As filed with the Securities and Exchange Commission on September 25, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------
HEALTHSOUTH CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------(Exact Name of Registrant as Specified in its Charter)
-----------------
DELAWARE 8062 63-0860407
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Identification
Incorporation or Organization) Classification Code Number) Identification Number)
---------------------------------
ONE HEALTHSOUTH PARKWAY
BIRMINGHAM, ALABAMA 35243
(205) 967-7116
(Address, including Zip Code, and Telephone Number, including Area Code, of
Registrant's Principal Executive Offices)
-----------------
RICHARD M. SCRUSHY
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
HEALTHSOUTH CORPORATION
ONE HEALTHSOUTH PARKWAY
BIRMINGHAM, ALABAMA 35243
(205) 967-7116
(Name, Address, including Zip Code, and Telephone Number, including Area Code,
of Agent for Service)
COPIES TO:-----------------
Copies to:
ROBERTMARK E. LEE GARNER,EZELL, ESQ. WILLIAM W. HORTON, ESQ. WILLIAM E. JOORNATHANIEL M. CARTMELL III, ESQ.
F. HAMPTON MCFADDEN, JR., ESQ. BEALL D. GARY, JR.,HEALTHSOUTH CORPORATION KAREN A. DEMPSEY, ESQ.
JAMES H. WILSON, ESQ.
Haskell SlaughterHASKELL SLAUGHTER & Young,YOUNG, L.L.C. ONE HEALTHSOUTH Corporation VINSONPARKWAY PILLSBURY MADISON & ELKINS L.L.P.SUTRO, LLP
1200 AmSouth/Harbert Plaza One HealthSouth Parkway 3600 First City TowerAMSOUTH/HARBERT PLAZA BIRMINGHAM, ALABAMA 35243 235 MONTGOMERY STREET
1901 Sixth Avenue North Birmingham, Alabama 35243 1001 Fannin
Birmingham, Alabama 35203SIXTH AVENUE NORTH (205) 967-7116 Houston, Texas 77002-676016TH FLOOR
BIRMINGHAM, ALABAMA 35203 SAN FRANCISCO, CALIFORNIA 94104
(205) 251-1000 (713) 758-2222
---------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering [ ] -------------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] -------------
CALCULATION OF REGISTRATION FEE
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=====================================================================================================================
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM CLASSAMOUNT OF
OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OFREGISTRATION
TO BE REGISTERED TO BE REGISTERED(1)REGISTERED PER UNIT PRICE(2) REGISTRATION FEE(3)OFFERING PRICE (1) FEES (2)
- ---------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.01 per
share ........................ 48,025,579 shares Inapplicable $1,162,230,632 $352,191.106.875% Senior Notes due 2005 ......... $250,000,000 100% $250,000,000 $ 73,750.00
- ---------------------------------------------------------------------------------------------------------------------
7.0% Senior Notes due 2008 ........... $250,000,000 100% $250,000,000 $ 73,750.00
- ---------------------------------------------------------------------------------------------------------------------
Total ................................ $500,000,000 100% $500,000,000 $ 147,500.00
=====================================================================================================================
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(1) The amount of common stock, par value $.01 per share (the "HEALTHSOUTH
Common Stock"), of the Registrant to be registered has been determined
based upon 52,889,832 shares of common stock, par value $.001 per share
(the "Horizon/CMS Common Stock"), of Horizon/CMS Healthcare Corporation
outstanding as of September 24, 1997, 4,054,344 shares of Horizon/CMS
Common Stock that may be issued pursuant to outstanding options that may be
exercised prior to the Effective Time of the Merger described herein and an
Exchange Ratio of 0.84338 of a share of HEALTHSOUTH Common Stock per share
of Horizon/CMS Common Stock, the Exchange Ratio provided for in the Plan
and Agreement of Merger among HEALTHSOUTH Corporation, Reid Acquisition
Corporation and Horizon/CMS Healthcare Corporation, dated as of February
17, 1997, as amended (the "Plan").
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(f)(1) of the Securities Act of 1933, as amended (the "Securities
Act").
Pursuant to Rule 457(f)(1), the maximum aggregate
offering price is the product of (a) $20.41, representing the average of
the high and low sales prices of Horizon/CMS Common Stock as reported on
the New York Stock Exchange Composite Transactions Tape on September 24,
1997, and (b) 56,944,176, the maximum number of shares of Horizon/CMS
Common Stock to be acquired by the Registrant in connection with the
acquisition of Horizon/CMS pursuant to the Plan.
(3)(2) Calculated pursuant to Section 6(b) and Rule 457 of the Securities Act.
Of
such fee, $164,545.45 was paid at the time of the filing of the preliminary
proxy materials for this matter and $187,645.65 is paid herewith.
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall-----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
HORIZON/CMS HEALTHCARE CORPORATION
6001 Indian School Road, N.E.SUBJECT TO COMPLETION, DATED AUGUST 14, 1998
PROSPECTUS
[HEALTHSOUTH LOGO]
OFFER TO EXCHANGE THE 6.875% SENIOR NOTES DUE 2005 AND 7.0% SENIOR NOTES
DUE 2008 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OUTSTANDING 6.875% SENIOR NOTES DUE 2005 AND
7.0% SENIOR NOTES DUE 2008, RESPECTIVELY
------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., Suite 530
Albuquerque,NEW YORK CITY TIME,
ON _____________, 1998, UNLESS EXTENDED.
HEALTHSOUTH Corporation, a Delaware corporation (the "Issuer" or
"HEALTHSOUTH"), hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and the accompanying letter of transmittal (the "Letter
of Transmittal", and, together with this Prospectus, the "Exchange Offer"), to
exchange its 6.875% Senior Notes due 2005 (the "New Notes due 2005") and its
7.0% Senior Notes due 2008 (the "New Notes due 2008", and together with the New
Mexico 87110
September 26, 1997
To Our Stockholders:
YouNotes due 2005, the "New Notes"), which have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
Registration Statement of which this Prospectus is a part, for an equal
principal amount of the Issuer's outstanding 6.875% Senior Notes due 2005 (the
"Old Notes due 2005") and 7.0% Senior Notes due 2008 (the "Old Notes due 2008",
and together with the Old Notes due 2005, the "Old Notes"), that were issued in
a transaction exempt from registration under the Securities Act. The New Notes
and the Old Notes are cordially invitedcollectively referred to attend a Special Meeting of Stockholders of
Horizon/CMS Healthcare Corporationherein as the "Notes".
Any and all Old Notes that are validly tendered and not withdrawn at or
prior to 5:00 p.m., New York City time, on the Crowne Plaza Pyramid, 5151 San
Francisco Road, N.E.date on which the Exchange Offer
expires ("the Expiration Date"), Albuquerque, New Mexico 87109, on October 29, 1997, at
10:00 a.m., local time (the "Special Meeting").
At the Special Meeting, youwhich will be asked___________, 1998 (30 calendar
days following the commencement of the Exchange Offer) unless the Exchange Offer
is extended, will be accepted for exchange. Tenders of Old Notes may be
withdrawn at any time prior to consider5:00 p.m., New York City time, on the Expiration
Date. The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered for exchange. However, the Exchange Offer is subject to
certain customary conditions, which may be waived by the Issuer, and vote upon a
proposal to approve and adopt the
Plan andterms of the Registration Rights Agreement, of Merger dated as of February 17, 1997, as amendedJune 22, 1998 (the
"Registration Rights Agreement"), by and among the First Amendment to PlanIssuer and Agreement of
Merger dated September 15, 1997 (the "Plan") providing for the merger (the
"Merger") of a wholly owned subsidiary of HEALTHSOUTH Corporation
("HEALTHSOUTH') with and into Horizon/CMS Healthcare Corporation
("Horizon/CMS"). The Plan provides that, upon consummation of the Merger, each
issued and outstanding share of common stock of Horizon/CMS will be converted
into 0.84338 of a share of common stock of HEALTHSOUTH (the "Exchange Ratio")
and Horizon/CMS will become a wholly owned subsidiary of HEALTHSOUTH. The Plan
and the Merger are discussed in more detail in the accompanying Prospectus-Proxy
Statement. Please review and consider the enclosed materials carefully.
For the reasons set forth in the accompanying Prospectus-Proxy Statement,
your Board of Directors believes that the Merger is fair to, and in the best
interests of, the stockholders of Horizon/CMS and recommends that you vote in
favor of approval and adoption of the Plan. In making that determination, the
Board of Directors received and took into account the oral opinion rendered on
February 17, 1997 bySalomon Brothers
Inc, Goldman, Sachs & Co., J.P. Morgan Securities Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, an
investment banking firm retained by Horizon/CMSMorgan Stanley & Co. Incorporated, NationsBanc
Montgomery Securities LLC, Bear, Stearns & Co. Inc., Credit Suisse First Boston
Corporation, Deutsche Bank Securities Inc., PaineWebber Incorporated and Scotia
Capital Markets (USA) Inc. (the "Initial Purchasers"). Old Notes may only be
tendered in integral multiples of $1,000. See "The Exchange Offer".
The New Notes will be obligations of the Issuer and will be entitled to actthe
benefits of the same Indenture (as defined herein) that governs the Old Notes.
The form and terms of the New Notes are the same in all material respects as financial advisorthe
form and terms of the Old Notes, except that (i) the New Notes have been
registered under the Securities Act and therefore will not bear legends
restricting the transfer thereof and (ii) holders of New Notes will not be
entitled to it, that, ascertain rights of that date,holders of the Old Notes under the Registration
Rights Agreement, which rights will be terminated upon consummation of the
Exchange Ratio was fairOffer. See "The Exchange Offer" and "Description of the New Notes".
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
The Old Notes will be redeemable as a whole or in part, at the option of
the Issuer, at any time at a redemption price equal to the stockholdersgreater of Horizon/CMS from a financial point(i) 100%
of view. That opinion was subsequently
confirmed in writing ontheir principal amount and (ii) the sum of the present values of the
remaining scheduled payments of principal and interest thereon discounted to the
date hereof. The full textof redemption on a semi-annual basis (assuming a 360-day year consisting of
twelve 30-day months) at the applicable Treasury Yield (as defined herein) plus
15 basis points in the case of the opinionNew Notes due 2005 and 20 basis points in the
case of Merrill
Lynch datedthe New Notes due 2008, plus in each case accrued interest to the date
hereof is attached to the accompanying Prospectus-Proxy
Statement as Annex B.
If you have any questions prior to the Special Meeting or need assistance,
please call Georgeson & Company Inc.,of redemption.
The New Notes will be represented by permanent global notes in fully
registered form which will be assistingdeposited with, or on behalf of, The Depository
Trust Company ("DTC") and registered in the name of a nominee of DTC. Beneficial
interests in the permanent global notes are shown on, and transfers thereof will
be effected through, records maintained by DTC and its participants.
The New Notes are being offered hereunder to satisfy certain obligations of
the Issuer contained in the Registration Rights Agreement. Based on
interpretations by the staff of the Securities and Exchange Commission (the
"Commission"), as set forth in no-action letters issued to third parties,
including Exxon Capital Holdings Corporation (SEC No-Action Letter available
April 13, 1988), Morgan Stanley & Co. Incorporated (SEC No-Action Letter
available June 5, 1991) and Shearman & Sterling (SEC No-Action Letter available
July 2, 1993) (collectively, the "Exchange Offer No-Action Letters"), the Issuer
believes that the New Notes issued pursuant to the Exchange Offer may be offered
for resale, resold or otherwise transferred by each holder (other than a
broker-dealer who acquires such New Notes directly from the Issuer for resale
pursuant to Rule 144A under the Securities Act or any other available exemption
under the Securities Act and other than any holder that is an "affiliate" (as
defined in Rule 405 under the Securities Act) of the Issuer) without compliance
with the registration and prospectus delivery provisions of the Securities Act,
provided that such New Notes are acquired in the ordinary course of such
holder's business and such holder is not engaged in, and does not intend to
engage in, a distribution of such New Notes and has no arrangement with any
person to participate in a distribution of such New Notes. By tendering Old
Notes in exchange for New Notes, each holder, other than a broker-dealer, will
represent to the Issuer that: (i) it is not an affiliate (as defined in Rule 405
under the Securities Act) of the Issuer; (ii) it is not a broker-dealer
tendering Old Notes acquired for its own account directly from the Issuer; (iii)
any New Notes to be received by it will be acquired in the ordinary course of
its business; and (iv) it is not engaged in, and does not intend to engage in, a
distribution of such New Notes and has no arrangement or understanding to
participate in a distribution of New Notes. If a holder of Old Notes is engaged
in or intends to engage in a distribution of New Notes or has any arrangement or
understanding with respect to the distribution of New Notes to be acquired
pursuant to the Exchange Offer, such holder may not rely on the applicable
interpretations of the staff of the Commission and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with the Special Meeting, at (800) 223-2064.
Whether or not you plan to attend the Special Meeting, please be sure to
sign, date and return the enclosed proxy or voting instruction card in the
enclosed envelope as promptly as possible so that your shares may be represented
at the Special Meeting and voted in accordance with your wishes. Your vote is
important regardless of the number of shares that you own.
Sincerely,
Neal M. Elliott
Chairman and Chief Executive Officer
HORIZON/CMS HEALTHCARE CORPORATION
6001 Indian School Road, N.E., Suite 530
Albuquerque, New Mexico 87110
NOTICEany secondary resale transaction.
(Continued on next page)
SEE "RISK FACTORS" BEGINNING AT PAGE 14 FOR A DISCUSSION OF SPECIAL MEETING OF STOCKHOLDERSCERTAIN
FACTORS TO BE HELD ON OCTOBER 29, 1997
To the Stockholders of Horizon/CMS Healthcare Corporation:
A Special Meeting of Stockholders (the "Special Meeting") of Horizon/CMS
Healthcare Corporation, a Delaware corporation ("Horizon/CMS"), will be held on
October 29, 1997 at 10:00 a.m., local time, at the Crowne Plaza Pyramid, 5151
San Francisco Road, N.E., Albuquerque, New Mexico 87109, for the following
purposes:
1. To consider and vote upon a proposal to approve and adopt the Plan and
Agreement of Merger (the "Plan") dated as of February 17, 1997, as amended
by the First Amendment to Plan and Agreement of Merger dated September 15,
1997, among Horizon/CMS, HEALTHSOUTH Corporation ("HEALTHSOUTH") and a
wholly owned subsidiary of HEALTHSOUTH (the "Subsidiary"). Pursuant to the
Plan, the Subsidiary would merge with and into Horizon/CMS (the "Merger")
and, among other things, each issued and outstanding share of common
stock, par value $.001 per share of Horizon/CMS ("Horizon/CMS Common
Stock"), would be converted in the Merger into 0.84338 of a share of
HEALTHSOUTH common stock, par value $0.01 per share, all as more fully set
forth in the accompanying Prospectus-Proxy Statement and in the Plan, a
copy of which is included as Annex A thereto; and
2. To transact such other business as may properly come before the Special
Meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on September 14,
1997 as the record date for the determination of stockholders entitled to notice
of, and to vote at, the Special Meeting or any adjournment thereof. Only holders
of record of shares of Horizon/CMS Common Stock at the close of business on the
record date are entitled to notice of, and to vote at, the Special Meeting. A
complete list of such stockholders will be available for examination at the
offices of Horizon/CMS in Albuquerque, New Mexico during normal business hours
by any Horizon/CMS stockholder, for any purpose germane to the Special Meeting,
for a period of 10 days prior to the Special Meeting
STOCKHOLDERS ARE URGED, WHETHER OR NOT THEY PLAN TO ATTEND THE SPECIAL
MEETING, TO SIGN, DATE AND MAIL THE ENCLOSED PROXY OR VOTING INSTRUCTION CARD IN
THE POSTAGE-PAID ENVELOPE PROVIDED. IF A STOCKHOLDER WHO HAS RETURNED A PROXY
ATTENDS THE SPECIAL MEETING IN PERSON, SUCH STOCKHOLDER MAY REVOKE THE PROXY AND
VOTE IN PERSON ON ALL MATTERS SUBMITTED AT THE SPECIAL MEETING.
By Order of the Board of Directors
Scot Sauder
Secretary
Albuquerque, New Mexico
September 26, 1997
PROSPECTUS-PROXY STATEMENT
PROXY STATEMENT
OF
HORIZON/CMS HEALTHCARE CORPORATION
FOR THE SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 29, 1997
----------------
PROSPECTUS
OF
HEALTHSOUTH CORPORATION
THIS PROSPECTUS RELATES TO UP TO 48,025,579 SHARES OF THE COMMON STOCK, PAR
VALUE $.01 PER SHARE (THE "HEALTHSOUTH COMMON STOCK"), OF HEALTHSOUTH
CORPORATION (TOGETHER WITH ITS SUBSIDIARIES, AS APPLICABLE, "HEALTHSOUTH")
ISSUABLE TO THE STOCKHOLDERS OF HORIZON/CMS HEALTHCARE CORPORATION (TOGETHER
WITH ITS SUBSIDIARIES, AS APPLICABLE, "HORIZON/CMS") UPON CONSUMMATION OF THE
MERGER (AS DEFINED BELOW). SUCH NUMBER OF SHARES REPRESENTS THE MAXIMUM NUMBER
OF SHARES THAT MAY BE ISSUED TO HORIZON/CMS STOCKHOLDERS. THIS PROSPECTUS ALSO
SERVES AS THE PROXY STATEMENT OF HORIZON/CMS FOR ITS SPECIAL MEETING OF
STOCKHOLDERS TO BE HELD ON OCTOBER 29, 1997, AND ANY ADJOURNMENTS AND
POSTPONEMENTS THEREOF (THE "SPECIAL MEETING"). SEE "THE SPECIAL MEETING".
--------------
This Prospectus-Proxy Statement describes the terms of a proposed business
combination between HEALTHSOUTH and Horizon/CMS, pursuant to which HEALTHSOUTH
will acquire Horizon/CMS by means of the merger (the "Merger") of Reid
Acquisition Corporation, a wholly-owned subsidiary of HEALTHSOUTH (the
"Subsidiary"), with and into Horizon/CMS, with Horizon/CMS being the surviving
corporation (the "Surviving Corporation"). After the Merger, the combined
operations of HEALTHSOUTH and Horizon/CMS are expected to be conducted with
Horizon/CMS as a wholly-owned subsidiary of HEALTHSOUTH and the present
subsidiaries of Horizon/CMS continuing as subsidiaries of Horizon/CMS and thus
indirect subsidiaries of HEALTHSOUTH. The Merger will be effected pursuant to
the terms and subject to the conditions of the Plan and Agreement of Merger,
dated as of February 17, 1997, as amended by the First Amendment to Plan and
Agreement of Merger dated September 15, 1997, among HEALTHSOUTH, the Subsidiary
and Horizon/CMS (as it may be further amended, supplemented or otherwise
modified from time to time, the "Plan"). The Plan is attached to this
Prospectus-Proxy Statement as Annex A and is incorporated herein by reference.
HEALTHSOUTH and Horizon/ CMS are hereinafter sometimes referred to collectively
as the "Companies" and individually as a "Company".
Upon consummation of the Merger, except as described herein, each
outstanding share of Common Stock, par value $.001 per share, of Horizon/CMS,
other than shares owned by Horizon/CMS or any wholly-owned subsidiary of
Horizon/CMS (the "Horizon/CMS Common Stock" or the "Horizon/CMS Shares"), will
be converted into 0.84338 of a share of HEALTHSOUTH Common Stock (the "Exchange
Ratio"). Horizon/CMS stockholders will receive cash (without interest) in lieu
of fractional shares of HEALTHSOUTH Common Stock. For a more complete
description of the terms of the Merger, see "THE MERGER".
HEALTHSOUTH has effected a two-for-one stock split in the form of a 100%
stock dividend paid on March 17, 1997. All information relating to HEALTHSOUTH
Common Stock set forth herein, including without limitation the Exchange Ratio
and all per-share information, gives effect to the two-for-one stock split
(except as otherwise set forth in "THE MERGER - Opinion of Financial Advisor to
Horizon/CMS").
This Prospectus-Proxy Statement and the form of Proxy are first being
mailed to stockholders of Horizon/CMS on or about September 30, 1997.
See "Risk Factors" beginning at page 18 for a discussion of certain factors
that should be CONSIDERED BY HORIZON/CMS STOCKHOLDERS.
----------------EXISTING HOLDERS IN CONNECTION WITH THE EXCHANGE
OFFER.
------------------
THE SECURITIES TO BE ISSUED HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR BY ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS-PROXY STATEMENT.PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------------------------
The date of this Prospectus is August , 1998.
2
(Continued from previous page)
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer (a "Participating Broker-Dealer") must acknowledge that it
will deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a Participating
Broker-Dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating Broker-Dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired by such Participating Broker-Dealer as a result of
market-making activities or other trading activities. Pursuant to the
Registration Rights Agreement, the Issuer has agreed that it will make this
Prospectus available to any Participating Broker-Dealer for a period of time not
to exceed six months after the date on which the Exchange Offer is consummated
for use in connection with any such resale. See "Plan of Distribution".
The Issuer will not receive any proceeds from the Exchange Offer. The
Issuer has agreed to pay the expenses of the Exchange Offer. No underwriter is
being utilized in connection with the Exchange Offer.
THE DATEEXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE ISSUER ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF THIS PROSPECTUS-PROXY STATEMENT IS SEPTEMBER 26, 1997.OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES AND BLUE SKY LAWS OF SUCH JURISDICTION.
Prior to this Exchange Offer, there has been no public market for the New
Notes. If such a market were to develop, the New Notes could trade at prices
that may be higher or lower than their principal amount. The Issuer does not
intend to apply for listing of the New Notes on any securities exchange or for
quotation of the New Notes on the New York Stock Exchange or otherwise. The
Initial Purchasers have previously made a market in the Old Notes, and the
Issuer has been advised that the Initial Purchasers currently intend to make a
market in the New Notes, as permitted by applicable laws and regulations, after
consummation of the Exchange Offer. The Initial Purchasers are not obligated,
however, to make a market in the Old Notes or the New Notes and any such market
making activity may be discontinued at any time without notice at the sole
discretion of the Initial Purchasers. There can be no assurance as to the
liquidity of the public market for the New Notes or that any active public
market for the New Notes will develop or continue. If an active public market
does not develop or continue, the market price and liquidity of the New Notes
may be adversely affected. See "Risk Factors -- Absence of a Public Market".
3
AVAILABLE INFORMATION
HEALTHSOUTH has filed a Registration Statement on Form S-4 under the
Securities Act of 1933, as amended (the "Securities Act"), with the Securities
and Exchange Commission (the "SEC") covering the shares of HEALTHSOUTH Common
Stock to be issued in connection with the Merger (including exhibits and
amendments thereto, the "Registration Statement"). As permitted by the rules and
regulations of the SEC, this Prospectus-Proxy Statement omits certain
information contained in the Registration Statement. For further information
pertaining to the securities offered hereby, reference is made to the
Registration Statement.
HEALTHSOUTH and Horizon/CMS are subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") (Commission File Nos. 1-10315 and 1-9369, respectively)No.
1-10315), and in accordance therewith filefiles periodic reports, proxy statements
and other information with the SEC relating to their respectiveits businesses, financial
statements and other matters. The Registration Statement, as well as such
reports, proxy statements and other information, may be inspected and copied at
the public reference facilities maintained by the SEC at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and at the public
reference facilities maintained by the SEC at its regional offices located at
Seven World Trade Center, Suite 1300, New York, New York, 10048; and Citicorp
Center, 500 West Madison Street, Room 1400, Chicago, Illinois 60661-2511. Copies
of such material can be obtained at prescribed rates by writing to the SEC,
Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549. The
SEC also maintains a web site that contains reports, proxy and information
statements and other information regarding HEALTHSOUTH Horizon/CMS and the Registration
Statement. The address of that web site is http://www.sec.gov. Both theThe HEALTHSOUTH
Common Stock and
the Horizon/CMS Common Stock areis listed on the New York Stock Exchange, (the
"NYSE"), and the Registration
Statement and other information with respect to HEALTHSOUTH and Horizon/CMS are available for
inspection at the library of the New York Stock Exchange, Inc., 20 Broad Street,
7th Floor, New York, New York 10005.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
THIS PROSPECTUS-PROXY STATEMENTPROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. COPIES OF SUCH REPORTS, PROXY STATEMENTS AND OTHER
INFORMATION FILED BY HEALTHSOUTH, OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS
SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED HEREIN BY REFERENCE, ARE AVAILABLE
WITHOUT CHARGE, UPON WRITTEN OR ORAL REQUEST, FROM THE SECRETARY OF HEALTHSOUTH
CORPORATION, ONE HEALTHSOUTH PARKWAY, BIRMINGHAM, ALABAMA 35243, TELEPHONE (205)
967-7116.
COPIES OF SUCH REPORTS, PROXY
STATEMENTS AND OTHER INFORMATION FILED BY HORIZON/CMS, OTHER THAN EXHIBITS TO
SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED HEREIN BY
REFERENCE, ARE AVAILABLE, WITHOUT CHARGE, UPON WRITTEN OR ORAL REQUEST, FROM THE
VICE PRESIDENT OF INVESTOR AND PUBLIC RELATIONS OF HORIZON/CMS HEALTHCARE
CORPORATION, 6001 INDIAN SCHOOL ROAD, N.E., FIFTH FLOOR, ALBUQUERQUE, NEW MEXICO
87110, TELEPHONE (505) 878-6100. IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY REQUEST SHOULD BE MADE AT LEAST FIVE DAYS PRIOR TO THE SPECIAL
MEETING.
THERE ARE HEREBY INCORPORATED BY REFERENCE INTO THIS PROSPECTUS-PROXY
STATEMENT AND MADE A PARTThere are hereby incorporated by reference into this Prospectus and made a
part hereof the following documents filed by HEALTHSOUTH (Commission File No.
1-10315):
1. HEALTHSOUTH's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, as amended.
2. HEALTHSOUTH's Current Report on1997 (the "1997 Form 8-K filed February 19, 1997
(relating to the acquisition of Horizon/CMS).
3. HEALTHSOUTH's Current Report on Form 8-K filed March 13, 1997 (reporting
the consummation of the acquisition of Health Images, Inc.10-K").
4.2. HEALTHSOUTH's Quarterly Reports on Form 10-Q for the quarterly periodsquarters ended
March 31 1997, and June 30, 1997 as amended.1998.
3. HEALTHSOUTH's Proxy Statement on Schedule 14A filed April 17, 1998, in
connection with HEALTHSOUTH's 1998 Annual Meeting of Stockholders.
4. HEALTHSOUTH's Current Report on Form 8-K filed May 28, 1998.
5. HEALTHSOUTH's Current Report on Form 8-K filed August 26, 1997, as
amended (containing audited consolidated financial statements of HEALTHSOUTH at
December 31, 1996 and for the three years then ended reflecting the combined
operations of HEALTHSOUTH and Health Images, Inc.).
2
April 3, 1998.
6. The description of HEALTHSOUTH's capital stock contained in
HEALTHSOUTH's Registration Statement on Form 8-A filed August 26, 1989.
There are also hereby incorporated by reference into this Prospectus-Proxy
Statement and made a part hereof the following documents filed by Horizon/CMS
(Commission File No. 1-9369):
1. Horizon/CMS's AnnualCurrent Report on Form 10-K for the fiscal year ended
May 31, 1997, as amended.
2. Horizon/CMS's Registration Statement on Form 8-A8-K filed March 17,
1987, as amended by Amendment No. 1 on Form 8-A/A filed June 23, 1994 and
Amendment No. 2 on Form 8-A/A filed September 22, 1994.
3. Horizon/CMS's Registration Statement on Form 8-A filed September 16,
1994.January 15, 1998.
All documents filed by HEALTHSOUTH and Horizon/CMS pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus-Proxy Statement and prior to the Special Meeting or any adjournment
thereofProspectus shall be deemed to
be incorporated by reference into this Prospectus-Proxy StatementProspectus and to be made a part hereof
from the date of the filing of such documents. Any statement contained in a
document incorporated by reference herein shall be deemed to be modified or
superseded for the purpose hereof to the extent that a statement contained
herein (or in any other subsequently filed document which also is incorporated
by reference herein) modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed to constitute a part hereof, except
as so modified or superseded.
All information contained in this Prospectus-Proxy Statement or
incorporated herein by reference with respect to HEALTHSOUTH was supplied by
HEALTHSOUTH, and all information contained in this Prospectus-Proxy Statement or
incorporated herein by reference with respect to Horizon/CMS was supplied by
Horizon/CMS. Although neither HEALTHSOUTH nor Horizon/CMS has actual knowledge
that would indicate that any statements or information (including financial
statements) relating to the other party contained or incorporated by reference
herein are inaccurate or incomplete, neither HEALTHSOUTH nor Horizon/CMS
warrants the accuracy or completeness of such statements or information as they
relate to the other party.
FORWARD-LOOKING INFORMATION
Statements relating to HEALTHSOUTH contained in this Prospectus-Proxy
StatementProspectus that are
not historical facts are forward-looking statements. In addition, HEALTHSOUTH,
through its senior management, from time to time makes forward-looking public
statements concerning its expected future operations and
4
performance and other developments. Such forward-looking statements are
necessarily estimates reflecting HEALTHSOUTH's best judgment based upon current
information and involve a number of risks and uncertainties, and there can be no
assurance that other factors will not affect the accuracy of such
forward-looking statements. While it is impossible to identify all such factors,
factors which could cause actual results to differ materially from those
estimated by HEALTHSOUTH include, but are not limited to, changes in the
regulation of the healthcare industry at either or both of the federal and state
levels, changes in reimbursement for HEALTHSOUTH's services by government or
private payors, competitive pressures in the healthcare industry and
HEALTHSOUTH's response thereto, HEALTHSOUTH's ability to obtain and retain
favorable arrangements with third-party payors, unanticipated delays in
HEALTHSOUTH's implementation of its Integrated Service Model, general conditions
in the economy and capital markets, and other factors which may be identified
from time to time in HEALTHSOUTH's SEC filings and other public announcements.
Certain of the matters discussed in this Prospectus-Proxy Statement
relating to Horizon/CMS are forward-looking statements, and such statements
involve risks and uncertainties. Although Horizon/ CMS believes that its
expectations are based upon reasonable assumptions, it can give no assurance
that the anticipated results will occur. Important factors that could cause
actual results to differ materially from those in the forward-looking statements
include conditions in the capital markets, the regulatory environment in which
Horizon/CMS operates and the enactment by Congress of healthcare reform
measures.
3
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS-PROXY STATEMENT,PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. NEITHER THE DELIVERY OF THIS PROSPECTUS-PROXY STATEMENTPROSPECTUS NOR ANY DISTRIBUTION OF THE
SECURITIES TO WHICH THIS PROSPECTUS-PROXY STATEMENTPROSPECTUS RELATES SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION
CONCERNING HEALTHSOUTH OR HORIZON/CMS CONTAINED IN THIS PROSPECTUS-PROXY STATEMENTPROSPECTUS SINCE THE DATE OF SUCH
INFORMATION. THIS PROSPECTUS-PROXY STATEMENTPROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE, ANY SECURITIES OTHER THAN THE SECURITIES
TO WHICH IT RELATES, OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO
PURCHASE, THE SECURITIES OFFERED BY THIS PROSPECTUS-PROXY STATEMENTPROSPECTUS IN ANY JURISDICTION IN WHICH
SUCH AN OFFER OR SOLICITATION IS NOT LAWFUL.
45
TABLE OF CONTENTS
PAGE
-----
AVAILABLE INFORMATION ......................................................... 2................................................. 4
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE .............................. 2..................... 4
FORWARD-LOOKING INFORMATION ........................................... 4
SUMMARY OF PROSPECTUS-PROXY STATEMENT .......................................... 7
COMPARATIVE PER SHARE INFORMATION ............................................. 16
HEALTHSOUTH'S AND HORIZON/CMS'S SELECTED PRO FORMA FINANCIAL INFORMA-
TION (UNAUDITED) 17PROSPECTUS ................................................. 8
The Issuer ........................................................... 8
Recent Developments .................................................. 8
Risk Factors ......................................................... 8
The Exchange Offer ................................................... 8
The New Notes ........................................................ 12
Use of Proceeds ...................................................... 13
RISK FACTORS .................................................................. 18
RECENT DEVELOPMENTS ............................................................ 25.......................................................... 14
RATIO OF EARNINGS TO FIXED CHARGES .................................... 20
THE SPECIAL MEETING ............................................................ 26
General ..................................................................... 26
Date, Place and Time ......................................................... 26
Record Date; Quorum ......................................................... 26
Vote Required ............................................................... 26
Voting and Revocation of Proxies ............................................. 26
Solicitation of Proxies ...................................................... 27
THE MERGER ..................................................................... 28EXCHANGE OFFER .................................................... 20
Terms of the Merger ......................................................... 28
BackgroundExchange Offer .......................................... 20
Expiration Date; Extensions; Amendments; Termination ................. 22
Interest on the New Notes ............................................ 23
Procedures for Tendering ............................................. 23
Acceptance of the Merger ...................................................... 28
Certain Information Provided ................................................... 34
ReasonsOld Notes for the Merger; RecommendationExchange; Delivery of the BoardNew Notes .......... 24
Book-Entry Transfer .................................................. 25
Guaranteed Delivery Procedures ....................................... 25
Withdrawal of Directors of Horizon/CMS 34
Opinion of Financial Advisor to Horizon/CMS .................................... 37
Effective Time of the MergerTenders ................................................ 46
Exchange of Certificates ...................................................... 46
Representations and Warranties ................................................ 4725
Conditions to the Merger ...................................................... 48
Regulatory Approvals ......................................................... 48
Business Pending the Merger ................................................... 49
Waiver and Amendment ......................................................... 50
Termination .................................................................. 51
Break-up Fee; Third Party Bids ................................................ 51
Interests of Certain Persons in the Merger .................................... 51
Indemnification ............................................................... 53........................................................... 26
Accounting Treatment ......................................................... 53
Certain Federal Income Tax Consequences ....................................... 53
Resale of HEALTHSOUTH Common Stock by Affiliates .............................. 54
No Appraisal Rights ............................................................ 55
No Solicitation of Transactions ................................................ 55................................................. 26
Exchange Agent ....................................................... 26
Fees and Expenses ..................................................................... 55
NYSE Listing .................................................................. 56.................................................... 27
USE OF PROCEEDS ....................................................... 27
CAPITALIZATION ........................................................ 28
SELECTED CONSOLIDATED FINANCIAL DATA - HEALTHSOUTH .............................. 57
SELECTED CONSOLIDATED FINANCIAL DATA - HORIZON/CMS ........................... 58
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION ........................... 59
BUSINESS.................................. 29
DESCRIPTION OF HEALTHSOUTH ...................................................... 67THE NEW NOTES .......................................... 31
General ........................................................................ 67
Company Strategy ............................................................... 67
Patient Care Services: General ................................................ 68
Outpatient Rehabilitation Services ............................................. 69
Inpatient Rehabilitation Services ............................................. 69
Medical Centers ............................................................... 69
Surgery Centers ............................................................... 69.............................................................. 31
Global Securities .................................................... 31
Optional Redemption .................................................. 33
Certain Covenants of the Issuer ...................................... 34
Merger, Consolidation and Sale of Assets ............................. 36
Events of Default .................................................... 36
Discharge, Defeasance and Covenant Defeasance ........................ 37
56
PAGE
-----
Diagnostic Centers ................................................... 69
Occupational Medicine Services ....................................... 70
OtherModification of the Indenture .............................................. 38
Concerning the Trustee ..................................................... 38
No Personal Liability of Directors, Officers, Stockholders or Incorporators 39
Governing Law .............................................................. 39
Information Concerning the Trustee ......................................... 39
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS ..................... 40
Exchange of Old Notes for New Notes ........................................ 40
Tax Considerations Applicable to United States Persons ..................... 40
Tax Considerations Applicable to Non-U.S. Holders .......................... 41
Information Reporting and Backup Withholding ............................... 42
BUSINESS OF HEALTHSOUTH ..................................................... 43
General .................................................................... 43
HEALTHSOUTH Strategy ....................................................... 43
Recent Developments ........................................................ 44
Patient Care Services .......................................... 70
Locations ............................................................ 71
BUSINESS...................................................... 45
PLAN OF HORIZON/CMS ................................................ 72
Patient Care Services: General Overview .............................. 72
Inpatient Care Services ............................................. 72
Outpatient Care Services ............................................. 73
Patient Care Services Provided Under Contract ........................ 73
Facilities ............................................................ 75
DESCRIPTION OF CAPITAL STOCK OF HEALTHSOUTH ........................... 76
Common Stock ......................................................... 76
Fair Price Provision ................................................ 76
Section 203 of the DGCL ............................................. 76
Preferred Stock ...................................................... 77
Transfer Agent ...................................................... 77
COMPARISON OF RIGHTS OF HORIZON/CMS AND HEALTHSOUTH STOCKHOLDERS ...... 78
Classes and Series of Capital Stock ................................. 78
Size and Election of the Board of Directors ........................ 78
Removal of Directors ................................................ 79
Other Voting Rights ................................................... 79
Conversion and Dissolution .......................................... 79
Business Combinations ................................................ 80
Amendment or Repeal of the Certificate of Incorporation ............ 81
Special Meeting of Stockholders ....................................... 81
Liability of Directors ................................................ 81
Indemnification of Directors and Officers ........................... 82
OPERATIONS AND MANAGEMENT OF HEALTHSOUTH AFTER THE MERGER ............ 83
Operations ......................................................... 83
Management ......................................................... 83DISTRIBUTION ........................................................ 47
EXPERTS ............................................................... 84..................................................................... 48
LEGAL MATTERS ......................................................... 84
ADDITIONAL INFORMATION ................................................ 84
ANNEXES:
A. Plan and Agreement of Merger ....................................... A-1
First Amendment to Plan and Agreement of Merger ..................... A-32
B. Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated ...... B-1............................................................... 48
67
SUMMARY OF PROSPECTUS-PROXY STATEMENTPROSPECTUS
The following is a summary of certain information contained elsewhere in
this Prospectus-Proxy Statement.Prospectus. Certain capitalized terms used in this Summary are defined
elsewhere in this Prospectus-Proxy Statement.Prospectus. Reference is made to, and this Summary is
qualified in its entirety by, the more detailed information contained in this
Prospectus-Proxy Statement, the
Annexes heretoProspectus, and the documents incorporated by reference herein.
THE COMPANIESISSUER
HEALTHSOUTH. HEALTHSOUTH is the nation's largest provider of outpatient
surgery and rehabilitative healthcare services, based upon number of staffed
rehabilitation beds, number of facilities and revenues derived from those
services. It provides these services through its national network of outpatient
and inpatient rehabilitation facilities, outpatient surgery centers, diagnostic
centers, occupational medicine centers, medical centers and other healthcare
facilities. HEALTHSOUTH believes that it provides patients, physicians and
payors with high-quality healthcare services at significantly lower costs than
traditional inpatient hospitals. Additionally, HEALTHSOUTH's national network,
reputation for quality and focus on outcomes has enabled it to secure contracts
with national and regional managed care payors. At June 30, 1997,1998, HEALTHSOUTH
had over 1,2501,900 patient care locations in 50 states, and the United Kingdom.Kingdom and
Australia. See "BUSINESS OF HEALTHSOUTH".
At June 30, 1997,1998, HEALTHSOUTH had consolidated assets of approximately
$3,894,795,000$6.113 billion and consolidated stockholders' equity of approximately $1,848,796,000$3.474
billion and employed approximately 38,00058,500 persons.
HEALTHSOUTH was incorporated under the laws of Delaware in 1984. Its
principal executive offices are located at One HealthSouth Parkway, Birmingham,
Alabama 35243, and its telephone number is (205) 967-7116.
Horizon/CMS. Horizon/CMSRECENT DEVELOPMENTS
On July 1, 1998, HEALTHSOUTH acquired 33 ambulatory surgery centers from
Columbia/ HCA Healthcare Corporation. The surgery centers are located in
Alabama, California, Iowa, Illinois, Kentucky, Louisiana, Minnesota,
Mississippi, North Carolina, Nevada, Oregon, Rhode Island and Texas. Effective
July 31, 1998, HEALTHSOUTH entered into certain other arrangements to acquire
substantially all of the economic benefits of Columbia/HCA's interest in one
additional surgery center. The transaction was valued at approximately
$550,000,000.
On July 22, 1998, HEALTHSOUTH acquired National Surgery Centers, Inc.
("NSC"), adding 40 outpatient surgery centers in 14 states to HEALTHSOUTH's
existing network of outpatient surgery and rehabilitative healthcare facilities.
The value of the NSC transaction was approximately $590,000,000. Under the terms
of the applicable agreement, NSC stockholders received 1.0972 shares of
HEALTHSOUTH Common Stock for each share of NSC Common Stock. The NSC transaction
is expected to be accounted for as a leading providerpooling of post-acute healthcare
servicesinterests and operatesis intended to be
a tax-free reorganization.
RISK FACTORS
Existing holders of the second-largest groupOld Notes should pay special attention to the "Risk
Factors" section beginning on page 14.
THE EXCHANGE OFFER
THE EXCHANGE OFFER.... New Notes are being offered in exchange for an equal
principal amount of acute rehabilitation hospitals
inOld Notes of the nation based upon total staffed beds. At May 31, 1997, Horizon/CMS
operated 30 inpatient rehabilitation hospitals, 36 specialty hospitals and
subacute units and 288 outpatient rehabilitation units. In addition, Horizon/CMS
also owned, leased or managed 135 long-term care facilities, a contract therapy
business holding 1,453 contracts, an institutional pharmacy business serving
facilities that containedsame maturity.
As of the date hereof, Old Notes due 2005 are
outstanding in the aggregate
approximately 44,400 beds,8
principal amount of $250,000,000 and Old Notes due
2008 are outstanding in the aggregate principal
amount of $250,000,000. Old Notes may be tendered
only in integral multiples of $1,000.
RESALE OF NEW NOTES.. Based on interpretations by the staff of the
Commission, as set forth in no-action letters issued
to third parties, including the Exchange Offer
No-Action Letters, the Issuer believes that the New
Notes issued pursuant to the Exchange Offer may be
offered for resale, resold or otherwise transferred
by each holder thereof (other than a broker-dealer
who acquires such New Notes directly from the Issuer
for resale pursuant to Rule 144A under the
Securities Act or any other available exemption
under the Securities Act and other healthcare services. See "THE MERGER - Regulatory Approvals"than any holder
that is an "affiliate" (as defined under Rule 405 of
the Securities Act) of the Issuer) without
compliance with the registration and "BUSINESS OF
HORIZON/CMS".
At May 31, 1997, Horizon/CMS had consolidated assetsprospectus
delivery provisions of approximately
$1,606,381,000the Securities Act, provided
that such New Notes are acquired in the ordinary
course of such holder's business and consolidated stockholders' equity of approximately
$620,489,000 and employed approximately 37,500 persons.
Horizon/CMS was incorporated under the laws of Delaware in 1986. Its
principal executive offices are located at 6001 Indian School Road, N.E., Fifth
Floor, Albuquerque, New Mexico 87110, and its telephone numbersuch holder is (505)
878-6100.
Reid Acquisition Corporation. The Subsidiary is a direct, wholly-owned
subsidiary of HEALTHSOUTH and has
not engaged in, and does not intend to engage in, a
distribution of such New Notes and has no
arrangement with any business activity unrelatedperson to participate in a
distribution of such New Notes. By tendering the Old
Notes in exchange for New Notes, each holder, other
than a broker-dealer, will represent to the Merger. The principal executive officesIssuer
that: (i) it is not an affiliate (as defined in Rule
405 under the Securities Act) of the Subsidiary are located at
One HealthSouth Parkway, Birmingham, Alabama 35243, andIssuer; (ii) it
is not a broker-dealer tendering Old Notes acquired
for its telephone number is
(205) 967-7116.
