(DC)(FL)(GA)(IA)(IL)(IN)(LA)
(MA)(MD)(MO)(NC)(NJ)(NM)(NV)(OK)(PA)(SC)(TN)(TX)(UT)(VA)
Health Images Aurora North, Inc. (GA) (Shell)
Health Images Aurora South, Inc. (GA) (Shell)
Health Images Baton Rouge North, Inc. (GA) (Shell)
Health Images Baton Rouge South, Inc. (GA) (Shell)
Health Images Beaumont, Inc. (GA) (Shell)
Health Images Birmingham, Inc. (GA) (Shell)
Health Images Colorado, Inc. (GA) (Shell)
Health Images Columbia, Inc. (GA) (Shell)
Health Images Dallas, Inc. (GA) (Shell)
Health Images Denver, Inc. (GA) (Shell)
Health Images Greenville, Inc. (GA) (Shell)
Health Images Huntsville, Inc. (GA) (Shell)
Health Images Knoxville, Inc. (GA) (Shell)
Health Images Nashville, Inc. (GA) (Shell)
Health Images Orange Park, Inc. (GA) (Shell)
Health Images Port Arthur, Inc. (GA) (Shell)
Health Images Stratford, Inc. (GA) (Shell)
Health Images Tulsa, Inc. (GA) (Shell)
Health Images (UK) plc (UK)
HEALTHSOUTH ASC of Houston, Inc. (DE) (TX)
HEALTHSOUTH Diagnostic Centers, Inc. (AK) (AL)
Disability and Impairment Evaluation Centers of America, Inc. (DE) (TX)(LA)(OK)
DIECA, Inc. (DE) (LA)
Doty-Moore Tower Services, Inc. (TX) (NV)
Encinitas Physical Therapy and Sports Rehabilitation, Inc. (CA)
Flatirons Physical Therapy, Inc. (CO)
HEALTHSOUTH Aviation, Inc. (AL)
HEALTHSOUTH Community Re-Entry Center of Dallas, Inc. (DE) (TX)
HEALTHSOUTH Doctors' Hospital, Inc. (DE) (FL)
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) (AL)(AR)(CT)(DC)(GA)(IL)(IA)(IN)(KY)(LA)
(MA)(MD)(ME)(MS)(MO)(NE)(NH)(NV)(NJ)(NC)(NY)(OK)(PA)(RI)(SC)(SD)
(TN)(VA)(VT)(WA)(WI)(WV)
Delaware Sportscare/Physical Therapy, Inc. (DE)
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 Connecticut, prn, Inc. (CT)
HEALTHSOUTH International, Inc. (DE) (AL)(AU)
HEALTHSOUTH IMC, Inc. (DE) (AK)(AR)(AZ)(CT)(FL)(IN)(IA)(KS)(LA)(MD)(MO)(NC)
(NJ)(NM)(NY)(OH)(PA)(RI)(TN)(UT)(VA)
HEALTHSOUTH Medical Center, Inc. (AL)
HEALTHSOUTH Medical Clinic, Inc. (DE) (AK)(AL)(FL)(GA)(IA)(IL)(IN)(KY)(LA)(MA)
(MD)(MO)(NE)(NV)(OK)(PA)(SD)(TN)(VA)(VT)
HEALTHSOUTH Network Services, Inc. (DE) (AL)(AZ)(CA)(CO)(CT)(DC)(FL)(GA)(HI)(IL)
(IN)(KS)(LA)(MA)(MD)(MO)(NC)(NE)(NH)(NJ)(NV)(NY)(OH)(OR)(PA)(TN)(TX)(VA)(WA)
(WY)
HEALTHSOUTH Network Services of New York IPA, Inc. (NY)
HEALTHSOUTH Occupational Health & Injury
<PAGE>
Management of Colorado, Inc. (DE) (CO)
HEALTHSOUTH Occupational Health & Rehabilitation Center, Inc. (DE) (FL)
HEALTHSOUTH of Altoona, Inc. (DE) (MD)(PA)(WV)
HEALTHSOUTH of Austin, Inc. (DE) (TX)
HEALTHSOUTH of Birmingham, Inc. (DE) (AL)
HEALTHSOUTH of Charleston, Inc. (DE) (SC)
HEALTHSOUTH of Chesapeake, Inc. (DE) (MD)
HEALTHSOUTH of Columbia, Inc. (DE) (MO)
HEALTHSOUTH of Dallas, Inc. (DE) (TX)
HEALTHSOUTH of Dothan, Inc. (AL)
HEALTHSOUTH of East Tennessee, Inc. (DE) (TN)
HEALTHSOUTH of Erie, Inc. (DE) (OH)(PA)
HEALTHSOUTH of Fort Smith, Inc. (DE) (AR)(OK)
HEALTHSOUTH of Gadsden, Inc. (DE) (AL)
HEALTHSOUTH of Goshen, Inc. (DE)(NY)
HEALTHSOUTH of Houston, Inc. (DE) (TX)
HEALTHSOUTH of Louisiana, Inc. (DE) (LA)
HEALTHSOUTH of Mechanicsburg, Inc. (DE) (PA)
HEALTHSOUTH of Michigan, Inc. (DE) (MI)
HEALTHSOUTH of Middle Tennessee, Inc. (DE) (TN)
HEALTHSOUTH of Midland, Inc. (DE) (TX)
HEALTHSOUTH of Missouri, Inc. (DE) (MO)
HEALTHSOUTH of Montgomery, Inc. (AL)
HEALTHSOUTH of Naples, Inc. (FL)
HEALTHSOUTH of New Hampshire, Inc. (DE) (NH)
HEALTHSOUTH of New Mexico, Inc. (NM)
HEALTHSOUTH of Nittany Valley, Inc. (DE) (PA)
HEALTHSOUTH of Oklahoma, Inc. (DE) (OK)
HEALTHSOUTH of Ontario, Inc. (DE) (Canada) (BC) (Ont.) (Que.)
