SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
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Check the appropriate box:
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14A-6(E)(2))
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[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
HEALTHSOUTH CORPORATION
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(Name of Registrant as Specified In Its Charter)
HEALTHSOUTH CORPORATION
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<PAGE>
HEALTHSOUTH CORPORATION
ONE HEALTHSOUTH PARKWAY
BIRMINGHAM, ALABAMA 35243
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
The 2000 annual meeting of our stockholders will be held at One HealthSouth
Parkway, Birmingham, Alabama on Thursday, May 18, 2000, beginning at 2:00 p.m.,
Central Daylight Time. The meeting is being held for the following purposes:
(1) To elect ten Directors to serve until our next annual meeting of
stockholders and until their successors shall have been duly elected
and qualified; and
(2) To act on any other matter that may properly come before the annual
meeting or any adjournment(s) or postponement(s) of the annual
meeting.
All stockholders of record who own shares of HEALTHSOUTH common stock, par
value $.01 per share, at the close of business on March 29, 2000 are entitled to
receive notice of and to vote at the annual meeting.
WHETHER OR NOT YOU INTEND TO ATTEND THE ANNUAL MEETING, PLEASE MARK, DATE,
SIGN AND PROMPTLY RETURN THE ACCOMPANYING FORM OF PROXY, USING THE ENCLOSED
PREPAID ENVELOPE. IF YOU ATTEND THE ANNUAL MEETING IN PERSON, YOU MAY REVOKE
YOUR PROXY AND VOTE IN PERSON. ATTENDANCE AT THE MEETING DOES NOT OF ITSELF
REVOKE YOUR PROXY.
BRANDON O. HALE
Secretary
April 14, 2000
<PAGE>
HEALTHSOUTH CORPORATION
PROXY STATEMENT
INTRODUCTION
This proxy statement and the accompanying form of proxy are being sent to
our stockholders in connection with our solicitation of proxies for use at the
2000 annual meeting of our stockholders or at any adjournment(s) or
postponement(s) of the annual meeting. The annual meeting will be held on May
18, 2000, beginning at 2:00 p.m., Central Daylight Time, at our principal
executive offices located at One HealthSouth Parkway, Birmingham, Alabama. We
encourage all of our stockholders to vote at the annual meeting, and we hope
that the information contained in this document will help you decide how you
wish to vote at the annual meeting. These proxy solicitation materials are being
sent to our stockholders on or about April 14, 2000.
THE ANNUAL MEETING
Purpose of the Annual Meeting
The purpose of the annual meeting is to elect a Board of Directors to serve
until our 2001 annual meeting of stockholders and until their successors are
duly elected and qualified.
Voting at the Annual Meeting; Proxies
If you wish to vote at the annual meeting you may either attend the annual
meeting and vote your shares of HEALTHSOUTH common stock in person, or you may
appoint a person to act as your proxy who will vote your shares at the annual
meeting in accordance with your instructions. If you wish to appoint a proxy who
will vote your shares of HEALTHSOUTH common stock on your behalf at the annual
meeting, you should complete, date, sign and return the form of proxy
accompanying this document, using the enclosed prepaid envelope. If you properly
complete, date and sign your proxy and it is received by ChaseMellon Shareholder
Services, L.L.C. before, or by us at, the annual meeting, your shares of
HEALTHSOUTH common stock will be voted in accordance with the voting
instructions you completed on the proxy, unless you have validly revoked the
proxy. If you properly date, sign and return a proxy, but you fail to complete
the voting instructions, your shares of HEALTHSOUTH common stock will be voted
FOR the election of each nominee named under the section of this document
captioned "Election of Directors".
We do not currently anticipate any other matters being presented for action
at the annual meeting. If any other matters are properly presented for action at
the annual meeting, the person(s) named on your proxy will vote your shares of
HEALTHSOUTH common stock on these other matters in their discretion and best
judgment, under the discretionary authority you have granted to them in your
proxy.
You may revoke your proxy at any time prior to its exercise at the annual
meeting by:
o writing to us notifying us that you wish to revoke your written proxy;
o properly completing, dating, signing and returning to us another proxy
which is granted and dated after any other proxy previously granted by
you; or
o attending the annual meeting and voting in person.
All notices of revocation should be addressed to us as follows:
HEALTHSOUTH Corporation
One HealthSouth Parkway
Birmingham, Alabama 35243
Attention: Brandon O. Hale, Secretary
<PAGE>
All notices of revocation of your proxy must be received by us at the address
above as originals sent by U.S. mail or overnight courier. You may not revoke
your proxy by any other means.
If you grant a proxy, you are not prevented from attending the annual
meeting and voting in person. However, your attendance at the annual meeting
will not by itself revoke a proxy that you have previously granted; you must
vote in person at the annual meeting to revoke your proxy. If you have
instructed your broker, nominee, custodian or other fiduciary to vote your
shares of HEALTHSOUTH common stock, you must contact them and follow their
directions on how to change your vote.
Quorum; Voting Rights
Our Board of Directors has determined that those stockholders who are
recorded in our record books as owning shares of HEALTHSOUTH common stock as of
the close of business on March 29, 2000, are entitled to receive notice of and
to vote at the annual meeting. As of the record date, there were 385,387,284
shares of HEALTHSOUTH common stock issued and outstanding.
Before any business may be transacted at the annual meeting, a quorum must
be present. A quorum will be attained if a majority of the shares of HEALTHSOUTH
common stock which are entitled to vote at the annual meeting are present in
person or represented by proxy at the annual meeting.
Each share of common stock is entitled to one vote on any matter to
properly come before the annual meeting.
There are no dissenters' rights of appraisal in connection with any vote of
our stockholders to be taken at the annual meeting.