THE SPECIAL MEETING
The Special Meeting of Horizon/CMS's stockholdersown account directly from the Issuer; (iii)
any New Notes to consider and vote on a
proposal to approve the Planbe received by it will be heldacquired
in the ordinary course of its business; and (iv) it
is not engaged in, and does not intend to engage in,
a distribution of such New Notes and has no
arrangement or understanding to participate in a
distribution of the New Notes. If a holder of Old
Notes is engaged in or intends to engage in a
distribution of the New Notes to be acquired
pursuant to the Exchange Offer, such holder may not
rely on October 29, 1997, at 10:00 a.m.,
localthe applicable interpretations of the staff
of the Commission and must comply with the
registration and prospectus delivery requirements of
the Securities Act in connection with any secondary
resale transaction. Each Participating Broker-Dealer
that receives New Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will
deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such
New Notes. The Letter of Transmittal states that by
so acknowledging and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the meaning
of the Securities Act. This Prospectus, as it may be
amended or supplemented from time atto time, may be
used by a Participating Broker-Dealer in connection
with resales of New Notes received in exchange for
Old Notes where such Old Notes were acquired by such
Participating Broker-Dealer as a result of
market-making activities or other trading
activities. The Issuer has agreed that it will make
this Prospectus available to any Participating
Broker-Dealer for a period of time not to exceed one
year after the Crowne Plaza Pyramid, 5151 San Francisco Road N.E.,
Albuquerque,date on which the Exchange Offer is
con-
9
summated for use in connection with any such resale.
See "Plan of Distribution". To comply with the
securities laws of certain jurisdictions, it may be
necessary to qualify for sale or register the New
Mexico 87109. OnlyNotes prior to offering or selling such New Notes.
The Issuer has agreed, pursuant to the Registration
Rights Agreement and subject to certain specified
limitations therein, to register or qualify the New
Notes for offer or sale under the securities or
"blue sky" laws of such jurisdictions as may be
necessary to permit consummation of the Exchange
Offer.
REGISTRATION RIGHTS AGREE
MENTS .................. The Old Notes were issued on June 22, 1998, to the
Initial Purchasers. The Initial Purchasers placed
the Old Notes with institutional or overseas
investors. In connection therewith, the Issuer and
the Initial Purchasers entered into the Registration
Rights Agreement, providing, among other things, for
the Exchange Offer. See "The Exchange Offer".
CONSEQUENCES OF FAILURE TO
EXCHANGE OLD NOTES.... Upon consummation of the Exchange Offer, subject to
certain exceptions, holders of record of Horizon/CMS Shares atOld Notes who do not
exchange their Old Notes for New Notes in the
close of business on September 14, 1997 (the "Record Date"),Exchange Offer will 7
no longer be entitled to
noticeregistration rights and will not be able to offer or
sell their Old Notes, unless such Old Notes are
subsequently registered under the Securities Act
(which, subject to certain limited exceptions, the
Issuer will have no obligation to do), or pursuant
to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state
securities laws. See "Risk Factors -- Consequences
of Failure to Exchange" and "The Exchange Offer --
Terms of the Exchange Offer".
EXPIRATION DATE......... 5:00 p.m., New York City time, on __________, 1998
(30 calendar days following the commencement of the
Exchange Offer), unless the Exchange Offer is
extended, in which case the term "Expiration Date"
means the latest date and time to votewhich the Exchange
Offer is extended.
INTEREST ON THE NEW NOTES. Interest on the New Notes will accrue from June 22,
1998 and be payable, at the Special Meeting. At such date,rates of 6.875% per
annum on the New Notes due 2005 and 7.0% on the New
Notes due 2008, on June 15 and December 15 of each
year, commencing December 15, 1998.
CONDITIONS TO THE EXCHANGE
OFFER................. The Exchange Offer is not conditioned upon any
minimum principal amount of Old Notes being tendered
for exchange. However, the Exchange Offer is subject
to certain customary conditions, which may, under
certain circumstances, be waived by the Issuer. See
"The Exchange Offer -- Conditions". Except for the
requirements of applicable federal and state
securities laws, there were outstanding and entitled to vote 52,713,226 shares of Horizon/CMS Common
Stock. Each issued and outstanding Horizon/CMS Share is entitled to one vote on
each matterare no federal or state
regulatory requirements to be presented at the Special Meeting. For additional information
relating to the Special Meeting, see "THE SPECIAL MEETING".
VOTE REQUIRED
Approval of the Plancomplied with by the
stockholdersIssuer in connection with the Exchange Offer.
10
PROCEDURES FOR TENDERING
OLD NOTES.............. Each holder of Horizon/CMS requiresOld Notes wishing to accept the
affirmative voteExchange Offer must complete, sign and date the
Letter of the holders of a majority of the outstanding shares of
Horizon/CMS Common Stock entitled to vote thereon. Accordingly, approval of the
Plan at the Special Meeting will require the affirmative vote of the holders of
at least 26,356,614 shares of Horizon/CMS Common Stock.
As of the Record Date, directors and executive officers of Horizon/CMS and
their affiliates beneficially owned an aggregate of 1,241,828 shares of
Horizon/CMS Common Stock (excluding shares issuable upon exercise of options),
or approximately 2.4% of the Horizon/CMS Shares outstanding on such date. To
Horizon/CMS's knowledge, each of its directors and executive officers intends to
vote in favor of the proposal to approve the Plan.
If the Plan is not approved by Horizon/CMS stockholders, the Plan may be
terminated by HEALTHSOUTH or Horizon/CMSTransmittal, in accordance with its terms. Such
approval is also a conditionthe
instructions contained herein and therein, and mail
or otherwise deliver such Letter of Transmittal,
together with the Old Notes to HEALTHSOUTH'sbe exchanged and Horizon/CMS's obligations to
consummate the Merger. See "THE SPECIAL MEETING - Vote Required", "THE MERGER
Conditionsany
other required documentation to the Merger"Exchange Agent
(as defined herein) at the address set forth herein
or effect a tender of Old Notes pursuant to the
procedures for book-entry transfer as provided for
herein. See "The Exchange Offer -- Procedures for
Tendering" and "- Termination""-- Book Entry Transfer".
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS........ Any beneficial owner whose Old Notes are registered
in the name of a broker, dealer, commercial bank,
trust company or other nominee and who wishes to
tender should contact such registered holder
promptly and insruct such registered holder to
tender on his behalf. If such beneficial owner
wishes to tender on his own behalf, such beneficial
owner must, prior to completing and executing the
Letter of Transmittal and delivering his Old Notes,
either make appropriate arrangements to register
ownership of the Old Notes in such owner's name or
obtain a properly completed bond power from the
registered holder. The Merger
TERMStransfer of registered
ownership may take considerable time. See "Exchange
Offer -- Procedures for Tendering".
GUARANTEED DELIVERY
PROCEDURES............ Holders of Old Notes who wish to tender their Old
Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes and
a properly completed Letter of Transmittal or any
other documents required by the Letter of
Transmittal to the Exchange Agent prior to the
Expiration Date may tender their Old Notes according
to the guaranteed delivery procedures set forth in
"The Exchange Offer -- Guaranteed Delivery
Procedures".
WITHDRAWAL RIGHTS...... Tenders of Old Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the
Expiration Date. To withdraw a tender of Old Notes,
a written notice of withdrawal must be received by
the Exchange Agent at its address set forth herein
under "The Exchange Offer -- Exchange Agent" prior
to 5:00 p.m., New York City time, on the Expiration
Date.
ACCEPTANCE OF THE MERGER. Horizon/CMSOLD NOTES AND
DELIVERY OF NEW NOTES.. Subject to certain conditions, any and all Old Notes
tha are properly tendered in the Exchange Offer
prior to 5:00 p.m., New York City time, on the
Expiration Date will be acquired by HEALTHSOUTHaccepted for exchange. The
New Notes issued pursuant to the Exchange Offer will
be delivered promptly following the Expiration Date.
See "The Exchange Offer -- Terms of the Exchange
Offer".
In all cases, issuance of New Notes for Old Notes
that are accepted for exchange pursuant to the
Exchange Offer will be made only after timely
receipt by the Exchange Agent of cer-
11
tificates for the Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility,
a properly completed and subject toduly executed Letter of
Transmittal and all other required documents. If any
tendered Old Notes are not accepted for any reason
set forth in the terms and conditions of the
Plan, which provides that, atExchange Offer or if Old Notes are submitted for a
greater principal amount than the effective timeholder desires to
exchange, such unaccepted or non-exchanged Old Notes
will be returned without expense to the tendering
holder thereof (or, in the case of Old Notes
tendered by book-entry transfer procedures described
herein, such non-exchanged Old Notes will be
credited to an account maintained with such
Book-Entry Transfer Facility) as promptly as
practicable after the expiration or termination of
the Merger (the "Effective Time"), the SubsidiaryExchange Offer.
CERTAIN TAX
CONSIDERATIONS......... The exchange of New Notes for Old Notes will merge with and into Horizon/CMS with Horizon/ CMS being the Surviving
Corporation. The Certificate of Incorporation of Horizon/CMS,not b
considered a sale or exchange or otherwise a taxable
event for Federal income tax purposes. See "Certain
United States Federal Tax Considerations".
EXCHANGE AGENT......... PNC Bank, N.A. is serving as amended at the
Effective Time pursuant to the request of HEALTHSOUTH, and the Bylaws of the
Subsidiary in effect at the Effective Time will be the Certificate of
Incorporation and Bylaws of the Surviving Corporation until amended or repealed
in accordance with applicable law. At the Effective Time, each outstanding
Horizon/CMS Share (excluding shares held by Horizon/CMS and any of its
subsidiaries) will be converted into 0.84338exchange agent (the
"Exchange Ratio"Agent") of a share
of HEALTHSOUTH Common Stock (the "Merger Consideration"). The Exchange Ratio
reflects the two-for-one stock split of the HEALTHSOUTH Common Stock effected in
the form of a 100% stock dividend paid on March 17, 1997. Fractional shares of
HEALTHSOUTH Common Stock will not be issuable in connection with the Merger.
Horizon/CMS stockholdersExchange
Offer.
FEES AND EXPENSES..... All expenses incident to consummation of the
Exchange Offer and compliance with the Registration
Rights Agreement will receive cash (without interest)be borne by the Issuer. See
"The Exchange Offer -- Fees and Expenses".
USE OF PROCEEDS....... There will be no proceeds payable to the Issuer from
the issuance of the New Notes pursuant to the
Exchange Offer. See "Use of Proceeds".
THE NEW NOTES
The Exchange Offer relates to (a) the exchange of up to $250,000,000
aggregate principal amount of Old Notes due 2005 for up to an equal aggregate
principal amount of New Notes due 2005 and (b) the exchange of up to
$250,000,000 aggregate principal amount of Old Notes due 2008 for up to an equal
aggregate principal amount of New Notes due 2008. The New Notes will be entitled
to the benefits of the same Indenture that governs the Old Notes and that will
govern the New Notes. The form and terms of the New Notes are the same in lieuall
material respects as the form and terms of fractional sharesthe Old Notes, except that (i) the
New Notes have been registered under the Securities Act and therefore will not
bear legends restricting the transfer thereof and (ii) holders of HEALTHSOUTH Common Stock.New Notes will
not be entitled to certain rights of holders of the Old Notes under the
Registration Rights Agreement, which rights will be terminated upon consummation
of the Exchange Offer (e.g. liquidated damages). See "THE MERGER""Description of the New
Notes".
MATURITY DATES......... The New Notes due 2005 will mature on June 15, 2005
and "DESCRIPTION
OF CAPITAL STOCK OF HEALTHSOUTH".
Asthe New Notes due 2008 will mature on June 15,
2008
INTEREST PAYMENT DATES... June 15 and December 15 of May 31, 1997, Horizon/CMS had outstanding approximately $742.5
millioneach year, commencing
December 15, 1998.
OPTIONAL REDEMPTION.... The Old Notes will be redeemable as a whole or in
long-term indebtedness (including the current portion thereof), all
of which willpart, at the Effective Time become long-term indebtednessoption of the Surviving Corporation (beingIssuer, at any time at a
subsidiaryredemption price equal to the greater of HEALTHSOUTH) as a result(i) 100% of
their principal amount and (ii) the sum
12
of the Merger.
Recommendationpresent values of the Boardremaining scheduled
payments of Directors. THE BOARD OF DIRECTORS OF
HORIZON/CMS HAS ADOPTED AND APPROVED THE PLAN AND HAS RECOMMENDED A VOTE FOR
APPROVAL OF THE PLAN. THE BOARD OF DIRECTORS BELIEVES THE PLAN IS FAIR TO AND IN
THE BEST INTERESTS OF THE STOCKHOLDERS OF HORIZON/CMS.
In reaching its determination,principal and interest thereon
discounted to the Boarddate of Directors was motivated to
restore stockholder value lost,redemption on a
semi-annual basis (assuming a 360-day year
consisting of twelve 30-day months) at leastthe
applicable Treasury Yield (as defined herein) plus
15 basis points in part, as a resultthe case of the public
disclosuresNew Notes due
2005 and newspaper articles described under "THE MERGER-Background20 basis points in the case of the Merger" below. In its deliberations with respect to
8
the Merger, the Board of Directors consulted with management of Horizon/CMS and
the financial and legal advisors to Horizon/CMS. The composite mix of
information availableNew
Notes due 2008, plus in each case accrued interest
to the Boarddate of Directors with respect to the Merger
included the information regarding the matters enumerated under "THE
MERGER-Reasons for the Merger; Recommendationredemption. See "Description of the
Board of Directors of
Horizon/CMS" below.
These matters included: (i) strategic alternatives, including Horizon/CMS's
prospects as an independent company; (ii) the growth records of each of
HEALTHSOUTHNew Notes -- Optional Redemption".
RANKING................. The New Notes will constitute unsecured and
another active bidder ("Company A"), and the ability of each to
meet its anticipated financial objectives; (iii) financial information and
prospects (including the opportunity for operating efficiencies and synergies)
of a business combination with each of such companies; (iv) the resultsunsubordinated obligations of the due diligence investigations; (v) the abilityIssuer and will
rank pari passu in right of each of (a) Horizon/CMS as an
independent entity, (b) a combinationpayment with all other
unsecured and unsubordinated obligations of the
Companies and (c) a combination of
Horizon/CMS and Company A to compete in the healthcare industry; (vi)
comparative data regarding market capitalization, debt to equity ratio and other
financial information with respect to eachIssuer. See "Description of the foregoing alternatives; (vii)New Notes".
RESTRICTIVE COVENANTS... The Indenture governing the absence of continued interest on the part ofNew Notes contains
certain covenants that, among other prospective
bidders in a business combination; (viii) specifically with respect to the
Merger, the Exchange Ratio and recent trading prices for the Companies' stock,
including the opportunity for the stockholders of Horizon/CMS to receive a
premium over the market price for their shares immediately prior to the
announcement of the Plan, and the lack of any substantial impediments onthings, limit
the ability of the Board, as required by its fiduciary obligations,Issuer to give
information to third parties, entertainincur liens and negotiate alternative proposalsengage
in mergers and terminate the Plan in the event of an unsolicited alternative proposal;consolidations or sale and (ix)
the financial presentations of Merrill Lynch. For a more detailed description of
these matters, see "THE MERGER-Reasons for the Merger; Recommendationlease-back
transactions. See "Description of the Board of Directors of Horizon/CMS" below.
Opinion of Financial Advisor to Horizon/CMS. Merrill Lynch has acted as
financial advisor to Horizon/CMS in connection with the Merger. On February 17,
1997, Merrill Lynch rendered its oral opinion, which it subsequently confirmed
in writing on the date hereof,New Notes".
USE OF PROCEEDS
There will be no proceeds payable to the Board of Directors of Horizon/CMS that, as
of such dates, and based uponIssuer from the assumptions made, matters considered and
limits of review as set forth in such opinion, the Exchange Ratio was fair to
the stockholders of Horizon/CMS from a financial point of view. The full textissuance of the
written opinion of Merrill Lynch dated the date hereof is attached as Annex
B to this Prospectus-Proxy Statement and should be read carefully in its
entirety. The opinion of Merrill Lynch is for the use and benefit of the Board
of Directors of Horizon/CMS and relates only to the fairness of the Exchange
Ratio to the stockholders of Horizon/CMS from a financial point of view. The
opinion of Merrill Lynch does not address the underlying decision by Horizon/CMS
to engage in the Merger and does not constitute a recommendation to any
stockholder as to how such stockholder should vote on the Merger. See "THE
MERGER - Opinion of Financial Advisor to Horizon/CMS".
Under the terms of its engagement of Merrill Lynch, Horizon/CMS has paid
Merrill Lynch a fee of $150,000 and has agreed to pay Merrill Lynch a fee equal
to 0.90% of the transaction value of the Merger at the Effective Time of the
Merger. The latter fee, which is estimated to be approximately $14.6 million, is
payable only if the Merger is consummated.
Effective Time of the Merger. The Merger will become effective upon the
filing of a Certificate of Merger by Horizon/CMS under the General Corporation
Law of the State of Delaware (the "DGCL"), or at such later time as may be
specified in such Certificate of Merger. The Plan requires that this filing be
made no later than two business days after satisfaction or waiver of the various
conditions to the Merger set forth in the Plan, or at such other time as may be
agreed by HEALTHSOUTH and Horizon/CMS. See "THE MERGER - Effective Time of the
Merger" and "- Conditions to the Merger".
Exchange of Certificates. As soon as reasonably practicable after the
Effective Time, transmittal materials will be mailed to each holder of record of
Horizon/CMS Shares for use in exchanging such holder's stock certificates for
certificates evidencing shares of HEALTHSOUTH Common
9
Stock and for receiving cash in lieu of fractional shares and any dividends or
other distributions to which such holder is entitled as a result of the Merger.
STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY CARDS. See
"THE MERGER - Exchange of Certificates".
Representations and Warranties. The Plan contains certain representations
and warranties made by each of the parties thereto that must be confirmed as of
the Closing Date, including representations that neither HEALTHSOUTH nor
Horizon/CMS has engaged in certain types of transactions. See "THE MERGER
Representations and Warranties".
Conditions to the Merger. The obligation of each of HEALTHSOUTH, the
Subsidiary and Horizon/CMS to consummate the Merger is subject to certain
conditions, including approval of the Plan by the Horizon/CMS stockholders,
certain regulatory approvals and confirmation by each of HEALTHSOUTH and
Horizon/CMS of its representations and warranties as of the Closing Date. See
"THE MERGER - Conditions to the Merger". Certain conditions to the Merger
contained in the Plan may be waived by the parties thereto. Horizon/CMS does
not, however, intend to waive satisfaction of any such condition or amend the
Plan if such waiver or amendment would be material to the Horizon/CMS
stockholders' consideration of and vote upon the proposal to approve the Plan
without resoliciting the vote of such stockholders.
Regulatory Approvals. The Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"), provides that certain business mergers
(including the Merger) may not be consummated until certain information has been
furnished to the Department of Justice (the "DOJ") and the Federal Trade
Commission (the "FTC") and certain waiting period requirements have been
satisfied. On April 11, 1997, HEALTHSOUTH and Horizon/CMS made their respective
filings with the DOJ and the FTC with respect to the Plan. Under the HSR Act,
the filings commenced a waiting period of up to 30 days during which the Merger
cannot be consummated, which waiting period was originally to expire on May 11,
1997, unless extended by a request for additional information. In order to
provide an additional period of time for the Companies to provide certain
information to the FTC on a voluntary basis, HEALTHSOUTH withdrew its HSR filing
on May 7, 1997 and refiled it on May 8, 1997, beginning a new 30-day waiting
period. On June 6, 1997, the Companies received a request for additional
information from the FTC. The request for additional information relates
exclusively to the competitive effect the Merger will have on the Johnson City,
Tennessee market area. The effect of that request is to extend the waiting
period under the HSR Act until 20 days after HEALTHSOUTH and Horizon/CMS
substantially comply with such request, unless earlier terminated by the FTC.
The Companies are working to resolve the issues in the Johnson City, Tennessee
market to the satisfaction of the FTC, and expect to enter into a consent order
requiring the divestiture of Horizon/CMS's interest in its rehabilitation
hospital in Johnson City. Notwithstanding the termination or expiration of the
HSR Act waiting period, at any time before or after the Effective Time, the FTC,
the DOJ or others could initiate legal action under the antitrust laws seeking
to enjoin the consummation of the Merger or seeking the divestiture by
HEALTHSOUTH of any part of its assets or all or any part of the stock or assets
of Horizon/CMS. There can be no assurance that a challenge to the Merger on
antitrust grounds will not be made or, if such a challenge were made, that it
would not be successful. The operations of each Company also are subject to a
substantial body of federal, state, local and accrediting body laws, rules and
regulations relating to the conduct, licensing and development of healthcare
businesses and facilities. See "THE MERGER - Regulatory Approvals".
Conduct Pending the Merger. The Plan provides that, until the Effective
Time, except as provided in the Plan, Horizon/CMS will use its reasonable best
efforts to preserve intact its present business organization, to keep available
to HEALTHSOUTH and the Surviving Corporation the services of its present
employees and to preserve the goodwill of customers, suppliers and others having
business dealings with it. In addition, Horizon/CMS has agreed not to engage in
certain types of transactions pending the Effective Time. Both HEALTHSOUTH and
Horizon/CMS have agreed not
10
to engage knowingly or intentionally in any conduct that would cause its
representations and warranties to become untrue in any material respect pending
the Effective Time. See "THE MERGER - Business Pending the Merger".
Amendment. The Plan provides that, at any time prior to the Effective Time,
the parties may, under certain circumstances, amend or otherwise change the
Plan. See "THE MERGER - Waiver and Amendment".
Termination. The Plan may be terminated at any time prior to the Effective
Time, whether before or after approval of the Plan by the stockholders of
Horizon/CMS, under certain circumstances that are set forth in the Plan. See
"THE MERGER - Termination".
No Solicitation. The Plan provides that Horizon/CMS and its representatives
will not, directly or indirectly, (i) solicit or initiate (including by way of
furnishing or publishing nonpublic information) any inquiries or the making of
any proposal with respect to any merger, consolidation or other business
combination involving Horizon/CMS or the acquisition of all or any significant
part of the assets or capital stock of Horizon/CMS or any similar transaction
(an "Acquisition Transaction"), (ii) negotiate, explore or otherwise engage in
discussions with any persons (other than HEALTHSOUTH) with respect to any
Acquisition Transaction or (iii) enter into any agreement, arrangement or
understanding with respect to any Acquisition Transaction; provided, however,
that Horizon/CMS may furnish information and access in response to an
unsolicited written proposal for a Superior Transaction (as defined in the Plan)
to any person pursuant to an appropriate confidentiality agreement and may
participate in discussions and negotiate with such person concerning any
proposal for a Superior Transaction if the Board of Directors of Horizon/CMS
determines in its good faith judgment in the exercise of its fiduciary duties
that such action is appropriate in furtherance of the best interests of its
stockholders.
Break-up Fee; Third Party Bids. If the Plan is terminated by the Board of
Directors of Horizon/CMS because, in the exercise of its fiduciary duties under
applicable law, it has (i) determined not to recommend the Merger to the holders
of Horizon/CMS Common Stock, (ii) withdrawn such recommendation, (iii) approved,
recommended or endorsed any Acquisition Transaction other than the Plan or (iv)
resolved to take any of such actions, and within one year after the effective
date of such termination Horizon/CMS is the subject of a Third Party Acquisition
Event (as defined in the Plan), then at the time of consummation of such a Third
Party Acquisition Event Horizon/CMS shall pay to HEALTHSOUTH a break-up fee of
$35,000,000 and shall pay or reimburse HEALTHSOUTH for actual expenses incurred
by HEALTHSOUTH in connection with the Merger up to a maximum of $5,000,000. See
"THE MERGER - Break-up Fee; Third Party Bids".
Interests of Certain Persons in the Merger. In considering the
recommendation of the Board of Directors of Horizon/CMS with respect to the Plan
and the transactions contemplated thereby, stockholders of Horizon/CMS should be
aware that certain members of the management of Horizon/CMS and its Board of
Directors have certain interests in the Merger in addition to the interests of
stockholders generally.
HEALTHSOUTH has agreed to add Neal M. Elliott, Chairman of the Board,
President and Chief Executive Officer of Horizon/CMS, to the HEALTHSOUTH Board
of Directors promptly after the Effective Time. In addition, Mr. Elliott is
party to an Employment and Change of Control Agreement, dated December 24, 1996,
with Horizon/CMS, and HEALTHSOUTH has agreed to assume the obligations of
Horizon/CMS thereunder at the Effective Time. The Employment and Change of
Control Agreement provides for a lump sum payment of three times Mr. Elliott's
base salary, the acceleration of vesting of stock options held by Mr. Elliott
and certain other benefits described in the paragraph below upon the occurrence
of certain circumstances following a transaction such as the Merger. The change
of control provisions of Mr. Elliott's agreement are consistent with the terms
of the change of control agreements with Horizon/CMS's other management
11
employees described in the paragraph below, except that the agreements with the
other management employees contain provisions reducing the amount payable and
the number of options that may be vested on an accelerated basis to the extent
that such compensation would constitute an "excess parachute payment" (as
defined in Section 280G(b)(i) of the Internal Revenue Code of 1986, as amended
(the "Code")), while Mr. Elliott's agreement contains no such provision. A
portion of Mr. Elliott's compensationNew Notes pursuant to the change in control
provisions in his agreement likely would be subject to excise tax and not be
deductible by Horizon/CMS for federal income tax purposes. If Mr. Elliott's
compensation constitutes an "excess parachute payment" and is subject to excise
tax, his agreement contains a gross-up provision pursuant to which Horizon/CMS
must pay him an amount that will place him inExchange Offer. The proceeds from the same after-tax economic
position in which he would have been absent the excise tax. Such amount also
will not be deductible by Horizon/CMS for federal income tax purposes.
Horizon/CMS is also a party to change of control agreements with 49
additional management employees, including its other executive officers. These
agreements (together with Mr. Elliott's Employment and Change of Control
Agreement described above) provide, upon terminationsale of the employment of such
employees for any reason other than "cause" after certain events, such as the
Merger, constituting a "change of control" of Horizon/CMS, for certain lump sum
cash payments, the acceleration of vesting of stock options heldOld
Notes were used by such
employees and the continuance of participation by such employees in life
insurance, accident and health plans and other welfare plans maintained by
Horizon/CMS for a period not exceeding three years (assuming Horizon/CMS gives
timely notice of termination of the agreements). For this purpose, an assignment
of duties inconsistent with an employee's position, a relocation of the
employee's principal place of work and an increase in the amount of travel
required of the employee will be deemed a termination of employment.
Under the change of control agreements, a maximum of $17.5 million in cash
would be payable in lump sum and the vesting of stock options relating to
approximately 803,000 shares of Horizon/CMS Common Stock (at a weighted average
exercise price of approximately $14.62 per share) would be accelerated if the
employment of all such employees were terminated after consummation of the
Merger. If any such events should transpire with respect to Mr. Elliott; Joseph
Turmes, Senior Vice President of Operations; Charles H. Gonzales, Senior Vice
President of Subsidiary Operations and a Director; Ernest A. Schofield, Senior
Vice President, Treasurer, Chief Financial Officer and a Director; Scot Sauder,
Vice President of Legal Affairs, Secretary and General Counsel; or Anthony
Misitano, President and Chief Executive Officer of Horizon/CMS's Acute
Rehabilitation Hospital Division, the maximum amount of the lump sum cash
payments due to such officers under such agreements would be approximately
$5,160,000 (including a $2,440,000 gross-up payment as described in the
preceding paragraph), $424,000, $735,000, $687,000, $437,000 and $1,001,000,
respectively. In addition, the vesting of the following options held by such
officers would be accelerated: Mr. Elliott - 233,000 shares (at a weighted
average exercise price of $14.55 per share); Mr. Turmes - 39,000 shares (at a
weighted average exercise price of $14.82 per share); Mr. Gonzales - 53,000
shares (at a weighted average exercise price of $14.06 per share); Mr. Schofield
- - 38,000 shares (at a weighted average exercise price of $14.51 per share); Mr.
Sauder - 25,000 shares (at a weighted average exercise price of $15.67 per
share); and Mr. Misitano - 47,000 shares (at a weighted average exercise price
of $13.76 per share). At the time of approval and adoption of the Plan by the
Board of Directors of Horizon/CMS, Michael A. Jeffries served as a Director and
Senior Vice President of Operations and was a party to a change of control
agreement. Pursuant to such agreement, if the events described above were to
transpire with respect to Mr. Jeffries, the maximum amount of the lump such cash
payment due to Mr. Jeffries would be $853,000 and the vesting of options with
respect to 43,000 shares (at a weighted average exercise price of $14.86 per
share) would be accelerated. Effective June 1, 1997, Mr. Jeffries resigned from
such positions and, in connection therewith, his change of control agreement was
amended so that he was entitled, without regard to the events described above,
to the foregoing benefits at Septem-
12
ber 1, 1997. Mr. Turmes was appointed to his present position on June 1, 1997
and, as a result, was not a director or executive officer of Horizon/CMS at the
time the Plan was approved and adopted by the Board of Directors of
Horizon/CMS.
In addition, pursuant to the terms of Horizon/CMS's stock option plans, a
substantial portion of Horizon/CMS stock options that are not fully vested prior
to the Effective Time will accelerate and vest in full as a result of the Merger
at the Effective Time. Certain directors and members of Horizon/CMS management
hold such options.
See "THE MERGER - Interests of Certain Persons in the Merger".
Accounting Treatment. It is intended that the Merger will be accounted for
as a purchase. See "THE MERGER - Accounting Treatment" and "PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION".
Certain Federal Income Tax Consequences. The Merger is intended to qualify
as a reorganization within the meaning of Section 368(a) of the Code. If the
Merger so qualifies, no gain or loss will be recognized by holders of
Horizon/CMS Shares who hold such shares as capital assets upon their receipt of
HEALTHSOUTH Common Stock in exchange for their Horizon/CMS Shares, except with
respect to cash received in lieu of fractional shares. The obligations of
Horizon/CMS and HEALTHSOUTH to consummate the Merger are conditioned upon their
receiptrepay bank debt. See "Use of opinions from their respective counsel to the effect that the Merger
will qualify as a reorganization within the meaning of Section 368(a) of the
Code. Each holder of Horizon/CMS Shares is urged to consult his or her personal
tax and financial advisors concerning the federal income tax consequences of the
Merger, as well as any state, local, foreign or other tax consequences of the
Merger, based upon such holder's own particular facts and circumstances. See
"THE MERGER - Certain Federal Income Tax Consequences".
Resale Restrictions. All shares of HEALTHSOUTH Common Stock received by
Horizon/ CMS stockholders in the Merger will be freely transferable, except that
shares of HEALTHSOUTH Common Stock received by persons who are deemed to be
"affiliates" (as such term is defined under the Securities Act) of Horizon/CMS
at the time of the Special Meeting may be resold by them only in certain
circumstances as permitted by the rules and regulations promulgated under the
Securities Act. See "THE MERGER - Resale of HEALTHSOUTH Common Stock by
Affiliates".
Appraisal Rights. Holders of Horizon/CMS Common Stock are not entitled to
appraisal rights under the DGCL with respect to the Merger. See "THE MERGER -
No Appraisal Rights".
NYSE Listing. A listing application will be filed with the NYSE to list the
shares of HEALTHSOUTH Common Stock to be issued to the Horizon/CMS stockholders
in the Merger. Although no assurance can be given that the NYSE will accept such
shares of HEALTHSOUTH Common Stock for listing, HEALTHSOUTH anticipates that
these shares will qualify for listing. It is a condition to the obligation of
HEALTHSOUTH, the Subsidiary and Horizon/CMS to consummate the Merger that such
shares of HEALTHSOUTH Common Stock be approved for listing on the NYSE upon
official notice of issuance at the Effective Time. See "THE MERGER - NYSE
Listing"Proceeds".
13
MARKET AND MARKET PRICE
HEALTHSOUTH Common Stock is listed under the symbol "HRC" on the NYSE.
Horizon/
CMS Common Stock is listed under the symbol "HHC" on the NYSE. Set forth below
are the closing prices per share of HEALTHSOUTH Common Stock and Horizon/CMS
Common Stock on the NYSE, and the pro forma closing price per share of
Horizon/CMS Common Stock, on (i) February 14, 1997, the last business day
preceding public announcement of the Merger, and (ii) September 24, 1997:
PRO FORMA
CLOSING PRICE CLOSING PRICE CLOSING PRICE
PER SHARE OF PER SHARE OF PER SHARE
HEALTHSOUTH HORIZON/CMS OF HORIZON/CMS
DATE COMMON STOCK COMMON STOCK COMMON STOCK(1)
- --------------------------- --------------- --------------- ----------------
February 14, 1997 ...... $21.56 $14.25 $18.18
September 24, 1997 ...... $25.75 $20.50 $21.72
- ----------
(1) Horizon/CMS pro forma market price data have been calculated by multiplying
the market price per share of HEALTHSOUTH Common Stock by the Exchange Ratio
of 0.84338.
The following table sets forth certain information as to the high and low
reported sale prices per share of HEALTHSOUTH Common Stock for the periods
indicated. The prices for HEALTHSOUTH Common Stock are as reported on the NYSE
Composite Transactions Tape. HEALTHSOUTH has never paid dividends on its capital
stock (although a company acquired by HEALTHSOUTH in a pooling-of-interests
merger has paid cash dividends in the past). All prices shown have been adjusted
for a two-for-one stock split effected in the form of a 100% stock dividend paid
on April 17, 1995 and a two-for-one stock split effected in the form of a 100%
stock dividend paid on March 17, 1997.
HEALTHSOUTH
COMMON STOCK
--------------------
HIGH LOW
--------- --------
1995
First Quarter ................................. $ 10.22 $ 9.03
Second Quarter ................................. 10.82 8.16
Third Quarter ................................. 12.88 8.63
Fourth Quarter ................................. 16.19 11.25
1996
First Quarter ................................. $ 19.07 $ 13.50
Second Quarter ................................. 19.32 16.16
Third Quarter ................................. 19.32 14.25
Fourth Quarter ................................. 19.88 17.57
1997
First Quarter .................................... $ 22.38 $ 17.94
Second Quarter ................................. 27.13 17.75
Third Quarter (through September 24, 1997) ...... 28.94 23.12
14
The following table sets forth certain information as to the high and low
reported sale prices per share of Horizon/CMS Common Stock for the periods
indicated. The prices for Horizon/CMS Common Stock are as reported on the NYSE
Composite Transactions Tape. No dividends were paid by Horizon/CMS during the
periods presented.
HORIZON/CMS
COMMON STOCK
--------------------
HIGH LOW
--------- --------
FISCAL 1996
First Quarter .................................... $ 23.75 $17.13
Second Quarter .................................... 24.00 17.75
Third Quarter .................................... 28.00 21.63
Fourth Quarter .................................... 19.50 12.13
FISCAL 1997
First Quarter .................................... $ 13.88 $ 9.63
Second Quarter .................................... 13.38 10.13
Third Quarter .................................... 17.25 10.25
Fourth Quarter ................................. 18.25 14.50
FISCAL 1998
First Quarter .................................... 23.50 18.25
Second Quarter (through September 24, 1997) ...... 22.44 19.87
As of June 30, 1997, there were approximately 4,909 record holders of
HEALTHSOUTH Common Stock. As of the Record Date, there were approximately 2,899
record holders of Horizon/CMS Common Stock.
HOLDERS OF HORIZON/CMS SHARES ARE ADVISED TO OBTAIN CURRENT MARKET
QUOTATIONS FOR HEALTHSOUTH COMMON STOCK AND HORIZON/CMS COMMON STOCK. No
assurance can be given as to the market price of HEALTHSOUTH Common Stock at the
Effective Time or at any other time.
OPERATIONS AND MANAGEMENT OF HEALTHSOUTH AFTER THE MERGER
Pursuant to the Plan, following the Effective Time, Horizon/CMS will be a
wholly-owned subsidiary of HEALTHSOUTH, and all of Horizon/CMS's subsidiaries
and affiliates will be indirect subsidiaries and affiliates of HEALTHSOUTH.
HEALTHSOUTH will continue its operations as prior to the Merger and will
continue to be managed by the same Board of Directors and executive officers,
except that Neal M. Elliott, Chairman of the Board, President and Chief
Executive Officer of Horizon/CMS, will join HEALTHSOUTH's Board of Directors at
the Effective Time. See "OPERATIONS AND MANAGEMENT OF HEALTHSOUTH AFTER THE
MERGER".
15
COMPARATIVE PER SHARE INFORMATION
THE FOLLOWING SUMMARY PRESENTS SELECTED COMPARATIVE PER SHARE INFORMATION
(I) FOR HEALTHSOUTH on a historical basis in comparison with pro forma
equivalent information giving effect to the Merger on a purchase basis, and (ii)
for Horizon/CMS on a historical basis in comparison with its pro forma
equivalent information after giving effect to the Merger, including receipt of
shares of HEALTHSOUTH Common Stock to be issued in exchange for Horizon/CMS
Shares in accordance with the Exchange Ratio. This financial information should
be read in conjunction with the historical consolidated financial statements of
HEALTHSOUTH and Horizon/CMS and the related notes thereto contained elsewhere
herein or in documents incorporated herein by reference, and in conjunction with
the unaudited pro forma condensed combined financial information appearing
elsewhere in this Prospectus-Proxy Statement. See "INCORPORATION OF CERTAIN
INFORMATION BY REFERENCE" and "PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION".
Neither HEALTHSOUTH nor Horizon/CMS has paid cash dividends since inception
(although a company acquired by HEALTHSOUTH in a pooling-of-interests merger
paid cash dividends in the past). It is anticipated that HEALTHSOUTH will retain
all earnings for use in the expansion of the business and therefore does not
anticipate paying any cash dividends in the foreseeable future. The payment of
future dividends will be at the discretion of the Board of Directors of
HEALTHSOUTH and will depend, among other things, upon HEALTHSOUTH's earnings,
capital requirements, financial condition and debt covenants.
The following information is not necessarily indicative of the combined
results of operations or combined financial position that would have resulted
had the Merger been consummated at the beginning of the periods indicated, nor
is it necessarily indicative of the combined results of operations in future
periods or future combined financial position.
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
1996 JUNE 30, 1997
-------------- --------------
Net income per common share:
HEALTHSOUTH(1)
Historical (primary) ........................ $ 0.56 $ 0.42
Historical (fully diluted)(2) ............... 0.55 0.41
Pro forma combined (primary) ............... 0.51 0.25
Pro forma combined (fully diluted)(2) ...... 0.50 0.25
Horizon/CMS
Historical (primary)(3)(4) .................. $ 0.43 $ (0.72)
Pro forma equivalent (primary)(5) ............ 0.43 0.21
Pro forma equivalent (fully diluted)(5) ...... 0.42 0.21
AT
JUNE 30,
1997
---------
Book value per common share outstanding(1):
HEALTHSOUTH - historical ..................... $ 5.43
HEALTHSOUTH - pro forma combined ............ 7.35
Horizon/CMS - historical(4) ............... 11.74
Horizon/CMS - pro forma equivalent (5) ...... 6.20
- ----------
(1) Adjusted to reflect a two-for-one stock split effected in the form of a 100%
stock dividend paid on March 17, 1997.
(2) Fully diluted earnings per share reflects shares reserved for issuance upon
exercise of dilutive stock options and shares reserved for issuance upon
conversion of HEALTHSOUTH's 5% Convertible Subordinated Debentures Due
2001, where applicable.
(3) This amount represents income from continuing operations per common share
and does not reflect the effects of an extraordinary loss of $27,074,000,
net of tax, recorded by Horizon/CMS during the year ended December 31, 1996
and an extraordinary gain of $3,963,000, net of tax, recorded by Horizon
/CMS during the six months ended June 30, 1997.
(4) Horizon/CMS has historically reported on a fiscal year ending on May 31.
The historical results of operations for Horizon/
CMS have been recast to a November 30 fiscal year end to more closely
conform to HEALTHSOUTH's fiscal year.
(5) Horizon/CMS pro forma equivalent per share data have been calculated by
multiplying the pro forma HEALTHSOUTH amounts by the Exchange Ratio of
0.84338.
16
HEALTHSOUTH'S AND HORIZON/CMS'S
SELECTED PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following selected pro forma financial information for the combined
Companies gives effect to the Merger as a purchase. All of the following
selected pro forma financial information should be read in conjunction with the
pro forma financial information, including the notes thereto, appearing
elsewhere in this Prospectus-Proxy Statement. See "PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION". The pro forma financial information set forth in this
Prospectus-Proxy Statement is not necessarily indicative of the results that
actually would have occurred had the Merger been consummated on the dates
indicated or that may be obtained in the future.
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
------------------- -----------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
INCOME STATEMENT DATA (1):
Revenues ................................................ $4,314,659 $2,322,960
Operating unit expenses ................................. 3,106,815 1,638,457
Corporate general and administrative expenses ............ 174,041 83,323
Provision for doubtful accounts ........................ 85,921 50,143
Depreciation and amortization ........................... 285,249 161,861
Merger and acquisition related expenses .................. 41,515 15,875
Loss on impairment of assets .............................. 48,390 -
Special charge .......................................... 17,150 86,155
Interest expense ....................................... 147,643 80,904
Interest income .......................................... (13,645) (5,894)
---------- ----------
3,893,079 2,110,824
Income before income taxes, minority
interests and extraordinary item ........................ 421,580 212,136
Provision for income taxes .............................. 171,331 77,244
---------- ----------
250,249 134,892
Minority interests ....................................... 57,875 36,410
---------- ----------
Income from continuing operations ........................ $ 192,374 $ 98,482
========== ==========
Weighted average common and common equivalent shares out-
standing(2) 380,887 393,426
========== ==========
Income from continuing operations per common and common
equivalent shares outstanding(2) ........................ $ 0.51 $ 0.25
========== ==========
Income from continuing operations per common share - assum-
ing full dilution(2)(3) $ 0.50 $ 0.25
========== ==========
JUNE 30, 1997
---------------
(IN THOUSANDS)
BALANCE SHEET DATA(1):
Cash and marketable securities ...... $ 223,957
Working capital ..................... 981,588
Total assets ........................ 5,884,285
Long-term debt (4) .................. 2,418,003
Stockholders' equity .................. 2,825,967
- ----------
(1) Reflects combination of HEALTHSOUTH and Horizon/CMS for the periods
presented. Horizon/CMS has historically reported on a May 31 fiscal
year-end. Horizon/CMS's results of operations have been recast to a November
30 fiscal year-end to more closely conform to HEALTHSOUTH's fiscal year. See
"PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION".
(2) Adjusted to reflect a two-for-one stock split effected in the form of a 100%
stock dividend paid on March 17, 1997.
(3) Fully-diluted income from continuing operations per share reflects shares
reserved for issuance upon conversion of HEALTHSOUTH's 5% Convertible
Subordinated Debentures Due 2001, where applicable.
(4) Includes current portion of long-term debt.
17
RISK FACTORS
In addition to the other information in this Prospectus-Proxy Statement,Prospectus, the following
should be considered carefully by holders of Horizon/CMS Shares.the Notes. Statements made herein
should be considered as "forward-looking information". See "INCORPORATION OF CERTAIN INFORMATION BY REFERENCE-Forward-Looking"Forward-Looking
Information".
REIMBURSEMENT BY THIRD PARTYTHIRD-PARTY PAYORS
Substantially all of HEALTHSOUTH's revenues are derived from private and
governmental third partythird-party payors (in 1996,1997, approximately 37.8%36.9% from Medicare and
approximately 62.2%63.1% from commercial insurers, managed care plans, workers'
compensation payors and other private pay revenue sources). There are increasing
pressures from many payor sources to control healthcare costs and to limit
increases in reimbursement rates for medical services. There can be no
assurances that payments under governmental and third partythird-party payor programs will
remain at levels comparable to present levels. In attempts to limit the federal
budget deficit, there have been, and HEALTHSOUTH expects that there will
continue to be, a number of proposals to limit Medicare reimbursements for
certain services. HEALTHSOUTH cannot now predict whether any of these pending
proposals will be adopted or, if adopted and implemented, what effect such
proposals would have on HEALTHSOUTH.