HEALTHSOUTH of Pittsburgh, Inc. (DE) (PA)
HEALTHSOUTH of Reading, Inc. (DE) (PA)
HEALTHSOUTH of Salem, Inc. (DE) (NH)
HEALTHSOUTH of San Antonio, Inc. (DE) (TX)
HEALTHSOUTH of Sewickley, Inc. (DE) (PA)
HEALTHSOUTH of South Carolina, Inc. (DE) (SC)
HEALTHSOUTH of Spring Hill, Inc. (DE) (FL)
HEALTHSOUTH of St. Joseph, Inc. (DE) (MO)
HEALTHSOUTH of Texarkana, Inc. (DE) (TX)(LA)
HEALTHSOUTH of Texas, Inc. (TX)
HEALTHSOUTH of Toms River, Inc. (DE) (NJ)
HEALTHSOUTH of Treasure Coast, Inc. (DE) (FL)
HEALTHSOUTH of Utah, Inc. (DE) (UT)
HEALTHSOUTH of Virginia, Inc. (DE) (VA)
HEALTHSOUTH of Witchita, Inc. (DE) (KS)
HEALTHSOUTH of York, Inc. (DE) (PA)
HEALTHSOUTH Orthopedic Services, Inc. (DE) (AL)(CA)(CO)(FL)(IL)(MD)(MO)(NJ)
(NC)(OH)(OR)(PA)(SC)(TX)(WA)(WI)
Northwestern Memorial/HEALTHSOUTH Sports Medicine & Rehabilitation
Center, Inc. (IL) (50%)
HEALTHSOUTH Properties Corporation (DE) (AL)(AZ)(CA)(FL)(IN)(KY)(NM)(OH)
(TN)(TX)(WV)
HEALTHSOUTH Real Property Holding Corporation (DE) (AL)(AZ)(FL)(NC)(TX)
HEALTHSOUTH Rehabilitation Center, Inc. (SC)
HEALTHSOUTH Specialty Hospital, Inc. (TX)
HEALTHSOUTH Sub-Acute Center of Houston, Inc. (DE) (TX)
HEALTHSOUTH Sub-Acute Center of Mechanicsburg, Inc. (DE) (PA)
HEALTHSOUTH Surgery Centers-West, Inc. (DE) (AL)(AZ)(CA)(UT)
<PAGE>
HEALTHSOUTH Salt Lake Surgical Center, Inc. (DE) (UT)
HEALTHSOUTH Surgical Center of Tuscaloosa, Inc. (AL)
Horizon/CMS Healthcare Corporation (DE) (CA)(CO)(CT)(FL)(ID)(KS)(LA)(MD)(MA)(MI)
(MT)(NE)(NV)(NM)(NC)(OH)(OK)(PA)(TX)(VA)(WI)
Continental Medical Systems, Inc. (DE) (CA)(MD)(PA)(TX)
Central Arizona Rehabilitation Hospital, Inc. (DE) (AZ)
Central Arkansas Outpatient Centers, Inc. (DE) (AR)
Chandler Rehabilitation Hospital, Inc. (DE) (AZ)
Chico Rehabilitation Hospital, Inc. (DE) (CA)
Clear Lake Rehabilitation Hospital, Inc. (TX)
CMS Administrative Services, Inc. (DE) (CO)
CMS Alexandria Rehabiliation, Inc. (DE) (LA)
CMS Baton Rouge Rehabilitation, Inc. (DE) (LA)
CMS Beaumont Rehabilitation, Inc. (TX)
The Kelton Corporation (MA) (RI)
Braintree Rehabilitation Ventures, Inc. (MA)
KBT Corporation (MA)
CMS Denver Rehabilitation, Inc. (DE) (CO)
CMS Development and Management Company, Inc. (DE) (IN)(KS)(NV)
(PA)(TX)
CMS Elizabethtown, Inc. (DE) (KY)
CMS Fayetteville Rehabilitation, Inc. (DE) (AR)
CMS Fort Worth Rehabilitation, Inc. (TX)
CMS Fresno Rehabilitation, Inc. (DE) (CA)
CMS Houston Rehabilitation, Inc. (TX)
CMS Jonesboro Rehabilitation, Inc. (DE) (AR)
CMS Kansas City Rehabilitation, Inc. (DE) (KS)
CMS Outpatient Centers of North Texas, Inc. (DE) (TX)
CMS Outpatient Centers of South Texas, Inc. (DE) (TX)
CMS Outpatient Rehabilitation Services, Inc. (DE) (CO)
CMS Pennsylvania, Inc. (DE) (PA)
CMS Physician Services, Inc. (DE)
CMS of Ohio, Inc. (DE) (OH)
CMS Rehab Technologies Corp. (DE) (CA)
CMS Rehabilitation Center of Hialeah, Inc. (DE) (FL)
CMS Ruston Rehabilitation, Inc. (DE) (LA)