Proxy Solicitation
This proxy solicitation is being made by our Board of Directors. To assist
us in soliciting proxies we have retained ChaseMellon Shareholder Services,
L.L.C., a proxy soliciting firm, and we have agreed to pay ChaseMellon
Shareholder Services, L.L.C. a fee of $12,000, and all reasonable out-of-pocket
expenses incurred by it in connection with the provision of its services. In
addition, our Directors, officers and other employees, not specifically employed
for this purpose, may also solicit proxies by personal interview, mail,
telephone or facsimile. They will not receive additional compensation for their
efforts. We will bear the entire cost of this proxy solicitation. We will
request banks, brokers, nominees, custodians and other fiduciaries who hold
shares of HEALTHSOUTH common stock in street name to forward these proxy
solicitation materials to the beneficial owners of those shares and we will
reimburse them the reasonable out-of-pocket expenses incurred by them in doing
so.
Effect of "Abstentions" and "Broker Non-Votes"
We intend to count "abstentions" and "broker non-votes" only for the
purpose of determining if a quorum is present at the annual meeting; they will
not be counted as votes cast on any other proposal which requires the vote of
our stockholders. An "abstention" will occur at the annual meeting if your
shares of HEALTHSOUTH common stock are deemed to be present at the annual
meeting, either because you attend the annual meeting or because you have
properly completed and returned a proxy, but you do not vote on any proposal or
other matter which is required to be voted on by our stockholders at the annual
meeting. A "broker non-vote" will occur if your shares of HEALTHSOUTH common
stock are held by a broker or nominee and your shares are deemed to be present
at the annual meeting, but you have not instructed your broker or nominee how to
vote your shares. Brokerage firms which hold shares in street name may not vote
a client's shares with respect to any "non-discretionary" item if the client has
not furnished voting instructions to the brokerage firm. You should consult your
broker if you have any questions about this.
Abstentions and broker non-votes will have no effect in connection with the
election of Directors because the Directors are elected by a majority of the
shares of HEALTHSOUTH common stock present or represented and entitled to be
voted at the annual meeting. No other matters are expected to be voted on at the
annual meeting.
2
<PAGE>
ELECTION OF DIRECTORS
GENERAL
Our bylaws permit our Board of Directors to determine the number of our
Directors. Our Board of Directors proposes that each of the ten nominees listed
below be elected at the annual meeting as members of our Board of Directors, to
serve until the annual meeting of our stockholders in 2001 and until such
nominee's successor is duly elected and qualified. The affirmative vote of a
majority of the shares of HEALTHSOUTH common stock present or represented and
entitled to vote at the annual meeting is required for the election of each
nominee. Unless otherwise instructed on the proxy, the persons designated as
proxies will vote the shares represented by them FOR the election of all
nominees listed below. If a nominee becomes unable or unwilling to accept the
nomination or election, the persons designated as proxies will be entitled to
vote for any other person designated as a substitute nominee by our Board of
Directors.
NOMINEES FOR DIRECTOR
Information relating to each of the nominees proposed by our Board of
Directors for election as a Director is set out below. We have no reason to
believe that any of the following nominees will be unable to serve.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
AND ALL POSITIONS A DIRECTOR
NAME AGE WITH HEALTHSOUTH SINCE
- -------------------------- ----- --------------------------------------------- -----------
<S> <C> <C> <C>
Richard M. Scrushy 47 Chairman of the Board 1984
and Chief Executive Officer
and Director
James P. Bennett 42 President and Chief Operating Officer 1993
and Director
Phillip C. Watkins, M.D. 58 Physician, Birmingham, Alabama, 1984
and Director
George H. Strong 73 Private Investor, Locust, New Jersey, 1984
and Director
C. Sage Givens 43 General Partner, 1985
Acacia Venture Partners
and Director
Charles W. Newhall III 55 General Partner, New Enterprise 1985
Associates Limited Partnerships,
and Director
John S. Chamberlin 71 Private Investor, 1993
Princeton, New Jersey,
and Director
Joel C. Gordon 70 Chairman, Crofton Capital Corp., 1996
Consultant to HEALTHSOUTH
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, 1999
and Director
</TABLE>
3
<PAGE>
Richard M. Scrushy, one of our 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.
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 us in May 1991 as Director of Inpatient Operations,
subsequently served in various senior operations positions, including President
- -- HEALTHSOUTH Inpatient Operations, and was named as our President and Chief
Operating Officer 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.
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 we
acquired Surgical Care Affiliates. Mr. Gordon also served as Chief Executive
Officer of Surgical Care Affiliates 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.
4
<PAGE>
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.
MANAGEMENT MATTERS
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 us and various executive
officers described elsewhere in this Proxy Statement (see "Executive
Compensation and Other Information -- Audit and Compensation Committee Report on
Executive Compensation -- Chief Executive Officer Employment Agreement"; and "
- -- Other Executive Employment Agreements"), and except that we initially agreed
to appoint Mr. Gordon to the Board of Directors in connection with the Surgical
Care Affiliates merger. There are no family relationships between any Directors
or executive officers of HEALTHSOUTH. None of our Directors or executive
officers is a party to any material proceedings adverse to us or any of our
subsidiaries or has a material interest adverse to us or any of our
subsidiaries. The Board of Directors held a total of eight meetings during 1999.