REGULATION
HEALTHSOUTH is subject, and the combined Companies will be subject to various other types of regulation at the federal
and state levels, including licensure and certification laws, Certificate of
Need laws and laws relating to financial relationships among providers of
healthcare services, Medicare fraud and abuse and physician self-referral.
The operation of HEALTHSOUTH's facilities and the provision of healthcare
services are subject to federal, state and local licensure and certification
laws. These facilities and services are subject to periodic inspection by
governmental and other authorities to assure compliance with the various
standards established for continued licensure under state law, certification
under the Medicare and Medicaid programs and participation in the Veteran's
Administration program. Additionally, in many states, Certificates of Need or
other similar approvals are required for expansion of HEALTHSOUTH's operations.
HEALTHSOUTH could be adversely affected by the failure or inability to obtain
such approvals, by changes in the standards applicable to approvals and by
possible delays and expenses associated with obtaining approvals. The failure by
HEALTHSOUTH to obtain, retain or renew any required regulatory approvals,
licenses or certificates could prevent HEALTHSOUTH from being reimbursed for, or
from offering, its services, or could adversely affect its results of
operations.
A wide array of Medicare/Medicaid fraud and abuse provisions apply to the
operations of HEALTHSOUTH. HEALTHSOUTH is subject to extensive federal and state
regulation with respect to financial relationships among healthcare providers,
physician self-referral arrangements and other fraud and abuse issues. Penalties
for violation of federal and state laws and regulations include exclusion from
participation in the Medicare/Medicaid programs, asset forfeiture, civil
penalties and criminal penalties. The Office of Inspector General of the
Department of Health and Human Services (the "OIG"), the DOJDepartment of Justice
(the "DOJ") and other federal agencies interpret healthcare fraud and abuse
provisions liberally and enforce them aggressively. See "INCORPORATION OF CERTAIN INFORMATION BY REFERENCE""-- Certain Horizon/CMS
Litigation". See also "Business -- Regulation" in HEALTHSOUTH's 1997 Form 10-K.
HEALTHCARE REFORM
In recent years, an increasing number of legislative proposals have been
introduced or proposed in Congress and in some state legislatures that would
effect major changes in the healthcare system, either nationally or at the state
level. Among the proposals which are, or recently have been, under consideration
are cost controls on hospitals, insurance market reforms to increase the
availability of group health insurance to small businesses, requirements that
all businesses offer health insurance coverage to their employees and the
creation of a single government health insurance plan that would cover all
citizens. 18
The costs of certain proposals would be funded in significant part by
reductions in payments by governmental programs, including Medicare and
Medicaid, to healthcare providers. There continue to be federalfed-
14
eral and state proposals that would, and actions that do, impose more
limitations on government and private payments to healthcare providers such as
HEALTHSOUTH and proposals to increase copayments and deductibles from program
and private patients. At the federal level, both Congress and the current
Administration have continued to propose healthcare budgets that substantially
reduce payments under the Medicare and Medicaid programs. In addition, many
states are considering the enactment of initiatives designed to reduce their
Medicaid expenditures, to provide universal coverage or additional levels of
care and/or to impose additional taxes on healthcare providers to help finance
or expand the states' Medicaid systems. There can be no assurance as to the
ultimate content, timing or effect of any healthcare reform legislation, nor is
it possible at this time to estimate the impact of potential legislation, which
may be material, on HEALTHSOUTH.
COMPUTER TECHNOLOGIES AND YEAR 2000 COMPLIANCE
HEALTHSOUTH is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. Many existing computer
programs use only two digits to identify a year in the date field. The issue is
whether such code exists in HEALTHSOUTH's mission-critical applications and if
that code will produce accurate information to date-sensitive calculations after
the turn of the century.
HEALTHSOUTH is involved in an extensive, ongoing program to identify and
correct problems arising from the year 2000 issues. The program is broken down
into the following categories: (1) mission-critical computer applications which
are internally maintained by HEALTHSOUTH's information technology department;
(2) mission-critical computer applications which are maintained by third-party
vendors; (3) non-mission-critical applications, whether internally or externally
maintained; (4) hardware; (5) embedded applications which control certain
medical and other equipment; (6) computer applications of its significant
suppliers; and (7) computer applications of its significant payors.
Mission-critical computer applications are those which are integral to
HEALTHSOUTH's business mission, which have no reasonable manual alternative for
producing the same information and results, and the failure of which to produce
accurate information and results would have a significant adverse impact on the
combined Companies.
DEMAND FOR PERSONNELCompany. Such applications include HEALTHSOUTH's general business systems and
its patient billing systems. Most of HEALTHSOUTH's clinical applications are not
considered mission-critical, because reasonable manual alternatives are
available to produce the same information and results for as long as necessary.
HEALTHSOUTH's review of its internally maintained mission-critical
applications revealed that such applications contained very few date-sensitive
calculations. The successrevisions to these applications are scheduled to be completed
by October 31, 1998, tested during November and growth strategyDecember, 1998 and implemented
during the first quarter of 1999. The budget for this project is approximately
$150,000. The project is currently on schedule, with coding approximately 25%
complete at the end of July 1998.
HEALTHSOUTH's general business applications are all licensed from and
maintained by the same vendor. All such applications are already year 2000
compliant. HEALTHSOUTH has received written confirmation from the vendors of its
other externally maintained mission-critical applications that such applications
are dependent in part on its
ability to attract and retain competent individuals with training and experience
in marketing, therapy, nursing and other clinicalcurrently year 2000 compliant or operating disciplines. Such
persons are in high demand and often are subject to competing offers. In past
years, the healthcare industry has experienced nursing and therapy personnel
shortages. There can be no assurance that HEALTHSOUTH, Horizon/CMS or the
combined Companies will be ablemade year 2000 compliant by the end
of 1998. The cost to attractbe incurred by HEALTHSOUTH related to externally maintained
applications is not currently expected to be material.
HEALTHSOUTH has reviewed all of its non-mission-critical applications and
retaindetermined that some of these applications are not year 2000 compliant and will
not be made to be compliant. In such cases, HEALTHSOUTH has developed manual
alternatives to produce the qualified clinical or
operating personnel necessaryinformation that such systems currently produce. The
incremental cost of the manual systems is not currently estimated to be
material. HEALTHSOUTH plans to evaluate the effectiveness of the manual systems
before any decisions are made on the replacement of the non-compliant
applications.
HEALTHSOUTH has engaged a consultant to test all of its computer hardware
for existing businessyear 2000 compliance at a cost of approximately $800,000. The results of
these tests are expected to be available by November 30, 1998. The Company has
regularly upgraded its significant servers and planned growth. A future
lack of such personnel could adversely affecthardware platforms. Therefore, it
is expected that the consultant's tests will only reveal that HEALTHSOUTH's
older per-
15
sonal computers are not year 2000 compliant. Once the results of operationsthe tests are
available, HEALTHSOUTH will determine which hardware components are necessary to
replace and will develop a plan to do so. The cost of such replacements cannot
be estimated until the plan is developed.
HEALTHSOUTH Horizon/CMS orhas not completed its review of embedded applications which
control certain medical and other equipment. HEALTHSOUTH expects to complete
this review during the combined Companies.
DEPENDENCE ON KEY PERSONNELthird quarter of 1998. The future successnature of HEALTHSOUTH's
business will depend in partis such that any failure of these type applications is not expected to
have a material adverse effect on its abilitybusiness.
HEALTHSOUTH has sent inquiries to attractits significant suppliers of equipment
and retain highly qualified individualsmedical supplies concerning the year 2000 compliance of their significant
computer applications. Responses have been received from over 50% of those
suppliers, and no significant problems have been identified. Second requests
have been mailed to fill key
management positions.all non-respondents.
HEALTHSOUTH competes forhas also sent inquiries to its significant third-party payors.
Responses have been received from payors representing over 35% of HEALTHSOUTH's
revenues. Such responses indicate that these payors' systems will be year 2000
compliant. Second requests will be mailed to all non-respondents during October
1998. HEALTHSOUTH will continue to evaluate year 2000 risks with respect to such
individualspayors as additional responses are received. In that connection, it should be
noted that substantially all of HEALTHSOUTH's revenues are derived from
reimbursement by governmental and private third-party payors, and that
HEALTHSOUTH is dependent upon such payors' evaluation of their year 2000
compliance status to access such risks. If such payors are incorrect in their
evaluation of their own year 2000 compliance status, this could result in delays
or errors in reimbursement to HEALTHSOUTH by such payors, the effects of which
could be material to HEALTHSOUTH.
Based on the information currently available, HEALTHSOUTH believes that its
risk associated with similar
healthcare companies,problems arising from year 2000 issues is not significant.
However, because of the many uncertainties associated with year 2000 compliance
issues, and because HEALTHSOUTH's assessment is necessarily based on information
from third-party vendors, payors and supplies, there can be no assurance that
HEALTHSOUTH's assessment is correct or as to the materiality or effect of any
failure of such assessment to be correct. HEALTHSOUTH will continue with the
assessment process as described above and, to the extent that changes in such
assessment require it, will attempt to develop alternatives or modifications to
its compliance plan above. There can, however, be successful
in hiringno assurance that such
compliance plan, as it may be changed, augmented or retaining qualified personnel. The loss of key personnel ormodified from the inabilitytime to
hire or retain qualified management personnel could adversely
affect HEALTHSOUTH's results of operations.time, will be successful.
COMPETITION
HEALTHSOUTH operates in a highly competitive industry. HEALTHSOUTH
generally operates its facilities in communities that also are served by similar
facilities operated by others. Although HEALTHSOUTH is the largest provider of
outpatient surgery and rehabilitation healthcare services on a nationwide basis,
in any particular market it may encounter competition from local or national
entities with longer operating histories or other superior competitive
advantages. There can be no assurance that such competition, or other
competition which HEALTHSOUTH may encounter in the future, will not adversely
affect HEALTHSOUTH's results of operations.
FAIR PRICE PROVISION
HEALTHSOUTH's Restated Certificate of Incorporation (the "HEALTHSOUTH
Certificate") contains certain provisions requiring supermajority stockholder
approval to effect specified extraordinary corporate transactions unless certain
conditions are met. The HEALTHSOUTH Certificate requires the affirmative vote of
66 2/3% of all shares of HEALTHSOUTH entitled to vote in an election of
Directors to approve a "business combination" with any "other entity" that is
the beneficial owner, directly or indirectly, of more than 20% of the
outstanding shares of HEALTHSOUTH entitled to vote in an election of Directors.
The effect of the foregoing provisions is to make it more difficult for a
person, entity or group to effect a change in control of HEALTHSOUTH through the
acquisition of a large block of HEALTHSOUTH's voting stock, or to effect a
merger or other acquisition that is not approved by a majority of HEALTHSOUTH's
Directors serving in office prior to the acquisition by the other entity of 5%
or more of HEALTHSOUTH's stock. See "DESCRIPTION OF CAPITAL STOCK OF
HEALTHSOUTH".
19
RISKS RELATING TO FEDERAL INCOME TAXES
If the Merger were determined not to constitute a tax-free reorganization
under Section 368(a) of the Code, each holder of Horizon/CMS Shares would
recognize gain or loss equal to the difference between the fair market value of
the HEALTHSOUTH Common Stock received (plus cash received in lieu of fractional
shares) and such holder's basis in the Horizon/CMS Shares exchanged therefor.
See "THE MERGER - Certain Federal Income Tax Consequences".
CERTAIN HORIZON/CMS LITIGATION
On October 29, 1997, HEALTHSOUTH acquired Horizon/CMS Healthcare
Corporation ("Horizon/ CMS") through the merger of a wholly-owned subsidiary of
HEALTHSOUTH with and into Horizon/ CMS. Horizon/CMS is currently a party, or is
subject, to certain material litigation matters and disputes, which are
described below. Horizon/CMS is also,
from time to time, a party tobelow, as well as various other litigation matters and disputes
arising in the ordinary course of its business. See "INCORPORATION OF CERTAIN INFORMATION
BY REFERENCE".
Tenet Healthcare Corporation and Related Litigation
As previously disclosed, Horizon/CMS filedHEALTHSOUTH is not itself a
lawsuit on March 7, 1996
against Tenet Healthcare Corporation ("Tenet") in the United States District
Court for the District of Nevada. The lawsuit arose out of an agreement entered
into between Horizon/CMS and Tenet in connection with Horizon/CMS's attempted
acquisition of The Hillhaven Corporation ("Hillhaven") in January 1995. In the
lawsuit, Horizon/CMS alleges that Tenet failed to honor its commitment to pay
Horizon/CMS approximately $14.5 million pursuantparty to the agreement. Tenet has
contended that the amount owing to Horizon/CMS under the agreement is
approximately $5.1 million. During the nine months ended February 28, 1996,
Horizon/CMS recognized as a receivable approximately $13.0 million of the
approximately $14.5 million Horizon/CMS contends it is owed under the agreement.
On May 13, 1997, Horizon/CMS sought leave of the court to amend its complaint
against Tenet to assert, among other things, that Tenet tortiously interfered
with Horizon/CMS's contractual relationship with its investment bankers,
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"). In this connection,
Horizon/CMS seeks actual damages against Tenet in the approximate amount of
$14.5 million plus pre-judgment interest and punitive damages.
On May 13, 1997, Horizon/CMS filed a lawsuit against DLJ in the United
States District Court for the Central District of California. This lawsuit
arises out of the events and circumstances involved in the lawsuit against
Tenet. Specifically, this lawsuit alleges that DLJ, which served as investment
banker to Horizon/CMS in connection with Horizon/CMS's attempted acquisition of
Hillhaven, breached its fiduciary duty to Horizon/CMS, engaged in professional
negligence and tortiously interfered with Horizon/ CMS's contract with Tenet by
advising Tenet not to pay the $14.5 million Horizon/CMS contends is owing under
the agreement. In this connection, Horizon/CMS seeks actual damages against DLJ
in the approximate amount of $14.5 million and punitive damages. On June 27,
1997, pursuant to an agreement reached with DLJ and its counsel, Horizon/CMS
filed a new lawsuit against DLJ in the United States District Court for the
District of Nevada. This lawsuit is identical in all respects to the lawsuit
filed in the United States District Court for the Central District of
California. Pursuant to the agreement with DLJ and its counsel, DLJ has agreed
that it will not contest either jurisdiction or venue in Nevada. In addition, on
June 27, 1997, Horizon/CMS moved to consolidate the two Nevada matters.
Horizon/CMS has agreed to dismiss the litigation pending in California upon
consolidation of the two Nevada matters. Upon consolidation, Horizon/CMS will
seek an aggregate of $14.5 million in actual damages plus prejudgment interest
and punitive damages against Tenet, DLJ or both. Horizon is vigorously
prosecuting, this litigation matter; no assurance can be given, however, that
Horizon will ultimately prevail.
OIG/DOJ Investigation Involving Certain Medicare Part B and Related
Co-Insurance Billings
Horizon/CMS announced on March 15, 1996 that certain Medicare Part B and
related co-insurance billings previously submitted by Horizon/CMS were being
investigated by the OIG and the DOJ. On December 31, 1996, Horizon/CMS announced
that it had reached a settlement with the DOJ and OIG that concluded their
investigation of these billings. Horizon/CMS also announced that it had received
a letter from the United States Attorney's office conducting such investigation
indicating that the United
20
States declined any criminal prosecution of Horizon/CMS or any of its employees
with respect to these billings. Under the settlement, Horizon/CMS paid
approximately $5.8 million to the United States as a complete and final
resolution of such matters. In addition, pursuant to the terms of the
settlement, Horizon/CMS is implementing a corporate-wide Medicare Part B
compliance program that includes the appointment of a subcommittee to
Horizon/CMS's Corporate Compliance Committee reporting directly to the
Chairman's office and to Horizon/CMS's Board of Directors, ongoing orientation
and training sessions for current and new employees, training evaluation and
annual audits to assess accuracy, validity and reliability of billings.described below.
SEC and NYSE Investigations
The Division of Enforcement of the SEC is conducting a private
investigation with respect to trading in the securities of Horizon/CMS and
Continental Medical Systems, Inc. ("CMS")., which was acquired by Horizon/CMS in
June 1995. In connection with that investigation, Horizon/CMS has produced
16
certain documents, and Neal M. Elliott, then Chairman of the Board, President
and Chief Executive Officer of Horizon/CMS, and certain other present and former officers of
Horizon/CMS have given testimony to the SEC. Horizon/CMS has also been informed
that certain of its division office employees and an individual, affiliates of
whom havehad limited business relationships with Horizon/CMS, have responded to
subpoenas from the SEC. Mr. Elliott has also produced certain documents in response
to a subpoena from the SEC. In addition, Horizon/CMS and Mr. Elliott have
responded or are responding
to separate subpoenas from the SEC pertaining to trading in
Horizon/CMS's common stock and Horizon/CMS's March 1,various material press releases issued in 1996 press release announcing a
revision inby
Horizon/CMS's third quarter earnings estimate; Horizon/CMS's March
7, 1996 press release announcing the filing of a lawsuit against Tenet; the
March 12, 1996 press release announcing that the merger with Pacific
Rehabilitation & Sports Medicine, Inc. could not be effected by April 1, 1996;
Horizon/CMS's March 15, 1996 press release announcing the existence of a federal
investigation into certain of Horizon/ CMS's Medicare Part B billings;CMS; Horizon/CMS's February 19,18, 1997 announcement that HEALTHSOUTH would
acquire Horizon/CMS; and any discussions of proposed business combinations
between Horizon/CMS and Medical Innovations and Horizon/CMS and certain other
companies. The investigation is, to the knowledge of HEALTHSOUTH and
Horizon/CMS, ongoing, and neither Horizon/CMS nor Mr. ElliottHEALTHSOUTH possesses all the
facts with respect to the matters under investigation. Although neither
Horizon/CMS nor Mr. ElliottHEALTHSOUTH has been advised by the SEC that the SEC has
concluded that any of Horizon/CMS, Mr. Elliott or any other current or former
officer or director of Horizon/CMS has been involved in any violation of the
federal securities laws, there can be no assurance as to the outcome of the
investigation or the time of its conclusion. Both Horizon/CMS and Mr.
Elliott intendHEALTHSOUTH
have, to continue cooperatingthe extent requested to date, cooperated fully with the SEC in
connection with the investigation.
In March 1995, the NYSENew York Stock Exchange (the "NYSE") informed
Horizon/CMS that it had initiated a review of trading in The Hillhaven
Corporation common stock prior to the announcement of Horizon/CMS's proposed
acquisition of Hillhaven. In April 1995, the NYSE extended the review of trading
to include all dealings with CMS. On April 3, 1996, the NYSE notified
Horizon/CMS that it had initiated a review of trading in its common stock
preceding Horizon/CMS's March 1, 1996 press release described above.announcing a revision in
Horizon/CMS's third quarter earnings estimate. On February 20, 1997, the NYSE
notified Horizon/CMS that it was reviewing trading in Horizon/CMS's securities
prior to the February 18, 1997 announcement that HEALTHSOUTH would acquire
Horizon/CMS. Horizon/CMS is cooperatinghas cooperated with the NYSE in its reviews and, to
Horizon/CMS's knowledge, the reviews are ongoing.
In February 1997, HEALTHSOUTH received a subpoena from the SEC with respect
to its investigation concerning trading in Horizon/CMS common stock prior to the
February 18, 1997 announcement that HEALTHSOUTH would acquire Horizon/CMS and a
request for information from the NYSE in connection with its review of such
trading. HEALTHSOUTH responded to such subpoena and request for information and
advised both the SEC and the NYSE that it intended to cooperate fully in any
investigations or reviews relating to such trading. HEALTHSOUTH provided certain
additional information to the SEC in April 1997. Since that time, HEALTHSOUTH
has had no further inquiries from either the SEC or the NYSE with respect to
such matters, and is unaware of the current status of such investigations or
reviews.
Michigan Attorney General Investigation Into Long-Term Care Facility In
Michigan
Horizon/CMS learned in September 1996 that the Attorney General of the
State of Michigan iswas investigating one of its skilled nursing facilities. The
facility, in Howell, Michigan, has beenwas owned and operated by Horizon/CMS sincefrom
February 1994.1994 until December 31, 1997. As widely reported in the press, the
Attorney General seized a number of patient, financial and accounting records
that were located at this facility. By order of a circuit judge in the county in
which the facility is located, the Attorney General was ordered to return
patient records to the facility for copying. The investigation appears to involve allegations arising
out of a licensing survey conducted in April 1996. Horizon/CMS has advised the Michigan
Attorney General that it iswas willing to cooperate fully in thisthe investigation.
DueThe facility in question was sold by Horizon/CMS to Integrated Health Services,
Inc., on December 31, 1997.
On February 19, 1998, the State of Michigan filed a criminal complaint
against Horizon/CMS, four former employees of the facility and one former
Horizon/CMS regional manager, alleging various violations in 1995 and 1996 of
certain statutes relating to patient care, patient medical records and the
making of false statements with respect to the preliminary nature of this investigation, Horizon/CMS cannot now
predict when the investigation will be completed; the ultimate outcomecondition or operations of the
investigation; or the effect thereof on Horizon/CMS's financial condition or
resultsfacility (State of operations. If
21
adversely determined, this investigation could result in the imposition of civil
and criminal fines or sanctions against Horizon/CMS, which could have a material
adverse impact on Horizon/CMS's financial condition and its results of
operations.
Stockholder Litigation
On March 28, 1996, Horizon/CMS was served with a lawsuit filed on March 21,
1996 in New Mexico state district court in Albuquerque, New Mexico, by a former
stockholder of CMS, Ronald GottesmanMichigan v. Horizon/CMS Healthcare Corporation,Corp., et al., Case No.
CV-96-02894, Second Judicial98-630-FY, State of Michigan District Court County of Bernalillo, State of New
Mexico. This lawsuit, which among other things seeks class certification,
alleges violations of federal and New Mexico state securities laws arising from
what the plaintiff contends are materially misleading statements by Horizon/CMS
in its June 6, 1995 joint proxy statement/prospectus (the "CMS Prospectus")54B). The plaintiff alleges thatmaximum fines chargeable
against Horizon/CMS failed to discloseunder the counts alleged in the CMS Prospectus
those problems in Horizon/CMS's Medicare Part B billings Horizon/CMS described
in its related March 15, 1996 announcement. In this action, the plaintiff seeks
damages in an unspecified amount, plus costs and attorneys' fees. On August 22,
1997, Horizon/CMS and the plaintiff entered into a stipulation whereby the
plaintiff agreed to dismiss the litigation upon final approvalcomplaint (exclusive of
the proposed
settlement described below.
Since April 5, 1996, Horizon/ has been served with several complaints by
current or former stockholders of Horizon/CMS on behalf of all persons who
purchased Horizon/CMS Common Stock between June 6, 1995 and March 15, 1996. Each
of these lawsuits was filed in the United States District Court for the District
of New Mexico, in Albuquerque, New Mexico. In July 1996, the Court entered its
order consolidating these lawsuits into a single action styled In re Horizon/CMS
Healthcare Corporation Securities Litigation, Case No. CIV 96-0442-BB. On
September 30, 1996, the consolidated putative class plaintiffs filed their
consolidated complaint. In this complaint, the plaintiffs allege violations of
federal and New Mexico state securities laws. Among such violations, the
plaintiffs alleged that Horizon/CMS, certain of its current and former directors
and certain former directors of CMS, disseminated materially misleading
statements or omitted disclosing material facts about Horizon/CMS and its
operations. In December 1996, Horizon/CMS andcharges against the individual defendants, filed
their motions to dismiss this consolidated lawsuit.
On February 20, 1997,some of which charges may result in
indemnification
17
obligations for Horizon/CMS) aggregate $69,000. Horizon/CMS announced that it had reached an
agreement in principle to settledenies the
claims against it and certain of its
current and former directors in the consolidated class action lawsuit. Under the
proposed settlement, Horizon/CMS agreed to pay a minimum amount of $17.0 million
to resolve all claims against Horizon/CMS and its current and former directors,
excluding those claims arising against the former directors of CMS for conduct
occurring prior to the merger between CMS and Horizon. Under the settlement, the
maximum amount payable by Horizon/CMS is $20.0 million to completely and finally
resolve all claims in the litigation, including any amounts related to claims
against former directors of CMS. In agreeing to settle the litigation, none of
the defendants concede, or admit to, any of the plaintiffs' claims or
allegations. The settlement is subject to court approval.
On April 7, 1997, Horizon/CMS paid the $17.0 million, in trust, to the
plaintiffs' lead counsel. Also in April, Horizon/CMS paid $2.25 million to CMS's
directors' and officers' liability insurance carrier in exchange for the
carrier's assumption of the remaining risk contingency. On June 16, 1997, the
Court preliminarily approved the proposed settlement and set a final hearing to
approve the proposed settlement in September 1997. The parties are currently
proceeding to consummate the settlement in accordance with the rules governing
these proceedings.
On August 19, 1997, the plaintiffs and the individual defendants announced
to the Court that they had reached a settlement of the claims excluded by
Horizon/CMS's prior settlement. This proposed settlement calls for the claims to
settle by a payment of $4 million. This entire amount will be paid by CMS's
directors' and officers' liability insurance carrier. The effect of this
settlement is to discharge Horizon/CMS of its $3 million guarantee described
above. Accordingly, subject to negotiation and execution of definitive
agreements between Horizon/CMS and its carrier reflecting such settlement,
Horizon/CMS's $17 million payment will represent Horizon/CMS's total liability
to the plaintiffs in this matter.
22
On September 12, 1997 the Court, after hearing, entered an order approving
the settlement. While an appeal from such order may be perfected during the 30
day period following the entry of the order, Horizon/CMS does not believe, since
no plaintiff objected thereto, that any appeal will be perfected. In the absence
of an appeal, the order will become final at the end of such 30 day period.
Stockholder Derivative Actions
Commencing in April and continuing into May 1996, Horizon/CMS was served
with nine complaints alleging a class action derivative action brought by
stockholders of Horizon/CMS for and on behalf of Horizon/CMS in the Court of
Chancery of New Castle County, Delaware, against Neal M. Elliott, Klemett L.
Belt, Jr., Rocco A. Ortenzio, Robert A. Ortenzio, Russell L. Carson, Bryan C.
Cressey, Charles H. Gonzales, Michael A. Jeffries, Gerard M. Martin, Frank M.
McCord, Raymond M. Noveck, Barry M. Portnoy and LeRoy S. Zimmerman. The nine
lawsuits have been consolidated into one action styled In re Horizon/CMS
Healthcare Corporation Shareholders Litigation. The plaintiffs allege, among
other things, that Horizon/CMS's current and former directors breached their
fiduciary duties to Horizon/CMS and the stockholders as a result of (i) the
purported failure to supervise adequately and the purported knowing
mismanagement of the operations of Horizon/CMS, and the (ii) purported misuse of
inside information in connection with the sale of Horizon/CMS's Common Stock by
certain of the current and former directors in January and February 1996. To
that end, the plaintiffs seek an accounting from the directors for profits to
themselves and damages suffered by Horizon/CMS as a result of the transaction
complained ofallegations made in the complaint and attorneys' fees and costs. On June 21, 1996,expects to vigorously defend against the
individual defendants filed a motion with the Chancery Court seekingcharges. It is not possible to dismisspredict at this matter because, among other things, the plaintiffs failed to make a
demand on the board of directors prior to commencing this litigation.
Horizon/CMS cannot now predicttime the outcome or the effect of this litigation or
the length of time it will take to resolve this litigation.
In April 1996, Horizon/CMS was served with a complaint in a stockholder's
derivative lawsuit styled Lind v. Rocco A. Ortenzio, Neal M. Elliott, Klemett
L. Belt, Jr., Robert A. Ortenzio, Russell L. Carson, Bryan C. Cressey, Charles
H. Gonzales, Michael A. Jeffries, Gerard M. Martin, Frank M. McCord, Raymond N.
Noveck, Barry M. Portnoy, LeRoy S. Zimmerman and Horizon/CMS Healthcare
Corporation, No. CIV 96-0538-BB, pending in the United States District Court
for the District of New Mexico. The plaintiff alleges, among other things, that
Horizon/CMS's current and former directors breached their fiduciary duties to
Horizon/CMS and the stockholders as a result of (i) the purported failure to
supervise adequately and the purported knowing mismanagement of the operations
of Horizon/CMS, and the (ii) purported misuse of inside information in
connection with the sale of Horizon/CMS's Common Stock by certain of the
current and former directors in January and February 1996. To that end, the
plaintiff seeks an accounting from the directors for profits to themselves and
damages suffered by Horizon/CMS as a result of the transaction complained of in
the complaint and attorneys' fees and costs. Horizon/CMS filed a motion seeking
a stay of this case pending the outcome of the motion to dismiss in the
Delaware derivative lawsuits or, in the alternative, to dismiss this case for
those same reasons. Horizon/CMS cannot now predict the outcome or the effect of
this litigation or the length of time it will take to resolve this litigation.
Lawsuit by Former Shareholders of Communi-Care, Inc. and Pro Rehab, Inc.
On May 28, 1997, CMS was served with a lawsuit styled Kenneth Hubbard and
Lynn Hubbard v. Rocco Ortenzio, Robert A. Ortenzio and Continental Medical
Systems, Inc., No. 3:97 CV294MCK, filed in the United States District Court for
the Western District of North Carolina, Charlotte Division, by the former
shareholders of Communi-Care, Inc. and Pro Rehab, Inc. seeking damages arising
out of certain "earnout" provisions of the definitive purchase agreements under
which CMS purchased the outstanding stock of Communi-Care, Inc., and Pro Rehab,
Inc. from such shareholders. The plaintiffs allege that the manner in which CMS
and the other defendants operated the companies after their acquisition breached
its fiduciary duties to the plaintiffs, constituted fraud, gross negligence and
bad faith, and a breach ofbreached their employment agreements with the companies. As a
result of such alleged conduct, the plaintiffs assert that they are entitled to
damages in an amount in excess of $27.0 million$27,000,000 from CMS and the other defendants.
Horizon/CMS believes, based upon its evaluation of the advice of Eaves, Bardacke &
Baugh, P.A.,
23
counsellegal and factual matters
relating to Horizon/CMS in this matter, the plaintiffs' assertions, of these plaintiffsthat it has valid defenses to be
without factual or legal meritthe
plaintiffs' claims and, as a result, intends to vigorously contest such claims.
Because this litigation has just been commenced, Horizon/CMSremains at an early stage, HEALTHSOUTH cannot now
predict the outcome or effect of such litigation or the length of time it will
take to resolve such litigation or the effect of any such resolution on Horizon/CMS's
financial condition or results of operations.
RehabOne Litigation
In March 1997, Horizon/CMS was served with a lawsuit filed in the United
States District Court for the Middle District of Pennsylvania, styled RehabOne,
Inc. v. Horizon/CMS Healthcare Corporation, Continental Medical Systems, Inc.,
David Nation and Robert Ortenzio, No. CV-97-0292. In this lawsuit the plaintiff
alleges violations of federal and state securities laws, fraud, and negligent
misrepresentation by Horizon/CMS and certain former officers of CMS in
connection with the issuance of a warrant to purchase 500,000 shares of
Horizon/CMS Common Stock (the "Warrant"). The Warrant was issued to the
plaintiff by Horizon/CMS in connection with the settlement of certain prior
litigation between the plaintiff and CMS. The plaintiff's complaint does not
state the amount of damages sought. Horizon/CMS disputes the factual and legal
assertions of the plaintiff in this litigation and intends to vigorously contest
the plaintiff's claims. Because this litigation has just commenced, Horizon/CMS
cannot predict the length of time it will take to resolve the litigation, the
outcome of the litigation or the effect of any such outcome on Horizon/CMS's
financial condition or results of operations.litigation.
EEOC Litigation
In March 1997, the Equal Employment Opportunity Commission (the "EEOC")
filed a complaint against Horizon/CMS alleging that Horizon/CMS hashad engaged in
unlawful employment practices in respect of Horizon/CMS's employment policies
related to pregnancies. Specifically, the EEOC asserts that Horizon/CMS's
alleged refusal to provide pregnant employees with light-duty assignments to
accommodate their temporary disabilities caused by pregnancy violates Sections
701(k) and 703(a) of Title VII, 42 U.S.C. (section)(section) 2000e-(k) and
2000e-2(a). In this lawsuit, the EEOC seeks, among other things, to permanently
enjoin Horizon/CMS's employment practices in this regard. Horizon/CMS disputes
the factual and legal assertions of the EEOC in this litigation and intends to
vigorously contest the EEOC's claims. Because this litigation has just
commenced, Horizon/CMSHEALTHSOUTH cannot predict the length of
time it will take to resolve the litigation, the outcome of thethis litigation or the outcome or effect of any such outcome
on Horizon/CMS's financial condition or results of operations.
North Louisiana Rehabilitation Hospital Medicare Billing Investigation
In Augustthe
litigation.
Heritage Western Hills Litigation
Since July 1996, the United States Attorney for the Western District of
Louisiana, without actually initiating litigation, apprised Horizon/CMS of
alleged civil liability under the federal False Claims Act for what the
government believes were false or fraudulent Medicare and other federal program
claims submitted by Horizon/CMS's North Louisiana Rehabilitation Hospital
("NLRH") during the period from 1989 through 1992, including certain claims
submitted by a physician who was a member of the medical staff and under
contract to NLRH during the period. Specifically, the government alleges that
NLRH facilitated the submission of false claims under Part B of the Medicare
program by the physician and that NLRH itself submitted false claims under Part
A of the Medicare program for services that were not medically necessary. In
August 1996, the U.S. Attorney identified allegedly improper Part A and Part B
billings, together with penalty provisions under the False Claims Act, ranging
in the aggregate from approximately $1.7 million to $2.2 million. The government
does not dispute that the Medicare Part A services were rendered, only whether
they were medically necessary. Horizon/CMS has vigorously contestedbeen a defendant in a lawsuit styled Lexa
A. Auld, Administratrix of Martha Hary, Deceased v. Horizon/CMS Healthcare
Corporation and Charles T. Maxvill, D.O., No. 48-165121, 48th Judicial District
Court, Tarrant County, Texas. The case involved injuries allegedly suffered by a
resident of the allegation that any cases of disputed medical necessityHeritage Western Hills nursing facility in this matter
constitute false or fraudulent claims underFort Worth, Texas.
Horizon/CMS tendered the civil False Claims Act.
Moreover, Horizon/CMS denies that NLRH facilitated the submission of false
claims under Medicare Part B.
In late April 1997, Horizon/CMS received administrative subpoenas relatingclaim to the matter and has since then produced extensive materials with respect
thereto. Without conceding liability for either the Medicare Part A or Part B
claims, in May 1997, Horizon commenced preliminary settlement discussions
24
with the government. In preparation for settlement meetings held in late June
and mid-July 1997, Horizon/CMS and the government developed and then refined
their respective analyses of any losses the government may have incurred in this
regard. Following the July 1997 meeting, the government proposed to Horizon/CMS
that the matter be settled by Horizon/CMS paying the government $4.9 million
with respect to alleged Medicare Part A overpayments and that Horizon/CMS and
certain individual physicians pay the government $820,000 with respect to
Medicare Part B claims for physician services. In late July, Horizon/CMS
responded by offering to settle the matter for $3.7 million for alleged Medicare
Part A overpayments and $445,000 for alleged Medicare Part B claims forits insurance carrier, which Horizon/CMS potentially could bear any responsibility. Horizon/CMS anticipates
that settlement discussions will continue and, at this time, is optimistic that
the matter can be resolved without litigation.
RECENT DEVELOPMENTS
On September 3, 1997, HEALTHSOUTH and ASC Network Corporation ("ASC")
entered into a definitive agreement pursuant to which HEALTHSOUTH will acquire
ASC. ASC operates outpatient surgery centers at twenty-nine locations in eight
states. The transaction is structured as an all-cash merger,accepted coverage
with a valuereservation of approximately $130,000,000, plusrights and provided a defense through the assumption of approximately $50,000,000carrier's
selected counsel in debt by HEALTHSOUTH.Dallas, Texas. The transaction is subjectcase went to the approval of ASC
stockholders and various regulatory approvals, including clearance under the
Hart-Scott-Rodino Anti-Trust Improvements Act, as well as the satisfaction of
certain other conditions normal to a transaction of this type.
Since the public announcement of the pending Merger in February 1997,
Horizon/CMS has experienced a significant loss of home office, divisional and
regional employees. These personnel were, in the case of the home office,
primarily administrative personnel such as those involved in payor
reimbursement, management information systems and finance and accounting
functions and, in the case of divisions and regions, primarily administrative
personnel engaged in Horizon/CMS's outpatient rehabilitation and contract
therapy operations. Moreover, while it has had some success in hiring additional
personnel, Horizon/CMS has not been able to replace nearly all those employees
that have terminated their employment. In an effort to counteract this trend,
Horizon/CMS implemented various retention programs, including limited "pay to
stay" and retention bonus programs for certain of the divisional and regional
groups. Employees subject to these programs, however, earned their bonus
payments as of September 1, 1997, which were paid on September 15, 1997.
Horizon/CMS has no present plan to extend or replace such programs. There is no
assurance that Horizon/CMS will not experience further personnel losses pending
the effectiveness of the Merger or that its ability to manage its operations
effectively will not be impaired if the Merger is not consummated.
The Plan, as originally executed, contained a provision that, for a period
of at least one year following the Closing Date, certain divisions of
Horizon/CMS (including in particular the Long Term Care, Specialty Hospital,
Contract Rehab Therapy and Institutional Pharmacy Divisions) would continue to
be operated and managed by Horizon/CMS, as a subsidiary of HEALTHSOUTH, at or
through Horizon/CMS's headquarters and existing management (subject to standards
of performance imposed generally by HEALTHSOUTH on its managerial employees and
to reasonable restraints on managerial overhead). Recently, HEALTHSOUTH
requested Horizon/CMS to agree to delete such provision from the Plan in order
to provide HEALTHSOUTH with the flexibility to explore its alternatives with
respect to the disposition or combination of any of such operations that it may
determine are not complementary to its overall business strategy. Following
discussions between Horizon/CMS and HEALTHSOUTH regarding the provision of
certain benefits for employees of Horizon/CMS who may have been affected by such
provision of the Plan, Horizon/CMS acceded to such request based on
HEALTHSOUTH's willingness to allow Horizon/CMS to provide additional severance
protection for such employees (none of whom is an officer of Horizon/CMS), as
well as certain retention bonuses for employees who remain in the employ of the
Company through at least June 30, 1998.
25
THE SPECIAL MEETING
GENERAL
THIS PROSPECTUS-PROXY STATEMENT IS BEING FURNISHED TO HOLDERS OF
HORIZON/CMS SHARES IN CONNECTION with the solicitation of proxies by the Board
of Directors of Horizon/CMS for use at the Special Meeting to consider and vote
upon a proposal to approve the Plan and to transact such other business as may
properly come before the Special Meeting or any adjournments or postponements
thereof.
Each copy of this Prospectus-Proxy Statement mailed to holders of
Horizon/CMS Common Stock is accompanied by a form of Proxy for use at the
Special Meeting.
This Prospectus-Proxy Statement is also furnished to holders of Horizon/CMS
Shares as a Prospectus in connection with the issuance to them of the shares of
HEALTHSOUTH Common Stock upon consummation of the Merger.
DATE, PLACE AND TIME
The Special Meeting will be held at the Crowne Plaza Pyramid, 5151 San
Francisco Road N.E., Albuquerque, New Mexico, 87109,trial on October 29, 1997,
at
10:00 a.m., local time.
RECORD DATE; QUORUM
The Board of Directors of Horizon/CMS has fixedand on November 7, 1997, the close of business on
September 14, 1997, as the Record Date for the determination of holders of
Horizon/CMS Shares entitled to receive notice of and to vote at the Special
Meeting. The presence, in person or by proxy, of the holders ofjury rendered a majority of
the Horizon/CMS Shares entitled to vote at the Special Meeting will constitute a
quorum at the Special Meeting.
VOTE REQUIRED
As of the Record Date, there were outstanding and entitled to vote
52,713,226 shares of Horizon/ CMS Common Stock. Each of such Horizon/CMS Shares
is entitled to one vote on each matter that comes before the Special Meeting.
Approval of the Plan will require the affirmative vote of the holders of a
majority of the outstanding shares of Horizon/CMS Common Stock entitled to vote
at the Special Meeting. Accordingly, approval of the Plan will require the
affirmative vote of the holders of at least 26,356,614 shares of Horizon/CMS
Common Stock.
As of the Record Date, Horizon/CMS's directors and executive officers and
their affiliates beneficially owned an aggregate of 1,241,828 shares, or
approximately 2.4% of the outstanding shares, of Horizon/CMS Common Stock
outstanding on such date (excluding shares issuable upon exercise of options).
To Horizon/CMS's knowledge, each of its directors and executive officers intends
to voteverdict in favor of the proposalplaintiff
in the amount of $2,370,000 in compensatory damages and $90,000,000 in punitive
damages. Counsel has advised Horizon/CMS that, under applicable Texas law, the
punitive damages award is, at worst, limited to approvefour times the Plan.
By the voteamount of the
memberscompensatory damages (the "Punitive Damages Cap"), and thus that the maximum
amount of an enforceable judgment in favor of the plaintiff is approximately
$12,000,000. Counsel has also advised Horizon/CMS Boardthat there are, potentially,
other and further caps on both the amount of Directorscompensatory damages available to
the plaintiff and the amount of punitive damages. Horizon/CMS filed the required
motions with the court to impose the Punitive Damages Cap. On February 20, 1998,
the court reduced the jury's verdict and entered a judgment in the amount of
approximately $11,237,000. Horizon/CMS also vigorously disputes the efficacy of
the jury's verdict and has appealed the judgment.
Horizon/CMS's insurance carrier continues to defend the matter subject to a
reservation of rights. Based upon an evaluation by its then-current internal
counsel, after reviewing the findings contained in the jury verdict, the
insurance policy at a
special meeting held on February 17,issue and the carrier's handling of the case, Horizon/CMS
18
believes that the entirety of any judgment ultimately entered is covered by and
payable from such insurance policy, less Horizon/CMS's self-insured retention of
$250,000. On November 19, 1997, the insurance carrier sent Horizon/CMS Boarda letter
indicating its belief that certain policy exclusions might apply and requesting
additional information which might affect its coverage determination. Horizon/
CMS has retained separate counsel to analyze the coverage issues and advise
Horizon/CMS on its position, and Horizon/CMS expects to continue to negotiate
any coverage issues with its carrier. Settlement negotiations by Horizon/CMS's
insurance carrier, in conjunction with HEALTHSOUTH's retained counsel, continue
with the plaintiff. It is not possible at this time to predict the outcome of
Directors
determinedany post-trial motions or appeals, the resolution of any coverage issues, the
outcome of any settlement negotiations or the ultimate amount of any liability
which will be borne by Horizon/CMS.
PROCEDURES FOR TENDER OF OLD NOTES
The New Notes will be issued in exchange for Old Notes only after timely
receipt by the Exchange Agent of such Old Notes, a properly completed and duly
executed Letter of Transmittal and all other required documents. Therefore,
holders of Old Notes desiring to tender such Old Notes in exchange for New Notes
should allow sufficient time to ensure timely delivery. Failure by a holder to
follow such procedures may result in delay in receiving a New Note on a timely
basis. Neither the Exchange Agent nor HEALTHSOUTH is under any duty to give
notification of defects or irregularities with respect to tenders of Old Notes
for exchange. Any holder of Old Notes who tenders in the Exchange Offer for the
purpose of participating in a distribution of the New Notes will be required to
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. Each broker-dealer
that receives New Notes for its own account in exchange for Old Notes, where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or any other trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of New Notes. See "The
Exchange Offer -- Procedures for Tendering" and "Plan of Distribution".