CMS San Diego Rehab, Inc. (DE) (CA)
CMS San Diego Surgical, Inc. (DE) (CA)
CMS Sherwood Rehabilitation, Inc. (DE) (AR)
CMS South Miami Rehab, Inc. (DE) (FL)
CMS Sportsmed Clinic, Inc. (DE) (CA)
CMS Topeka Rehabilitation, Inc. (DE) (KS)
CMS Tri-Cities Rehabilitation Hospital, Inc. (DE) (TN)
CMS Wichita Rehabilitation, Inc. (DE) (KS)
CMS WorkAble, Inc. (DE) (AZ)(CA)(LA)(TX)
CMS WorkAble of Paragould, Inc. (DE) (AR)
CMS Worknet of Baton Rouge, Inc. (DE) (LA)
CMSI Systems of Texas, Inc. (TX)
Colorado Outpatient Centers, Inc. (DE) (CO)
Continental Medical of Arizona, Inc. (DE) (AZ)
Continental Medical of Colorado, Inc. (DE) (CO)
Continental Medical Systems of Florida, Inc. (FL)
Continental Medical of Kentucky, Inc. (DE) (KY)
Continental Medical of Palm Beach, Inc. (DE) (FL)
Continental Rehab of W.F., Inc. (TX)
Continental Rehabilitation Hospital of Arizona, Inc. (DE) (AZ)
Contra Costa Rehab Clinic, Inc. (DE)
Fairland Nursing and Retirement Home, Inc. (DE) (MD)
<PAGE>
Great Plains Rehabilitation Hospital, Inc. (DE) (KS)
HCA Wesley Rehabilitation Clinic of Liberal, Inc. (DE) (KS)
HCA Wesley Rehabilitation Hospital, Inc. (DE) (KS)
Hialeah Convalescent Centers, Inc. (FL)
Indiana Outpatient Centers, Inc. (DE) (IN)
Innovative Health Alliances, Inc. (DE) (FL)(IN)(KS)(KY)(MO)
(TN)(TX)
K.C. Rehabilitation Hospital, Inc. (DE) (KS)(MO)
Kansas Outpatient Centers, Inc. (DE) (KS)
Kansas Rehabilitation Hospital, Inc. (DE) (KS)
Kentfield Hospital Corporation (CA)
Kokomo Rehabilitation Hospital, Inc. (DE) (IN)
Lafayette Rehabilitation Hospital, Inc. (DE) (LA)
Louisiana Outpatient Centers, Inc. (DE) (LA)
Maryland Rehabilitation Hospital, Inc. (DE)
Medical Management Associates, Inc. (CA)
Mancor Medical Management Company, Inc. (CA)
Mid-America Outpatient Centers, Inc. (DE) (KS)
National Physicians Equity Corporation (CA)
Nevada Rehabilitation Hospital, Inc. (DE) (NV)
North Louisiana Rehabilitation Center, Inc. (LA)
Northeast Arkansas Rehabilitation Unit, Inc. (AR)
Northeast Oklahoma Rehabilitation Hospital, Inc. (DE) (OK)
Northern Virginia Rehabilitation Hospital, Inc. (DE) (VA)
The Nursing Home at Chevy Chase, Inc. (DE) (MD)
Palm Springs Rehabilitation Hospital, Inc. (DE) (CA)
Park Manor Nursing Home, Inc. (DE) (NJ)
RCM Management Company, Inc. (DE) (MA)
Rehab Concepts Corp. (DE) (CA)(FL)(IN)(LA)(NV)(OK)(TX)
Rehab Resources, Inc. (DE) (CT)(NJ)(NY)
Rehabilitation Hospital of Colorado Springs, Inc. (DE) (CO)
Rehabilitation Hospital of Fort Wayne, Inc. (DE) (IN)
Rehabilitation Hospital of Nevada - Las Vegas, Inc. (DE) (NV)
Rehabilitation Hospital of Plano, Inc. (TX)
Romano Rehabilitation Hospital, Inc. (TX)
SD Acquisition Corporation (DE) (CA)
SD Partners, Inc. (DE)
SelectRehab, Inc. (DE) (AZ)(AR)(CA)(CT)(FL)(IN)(LA)(MD)(MI)
(MS)(NM)(OH)(OK)(PA)(TN)(TX)
Sherwood Rehabilitation Hospital, Inc. (DE) (AR)
Sierra Pain and Occupational Rehabilitation Center, Inc.