We have Employment Agreements with the executive officers named in the
Summary Compensation Table under "Executive Compensation and Other Information
- -- Executive Compensation -- General". Except for such Employment Agreements and
except for the broad-based retirement plans described under "Executive
Compensation and Other Information -- Retirement Investment Plan" and "Executive
Compensation and Other Information -- Employee Stock Benefit Plan" and the
Executive Deferred Compensation Plan described under "Executive Compensation and
Other Information -- Deferred Compensation Plan", there are no compensatory
plans or arrangements with respect to any such executive officer which result or
will result from the resignation or retirement of such executive officer or any
other termination of such executive officer's employment with HEALTHSOUTH and
its subsidiaries or from a change in control of, or from a change in such
executive officer's responsibilities following a change in control of,
HEALTHSOUTH.
In 1999, the Audit and Compensation Committee of the Board was responsible
for reviewing all reports from our auditors, monitoring internal controls and
reviewing our compensation program, as well as administering our stock option
plans. On May 20, 1999, C. Sage Givens, George H. Strong and Phillip C. Watkins,
M.D., all of whom are outside Directors, were appointed to serve on this
committee for a period of one year or until their successors are appointed. This
committee held two meetings and acted once by unanimous written consent during
1999.
The Corporate Compliance Committee of the Board of Directors is responsible
for establishing and reviewing our Corporate Compliance Program and otherwise
ensuring that HEALTHSOUTH operates in compliance with federal, state and local
laws and regulations. In 1999, Richard M. Scrushy, Chairman of the Board and
Chief Executive Officer, James P. Bennett, President and Chief Operating
Officer, and Anthony J. Tanner, then Executive Vice President -- Administration
and Secretary and a Director, and John S. Chamberlin, Joel C. Gordon, and
Charles W. Newhall III, all of whom are outside Directors, were appointed to
serve on this committee, with Mr. Tanner appointed as Chairman and Compliance
Officer. Members of the committee serve for a period of one year or until their
successors are appointed. This committee conducted its business during regular
Board of Directors meetings in 1999 and did not meet separately from the Board
of Directors.
In March 2000, the Board of Directors reorganized its committee structure,
reconstituting the Audit Committee and the Compensation Committee as separate
committees and limiting the Corporate Compliance Committee to outside Directors.
From March 2000, the Audit Committee, which is responsible for reviewing all
reports from our auditors and monitoring internal controls, consists of C. Sage
Givens, Larry D. Striplin, Jr. and George H. Strong, Chairman; the Compensation
Committee, which is responsible for reviewing our compensation programs and
administering our stock option plans,
5
<PAGE>
consists of John S. Chamberlin, Jan L. Jones and Larry D. Striplin, Jr.,
Chairman; and the Corporate Compliance Committee consists of Charles W. Newhall
III, Phillip C. Watkins, M.D. and Joel C. Gordon, Chairman. All members of
these three committees are outside Directors.
There are no other standing audit, nominating or compensation committees of
the Board of Directors.
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 "Executive Compensation and Other Information
- -- Stock Option Plans".
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.
6
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
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 our 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 COM-
NAME AND CURRENT POSITION YEAR SALARY AWARD AWARDS AWARDS PENSATION(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
"Executive Compensation and Other Information -- Retirement Investment Plan"
and -- 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
"Executive Compensation and Other Information -- 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 "Executive Compensation and Other Information -
1998 Restricted Stock Plan".
(4) Includes $200,000 withdrawn by Mr. Brown in 1999 from his deferred
compensation account. See "Executive Compensation and Other Information --
Deferred Compensation Plan".
7
<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 "Principal Stockholders".
(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.
8
<PAGE>
STOCKHOLDER RETURN COMPARISON(1)
Set forth below is a line graph comparing the total returns of HEALTHSOUTH
common stock, the Standard & Poor's 500 (S&P 500) Index and a peer group index
("Rehab Index") compiled by HEALTHSOUTH, consisting of Tenet Healthcare
Corporation and NovaCare, Inc., publicly traded healthcare companies whose
businesses have historically been similar in some respects to ours. The graph
assumes $100 invested on December 31, 1994, in HEALTHSOUTH common stock and each
of the indices. The Rehab Index has been weighted for market capitalization, and
we assume reinvestment of dividends for purposes of the graph.
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
December 31 HEALTHSOUTH S&P 500 Rehab Index
- ----------- ----------- ------- -----------
<S> <C> <C> <C>
1994 100 100 100
1995 159.82 138.14 134.00
1996 211.96 170.03 155.00
1997 304.61 227.18 229.00
1998 169.46 292.24 175.00
1999 59.00 353.65 163.00
</TABLE>
(1) In previous Proxy Statements of HEALTHSOUTH, the Rehab Index included
Continental Medical Systems, Inc. ("CMS"). In May 1995, CMS was acquired by
Horizon Healthcare Corporation, which was the surviving corporation in the
merger. Because CMS was not publicly traded during all of 1995 or
thereafter, data relating to CMS have been deleted from the Rehab Index for
all periods.
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. Effective in March 2000, the
Compensation Committee of the Board of Directors assumed all responsibilities of
the Audit and Compensation Committee described below.
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 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
9
<PAGE>
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 our Directors, officers and
other key employees 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.
<TABLE>
<CAPTION>
MAXIMUM NUMBER
OF SHARES OF NUMBER OF
HEALTHSOUTH ADDITIONAL SHARES OF
COMMON STOCK HEALTHSOUTH
SUBJECT TO COMMON STOCK
PURCHASE UNDER RESERVED FOR USE
NAME OF PLAN 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
<PAGE>
<CAPTION>
NUMBER OF SHARES OF PRICE OR RANGE OF
HEALTHSOUTH PRICES AT WHICH DATE THE PLAN TERMINATED OR WILL
COMMON STOCK SHARES MAY BE TERMINATE UNLESS OTHERWISE DETERMINED
SUBJECT TO PURCHASE IF PURCHASED SUBJECT BY OUR BOARD OF DIRECTORS OR IF ALL OF
ALL OPTIONS TO OPTIONS THE SHARES OF HEALTHSOUTH
OUTSTANDING ON OUTSTANDING ON COMMON STOCK RESERVED FOR ISSUANCE
DECEMBER 31, 1999 DECEMBER 31, UNDER THE PLAN HAVE BEEN PURCHASED DUE
NAME OF PLAN ARE EXERCISED 1999 TO 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
10
<PAGE>
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.