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold unless registered under the Securities Act, or pursuant to an
exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. HEALTHSOUTH does not currently anticipate that
it will register the Old Notes under the Securities Act. To the extent that Old
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered and tendered but unaccepted Old Notes could be adversely affected.
LACK OF PUBLIC MARKET FOR THE NOTES
There can be no assurance that a public market for the New Notes will
develop or, if such a market develops, as to the liquidity of such market. If
such a market were to develop, the New Notes could trade at prices that may be
higher or lower than their principal amount. HEALTHSOUTH does not intend to
apply for listing of the New Notes on any securities exchange or for quotation
of the New Notes on any automated quotation system. The Initial Purchasers have
previously made a market in the Old Notes, and HEALTHSOUTH has been advised that
the proposed Merger,Initial Purchasers currently intend to make a market in the New Notes, as
permitted by applicable laws and the terms and conditionsregulations, after consummation of the Plan,
wereExchange
Offer. The Initial Purchasers are not obligated, however, to make a market in
the best interests of Horizon/CMSOld Notes or the New Notes and its stockholders. The Plan and the
Merger were adopted and approved unanimously by the members of the Horizon/CMS
Board of Directors, who also unanimously resolved to recommend that the
stockholders of Horizon/ CMS vote FOR approval of the Plan.
If the Plan is not approved by Horizon/CMS stockholders, the Planany such market making activity may be
terminated in accordance with its terms. See "THE MERGER - Termination".
VOTING AND REVOCATION OF PROXIES
HORIZON/CMS SHARES REPRESENTED BY A PROXY PROPERLY SIGNED AND RECEIVED AT
OR PRIOR TO THE SPECIAL Meeting, unless such Proxy is subsequently revoked, will
be voted in accordance with the instructions thereon. IF A PROXY FOR THE SPECIAL
MEETING IS PROPERLY EXECUTED AND RETURNED WITHOUT INDICATING ANY
26
VOTING INSTRUCTIONS, HORIZON/CMS SHARES REPRESENTED BY THE PROXY WILL BE VOTED
FOR APPROVAL OF THE PLAN. Any Proxy given pursuant to this solicitation may be
revoked by the person giving itdiscontinued at any time without notice at the sole discretion of the Initial
Purchasers. If an active public market does not develop or continue, the market
price and liquidity of the New Notes may be adversely affected.
19
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the Issuer's consolidated ratio of earnings
to fixed charges for the periods shown.
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------------------------------------ JUNE 30,
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
Ratio of earnings to fixed charges ......... 5.71x 3.31x 3.27x 4.61x 5.34x 6.59x
For purposes of calculating ratio of earnings to fixed charges, (i)
earnings consist of consolidated income (loss) before taxes and nonrecurring
charges, plus fixed charges, and (ii) fixed charges consist of interest expense
incurred and the Proxy is votedportion of rental expense under operating leases deemed by the
filing of an instrument revoking it or of a duly executed Proxy bearing a later
date with the Secretary of Horizon/CMS priorIssuer to or at the Special Meeting or by
voting in person at the Special Meeting. Attendance at the Special Meeting will
not in and of itself constitute a revocation of a Proxy. Only votes cast for
approvalbe representative of the Plan constitute affirmative votes. Abstentions and broker
non-votes with respect tointerest factor.
THE EXCHANGE OFFER
The following discussion sets forth or summarizes the Plan will, therefore, have the same effect as
votes against approvalmaterial terms of the
Plan.
The Board of Directors of Horizon/CMS is not aware of any business to be
acted upon at the Special Meeting other than as described herein. If, however,
other matters are properly brought before the Special Meeting, or any
adjournments or postponements thereof, the persons appointed as proxies will
have discretion, subject to the DGCL and applicable rules of the SEC, to vote or
act thereon according to their best judgment.
SOLICITATION OF PROXIES
In addition to solicitation by mail, directors, officers and employees of
Horizon/CMS, who will not be specifically compensated for such services, may
solicit proxies from the stockholders of Horizon/ CMS, personally or by
telephone or telegram or other forms of communication. Brokerage houses,
nominees, fiduciaries and other custodians will be requested to forward
soliciting materials to beneficial owners and will be reimbursed for their
reasonable expenses incurred in doing so. Horizon/CMS has engaged the services
of Georgeson & Company Inc. to distribute proxy solicitation materials to
brokers, banks and other nominees and to assistExchange Offer, including those set forth in the solicitationLetter of proxies
from Horizon/CMS stockholders for a fee of $8,000, plus reasonable out-of-pocket
expenses.
STOCKHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY CARDS. THE
PROCEDURE FOR THE EXCHANGE OF SHARES AFTER THE MERGER IS CONSUMMATED IS SET
FORTH ELSEWHERE IN THIS PROSPECTUS-PROXY STATEMENT. SEE "THE MERGER - EXCHANGE
OF CERTIFICATES".
27
THE MERGER
The description of the Merger contained inTransmittal
distributed with this Prospectus-Proxy Statement
summarizes the principal provisions of the Plan; it is not complete andProspectus. This summary is qualified in its entirety by
reference to the Plan, the full text of the documents underlying the Exchange Offer
(including the Indenture and the Registration Rights Agreement), which are
exhibits to the registration statement of which this Prospectus is attached hereto as Annex A and which is incorporated by reference herein. All
Horizon/CMS stockholders are urged to read Annex A in its entirety.a part.
TERMS OF THE MERGEREXCHANGE OFFER
The acquisitionOld Notes were sold by the Issuer to the Initial Purchasers on June 22,
1998, the "Closing Date", pursuant to a Purchase Agreement entered into by the
Initial Purchasers on June 22, 1998 (the "Purchase Agreement") and were
subsequently resold (i) to qualified institutional buyers pursuant to Rule 144A
under the Securities Act, and (ii) pursuant to offers and sales that occurred
outside the United States within the meaning of Horizon/CMS by HEALTHSOUTH will be effected by meansRegulation S under the
Securities Act. In connection with the issuance of the merger of the Subsidiary with and into Horizon/CMS, with Horizon/CMS being
the Surviving Corporation. The Certificate of Incorporation of Horizon/CMS (the
"Horizon/CMS Certificate"), as amended at the Effective TimeOld Notes pursuant to the
request of HEALTHSOUTH, will becomePurchase Agreement, the Certificate of IncorporationInitial Purchasers and their respective assignees became
entitled to the benefits of the Surviving Corporation from andRegistration Rights Agreement.
Under the Registration Rights Agreement, the Issuer is required to file
within 60 days after the Effective TimeClosing Date a registration statement (the "Exchange
Offer Registration Statement") for a registered exchange offer with respect to
an issue of new notes identical in all material respects to the Old Notes except
that the new notes shall contain no restrictive legend thereon. Under the
Registration Rights Agreement, the Issuer is required to (i) cause the Exchange
Offer Registration Statement to be filed with the Commission no later than 60
days after the Closing Date, (ii) use its best efforts to cause such Exchange
Offer Registration Statement to become effective no later than 150 days after
the Closing Date, (iii) use its best efforts to keep the Exchange Offer open for
at least 30 and until thereafter
amendednot longer than 45 calendar days (or longer if required by
applicable law), (iv) use its best efforts to consummate the Exchange Offer as
soon as practicable following the date on which the Exchange Offer Registration
Statement is declared effective by the Commission, but in accordanceno event later than
180 days after the Closing Date and (v) cause the Exchange Offer to comply with
all applicable law.federal and state securities laws. The BylawsExchange Offer being made
hereby, if commenced and consummated within the time periods described in this
paragraph, will satisfy those requirements under the Registration Rights
Agreement.
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, all Old Notes validly tendered and not
withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date will be
accepted for exchange. New Notes of the Subsidiary as in
effect at the Effective Time will become the Bylaws of the Surviving Corporation
until amended or repealed in accordance therewith and with applicable law. At
the Effective Time, Horizon/CMS will continue as the Surviving Corporation under
the name "Horizon/CMS Healthcare Corporation".
At the Effective Time, each outstanding Horizon/CMS Share (excluding shares
held by Horizon/ CMS and any of its subsidiaries, which will automatically be
cancelled and retired) (collectively, the "Exchanging Horizon/CMS Shares")same maturity will be converted into 0.84338issued in exchange
for an equal principal amount of a shareoutstanding Old Notes accepted in the Exchange
Offer. Old Notes may be tendered only in integral multiples of HEALTHSOUTH Common Stock (the "Exchange
Ratio"). Each certificate previously evidencing Exchanging Horizon/ CMS Shares
outstanding immediately prior$1,000. This
Prospectus, together with the Letter of Transmittal, is being sent to all
registered holders on or about ____________, 1998. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered in
exchange. However, the Effective Time ("Certificates") will
thereafter be deemed,obligation to accept Old Notes for all purposes other than the payment of dividends or
distributions, to represent that number of shares of HEALTHSOUTH Common Stock
determinedexchange pursuant to
the Exchange RatioOffer is subject to certain conditions as set forth herein under
"-- Conditions".
20
Old Notes shall be deemed to have been accepted as validly tendered when,
as and if the Trustee has given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering holders of Old
Notes for the purposes of receiving the New Notes and delivering New Notes to
such holders.
Based on interpretations by the staff of the Commission, as set forth in
no-action letters issued to third parties, including the Exchange Offer
No-Action Letters, the Issuer believes that the New Notes issued pursuant to the
Exchange Offer may be offered for resale, resold or otherwise transferred by
each holder thereof (other than a broker-dealer who acquires such New Notes
directly from the Issuer for resale pursuant to Rule 144A under the Securities
Act or any other available exemption under the Securities Act and other than any
holder that is an "affiliate" (as defined in Rule 405 under the Securities Act)
of the Issuer without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such holder's business and such holder is not engaged in,
and does not intend to engage in, a distribution of such New Notes and has no
arrangement with any person to participate in a distribution of such New Notes.
By tendering the Old Notes in exchange for New Notes, each holder, other than a
broker-dealer, will represent to the Issuer that: (i) it is not an affiliate (as
defined in Rule 405 under the Securities Act) of the Issuer; (ii) it is not a
broker-dealer tendering Old Notes acquired for its own account directly from the
Issuer; (iii) any New Notes to be received by it will be acquired in the
ordinary course of its business; and (iv) it is not engaged in, and does not
intend to engage in, a distribution of such New Notes and has no arrangement or
understanding to participate in a distribution of the New Notes. If a holder of
Old Notes is engaged in or intends to engage in a distribution of the New Notes
or has any arrangement or understanding with respect to the distribution of the
New Notes to be acquired pursuant to the Exchange Offer, such holder may not
rely on the applicable interpretations of the staff of the Commission and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any secondary resale transaction. Each
Participating Broker-Dealer that receives New Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a Participating
Broker-Dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating Broker-Dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired by such Participating Broker-Dealer as a result of
market-making activities or other trading activities. The Issuer has agreed that
it will make this Prospectus available to any Participating Broker-Dealer for a
period of time not to exceed one year after the date on which the Exchange Offer
is consummated for use in connection with any such resale. See "Plan of
Distribution".
In the event that (i) any changes in law or the applicable interpretations
of the staff of the Commission do not permit the Issuer to effect the Exchange
Offer, or (ii) if any holder of Old Notes shall notify the Issuer within 30
calendar days following the consummation of the Exchange Offer that (A) such
holder was prohibited by law or Commission policy from participating in the
Exchange Offer or (B) such holder may not resell the New Notes acquired by it in
the Exchange Offer to the public without delivering a prospectus and the
prospectus contained in the Exchange Offer Registration Statement is not
appropriate or available for such resales by such holder or (C) such holder is a
broker-dealer and holds Old Notes acquired directly from the Issuer or one of
its affiliates, then the Issuer shall (x) cause to be filed a shelf registration
statement pursuant to Rule 415 under the Securities Act (the "Shelf Registration
Statement") on or prior to 30 days after the date on which the Issuer determines
that it is not required to file the Exchange Offer Registration Statement
pursuant to clause (i) above or 30 days after the date on which the Issuer
receives the notice specified in clause (ii) above and shall (y) use its best
efforts to cause such Shelf Registration Statement to become effective within 30
days after the date on which the Issuer becomes obligated to file such Shelf
Registration Statement. If, after the Issuer has filed an Exchange Offer
Registration Statement, the Issuer is required to file and make effective a
Shelf Registration Statement solely because the Exchange Offer is not permitted
under applicable federal law, then the filing of the Exchange Offer Registration
Statement shall be deemed to satisfy the requirements of clause (x) above. Such
an event shall have no effect on the requirements of clause (y) above. The
21
Issuer shall use its best efforts to keep the Shelf Registration Statement
continuously effective, supplemented and amended to the extent necessary to
ensure that it is available for sales of Transfer Restricted Securities (as
defined below) by the holders thereof for a period of at least two years
following the date on which such Shelf Registration Statement first becomes
effective under the Securities Act. The term "Transfer Restricted Securities"
means each Note, until the earliest to occur of (a) the date on which such Note
is exchanged in the Exchange Offer and entitled to be resold to the public by
the holder thereof without complying with the prospectus delivery requirements
of the Act, (b) the date on which such Note has been disposed of in accordance
with a Shelf Registration Statement, (c) the date on which such Note is disposed
of by a broker-dealer pursuant to the "Plan of Distribution" contemplated by the
Exchange Offer Registration Statement (including delivery of the prospectus
contained therein) or (d) the date on which such Note is distributed to the
public pursuant to Rule 144 under the Act.
If (i) the Exchange Offer Registration Statement or the Shelf Registration
Statement is not filed with the Commission on or prior to the date specified in
the Registration Rights Agreement, (ii) any such Registration Statement has not
been declared effective by the Commission on or prior to the date specified for
such effectiveness in the Registration Rights Agreement, (iii) the Exchange
Offer has not been consummated within 180 days after the Closing Date or (iv)
any Registration Statement required by the Registration Rights Agreement is
filed and declared effective but shall thereafter cease to be effective or fail
to be usable for its intended purpose without being succeeded immediately by a
post-effective amendment to such Registration Statement that cures such failure
and that is itself declared effective immediately (each such event referred to
in clauses (i) through (iv), a "Registration Default"), then the Issuer has
agreed to pay liquidated damages to each holder of Transfer Restricted
Securities. Liquidated Damages shall accrue on the applicable Old Notes or the
applicable New Notes, as the case may be, over and above the applicable interest
rate set forth in the title to the applicable Old Notes or the applicable New
Notes. Following the occurrence of each such Registration Default mentioned
herein from and including the next day following each such Registration Default
in each case at a rate equal to 0.25% per annum; provided, however, that in any
case, if one or more Registration Defaults occurs and continues for more than 60
days (whether or not consecutive) in any twelve month period (the 61st day being
referred to as the "Default Day") then and from the Default Day until the
earlier of (i) the date such Shelf Registration Statement is again deemed
effective or is useable, (ii) the date that is the second anniversary of the
Closing Date (or, if Rule 144(k) of the Securities Act is amended to provide a
shorter restrictive period, such shorter period) or (iii) the date on which the
Notes are sold pursuant to such Shelf Registration Statement, Liquidated Damages
shall accrue at a rate of 0.25% per annum, provided, however, that the aggregate
amount of Liquidated Damages payable will in no event exceed 0.25% per annum.
The Liquidated Damages attributable to each Registration Default shall cease to
accrue from the date such Registration Default is cured.
All accrued liquidated damages shall be paid to the holders of record on
the preceding June 1 and December 1, respectively, of the global note
representing the Old Notes by wire transfer of immediately available funds or by
federal funds check and to holders of certificated securities by mailing checks
to their registered addresses on each June 15 and December 15. All obligations
of the Issuer set forth in the preceding paragraph that are outstanding with
respect to any Transfer Restricted Security at the time such security ceases to
be a Transfer Restricted Security shall survive until such time as all such
obligations with respect to such security shall have been satisfied in full.
Upon consummation of the Exchange Offer, subject to certain exceptions, holders
of Old Notes who do not exchange their Old Notes for New Notes in the Exchange
Offer will no longer be entitled to registration rights and will not be able to
offer or sell their Old Notes, unless such Old Notes are subsequently registered
under the Securities Act (which, subject to certain limited exceptions, the
Issuer will have no obligation to do), except pursuant to an exemption from, or
in a transaction not subject to, the Securities Act and applicable state
securities laws. See "Risk Factors -- Risk Factors Relating to the Notes --
Consequences of Failure to Exchange".
EXPIRATION DATE; EXTENSIONS; AMENDMENTS; TERMINATION
The term "Expiration Date" shall mean ____________, 1998 (30 calendar days
following the commencement of the Exchange Offer), unless the Exchange Offer is
extended, if and as required by
22
applicable law, in which case the term "Expiration Date" shall mean the latest
date to which the Exchange Offer is extended.
In order to extend the Expiration Date, the Issuer will notify the Exchange
Agent of any extension by oral or written notice and will notify the holders of
the Old Notes by means of a press release or other public announcement prior to
9:00 a.m., New York City time, on the next business day after the previously
scheduled Expiration Date.
The Issuer reserves the right (i) to receive cash in lieudelay acceptance of any fractional shares.
AtOld Notes, to
extend the Effective TimeExchange Offer or to terminate the Exchange Offer and not permit
acceptance of Old Notes not previously accepted if any of the Merger,conditions set
forth herein under "-- Conditions" shall have occurred and shall not have been
waived by the Issuer, by giving oral or written notice of such delay, extension
or termination to the Exchange Agent, or (ii) to amend the terms of the Exchange
Offer in any manner deemed by it to be advantageous to the holders of the Old
Notes. Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to the
Exchange Agent. If the Exchange Offer is amended in a manner determined by the
Issuer to constitute a material change, the Issuer will promptly disclose such
amendment in a manner reasonably calculated to inform the holders of the Old
Notes of such amendment.
INTEREST ON THE NEW NOTES
The New Notes will accrue interest from June 22, 1998, at the rates of
6.875% on the New Notes due 2005 and 7.0% on the New Notes due 2008. Commencing
December 15, 1998, cash interest on the New Notes will accrue and be payable, at
a per annum rate of 6.875% on the New Notes due 2005 and 7.0% on the New Notes
due 2008, semi-annually in arrears on each June 15 and December 15.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, have the signatures thereon guaranteed if required by the
Letter of Transmittal, and mail or otherwise deliver such Letter of Transmittal,
together with any other required documents, to the Exchange Agent prior to 5:00
p.m., New York City time, on the Expiration Date. In addition, either (i)
certificates for such Old Notes must be received by the Exchange Agent along
with the Letter of Transmittal, (ii) a timely confirmation of a book entry
transfer (a "Book-Entry Confirmation") of such Old Notes, if such procedure is
available, into the Exchange Agent's account at DTC (the "Book-Entry Transfer
Facility") pursuant to the procedure for book-entry transfer described below,
must be received by the Exchange Agent prior to the Expiration Date or (iii) the
holder must comply with the guaranteed delivery procedures described below. THE
METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED
DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS OF THE NOTES. IF SUCH
DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD
BE SENT TO THE ISSUER. Delivery of all then-outstanding optionsdocuments must be made to the Exchange
Agent at its address set forth below. Holders of Notes may also request their
respective brokers, dealers, commercial banks, trust companies or nominees to
effect such tender for such holders.
The tender by a holder of Old Notes will constitute an agreement between
such holder and warrants to purchase Horizon/CMS Common Stock, whether or not then exercisable,
will,the Issuer in accordance with the Plan,terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
The term "holder" with respect to the Exchange Offer means any person in whose
name Old Notes are registered on the books of the Issuer or any other person who
has obtained a properly completed bond power from the registered holder.
23
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered holder promptly and instruct such
registered holder to tender on his behalf. If such beneficial owner wishes to
tender on his own behalf, such beneficial owner must, prior to completing and
executing the Letter of Transmittal and delivering his Old Notes, either make
appropriate arrangements to register ownership of the Old Notes in such owner's
name or obtain a properly completed bond power from the registered holder. The
transfer of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, assumedmust be guaranteed by HEALTHSOUTHany member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor" institution within the meaning of Rule
17Ad-15 under the Exchange Act (each, an "Eligible Institution") unless the Old
Notes tendered pursuant thereto are tendered (i) by a registered holder who has
not completed the box entitled "Special Issuance Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution.
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by bond powers and will become
optionsa proxy which authorizes such person
to tender the Old Notes on behalf of the registered holder, in each case as the
name of the registered holder or holders appears on the Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and warrants to purchase HEALTHSOUTH Common Stock. As a result of such
assumption, each such option and warrant will relate to a number of shares of
HEALTHSOUTH Common Stock determined by multiplying the number of shares of
Horizon/CMS Common Stock theretofore subject theretounless waived by the Exchange RatioIssuer,
evidence satisfactory to the Issuer of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and withdrawal of the exercise prices thereoftendered Old Notes will be determined by dividing the
exercise price
containedIssuer in its sole discretion, which determination will be final and binding.
The Issuer reserves the absolute right to reject any and all Old Notes not
properly tendered or any Old Notes which, if accepted, would, in the opinion of
counsel for the Issuer, be unlawful. The Issuer also reserves the absolute right
to waive any irregularities or conditions of tender as to particular Old Notes.
The Issuer's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such optiontime as the
Issuer shall determine. Neither the Issuer, the Exchange Agent nor any other
person shall be under any duty to give notification of defects or warrantirregularities
with respect to tenders of Old Notes, nor shall any of them incur any liability
for failure to give such notification. Tenders of Old Notes will not be deemed
to have been made until such irregularities have been cured or waived. Any Old
Notes received by the Exchange Ratio. At August 31, 1997,
optionsAgent that are not properly tendered and as to
acquire approximately 4,186,000 shareswhich the defects or irregularities have not been cured or waived will be
returned without cost to such holder by the Exchange Agent to the tendering
holders of Horizon/ CMS Common Stock
and warrantsOld Notes, unless otherwise provided in the Letter of Transmittal, as
soon as practicable following the Expiration Date.
In addition, the Issuer reserves the right in its sole discretion, subject
to acquire approximately 500,000 shares of Horizon/CMS Common Stock
were outstanding.
Based upon the number of shares of HEALTHSOUTH Common Stock, excluding
shares obtainable upon exercise of options and convertible securities,
outstanding asprovisions of the RecordIndenture, to (i) purchase or make offers for any Old
Notes that remain outstanding subsequent to the Expiration Date or, as set forth
under "-- Conditions", (ii) to terminate the Exchange Offer in accordance with
the terms of the Registration Rights Agreement and (iii) to the extent permitted
by applicable law, purchase Old Notes in the open market, in privately
negotiated transactions or otherwise. The terms of any such purchases or offers
could differ from the terms of the Exchange Offer.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
all Old Notes properly tendered will be accepted, promptly after the Expiration
Date, and the New Notes will be issued promptly after acceptance of the Old
Notes. See "-- Conditions" below. For purposes of the Exchange Offer, Old Notes
shall be deemed to have been accepted as validly tendered for exchange when, as
and if the Issuer has given oral or written notice thereof to the Exchange
Agent.
24
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Old Notes are not
accepted for any reason set forth in the terms and conditions of the Exchange
Offer or if Old Notes are submitted for a greater principal amount than the
holder desires to exchange, such unaccepted or nonexchanged Old Notes will be
returned without expense to the tendering holder thereof (or, in the case of Old
Notes tendered by book-entry transfer procedures described below, such
nonexchanged Old Notes will be credited to an account maintained with such
Book-Entry Transfer Facility) as promptly as practicable after the expiration or
termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus. Any
financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal with any required
signature guarantees and any other required documents must, in any case, be
transmitted to and received by the Exchange Agent at one of the addresses set
forth below under "-- Exchange Agent" on or prior to the Expiration Date or the
guaranteed delivery procedures described below must be complied with. DELIVERY
OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes,
and the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedures for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) prior to the Expiration Date, the holdersExchange
Agent receives from such Eligible Institution a properly completed and duly
executed Letter of Horizon/CMS Shares will
receiveTransmittal and Notice of Guaranteed Delivery, substantially
in the aggregate approximately 13%form provided by the Issuer (by mail or hand delivery), setting forth the
name and address of the sharesholder of HEALTHSOUTH Common
Stock anticipated to be outstanding immediately after the Effective Time.
Background of the Merger
In March 1996:
o Horizon/CMS announced (the "March 1 Press Release") a revision in its third
fiscal quarter estimates to $.36 per share of Horizon/CMS Common Stock
from the then-current consensus estimate among financial analysts of $.41
per share. The revision was attributed to downward Medicaid rate
adjustments for many of its New Mexico facilities; a revenue decline in
Horizon/CMS's contract therapy division; a write-off of certain of the
contract therapy division's accounts receivable; and a failure of
anticipated Medicaid rate increases in Texas to meet Horizon/CMS's
budgeted increase. Horizon/CMS also reported a general softness in the
census at its long-term care facilities.
o Horizon/CMS announced (the "March 7 Press Release") that it had filed a
lawsuit against Tenet Healthcare Corporation in which Horizon/CMS alleged
that Tenet failed to honor its commitment to pay Horizon/CMS approximately
$14.5 million pursuant to an agreement between Horizon/CMS and Tenet
related to Horizon/CMS's attempted acquisition of The Hillhaven
Corporation.
28
o Horizon/CMS announced (the "March 15 Press Release") that certain Medicare
Part B and related co-insurance billings previously submitted by
Horizon/CMS were being investigated (the "OIG Investigation") by the
Office of Inspector General of the Department of Health and Human Services
(the "OIG")Old Notes and the Departmentamount of Justice (the "DOJ") as to compliance
with applicable Medicare Part B rules. In that regard, Horizon/CMS then
acknowledged that, if civil or criminal proceedings were initiated against
Horizon/CMS and adversely determined, fines or sanctions could be imposed
against Horizon/CMS that could have a material adverse effect on
Horizon/CMS's financial condition or results of operations.
o Various articles appeared in newspapers of national circulation regarding
trading in Horizon/CMS's Common Stock by various insiders. Horizon/CMS
later reported in a filing with the Commission that Horizon/CMS and Neal
M. Elliott, Chairman of the Board, President and Chief Executive Officer
of Horizon/CMS, had responded to separate subpoenas from the Commission
pertaining to trading in Horizon/CMS's Common Stock and the March 1 Press
Release, the March 7 Press Release and the March 15 Press Release.
Horizon/CMS believedOld Notes
tendered, stating that the subpoenas were extensions of a formal
investigation into trading in Horizon/CMS's Common Stock initiated in
March 1995 in connection with Horizon/CMS's then-pending acquisition of
Continental Medical Systems, Inc.
See "RISK FACTORS - Certain Horizon/CMS Litigation".
As a result of this unfavorable publicity, the market price of
Horizon/CMS's Common Stock declined from a closing sale price on thetender is being made thereby and guaranteeing that
within three New York Stock Exchange ("NYSE") trading days after the date of
execution of the Notice of Guaranteed Delivery, the certificates for all
physically tendered Old Notes, in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, and any other documents required by the Letter
of Transmittal will be deposited by the Eligible Institution with the Exchange
Agent and (iii) the certificates for all physically tendered Old Notes, in
proper form for transfer, or a Book Entry Confirmation, as the case may be, and
all other documents required by the Letter of Transmittal are received by the
Exchange Agent within three NYSE trading days after the date of execution of the
Notice of Guaranteed Delivery.
WITHDRAWAL OF TENDERS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time on February 29, 1996the Expiration Date.
For a withdrawal to be effective, a written notice of $23.50withdrawal must be
received by the Exchange Agent prior to a closing sale price5:00 p.m., New York City time on March
18, 1996the
Expiration Date at one of $13.875. On March 28, 1996, Horizon/CMS was served with,the addresses set forth below under "-- Exchange
Agent". Any such notice of withdrawal must specify the name of the person having
tendered the Old Notes to be withdrawn, identify the Old Notes to be withdrawn
(including the principal amount of such Old Notes) and announced,(where certificates for
Old Notes have been transmitted)
25
specify the firstname in which such Old Notes are registered, if different from that
of 18 lawsuits, both stockholder class action lawsuits and
stockholder derivative actions, alleging, among other things, various violations
of federal and state securities laws relatedthe withdrawing holder. If certificates for Old Notes have been delivered or
otherwise identified to the OIG Investigation, tradingExchange Agent, then, prior to the release of such
certificates, the withdrawing holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an Eligible Institution unless such holder is an
Eligible Institution. If Old Notes have been tendered pursuant to the procedure
for book-entry transfer described above, any notice of withdrawal must specify
the name and number of the account at the Book-Entry Transfer Facility to be
credited with the withdrawn Old Notes and otherwise comply with the procedures
of such facility. All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by the Issuer,
whose determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for exchange for
purposes of the Exchange Offer. Any Old Notes which have been tendered for
exchange but which are not exchanged for any reason will be returned to the
holder thereof without cost to such holder (or, in Horizon/CMS Common Stockthe case of Old Notes
tendered by insiders,book-entry transfer into the acquisitionExchange Agent's account at the
Book-Entry Transfer Facility pursuant to the book-entry transfer procedures
described above, such Old Notes will be credited to an account maintained with
such Book-Entry Transfer Facility for the Old Notes) as soon as practicable
after withdrawal, rejection of CMStender or termination of the Exchange Offer.
Properly withdrawn Old Notes may be retendered by following one of the
procedures described under "-- Procedures for Tendering" and various
filings made"-- Book-Entry
Transfer" above at any time on or prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, Old Notes will not be
required to be accepted for exchange, nor will New Notes be issued in exchange
for any Old Notes, and the Issuer may terminate or amend the Exchange Offer as
provided herein before the acceptance of such Old Notes, if because of any
change in law, or applicable interpretations thereof by Horizon/CMS pursuantthe Commission, the
Issuer determines that it is not permitted to effect the Exchange Offer. The
Issuer has no obligation to, and will not knowingly, permit acceptance of
tenders of Old Notes from affiliates (within the meaning of Rule 405 under the
Securities Act) of the Issuer or from any other holder or holders who are not
eligible to participate in the Exchange Offer under applicable law or
interpretations thereof by the Commission, or if the New Notes to be received by
such holder or holders of Old Notes in the Exchange Offer, upon receipt, will
not be tradable by such holder without restriction under the Securities Act and
the Exchange Act.
The class action lawsuits were subsequently consolidated by court order (the
"Consolidated Class Action Lawsuit"), as wereAct and without material restrictions under the stockholder derivative
actions.
In the context"blue sky" or
securities laws of substantially all of the market loss experienced by the stockholders of
Horizon/CMS during this period and the market uncertainty caused by the
contingencies facing Horizon/CMS and publicized in March, management of
Horizon/CMS began to explore alternatives with the objective of restoring
stockholder value in Horizon/CMS's Common Stock. One initiative developed by
management was the possible sale of Horizon/CMS's acute rehabilitation hospitals
(the "Hospitals"). In that regard, Mr. Elliott contacted Richard M. Scrushy,
Chairmanstates of the Board and Chief Executive Officer of HEALTHSOUTH, in late March
1996 to determine if HEALTHSOUTH had any interest in acquiringUnited States.
ACCOUNTING TREATMENT
The New Notes will be recorded at the Hospitals.
Thereafter, at Mr. Scrushy's suggestion, Mr. Elliott held very preliminary
discussions with Michael D. Martin, Executive Vice President and Treasurer of
HEALTHSOUTH, concerningsame carrying value as the possibility of such a sale.
In early April 1996, Horizon/CMS and HEALTHSOUTH entered into a
confidentiality agreement with respect to information provided regarding the
possible sale of the Hospitals. In mid-April, Horizon/ CMS prepared an analysis
of the ownership and operational structure of each of the Hospitals and
delivered it to HEALTHSOUTH.
In June 1996, Horizon/CMS engaged Merrill Lynch to advise it generally
regarding its strategic alternatives to restore and enhance stockholder value,
including the alternative of selling the Hospitals to HEALTHSOUTH.
The analysis and discussions regarding this alternative continued, albeit
at a modest pace. On July 11, 1996, Mr. Elliott, Ernest A. Schofield, Senior
Vice President and Chief Financial Officer of Horizon/ CMS, and representatives
of Merrill Lynch met with officers of HEALTHSOUTH and representatives of its
investment bankers, Smith Barney Inc. ("Smith Barney"), to discuss the potential
sale of the Hospitals and a tax-efficient structure for such a transaction. The
parties reached no agreement in this regard, and the parties thereafter
terminated their discussions.
In October 1996, Mr. Schofield and other members of the senior management
of Horizon/CMS separately initiated the preparation of an internal strategic
plan for Horizon/CMS.
29
In the absence of any progress with respect to the sale of the Hospitals,
Mr. Elliott, in October 1996, initiated a contact with the chief executive
officer of a publicly owned healthcare corporation that had an emphasis,Old Notes,
as does
Horizon/CMS, on long-term care ("Company A"). During that month, Mr. Elliott and
the chief executive officer of Company A engaged in several conversations
regarding the possibility of effecting a "merger of equals" between Horizon/CMS
and Company A.
In early November 1996, these discussions were extended to include Mr.
Schofield and the principal financial officers of Company A who, together,
engaged in a financial analysis of a business combination of the two entities.
During the latter part of November 1996, Mr. Schofield met with the
principal financial officers of Company A to discuss the comparative results of
the financial analysis prepared by each company of a business combination of the
two entities.
In early December 1996, Mr. Elliott directed all department heads to
prepare operational plans for their respective departments for presentation to
the Board of Directors of Horizon/CMS on December 20, 1996.
On December 10, 1996, Messrs. Elliott, Schofield and legal counsel met with
their counterparts at Company A to exchange information regarding various
contingent liabilities of each of the companies and the extent to which such
contingencies posed hurdles to a possible business combination.
HEALTHSOUTH expressed a renewed interest in acquiring the Hospitals in a
telephone conversation between Mr. Martin and Mr. Elliott in December 1996.
On December 20, 1996, the Horizon/CMS department heads made presentations
of operational plans for their departments to the Board of Directors of
Horizon/CMS. These operational plans compared current operations with budgeted
operations to date and included operational initiatives for improvements of the
projected results of operations during the next succeeding four quarters.
Following this meeting (which Mr. Elliott attended by telephone), Horizon/CMS
announced that Mr. Elliott had undergone cancer surgery and that, during his
convalescence, a temporary committee composed of members of senior management of
Horizon/CMS would assume and perform the duties of the office of the President
and Chief Executive Officer.
On December 23, 1996, Horizon/CMS and Company A executed and delivered a
confidentiality agreement regarding information exchanged with respect to the
evaluation of a business combination of the two companies.
On December 31, 1996, Horizon/CMS announced that it had reached a
settlement with the OIG and the DOJ that concluded the OIG Investigation.
Concurrently, Horizon/CMS reported that it had received a letter from the U.S.
Attorney for the District of New Mexico declining any criminal prosecution of
Horizon/CMS or any of its employees with respect to the subject matter of the
OIG Investigation. Horizon/CMS announced that it had, pursuant to the
settlement, paid approximately $5.8 million in final resolution of the issues
involvedreflected in the OIG Investigation.
On January 2, 1997, Messrs. Elliott and Schofield, and Scot Sauder, Vice
President of Legal Affairs of Horizon/CMS, met with their counterparts at
Company A to address certain apparent obstacles to any combination of the
companies. During the period from January 7 through January 10, 1997, Company A
and Horizon/CMS initiated due diligence investigations of each other.
Pursuant to arrangements made in their December 1996 telephone
conversation, Mr. Martin and other representatives of HEALTHSOUTH met with
Messrs. Elliott and Schofield, who were accompanied by representatives of
Merrill Lynch, in Los AngelesIssuer's accounting records on Wednesday, January 8, 1997 to discuss further a
transaction involving the Hospitals. At this time, Mr. Martin proposed that
HEALTHSOUTH acquire both the Hospitals and Horizon/CMS's outpatient
rehabilitation centers (the "Rehab Clinic Business") in a tax-efficient
structure.
On January 15, 1997, the Board of Directors of Horizon/CMS met in Los
Angeles. The principal business of the meeting was to review the strategic
alternatives available to Horizon/CMS. In this regard, representatives of
Merrill Lynch provided an analysis of the following alternatives: (i) a
continuation of
30
Horizon/CMS's status as an independent entity; (ii) a "merger of equals" with
Company A; (iii) the sale of the Hospitals, alone and in combination with the
Rehab Clinic Business, to HEALTHSOUTH; (iv) a recapitalization of Horizon/CMS
through a significant stock repurchase program (in the range of 10% to 50% of
the outstanding Horizon/CMS Common Stock); (v) a spin-off of the rehabilitation
business of Horizon/CMS to its stockholders; (vi) a "Morris Trust" transaction
in which Horizon/CMS would spin-off to its stockholders all of its businesses
other than its rehabilitation business, which would then be sold to HEALTHSOUTH
for HEALTHSOUTH Common Stock; (vii) the sale of Horizon/CMS in a leveraged
buy-out transaction; and (viii) the sale of Horizon/CMS through an auction
process.
While each of the alternatives was discussed by the directors, the Board
did not make any specific determinations with respect to any of the alternatives
except as noted below. Most of the directors' attention was focused on the first
three alternatives. Mr. Schofield presented to the Board a composite of the
various operational plans of the Horizon/CMS departments presented at the
December 1996 Board meeting and Mr. Elliott reviewed for the Board the progress
of the discussions with Company A, as well as the nature of the discussions to
date with HEALTHSOUTH. Predicated primarily on the Board's view of the value of
the Rehab Clinic Business to the ongoing operations of Horizon/CMS, the Board
directed management of Horizon/CMS to advise HEALTHSOUTH that Horizon/CMS was
willing to continue discussions regarding the sale of the Hospitals but not the
Rehab Clinic Business. In addition, the Board authorized management to continue
Horizon/CMS's due diligence investigation of Company A without authorizing any
discussion of structure or terms of a business combination. Finally, the Board
directed Mr. Schofield to investigate further the attainability of the composite
projected results of operations presented earlier in the meeting. The Board took
no other actions at the meeting regarding any other strategic alternatives of
Horizon/CMS.
The next day, Merrill Lynch conveyed to HEALTHSOUTH the Board's views
regarding the Hospitals and the Rehab Clinic Business. The parties then
scheduled their next meeting for Wednesday, January 22, 1997.
On January 18, 1997, the chief executive officers of Horizon/CMS and
Company A met in California to discuss the preliminary results of the due
diligence investigations conducted by each organization and the likelihood of
overcoming existing obstacles to a business combination.
On January 22, 1997, Messrs. Elliott and Schofield met with Messrs. Scrushy
and Martin at a hotel in Westwood, California. At this point, Mr. Scrushy
proposed to expand the scope of the discussions to embrace a business
combination of Horizon/CMS with HEALTHSOUTH. Specifically, Mr. Scrushy proposed
that the parties should consider an acquisition of Horizon/CMS by HEALTHSOUTH
pursuant to which Horizon/CMS Common Stock would be valued at $17.00 per share
in an exchange for HEALTHSOUTH Common Stock. The parties agreed to explore this
possibility.
During January 23 and 24, 1997, Horizon/CMS and Company A continued their
respective due diligence investigations of each other at the offices of
Horizon/CMS's counsel in Dallas, Texas.
On January 27, 1997, Horizon/CMS and HEALTHSOUTH executed and delivered a
confidentiality agreement. HEALTHSOUTH conducted a due diligence investigation
of Horizon/CMS at the offices of Horizon/CMS's counsel in Dallas, Texas during
the period from January 29 through Friday, January 31, 1997.
On January 28, 1997, the chief executive officers of Horizon/CMS and
Company A met again in California with respect to the financial prospects of and
obstacles (consisting of certain litigation and regulatory proceedings pending
against Company A) to a business combination of the companies.
On January 29, 1997, representatives of Merrill Lynch contacted the chief
executive officer of a major, publicly owned healthcare corporation ("Company
B") with respect to the extent of its interest, if any, in a business
combination with Horizon/CMS.
On January 31, 1997, Messrs. Elliott and Schofield and Charles H. Gonzales,
Senior Vice President of Subsidiary Operations of Horizon/CMS, met with Messrs.
Scrushy and Martin at the HEALTHSOUTH offices in Birmingham, Alabama for further
discussions regarding a combination of the companies. HEALTHSOUTH continued its
due diligence investigation of Horizon/CMS at an offsite location in
Albuquerque, New Mexico during the period from February 5 through February 7,
1997.
31
On February 3, 1997, Mr. Schofield met with his counterpart at Company A
for further discussions of the financial analysis of a combination of the two
companies, with particular emphasis on the extent of the synergies that might be
realized.
On February 4, 1997, Horizon/CMS and Company B executed and delivered a
confidentiality agreement. On the same day, Mr. Elliott was contacted by the
chief executive officer of another healthcare organization ("Company C") and a
senior executive officer of a venture capital fund ("Company D"), each of whom
expressed interest in a business transaction with Horizon/CMS.
On February 5, 1997, the chief executive officer of Company A made an oral
proposal (the "February 5 Proposal") to Mr. Elliott regarding a business
combination of Horizon/CMS with Company A. Pursuant to this proposal,
Horizon/CMS would be merged with a subsidiary of Company A and the outstanding
Horizon/CMS Common Stock would be converted into common stock of Company A at an
implied value at the date of the agreementexchange.
Accordingly, no gain or loss for accounting purposes will be recognized by the
Issuer. The costs of $17.00 per share of Horizon/CMS
Common Stock, subject to a maximum and minimum number of shares of common stock
of Company A. Based on the closing price per share of common stock of Company AExchange Offer and the maximum conversion ratio,unamortized expenses related to
the implied price on February 5, 1997 was
$16.39 per share of Horizon/CMS Common Stock.
On February 6 and 7, 1997, Company B conducted a due diligence
investigation of Horizon/CMS at the offices of Horizon/CMS's counsel in Dallas,
Texas.
On February 7, 1997, HEALTHSOUTH made an oral proposal to Horizon/CMS
through Merrill Lynch to acquire Horizon/CMS by means of a merger with a
subsidiary of HEALTHSOUTH in which Horizon/CMS Common Stock would be converted
into HEALTHSOUTH Common Stock at a conversion ratio that would reflect a value
of $17.00 per share for Horizon/CMS Common Stock, and HEALTHSOUTH provided
Merrill Lynch with a draft plan and agreement of merger. Representatives of
Merrill Lynch conveyed the proposal to management of Horizon/CMS. Concurrently,
Mr. Scrushy sent a letter to Mr. Elliott advising him that the HEALTHSOUTH
proposal would be withdrawn, if not theretofore accepted, on February 10, 1997,
the dateissuance of the next scheduled meetingOld Notes will be amortized over the term of the BoardNew Notes.
EXCHANGE AGENT
PNC Bank, N.A. has been appointed as Exchange Agent for the Exchange Offer.
Questions and requests for assistance and requests for additional copies of Directors of Horizon/CMS.
The following day, representatives of Merrill Lynch discussed the February 7,
1997 letter with Mr. Martin.
On February 9, 1997, senior officers of Horizon/CMS, including Messrs.
Elliott and Schofield, met with the chief executive officer and other officers
of Company B to discuss the resultsthis
Prospectus or of the due diligence investigation by
Company B and the interestLetter of the latter in a business combination transaction.
Early on February 10, 1997, the chief executive officer of Company B
advised Mr. Elliott that Company B would not make a proposal for a business
combination with Horizon/CMS. Later in the day, a meeting of the Board of
Directors of Horizon/CMS, with all directors present, convened in Los Angeles.
At the meeting, the directors evaluated the proposals from HEALTHSOUTH and from
Company A. To that end, Merrill Lynch representatives provided an extensive
financial analysis of each of the companies on a stand-alone basis and on a
combined basis. Representatives of Merrill Lynch also indicated that neither
they nor representatives of Horizon/CMS had been contacted further by either
Company C or Company D. In addition, Mr. Schofield reportedTransmittal should be directed to the Board that,
after investigationExchange
Agent addressed as follows:
BY REGISTERED OR CERTIFIED MAIL: FOR INFORMATION CALL: BY HAND/OVERNIGHT DELIVERY:
PNC Bank, N.A. David G. Metcalf PNC Bank, N.A.