(DE)(NV)
Southeast Texas Rehabilitation Hospital, Inc. (TX)
Tarrant County Rehabilitation Hospital, Inc. (TX)
Terre Haute Rehabilitation Hospital, Inc. (DE) (IL)(IN)
Texas Hospital Partners, Inc. (DE)
Tulsa Rehabilitation Hospital, Inc. (DE) (OK)
Tyler Rehabilitation Hospital, Inc. (TX)
Western Neuro Care, Inc. (DE) (CA)
Western Neurologic Residential Centers (CA)
Western Neuro Residential, Inc. (DE) (CA)
Wichita Falls Rehabilitation Hospital, Inc. (TX)
Wilson Lane Holdings, Inc. (DE)
Desert Corporation (NV)
Eagle Rehab Corporation (DE) (AZ)(AR)(CA)(CO)(FL)(IL)(IN)(KS)(LA)(MD)
(MI)(MS)(NV)(OH)(OR)(PA)(TX)(VA)(WA)
Fankhauser Physical Therapy Orthopedic & Sports
Rehabilitation, Inc. (WA)
Northwestern Sports Clinic, Inc. (WA)
Physical Therapy & Athletic Rehabilitation Associates, Inc.
(WA)
<PAGE>
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) (MS)(OR)
(WA)
Dade Physical Therapy Rehab, Inc. (FL)
Leeward Back and Neck, Inc. (HI)
Longview Physicians Physical Therapy Service, Inc.
(WA)
Pacific Rehab of Alabama, Inc. (AL)
Pacific Rehab of Mississippi, Inc. (MS)
PR Acquisition Corporation (CA) (NV)
The Rehab Group, Inc. (TN) (AL)(AR)(GA)(KY)(MS)(VA)
The Rehab Clinic Richmond, Inc. (VA)
The Rehab Group - Brunswick, Inc. (TN)
Swanson Sports Training & Physical Therapy, Inc. (TN)
Eagle Rehab Corporation (WA) (WA) (ID)
Great Eastern Nursing Corp. (TX) (NJ)
Greenery Securities Corp. (DE) (MA)
HHC Acquisition Corp. (DE) (NM)(TX)
HHC Nursing Facilities, Inc. (DE) (ID)(NM)(OK)(TX)
Home Care Management Corp. (NV)
Home Health Associates, Inc. (NV)
Horizon Assisted Living Services, Inc. (DE) (TX)
Horizon Facilities Management, Inc. (DE) (MI)(OK)(TX)
Horizon Holding, Inc. (DE) (KS)(NM)
Horizon Hospice Care, Inc. (DE) (LA)(MA)(MI)(NV)(NM)(NC)(OH)(OK)(PA)
(TX)
Horizon Management Holding, Inc. (DE) (NM)
Horizon Medical Management, Inc. (DE) (FL)
Orthopaedic Associates of Broward, Inc. (FL)
Horizon Medical Specialties, Inc. (DE) (AR)(FL)(KY)(LA)(MA)(MI)(MT)(NV)
(NM)(OH)(TN)(TX)
Horizon MDS Corporation (DE) (NV)(NM)
Horizon Sleep Diagnostics Corporation (DE) (NV)(NM)(TN)(TX)
Horizon Therapy Holdings, Inc. (DE)
CMS Therapies Provider, Inc. (NC) (AL)(AR)(CA)(FL)(GA)(IL)(IN)
(IA)(KS)(KY)(LA)(MD)(MI)(MS)(MO)(OH)(PA)(SC)(TN)(TX)
(VA)(WI)
Baton Rouge Rehab, Inc. (DE) (LA)(MS)
Hospital HomeCare Corporation (TX)
Intra-City Enterprises, Inc. (OH)
Medical Innovations, Inc. (DE) (AL)(AR)(FL)(IL)(LA)(OK)(TX)
Medical Innovations (Texas), Inc. (TX)
Medical Innovations of New Jersey, Inc. (DE) (NJ)
Medical Innovations Hospice, Inc. (TX)
Medical Innovations of Virginia, Inc. (TX) (VA)
PRN Home Health Care, Inc. (NV) (CA)
Midwest Regional Rehabilitation Center, Inc. (DE) (MI)(NM)
Nevada Home Care Partners, Inc. (NV)
Northwest Arkansas Physical Therapy, Inc. (TN) (AR)
Nurses PRN of Virginia, Inc. (TX) (VA)
Nursing Innovations, Inc. (TX)
Orange Rehabilitation Hospital, Inc. (DE) (CA)
Physicians Hospital for Extended Care (NV)
Physician's Visiting Nurses Services, Inc. (TX)