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 our
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.
11
<PAGE>
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 our executives and other key
employees (including those employed by our 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 of our
executive officers. 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.
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 of our full-time and
part-time employees who are over the age of 21, have one full year of service
with us 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. We 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.
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 us.
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 of our full-time and part-time employees of
HEALTHSOUTH who are over the age of 21, have one full year of service with us
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.
12
<PAGE>
The ESOP was established with a $10,000,000 loan from us, 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.
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 of the
Company, 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, our 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% 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 us.
DEFERRED COMPENSATION PLAN
In 1997, our 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 us 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 our
13
<PAGE>
Board of Directors may approve loans to our executive and key employees 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, we may, but are 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 our
Board of Directors may determine.
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>
AUDIT AND COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
General
Through December 31, 1999, the establishment and review of HEALTHSOUTH's
compensation plans were delegated to the Audit and Compensation Committee of
HEALTHSOUTH's Board of Directors, which consisted of Ms. Givens, Mr. Strong and
Dr. Watkins, who served as Chairman. The Committee is charged by the Board of
Directors with establishing a compensation plan which will enable HEALTHSOUTH to
compete effectively for the services of qualified offices and key employees, to
give those employees appropriate incentive to pursue the maximization of
long-term stockholder value, and to recognize those employees' success in
achieving both qualitative and quantitative goals for the benefit of
HEALTHSOUTH. The Committee makes recommendations to the full Board of Directors
as to appropriate levels of compensation for specific individuals, as well as
compensation and benefit programs for the company as a whole. In March 2000, the
Board of Directors reconstituted the Audit Committee and the Compensation
Committee as separate committees, and the compensation-related functions of the
Committee described in this report and elsewhere in this Proxy Statement will be
carried out by the Compensation Committee for the year 2000 and subsequent
years.
The following sections discuss the Committee's general philosophy and
policies concerning compensation for executive officers of HEALTHSOUTH, as well
as providing information concerning the specific implementation of such
policies. The Committee's report also discusses actions taken by
14
<PAGE>
HEALTHSOUTH's management and the Committee in 1998 and 1999 in response to
various adverse changes in the economic environment for healthcare providers and
the associated depression in HEALTHSOUTH's stock price.
Compensation Philosophy and Policies for Executive Officers
As its first principle, the Committee believes that HEALTHSOUTH executives
should be rewarded based upon their success in meeting the company's operational
goals, improving its earnings, maintaining its leadership role in the healthcare
services field, and generating returns for its stockholders, and the Committee
strives to establish levels of compensation that take such factors into account
and provide appropriate recognition for past achievement and incentive for
future success. The Committee recognizes that the demand for executives with
expertise and experience in the healthcare services field is intense. In order
to attract and retain qualified persons, the Committee believes that HEALTHSOUTH
must offer current compensation at levels consistent with those of other
publicly traded healthcare companies. In addition, the Committee believes that
it is in the best interests of HEALTHSOUTH's stockholders to offer its
executives meaningful equity participation in HEALTHSOUTH, in order that those
executives' interests will be aligned with those of the company's stockholders.
The Committee feels that the historic mix of cash compensation and equity
participation has proven to be effective in stimulating HEALTHSOUTH's executives
to meet both long-term and short-term goals and has been a major factor in
limiting turnover among senior executives.
HEALTHSOUTH's compensation program has three distinct elements: base
salary; incentive compensation, including both cash incentive compensation and
equity-based compensation; and retirement compensation. These elements are
discussed below.
Base Salary: While the demand for experienced managers in the healthcare
industry continues to grow, HEALTHSOUTH has been very successful in attracting
and retaining key executives, many of whom have been with the company since its
early days. HEALTHSOUTH believes that its compensation package has been
instrumental in such success. The Committee endeavors to establish base salary
levels for those key executives which are consistent with those provided for
similarly situated executives of other publicly-traded healthcare companies,
taking into account each executive's areas and level of responsibility,
historical performance and tenure with HEALTHSOUTH. In establishing such levels,
the Committee considers compensation for executives of other publicly-traded
providers of healthcare services, as well as other publicly-traded companies of
similar size and with a similar growth rate. Compensation decisions are not
targeted to specific levels in the range of compensation paid by those other
companies, nor does HEALTHSOUTH maintain a record of where its compensation
stands with respect to those companies. However, the Committee and the Board of
Directors take such levels of compensation into account in determining
appropriate levels of compensation for HEALTHSOUTH's executives.
Incentive Compensation: In addition to base salary, the Committee
recommends to the Board of Directors cash incentive compensation for
HEALTHSOUTH's executives, based upon each executive's success in meeting
qualitative and quantitative performance goals on an annual basis. The total
incentive bonus pool available for the company's executives and management
personnel is capped at the lesser of (a) the amount by which the company's
annual net income exceeds the budgeted annual net income established by the
Board of Directors and (b) 10% of the company's annual net income. No bonuses
are payable unless annual net income exceeds budgeted net income. Individual
incentive bonuses within such bonus pool are not determined in a formulary
manner, but are determined on a basis that takes into account each executive's
success in achieving standards of performance, which may or may not be
quantitative, established by the Board of Directors and an executive's
superiors. Bonus determinations are made on a case-by-case basis, taking into
account appropriate quantitative and qualitative factors, and there is no fixed
relationship between any particular performance factor and the amount of a given
executive's bonus. Historically, incentive compensation has been a major
component of HEALTHSOUTH's executive compensation, and the Committee believes
that placing executives at risk for such a component has been effective in
motivating such executives to achieve such goals.