500 West Jefferson Street (502) 581-3029 500 West Jefferson Street
Louisville, Kentucky 40202 Facsimile (502) 581-2702 Louisville, Kentucky 40202
Attn: Corporate Trust Department Attn: Corporate Trust Department
26
FEES AND EXPENSES
The expenses of the assumptions on which the composite projected results
of operations were based, he could provide no assurance to the Board that those
results were achievable in the current healthcare environment. After debate, the
Board of Directors concluded that the HEALTHSOUTH proposal was financially
preferable to the Company A proposal and that it appeared to offer a greater
opportunity to increase stockholder value than either the Company A proposal or
remaining independent. The Board of Directors then unanimously authorized
management to agree to negotiate exclusively with HEALTHSOUTH for one week to
determine if the parties could reach agreement on a business combination and
directed management to seek a conversion rate based on an implied value of
$18.00 per share of Horizon/CMS Common Stock. The Board also directed management
to conduct a due diligence investigation of HEALTHSOUTH during that period. No
action was taken by the Board of Directors with respect to the proposal by
Company A. Immediately after the meeting, Mr. Elliott and representatives of
Merrill Lynch conveyed the authorization and direction of the Board to Mr.
Martin by telephone.
32
On February 11, 1997, Mr. Martin advised representatives of Merrill Lynch
of the terms of the HEALTHSOUTH proposal which included a conversion rate that,
based on the then-current market price of the HEALTHSOUTH Common Stock, implied
a value per share of Horizon/CMS Common Stock of less than $17.00, which terms
were conveyed to management of Horizon/CMS. Based on instructions from
management of Horizon/CMS, representatives of Merrill Lynch obtained a revised
proposal from HEALTHSOUTH that included a conversion rate that, based on the
then-current market price of the HEALTHSOUTH Common Stock, implied a value per
share of Horizon/CMS Common Stock of $17.00. On this basis, the parties agreed
to attempt to negotiate a definitive plan and agreement of merger during the
period ending on February 17, 1997.
On February 12, 1997, a team of Horizon/CMS's representatives initiated a
due diligence investigation of HEALTHSOUTH at its headquarters in Birmingham,
Alabama. Contemporaneously, representatives of Horizon/CMS and HEALTHSOUTH
commenced negotiations at the offices of Horizon/CMS's counsel in Dallas, Texas
with respect to a definitive plan and agreement of merger, which continued until
February 17, 1997.
On February 13, 1997, Horizon/CMS announced that it had reached agreement
in principle to settle the claims against it and certain of its current and
former directors in the Consolidated Class Action Lawsuit. Pursuant to the
proposed settlement, Horizon/CMS would pay a minimum of $17.0 million to resolve
all claims against it and such directors, excluding claims against certain
former directors of CMS (the "CMS directors") relating to events prior to the
acquisition of CMS by Horizon/CMS (which claims Horizon/CMS believed were
covered by insurance). The maximum amount payable by Horizon/CMSsoliciting tenders pursuant to the proposed settlement wouldExchange Offer will be
$20.0 million, including any amounts relatedborne by the Issuer. The principal solicitation for tenders pursuant to the
CMS directors.
On February 14, 1997, the chief executive officer of Company A transmitted
an unsolicited written proposal (the "February 14 Proposal") to Mr. ElliottExchange Offer is being made by mail; however, additional solicitations may be
made by telegraph, telephone, telecopy or in which the outstanding Horizon/CMS Common Stock would be converted into common
stock of Company A at an implied value of $17.00 per share of Horizon/CMS Common
Stock.
On February 17, 1997, the Board of Directors of Horizon/CMS met in Chicago
to evaluate Horizon/ CMS's two strategic alternatives, in addition to retention
of Horizon/CMS's status as an independent entity, then under considerationperson by management of Horizon/CMS. The Merrill Lynch representatives outlined in detail
the financial aspects of a business combination of Horizon/CMS with HEALTHSOUTH,
discussed the financial aspectsofficers and regular
employees of the February 14 Proposal and presented a
limited comparison of the two proposed business combinations.Issuer.
The Board of
Directors didIssuer will not request, and as a result, Merrill Lynch did not render, a
fairness opinion with respectmake any payments to the February 14 Proposal of Company A. Counsel
to Horizon/CMS reviewed the terms of a definitive plan and agreement of merger
between Horizon/CMS and HEALTHSOUTH that, but for two corporate governance
matters, had been negotiated by the representatives of the parties. Merrill
Lynch rendered its oral opinion (which it subsequently confirmed in writing) to
the Board of Directors of Horizon/CMS that, based upon the assumptions made,
matters considered and limits of review as set forth in such opinion, the
Exchange Ratio was fair to the stockholders of Horizon/CMS from a financial
point of view. (The opinion of Merrill Lynch did not address the underlying
decision by Horizon/CMS to engage in the Merger and did not constitute a
recommendation to any stockholder as to how such stockholder should vote on the
Merger.) See "THE MERGER-Opinion of Financial Advisor to Horizon/CMS". After
discussion and evaluation, the Board of Directors, for the reasons set forth
under "- Reasons for the Merger; Recommendation of the Board of Directors of
Horizon/CMS" but subject to satisfactory resolution of the two remaining
unresolved matters, unanimously approved execution and delivery of the
definitive plan and agreement of merger as presented to the meeting.
During the evening of February 17, 1997, representatives of Horizon/CMS and
HEALTHSOUTH resolved the remaining open matters and the Plan, a copy of which is
attached to this Prospectus-Proxy Statement as Annex A, was executed and
delivered by the parties and an announcement of the transaction was released to
the press early on February 18, 1997.
33
CERTAIN INFORMATION PROVIDED
In connection with the discussions between HEALTHSOUTH and Horizon/CMS
described above, HEALTHSOUTH provided to Horizon/CMS and Merrill Lynch certain
financial projections with respect to HEALTHSOUTH's operating results, cash
flows and financing activities, capitalization and capital expenditures for
fiscal years 1997 through 2001, and the assumptions on which such financial
projections were based. Such financial projections were developed for internal
use only, were not prepared with the intent that they would be publicly
distributed, were based on numerous assumptions (many of which are beyond the
control of HEALTHSOUTH), and are not necessarily indicative of future results.
Such preliminary financial projections assumed a consolidated compound average
annual revenue growth rate of 15.19% and average EBITDA (earnings before
interest, taxes, depreciation and amortization) margins of 31.0%.
In connection with the discussion between HEALTHSOUTH and Horizon/CMS
described above, Horizon/CMS provided alternative case financial projections to
HEALTHSOUTH and base case and alternative case financial projections to Merrill
Lynch relating to Horizon/CMS's fiscal years 1997 through 2001 and the
assumptions on which such projections were based. Such preliminary financial
projections were prepared by Horizon/CMS for internal use only, were not
prepared with the intent that they would be publicly distributed, were based on
numerous assumptions (many of which are beyond the control of Horizon/CMS) and
are not necessarily indicative of future results. The base case financial
projections were prepared by management of Horizon/CMS based on the assumption
of a consolidated compound average annual revenue growth of 4.8% and average
EBITDA margins of 12.5%. The alternative case financial projections were
prepared by management based on the assumption of a consolidated compound
average annual revenue growth of 6.6% and average EBITDA margins of 12.8%. While
Horizon/CMS has recorded various special charges during the most recent interim
fiscal period and past five fiscal years, neither the base case nor the
alternative case projections reflected any future special charges.
HEALTHSOUTH and Horizon/CMS provided EBITDA information as additional
financial data to measure their respective projected operating performance.
Although such data are commonly used by the investment community, such data may
not be representative of, and are not a substitute for, operating results or net
income for the periods presented under generally accepted accounting principles.
For example, the Companies do not consider EBITDA data to be representative
measures of their respective operating cash flows.
Statements made under this caption should be regarded as forward-looking
information. For information regarding the factors that could cause actual
results to differ from such forward-looking statements, see "INCORPORATION OF
CERTAIN INFORMATION BY REFERENCE-Forward-Looking Information".
REASONS FOR THE MERGER; RECOMMENDATION OF THE BOARD OF DIRECTORS OF HORIZON/CMS
The Board of Directors of Horizon/CMS believes that the terms of the Plan
are fair to, and that the Merger is in the best interests of, Horizon/CMS and
its stockholders. Accordingly, the Board of Directors of Horizon/CMS has
approved the Merger upon the terms of the Plan and recommends approval thereof
by the stockholders of Horizon/CMS.
In reaching its determination, the Board of Directors of Horizon/CMS was
motivated to restore stockholder value lost, at least in part, as a result of
the public disclosures made in the March 1 Press Release, the March 7 Press
Release, the March 15 Press Release and the newspaper articles described under
"- Background of the Merger" above. In its deliberations with respect to the
Merger, the Board of Directors consulted with management of Horizon/CMS and the
financial and legal advisors to Horizon/CMS. The composite mix of information
available to the Board of Directors with respect to the Merger included
information regarding the matters enumerated below. While this information was
considered by the Board of Directors, the Board of Directors did not evaluate
and make determinations with respect to each such factor. Rather, the Board of
Directors made its judgment with respect to the Merger based upon the total mix
of information available to it, and the judgments of individual directors may
have been influenced to a greater or lesser degree by different factors.
34
(i) Its knowledge of the business, operations, assets, properties,
operating results and financial condition of Horizon/CMS;
(ii) Horizon/CMS's strategic alternatives, including the prospects of
restoring stockholder value over time by remaining an independent
company or by effecting a strategic business transaction or a business
combination with one or more other parties;
(iii) information concerning Horizon/CMS's prospects as an independent
company, including a composite of the departmental operating plans for
the next four quarters, other financial projections, its ability in
recent periods to meet the objectives of its financial plans, its
competitive position and the prospects for the segments of the health
care industry in which it operates, and the Board's judgments with
respect thereto;
(iv) the growth records of each of HEALTHSOUTH and Company A and the
ability of each over time to meet its anticipated financial objectives;
(v) information concerning the financial position, results of operations,
businesses, competitive position and prospects of a business combination
with each of HEALTHSOUTH and Company A, including the commitment of each
to the long-term care segment of the healthcare industry;
(vi) the opportunities for operating efficiencies and synergies as a
result of a business combination with each of HEALTHSOUTH and Company A
(which, in the case of HEALTHSOUTH, were estimated to range from $8.0
million to $13.0 million in year one, from $24.0 million to $39.0
million in year two and from $40.0 million to $65.0 million in year
three and, in the case of Company A, were estimated to range from $17.3
million to $45.3 million in year one, from $29.3 million to $76.5
million in year two and from $35.8 million to $93.5 million in year
three), including those resulting from integration of office facilities,
information systems and support functions;
(vii) the results of the due diligence investigations conducted by
Horizon/CMS with respect to each of HEALTHSOUTH and Company A, including
the existence of business and financial contingencies and the ability of
a combined organization to overcome such contingencies;
(viii) the business and management philosophies of HEALTHSOUTH and
Company A and the compatibility of each with those of Horizon/CMS;
(ix) the ability of each of (A) Horizon/CMS as an independent entity, (B)
a combination of Horizon/CMS and HEALTHSOUTH and (C) a combination of
Horizon/CMS and Company A to compete in the healthcare industry, which
is increasingly characterized by consolidation of providers and payors
and by the development of comprehensive integrated healthcare delivery
networks;
(x) the comparative market capitalization, debt-to-equity ratio and
financial strength of each of (A) Horizon/CMS as an independent entity,
(B) a combination of Horizon/CMS and HEALTHSOUTH and (C) a combination
of Horizon/CMS and Company A (the market capitalization, based on
closing sale prices of the appropriate common stocks on Friday, February
14, 1997, and debt-to-equity ratios at that time of (A) Horizon/CMS as
an independent entity were approximately $1,434.2 million and 1.01 to
1.00, (B) a combination of Horizon/CMS and HEALTHSOUTH were
approximately $9,541.5 million and 0.99 to 1.00 and (C) a combination of
Horizon/CMS and Company A were approximately $2,515.3 million and 0.93
to 1.00);
(xi) the absence of continued interest on the part of Companies B, C or
D in a business combination with Horizon/CMS;
(xii) specifically with respect to a business combination with
HEALTHSOUTH:
(a) the Exchange Ratio and recent trading prices for Horizon/CMS
Common Stock and HEALTHSOUTH Common Stock;
(b) the opportunity for the stockholders of Horizon/CMS to receive a
premium over the market price for their shares of Horizon/CMS Common
Stock immediately prior to the announcement of the Plan (the Exchange
Ratio implied a premium of $3.93, or 28%, over the closing market
price per share of Horizon/CMS Common Stock on February 14, 1997
based on the closing market price ($21.5625) for HEALTHSOUTH Common
Stock on the same day);
35
(c) the lack of any substantial impediments to the ability of the
Board of Directors of Horizon/CMS, as required by its fiduciary
obligations, to give information to third parties, entertain and
negotiate alternative proposals and terminate the Plan in the event
of an unsolicited alternative proposal; and
(d) the terms and conditions of the Plan, including the condition that
Horizon/CMS must receive an opinion of counsel that the Merger will
be a tax-free reorganization for federal income tax purposes; and
(xiii) the presentations of Merrill Lynch to the Board of Directors of
Horizon/CMS regarding each of (A) Horizon/CMS as an independent entity,
(B) a combination of Horizon/CMS and HEALTHSOUTH, and (C) a combination
of Horizon/CMS and Company A, including the oral opinion of Merrill
Lynch rendered to the Board of Directors of Horizon/CMS on February 17,
1997 that, as of such date, the Exchange Ratio was fair to the holders
of Horizon/CMS Common Stock from a financial point of view. See "THE
MERGER-Opinion of Financial Advisor to Horizon/CMS".
In conjunction with the efforts of the Board of Directors to analyze
Horizon/CMS's prospects of restoring and maximizing stockholder value as an
independent entity, information was presented to the Board (i) that, although
the announced settlement of the OIG Investigation had improved the market
outlook for the Horizon/CMS Common Stock, the price levels of the Horizon/CMS
Common Stock continued to suffer from low revenue growth and concerns over
Horizon/CMS's contract therapy business, (ii) that strong growth was expected in
Horizon/CMS's pharmaceutical, physician services and outpatient rehabilitation
operations and (iii) that, while Horizon/CMS's cost control efforts would
improve margins, Horizon/CMS would overall continue to experience low revenue
growth. Additional information was presented to the Board that indicated that
the reduced price of the Horizon/CMS Common Stock, together with Horizon/CMS's
levels of indebtedness, impeded growth through acquisitions.
With respect to its analysis of the prospects of restoring and maximizing
stockholder growth through a business combination with Company A, the Board of
Directors was presented information that indicated that, on a pro forma basis,
the combination, based on the terms of the February 5 Proposal and the February
14 Proposal, would be significantly dilutive to the earnings per share of common
stock of Company A for the reasonably predictable future (the dilution to
earnings per share of Company A resulting from a combination of Horizon/CMS with
Company A based on the terms of the February 14 Proposal was estimated to range
from 10.3% to 17.1% in fiscal 1997, from 3.2% to 16.3% in fiscal 1998 and from
4.0% to 17.4% in fiscal 1999) and that, on a subjective basis, it was unlikely
that the common stock of Company A would sustain its then-current price levels
in the face of such dilution. Additional information indicated some uncertainty
regarding realization of the implied values of assumed efficiencies and
synergies of the combination included in such pro forma information.
With regard to HEALTHSOUTH, the Board of Directors of Horizon/CMS was
presented information indicating that, on a pro forma basis using realistic
efficiency and synergy values as described above, the earnings per share of the
combined enterprise would be accretive for the reasonably predictable future
(the accretion to earnings per share of HEALTHSOUTH resulting from a combination
with Horizon/CMS was estimated to range from 0.7% to 1.1% in fiscal 1997, from
4.1% to 6.2% in fiscal 1998 and from 4.6% to 7.5% in fiscal 1999). The Board of
Directors of Horizon/CMS believes that the Merger offers an opportunity to the
holders of Horizon/CMS Common Stock to participate as equity owners in a
combined company that will have greater financial resources, competitive
strengths and business opportunities than would Horizon/CMS alone and that
HEALTHSOUTH brings to the combination an established leadership and growth
record.
In connection with its determination that the HEALTHSOUTH proposal was
superior to the February 14 Proposal of Company A, the Board of Directors of
Horizon/CMS considered, among other matters, (i) the greater implied value per
share of Horizon/CMS Common Stock offered in the HEALTHSOUTH proposal ($18.00
per share) as compared to the February 14 Proposal ($17.00 per share) and (ii)
the superior results of the pro forma earnings per share analysis with respect
to a combination with HEALTHSOUTH as compared to such analysis with respect to a
combination with Company A as described in preceding two paragraphs.
36
In connection with the analysis of the Merger by the Board of Directors of
Horizon/CMS, Merrill Lynch acted as financial advisor to Horizon/CMS. On
February 17, 1997, Merrill Lynch rendered its oral opinion (which it
subsequently confirmed in writing on the date hereof) to the Board of Directors
of Horizon/CMS that, as of such dates, based upon the assumptions made, matters
considered and limits of review as set forth in such opinion, the Exchange Ratio
was fair to the stockholders of Horizon/CMS from a financial point of view. (The
opinion of Merrill Lynch did not address the underlying decision by Horizon/CMS
to engage in the Merger and did not constitute a recommendation to any
stockholder as to how such stockholder should vote on the Merger.) See "THE
MERGER-Opinion of Financial Advisor to Horizon/CMS".
In view of the wide variety of factors considered in connection with its
evaluation of the Merger, the Horizon/CMS Board of Directors did not find it
practicable to quantify or otherwise to attempt to assign relative weights to
the specific factors considered in reaching its determination and did not do so.
THE BOARD OF DIRECTORS OF HORIZON/CMS RECOMMENDS THAT HORIZON/CMS
STOCKHOLDERS VOTE TO APPROVE AND ADOPT THE PLAN.
On February 17, 1997, the HEALTHSOUTH Board of Directors approved the Plan
and the Merger. The HEALTHSOUTH Board of Directors believes that the Merger is
desirable for the following reasons, among others:
(i) The position of Horizon/CMS as the second-largest operator of
rehabilitation facilities in the United States;
(ii) HEALTHSOUTH's expectation that the addition of the Horizon/CMS
facilities will enhance its ability to market its services to insurers,
managed care plans and self-insured employers;
(iii) The fact that the Horizon/CMS facilities will add 12 new markets in
which HEALTHSOUTH can offer both outpatient surgery and rehabilitative
healthcare services, thus strengthening the development of HEALTHSOUTH's
Integrated Service Model; and
(iv) HEALTHSOUTH's belief that the transaction will be at least 1%
accretive to 1997 earnings per share and will provide opportunities for
approximately $20 million in corporate overhead reductions.
Opinion of Financial Advisor to Horizon/CMS
On February 17, 1997, Merrill Lynch rendered its oral opinion, which it
subsequently confirmed in writing on the date hereof (the "Merrill Lynch
Opinion"), to the Board of Directors of Horizon/CMS that, as of such dates, and
based upon the assumptions made, matters considered and limits of review as set
forth in such opinion, the Exchange Ratio was fair to the stockholders of
Horizon/CMS from a financial point of view.
A COPY OF THE MERRILL LYNCH OPINION, WHICH SETS FORTH THE ASSUMPTIONS MADE,
MATTERS CONSIDERED AND LIMITATIONS ON THE SCOPE OF REVIEW UNDERTAKEN BY MERRILL
LYNCH, IS ATTACHED AS ANNEX B TO THIS PROSPECTUS-PROXY STATEMENT. MERRILL LYNCH
ADDRESSED ITS OPINION TO THE BOARD OF DIRECTORS OF HORIZON/CMS AND SUCH OPINION
IS DIRECTED ONLY TO THE FAIRNESS OF THE EXCHANGE RATIO FROM A FINANCIAL POINT OF
VIEW AND DOES NOT ADDRESS THE MERITS OF THE UNDERLYING DECISION OF HORIZON/CMS
TO ENGAGE IN THE MERGER OR CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO
HOW SUCH STOCKHOLDER SHOULD VOTE ON THE PROPOSED MERGER. THE SUMMARY OF THE
MERRILL LYNCH OPINION SET FORTH IN THIS PROSPECTUS-PROXY STATEMENT IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE MERRILL LYNCH OPINION WHICH
IS ATTACHED HERETO AS ANNEX B.
IN ARRIVING AT THE MERRILL LYNCH OPINION, MERRILL LYNCH, AMONG OTHER
THINGS, (I) REVIEWED CERTAIN PUBlicly available business and financial
information relating to Horizon/CMS and HEALTHSOUTH that Merrill Lynch deemed to
be relevant; (ii) reviewed certain information, including financial forecasts,
relating
37
to the business, earnings, cash flow, assets, liabilities and prospects of
Horizon/CMS and HEALTHSOUTH, furnished to Merrill Lynch by Horizon/CMS and
HEALTHSOUTH, respectively, as well as the amount and timing of the cost savings
and related expenses and synergies expected to result from the Merger furnished
to Merrill Lynch by HEALTHSOUTH (which Merrill Lynch was advised by Horizon/CMS
and HEALTHSOUTH reflect discussions of such matters between Horizon/CMS and
HEALTHSOUTH) (the "Expected Savings and Synergies"); (iii) conducted discussions
with members of senior management and representatives of Horizon/CMS and
HEALTHSOUTH concerning the matters described in clauses (i) and (ii) above, as
well as their respective businesses and prospects before and after giving effect
to the Merger, and, with respect to discussions with members of senior
management and representatives of HEALTHSOUTH, the Expected Savings and
Synergies; (iv) reviewed the historical market prices and trading activity for
Horizon/CMS Common Stock and HEALTHSOUTH Common Stock and compared them with
those of certain publicly traded companies that Merrill Lynch deemed to be
relevant; (v) compared the historical and projected results of operations of
Horizon/CMS and HEALTHSOUTH with those of certain companies that Merrill Lynch
deemed to be relevant; (vi) compared the proposed financial terms of the Merger
with the financial terms of certain other transactions that Merrill Lynch deemed
to be relevant; (vii) evaluated the potential pro forma impact of the Merger;
(viii) reviewed the Plan and Agreement of Merger dated as of February 17, 1997
(the "Agreement"), as amended by the First Amendment dated September 15, 1997
(the "First Amendment"); and (ix) reviewed such other financial studies and
analyses and took into account such other matters as Merrill Lynch deemed
necessary, including Merrill Lynch's assessment of general economic, market and
monetary conditions.
In preparing its opinion, Merrill Lynch assumed and relied on the accuracy
and completeness of all information supplied or otherwise made available to it
or publicly available, and Merrill Lynch did not assume any responsibility for
independently verifying such information or undertake an independent evaluation
or appraisal of any of the assets or liabilities of Horizon/CMS or HEALTHSOUTH,
nor has Merrill Lynch been furnished with any such evaluation or appraisal. In
addition, Merrill Lynch did not conduct any physical inspection of the
properties or facilities of Horizon/CMS or HEALTHSOUTH. With respect to (i) the
financial forecast information furnished to or discussed with Merrill Lynch by
Horizon/CMS or HEALTHSOUTH and (ii) the Expected Savings and Synergies, Merrill
Lynch assumed that they were reasonably prepared and reflected the best
currently available estimates and judgment of Horizon/CMS's management (with
respect to financial forecast information furnished to or discussed with Merrill
Lynch by Horizon/CMS) or HEALTHSOUTH's management (with respect to financial
forecast information and the Expected Savings and Synergies furnished to or
discussed with Merrill Lynch by HEALTHSOUTH) as to the expected future financial
performance of Horizon/CMS or HEALTHSOUTH, as the case may be, and the Expected
Savings and Synergies. Additionally, Merrill Lynch assumed that the Merger will
be consummated as contemplated by the Agreement and the First Amendment and will
qualify as a tax-free reorganization for U.S. federal income tax purposes.
Merrill Lynch's opinion was necessarily based upon market, economic and
other conditions as they existed and could be evaluated on the date thereof. In
rendering its opinion, Merrill Lynch assumed with Horizon/CMS's consent that in
the course of obtaining the necessary regulatorybrokers, dealers or other consents or approvals
for the Merger, no restrictions, including any divestiture requirements or
amendments or modifications, will be imposed that will have a material adverse
effect on the contemplated benefits of the Merger.
The following is a summary of material analyses and factors presented by
Merrill Lynch to Horizon/ CMS's Board of Directors on February 17, 1997.
Subsequent to that presentation, HEALTHSOUTH effected a two-for-one stock split
in the form of a 100% stock dividend paid on March 17, 1997. Merrill Lynch's
presentation to the Board of Directors of Horizon/CMS did not, and the following
summary does not, reflect the effect of the stock split, and the exchange ratio
of 0.42169 of a share of HEALTHSOUTH Common Stock for each Horizon/CMS Share is
based on the exchange ratio set forth in the Plan prior to the stock split (the
"Pre-Split Exchange Ratio"). In addition, to the extent the following analyses
utilized stock price information of Horizon/CMS or HEALTHSOUTH, unless otherwise
indicated, such information consisted of information through the close of
trading on February 14, 1997. As used herein, "First Call" refers to First Call
Corp., "I/B/E/S" refers to I/B/E/S International, Inc., and "Street Estimate"
refers to data and estimates published by First Call and I/B/E/S. First Call and
I/B/E/S are on-line data services that monitor and publish compilations of
earnings and growth rate estimates produced by selected research analysts on
certain public companies. In addition, as used herein, "FY" refers to fiscal
year; Horizon/CMS's fiscal year
38
ends on May 31, and HEALTHSOUTH's fiscal year ends on December 31. Unless
otherwise noted below, financial data for the latest twelve months ("LTM") (i)
for Horizon/CMS, reflects Horizon/CMS's financial condition and results of
operations through November 30, 1996 and (ii) for HEALTHSOUTH, reflects
HEALTHSOUTH's financial condition and results of operations through September
30, 1996.
Overview of Proposed Horizon/CMS - HEALTHSOUTH Transaction.
Based on HEALTHSOUTH's closing stock price of $43.125 per share as of
February 14, 1997 (the last trading day prior to public announcement of the
proposed transaction) ("HEALTHSOUTH's Closing Price") and the Pre-Split Exchange
Ratio, Merrill Lynch determined that the proposed transaction provided (i) an
implied offer price of $18.186 per Horizon/CMS Share (the "Implied Offer
Price"), (ii) an implied aggregate offer value of $980.4 million for
Horizon/CMS's equity (the "Implied Offer Value"), (iii) a 27.6% implied premium
(the "Implied Premium") to Horizon/CMS's closing stock price of $14.25 per share
as of February 14, 1997 ("Horizon/CMS's Closing Price"), and (iv) an estimated
total transaction value of $1,674.9 million (assuming net debt of $674.5
million). In addition, Merrill Lynch analyzed the Implied Offer Price as a
multiple of earnings per share ("EPS") (the "Implied P/E Ratio") of (i) 18.9x
based on Horizon/CMS's LTM EPS, (ii) 19.1x based on Horizon/CMS's management's
forecast ("Horizon/CMS's Forecast") EPS for FY 1997, and (iii) 18.9x based on
First Call's estimate of Horizon/CMS's EPS for FY 1997. Merrill Lynch also
determined that the Implied P/E Ratio based on First Call's estimate of
Horizon/CMS's EPS for FY 1997 was approximately 126.3% of I/B/E/S projected
five-year EPS growth rate for Horizon/CMS (the "Implied P.E.G. Ratio").
Overview of Horizon/CMS.
Merrill Lynch analyzed a variety of per share price to earnings ratios
("P/E Ratios") for Horizon/ CMS based on Horizon/CMS's Closing Price as follows:
(a) 14.8x based on Horizon/CMS's LTM EPS, (b) for FY 1997, (i) 14.8x based on
First Call's estimate of Horizon/CMS's EPS and (ii) 15.0x based on Horizon/CMS's
Forecast EPS and (c) for FY 1998, (i) 13.3x based on First Call's estimate of
Horizon/CMS's EPS and (ii) 13.1x based on Horizon/CMS's Forecast EPS.
Merrill Lynch also analyzed Horizon/CMS's market capitalization as a
multiple of Horizon/CMS's LTM and Horizon/CMS's Forecast earnings before
interest and taxes ("EBIT") (the "EBIT Multiple") and earnings before interest,
taxes, depreciation and amortization ("EBITDA") (the "EBITDA Multiple"). The
EBIT Multiple was (i) 9.6x based on Horizon/CMS's LTM EBIT, (ii) 9.6x based on
Horizon/ CMS's Forecast EBIT for FY 1997, and (iii) 8.8x based on Horizon/CMS's
Forecast EBIT for FY 1998. The EBITDA Multiple was (i) 6.9x based on
Horizon/CMS's LTM EBITDA, (ii) 6.7x based upon Horizon/CMS's Forecast EBITDA for
FY 1997, and (iii) 6.2x based on Horizon/CMS's Forecast EBITDA for FY 1998. In
addition, Merrill Lynch analyzed Horizon/CMS's market capitalization, plus eight
times facility leases expense, as a multiple of earnings, before interest,
taxes, depreciation, amortization and facility leases expense ("EBITDAR"). The
EBITDAR Multiple was (i) 7.2x based on Horizon/CMS's LTM EBITDAR, (ii) 7.1x
based on Horizon/CMS's Forecast EBITDAR for FY 1997, and (iii) 6.5x based on
Horizon/CMS's Forecast EBITDAR for FY 1998.
Merrill Lynch reviewed and charted the daily closing price of Horizon/CMS
Shares from January 2, 1996 through February 14, 1997, noting various corporate
events that occurred during that period, and indexed that data against (i) the
daily closing price of HEALTHSOUTH Common Stock during that period, (ii) the
daily closing price performance of the S&P 400 and (iii) the composite daily
closing price performances of (a) Horizon/CMS, HEALTHSOUTH, Beverly Enterprises,
Inc., Genesis Health Ventures, Inc., Living Centers of America, Inc., Mariner
Health Group, Inc., Sun Healthcare Group, Inc., TheraTx, Incorporated and
Vencor, Inc. (the "Principal Universe") and (b) Arbor Health Care Company,
GranCare, Inc., Health Care and Retirement Corporation, Integrated Health
Services, Inc., Manor Care, Inc., The Multicare Companies, Inc., NovaCare, Inc.
and Regency Health Services, Inc. (the "Expanded Universe"). Merrill Lynch noted
that Horizon/CMS delivered a negative 15.5% three-year compound annual return to
its stockholders.
Business and Financial Analysis. Merrill Lynch reviewed and charted
Horizon/CMS's historical financial performance for FY 1994 through FY 1996 and
its projected financial performance as set forth in Horizon/CMS's Forecast for
FY 1997 through FY 2001, based on Horizon/CMS's public documents
39
(with respect to Horizon/CMS's historical financial performance) and
Horizon/CMS's Forecast. Merrill Lynch reviewed (i) Horizon/CMS's annual
percentage revenue and EPS growth from FY 1994 through FY 1996 and Horizon/CMS's
forecasted percentage revenue and EPS growth from FY 1997 through FY 2001 and
(ii) Horizon/CMS's annual incremental revenue, forecasted revenue, EPS, and
forecasted EPS growth for the same periods. Merrill Lynch also reviewed (i)
Horizon/CMS's annual incremental EBITDA and EBIT growth from FY 1994 through FY
1996 and Horizon/CMS's forecasted incremental EBITDA and EBIT growth from FY
1997 through FY 2001 and (ii) Horizon/CMS's EBITDA, forecasted EBITDA, EBIT and
forecasted EBIT as a percentage of Horizon/CMS's revenue or forecasted revenue,
as the case may be, for the same periods. With respect to each of Horizon/CMS's
revenue, EBITDA, EBIT and EPS, Merrill Lynch calculated the Compounded Annual
Growth Rate ("CAGR"), which measures the average annual growth rate, from 1997
to 2001.
Discounted Cash Flow Analysis. Merrill Lynch summarized a discounted cash
flow analysis of Horizon/ CMS based upon Horizon/CMS's Forecast, Horizon/CMS's
management's forecast based on alternative assumptions ("Horizon/CMS's
Alternative Forecast") and Street Estimates with respect to (i) Horizon/CMS's
projected five-year stream of unlevered free cash flow and (ii) FY 2001 terminal
values based upon multiples of 6, 7 and 8 times its projected FY 2001 EBITDA and
discount rates based on Horizon/CMS's weighted average cost of capital and the
weighted average cost of capital of selected public companies, of 11%, 12%, 13%
and 14%. This analysis resulted in (i) with respect to Horizon/CMS's Forecast, a
calculation of net present value of equity per share ranging from $8.79 to
$18.05, with attention focused on the range of values from $9.60 to $16.91,
determined by applying discount rates of 12% and 13%, (ii) with respect to
Horizon/ CMS's Alternative Forecast, a calculation of net present value of
equity per share ranging from $11.64 to $22.19, with attention focused on the
range of values from $12.55 to $20.90, determined by applying discount rates of
12% and 13%, and (iii) with respect to Street Estimates for Horizon/CMS, a
calculation of net present value of equity per share ranging from $7.55 to
$16.34, with attention focused on the range of values from $8.30 to $15.26,
determined by applying discount rates of 12% and 13%. Applying the information
produced by the discounted cash flow analysis, Merrill Lynch estimated the range
of net present value of Horizon/CMS's equity per share to be (i) with respect to
Horizon/CMS's Forecast, from $9.50 to $17.00, (ii) with respect to Horizon/CMS's
Alternative Forecast, from $12.50 to $21.00 and (iii) with respect to Street
Estimates for Horizon/CMS, from $8.25 to $15.25.
Analysis of Selected Comparable Publicly-Traded Companies. Merrill Lynch
compared certain financial and operating information and projected financial
performance for Horizon/CMS with the companies constituting the Principal
Universe and the companies constituting the Expanded Universe (collectively, the
"Horizon/CMS Comparables"). Merrill Lynch used earnings estimates for the
Horizon/CMS Comparables based on First Call data calendarized to reflect a
December 31st year end and I/B/E/S EPS growth rate estimates. Merrill Lynch
estimated that, with respect to the ratio of market capitalization to LTM
EBITDA, (i) the mean for (a) the Principal Universe was 9.1x and (b) the
Expanded Universe was 8.9x, and (ii) the median for (a) the Principal Universe
was 8.6x and (b) the Expanded Universe was 8.8x, compared to 6.9x for
Horizon/CMS. Merrill Lynch estimated that, with respect to P/E Ratios, (i) the
mean for (a) the Principal Universe was 14.5x for 1997 and 12.3x for 1998 and
(b) the Expanded Universe was 14.9x for 1997 and 12.6x for 1998, and (ii) the
median for (a) the Principal Universe was 14.1x for 1997 and 11.9x for 1998 and
(b) the Expanded Universe was 15.3x for 1997 and 12.8x for 1998, compared to
Horizon/CMS's P/E Ratio based on (x) Street Estimates for Horizon/CMS of 14.1x
for 1997 and 12.3x for 1998, and (y) Horizon/CMS's Forecast of 13.8x for 1997
and 11.9x for 1998. Merrill Lynch estimated that, with respect to the estimated
return to stockholders (defined as I/B/E/S projected five-year annual EPS growth
rate, plus dividend yield), (i) the mean for (a) the Principal Universe was
18.6% and (b) the Expanded Universe was 17.0%, and (ii) the median for (a) the
Principal Universe was 18.5% and (b) the Expanded Universe was 17.2%, compared
to Horizon/CMS's estimated return to stockholders based on (x) I/B/E/S EPS
growth rate estimates for Horizon/CMS of 15.0%, and (y) Horizon/CMS's Forecast
of 15.3%. Merrill Lynch estimated that, with respect to estimated 1997 P/E Ratio
divided by estimated return to stockholders (based on I/B/E/S EPS growth rate
estimates plus, if applicable, dividend yield expressed as a percentage of
price), (i) the mean for (a) the Principal Universe was 77.4% and (b) the
Expanded Universe was 88.6%, and (ii) the median for (a) the Principal Universe
was 79.9% and (b) the Expanded Universe was 84.5%, compared to the ratio of
Horizon/CMS's 1997 P/E Ratio to Horizon/CMS's estimated
40
return to stockholders based on (x) I/B/E/S EPS growth rate estimates for
Horizon/CMS of 94.2% and (y) Horizon/CMS's Forecast of 90.3%. Applying a range
of multiples derived from Horizon/CMS's historical financial results, Street
Estimates for Horizon/CMS, Horizon/CMS's Forecast and the Horizon/CMS
Comparables' information analyzed by Merrill Lynch, Merrill Lynch estimated
relevant value per Horizon/ CMS Share to range from $11.75 to $15.00.
Analysis of Selected Acquisitions. Merrill Lynch also reviewed the
financial terms of seven acquisitions in the long-term care industry (the
"Long-term Care Acquisitions") and six acquisitions in the rehabilitation
services industry (the "Rehabilitation Services Acquisitions"). The Long-term
Care Acquisitions were (i) the acquisition of Geriatric & Medical Companies,
Inc. by Genesis Health Ventures, Inc., (ii) the acquisition of The Hillhaven
Corporation by Vencor, Inc., (iii) the acquisition of The Brian Center
Corporation by Living Centers of America, Inc., (iv) the acquisition of
Nationwide Care, Inc. by The Hillhaven Corporation, (v) the acquisition of The
Mediplex Group, Inc. by Sun Healthcare Group, Inc., (vi) the acquisition of Care
Enterprises, Inc. by Regency Health Services, Inc., and (vii) the acquisition of
Meridian Inc. by Genesis Health Ventures, Inc. The Rehabilitation Services
Acquisitions were (i) the acquisition of TheraTx, Incorporated by Vencor, Inc.,
(ii) the acquisition of Advantage Health Corporation by HEALTHSOUTH, (iii) the
acquisition of Continental Medical Systems, Inc. by Horizon/CMS, (iv) the
acquisition of NovaCare, Inc.'s rehabilitation hospitals division by
HEALTHSOUTH, (v) the acquisition of ReLife, Inc. by HEALTHSOUTH, and (vi) the
acquisition of selected rehabilitation hospitals of National Medical
Enterprises, Inc. by HEALTHSOUTH. Merrill Lynch analyzed ratios comparing offer
value per share and transaction value to various financial performance data.
Merrill Lynch determined that, with respect to offer value as a multiple of
current FY estimated EPS, (i) with respect to Long-term Care Acquisitions, (a)
the mean was 21.6x and (b) the median was 21.3x, and (ii) with respect to
Rehabilitation Services Acquisitions, (a) the mean was 21.2x and (b) the median
was 21.3x, compared to the Implied Offer Price as a multiple of Horizon/CMS's FY
1997 EPS of 18.9x. Merrill Lynch determined that, with respect to offer value
per share as a multiple of next FY estimated EPS, (i) with respect to Long-term
Care Acquisitions, (a) the mean was 18.5x, and (b) the median was 18.3x, and
(ii) with respect to Rehabilitation Services Acquisitions, (a) the mean was
16.9x and (b) the median was 15.6x, compared to the Implied Offer Price as a
multiple of Horizon/CMS's FY 1998 estimated EPS of 17.0x. Merrill Lynch
determined that, with respect to offer value per share as a multiple of next FY
estimated EPS divided by the I/B/E/S projected five-year EPS growth rate (i)
with respect to Long-term Care Acquisitions, (a) the mean was 103.2% and (b) the
median was 103.2%, and (ii) with respect to Rehabilitation Services
Acquisitions, (a) the mean was 62.8% and (b) the median was 62.8%, compared to
the Implied Offer Price as a multiple of Horizon/CMS's FY 1998 estimated EPS
divided by Horizon/CMS's estimated EPS growth rate of 113.3%. Merrill Lynch
determined that, with respect to transaction value as a multiple of LTM EBIT,
(i) with respect to Long-term Care Acquisitions, (a) the mean was 14.5x and (b)
the median was 14.2x, and (ii) with respect to Rehabilitation Services
Acquisitions, (a) the mean was 12.6x, and (b) the median was 12.0x, compared to
Horizon/CMS's transaction value as a multiple of Horizon/CMS's LTM EBIT of
11.2x. Merrill Lynch determined that, with respect to transaction value as a
multiple of LTM EBITDA, (i) with respect to Long-term Care Acquisitions, (a) the
mean was 10.5x and (b) the median was 10.4x, and (ii) with respect to
Rehabilitation Services Acquisitions, (a) the mean was 9.6x and (b) the median
was 9.5x, compared to Horizon/CMS's transaction value as a multiple of
Horizon/CMS's LTM EBITDA of 8.1x. Merrill Lynch determined that, with respect to
transaction value as a multiple of LTM sales, (i) with respect to Long-term Care
Acquisitions, (a) the mean was 1.24x and (b) the median was 1.23x, and (ii) with
respect to Rehabilitation Services Acquisitions, (a) the mean was 1.43x and (b)
the median was 1.43x, compared to Horizon/CMS's transaction value as a multiple
of Horizon/CMS's LTM sales of 0.95x. Applying a range of multiples derived from
the Comparable Acquisitions' information analyzed by Merrill Lynch, Merrill
Lynch estimated relevant value per Horizon/CMS Share to range from $13.50 to
$27.75.
Overview of HEALTHSOUTH.
Merrill Lynch analyzed a variety of P/E Ratios based on HEALTHSOUTH's
Closing Price as a multiple of HEALTHSOUTH's LTM data, forecasts provided to
Merrill Lynch by HEALTHSOUTH's management ("HEALTHSOUTH's Forecast") and First
Call estimates of HEALTHSOUTH's earn-
41
ings, as follows: (i) 30.6x based on HEALTHSOUTH's LTM EPS, (ii) for FY 1996 (a)
29.7x based on First Call's estimate of HEALTHSOUTH's EPS, and (b) 29.3x based
on HEALTHSOUTH's Forecast EPS, and (iv) for FY 1997 (a) 23.8x based on First
Call's estimate of HEALTHSOUTH's EPS, and (b) 23.3x based on HEALTHSOUTH's
Forecast EPS.
Merrill Lynch also analyzed HEALTHSOUTH's market capitalization as a
multiple of HEALTHSOUTH's (i) EBIT (the "HEALTHSOUTH EBIT Multiple") and (ii)
EBITDA (the "HEALTHSOUTH EBITDA Multiple"). The HEALTHSOUTH EBIT Multiple was
(i) 16.0x based on HEALTHSOUTH's LTM EBIT, (ii) 15.0x based on HEALTHSOUTH's
Forecast EBIT for FY 1996, and (iii) 11.9x based on HEALTHSOUTH's Forecast EBIT
for FY 1997. The HEALTHSOUTH EBITDA Multiple was (i) 11.9x based on
HEALTHSOUTH's LTM EBITDA, (ii) 11.1x based on HEALTHSOUTH's Forecast EBITDA for
FY 1996, and (iii) 8.8x based on HEALTHSOUTH's Forecast EBITDA for FY 1997.
Merrill Lynch reviewed and charted the daily closing price of HEALTHSOUTH
Common Stock from January 2, 1996 through February 14, 1997, noting various
corporate events that occurred during that period, and indexed that data against
(i) the daily closing price of Horizon/CMS Shares during that period, (ii) the
daily closing price performance of the S&P 400 during that period and (iii) the
composite daily closing price performances of Horizon/CMS, HEALTHSOUTH,
Columbia/HCA Healthcare Corporation, Health Care and Retirement Corporation,
Manor Care, Inc., Tenet Healthcare Corporation and Vencor, Inc. (collectively,
the "HEALTHSOUTH Comparables"). Merrill Lynch noted that HEALTHSOUTH delivered a
47.3% three-year compound annual return to its stockholders.