San Jacinto Management Company (TX)
Southern Nevada Hospice, Inc. (NV)
Vegas Valley Convalescent Center, Inc. (NV)
The Hitchcock Groups, Inc. (IN)
<PAGE>
Lakeshore System Services of Florida, Inc. (FL)
MCA Sports of Amarillo, Inc. (TX)
National Imaging Affiliates, Inc. (DE) (TN)
Heritage Medical Services of South Carolina, Inc. (SC)
National Imaging Affiliates of Fayetteville, Inc. (TN) (NC)
(NIA is 80% stockholder)
National Imaging Affiliates of Indian River, Inc. (TN) (FL)
Heritage Medical Services of Florida, Inc. (FL)
National Imaging Affiliates of San Angelo, Inc. (TX)
National Imaging Affiliates of Washington, Inc. (TN) (WA)
NIA Cancer Treatment Center, Inc. (TN) (TX)
Paces Imaging, Inc. (GA)
National Surgery Centers, Inc. (DE) (IL)
Bettom Medical Management, Inc. (CT)
Connecticut Surgical Center, Inc. (CT)
Endoscopy Center Affiliates, Inc. (DE) (CA)(IL)(TX)
KPSC, Inc. (WA)
National Surgery Centers - Bakersfield, Inc. (CA)
National Surgery Centers - Santa Monica, Inc. (CA)
Northern Rockies Surgicenter, Inc. (MT)
Eye Microsurgery Center, Inc. (MT)
NSC Atlanta, Inc. (DE) (GA)
NSC Auburn, Inc. (CA)
NSC Brownsville, Inc. (TX)
NSC Channel Islands, Inc. (CA)
NSC Connecticut, Inc. (CT)
NSC Dallas, Inc. (TX)
NSC Edmond, Inc. (OK)
NSC Elizabethtown, Inc. (KY)
NSC Fayetteville, Inc. (NC)
NSC Greensboro, Inc. (NC)
NSC Greensboro West, Inc. (NC)
NSC Houston, Inc. (TX)
NSC Jacksonville, Inc. (FL)
NSC Kent, Inc. (OH)
NSC Lancaster, Inc. (CA)
NSC Las Vegas, Inc. (NV)
NSC Las Vegas East, Inc. (NV)
NSC Manahawkin, Inc. (NJ)
NSC Miami, Inc. (FL)
NSC Midwest City, Inc. (OK)
NSC Norman, Inc. (OK)
NSC Oklahoma City, Inc. (OK)
NSC Phoenix, Inc. (AZ)
NSC Port St. Lucie, Inc. (FL)
NSC Provo, Inc. (UT)
NSC Sarasota, Inc. (DE) (FL)
NSC Seattle, Inc. (WA)
NSC St. Augustine, Inc. (FL)
NSC Upland, Inc. (CA)
Walk-In And Out Surgery Center, Inc. (KY)
NovaCare SMC, Inc. (MD)
Orthopaedic Surgeons, Inc. (DE) (VA)
Physical Therapeutix, Inc. (MI)
Physician Practice Management Corporation (DE) (AL)(FL)(VA)
Professional Sports Care Management, Inc. (DE) (CT)(NJ)(NY)
Ortho Network Services, Inc. (NY)
<PAGE>
Professional Therapy Systems, Inc. (TN)
ReadiCare, Inc. (DE) (CA)
CHEC Medical Centers, Inc. (WA)
Rebound, Inc. (DE) (AL)(FL)(GA)(LA)(MO)(OH)(SC)(TN)(TX)(WV)
Rehabilitation Hospital Corporation of America, Inc. (DE) (IN)(MD)(PA)((TX)VA)
(WV)
Surgery Center Holding Corporation (DE) (IL)(NC)
Birmingham Outpatient Surgical Center, Inc. (AL)
Chiron, Inc. (NV)
HEALTHSOUTH S.C. of Charlotte, Inc. (DE) (NC)
HEALTHSOUTH S.C. of Greensboro, Inc. (DE) (NC)
HEALTHSOUTH S.C. of Hickory, Inc. (DE) (NC)
HEALTHSOUTH S.C. of Southern Pines, Inc. (DE) (NC)
Lakeland Physicians Medical Building, Inc. (MS)
Northwest Surgicare, Inc. (DE) (IL)
St. Cloud Surgical Center, Inc. (MN)
Surgery Center of Des Moines, Inc. (IA)
Surgicare of Belleville, Inc. (IL)
Surgicare of Gulfport, Inc. (MS)
Surgicare of Jackson, Inc. (MS)
Surgicare of Joliet, Inc. (IL)
Surgicare of Laguna Hills, Inc. (CA)
Surgicare of La Veta, Inc. (CA)