15
<PAGE>
In 1994, the Committee initially engaged William M. Mercer, Inc. ("Mercer")
as a consultant to perform a study of HEALTHSOUTH's executive compensation
programs. The 1994 Mercer report concluded that HEALTHSOUTH's compensation mix
was significantly more highly-leveraged, at risk and performance-focused than
other companies selected by Mercer for comparison, with 41% of the Company's
cash compensation for executive officers being at-risk, performance-based
compensation, compared to 29% for the other companies reviewed by Mercer. The
company has continued to utilize Mercer's services in connection with analyzing
and structuring its compensation programs in recent years.
In addition to cash incentive compensation, as a growth-oriented company,
HEALTHSOUTH has always utilized equity-based compensation, in the form of stock
options, as a tool to encourage its executives to work to meet its operational
goals and maximize long-term stockholder value. Because the value of stock
options granted to an executive is directly related to HEALTHSOUTH's success in
enhancing its market value over time, the Committee feels that its stock option
programs have been very effective in aligning the interests of management and
stockholders.
The Committee determines stock option grants under HEALTHSOUTH's various
stock option plans, all of which are described above under "Executive
Compensation and Other Information -- Stock Option Plans". Specific grants are
determined taking into account an executive's current responsibilities and
historical performance, as well as the executive's perceived contribution to
HEALTHSOUTH's results of operations. Options are also used to give incentive to
newly-promoted officers at the time that they are asked to assume greater
responsibilities, and, in some cases, to executives who have joined the company
through acquisitions and have assumed significant leadership roles within the
company. In evaluating option grants, the Board of Directors considers prior
grants and shares currently held, as well as the recipient's success in meeting
operational goals and the recipient's level of responsibility. However, no fixed
formula is utilized to determine particular grants. The Committee believes that
the opportunity to acquire a significant equity interest in HEALTHSOUTH has been
a strong motivation for the company's executives to pursue the long-term
interests of HEALTHSOUTH and its stockholders, and has promoted longevity and
retention of key executives. Information relating to stock options granted to
HEALTHSOUTH's five most highly-compensated executive officers is set forth
elsewhere in this Proxy Statement.
Retirement Compensation: As described under "Executive Compensation and
Other Information -- Retirement Investment Plan", in 1991 HEALTHSOUTH adopted a
401(k) retirement plan in order to give all full-time employees an opportunity
to provide for their retirement on a tax-advantaged basis. In order to further
tie employees' interests to the long-term market value of the company,
HEALTHSOUTH adopted an Employee Stock Benefit Plan (the "ESOP") in 1991, which
gives all full-time employees an opportunity to invest a portion of their
retirement funds in HEALTHSOUTH common stock on a tax-advantaged basis. The
Committee believes that the ESOP provides additional incentive to executives to
maximize stockholder value over the long term. See "Executive Compensation and
Other Information -- Employee Stock Benefit Plan". Additionally, in 1997,
HEALTHSOUTH adopted a Deferred Compensation Plan, which gives senior management
employees the opportunity to elect to defer receipt of a portion of their salary
and bonus in exchange for a variable rate of interest on the amounts so
deferred. See "Executive Compensation and Other Information -- Deferred
Compensation Plan".
Chief Executive Officer Compensation
HEALTHSOUTH has an Employment Agreement, dated April 1, 1998, with Richard
M. Scrushy, pursuant to which Mr. Scrushy, a management founder of the company,
is employed as Chairman of the Board and Chief Executive Officer 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, HEALTHSOUTH has agreed to use its best efforts to
cause Mr. Scrushy to be elected as a Director of the company during the term of
the Agreement. 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 the Company's success in meeting certain monthly
and annual performance standards determined by the Audit and Compensation
Committee of the Board of
16
<PAGE>
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 the company 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 maintained by the company.
The Agreement may be terminated by Mr. Scrushy for "Good Reason" (as
defined), by HEALTHSOUTH 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, HEALTHSOUTH is 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, HEALTHSOUTH is required to pay him a lump-sum
severance amount equal to the 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, HEALTHSOUTH is 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, HEALTHSOUTH is required to pay his representatives or
estate a lump-sum payment equal to the discounted value of his then-current base
salary and Annual Target Bonus for the remainder of the year. In the event of a
voluntary termination by Mr. Scrushy following a Change in Control (as defined)
of HEALTHSOUTH, other than for Cause, HEALTHSOUTH is required to pay Mr. Scrushy
an additional lump-sum severance payment equal to the discounted value of his
then-current base salary and Annual Target Bonus for the remainder of the year.
The Agreement provides for HEALTHSOUTH 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 HEALTHSOUTH's business during, and for 24 months
after termination of, his employment with the company, unless such termination
occurs after a Change in Control.
The Committee reports to the Board of Directors on compensation
arrangements with Mr. Scrushy, and recommends to the Board of Directors the
level of incentive compensation, both cash and equity-based, which is
appropriate for Mr. Scrushy with respect to each fiscal year of HEALTHSOUTH. In
making such recommendation, the Committee takes into account HEALTHSOUTH's
performance in the marketplace, its success in meeting strategic goals and its
success in meeting monthly and annual budgets established by the Board of
Directors. Again, ultimate compensation decisions are not made in a formulary
manner, but in a manner which takes into account HEALTHSOUTH's competitive
position, its position in the financial markets, and the significant
contributions made by Mr. Scrushy to the success of the company. In making its
decisions with respect to Mr. Scrushy's compensation, the Committee believes
that it is appropriate to recognize that, as a management founder of the
company, Mr. Scrushy has played an instrumental role in establishing HEALTHSOUTH
as the industry leader in outpatient and rehabilitative healthcare services and
that, under his leadership, HEALTHSOUTH has continued to show strong performance
in asset growth and quality, net revenues and income.