Business and Financial Analysis. Merrill Lynch reviewed HEALTHSOUTH's
historical financial performance for FY 1994 through FY 1995 and its projected
financial performance as set forth in HEALTHSOUTH's Forecast for FY 1996 through
FY 2000, based on HEALTHSOUTH's public documents (with respect to its historical
financial performance) and HEALTHSOUTH's Forecast. Merrill Lynch reviewed (i)
HEALTHSOUTH's annual percentage revenue and EPS growth from FY 1994 through FY
1995 and HEALTHSOUTH's forecasted percentage revenue and EPS growth from FY 1996
through FY 2000 and (ii) HEALTHSOUTH's annual incremental revenue, forecasted
revenue, EPS, and forecasted EPS growth for the same periods. Merrill Lynch also
reviewed (i) HEALTHSOUTH's annual incremental EBITDA and EBIT growth from FY
1994 through FY 1995 and HEALTHSOUTH's forecasted annual incremental EBITDA and
EBIT growth from FY 1996 through FY 2000 and (ii) HEALTHSOUTH's EBITDA,
forecasted EBITDA, EBIT and forecasted EBIT as a percentage of HEALTHSOUTH's
revenue or forecasted revenue, as the case may be, for the same periods. With
respect to each of HEALTHSOUTH's revenue, EBITDA, EBIT and EPS, Merrill Lynch
calculated the CAGR from 1996 to 2000.
Discounted Cash Flow Analysis. Merrill Lynch summarized a discounted cash
flow analysis of HEALTHSOUTH, based upon HEALTHSOUTH's Forecast, with respect to
(i) HEALTHSOUTH's projected four-year stream of unlevered free cash flow and
(ii) FY 2000 terminal values based upon multiples of 10.5, 11.5 and 12.5 times
its projected FY 2000 EBITDA and discount rates, based on HEALTHSOUTH's weighted
average cost of capital and the weighted average cost of capital of selected
public companies, of 14%, 15%, 16% and 17%, which resulted in a calculation of
net present value of equity per share ranging from $42.57 to $57.51, with
attention focused on the range of values from $44.25 to $55.36, determined by
applying discount rates of 15% and 16%. Applying the information produced by the
discounted cash flow analysis, Merrill Lynch estimated the range of net present
value of HEALTHSOUTH's equity per share to be from $44.25 to $55.25.
Analysis of Selected Comparable Publicly-Traded Companies. Merrill Lynch
compared certain financial and operating information and projected financial
performance data for HEALTHSOUTH with the companies constituting the HEALTHSOUTH
Comparables. Merrill Lynch used earnings estimates for the HEALTHSOUTH
Comparables based on First Call data calendarized to reflect a December 31st
year end and I/B/E/S EPS growth rate estimates. Merrill Lynch estimated that,
with respect to market capitalization as a multiple of LTM EBITDA, for the
HEALTHSOUTH Comparables, the mean was 9.3x, and the median was 9.4x, compared to
11.9x for HEALTHSOUTH. Merrill Lynch estimated that, with respect to P/E Ratios,
for the HEALTHSOUTH Comparables, the mean was 16.8x
42
for 1997 and 14.3x for 1998, and the median was 17.0x for 1997 and 14.5x for
1998, compared to (i) 23.6x for 1997 and 19.3x for 1998 based on Street
Estimates for HEALTHSOUTH, and (ii) 23.3x for 1997 and 19.2x for 1998 based on
HEALTHSOUTH's Forecast. Merrill Lynch estimated that, with respect to the
estimated return to stockholders, for the HEALTHSOUTH Comparables, the mean was
16.6%, and the median was 15.8%, compared to (i) 25.0% based on I/B/E/S EPS
growth rate estimates for HEALTHSOUTH and (ii) 21.8% based on HEALTHSOUTH's
Forecast. Merrill Lynch estimated that, with respect to estimated 1997 P/E Ratio
divided by estimated return to stockholders, for the HEALTHSOUTH Comparables,
the mean was 102.4%, and the median was 104.9%, compared to (i) 94.3% based on
I/B/E/S EPS growth rate estimates for HEALTHSOUTH and (ii) 106.9% based on
HEALTHSOUTH's Forecast. Applying a range of multiples derived from HEALTHSOUTH's
historical financial performance, HEALTHSOUTH's Forecast, Street Estimates for
HEALTHSOUTH and the HEALTHSOUTH Comparables' information analyzed by Merrill
Lynch, Merrill Lynch estimated relevant value per share of HEALTHSOUTH Common
Stock to range from $40.00 to $46.75.
Historical Exchange Ratio Analysis.
Merrill Lynch compared the Pre-Split Exchange Ratio to the historical ratio
of the average market price per Horizon/CMS Share to the average market price
per share of HEALTHSOUTH Common Stock for the period from January 2, 1996
through February 14, 1997. Merrill Lynch estimated that the mean historical
ratio between such average market prices was (i) 0.3202 for the period from
January 15, 1997 to February 14, 1997, (ii) 0.3059 for the period from November
15, 1996 to February 14, 1997, (iii) 0.3141 for the period from August 15, 1996
to February 14, 1997, and (iv) 0.3564 for the period from February 15, 1996 to
February 14, 1997.
Implied Exchange Ratios.
Utilizing the discounted cash flow analyses described above and the
analyses of the Horizon/CMS Comparables and the HEALTHSOUTH Comparables
companies described above for Horizon/CMS and for HEALTHSOUTH, Merrill Lynch
compared the implied equity values per Horizon/CMS Share to the implied equity
values per share of HEALTHSOUTH Common Stock. Ratios were derived by comparing
the highest value for Horizon/CMS to the highest value for HEALTHSOUTH and the
lowest value for Horizon/CMS to the lowest value for HEALTHSOUTH. With respect
to information produced by the discounted cash flow analyses, Merrill Lynch
estimated the range of implied exchange ratios to be (i) with regard to
Horizon/CMS's Forecast and HEALTHSOUTH's Forecast, from 0.2147 to 0.3077, (ii)
with regard to Horizon/CMS's Alternative Forecast and HEALTHSOUTH's Forecast,
from 0.2825 to 0.3801, and (iii) with regard to Street Estimates for Horizon/CMS
and HEALTHSOUTH's Forecast, from 0.1864 to 0.2760. With respect to the
information produced by the analysis of comparable public companies, Merrill
Lynch estimated the range of implied exchange ratios to be from 0.2938 to
0.3209. A wider range of implied exchange ratios was derived by comparing the
highest value for Horizon/CMS to the lowest value for HEALTHSOUTH and the lowest
value for Horizon/CMS to the highest value for HEALTHSOUTH. With respect to the
information produced by the discounted cash flow analyses, Merrill Lynch
estimated this broader range of implied exchange ratios to be (i) with regard to
Horizon/CMS's Forecast and HEALTHSOUTH's Forecast, from 0.1719 to 0.3842, (ii)
with regard to Horizon/CMS's Alternative Forecast and HEALTHSOUTH's Forecast,
from 0.2262 to 0.4746, and (iii) with regard to Street Estimates for Horizon/CMS
and HEALTHSOUTH's Forecast, from 0.1493 to 0.3446. With respect to the
information produced by the analysis of comparable public companies, Merrill
Lynch estimated the range of implied exchange ratios to be from 0.2513 to
0.3750.
Contribution Analysis.
Merrill Lynch analyzed and compared the respective contributions (excluding
the Expected Savings and Synergies) of Horizon/CMS and HEALTHSOUTH to the pro
forma combined revenues, EBITDA, net income, and equity (based on Horizon/CMS's
Forecast and HEALTHSOUTH's Forecast) of the combined company. Assuming an all
stock transaction at an exchange ratio of 0.42169 of a share of HEALTHSOUTH
Common Stock per Horizon/CMS Share, Merrill Lynch estimated that Horizon/
43
CMS's existing stockholders would own approximately 11.5% of the combined
company. Based on the performances of HEALTHSOUTH for LTM ended September 30,
1996 and Horizon/CMS for LTM ended November 30, 1996, Merrill Lynch estimated
that, with respect to the combined company, Horizon/CMS would have contributed
on a pro forma combined basis (i) 43.2% of revenues, (ii) 23.3% of EBITDA, (iii)
17.8% of net income and (iv) 31.7% of equity of the combined company. Based on
projected pro forma combined data for the year ending December 31, 1997, Merrill
Lynch estimated that Horizon/CMS would contribute (i) 38.9% of revenues, (ii)
19.6% of EBITDA, (iii) 14.3% of net income, and (iv) 26.9% of equity of the
combined company.
Pro Forma Analysis.
Merrill Lynch analyzed revenue composition for Horizon/CMS stand-alone
(based on Horizon/ CMS's LTM data), HEALTHSOUTH stand-alone (based on
HEALTHSOUTH's management's estimates for LTM ended December 31, 1996) and
Horizon/CMS and HEALTHSOUTH on a pro forma combined basis. During the relevant
period, Horizon/CMS had revenues of $1,768.8 million, of which (i) $637.6
million, or 36.1%, were derived from inpatient rehabilitation, (ii) $393.4
million, or 22.2%, were derived from long-term care, (iii) $375.6 million, or
21.2%, were derived from contract therapy, (iv) $112.3 million, or 6.3%, were
derived from outpatient rehabilitation, (v) $52.5 million, or 3.0%, were derived
from pharmacy and (vi) $197.4 million, or 11.2%, were derived from other
sources. During the relevant period, HEALTHSOUTH had revenues of $2,440.6
million, of which (i) $1,153.4 million, or 47.3%, were derived from inpatient
rehabilitation, (ii) $504.3 million, or 20.6%, were derived from surgery
centers, (iii) $424.3 million, or 17.4%, were derived from outpatient
rehabilitation, (iv) $273.9 million, or 11.2%, were derived from medical
centers, and (v) $84.7 million, or 3.5%, were derived from other sources. On a
pro forma combined basis, the combined company's revenues would have been
$4,209.4 million, of which (i) $1,791 million, or 42.6%, would have been derived
from inpatient rehabilitation, (ii) $536.6 million, or 12.7%, would have been
derived from outpatient rehabilitation, (iii) $504.3 million, or 12.0%, would
have been derived from surgery centers, (iv) $393.4 million, or 9.3%, would have
been derived from long-term care, (v) $375.6 million, or 8.9%, would have been
derived from contract therapy, (vi) $273.9 million, or 6.5%, would have been
derived from medical centers, and (vii) $334.6 million, or 8.0%, would have been
derived from other sources.
Pro Forma Merger Analysis. Merrill Lynch reviewed the Expected Savings and
Synergies and also analyzed the impact of the Merger for HEALTHSOUTH's
stockholders on pro forma fully diluted EPS. Based upon the projections prepared
by the respective managements of Horizon/CMS and HEALTHSOUTH, the analysis
indicated that, for HEALTHSOUTH's stockholders, the Merger would be accretive.
Pro Forma Combined Book Capitalization. Merrill Lynch estimated
HEALTHSOUTH's book capitalization (i) as of June 30, 1997 (a) on a stand-alone
basis prior to consummation of the Merger and (b) on a pro forma combined basis
giving effect to the Merger and (ii) on a pro forma combined basis at December
31, 1997 assuming the Merger closed on June 30, 1997 and based on projections
provided by the respective managements of Horizon/CMS and HEALTHSOUTH. As of
June 30, 1997 (i) prior to consummation of the Merger, (a) HEALTHSOUTH's total
debt stated as a percentage of its common equity would be 76.0%, (b)
HEALTHSOUTH's total debt stated as a percentage of its capitalization (i.e.,
total debt plus common equity) would be 43.2%, (c) HEALTHSOUTH's LTM EBITDA as a
multiple of its LTM interest expense would be 9.9x, and (d) HEALTHSOUTH's LTM
EBITDA, less capital expenditures, as a multiple of its LTM interest expense
would be 8.0x, and (ii) after giving effect to the Merger and on a pro forma
combined basis, with respect to the combined company (a) total debt stated as a
percentage of common equity would be 77.4%, (b) total debt stated as a
percentage of capitalization would be 43.7%, (c) EBITDA as a multiple of
interest expense would be 8.6x, and (d) EBITDA less capital expenditures, as a
multiple of interest expense would be 5.9x. At December 31, 1997, assuming the
Merger closed as of June 30, 1997 and based on pre-tax synergies of $5.3 million
in the second half of 1997 on a pro forma combined basis, (i) total debt stated
as a percentage of common equity would be 70.4%, (ii) total debt stated as a
percentage of book capitalization would be 41.3%, (iii) EBITDA as a multiple of
interest expense would be 8.9x, and (iv) EBITDA, less capital expenditures, as a
multiple of interest expense would be 5.6x.
44
Historical Range of Nominal Values to Horizon/CMS Stockholders in the Proposed
Transaction.
Merrill Lynch determined that the average price per share of HEALTHSOUTH
Common Stock was (i) $42.25 for the week ended February 14, 1997, (ii) $41.63
for the two weeks ended February 14, 1997, (iii) $41.80 for the three weeks
ended February 14, 1997, (iv) $42.06 for the four weeks ended February 14, 1997,
(v) $40.46 for the eight weeks ended February 14, 1997, (vi) $39.40 for the
three months ended February 14, 1997, (vii) $37.95 for the six months ended
February 14, 1997, and (viii) $36.55 for the year ended February 14, 1997.
Merrill Lynch also estimated the nominal value of one Horizon/CMS Share at the
Pre-Split Exchange Ratio (based on the foregoing average prices per share of
HEALTHSOUTH Common Stock): (i) $17.82 for the week ended February 14, 1997, (ii)
$17.55 for the two weeks ended February 14, 1997, (iii) $17.63 for the three
weeks ended February 14, 1997, (iv) $17.74 for the four weeks ended February 14,
1997, (v) $17.06 for the eight weeks ended February 14, 1997, (vi) $16.62 for
the three months ended February 14, 1997, (vii) $16.01 for the six months ended
February 14, 1997, and (viii) $15.41 for the year ended February 14, 1997.
Merrill Lynch also estimated that if there were a 10% variance in the
HEALTHSOUTH Closing Price, (i) the Implied Offer Price could decrease to as low
as $16.367 or increase up to $20.004, (ii) the Implied Offer Value could
decrease to as low as $881.5 million or increase up to $1,079.6 million, (iii)
the Implied Premium could decrease to as low as 14.9% or increase up to 40.4%,
(iv) the Implied P/E Ratio for FY 1997 (a) based on Horizon/CMS's Forecast could
decrease to as low as 17.2x or increase up to 21.0x and (b) based on the FY 1997
Street Estimate, could decrease to as low as 17.0x or increase up to 20.8x, (v)
the Implied P.E.G. Ratio based on the FY 1997 Street Estimate, could decrease to
as low as 113.7% or increase up to 138.9%, (vi) the transaction value of the
Merger could decrease to as low as $1,576.0 million or increase up to $1,774.1
million, and (vii) the transaction value of the Merger as a multiple of
Horizon/CMS's LTM EBITDA could decrease to as low as 7.6x or increase up to
8.6x.
While the foregoing summary describes the material analyses and factors
presented by Merrill Lynch to the Board of Directors of Horizon/CMS, it does not
purport to be a complete description of the analyses conducted by Merrill Lynch
or of Merrill Lynch's presentation to the Board of Directors of Horizon/CMS. The
preparation of a fairness opinion is a complex process and is not necessarily
susceptible to partial analysis or summary description. Merrill Lynch believes
that its analysis must be considered as a whole and that selecting portions of
its analysis, without considering the analysis taken as a whole, would create an
incomplete or misleading view of the process underlying the analysis set forth
in the Merrill Lynch Opinion. In addition, Merrill Lynch considered the results
of every portion of its analysis and did not assign relative weights to any
portion of its analysis, so that the ranges of valuations resulting from any
particular analysis described above should not be taken to be Merrill Lynch's
view of the actual value of Horizon/CMS.
In performing its analysis, Merrill Lynch made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Horizon/CMS and/or
HEALTHSOUTH. The analysis performed by Merrill Lynch is not necessarily
indicative of actual values, trading values or actual future results that might
be achieved, all of which may be significantly more or less favorable than
suggested by such analysis. No public company utilized as a comparison is
identical to Horizon/CMS or HEALTHSOUTH and none of the comparable acquisition
transactions or other business combinations utilized as a comparison is
identical to the transactions contemplated by the Agreement and the First
Amendment. Accordingly, an analysis of publicly traded comparable companies and
comparable business combinations resulting from the transactions is not
mathematical; rather it involves complex considerations and judgments concerning
differences in financial and operating characteristics of the comparable
companies or the company, or transaction, and other factors that could affect
the public trading values of such comparable companies or company to which they
are being compared. In connection with its analysis, Merrill Lynch utilized
estimates and forecasts provided by the respective managements of Horizon/CMS
and HEALTHSOUTH. Analyses based upon forecasts of future results are not
necessarily indicative of actual future results, which may be significantly more
or less favorable than suggested by such analyses. Because such analyses are
inherently subject to uncertainty, being based upon numerous factors or events
beyond the control of Horizon/CMS and/or HEALTHSOUTH, none of Horizon/CMS,
HEALTHSOUTH and Merrill Lynch assumes responsibility if future results or actual
values are materially different from these forecasts or assumptions. Such
analyses were prepared solely as part of Merrill Lynch's analysis of the
fairnesspersons
soliciting acceptances of the Exchange Ratio
45
Offer. The Issuer, however, will pay the
Exchange Agent reasonable and were provided tocustomary fees for its services and will reimburse
the Board of Directors of Horizon/CMS. Merrill Lynch's
analysis does not purport to be an appraisal or to reflect the prices at which a
company might be sold. In addition, as described above, the opinion of Merrill
Lynch was one of many factors taken into consideration by the Board of Directors
of Horizon/CMS in making its determination to approve the Merger. Consequently,
the analysis described above should not be viewed as determinative of the
opinion of either the Board of Directors or management of Horizon/CMS with
respect to the value of Horizon/CMS or a combination of Horizon/CMS with
HEALTHSOUTH or whether either the Board of Directors or management of
Horizon/CMS would have been willing to agree to a different exchange ratio.
Pursuant to the terms of the engagement letter dated as of June 14, 1996,
Horizon/CMS has agreed to pay Merrill Lynch (i) a fee of $150,000 upon signing
the engagement letter and (ii) a fee equal to 0.90% of the transaction value of
the Merger, payable at the effective time of the Merger. In addition,
Horizon/CMS also agreed to reimburse Merrill LynchExchange Agent for its reasonable out-of-pocket expenses in connection
therewith. The Issuer may also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding copies of the Prospectus and related documents to the beneficial
owners of the Old Notes, and in handling or forwarding tenders for exchange.
The expenses to be incurred in connection with the Exchange Offer will be
paid by the Issuer, including all reasonable fees and expenses of its
attorneys,the Exchange Agent and
to indemnify Merrill LynchTrustee and certainaccounting, legal, printing and related persons against
certain liabilities, including liabilities under securities laws, arising out of
its engagement.
Merrill Lynch has, in the past, provided financial advisoryfees and financing
services to Horizon/CMS and HEALTHSOUTH and/or their respective affiliates and
has received fees for the rendering of such services. In addition, in the
ordinary course of its business, Merrill Lynch may actively trade Horizon/CMS
Shares, shares of HEALTHSOUTH Common Stock and other securities of HEALTHSOUTH
for its own account and for the accounts of its customers, and, accordingly, may
hold a long or short position in such securities.
Effective Time of the Merger
THE MERGER WILL BECOME EFFECTIVE UPON THE FILING OF A CERTIFICATE OF MERGER
BY THE SUBSIDIARY AND Horizon/CMS under the DGCL, or at such later time as may
be specified in such Certificate of Merger.expenses.
The Plan requires that this filing
be made, subject to satisfaction or waiver of the separate conditions set forth
in the PlanIssuer will pay all transfer taxes, if any, applicable to the obligationsexchange
of each party to consummate the Merger, no later
than two business days after satisfaction or waiver of such conditions or at
such other time as may be agreed by HEALTHSOUTH and Horizon/CMS. It is
anticipated that such filing will be made as soon as reasonably possible after
the Special Meeting and after all regulatory approvals have been obtained, and
that the Effective Time will occur upon such filing. There can be, however, no
assurance as to whether or when the Merger will occur. See "- Conditions to the
Merger" and "- Regulatory Approvals".
Exchange of Certificates
From and after the Effective Time, each holder of a Certificate will be
entitled to receive in exchange therefor, upon surrender thereofOld Notes pursuant to the Exchange Agent (as defined in the Plan), a certificate orOffer. If, however, certificates
representing the
number of whole shares of HEALTHSOUTH Common Stock into which such holder's
Horizon/CMS Shares have been converted, cash in lieu of fractional shares and
any dividendsNew Notes or other distributionsOld Notes for principal amounts not tendered or
accepted for exchange are to which such holder is entitled as a
result of the Merger as provided in the Plan.
As soon as reasonably practicable after the Effective Time, HEALTHSOUTH
will deliver through the Exchange Agent (as defined in the Plan)be delivered to, each holder
of record of Horizon/CMS Shares at the Effective Time transmittal materials for
use in exchanging the Certificates for certificates for shares of HEALTHSOUTH
Common Stock. After the Effective Time, there willor are to be no transfers on the stock
transfer books of Horizon/CMS Shares that were issued and outstanding
immediately prior to the Effective Time and converted in the Merger.
No fractional shares of HEALTHSOUTH Common Stock and no certificatesregistered or
scrip therefor, or other evidence of ownership thereof, will be issued
in the Merger; instead, HEALTHSOUTH will pay to each holdername of, Horizon/CMS Shares who
would otherwise be entitled to a fractional share an amount of cash in an amount
equal to the value of such fractional part of a share of HEALTHSOUTH Common
Stock. See "- Terms of the Merger".
46
No certificates representing shares of HEALTHSOUTH Common Stock, no
fractional share payment and no dividends or other distributions paid on such
HEALTHSOUTH Common Stock will be delivered or paid to a holder of a Certificate
or Certificates until the Certificates are delivered to HEALTHSOUTH through the
Exchange Agent. No interest will be paid on dividends or other distributions or
on any fractional share payment which the holder of such shares will be entitled
to receive upon such delivery.
At the Effective Time, holders of Horizon/CMS Shares immediately prior to
the Effective Time will cease to be, and will have no rights as, stockholders of
Horizon/CMS,person other than the right to receiveregistered holder of the shares of HEALTHSOUTH Common
Stock into which such shares have been converted and any fractional share
payment and any dividendsOld Notes
tendered, or other distributions to which they may be entitled
under the Plan. Holders of Horizon/CMS Shares will be treated as stockholders of
record of HEALTHSOUTH for purposes of voting at any annual or special meeting of
stockholders of HEALTHSOUTH after the Effective Time, both before and after such
time as they exchange their Certificates for certificates of HEALTHSOUTH Common
Stock as providedif tendered Old Notes are registered in the Plan.
Neither HEALTHSOUTH nor Horizon/CMS will be liable to any holder of
Horizon/CMS Shares for any shares of HEALTHSOUTH Common Stock (or dividends or
other distributions with respect thereto) or cash in lieu of fractional shares
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.
REPRESENTATIONS AND WARRANTIES
The Plan contains various customary representations and warranties of the
parties thereto. The representations and warranties of HEALTHSOUTH and the
Subsidiary, made jointly and severally, include representations as to: (i) the
corporate organization of the Subsidiary, (ii) the power and authority of the
Subsidiary to execute and perform the Plan, (iii) the absence of subsidiaries of
the Subsidiary, and (iv) the absence of contracts, liabilities and legal
proceedings relating to or affecting the Subsidiary.
The representations and warranties of HEALTHSOUTH include representations
as to: (i) the organization of HEALTHSOUTH, (ii) the power and authority of
HEALTHSOUTH to execute, deliver and perform the Plan, (ii) the capitalization of
HEALTHSOUTH, (iii) ownership of Subsidiary Common Stock by HEALTHSOUTH, (iv) the
fact that HEALTHSOUTH has furnished Horizon/CMS with true and complete copies of
certain reports, schedules, registration statements and proxy statements filed
by HEALTHSOUTH with the SEC since January 1, 1995, and that such documents did
not contain any untrue statements of material facts or omit to state material
facts that would be necessary to make the statements therein, under the
circumstances under which they were made, not misleading, (v) certain
information provided to Horizon/CMS, (vi) HEALTHSOUTH's investment intent with
respect to the Horizon/CMS Shares acquired, (viii) the absence of material legal
proceedings against HEALTHSOUTH, (x) the absence of certain material changes
relating to HEALTHSOUTH since September 30, 1996, (ix) the filing of
HEALTHSOUTH's tax returns, (x) the status of HEALTHSOUTH's accounts receivable,
(xi) HEALTHSOUTH's employee benefits, (xii) HEALTHSOUTH's compliance with laws
in general, and (xiii) HEALTHSOUTH's licenses, accreditations and regulatory
approvals.
The representations and warranties of Horizon/CMS include representations
and warranties as to: (i) the organization and good standing of Horizon/CMS and
its subsidiaries, (ii) the capitalization of Horizon/ CMS, (iii) foreign
qualifications, (iv) the power and authority of Horizon/CMS to execute, deliver
and perform the Plan, (v) the fact that Horizon/CMS has furnished HEALTHSOUTH
with true and complete copies of certain reports, schedules, registration
statements and proxy statements filed by Horizon/CMS with the SEC since January
1, 1995, and that such documents did not contain any untrue statements of
material facts or omit to state material facts that would be necessary to make
the statements therein, under the circumstances under which they were made, not
misleading, (vi) certain information provided to HEALTHSOUTH, (vii) the absence
of undisclosed material legal proceedings against Horizon/CMS, (viii) the
validity of Horizon/CMS's material contracts, (ix) the absence of certain
material changes relating to Horizon/CMS since November 30, 1996, (x) the status
of Horizon/CMS's accounts receivable, (xi) the filing of Horizon/CMS's tax
returns, (xii) commissions and fees payable by Horizon/CMS, (xiii) Horizon/CMS's
47
employee benefits, (xiv) Horizon/CMS's compliance with laws in general, (xv)
Horizon/CMS's licenses, accreditations and regulatory approvals, (xvi) the vote
required by holders of Horizon/CMS capital stock to approve the Plan to be
performed, and (xvii) the opinion of Horizon/CMS's financial advisor.
Conditions to the Merger
THE OBLIGATION OF HEALTHSOUTH AND THE SUBSIDIARY TO CONSUMMATE THE MERGER
IS SUBJECT TO, AMONG others, the following conditions: (i) Horizon/CMS shall
have performed all of its agreements as contemplated by the Plan to be performed
at or prior to the consummation date of the Merger; (ii), except as otherwise
provided therein the representations and warranties of Horizon/CMS set forth in
the Plan shall be true and correct in all material respects as of the dates
specified in the Plan; (iii) HEALTHSOUTH shall have received the opinion of its
counsel that the Merger constitutes a tax-free reorganization under the Code,
and (iv) HEALTHSOUTH shall have received an opinion of Horizon/CMS's counsel
substantially in the form specified in the Plan.
The obligation of Horizon/CMS to consummate the Merger is subject to, among
others, the following conditions: (i) HEALTHSOUTH and the Subsidiary shall have
performed all of their agreements as contemplated by the Plan to be performed at
or prior to the consummation of the Merger; (ii), except as otherwise provided
therein the representations and warranties of HEALTHSOUTH and the Subsidiary set
forth in the Plan shall be true and correct as of the dates specified in the
Plan; (iii) Horizon/CMS shall have received the opinion of its counsel that the
Merger constitutes a tax-free reorganization under the Code; and (iv)
Horizon/CMS shall have received an opinion of HEALTHSOUTH's counsel
substantially in the form specified in the Plan.
The obligation of each of HEALTHSOUTH, the Subsidiary and Horizon/CMS to
consummate the Merger is subject to certain additional conditions, including the
following: (i) no order, decree or injunction by a court of competent
jurisdiction preventing the consummation of the Merger or imposing any material
limitation on the ability of HEALTHSOUTH effectively to exercise full rights of
ownership of the common stock of the Surviving Corporation or any material
portion of the assets or business of Horizon/CMS shall be in effect; (ii) no
statute, rule or regulation shall have been enacted by the government of the
United States or any state, municipality or other political subdivision thereof
that makes the consummation of the Merger or any other transaction contemplated
by the Plan illegal; (iii) the waiting period under the HSR Act shall have
expired or shall have been terminated; (iv) the Registration Statement shall
have been declared effective under the Securities Act and shall not be subject
to any stop order; (v) the Merger shall have been approved by the requisite vote
of the holders of the outstanding Horizon/CMS Shares entitled to vote thereon;
(vi) the shares of HEALTHSOUTH Common Stock to be issued in connection with the
Merger shall have been approved for listing on the NYSE upon official notice of
issuance; (vii) HEALTHSOUTH and the Subsidiary shall have obtained, or obtained
the transfer of, any Licenses (as defined) necessary to allow the Surviving
Corporation to operate the Horizon/CMS facilities, unless the failure to obtain
such transfer or approval would not have a material adverse effect on the
Surviving Corporation; and (viii) HEALTHSOUTH and the Subsidiary shall have
received all required consents, approvals and authorizations of third parties
with respect to all material leases and management agreements to which
Horizon/CMS Subsidiaries or Horizon/CMS Other Entities are parties, except where
failure to do so would not have a material effect on the business of the
Surviving Corporation.
Regulatory Approvals
AS CONDITIONS PRECEDENT TO THE CONSUMMATION OF THE MERGER, THE PLAN
REQUIRES, AMONG OTHER THINGS: (I) that the HSR Act waiting period has expired or
been terminated and (ii) that all other governmental approvals required for the
consummation of the Merger have been obtained, except where the failure to
obtain such approvals would not have a material adverse effect on the business
of the Surviving Corporation.
HSR Act. The HSR Act prohibits consummation of the Merger until certain
information has been furnished to the Antitrust Division of the DOJ and the FTC
and certain waiting period requirements have been satisfied. On April 11, 1997,
HEALTHSOUTH and Horizon/CMS made their respective filings with the DOJ and the
FTC with respect to the Plan. Under the HSR Act, the filings commenced a waiting
period during which the Merger cannot be consummated, which waiting period was
originally
48
to expire on May 11, 1997, unless earlier terminated or extended by a request
for additional information. In order to provide an additional period of time for
the Companies to provide certain information to the FTC on a voluntary basis,
HEALTHSOUTH withdrew its HSR filing on May 7, 1997, and refiled it on May 8,
1997, beginning a new 30-day waiting period.
Horizon/CMS recently announced the disposition of its interest in Baptist
Rehabilitation Hospital in Memphis, Tennessee. Horizon/CMS believes that such
disposition was necessary in order to avoid either a second request from the FTC
for information relevant to the inquiry under the HSR Act or a requirement by
the FTC for a consent decree relating to the disposition of Horizon/CMS's
interest in Baptist Rehabilitation Hospital. Horizon/CMS sold its interest
therein to its partner, Baptist Memorial Healthcare Corp.
On June 6, 1997, the Companies received a request for additional
information from the FTC. The request for additional information relates
exclusively to the competitive effect the Merger will have on the Johnson City,
Tennessee market area. The effect of that request is to extend the waiting
period under the HSR Act until 20 days after HEALTHSOUTH and Horizon/CMS
substantially comply with such request unless earlier terminated by the FTC. The
Companies are working to resolve the issues in the Johnson City, Tennessee
market to the satisfaction of the FTC, and expect to enter into a consent order
requiring the divestiture of Horizon/CMS's interest in its rehabilitation
hospital in Johnson City.
Notwithstanding the termination or expiration of the HSR Act waiting
period, at any time before or after the Effective Time, the FTC or the DOJ could
initiate legal action under the antitrust laws seeking to enjoin the
consummation of the Merger or seeking the divestiture by HEALTHSOUTH of any part
of its assets or all or any part of the stock or assets of Horizon/CMS. In
addition, certain other persons, such as states' attorneys general and private
parties, could challenge the Merger as violative of the antitrust laws and seek
to enjoin the consummation of the Merger and, in the case of private persons,
also to obtain treble damages. There can be no assurance that a challenge to the
Merger on antitrust grounds will not be made or, if such a challenge were made,
that it would not be successful.
HEALTHSOUTH and Horizon/CMS believe that the Merger does not violate the
antitrust laws and intend to resist vigorously any assertion to the contrary by
the FTC, the DOJ or others. Any such assertion could delay consummation of the
Merger, perhaps for a considerable period. Prior to the Merger, the FTC or the
DOJ could seek to enjoin the consummation of the Merger under the federal
antitrust laws or require that HEALTHSOUTH or Horizon/CMS divest additional
assets to avoid such a proceeding. The FTC or DOJ could also, following the
Merger, take action under the federal antitrust laws to rescind the Merger, to
require divestiture of assets of either HEALTHSOUTH or Horizon/CMS, or to obtain
other relief.
Horizon/CMS does not intend to seek any further stockholder approval or
authorization of the Plan as a result of any action that the Companies may take
to resist or resolve any FTC, DOJ or other objections, unless required to do so
by applicable law.
Other Regulatory Approvals. The operations of each Company are subject to a
substantial body of federal, state, local and accrediting body laws, rules and
regulations relating to the conduct, licensing and development of healthcare
businesses and facilities. Many regulatory agencies require that a filing be
made to obtain consent to or approval of the Merger. All filings required to be
made prior to the date of this Prospectus-Proxy Statement to obtain the consents
and approvals required from federal and state healthcare regulatory bodies and
agencies have been made. Certain filings cannot, however, be made under
applicable laws, rules and regulations until after the Effective Time. As a
result of the Merger, certain of the arrangements between Horizon/CMS and
third-party payors may be deemed to have been transferred, requiring the
approval and consent of such payors. Although no assurances to this effect can
be given, it is anticipated that the Companies will be able to obtain any
required regulatory or third-party payor consent or approval.
BUSINESS PENDING THE MERGER
THE PLAN PROVIDES THAT, DURING THE PERIOD FROM THE DATE OF THE PLAN TO THE
EFFECTIVE TIME, EXCEPT AS provided in the Plan, Horizon/CMS will conduct its
businesses in the usual, regular and ordinary course in substantially the same
manner as previously conducted and will use its commercially reasonable efforts
to preserve intact its present business organization, to keep available the
services of its key employees and to preserve its relationships with customers,
suppliers and others having business dealings with it.
49
Under the Plan, Horizon/CMS has agreed that it will not (other than as
required pursuant to or contemplated by the terms of the Plan and related
documents), pending the Effective Time without first obtaining the written
consent of HEALTHSOUTH: (i) except as required by the Plan, amend its
Certificate of Incorporation or Bylaws; (ii) extend credit to anyone or
guarantee the obligationname of, any person
firm or corporation (other than
Horizon/CMS or any Horizon/CMS Subsidiary or Horizon/CMS Other Entity, as such
terms are defined in the Plan) in any amount that, in either case, is material
to Horizon/CMS except in the ordinary course of business consistent with prior
practice; (iii) discharge or satisfy any material lien or encumbrance, or pay or
satisfy any material obligation or liability (absolute, accrued, contingent or
otherwise) other than (a) liabilities shown or reflected on Horizon/CMS's
Consolidated balance sheet at November 30, 1996 (the "Horizon/CMS Balance
Sheet") or (b) liabilities incurred since the date of the Horizon/CMS Balance
Sheet in the ordinary course of business, which discharge or satisfaction would
have a material adverse effect on Horizon/CMS; (iv) increase or establish any
reserve for taxes or any other liability on its books or otherwise provide
therefor that would have a material adverse effect on Horizon/CMS, except as
relates to the consolidated results of operations of Horizon/CMS since the date
of the Horizon/CMS Balance Sheet; (v) sell or transfer any of its material
assets, tangible or intangible, cancel any material debts or claims held by it
or waive any of its material rights, except in the ordinary course of business;
(vi) mortgage, pledge or subject to any security interest any of its material
assets, tangible or intangible, other than as required under the existing
provisions of Horizon/CMS's primary credit facility; (vii) enter into any
employment contract which is not terminable upon notice of 30 days or less, at
will, and without penalty to Horizon/CMS except as provided in the Plan or grant
any general or uniform increase in the rates of pay of employees or grant any
increase in salary payable or to become payable by Horizon/CMS to any officer of
Horizon/CMS or by means of any bonus or pension plan, contract or other
commitment, increase the compensation of any officer of Horizon/CMS or enter
into any agreements providing for compensation to any officer or employee of
Horizon/CMS, any Horizon/CMS Subsidiary or any Horizon/CMS Other Entity based
upon a change in control of Horizon/CMS; (viii) make any contribution, payment
or distribution to the trustee under any Horizon/CMS employee benefit plan other
than any such contribution, payment or distribution that is in accordance with
Horizon/CMS's past practice, or establish or terminate any Horizon/CMS employee
benefit plan; (ix) issue any capital stock or other equity securities, other
than stock options granted to officers, employees, directors or consultants of
Horizon/CMS or warrants granted to third parties and shares of Horizon/CMS
Common Stock issuable upon the exercise thereof, all of which options and
warrants have been disclosed to HEALTHSOUTH; or (x) except for the Plan and any
other agreement executed and delivered pursuant to the Plan, enter into any
material transaction other than in the ordinary course of business or permitted
under the Plan or enter into any contract or agreement in the ordinary course of
business (i) which cannot be performed within three months or less or (ii) which
involves the expenditure by Horizon/CMS of over $250,000.
HEALTHSOUTH and Horizon/CMS have each represented and warranted to the
other that, since September 30, 1996 and November 30, 1996, respectively, such
party has not engaged in certain material transactions. The obligation of each
party to consummate the Merger is subject to confirmation of the accuracy of the
other party's representations and warranties, including this one, at the
Closing. In addition, HEALTHSOUTH and Horizon/CMS have each agreed not to engage
knowingly or intentionally in any conduct that would cause its representations
and warranties to become untrue in any material respect pending the Closing.
Waiver and Amendment
THE PLAN PROVIDES THAT, AT ANY TIME PRIOR TO THE EFFECTIVE TIME,
HEALTHSOUTH AND HORIZON/CMS may (i) extend the time for the performance of any
of the obligations or other acts of the other party contained in the Plan; (ii)
waive any inaccuracies in the representations and warranties of the other party
contained in the Plan or in any document delivered pursuant to the Plan; and
(iii) subject to the limitations regarding amendment of the Plan described in
the following sentence, and except for certain mutual conditions to closing,
waive compliance with the agreements or conditions under the Plan. In addition,
the Plan may be amended at any time upon the written agreement of HEALTHSOUTH
and Horizon/CMS without
50
the approval of stockholders of either Company, except that after the Special
Meeting no amendment may be made which by law requires a further approval by the
stockholders of Horizon/CMS without obtaining such further approvals.
Termination
THE PLAN MAY BE TERMINATED AT ANY TIME PRIOR TO THE EFFECTIVE TIME, WHETHER
BEFORE OR AFTER APPROVAL of the Plan by the stockholders of Horizon/CMS: (i) by
mutual written consent of HEALTHSOUTH and Horizon/CMS; (ii) by either
HEALTHSOUTH or Horizon/CMS if there is a material breach on the part of the
other party of any representation, warranty, covenant or other agreement set
forth in the Plan which is not cured as provided in the Plan; (iii) by either
HEALTHSOUTH or Horizon/CMS if any governmental entity or court of competent
jurisdiction shall have issued a final, permanent order, decree, or ruling or
other action enjoining or otherwise prohibiting the Merger and such order,
decree, or ruling or other action shall have become non-appealable; (iv) by
either HEALTHSOUTH or Horizon/CMS if the Merger has not been consummated on or
before December 31, 1997 (or such later date as may be determined under the
Plan), unless the failure to consummate the Merger by such time is due to the
breach of the Plan by the party seeking to terminate the Plan; (v) by either
HEALTHSOUTH or Horizon/CMS if any required approval of the Plan by stockholders
of Horizon/CMS has not been obtained by the required votes at a duly held
meeting of stockholders; (vi) by either HEALTHSOUTH or Horizon/CMS if any of the
conditions to the obligation of such party to effect the Merger is not capable
of being satisfied prior to December 31, 1997, unless such period is extended
and (vii) by Horizon/CMS, if the Board of Directors of Horizon/CMS, in the
exercise of its fiduciary duties under applicable law, has (w) determined not to
recommend the Merger to the holders of Horizon/CMS Common Stock, (x) withdrawn
such recommendation, (y) approved, recommended or endorsed any Acquisition
Transaction other than the Planperson signing the Letter of Transmittal, or (z) resolved to take any of such actions. For
the purposes of clause (vii), an "Acquisition Transaction" meansif a merger,
consolidation or other business combination involving Horizon/CMS or any of its
subsidiaries or the acquisition of all or any significant part of the assets or
capital stock or other equity interest of Horizon/CMS or any of its subsidiaries
or any similar transaction (other than the Merger).
Break-up Fee; Third Party Bids
If the Plantransfer tax is
terminated by Horizon/CMS for any of the reasons set forth
in clause (vii) under "- Termination" above and within one year after the
effective date of such termination Horizon/CMS is the subject of a Third Party
Acquisition Event (as defined in the Plan), then at the time of consummation of
such a Third Party Acquisition Event, Horizon/CMS shall pay to HEALTHSOUTH a
break-up fee of $35,000,000, and shall further pay, or reimburse HEALTHSOUTH
for, expenses actually incurred by HEALTHSOUTH in connection with the Merger, up
to $5,000,000.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of the Board of Directors of Horizon/CMS
with respect to the Plan and the transactions contemplated thereby, stockholders
of Horizon/CMS should be aware that certain members of the management of
Horizon/CMS and the Board of Directors of Horizon/CMS have certain interests in
the Merger that are in addition to the interests of the stockholders generally.
HEALTHSOUTH has agreed to add Neal M. Elliott, Chairman of the Board,
President and Chief Executive Officer of Horizon/CMS, to the HEALTHSOUTH Board
of Directors promptly after the Effective Time. In addition, Mr. Elliott is
party to an Employment and Change of Control Agreement, dated December 24, 1996,
with Horizon/CMS, and HEALTHSOUTH has agreed to assume the obligations of
Horizon/CMS thereunder at the Effective Time. The Employment and Change of
Control Agreement provides for a lump sum payment of three times Mr. Elliott's
base salary, the acceleration of vesting of stock options held by Mr. Elliott
and certain other benefits described in the paragraph below upon the occurrence
of certain circumstances following a transaction such as the Merger. The change
of control provisions of Mr. Elliott's agreement are consistent with the terms
of the change of control agreements between Horizon/CMS and its other management
employees described in the paragraph below, except that the agreements with the
other management employees contain provisions reducing
51
the amount payable and the number of options that may be vested on an
accelerated basis to the extent that such compensation would constitute an
"excess parachute payment" (as defined in Section 280G(b)(i) of the Code), while
Mr. Elliott's agreement contains no such provision. A portion of Mr Elliott's
compensation pursuant to the change in control provisions in his agreement
likely would be subject to excise tax and not be deductible by Horizon/CMS for
federal income tax purposes. If Mr. Elliott's compensation constitutes an
"excess parachute payment" and is subject to excise tax, his agreement contains
a gross-up provision pursuant to which Horizon/CMS must pay him an amount that
will place him in the same after-tax economic position in which he would have
been absent the excise tax. Such amount also will not be deductible by
Horizon/CMS for federal income tax purposes.
Horizon/CMS is also a party to change of control agreements with 49
additional management employees, including its other executive officers. These
agreements (together with Mr. Elliott's Employment and Change of Control
Agreement described above) provide, upon termination of the employment of such
employeesimposed for any reason other than "cause" after certain events,the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such astransfer taxes (whether imposed on
the Merger, constituting a "changeregistered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of control"payment of Horizon/CMS, for certain lump sumsuch taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering holder.