Surgicare of Minneapolis, Inc. (MN)
Surgicare of Mississippi, Inc. (MS)
Surgicare of Mobile, Inc. (AL)
Surgicare of Oceanside, Inc. (CA)
Surgicare of Orange, Inc. (CA)
Surgicare of Owensboro, Inc. (KY)
Surgicare of Reno, Inc. (NV)
Surgicare of Salem, Inc. (OR
Surgicare Outpatient Center of Baton Rouge, Inc. (LA)
SurgiCenters of Southern California, Inc. (CA)
Surgical Center of Wichita Falls, Inc. (TX)
Waco Outpatient Surgical Center, Inc. (TX)
Woodward Park Surgicenter, Inc. (CA)
Surgical Care Affiliates, Inc. (DE) (AL)(TN)(PA)
Alaska Surgery Center, Inc. (AK)
All-Care Surgery Center, Inc. (MD)
Aurora-SC, Inc. (CO)
Bakersfield-SC, Inc. (TN) (CA)
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) (FL)
El Paso-SC, Inc. (TX)
Fort Worth-SC, Inc. (TX)
Glenwood-SC, Inc. (TN) (CA)
Golden-SCA, Inc. (CO)
Greenpark Surgery Center, Inc. (TX)
Greenville Surgery Center, Inc. (TX)
HEALTHSOUTH-Montgomery, Inc. (TN) (OH)
HEALTHSOUTH Oak Leaf Surgery Center, Inc. (DE) (WI)
HEALTHSOUTH of Easton, Inc. (DE) (MD)
HEALTHSOUTH of Whitehall, Inc. (TN) (OH)
HEALTHSOUTH P.M.C. of Sacramento, Inc. (DE) (CA)
HEALTHSOUTH S.C. of Arrowhead Park, Inc. (DE) (OH)
<PAGE>
HEALTHSOUTH S.C. of Alhambra, Inc. (DE) (CA)
HEALTHSOUTH S.C. of Cape Girardeau, Inc. (DE) (MO)
Missouri Surgery Center, Inc. (MO)
HEALTHSOUTH S.C. of Cleveland, Inc. (DE) (OH)
HEALTHSOUTH S.C. of Colorado Springs, Inc. (DE) (CO)
HEALTHSOUTH S.C. of Columbus, Inc. (DE) (OH)
HEALTHSOUTH S.C. of D.C., Inc. (DE) (DC)
HEALTHSOUTH S.C. of East Rutherford, Inc. (DE)(NJ)
HEALTHSOUTH S.C. of Eldersburg, Inc. (DE) (MD)
HEALTHSOUTH S.C. of Ellicott City, Inc. (DE) (MD)
HEALTHSOUTH S.C. of Kendall, Inc. (DE) (FL)
HEALTHSOUTH S.C. of Kirkwood, Inc. (DE) (MO)
HEALTHSOUTH S.C. of Maui, L.P. (TN) (HI)
HEALTHSOUTH S.C. of Montgomery, Inc. (DE) (OH)
HEALTHSOUTH S.C. of Muskogee (DE) (OK)
HEALTHSOUTH S.C. of New Jersey, Inc. (DE) (NJ)
HEALTHSOUTH S.C. of Odessa, Inc. (DE) (TX)
HEALTHSOUTH S.C. of Park City, Inc. (DE) (UT)
HEALTHSOUTH S.C. of Pinole, Inc. (DE) (CA)
HEALTHSOUTH S.C. of Riverside, Inc. (DE) (CA)
HEALTHSOUTH S.C. of Riverton, Inc. (DE) (WY)
HEALTHSOUTH S.C. of San Angelo, Inc. (DE) (TX)
HEALTHSOUTH S.C. of San Marcos, Inc. (DE) (TX)
HEALTHSOUTH S.C. of Santa Monica, Inc. (DE) (CA)
HEALTHSOUTH S.C. of Scottsdale-Bell Road, Inc. (DE) (AZ)
HEALTHSOUTH S.C. of Tampa, Inc. (DE) (FL)
HEALTHSOUTH S.C. of Waco, Inc. (DE) (TX)
HEALTHSOUTH S.C. of Wilkes-Barre, Inc. (DE) (PA)
HEALTHSOUTH S.C. of Ygnacio Valley, Inc. (DE) (CA)
HEALTHSOUTH Surgery Center of Alamo Heights, Inc. (DE) (TX)
HEALTHSOUTH Surgery Center of Baltimore, Inc. (DE) (MD)
HEALTHSOUTH Surgery Center of Baton Rouge, Inc. (DE) (LA)
HEALTHSOUTH Surgery Center of Clearwater, Inc. (DE) (FL)
HEALTHSOUTH Surgery Center of Columbus, Inc. (DE) (OH)
HEALTHSOUTH Surgery Center of Crestview, Inc. (DE) (FL)
HEALTHSOUTH Surgery Center of Dayton, Inc. (DE) (OH)
HEALTHSOUTH Surgery Center of Fairfield, Inc. (DE)
HEALTHSOUTH Surgery Center of Kenosha, Inc. (DE) (WI)