In the period since December 31, 1993, HEALTHSOUTH, under Mr. Scrushy's
leadership, has grown from the fourth-largest provider of rehabilitative
healthcare services to the largest provider, and since 1995 has established
itself as the nation's largest provider of outpatient surgery services and
outpatient diagnostic services and one of the largest providers of occupational
medicine services through a series of strategic acquisitions. During that same
period, the company has expanded its operations to
17
<PAGE>
50 states, the United Kingdom, Australia and Puerto Rico and has been named to
the S&P 500. The Committee believes that Mr. Scrushy's leadership has been
essential to HEALTHSOUTH's success and growth. In view of these accomplishments,
the Committee believes that it is important to ensure that, if Mr. Scrushy is
successful in leading HEALTHSOUTH to achieve the goals set by the Board of
Directors, his compensation will be at a level commensurate with that of chief
executive officers of similarly-performing public companies and that he will
continue to have the opportunity to obtain a significant equity interest in the
company.
Despite the company's historic success, however, HEALTHSOUTH's stock price
fell substantially in the latter part of 1998 and has remained depressed since
that time, both as a result of general conditions in the capital markets and
market perceptions concerning the healthcare industry and following the
company's 1998 public announcement about the potential future impact of changes
in reimbursement and managed care pricing pressure. In addition, in 1999, the
company made a subsequent public announcement concerning its expectations for
diminished earnings margins for the reasonably foreseeable future, attributable
primarily to economic factors affecting the healthcare industry. The Committee
believes that the downward pressure on HEALTHSOUTH's stock price has been
largely a result of external factors beyond management's control. In connection
with those factors, including the impact of the Balanced Budget Act of 1997 and
managed care pricing pressure, the company heightened its efforts to reduce
corporate overhead and manage expenses. In order to lead by example, Mr. Scrushy
voluntarily chose to forgo receipt of his base salary and Annual Target Bonus
from November 1, 1998 through March 31, 1999, at which point Mr. Scrushy resumed
receipt of a substantially reduced portion of his annual base salary and Annual
Target Bonus. At that time, he elected to take base salary at the annual rate of
$900,000 per year and Annual Target Bonus at the rate of $900,000 per year. The
Committee believes that this voluntary decision by Mr. Scrushy reflects a
continued example of his leadership and his stewardship of HEALTHSOUTH's
resources. Mr. Scrushy resumed taking his full base salary and Annual Target
Bonus effective January 1, 2000.
Other Executive Employment Agreements
HEALTHSOUTH also has 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, pursuant to which each of these
persons is employed in these capacities for a three-year term initially 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, HEALTHSOUTH has agreed to use its best efforts to cause
Messrs. Bennett, Martin and Brown to be elected as Directors of the Company
during the term of their respective Agreements. Mr. Martin has subsequently left
the Board, and Mr. Brown is not standing for re-election at the 2000 annual
meeting of stockholders. 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 such officer 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 certain specified fringe benefits, originally 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, HEALTHSOUTH is 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), HEALTHSOUTH is also required to continue the officer's
salary for the same period. The Agreements restrict the officers from engaging
in certain activities competitive with HEALTHSOUTH's business during their
employment with the company and for any period during which the officer is
receiving severance compensation, unless such termination occurs after a Change
in Control.
18
<PAGE>
Notwithstanding the terms of those employment agreements, each of the
affected officers voluntarily agreed to a 25% reduction in base salary from
January 1, 1999 through May 22, 1999. The Committee believes that this voluntary
agreement by the officers represents a significant example of leadership for the
company.
In addition, to the foregoing, HEALTHSOUTH took other steps to respond to
potential future effects of pricing pressure in the healthcare industry.
HEALTHSOUTH discontinued the payment of car allowances to all officers in
October 1998, and the Committee determined that no management bonuses above the
field operations level would be awarded with respect to 1998. Further, senior
officers not covered by the employment agreements described above voluntarily
agreed to a 10% reduction in base salary from January 1, 1999 through May 22,
1999. The Committee believes that these steps reflect the continued commitment
of HEALTHSOUTH's Board of Directors and management to fiscally responsible
compensation policies.
Section 162(m) of the Internal Revenue Code
The Omnibus Budget Reconciliation Act of 1993 contains a provision under
which a publicly-traded corporation is sometimes precluded from taking a federal
income tax deduction for compensation in excess of $1,000,000 that is paid to
the chief executive officer and the four other most highly-compensated
executives of the corporation during a corporation's tax year. Compensation in
excess of $1,000,000 continues to be deductible if that compensation is
"performance based' within the meaning of that term under Section 162(m) of the
Internal Revenue Code. Certain transition rules apply with respect to stock
option plans which were approved prior to December 20, 1993, pursuant to Rule
16b-3(b) under the Exchange Act.
HEALTHSOUTH believes that its employee stock option plans meet the
requirements of Section 162(m) as performance-based plans. The Committee and the
Board of Directors have made a decision not to amend HEALTHSOUTH's cash
compensation programs to meet all requirements of Section 162(m) because such a
decision would not be in the best interests of the company's stockholders. The
Committee believes that, in establishing bonus and incentive awards, certain
subjective factors must be taken into account in particular cases, based upon
the experienced judgment of the Committee members as well as on factors which
may be objectively quantified. The preservation of tax deductibility of all
compensation is an important consideration. However, the Committee believes that
it is important that HEALTHSOUTH retain the flexibility to reward superior
effort and accomplishment even where all cash compensation may not be fully
deductible. The Committee will continue to review the requirements for
deductibility under Section 162(m) and will take such requirements into account
in the future as it deems appropriate and in the best interests of HEALTHSOUTH's
stockholders. Approximately $688,000 of Mr. Scrushy's compensation paid with
respect to 1999 will not be deductible; however, HEALTHSOUTH believes that all
other compensation paid to executive officers will be fully deductible.