USE OF PROCEEDS
There will be no cash payments,proceeds payable to HEALTHSOUTH from the acceleration of vesting of stock options held by such
employees and the continuance of participation by such employees in life
insurance, accident and health plans and other welfare plans maintained by
Horizon/CMS for a period not exceeding three years (assuming Horizon/CMS gives
timely notice of terminationissuance of
the agreements). For this purpose, an assignment
of duties inconsistent with an employee's position, a relocationNew Notes pursuant to the Exchange Offer. The proceeds from the sale of the
employee'sOld Notes were used by HEALTHSOUTH to repay bank debt. In consideration for
issuing the New Notes as contemplated in this Prospectus, HEALTHSOUTH will
receive in exchange the Old Notes in like principal placeamount, the terms of workwhich
are identical in all material respects to the New Notes. The Old Notes
surrendered in exchange for the New Notes will be retired and ancancelled and
cannot be reissued. Accordingly, the issuance of the New Notes will not result
in any increase in the amountindebtedness of travel
requiredHEALTHSOUTH.
27
CAPITALIZATION
The following table sets forth, as of June 30, 1998, the capitalization of
the employee will be deemed a terminationCompany, which reflects the sale of employment.
Under these agreements, a maximum of $17.5 million in cash would be payable
in lump sumthe Old Notes and the vestingapplication of stock options relating to approximately 803,000the
net proceeds therefrom. See "Selected Consolidated Financial Data" and "Use of
Proceeds".
JUNE 30,
1998
----
(IN THOUSANDS)
Current portion of long-term debt .................................. $ 47,600
==========
Long-term debt (net of current maturities):
Notes payable ...................................................... 750,000
Other .............................................................. 122,956
9.5% Senior Subordinated Notes due 2001 ............................ 250,000
3.25% Convertible Subordinated Debentures due 2003 ................. 567,750
6.875% Senior Notes due 2005 ....................................... 250,000
7.0% Senior Notes due 2008 ......................................... 250,000
----------
Total long-term debt ............................................ 2,190,706
Stockholders' equity:
Preferred Stock, par value $.10 per share, 1,500,000 shares autho-
rized; no shares outstanding .................................... --
Common Stock, par value $.01 per share, 600,000,000 shares autho-
rized; 401,817,000 shares outstanding (1) ....................... 4,018
Additional paid-in capital ....................................... 2,406,903
Retained earnings ................................................ 1,078,580
Treasury stock ................................................... (323)
Receivable from Employee Stock Ownership Plan .................... (10,169)
Notes receivable from stockholders ............................... (5,180)
----------
Total stockholders' equity ....................................... 3,473,829
----------
Total capitalization ............................................ $5,664,535
==========
- ----------
(1) Outstanding shares do not include a total of 28,406,753 shares of Horizon/CMS Common
Stock (at a weighted average exercise pricesubject to options outstanding under the Company's stock option plans.
An additional 8,089,191 shares of approximately $14.62 per share) would be accelerated if the employmentCommon Stock are reserved for future
option grants under such plans. Outstanding shares also do not include
980,542 shares of all
such employees were terminated after consummationCommon Stock reserved for issuance pursuant to outstanding
warrants, 15,501,707 shares of Common Stock initially reserved for issuance
upon conversion of the Merger. If any such
events should transpire with respect to Mr. Elliott; Joseph Turmes, Senior Vice
PresidentCompany's 3.25% Convertible Subordinated Debentures
due 2003, and 20,482,885 shares of Operations; Charles H. Gonzales, Senior Vice President of
Subsidiary Operations and a Director; Ernest A. Schofield, Senior Vice
President, Treasurer, Chief Financial Officer and a Director; Scot Sauder, Vice
President of Legal Affairs, Secretary and General Counsel; or Anthony Misitano,
President and Chief Executive Officer of Horizon/CMS's Acute Rehabilitation
Hospital Division, the maximum amount of the lump sum cash payments due to such
officers under such agreements would be approximately $5,160,000 (including a
$2,440,000 gross-up payment as described in the preceding paragraph), $424,000,
$735,000, $687,000, $437,000 and $1,001,000, respectively. In addition, the
vesting of the following options held by such officers would be accelerated: Mr.
Elliott - 233,000 shares (at a weighted average exercise price of $14.55 per
share); Mr. Turmes - 39,000 shares (at a weighted average exercise price of
$14.82 per share); Mr. Gonzales - 53,000 shares (at a weighted average exercise
price of $14.06 per share); Mr. Schofield - 38,000 shares (at a weighted average
exercise price of $14.51 per share); Mr. Sauder - 25,000 shares (at a weighted
average exercise price of $15.67 per share); and Mr. Misitano - 47,000 shares
(at a weighted average exercise price of $13.76 per share). At the time of
approval and adoption of the Plan by the Board of Directors of Horizon/CMS,
Michael A. Jeffries served as a Director and Senior Vice President of Operations
and was a party to a change of control agreement. Pursuant to such agreement, if
the events described above were to transpire with respect to Mr. Jeffries, the
maximum amount of the lump sum cash payment due to Mr. Jeffries would be
$853,000 and the vesting of options with respect to 43,000 shares (at a weighted
average exercise price of $14.86 per share) would be accelerated. Effective June
1, 1997, Mr. Jeffries resigned from such positions and, in connection therewith,
his change of control agreement was amended so that he was entitled, without
regard to the events described above, to the foregoing benefits at September 1,
1997. Mr. Turmes was appointed to his present position on June 1, 1997 and, as a
result, was not a director or executive officer of Horizon/CMS at the time the
Plan was approved and adopted by the Board of Directors of Horizon/CMS.
In addition, pursuant to the terms of Horizon/CMS's stock option plans, a
substantial portion of Horizon/CMS stock options that are not fully vested prior
to the Effective Time will accelerate and vest in full as a result of the Merger
at the Effective Time. Certain directors and members of Horizon/CMS management
hold such options.
52
Indemnification
THE PLAN PROVIDES THAT HORIZON/CMS SHALL, AND AFTER THE EFFECTIVE TIME
HEALTHSOUTH AND THE Surviving Corporation shall, indemnify, defend and hold
harmless each person who is, or has ever been at any time prior to the Effective
Time, an officer, director or employee of Horizon/CMS or any of its subsidiaries
(the "Indemnified Parties") against all losses, claims, damages, costs,
expenses, liabilities or judgments, or amounts that are paid in settlement with
the approval of the indemnifying partyCommon Stock issued in connection with
any claim arising, in
whole or in part, out of the fact that such person is or was a director, officer
or employee of Horizon/CMS and pertainingacquisitions subsequent to a matter occurring or existing at
or prior to the Effective Time.
HEALTHSOUTH has agreed to maintain, for a period of six years after the
Effective Time, the current policies of directors' and officers' liability
insurance (or substitute policies providing at least the same coverage and
limits and containing terms and conditions that are not materially less
advantageous) with respect to claims arising from facts or events that occurred
prior to the Effective Time. In complying with this agreement, however,
HEALTHSOUTH will not be required to expend more than 200% of the current annual
premiums paid by Horizon/CMS for such insurance.
ACCOUNTING TREATMENT
HEALTHSOUTH intends to account for the Merger by the purchase method of
accounting applicable to business combinations. Under the purchase method, the
assets and liabilities of Horizon/CMS will be recorded on the books of
HEALTHSOUTH at their fair value. Any cost in excess of the net asset value will
be amortized using the straight-line method over a period to be determined by
HEALTHSOUTH based upon its estimate of the useful life of the goodwill acquired.
The unaudited condensed combined pro forma financial information contained
in this Prospectus-Proxy Statement has been prepared using the purchase method
of accounting to account for the Merger. See "PRO FORMA CONDENSED FINANCIAL
INFORMATION".
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of the principal federal income tax
consequences of the Merger to the holders of Horizon/CMS Shares. The discussion
is based on currently existing provisions of the Code, Treasury Regulations
thereunder, administrative rulings and court decisions. All of the foregoing are
subject to change and any such change can affect the continuing validity of this
discussion. This summary applies to holders of Horizon/CMS Shares who hold their
Horizon/CMS Shares as capital assets. This summary does not discuss all aspects
of income taxation that may be relevant to a particular holder of Horizon/CMS
Shares in light of such holder's specific circumstances or to certain types of
holders subject to special treatment under the federal income tax laws (for
example, foreign persons, dealers in securities, banks and other financial
institutions, insurance companies, tax-exempt organizations and holders who
acquired Horizon/CMS Shares pursuant to the exercise of options or otherwise as
compensation or through a tax-qualified retirement plan or holders who are
subject to the alternative minimum tax provisions of the Code), and it does not
discuss any aspect of state, local, foreign or other tax law.
Horizon/CMS has received an opinion regarding all material federal income
tax consequences with respect to the Merger from its counsel, Vinson & Elkins
L.L.P. ("Vinson & Elkins"), and HEALTHSOUTH has received a similar opinion from
its counsel, Haskell Slaughter & Young, L.L.C. ("Haskell Slaughter", and
together with Vinson & Elkins, "Tax Counsel"). Based on the conditions and
qualifications discussed herein, such opinions collectively state that for
federal income tax purposes the Merger will constitute a reorganization within
the meaning of Section 368(a) of the Code and that the material federal income
tax consequences of the Merger will be that: (i) no gain or loss will be
recognized by HEALTHSOUTH, the Subsidiary or Horizon/CMS as a result of the
Merger, (ii) no gain or loss will be recognized by the stockholders of
Horizon/CMS upon the exchange of their Horizon/CMS Shares solely for shares of
HEALTHSOUTH Common Stock pursuant to the Merger, except that a Horizon/CMS
stockholder who receives cash proceeds in lieu of a fractional share of
HEALTHSOUTH Common Stock will recognize gain or loss equal to the difference, if
any, between such stockholder's tax basis allocated to such fractional share (as
described in clause (iii) below) and the amount of cash
53June 30.
28
received, and such gain or loss will constitute capital gain or loss if such
stockholder's Horizon/CMS Shares with respect to which gain or loss is
recognized are held as a capital asset at the Effective Time and such payment in
lieu of the fractional shares is not essentially equivalent to a dividend within
the meaning of Section 302(b)(l) of the Code, (iii) the aggregate tax basis of
the shares of the HEALTHSOUTH Common Stock received solely in exchange for
Horizon/CMS Shares pursuant to the Merger (including fractional shares of
HEALTHSOUTH Common Stock for which cash is received) will be the same as the
aggregate tax basis of the Horizon/CMS Shares exchanged therefor, and (iv) the
holding period for HEALTHSOUTH Common Stock received in exchange for Horizon/CMS
Shares pursuant to the Merger will include the holding period of the Horizon/CMS
Shares exchanged therefor, provided such Horizon/CMS Shares were held as a
capital asset at the Effective Time.
Neither HEALTHSOUTH nor Horizon/CMS has requested or will receive an
advance ruling from the Internal Revenue Service (the "Service") as to the
federal income tax consequences of the Merger. In rendering their opinions, Tax
Counsel may receive and will rely upon representations contained in certificates
of HEALTHSOUTH, the Subsidiary, Horizon/CMS and others. Tax Counsel's opinions
will be subject to certain limitations and qualifications and will be based upon
the truth and accuracy of these representations and upon certain factual
assumptions and represent Tax Counsel's best legal judgment. The tax opinions
are not binding on the Service or the courts and do not preclude the Service
from adopting a contrary position.
EACH HOLDER OF HORIZON/CMS SHARES IS URGED TO CONSULT SUCH HOLDER'S TAX
ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO SUCH HOLDER,
INCLUDING THE APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS.
RESALE OF HEALTHSOUTH COMMON STOCK BY AFFILIATES
THE OFFERING, SALE AND DELIVERY OF SHARES OF HEALTHSOUTH COMMON STOCK TO BE
ISSUED TO HOLDERS of Horizon/CMS Shares in connection with the Merger have been
registered under the Securities Act. HEALTHSOUTH Common Stock received by the
stockholders of Horizon/CMS upon consummation of the Merger will be freely
transferable under the Securities Act, except for shares issued to any person
who may be deemed an "Affiliate" of Horizon/CMS or HEALTHSOUTH within the
meaning of Rule 145 under the Securities Act. "Affiliates" are generally defined
as persons who control, are controlled by, or are under common control with
Horizon/CMS or HEALTHSOUTH at the time of the Special Meeting (generally,
directors, certain executive officers and major stockholders). Affiliates of
Horizon/CMS or HEALTHSOUTH may not sell their shares of HEALTHSOUTH Common Stock
acquired in connection with the Merger, except pursuant to an effective
registration statement under the Securities Act covering such shares or in
compliance with Rule 145 or another applicable exemption from the registration
requirements of the Securities Act. In general, under Rule 145, for one year
following the Effective Time, an Affiliate (together with certain related
persons) would be entitled to sell shares of HEALTHSOUTH Common Stock acquired
in connection with the Merger only through unsolicited "brokers' transactions"
or in transactions directly with a "market maker," as such terms are defined in
Rule 144 under the Securities Act. Additionally, the number of shares to be sold
by an Affiliate (together with certain related persons and certain persons
acting in concert) during such one-year period within any three-month period for
purposes of Rule 145 may not exceed the greater of (i) 1% of the outstanding
shares of HEALTHSOUTH Common Stock or (ii) the average weekly trading volume of
such stock during the four calendar weeks preceding such sale. The resale
provisions of Rule 145 will remain available to Affiliates only if HEALTHSOUTH
remains current with its information filings with the SEC under the Exchange
Act. One year after the Effective Time, an Affiliate will be able to sell such
HEALTHSOUTH Common Stock without such manner of sale or volume limitations if
HEALTHSOUTH is current with its Exchange Act information filings and such
Affiliate is not then an Affiliate of HEALTHSOUTH. Two years after the Effective
Time, an Affiliate will be able to sell such shares of HEALTHSOUTH Common Stock
without any restrictions so long as such Affiliate was not an Affiliate of
HEALTHSOUTH for at least three months prior thereto.
Horizon/CMS has agreed to use its reasonable, good faith efforts to cause
each holder of Horizon/ CMS Shares deemed to be an Affiliate of Horizon/CMS to
enter into an agreement providing that such Affiliate will not sell, pledge,
transfer or otherwise dispose of shares of HEALTHSOUTH Common
54
Stock to be received by such person in the Merger, except in compliance with the
applicable provisions of the Securities Act and the rules and regulations
thereunder.
NO APPRAISAL RIGHTS
Under the DGCL, holders of Horizon/CMS Common Stock will not be entitled to
dissenters' rights of appraisal in connection with the Merger.
NO SOLICITATION OF TRANSACTIONS
Subject to the provisions described in the next paragraph, Horizon/CMS has
agreed that it will not, and will not suffer any of the Horizon/CMS Subsidiaries
or the Horizon/CMS Other Entities or any of their respective directors,
officers, employees, agents or representatives to, directly or indirectly, (i)
solicit or initiate (including by way of furnishing or publishing nonpublic
information) any inquiries or the making of any proposal with respect to any
merger, consolidation or other business combination involving Horizon/CMS or any
Horizon/CMS Subsidiary or Horizon/CMS Other Entity or the acquisition of all or
any significant part of the assets or capital stock or other equity interests of
Horizon/CMS or any Horizon/CMS Subsidiary or Horizon/CMS Other Entity or any
similar transaction (an "Acquisition Transaction"), (ii) negotiate, explore or
otherwise engage in discussions with any persons (other than HEALTHSOUTH and its
representatives) with respect to any Acquisition Transaction or which may
reasonably be expected to lead to a proposal for an Acquisition Transaction, or
(iii) enter into any agreement, arrangement or understanding with respect to any
such Acquisition Transaction or which would require Horizon/CMS to abandon,
terminate or fail to consummate the Merger or any other transaction contemplated
by the Plan. Except as may be required by the fiduciary duties of Horizon/ CMS's
Board of Directors under applicable law, Horizon/CMS has agreed that as of the
date of the Plan, Horizon/CMS and the Horizon/CMS Subsidiaries and the
Horizon/CMS Other Entities and their respective directors, officers, employees,
agents and representatives shall immediately cease and cause to be terminated
any existing activities, discussions or negotiations conducted theretofore with
respect to any Acquisition Transaction.
Notwithstanding the provisions described in the preceding paragraph, under
the Plan, Horizon/CMS may (i), directly or indirectly, furnish information and
access, in response to an unsolicited written proposal for a Superior
Transaction (as defined below), to any corporation, partnership, person or other
entity or group, pursuant to appropriate confidentiality agreements, and may
participate in discussions and negotiate with such corporation, partnership,
person or other entity or group concerning any proposal for a Superior
Transaction, if the Board of Directors of Horizon/CMS determines in its good
faith judgment in the exercise of its fiduciary duties that such action is
appropriate in furtherance of the best interest of its stockholders and (ii)
comply with Rule 14e-2 promulgated under the Exchange Act with regard to an
Acquisition Transaction. Horizon/CMS has agreed to advise HEALTHSOUTH promptly
of the existence of any inquiries or proposals received by, any requests for
such information from, or any negotiations or discussions initiated or continued
with Horizon/CMS from or by a person (other than HEALTHSOUTH and its
representatives) with respect to an Acquisition Transaction and the identity of
such person and, except as may otherwise be required pursuant to the fiduciary
duties of Horizon/CMS's Board of Directors under applicable law, the terms, the
proposed form of consideration and the general terms of any financing
arrangement or commitment in connection with such Acquisition Transaction. As
used in the Plan, the term "Superior Proposal" means a bona fide, written and
unsolicited proposal or offer made by any person (other than HEALTHSOUTH) with
respect to an Acquisition Transaction on terms which the Board of Directors of
Horizon/CMS determines in good faith and in the exercise of reasonable judgment,
to be more favorable to Horizon/CMS and its stockholders than the Merger.
Expenses
The Plan provides that, except as described under "- Breakup Fee; Third
Party Bids", all costs and expenses incurred in connection with the Plan and the
transactions contemplated thereby shall be paid by the party incurring such
expense, except that expenses of printing and mailing this Prospectus-Proxy
Statement shall be shared equally by HEALTHSOUTH and Horizon/CMS.
55
NYSE LISTING
A listing application will be filed with the NYSE to list the shares of
HEALTHSOUTH Common Stock to be issued to Horizon/CMS stockholders in connection
with the Merger. Although no assurance can be given that the shares of
HEALTHSOUTH Common Stock so issued will be accepted for listing, HEALTHSOUTH
anticipates that these shares will qualify for listing on the NYSE upon official
notice of issuance thereof. It is a condition to the Merger that such shares of
HEALTHSOUTH Common Stock be approved for listing on the NYSE upon official
notice of issuance at the Effective Time.
56
bean ---
-
SELECTED CONSOLIDATED 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 1994 acquisition of ReLife, Inc. ("ReLife"), the 1995
acquisition of Surgical Health Corporation ("SHC") and Sutter Surgery Centers,
Inc. ("SSCI"), the 1996 acquisition of Surgical Care Affiliates, Inc. ("SCA")
and Advantage Health Corporation ("Advantage Health") and the 1997 acquisition
of Health Images, Inc. ("Health Images"), each of which was accounted for as a
pooling of interests. The data set
forth below should be read in conjunction with the
consolidated financial statements, related notes and other information included,
or incorporated by reference, herein. The financial information for all periods set
forth below has been restated to reflect the acquisitions of ReLife, Inc.
("ReLife") in December 1994, Surgical Health Corporation ("SHC") in June 1995,
Sutter Surgery Centers, Inc. ("SSCI") in October 1995, Surgical Care
Affiliates, Inc. ("SCA") in January 1996, Advantage Health Corporation
("Advantage Health") in March 1996 and Health Images, Inc. ("Health Images") in
March 1997, each of which has been accounted for as a pooling of interests.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1992-----------------------------------------
1993 1994 1995
1996
---------- ------------ ------------ ------------ ---------------- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Revenues ......................................................... $1,055,295 $1,726,321 $2,118,681
Operating unit expenses .......................................... 715,189 1,207,707 1,441,059
Corporate general and administrative expenses .................... 43,378 67,798 65,424
Provision for doubtful accounts .................................. 22,677 35,740 42,305
Depreciation and amortization .................................... 75,425 126,148 160,901
Merger and acquisition related expenses (1) ...................... 333 6,520 19,553
Loss on impairment of assets (2) ................................. -- 10,500 53,549
Loss on abandonment of computer project .......................... -- 4,500 --
Loss on disposal of surgery centers .............................. -- 13,197 --
NME Selected Hospitals Acquisition related expense ............... 49,742 -- --
Interest expense ................................................. 25,884 74,895 105,517
Interest income .................................................. (6,179) (6,658) (8,009)
Gain on sale of partnership interest ............................. (1,400) -- --
Gain on sale of MCA Stock ........................................ -- (7,727) --
---------- ---------- ----------
925,049 1,532,620 1,880,299
---------- ---------- ----------
Income from continuing operations before income taxes,
minority interests and extraordinary item ....................... 130,246 193,701 238,382
Provision for income taxes ....................................... 40,450 68,560 86,161
---------- ---------- ----------
89,796 125,141 152,221
Minority interests ............................................... 29,549 31,665 43,753
---------- ---------- ----------
Income from continuing operations before extraordi-
nary item ....................................................... 60,247 93,476 108,468
Income from discontinued operations .............................. 3,986 (6,528) (1,162)
Extraordinary item (2) ........................................... -- -- (9,056)
---------- ---------- ----------
Net income ...................................................... $ 64,233 $ 86,948 $ 98,250
========== ========== ==========
Weighted average common shares outstanding (3)(4) ................ 265,502 273,480 289,594
========== ========== ==========
Net income per common share: (3)(4)
Continuing operations ........................................... $ 0.23 $ 0.34 $ 0.37
Discontinued operations ......................................... 0.01 (0.02) 0.00
Extraordinary item .............................................. -- -- (0.03)
---------- ---------- ----------
$ 0.24 $ 0.32 $ 0.34
========== ========== ==========
Weighted average common shares outstanding -- as-
suming dilution(3)(4)(5) ....................................... 275,366 300,758 320,018
========== ========== ==========
Net income per common share -- assuming dilution:
(3)(4)(5)
Continuing operations ........................................... $ 0.22 $ 0.32 $ 0.35
Discontinued operations ......................................... 0.01 (0.02) 0.00
Extraordinary item .............................................. -- -- (0.03)
---------- ---------- ----------
$ 0.23 $ 0.30 $ 0.32
========== ========== ==========
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------- --------------------
1996 1997 1997 1998
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER (UNAUDITED)
SHARE DATA)
INCOME STATEMENT DATA:
Revenues ................................. $819,821 $1,055,295 $1,726,321 $2,118,681......................................................... $2,568,155 $3,017,269 $1,414,648 $1,850,145
Operating unit expenses .................. 570,543 715,189 1,207,707 1,441,059.......................................... 1,667,248 1,888,435 889,939 1,140,128
Corporate general and administrative ex-
penses 32,526 43,378 67,798 65,424expenses .................... 79,354 82,757 36,358 52,681
Provision for doubtful accounts ......... 18,755 22,677 35,740 42,305.................................. 58,637 71,468 32,788 43,723
Depreciation and amortization ............ 42,107 75,425 126,148 160,901.................................... 207,132 250,010 117,516 153,713
Merger and acquisition related expenses(1) - 333 6,520 19,553expenses (1) ...................... 41,515 15,875 15,875 --
Loss on impairment of assets(2) ......... - - 10,500 53,549assets (2) ................................. 37,390 -- -- --
Loss on abandonment of computer project(2) .............................. - - 4,500 - -project .......................... -- -- -- --
Loss on disposal of surgery centers(2) ... - - 13,197 - -centers .............................. -- -- -- --
NME Selected Hospitals Acquisition re-
lated expense - 49,742 - - -
Terminated mergerrelated expense ............... 3,665 - - - -
Loss on extinguishment of debt ............ 883 - - - --- -- -- --
Interest expense ........................... 20,164 25,884 74,895 105,517................................................. 98,751 111,504 53,415 56,918
Interest income ........................... (9,757) (6,179) (6,658) (8,009).................................................. (6,034) (4,414) (2,322) (4,522)
Gain on sale of partnership interest ...... - (1,400) - - -............................. -- -- -- --
Gain on sale of MCA Stock(2) ............ - - (7,727) - -
--------Stock ........................................ -- -- -- --
---------- ---------- ---------- ----------
678,886 925,049 1,532,620 1,880,299 2,183,993 --------2,415,635 1,143,569 1,442,641
---------- ---------- ---------- ----------
Income from continuing operations before income taxes,
minority interests and ex-
traordinaryextraordinary item 140,935 130,246 193,701 238,382....................... 384,162 601,634 271,079 407,504
Provision for income taxes ............... 42,621 40,450 68,560 86,161....................................... 143,929 --------206,153 92,465 145,484
---------- ---------- ---------- ----------
98,314 89,796 125,141 152,221 240,233 395,481 178,614 262,020
Minority interests ........................ 26,322 29,549 31,665 43,753............................................... 50,369 --------64,873 32,715 35,424
---------- ---------- ---------- ----------
Income from continuing operations ......... 71,992 60,247 93,476 108,468before extraordi-
nary item ....................................................... 189,864 330,608 145,899 226,596
Income from discontinued operations ...... 3,283 3,986 (6,528) (1,162) -.............................. -- -- -- --
Extraordinary item(2) ..................... - - - (9,056) -
--------item (2) ........................................... -- -- -- --
---------- ---------- ---------- ----------
Net income .............................. $75,275 $ 64,233 $ 86,948 $ 98,250...................................................... $ 189,864 ========$ 330,608 $ 145,899 $ 226,596
========== ========== ========== ==========
Weighted average common and common
equivalent shares outstanding(3) ......... 265,267 275,316 291,314 307,792 336,807
========outstanding (3)(4) ................ 321,367 346,872 334,233 399,540
========== ========== ========== ==========
IncomeNet income per common and common equiv-
alent share(3)share: (3)(4)
Continuing operations ................................................................ $ 0.270.59 $ 0.220.95 $ 0.320.44 $ 0.35 $ 0.560.57
Discontinued operations .................. 0.01 0.01 (0.02) - -......................................... -- -- -- --
Extraordinary item ........................ - - - (0.03) -
--------.............................................. -- -- -- --
---------- ---------- ---------- ----------
Net income .............................. $ 0.280.59 $ 0.230.95 $ 0.300.44 $ 0.32 $ 0.56
========0.57
========== ========== ========== ==========
Income per common share - assuming
full dilution(3)(4)
Continuing operations ..................... N/A N/A $ 0.32 $ 0.35 $ 0.55
Discontinued operations .................. N/A N/A (0.02) - -
Extraordinary item ........................ N/A N/A - (0.03) -
-------- ---------- ---------- ---------- ----------
Net income .............................. N/A N/A $ 0.30 $ 0.32 $ 0.55
======== ========== ========== ========== ==========
SIX MONTHS
ENDED JUNE 30,
---------------------------
1996 1997
------------ --------------
INCOME STATEMENT DATA:
Revenues ................................. $1,241,003 $1,414,648
Operating unit expenses .................. 814,026 889,939
Corporate general and administrative ex-
penses 37,807 36,358
Provision for doubtful accounts ......... 28,353 32,788
Depreciation and amortization ............ 96,956 117,516
Merger and acquisition related expenses(1) 28,939 15,875
Loss on impairment of assets(2) ......... - -
Loss on abandonment of computer
project(2) .............................. - -
Loss on disposal of surgery centers(2) ... - -
NME Selected Hospitals Acquisition re-
lated expense - -
Terminated merger expense ............... - -
Loss on extinguishment of debt ............ - -
Interest expense ........................... 49,203 53,415
Interest income ........................... (3,518) (2,322)
Gain on sale of partnership interest ...... - -
Gain on sale of MCA Stock(2) ............ - -
---------- ----------
1,051,766 1,143,569
---------- ----------
Income from continuing operations before
income taxes, minority interests and ex-
traordinary item 189,237 271,079
Provision for income taxes ............... 62,474 92,465
---------- ----------
126,763 178,614
Minority interests ........................ 25,097 32,715
---------- ----------
Income from continuing operations ......... 101,666 145,899
Income from discontinued operations ...... - -
Extraordinary item(2) ..................... - -
---------- ----------
Net income .............................. $ 101,666 $ 145,899 ========== ==========
Weighted average common and common
equivalent shares outstanding(3) ......... 338,327 349,227outstanding -- as-
suming dilution(3)(4)(5) ....................................... 349,033 365,546 355,340 420,248
========== ========== Income per common and common equiv-
alent share(3)
Continuing operations ..................... $ 0.30 $ 0.42
Discontinued operations .................. - -
Extraordinary item ........................ - -
---------- ----------========== ==========
Net income .............................. $ 0.30 $ 0.42
========== ==========
Income per common share --- assuming full dilution(3)dilution:
(3)(4)(5)
Continuing operations ................................................................ $ 0.300.55 $ 0.91 $ 0.41 $ 0.55
Discontinued operations .................. - -......................................... -- -- -- --
Extraordinary item ........................ - -.............................................. -- -- -- --
---------- ---------- Net income ..............................---------- ----------
$ 0.300.55 $ 0.91 $ 0.41 $ 0.55
========== ========== ========== ==========
29
DECEMBER 31,
---------------------------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997 1998
------------ ------------ ------------ ------------ ------------ -----------------------
(IN THOUSANDS) (UNAUDITED)
BALANCE SHEET DATA:
Cash and marketable securities ...... $ 190,153......... $ 153,011 $ 134,040 $ 159,793 $ 153,831 $ 179,670152,399 $ 204,546
Working capital ..................... 285,645........................ 300,876 308,770 406,601 554,589 728,769564,529 566,751 1,046,498
Total assets ........................ 1,264,334........................... 2,000,566 2,355,920 3,107,808 3,529,706 3,894,7955,401,053 6,112,778
Long-term debt(5) .................. 438,515debt (6) ..................... 1,028,610 1,164,135 1,453,018 1,560,143 1,675,4641,601,824 2,238,306
Stockholders' equity ............... 661,846................... 727,737 837,160 1,269,686 1,569,101 1,848,7963,157,428 3,473,829
- ----------
(1) Expenses related to SHC's Ballas Merger in 1993, the ReLife and Heritage
AcquisitionsSurgical Corporation acquisitions in 1994, the SHC, SSCI and NovaCare,
Rehabilitation Hospitals
AcquisitionInc.'s rehabilitation hospitals division acquisitions in 1995, the SCA,
Advantage Health, PSCMProfessional Sports Care Management, Inc. and ReadiCare
mergersacquisitions in 1996, and the Health Images mergeracquisition in 1997.
(2) See Notes 2 and 13 of "Notes to Consolidated Financial Statements". included
in HealthSouth's 1997 Annual Report on Form 10-K incorporated by reference
herein.
(3) Adjusted to reflect a two-for-one stock split effected in the form of a
100% stock dividend paid on April 17, 1995 and a two-for-one stock split
effected in the form of a 100% stock dividend paid on March 17, 1997.
(4) Fully-dilutedEarnings per share amounts prior to 1997 have been restated as required to
comply with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share". For further discussion, see Note 1 of "Notes to Consolidated
Financial Statements" included in HealthSouth's 1997 Annual Report on Form
10-K incorporated by reference herein.
(5) Diluted earnings per share in 1994, 1995, 1996 and 19961997 reflect shares
reserved for issuance upon conversion of HEALTHSOUTH's 5% Convertible
Subordinated Debentures due 2001, where applicable.
(5)2001. Substantially all of such Debentures were
converted into shares of HEALTHSOUTH's Common Stock in 1997. Diluted
earings per share in 1998 reflect shares reserved for issuance upon
conversion of HealthSouth's 3.25% Convertible Subordinated Debentures due
2001.
(6) Includes current portion of long-term debt.
57
RCI Group
INCORPORATED-------------------------------------------------------------------
WASHINGTON o30
DESCRIPTION OF THE NEW YORK
BOSTON o SAN FRANCISCO o LONDON
Financial Printing, Imaging & Time Sensitive Copying
1025 Connecticut Ave., NW, Suite 905
Washington, DC 20036
(202) 659-9600
(202) 659-0779 Fax
75 Varick Street, 16th FloorNOTES
The Old Notes were issued, and the New York, NY 10013
(212) 219-3700
(212) 219-1311 Fax
Proofed [ ]
SELECTED CONSOLIDATED FINANCIAL DATA - HORIZON/CMS
THE FOLLOWING CONSOLIDATED INCOME STATEMENT AND BALANCE SHEET DATA FOR THE
PERIODS ENDED MAY 31, 1993 THROUGH May 31, 1997 have been derived from
Horizon/CMS's consolidated financial statements, which have been audited by
Arthur Andersen LLP, independent public accountants. The information set forth
below is qualified by reference to and should be read in conjunctionNotes (together with the consolidated financial statementsOld Notes,
the "Notes") offered hereby will be issued pursuant to an Indenture, dated as of
June 22, 1998 (the "Indenture"), between the Issuer and related notes incorporated byPNC Bank, N.A., as
trustee (the "Trustee"). The following summary does not purport to be complete
and such summary is subject to the detailed provisions of the Indenture, to
which reference herein. The financialis hereby made for a full description of such provisions,
including the definition of certain terms used herein, and for other information
for all periods set forth below has been
restatedregarding the Notes. Wherever particular sections or defined terms of the
Indenture are referred to, reflect the acquisition of Continental Medical Systems, Inc. ("CMS")
in July 1995, which was accounted for as a pooling of interests.
YEAR ENDED MAY 31,
-------------------------
1993 1994
------------ ------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA(1):
Total operating revenues(1) .......................................... $1,136,358 $1,381,380
Costs and Expenses:
Cost of services ...................................................... 935,186 1,159,270
Facility leases ...................................................... 64,461 68,832
Depreciation and amortization ....................................... 33,915 48,249
Interest expense ...................................................... 26,999 44,396
Special charge(1) ................................................... 17,154 74,834
Total costs and expenses .......................................... 1,077,715 1,395,581
Earnings (loss) before minority interests, income taxes, cumulative ef-
fect of accounting change and extraordinary item 58,643 (14,201)
Minority interests ................................................... (6,787) (4,664)
Earnings (loss) before income taxes, cumulative offset of accounting
change and extraordinary item ....................................... 51,856 (18,865)
Income taxes ......................................................... 21,520 1,430
Earnings (loss) before cumulative effect of accounting change and ex-
traordinary item 30,336 (20,295)
Cumulative effect of accounting change, net of tax ..................... (3,204) -
Earnings (loss) before extraordinary item .............................. 27,132 (20,295)
Extraordinary item, net of tax(1) .................................... - 734
Net earnings (loss) ................................................... $ 27,132 $ (19,561)
Earnings (Loss) Per Common and Common Equivalent Share:
Earnings (loss) before cumulative effect of accounting charge and ex-
traordinary item $ 0.94 $ (0.55)
Cumulative effect of accounting change, net of tax .................. (0.10) -
Earnings (loss) before extraordinary item ........................... $ 0.84 $ (0.55)
Extraordinary item, net of tax ....................................... - 0.02
Net earnings (loss) ................................................ $ 0.84 $ (0.53)
Earnings (Loss) Per Common Share - Assuming Full Dilution:
Earnings (loss) before cumulative effect of accounting change and
extraordinary item ................................................... $ 0.89 $ (0.55)
Cumulative effect of accounting change, net of tax .................. (0.09) -
Earnings (loss) before extraordinary item ........................... $ 0.80 $ (0.55)
Extraordinary item, net of tax ....................................... - 0.02
Net earnings (loss) ................................................ $ 0.80 $ (0.53)
Weighted Average Shares Outstanding:
Primary ............................................................... 32,248 37,078
Fully diluted ......................................................... 36,941 40,051
1995 1996 1997
------------ ------------ --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA(1):
Total operating revenues(1) .......................................... $1,622,658 $1,756,534 $1,799,824
Costs and Expenses:
Cost of services ...................................................... 1,343,533 1,438,985 1,513,981
Facility leases ...................................................... 81,590 84,234 85,878
Depreciation and amortization ....................................... 56,618 57,883 64,628
Interest expense ...................................................... 53,045 47,318 53,539
Special charge(1) ................................................... 36,922 80,540 97,305
Total costs and expenses .......................................... 1,571,708 1,708,960 1,815,331
Earnings (loss) before minority interests, income taxes, cumulative ef-
fect of accounting change and extraordinary item 50,950 47,574 (15,507)
Minority interests ................................................... (5,245) (7,228) (7,375)
Earnings (loss) before income taxes, cumulative offset of accounting
change and extraordinary item ....................................... 45,705 40,346 (22,882)
Income taxes ......................................................... 22,348 31,672 (821)
Earnings (loss) before cumulative effect of accounting change and ex-
traordinary item 23,357 8,674 (22,061)
Cumulative effect of accounting change, net of tax ..................... - - -
Earnings (loss) before extraordinary item .............................. 23,357 8,674 (22,061)
Extraordinary item, net of tax(1) .................................... 2,571 (31,328) (13,858)
Net earnings (loss) ................................................... $ 25,928 $ (22,654) $ (35,919)
Earnings (Loss) Per Common and Common Equivalent Share:
Earnings (loss) before cumulative effect of accounting charge and ex-
traordinary item $ 0.49 $ 0.16 $ (0.42)
Cumulative effect of accounting change, net of tax .................. - - -
Earnings (loss) before extraordinary item ........................... $ 0.49 $ 0.16 (0.42)
Extraordinary item, net of tax ....................................... 0.05 (0.60) (0.27)
Net earnings (loss) ................................................ $ 0.54 $ (0.44) $ (0.69)
Earnings (Loss) Per Common Share - Assuming Full Dilution:
Earnings (loss) before cumulative effect of accounting change and
extraordinary item ................................................... $ 0.49 $ 0.16 $ (0.42)
Cumulative effect of accounting change, net of tax .................. - - -
Earnings (loss) before extraordinary item ........................... $ 0.49 $ 0.16 (0.42)
Extraordinary item, net of tax ....................................... 0.05 (0.60) (0.27)
Net earnings (loss) ................................................ $ 0.54 $ (0.44) $ (0.69)
Weighted Average Shares Outstanding:
Primary ............................................................... 47,850 52,048 52,269
Fully diluted ......................................................... 47,857 52,200 52,472
MAY 31,
-------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ------------ ------------ ------------ -----------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Working capital ........................ $227,199 $ 232,158 $ 282,221 $ 342,226 $ 289,737
Total assets ........................... 926,398 1,151,695 1,402,813 1,512,751 1,606,381
Long term debt, excluding current portion 459,062 461,331 532,688 645,639 732,657
Total stockholders' equity ............... 305,892 463,135 650,892 651,348 620,489
- ----------
(1) See the notes to "Item 6 - Selected Financial Data" and "Notes to
Consolidated Financial Statements" in the Horizon/CMS Form 10-K for the
fiscal year ended May 31, 1997such sections or defined terms are incorporated
herein by reference.
58
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following pro forma condensed combined financial information and
explanatory notes are presented to reflect the effect for all periods presentedreference as part of the mergerstatement made, and the statement is
qualified in its entirety by such reference.
GENERAL
The New Notes constitute two series for purposes of the Indenture. The
6.875% Senior Notes due 2005 (the "New Notes due 2005") will be unsecured,
unsubordinated obligations of the Issuer limited in aggregate principal amount
to $250,000,000 and will mature on June 15, 2005. The 7.0% Senior Notes due 2008
(the "New Notes due 2008") will be unsecured, unsubordinated obligations of the
Issuer limited in aggregate principal amount to $250,000,000 and will mature on
June 15, 2008.
Payment of the principal of and interest on the New Notes will rank pari
passu with all other unsecured, unsubordinated debt of the Issuer. The New Notes
will be redeemable in whole or in part at any time at the option of the Issuer
at a price equal to the greater of (i) 100% of the principal amount thereof and
(ii) the sum of the present values of the remaining schedule payments of
principal and interest thereon discounted to the date of redemption on a
semi-annual basis (assuming a 360-day year consisting of twelve 30-day months)
at the applicable Treasury Yield plus 15 basis points in the case of the New
Notes due 2005 and 20 basis points in the case of the New Notes due 2008, plus,
in each case, accrued interest to the date of redemption. See "-- Optional
Redemption". The New Notes will not be entitled to the benefit of any mandatory
redemption or sinking fund. The Indenture does not limit the amount of
additional indebtedness the Issuer or any of its subsidiaries may incur. The
Indenture does not limit the amount of notes, debentures or other evidences of
indebtedness ("Debt Securities") that the Issuer may issue thereunder and
provides that Debt Securities may be issued from time to time in one or more
series. As of the date of this Prospectus, no Debt Securities (other than the
Old Notes) were outstanding under the Indenture.
The New Notes will bear interest from June 22, 1998 at the respective rates
per annum set forth on the cover page of this Prospectus, and such interest will
be payable semiannually in arrears on June 15 and December 15 of each year,
commencing on December 15, 1998 to the persons in whose names the New Notes are
registered at the close of business on the immediately preceding June 1 and
December 1, respectively. Interest on the New Notes will accrue from the most
recent date to which interest has been paid or, if no interest has been paid,
from the date of original issuance. Interest on the New Notes will be computed
on the basis of a wholly-owned subsidiary360-day year consisting of HEALTHSOUTH with Horizon/CMS in a
transactiontwelve 30-day months. Principal of,
premium, if any, and interest on the New Notes will be payable, and the transfer
of New Notes will be registrable, at the office or agency of the Issuer to be
accountedmaintained for such purpose in the Borough of Manhattan, The City of New York,
except that, at the option of the Issuer, interest may be paid by mailing a
check to the address of the person entitled thereto as it appears on the New
Notes register. In the event that any date on which principal, premium, if any,
or interest is payable on the New Notes is not a purchaseBusiness Day (as defined in the
Indenture), then payment of the principal, premium, if any, or interest payable
on such date will be made on the next succeeding day that is a Business Day (and
without any interest or other payment in respect of any such delay).
GLOBAL SECURITIES
The New Notes will be issued in fully-registered form without coupons. The
Old Notes were initially issued in global form and definitive certificated
securities were not issued except in the limited circumstances described below.
31
Each series of Notes will be evidenced by one or more global Securities
(the "Merger""Global Securities"), which Merger is
expected towill be consummated by October 1997.deposited with, or on behalf of, The
pro forma condensed combined balance sheet assumes that the Merger was
consummated on June 30, 1997,Depository Trust Company, New York, New York ("DTC") and the pro forma condensed combined income
statements assume that the Merger was consummated on January 1, 1996. The
assumptions are describedregistered in the accompanying Notes to Pro Forma Condensed
Combined Financial Information.
All HEALTHSOUTH shares outstanding and per share amounts have been adjusted
to reflect a two-for-one stock splitname
of Cede & Co. ("Cede"), as DTC's nominee.
Persons holding interests in the Global Securities may hold their interests
directly through DTC, or indirectly through organizations which are participants
in DTC ("Participants"). Transfers between Participants will be effected in the
ordinary way in accordance with DTC rules and will be settled in immediately
available funds.
Holders who are not Participants may beneficially own interests in a Global
Security held by DTC only through Participants or certain banks, brokers,
dealers, trust companies and other parties that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly, and
have indirect access to the DTC system ("Indirect Participants"). So long as
Cede, as the nominee of DTC, is the registered owner of any Global Security,
Cede for all purposes will be considered the sole holder of such Global
Security. Except as provided below, owners of beneficial interests in a Global
Security will not be entitled to have certificates registered in their names,
will not receive or be entitled to receive physical delivery of certificates in
definitive form, and will not be considered the holder thereof.
Neither HEALTHSOUTH nor the Trustee (nor any registrar or paying agent)
will have any responsibility for the performance by DTC or its Participants or
Indirect Participants of their respective obligations under the rules and
procedures governing their operations. DTC has advised HEALTHSOUTH that it will
take any action permitted to be taken by a 100% stock
dividend paidholder of the Notes only at the
direction of one or more Participants whose accounts are credited with DTC
interests in a Global Security.
DTC has advised HEALTHSOUTH as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a "banking
organization" within the meaning of the New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its Participants and to facilitate the clearance and settlement
of securities transactions, such as transfers and pledges, among Participants in
deposited securities through electronic book-entry changes to accounts of its
Participants, thereby eliminating the need for physical movement of securities
certificates. Participants include securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. Certain of
such Participants (or their representatives), together with other entities, own
DTC. The rules applicable to DTC and its Participants are on March 17, 1997.