HEALTHSOUTH Surgery Center of Louisville, Inc. (DE) (KY)
HEALTHSOUTH Surgery Center of Loveland, Inc. (DE) (CO)
HEALTHSOUTH Surgery Center of New Jersey, Inc. (DE) (NJ)
HEALTHSOUTH Surgery Center of Pecan Valley, Inc. (DE) (TX)
HEALTHSOUTH Surgery Center of Pinellas Park, Inc. (DE) (FL)
HEALTHSOUTH Surgery Center of Reading, Inc. (DE) (PA)
HEALTHSOUTH Surgery Center of San Buenaventura, Inc. (DE) (CA)
HEALTHSOUTH Surgery Center of Scottsdale, Inc. (DE) (AZ)
HEALTHSOUTH Surgery Center of Spokane, Inc. (DE) (WA)
HEALTHSOUTH Surgery Center of Springfield, Inc. (DE) (OH)
HEALTHSOUTH Surgery Center of Summerlin, Inc. (DE) (NV)
HEALTHSOUTH Surgery Center of Toledo, Inc. (DE) (OH)
HEALTHSOUTH Surgery Center of West Columbus, Inc. (DE)
HEALTHSOUTH Surgery Center of Westerville, Inc. (DE)
HEALTHSOUTH Surgery Center of Westlake, Inc. (DE) (OH)
HEALTHSOUTH Surgery Center of Wilmington, Inc. (DE)
Knoxville-SCA Surgery Center, Inc. (TN)
Lancaster Medical Centre, Inc. (PA)
Lancaster Surgical Center, Inc. (PA)
<PAGE>
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) (NC)
SCA Cabell Development Corporation (WV)
SCA Cabell, Inc. (WV)
SCA-Charleston, Inc. (SC)
SCA-Citrus, Inc. (TN) (FL)
SCA-Colorado Springs, Inc. (CO)
SCA-Conroe, Inc. (TN) (TX)
SCA-Dalton, Inc. (TN)
SCA-Development, Inc. (TN) (AL)(MO)
SCA-Dothan, Inc. (TN) (AL)
SCA-Dover, Inc. (DE)
SCA-Eugene, Inc. (TN) (OR)
SCA-Evansville, Inc. (IN)
SCA-Florence, Inc. (TN) (AL)
SCA-Fort Collins, Inc. (CO)
SCA-Fort Walton, Inc. (TN) (FL)
SCA-Ft. Myers, Inc. (FL)
SCA-Gadsden, Inc. (AL)
Gadsden Surgery Center, Inc. (AL)
SCA-Gainesville, Inc. (TN) (GA)
SCA-Green River, Inc. (TN) (WA)
SCA-Hamilton Development Corp. (TN)
SCA-HHI, Inc. (TN)
Health Horizons of San Francisco, Inc. (TN) (CA)
SCA-Greenville East, Inc. (TN) (SC)
SCA-Honolulu, Inc. (TN) (HI)
SCA-Indianapolis, Inc. (IN)
SCA Investment Company (NV)
SCA-JV, Inc. (IL) WI)
SCA-Knoxville/St. Mary's, Inc. (TN)
SCA-Lake Forest, Inc. (TN) (LA)
SCA-Little Rock Development Corp. (AR)
SCA-Mecklenberg Development Corp. (NC)
SCA-Mobile, Inc. (AL)
SCA-Mobile Properties, Inc. (AL)
SCA-Mt. Pleasant, Inc. (TN) (PA)
SCA-North Indianapolis, Inc. (IN)
SCA-Ohio Valley, Inc. (TN)
SCA-Paoli, Inc. (TN) (PA)
SCA-Plano, Inc. (TX)
SCA-Roseland, Inc. (NJ)
SCA-San Jose, Inc. (CA)
<PAGE>
SCA-San Luis Obispo, Inc. (CA)
SCA-Santa Rosa, Inc. (TN) (CA)(NV)
SCA-Sarasota, Inc. (FL)
SCA-Shelby Development Corp. (TN)
SCA-South Jersey, Inc. (NJ)
SCA-St. Joseph Missouri, Inc. (TN) (MO)
SCA-St. Petersburg, Inc. (FL)
SCA-Tampa, Inc. (FL)
SCA-Ukiah, Inc. (TN) (CA)
SCA-Wausau, Inc. (TN) (WI)
SCA-Winter Park, Inc. (TN) (FL)
SCA-Yuma, Inc. (TN) (AZ)
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) (AL)(ID)
Healthcare Real Estate Holdings II, Inc. (GA) (MO)
HEALTHSOUTH Salt Lake Surgical Center, Inc. (DE) (UT)
Heritage Medical Services of Maryland, Inc. (TN) (MD)
Heritage Medical Services of Texas, Inc. (TX)
Heritage Surgical Associates of Chula Vista, Inc. (CA)
HSC of Beaumont, Inc. (TN) (TX)
HSC of Boca Raton, Inc. (FL)