Conclusion
The Committee believes that the levels and mix of compensation provided to
HEALTHSOUTH's executives during 1999 were appropriate and were instrumental in
the achievement of the company's goals for 1999. It is the intent of the
Committee to ensure that HEALTHSOUTH's compensation programs continue to
motivate its executives and reward them for being responsive to the long-term
interests of HEALTHSOUTH and its stockholders.
The foregoing report is submitted by the following Directors of
HEALTHSOUTH, constituting all of the members of the Audit and Compensation
Committee of the Board of Directors for the year ending December 31, 1999:
C. Sage Givens
George H. Strong
Phillip C. Watkins, M.D., Chairman
19
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of HEALTHSOUTH common stock as of March 29, 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 ...................... 19,704,955(2) 4.93%
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.
82 Devonshire Street
Boston, Massachusetts 02109 ............ 21,056,707(15) 5.46%
AXA Financial, Inc.
1290 Avenue of the Americas
New York, New York 10104 ............... 19,327,588(16) 5.02%
All Executive Officers and Directors as a
Group (20 persons) ..................... 36,240,464(17) 8.83%
</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.
20
<PAGE>
(12) Includes 1,030,000 shares subject to currently exercisable stock options.
(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%
CERTAIN 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 our Chief Executive Officer, and Michael D. Martin,
then our Executive Vice President and Chief Financial Officer and one of our
Directors, along with another individual not then employed by us, 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 we 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.
21
<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 "Executive Compensation and Other Information -- 1999 Executive Equity Loan
Plan", for information concerning loans to executive officers to purchase
HEALTHSOUTH common stock.
GENERAL INFORMATION
STOCKHOLDER PROPOSALS FOR 2001 ANNUAL MEETING
Any proposals that our stockholders wish to have included in our proxy
statement and form of proxy for the 2001 annual meeting of stockholders must be
received by us no later than the close of business on December 15, 2000. Any
proposals submitted after that date will not be included in our proxy statement
and form of proxy. You may also submit a proposal without having it included in
our proxy statement and form of proxy, but we need not submit such a proposal
for consideration at the annual meeting if it is considered untimely. Under the
applicable rules of the Securities and Exchange Commission, a proposal will be
considered untimely unless you have given us notice of your intent to submit it
for consideration no later than the close of business on February 28, 2001. Any
proposals should be sent to:
HEALTHSOUTH Corporation
One HealthSouth Parkway
Birmingham, Alabama 35243
Attention: Brandon O. Hale, Secretary
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
Our Board of Directors has engaged Ernst &Young LLP to audit our
consolidated financial statements for the fiscal year ending December 31, 1999.
We expect that Ernst & Young LLP will serve in that capacity for the 2000 fiscal
year as well. We expect that representatives of Ernst & Young LLP will be
present at the annual meeting to make a statement if they desire to do so and to
respond to appropriate questions.
FINANCIAL STATEMENTS
Our audited consolidated financial statements for the fiscal year ended
December 31, 1999, and other selected information, including our management's
discussion and analysis of our financial condition and results of operations,
are included in Appendix A to this proxy statement.
22
<PAGE>
ANNUAL REPORT ON FORM 10-K
A copy of our annual report on Form 10-K for the year ended December 31,
1999 may be obtained without charge by writing to our Secretary at the address
below:
HEALTHSOUTH Corporation
One HealthSouth Parkway
Birmingham, Alabama 35243
Attention: Brandon O. Hale, Secretary
All requests submitted by beneficial owners of HEALTHSOUTH common stock
must include a good faith representation by the requesting stockholder
confirming that, as of March 29, 2000, he was a beneficial owner of shares of
HEALTHSOUTH common stock.
Please complete, sign and return the enclosed proxy promptly.
By Order of the Board of Directors:
BRANDON O. HALE
Secretary
April 14, 2000
23
<PAGE>
APPENDIX A
NOTE: This Appendix A, together with the foregoing Proxy Statement,
contains the information required to be provided in our annual report to
security holders pursuant to the Rules and Regulations of the Securities and
Exchange Commission. Our 1999 Annual Report to Stockholders, which provides
additional information concerning HEALTHSOUTH and our performance in 1999, is
also included in the mailing containing our Proxy Statement.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Business ..................................................... A-2
Selected Financial Data ...................................... A-2
Quarterly Results ............................................ A-4
Directors and Executive Officers ............................. A-5
Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................... A-7
Audited Consolidated Financial Statements of
HEALTHSOUTH Corporation and Subsidiaries
Report of Independent Auditors .............................. A-16
Consolidated Balance Sheets ................................. A-17
Consolidated Statements of Income ........................... A-18
Consolidated Statements of Stockholders' Equity ............. A-19
Consolidated Statements of Cash Flows ....................... A-20
Notes to Consolidated Financial Statements .................. A-22
Market for HEALTHSOUTH's Common Equity and Related Stockholder
Matters ..................................................... A-45
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure .................................... A-45
</TABLE>
A-1
<PAGE>
BUSINESS
HEALTHSOUTH Corporation is the nation's largest provider of outpatient
surgery and rehabilitative healthcare services. We provide these services
through our national network of outpatient and inpatient 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, 1998, the Company had nearly 2,000 patient care
locations in 50 states, Puerto Rico, the United Kingdom and Australia.
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 acquisition
of Health Images, Inc. and the 1998 acquisition of National Surgery Centers,
Inc. ("NSC"), 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
========== ========== ========== ========== ==========
</TABLE>
A-2
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
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>
<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.
A-3
<PAGE>
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>
A-4
<PAGE>
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to our
executive officers:
<TABLE>
<CAPTION>
ALL POSITIONS AN OFFICER
NAME AGE WITH HEALTHSOUTH SINCE
- ---------------------------- ----- ------------------------------------------------------- -----------
<S> <C> <C> <C>
Richard M. Scrushy ......... 47 Chairman of the Board 1984
and Chief Executive Officer 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 1985
P. Daryl Brown ............. 45 President -- Ambulatory Services -- East and Director 1986
(through May 2000)
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 and Bennett is set forth in
the Proxy Statement to which this Appendix A is attached under "Election of
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.
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, continuing to serve as a Director until May 2000. 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.
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
A-5
<PAGE>
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.
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.
See "Election of Directors" in the Proxy Statement to which this Appendix A
is attached for identification of our Directors.
A-6
<PAGE>
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
Appendix A.
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.
A-7
<PAGE>
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
A-8
<PAGE>
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
A-9
<PAGE>
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, 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.
A-10
<PAGE>
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.
A-11
<PAGE>
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
A-12
<PAGE>
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.
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.
A-13
<PAGE>
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.
A-14
<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 Appendix A which are not historical facts are
forward-looking statements. Without limiting the generality of the preceding
statement, all statements in this Appendix A 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.
A-15
<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. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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.
ERNST & YOUNG LLP
Birmingham, Alabama
March 19, 2000
A-16
<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.
A-17
<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.
A-18
<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)
<PAGE>
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.
A-19
<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>
A-20
<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.
A-21
<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.
A-22
<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.
A-23
<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.
A-24
<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 value of the asset, a
significant adverse change in legal factors or in the business climate, adverse
action
A-25
<PAGE>
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
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.
A-26
<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.
A-27
<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>
A-28
<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
A-29
<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
A-30
<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.
A-31
<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.
A-32
<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
A-33
<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.
A-34
<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.
A-35
<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 ................................. -- 136,470 136,470
--------- ---------- ----------
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.
A-36
<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
A-37
<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.
A-38
<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
A-39
<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.
A-40
<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
========= ======== =========
<PAGE>
<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
A-41
<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.
A-42
<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>
A-43
<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.
A-44
<PAGE>
MARKET FOR HEALTHSOUTH'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 April 6, 2000, was $6.25.
There were approximately 6,841 holders of record of HEALTHSOUTH common
stock as of March 29, 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.
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.
A-45
<PAGE>
PROXY HEALTHSOUTH CORPORATION
PROXY FOR THE ANNUAL MEETING OF STOCKHOLDERS -- MAY 18, 2000
THIS PROXY IS SOLICITED BY OUR BOARD OF DIRECTORS
The undersigned hereby revoke(s) any and all proxies previously given by
the undersigned to vote or act with respect to the common stock of HEALTHSOUTH
Corporation owned by the undersigned, and appoints RICHARD M. SCRUSHY and
WILLIAM T. OWENS or __________________, and each of them, with several powers of
substitution, as proxies to vote the shares of common stock, par value $.01 per
share, of HEALTHSOUTH Corporation that the undersigned would be entitled to vote
if personally present at the annual meeting of stockholders of HEALTHSOUTH
Corporation to be held at One HealthSouth Parkway, Birmingham, Alabama, on
Thursday, May 18, 2000, at 2:00 p.m., C.D.T., and at any adjournment(s) or
postponement(s) of the annual meeting.
1. ELECTION OF DIRECTORS
[ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY to vote (Except as
marked to the contrary below) for all nominees listed below
<TABLE>
<S> <C> <C>
Richard M. Scrushy Joel C. Gordon George H. Strong
James P. Bennett Jan L. Jones Phillip C. Watkins, M.D.
John S. Chamberlin Charles W. Newhall III
C. Sage Givens Larry D. Striplin, Jr.
</TABLE>
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, MARK A
LINE THROUGH THAT NOMINEE'S NAME IN THE LIST PROVIDED ABOVE.
2. IN THE DISCRETION OF THE PROXIES, TO ACT UPON ANY OTHER MATTER
INCIDENTAL TO THE FOREGOING OR THAT MAY PROPERLY COME BEFORE THE ANNUAL MEETING
OR ANY ADJOURNMENT(S) OR POSTPONEMENT(S) OF THE ANNUAL MEETING.
(Continued and to be signed on reverse.)
<PAGE>
(Continued from other side.)
THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED ON THIS PROXY BY THE
UNDERSIGNED STOCKHOLDER(S). IF NO SPECIFICATION IS MADE, THIS PROXY WILL BE
VOTED FOR ITEM 1. IF YOU WISH TO WITHHOLD THE DISCRETIONARY AUTHORITY DESCRIBED
IN ITEM 2 ABOVE, MARK A LINE THROUGH THE ENTIRE ITEM 2.
Please mark, date, sign and promptly mail this proxy using the enclosed
envelope. No postage is required.
DATED________________________,1999
-------------------------------------
Signature of Stockholder
-------------------------------------
Signature of Stockholder
Please sign your name as it appears on
this form of proxy. If there is more
than one owner, each owner should
sign. If you are signing as an
attorney, administrator, executor,
guardian or trustee, please indicate
the capacity in which you are signing.
If executed by a corporation or
partnership, this form of proxy must
be signed by an authorized
representative.