HSC of Bradenton, Inc. (TN) (FL)
HSC of Chesapeake, Inc. (TN)
HSC of Cincinnati, Inc. (TN) (OH)
HSC of Clarksville, Inc. (TN)
HSC of Ft. Pierce, Inc. (GA) (FL)
HSC of Gulf Coast, Inc. (TN)
HSC of Houston, Inc. (TN) (TX)
HSC of Nashville, Inc. (TN)
HSC of Southwest Houston, Inc. (TN) (TX)
HSC of Vero Beach, Inc. (TN) (FL)
HVPG of California, Inc. (CA)
La Jolla Health Systems, Inc. (CA)
Midwest Anesthesia, Inc. (MO) (IL)
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) (FL)
SHC Central Florida, Inc. (GA) (FL)
SHC Chattanooga, Inc. (GA) (TN)
SHC Gwinnett, Inc. (GA)
SHC Hawthorn, Inc. (GA) (IL)
SHC Management Corporation (GA) (AZ)(FL)(IL)(MO)(OK)(TX)
SHC Melbourne, Inc. (GA) (FL)
SHC Midwest City, Inc. (GA) (OK)
SHC Naples, Inc. (FL)
SHC North Dade, Inc. (GA) (FL)
SHC North Shore, Inc. (GA) (IL)
SHC Northlake, Inc. (GA)
<PAGE>
SHC Oakwater, Inc. (GA) (FL)
SHC Oklahoma City, Inc. (GA) (OK)
SHC Palms Wellington, Inc. (GA) (FL)
SHC Phoenix, Inc. (GA) (AZ)
SHC San Diego, Inc. (GA) (CA)
SHC Tri-County, Inc. (GA)(MO)
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)
Tesson Ferry Recovery, Inc. (MO)
Tesson Ferry Medical Management, Inc. (MO)
The Woodlands Surgery Systems, Inc. (DE) (TX)
Sigma Health Properties, Inc. (FL)
The Company Doctor (DE) (AR)(TX)
Emergency Occupational Physician's Services, Inc. (TX)
Andicare, Inc. (LA)
Transfer Assets, Inc. (AL)
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 Statements (Form S-8 No. 333-02221, 333-42301
and 333-49345) 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, in the
Registration Statement (Form S-8 No. 333-59887) pertaining to the National
Surgery Centers, Inc. Stock Option Plans, in the Registration Statement (Form
S-8 No. 333-59895) pertaining to The Company Doctor Amended and Restated Omnibus
Stock Plan of 1995, and the Registration Statement (Form S-3 No. 333-52237)
pertaining to the 3.25% Convertible Subordinated Debentures due 2003, and the
Registration Statement (Form S-8 No. 333-80073) pertaining to the 1999 Exchange
Stock Option Plan of our report, dated March 19, 2000, 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, 1999.
ERNST & YOUNG LLP
Birmingham, Alabama
March 24, 2000
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<NAME> HEALTHSOUTH CORPORATION
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 129,400
<SECURITIES> 3,482
<RECEIVABLES> 1,712,935
<ALLOWANCES> (814,406)
<INVENTORY> 85,551
<CURRENT-ASSETS> 1,270,896
<PP&E> 3,322,825
<DEPRECIATION> (819,858)
<TOTAL-ASSETS> 6,832,334
<CURRENT-LIABILITIES> 418,185
<BONDS> 3,076,830
0
0
<COMMON> 4,240
<OTHER-SE> 3,202,122
<TOTAL-LIABILITY-AND-EQUITY> 6,832,334
<SALES> 0
<TOTAL-REVENUES> 4,072,107
<CGS> 0
<TOTAL-COSTS> 2,838,134
<OTHER-EXPENSES> 374,248
<LOSS-PROVISION> 342,708
<INTEREST-EXPENSE> 176,652
<INCOME-PRETAX> 229,915
<INCOME-TAX> 66,929
<INCOME-CONTINUING> 76,517
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 76,517
<EPS-BASIC> 0.19
<EPS-DILUTED> 0.18
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