The pro forma information should be read in conjunctionfile with the
historical
financialCommission.
Exchanges of the Old Notes for New Notes under the DTC system must be made
by or through Participants, which will receive a credit for the New Notes on
DTC's records. The ownership interest of actual holders of each New Note (a
"Beneficial Owner") is in turn to be recorded on the Participants' and Indirect
Participants' records. Beneficial Owners will not receive written confirmation
from DTC of their exchange, but Beneficial Owners are expected to receive
written confirmations providing details of the transaction, as well as periodic
statements of HEALTHSOUTH and Horizon/CMS incorporated herein by
reference. The HEALTHSOUTH historical amountstheir holdings, from the Participant or Indirect Participant
through which the Beneficial Owner entered into the transaction. Transfers of
ownership interests in the accompanying pro forma
statements includeNotes are to be accomplished by entries made on the
financial positionbooks of Participants acting on behalf of Beneficial Owners. Beneficial Owners
will not receive certificates representing their ownership interests in the New
Notes, except in the event that use of the book-entry system for the New Notes
is discontinued.
The deposit of New Notes with DTC and resultstheir registration in the name of
operationsCede effect no change in beneficial ownership. DTC has no knowledge of Health
Images, Inc.the
actual Beneficial Owners of the New Notes; DTC's records reflect only the
identity of the Participants to whose accounts such New Notes are credited,
which may or may not be the Beneficial Owners. The Participants will remain
responsible for keeping account of their holdings on behalf of their customers.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of securities in definitive form. Such laws
may impair the ability to transfer beneficial interests in the Global
Securities.
32
Conveyance of notices and other communications by DTC to Participants, by
Participants to Indirect Participants and by Participants and Indirect
Participants to Beneficial Owners will be governed by arrangements among them,
subject to any statutory or regulatory requirements that may be in effect from
time to time. Redemption notices shall be sent to Cede. If less than all of the
New Notes due 2005 or the New Notes due 2008, as the case may be, are being
redeemed, DTC's practice is to determine by lot the interest of each Participant
in such New Notes due 2005 or New Notes due 2008, as the case may be, to be
redeemed.
Principal and interest payments on the New Notes will be made to DTC by
wire transfer of immediately available funds. DTC's practice is to credit
Participants' accounts on the payable date in accordance with their respective
holdings shown on DTC's records unless DTC has reason to believe that it will
not receive payment on the payable date. Payments by Participants to Beneficial
Owners will be governed by standing instructions and customary practices, as is
the case with securities held for the accounts of customers in bearer form or
registered in "street name", which was acquiredand will be the responsibility of such Participant
and not of DTC, or HEALTHSOUTH, subject to any statutory or regulatory
requirements as may be in effect from time to time. Payment of principal and
interest to DTC is the responsibility of HEALTHSOUTH, disbursement of such
payments to Participants shall be the responsibility of DTC, and disbursement of
such payments to the Beneficial Owners shall be the responsibility of
Participants and Indirect Participants. Neither HEALTHSOUTH nor the Trustee will
have any responsibility or liability for any aspect of the records relating to
or payments made on account of beneficial ownership interests in the Global
Securities or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
DTC may discontinue providing its services as securities depositary with
respect to any series of the New Notes at any time by giving reasonable notice
to HEALTHSOUTH. In the event that DTC notifies HEALTHSOUTH in March 1997 inthat it is unwilling
or unable to continue as depositary for any Global Security or if at any time
DTC ceases to be a transaction
accounted forclearing agency registered as a pooling of interests. Certain balance sheetsuch under the Exchange Act
when DTC is required to be so registered to act as such depositary and income
statement amounts from the Horizon/CMS historical financial statementsno
successor depositary shall have been reclassified in orderappointed within 90 days of such
notification or of HEALTHSOUTH becoming aware of DTC's ceasing to conform tobe so
registered, as the HEALTHSOUTH method of presentation.
These conforming reclassifications had no effect oncase may be, certificates for the reported financial
position or results of operations of Horizon/CMS. The pro forma financial
information is presented for informational purposes only and is not necessarily
indicative of the combined financial position or results of operations that
would have resulted had the Merger been consummated at the dates indicated, nor
is such information necessarily indicative of the combined financial position of
the Companies or their combined results of operations for future periods.
59
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED)
JUNE 30, 1997
PRO FORMA PRO FORMA
HEALTHSOUTH HORIZON/CMS ADJUSTMENTS COMBINED
------------- ------------- ------------------ --------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents ................................. $ 175,831 $ 44,287 $ 0 $ 220,118
Other marketable securities ................................. 3,839 0 0 3,839
Accounts receivable ....................................... 622,142 368,245 0 990,387
Inventories, prepaid expenses and other current assets . 195,952 74,559 0 270,511
Deferred income taxes ....................................... 16,435 14,925 0 31,360
---------- ---------- ------------ ----------
Total current assets ....................................... 1,014,199 502,016 0 1,516,215
Other assets ................................................ 102,419 127,412 (10,491)(1) 219,340
Property, plant and equipment, net ........................... 1,627,443 626,670 150,568 (2) 2,404,681
Intangible assets, net ....................................... 1,150,734 350,283 206,114 (2) 1,744,049
36,918 (3)
------------
Total assets ................................................ $3,894,795 $1,606,381 $ 383,109 $5,884,285
========== ========== ============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................... $ 91,005 $ 21,086 $ 0 $ 112,091
Salaries and wages payable ................................. 54,047 21,851 19,100 (3) 94,998
Accrued interest payable and other liabilities ............ 100,611 159,460 17,818 (3) 277,889
Current portion of long-term debt ........................... 39,767 9,882 0 49,649
---------- ---------- ------------ ----------
Total current liabilities .................................... 285,430 212,279 36,918 534,627
Long-term debt ............................................. 1,635,697 732,657 0 2,368,354
Deferred income taxes ....................................... 43,146 0 (10,491)(1) 32,655
Other long-term liabilities ................................. 3,047 20,598 0 23,645
Deferred revenue ............................................. 577 805 0 1,382
Minority interests .......................................... 78,102 19,553 0 97,655
Stockholders' equity:
Preferred Stock, $.10 par.................................... 0 0 0 0
Common Stock, $.01 par....................................... 3,407 53 387 (2) 3,847
Additional paid-in capital ................................. 1,193,818 594,576 382,155 (2) 2,170,549
Retained earnings .......................................... 669,514 34,565 (34,565)(2) 669,514
Treasury stock ............................................. (323) (8,705) 8,705 (2) (323)
Receivable from Employee Stock Ownership Plan ............... (12,247) 0 0 (12,247)applicable New Notes receivable from stockholders ........................ (5,373) 0 0 (5,373)
---------- ---------- ------------ ----------
Total stockholders' equity ................................. 1,848,796 620,489 356,682 2,825,967
---------- ---------- ------------ ----------
Total liabilities and stockholders' equity .................. $3,894,795 $1,606,381 $ 383,109 $5,884,285
========== ========== ============ ==========
See accompanying notes.
60
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED INCOME STATEMENT (UNAUDITED)
YEAR ENDED DECEMBER 31, 1996
PRO FORMA PRO FORMA
HEALTHSOUTH HORIZON/CMS ADJUSTMENTS COMBINED
------------- ------------- ----------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues .......................................... $2,568,155 $1,746,504 $ 0 $4,314,659
Operating unit expenses ........................... 1,667,248 1,439,567 0 3,106,815
Corporate general and administrative expenses ... 79,354 94,687 0 174,041
Provision for doubtful accounts .................. 58,637 27,284 0 85,921
Depreciation and amortization ..................... 207,132 58,311 14,886 (4) 285,249
4,920 (5)
Merger and acquisition related expenses ......... 41,515 0 0 41,515
Loss on impairment of assets ..................... 37,390 11,000 0 48,390
Special charge .................................... 0 17,150 0 17,150
Interest expense ................................. 98,751 48,892 0 147,643
Interest income ................................. (6,034) (7,611) 0 (13,645)
---------- ---------- ----------- ----------
2,183,993 1,689,280 19,806 3,893,079
Income before income taxes, minority interests and
extraordinary item .............................. 384,162 57,224 (19,806) 421,580
Provision for income taxes ........................ 143,929 27,402 0 171,331
---------- ---------- ----------- ----------
240,233 29,822 (19,806) 250,249
Minority interests .............................. 50,369 7,506 0 57,875
---------- ---------- ----------- ----------
Income from continuing operations ............... $ 189,864 $ 22,316 $ (19,806) $ 192,374
========== ========== =========== ==========
Weighted average common and common equivalent
shares outstanding .............................. 336,807 52,266 (8,186)(6) 380,887
========== ========== =========== ==========
Income from continuing operations per common
and common equivalent share ..................... $ 0.56 $ 0.43 $ N/A $ 0.51
========== ========== =========== ==========
Income from continuing operations per common
share - assuming full dilution .................. $ 0.55 $ 0.43 $ N/A $ 0.50
========== ========== =========== ==========
See accompanying notes.
61
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED INCOME STATEMENT (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997
PRO FORMA PRO FORMA
HEALTHSOUTH HORIZON/CMS ADJUSTMENTS COMBINED
------------- ------------- ---------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues .......................................... $1,414,648 $ 908,312 $ 0 $2,322,960
Operating unit expenses ........................... 889,939 748,518 0 1,638,457
Corporate general and administrative expenses ...... 36,358 46,965 0 83,323
Provision for doubtful accounts ..................... 32,788 17,355 0 50,143
Depreciation and amortization ..................... 117,516 34,442 7,443 (4) 161,861
2,460 (5)
Merger and acquisition related expenses ............ 15,875 0 0 15,875
Special charge .................................... 0 86,155 0 86,155
Interest expense .................................... 53,415 27,489 0 80,904
Interest income .................................... (2,322) (3,572) 0 (5,894)
---------- --------- ----------- ----------
1,143,569 957,352 9,903 2,110,824
Income before income taxes, minority interests
and extraordinary item ........................... 271,079 (49,040) (9,903) 212,136
Provision for income taxes ........................ 92,465 (15,221) 0 77,244
---------- --------- ----------- ----------
178,614 (33,819) (9,903) 134,892
Minority interests ................................. 32,715 3,695 0 36,410
---------- --------- ----------- ----------
Income from continuing operations .................. $ 145,899 $ (37,514) $ (9,903) $ 98,482
========== ========= =========== ==========
Weighted average common and common equiva-
lent shares outstanding 349,227 52,407 (8,208)(6) 393,426
========== ========= =========== ==========
Income from continuing operations per common
and common equivalent share ........................ $ 0.42 $ (0.72)$ N/A $ 0.25
========== ======= =========== ==========
Income from continuing operations per common
share - assuming full dilution ..................... $ 0.41 $ (0.72) $ N/A $ 0.25
========== ======= =========== ==========
See accompanying notes.
62
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
In February 1997 HEALTHSOUTH entered into a definitive agreement to
purchase Horizon/CMS by means of a stock-for-stock merger. The transaction will
be accounted for as a purchaseprinted and is expected to be completed by October 1997.
Under the terms of the Plan, HEALTHSOUTH will issue 0.84338 of a share of its
Common Stockdelivered in exchange for each outstanding shareinterests in such Global Security. Any
Global Security that is exchangeable pursuant to the preceding sentence shall be
exchangeable for New Notes registered in such names as DTC shall direct. It is
expected that such instructions will be based upon directions received by DTC
from its Participants with respect to ownership of Horizon/CMS Common Stock.
For purposesbeneficial interests in such
Global Security.
HEALTHSOUTH may decide to discontinue use of the accompanying pro forma financial statements, it is assumedsystem of book-entry
transfers through DTC (or a successor securities depositary). In that event,
certificates representing each series of the New Notes will be printed and
delivered.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that HEALTHSOUTH believes to be reliable, but
HEALTHSOUTH does not take responsibility for the accuracy thereof.
OPTIONAL REDEMPTION
The New Notes will issue approximately 43,958,000 sharesbe redeemable as a whole or in part, at the option of
the Issuer, at any time at a redemption price equal to the greater of (i) 100%
of their principal amount and (ii) the sum of the present values of the
remaining scheduled payments of principal and interest thereon discounted to the
date of redemption on a semi-annual basis (assuming a 360-day year consisting of
twelve 30-day months) at the applicable Treasury Yield plus 15 basis points in
the case of the New Notes due 2005 and 20 basis points in the case of the New
Notes due 2008, plus, in each case, accrued interest to the date of redemption.
"Treasury Yield" means, with respect to any redemption date, the rate per
annum equal to the semi-annual equivalent yield to maturity of the applicable
Comparable Treasury Issue, assuming a price for the applicable Comparable
Treasury Issue (expressed as a percentage of its Common Stock
valuedprincipal amount) equal to the
applicable Comparable Treasury Price for such redemption date.
33
"Comparable Treasury Issue" means the United States Treasury security
selected by an Independent Investment Banker as having a maturity comparable to
the remaining term of the New Notes due 2005 or New Notes due 2008, as the case
may be, that would be utilized, at $947,734,000,the time of selection and in accordance with
customary financial practice, in pricing new issues of corporate debt securities
of comparable maturity to the remaining term of the New Notes due 2005 or $21.56 per share,the
New Notes due 2008, as the case may be. "Independent Investment Banker" means
Salomon Brothers Inc and its successor or, if such firm is unwilling or unable
to select the applicable Comparable Treasury Issue, an independent investment
banking institution of national standing appointed by the Trustee.
"Comparable Treasury Price" means, with respect to any redemption date, (i)
the average of the bid and asked prices for the applicable Comparable Treasury
Issue (expressed in the Merger. The per share value
is basedeach case as a percentage of its principal amount) on the
closing price per share of HEALTHSOUTH Common Stock on February
14, 1997, the lastthird business day preceding public announcementsuch redemption date, as set forth in the daily
statistical release (or any successor release) published by the Federal Reserve
Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S.
Government Securities" or (ii) if such release (or any successor release) is not
published or does not contain such prices on such business day, (A) the average
of the Merger. In
addition, HEALTHSOUTH will assumeapplicable Reference Treasury Dealer Quotations for such redemption date,
after excluding the highest and lowest such Reference Treasury Dealer
Quotations, or (B) if the Trustee obtains fewer than four such Reference
Treasury Dealer Quotations, the average of all outstanding Horizon/CMS stock options,
which will, insuch quotations. "Reference
Treasury Dealer Quotations" means, with respect to each Reference Treasury
Dealer and any redemption date, the aggregate, be exercisable for options to acquire
approximately 4,200,000 shares of HEALTHSOUTH Common Stock. For purposesaverage, as determined by the Trustee, of
the accompanying pro forma financial statements, these options have an estimated
total valuebid and asked prices of $29,437,000, bringing the total equity consideration to
$977,171,000.
Horizon/CMS has historically reported onapplicable Comparable Treasury Issue (expressed
in each case as a May 31 fiscal year-end.
Horizon's resultspercentage of operations have been recast to a November 30 fiscal
year-endits principal amount) quoted in the accompanying pro forma condensed combined income statement for
the year ended December 31, 1996. This was accomplished by excluding the results
of operations for the six months ended November 30, 1995 from Horizon/CMS's
historical May 31, 1996 income statement and then adding to it Horizon/CMS's
results of operations for the six months ended November 30, 1996. The
accompanying pro forma condensed combined income statement for the six months
ended June 30, 1997 is based on a combination of HEALTHSOUTH's results of
operations for the six months ended June 30, 1997 and Horizon/CMS's results of
operations for the six months ended May 31, 1997.
The accompanying pro forma balance sheet assumes that the Merger was
consummated on June 30, 1997 and includes adjustments which give effect to
events that are directly attributablewriting to the
transaction. The accompanying pro
forma income statements assume thatTrustee by such Reference Treasury Dealer at 5:00 p.m. on the Merger was consummated on January 1,
1996 and include adjustments which give effect to events that are directly
attributable tothird business day
preceding such redemption date.
"Reference Treasury Dealer" means a primary U.S. Government Securities
dealer in New York City selected by the Merger and are expected to have a continuing impact in
future periods. The historical statements used in the accompanying pro forma
income statement for the year ended December 31, 1996 do not reflect an
extraordinary loss of $27,074,000, net of tax, recorded by Horizon/CMS during
the period. Likewise, the historical statements used in the accompanying pro
forma income statement for the six months ended June 30, 1997 do not reflect an
extraordinary gain of $3,963,000, recorded by Horizon/CMS during the period. As
noted in "THE MERGER - Regulatory Approvals", it is expected that the Companies
will enter into a consent orderTrustee after consultation with the
Federal Trade Commission requiringIssuer.
On and after the divestitureredemption date, interest will cease to accrue on the New
Notes or any portion thereof called for redemption. On or before the redemption
date, the Issuer shall deposit with a paying agent (or the Trustee) money
sufficient to pay the redemption price of Horizon/CMS'sand accrued interest its rehabilitation hospital in Johnson
City, Tennessee. Revenues and pre-tax income attributable toon the Johnson City
facility represent less than 0.3% and 0.1%, respectively, of the related pro
forma combined amounts in the accompanying statements. The carrying value of the
Johnson City assetsNew Notes
to be sold representsredeemed on such date. If less than 0.1% of pro forma combined
fixed assets and less than 0.1% pro forma combined working capital. Due to the
immateriality of the Johnson City operations and assets, no adjustment has been
made in the accompanying pro forma financial statements to give effect to the
continuing impact of the pending sale. The resulting gain or loss on the sale of
the Johnson City facility is not expected to be material to the pro forma
financial position of the combined companies.
63
The following pro forma adjustments are necessary to reflect the Merger:
1. To net Horizon/CMS's noncurrent deferred income tax asset against
HEALTHSOUTH's noncurrent deferred income tax payable.
2. To allocate the purchase price as follows (in thousands):
Purchase price ................................. $ 977,171
==========
Historical net asset value of Horizon/CMS ...... $ 620,489
Capitalized favorable leasehold value ......... 150,568
Client and customer lists ..................... 34,091
Joint venture agreements ........................ 12,136
Cost in excess of net asset value ............... 159,887
----------
$ 977,171
==========
This adjustment also reflects the issuance of approximately 43,958,000
shares of HEALTHSOUTH Common Stock, valued at $947,734,000, in exchange for all of the outstanding sharesNew Notes due 2005 or the
New Notes due 2008 are to be redeemed, the New Notes to be redeemed shall be
selected by the Trustee by such method as the Trustee shall deem fair and
appropriate.
Holders of Horizon/CMS Common StockNew Notes to be redeemed will receive notice thereof by
first-class mail at least 30 and not more than 60 days prior to the assumptiondate fixed
for redemption.
CERTAIN COVENANTS OF THE ISSUER
Definitions. "Attributable Debt" shall mean, in connection with a sale and
lease-back transaction, the lesser of Horizon/CMS stock options which will, in the aggregate, be exercisable for
approximately 4,200,000 shares of HEALTHSOUTH Common Stock, valued at
$29,437,000. The fair value of these options was estimated based upon
HEALTHSOUTH's historical option valuation criteria. The value was calculated by
using the Black-Scholes option pricing model with the following weighted average
assumptions; risk free interest rate of 6.01%; dividend yield of 0%; volatility
factor of the expected market price of HEALTHSOUTH's Common Stock of .37; and a
weighted average expected life of the options of 4.3 years. Horizon/CMS options,
both vested and nonvested, will be assumed by HEALTHSOUTH at the Effective Time
and will, as a result of the Merger, become exercisable for HEALTHSOUTH Common
Stock. Of the total fair value assigned to these options, approximately
$15,850,000 relates to nonvested options. At the Effective Time, the vesting of
substantially all of these options will automatically be accelerated. Because
HEALTHSOUTH and Horizon/CMS have both elected to account for stock options under
APB Opinion No. 25,(i) the fair value of the nonvested options is included as
additional consideration. In addition, this adjustment reflectsassets subject
to such transaction or (ii) the retirement
of all of Horizon/CMS's treasury stock and the write-off of its retained
earnings. A $1.00 increase (decrease) in the per share value of HEALTHSOUTH
Common Stock would increase (decrease) the cost in excess of net asset value
allocated by approximately $43,958,000. The effect of the amortization of this
increase (decrease) on pro forma income from continuing operations per common
and common equivalent share would be approximately $.003 (see Note 5).
For purposes of allocating the purchase price in the accompanying pro forma
financial statements, the remaining Horizon/CMS net assets acquired have been
assigned values equal to their historical book values at May 31, 1997. At the
time the Merger is consummated, management of HEALTHSOUTH will, as a matter of
routine, perform a comprehensive analysis to determine the fairpresent value of the net
assets acquired and allocate the purchase price based on the determined fair
valuesobligations of the lessee
for net rental payments during the term of any lease discounted at the rate of
interest set forth or implicit in the terms of such lease or, if not practicable
to determine such rate, the weighted average interest rate per annum borne by
the Debt Securities of each series outstanding pursuant to the Indenture and
subject to the limitation on sale and lease-back transaction provisions of the
Indenture, compounded semiannually in either case as determined by the principal
accounting or financial officer of the Issuer.
"Capital Stock" of any specified person shall mean any and all shares,
rights to purchase, warrants or options (whether or not currently exercisable),
participation or other equivalents of or interests in (however designated) the
equity (including, without limitation, common stock, preferred stock and
partnership and joint venture interests) of such person (excluding any debt
securities that are convertible into, or exchangeable for, such equity).
"Common Equity" of any specified person shall mean all Capital Stock of
such person that is generally entitled to (i) vote in the election of directors
of such person or (ii) if such person is not a corporation, vote or otherwise
participate in the selection of the governing body, partners, managers or others
that will control the management and policies of such person.
34
"Consolidated Tangible Assets" with respect to any specified person as of
any date shall mean the total assets acquiredof such person and the liabilities assumedits Subsidiaries
(excluding any assets that would be classified as "intangible assets" under
GAAP) on a consolidated basis at such date, as determined in accordance with
GAAP, less all write-ups subsequent to the date of acquisition. Based on allinitial issuance of the information it has obtained and reviewed to
date regardingNotes
in the book value of any asset owned by such person or any of its Subsidiaries.
"Exempted Debt" shall mean the remaining netsum of the following as of the date of
determination: (i) Indebtedness of the Issuer and its Subsidiaries incurred
after the date of issuance of the New Notes and secured by liens not otherwise
permitted by the limitation on liens provisions of the Indenture, and (ii)
Attributable Debt of the Issuer and its Subsidiaries in respect of every sale
and lease-back transaction entered into after the date of the issuance of the
Old Notes, other than leases permitted by the limitation on sale and lease-back
provisions of the Indenture.
"GAAP" shall mean generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, as from time to time in effect.
"Indebtedness" shall mean all items classified as indebtedness on the most
recently available consolidated balance sheet of the Issuer and its
Subsidiaries, in accordance with GAAP.
"Subsidiary" with respect to any specified person shall mean (i) any
corporation of which the Common Equity having ordinary voting power to elect a
majority of directors of such corporation is owned by such person directly or
through one or more Subsidiaries of such person and (ii) any entity other than a
corporation in which such person, directly or indirectly, owns at least 50% of
the Common Equity of such entity and has the authority to manage such entity on
a day-to-day basis.
Limitation on Liens. The Issuer covenants that, so long as any of the New
Notes remain outstanding, it will not, nor will it permit any Subsidiary to,
create or assume any Indebtedness for money borrowed which is secured by a
mortgage, security interest, pledge, charge, lien or other similar encumbrance
of any kind (collectively, a "lien") upon any assets, whether now owned or
hereafter acquired, of the Issuer or any such Subsidiary without equally and
ratably securing the New Notes by a lien ranking ratably with and equally to
such secured Indebtedness, except that the foregoing restriction shall not apply
to (i) liens on assets of Horizon/CMS, managementany corporation existing at the time such corporation
becomes a Subsidiary; (ii) liens on assets existing at the time of HEALTHSOUTH is not aware of any material differences betweenacquisition
thereof, or to secure the historical
book value and the fair value of the remaining Horizon/CMS net assets, except
for the adjustments noted above. Furthermore, at this time, management of
HEALTHSOUTH is not aware of any material pre-acquisition contingencies that
would materially affect the purchase price allocation. For these reasons the
allocationpayment of the purchase price described above is an estimate based on
tentative and preliminary data. The final amount of such assets, or to
secure indebtedness incurred or guaranteed by the excess purchase price
andIssuer or a Subsidiary for the
allocation among the net assets may differ from the amounts estimated
(see also Note 3).
3. HEALTHSOUTH and Horizon/CMS expect to incur certain direct, nonrecurring
costs and charges resulting from the proposed Merger. The following is a detailpurpose of the estimated costs related to the Merger (in thousands):
Financial advisory fees ............ $ 25,900
Professional fees .................. 1,900
Severance and related benefits ...... 19,100
---------
$ 46,900
=========
64
These costs, net of an estimated tax benefit of $9,982,000, have been
accrued and added tofinancing the purchase price inof such assets or improvements or
construction thereon, which indebtedness is incurred or guaranteed prior to, at
the accompanying pro forma balance
sheet. Mosttime of these costs are only partially deductible for income tax
purposes. The income tax benefit of $9,982,000 is based on the deductible
portion of these costs, estimated at $25,595,000, multiplied by an effective
income tax rate of 39%.
The financial advisory fees are estimated based on the contractually agreed
upon fees with the two financial advisors, which,or within 360 days after such acquisition (or in the case of HEALTHSOUTH,real
property, completion of such improvement or construction or commencement of full
operation of such property, whichever is determined aslater); (iii) liens securing
indebtedness owed by any Subsidiary to the Issuer or another wholly-owned
Subsidiary; (iv) liens on any assets of a percentagecorporation existing at the time such
corporation is merged into or consolidated with the Issuer or a Subsidiary or at
the time of a purchase, lease or other acquisition of the estimated valueassets of a
corporation or firm as an entirety or substantially as an entirety by the Issuer
or a Subsidiary; (v) liens on any assets of the securitiesIssuer or a Subsidiary in favor
of the United States of America or any state thereof, or in favor of any other
country, or in favor of any political subdivision of any of the foregoing, to
be issuedsecure certain payments pursuant to consummateany contract or statute or to secure any
indebtedness incurred or guaranteed for the Merger and,purpose of financing all or any part
of the purchase price (or, in the case of Horizon/CMS, is determined as a
percentagereal property, the cost of
construction) of the total transaction value, which includesassets subject to such liens (including but not limited to,
liens incurred in connection with industrial revenue or similar financing
involving a political subdivision, agency or authority thereof); (vi) any
extension, renewal or replacement (or successive extensions, renewals or
replacements) in whole or in part, of any lien referred to in the valueforegoing
clauses (i) to (v), inclusive; (vii) certain statutory liens or other similar
liens arising in the ordinary course of business of the securitiesIssuer or a Subsidiary,
or certain liens arising out of government contracts; (viii) certain pledges,
deposits or liens made or arising under workers compensation or similar
legislation or in certain other circumstances; (ix) certain liens in connection
35
with legal proceedings, including certain liens arising out of judgments or
awards; (x) liens for certain taxes or assessments, landlord's liens and liens
and charges incidental to be issued and the debt acquired as a resultconduct of the Merger.
The $19,100,000 in severance and related benefits described above comprises
$4,577,000 payable tobusiness or the chief executive officerownership of Horizon/CMS pursuant to an
Employment and Changethe
assets of Control Agreement, $14,306,000 payable to other
Horizon/CMS executive officers pursuant to other change in control agreements
(see "THE MERGER - Intereststhe Issuer or of Certain Persons in the Merger"), and $217,000 in
other severance and related benefits.
Alsoa Subsidiary, which were not incurred in connection
with the Merger, it is possible that, subsequent toborrowing of money and which do not, in the consummationopinion of the Merger, HEALTHSOUTH will incur costs to discontinue or
disposeIssuer,
materially impair the use of certain activities previously performed at HEALTHSOUTH and
Horizon/CMS. Furthermore,such assets in order to combine the operationsoperation of the Companies,
it is possible that HEALTHSOUTH will incur integration costs,business of the
Issuer or such as training
Horizon/CMS personnel, relocating certain HEALTHSOUTH and Horizon/CMS personnel,
integrating and upgrading certain Horizon/ CMS computer systems, consolidating
and restructuring certain functions, severance and other expensesSubsidiary or the value of such assets for the purposes thereof
or (xi) liens relating to personnel performing duplicative functions, and other related costs. These
activities are collectively referred to as "restructuring measures". At this
time, a formal plan of restructuring measures has not been formulated or
approved by HEALTHSOUTH management. Furthermore, other than the estimated costs
noted in the table above, it is not practicable at this time to estimate the
individual nature, timing or total costaccounts receivable of the various potential restructuring
measuresIssuer or any of its
Subsidiaries which have been sold, assigned or otherwise transferred to assess the likelihood that particular restructuring measures will
be implemented. Therefore, no provision for the costanother
Person in a transaction classified as a sale of restructuring measures
has been included in the accompanying pro forma condensed combined financial
information. However, if restructuring measures are approved and implemented by
HEALTHSOUTH management and, depending upon the nature of the measures to be
undertaken and the timing of management's commitment with respect to such
measures, costs resulting from such measures may be accrued as liabilities and
added to the total consideration in this purchase business combinationaccounts receivable in
accordance with generally accepted accounting principles. Alternatively,
management's decisionsprinciples (to the extent the sale
by the Issuer or the applicable Subsidiary is deemed to give rise to a lien in
favor of the purchaser thereof in such accounts receivable or the proceeds
thereof). Notwithstanding the above, the Issuer or any Subsidiary may, without
securing the New Notes, create or assume any Indebtedness which is secured by a
lien which would otherwise be subject to the foregoing restrictions, provided
that after giving effect thereto the Exempted Debt then outstanding does not
exceed 10% of the total Consolidated Tangible Assets of the Issuer and its
Subsidiaries at such time.
Limitation on Sale and Lease-Back Transactions. Sale and lease-back
transactions (except such transactions involving leases for less than three
years) by the Issuer or any Subsidiary of any assets are prohibited unless (i)
the Issuer or such Subsidiary would be entitled pursuant to clauses (i) through
(xi) contained in the covenant described under "-- Limitations on Liens", to
create, incur or permit to exist a lien on the assets to be leased in an amount
at least equal to the Attributable Debt in respect of such transaction without
equally and ratably securing the New Notes, or (ii) the proceeds from the sale
of the assets to be leased are at least equal to their fair market value and the
proceeds are applied to the purchase or acquisition (or, in the case of real
property, the construction) of assets or to the retirement of indebtedness.
MERGER, CONSOLIDATION AND SALE OF ASSETS
The Indenture provides that the Issuer shall not consolidate or merge with
or into, or transfer or lease its assets substantially as an entirety to any
entity unless the Issuer shall be the continuing entity, or the successor entity
or entity to which such assets are transferred or leased shall be an entity
organized under the laws of the United States, any state thereof or the District
of Columbia and shall expressly assume the Issuer's obligations on the Debt
Securities and under the Indenture, and immediately after giving effect to such
transaction no Event of Default (as defined in the Indenture) shall have
occurred and be continuing, and certain other conditions are met. Upon
assumption of the Issuer's obligations by an entity to whom such assets are
transferred or leased, subject to certain exceptions, the Issuer shall be
discharged from all obligations under the New Notes and the Indenture.
There are no covenants or other provisions in the Indenture providing for a
put at the option of the holders of the New Notes or an increase in the rate of
interest borne by the respective New Notes or that would otherwise afford
holders of any of New Notes protection in the event of a recapitalization
transaction, a change of control of the Issuer or a highly leveraged
transaction.
EVENTS OF DEFAULT
An Event of Default is defined under the Indenture with respect to Debt
Securities of each series as being: (i) default in payment of all or any part of
the principal of, or premium, if any, on any Debt Securities of such series when
due, either at maturity, upon any redemption, by declaration or otherwise; (ii)
default for 30 days in payment of any interest on any Debt Securities of such
series; (iii) default in payment of any sinking fund installment when due by the
terms of the Debt Securities of such series; (iv) default for 60 days after
written notice as provided in the Indenture in the observance or performance of
any other covenant or agreement in the Debt Securities of such series or in the
Indenture, other than a covenant included in the Indenture solely for the
benefit of a series of Debt Securities other than such series; (v) acceleration
of $25 million or more, individually or in the aggregate, in principal amount of
Indebtedness of the Issuer or any Subsidiary under the terms of the instrument
under which such Indebtedness is issued or secured if such Indebtedness shall
not have been discharged or such acceleration is not annulled within 10 days
after written notice; or (vi) certain events of bankruptcy, insolvency or
reorganization.
36
The Indenture provides that (a) if an Event of Default due to the default
in payment of principal, premium, if any, or interest on any series of Debt
Securities, or due to the default in the performance or breach of any other
covenant or agreement of the Issuer applicable to the Debt Securities of such
series but not applicable to all outstanding Debt Securities, shall have
occurred and be continuing, either the Trustee or the holders of not less than
25% in principal amount of the Debt Securities of such series may declare the
principal of all Debt Securities of such series and interest accrued thereon to
be due and payable immediately and (b) if an Event of Default due to a default
in the performance of any other of the covenants or agreements in the Indenture
applicable to all Debt Securities then outstanding or due to certain events of
bankruptcy, insolvency and reorganization of the Issuer shall have occurred and
be continuing, either the Trustee or the holders of not less than 25% in
principal amount of the Debt Securities then outstanding (treated as one class)
may declare the principal of all such Debt Securities and interest accrued
thereon to be due and payable immediately, but upon certain conditions such
declarations may be annulled and past defaults may be waived (except a
continuing default in payment of principal, premium, if any, or interest on such
Debt Securities) by the holders of a majority in principal amount of the Debt
Securities of such series (or of all series, as the case may be) then
outstanding.
The Indenture contains a provision entitling the Trustee, subject to the
duty of the Trustee to act with the required standard of care, to be indemnified
by the holders of Debt Securities requesting the Trustee to exercise any right
or power under the Indenture before proceeding to exercise any such right or
power at the request of such holders.
The Indenture provides that no holder of Debt Securities of any series may
institute any action against the Issuer under the Indenture (except actions for
payment of overdue principal, premium, if any, or interest) unless such holder
previously shall have given to the Trustee written notice of default and
continuance thereof and unless the holders of not less than 25% in principal
amount of the Debt Securities of such series then outstanding shall have
requested the Trustee to institute such action and shall have offered the
Trustee reasonable indemnity, the Trustee shall not have instituted such action
within 60 days of such request and the Trustee shall not have received direction
inconsistent with such written request by the holders of a majority in principal
amount of the Debt Securities of such series then outstanding.
The Indenture contains a covenant that the Issuer will file annually with
the Trustee a certificate of no default or a certificate specifying any default
that exists.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
Legal Defeasance. The Indenture provides that the Issuer, at the Issuer's
option, will be discharged from any and all obligations in respect of the Debt
Securities of any series (except for certain obligations to register the
transfer or exchange of Debt Securities of any series, to replace stolen, lost
or mutilated Debt Securities of such series, to maintain paying agencies and to
hold monies for payment in trust) upon the deposit with the Trustee, in trust,
of cash and/or U.S. Government Obligations (as defined in the Indenture) which,
through the payment of interest and principal in respect thereof in accordance
with their terms, will provide money in an amount sufficient to pay and
discharge each installment of principal (and premium, if any) and interest, if
any, on, and any mandatory sinking fund payments in respect of, the Debt
Securities of such series on the stated maturity of such payments in accordance
with the terms of the Indenture and such Debt Securities. Such discharge may
occur only if, among other things, the Issuer has delivered to the Trustee an
opinion of counsel to the effect that the Issuer has received from, or there has
been published by, the United States Internal Revenue Service a ruling, or there
has been a change in tax law, in either case to the effect that such discharge
will not be deemed, or result in, a taxable event with respect to holders of the
Debt Securities of such series.
Covenant Defeasance. The Indenture provides that upon compliance with
certain conditions, the Issuer may omit to comply with the obligations imposed
by certain provisions of the Indenture (which contain the covenants described
above limiting liens, consolidations, mergers, transfers and leases) and any
omission to comply with such sections will not constitute an Event of Default.
The Issuer, in order to exercise such option, will be required to deposit with
the Trustee cash and/or U.S. Government Obligations which, through the payment
of interest and principal in respect thereof in accordance with
37
their terms, will provide money in an amount sufficient to pay and discharge
each installment of principal (and premium, if any) and interest, if any, on and
any mandatory sinking fund payments in respect of the Debt Securities of such
series on the stated maturity of such payments in accordance with the terms of
the Indenture and such Debt Securities. The Issuer will also be required to
deliver to the Trustee an opinion of counsel to the effect that the deposit and
related covenant defeasance will not cause the holders of the Debt Securities of
such series to recognize income, gain or loss for federal income tax purposes.
MODIFICATION OF THE INDENTURE
The Indenture provides that the Issuer and the Trustee may enter into
supplemental indentures without the consent of the holders of Debt Securities
to: (i) secure any Debt Securities, (ii) evidence the assumption by a successor
corporation of the obligations of the Issuer, (iii) add covenants for the
protection of the holders of Debt Securities, (iv) cure any ambiguity or correct
any inconsistency in the Indenture, provided that such cure or correction does
not adversely affect the holders of Debt Securities, (v) establish the forms or
terms of Debt Securities of any series and (vi) evidence the acceptance of
appointment by a successor trustee.
The Indenture also contains provisions permitting the Issuer and the
Trustee, with the consent of the holders of not less than a majority in
aggregate principal amount of Debt Securities of all series then outstanding and
affected (voting as one class), to add any provisions to, or change in any
manner or eliminate any of the provisions of, the Indenture or modify in any
manner the rights of the holders of the Debt Securities of each series so
affected; provided that the Issuer and the Trustee may not, without the consent
of the holder of each outstanding Debt Security affected thereby, (a) extend the
final maturity of any Debt Security, or reduce the principal amount thereof or
premium thereon, if any, or reduce the rate or extend the time of payment of
interest thereon, or reduce any amount payable on redemption thereof or change
the currency in which the principal thereof, premium, if any, or interest
thereon is payable or reduce the amount of the principal of any Debt Security
issued with original issue discount that is payable upon acceleration or
provable in bankruptcy or alter certain provisions of the Indenture relating to
the Debt Securities not denominated in U.S. dollars or impair the right to
institute suit for the enforcement of any payment on any Debt Security when due
or (b) reduce the aforesaid percentage in principal amount of Debt Securities of
any series, the consent of the holders of which is required for any such
modification.
CONCERNING THE TRUSTEE
PNC Bank, N.A., is the Trustee under the Indenture. All payments of
principal of, premium, if any, and interest on and all registration, transfer,
exchange, authentication and delivery of, the New Notes will be effected by the
Trustee at an office designated by the Trustee in New York, New York. The
Trustee is one of a number of banks with which the Issuer and its subsidiaries
maintain ordinary banking and trust relationships.
The Indenture contains certain limitations on the right of the Trustee,
should it become a creditor of the Issuer, to obtain payment of claims in
certain cases or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict or resign.
In case of any conflicting interest relating to the Trustee's duties with
respect to the nature and timingNew Notes, the Trustee shall either eliminate such conflicting
interest or, except as otherwise provided in the Trust Indenture Act of 1939, as
amended, resign.
The holders of a majority in principal amount of any potential
restructuring measures may require that nonrecurring charges, potentially
significant, be recorded in HEALTHSOUTH's income statements in periods
subsequentseries of Debt
Securities then outstanding will have the right to direct the time, method and
place of conducting any proceeding for exercising any remedy available to the
Merger. TheseTrustee with respect to such series of Debt Securities, provided that such
direction would not conflict with any rule of law or with the Indenture, would
not be unduly prejudicial to the rights of another holder of the Debt
Securities, and would not involve the Trustee in personal liability. The
Indenture provides that in case an Event of Default shall occur and be known to
the
38
Trustee (and not be cured), the Trustee will be required to use the degree of
care of a prudent person in the conduct of his or her own affairs in the
exercise of its power. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any of the holders of the Debt Securities, unless they shall have
offered to the Trustee security and indemnity satisfactory to it.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, STOCKHOLDERS OR INCORPORATORS
The Indenture provides that no past, present or future director, officer,
employee, stockholder or incorporator of the Issuer or any successor corporation
shall have any liability for any obligations of the Issuer under the New Notes
or the Indenture or for any claim based on, in respect of, or by reason of such
obligations or their creation, by reason of such person's or entity's status as
such director, officer, stockholder or incorporator.
GOVERNING LAW
The Indenture and New Notes will be governed by and construed in accordance
with the laws of the State of New York, without giving effect to such State's
conflicts of laws principles.
INFORMATION CONCERNING THE TRUSTEE
The Issuer and its subsidiaries may maintain deposit accounts and conduct
other banking transactions with the Trustee in the ordinary course of business.
39
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain United States federal
income tax considerations to holders of the New Notes. This discussion is based
upon the Internal Revenue Code of 1986, as amended (the "Code"), Treasury
Regulations, Internal Revenue Service ("IRS") rulings, and judicial decisions
now in effect, all of which are subject to change (possibly with retroactive
effect) or different interpretations.
This discussion does not deal with all aspects of United States federal
income taxation that may be important to holders of the New Notes and does not
deal with tax consequences arising under the laws of any foreign, state or local
jurisdiction. This discussion is for general information only, and does not
purport to address all tax consequences that may be important to particular
holders in light of their personal circumstances, or to certain types of charges would include all costs relatedholders
(such as certain financial institutions, insurance companies, tax-exempt
entities, dealers in securities or persons who hold the New Notes in connection
with a straddle) that may be subject to activitiesspecial rules. This discussion assumes
that each holder holds the New Notes as capital assets.
For the purpose of this discussion, a "Non-U.S. Holder" refers to any
holder who is not a United States person. The term "United States person" means
a citizen or employees of HEALTHSOUTH.
4. To adjust depreciation and amortization expense to reflect the purchase
price allocation of capitalized favorable leasehold value totaling $150,568,000,
client and customer lists totaling $34,091,000 and joint venture agreements
totaling $12,136,000 described in Note 2 above. These intangible assets are
being amortized over their estimated useful lives as follows:
Favorable leasehold value ...... 16 years
Client and customer lists ...... 8 years
Joint venture agreements ...... 10 years
5. To adjust depreciation and amortization expense to reflect the
allocationresident of the excess purchase priceUnited States, a corporation or partnership
(including any entity taxed as a partnership for U.S. federal income tax
purposes) created or organized in the United States or any state thereof, an
estate, the income of which is includible in income for the United States
federal income tax purposes regardless of its source, or a trust if (i) a court
within the United States is able to exercise primary supervision over the
net asset value acquired
totaling $159,887,000administration of the trust and $36,918,000 ($46,900,000(ii) one or more United States persons have the
authority to control all substantial decisions of the trust.
HOLDERS OF THE NOTES ARE URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING
THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE EXCHANGE,
OWNERSHIP AND DISPOSITION OF THE NEW NOTES AND THE EFFECT THAT THEIR PARTICULAR
CIRCUMSTANCES MAY HAVE ON SUCH TAX CONSEQUENCES.
EXCHANGE OF OLD NOTES FOR NEW NOTES
The terms of the New Notes are identical to those of the Old Notes, except
that the New Notes are registered under applicable federal securities laws.
Under applicable Treasury Regulations, the exchange of Old Notes for New Notes
pursuant to the Exchange Offer should not be treated as an "exchange" for
federal income tax purposes. If, however, the exchange of Old Notes for New
Notes were treated as an "exchange" for federal income tax purposes, such
transactions should constitute a recapitalization for federal income tax
purposes and holders of the Old Notes should not recognize any gain or loss on
such exchanged. The term "New Notes" utilized in costs less the estimated
$9,982,000following sections means,
in certain contexts, the Old Notes an New Notes considered as one and the same
evidences of indebtedness in applying the federal income tax benefit) describedrule in question.
TAX CONSIDERATIONS APPLICABLE TO UNITED STATES PERSONS
Interest on New Notes. Interest paid on the New Notes 2 and 3 above. Inwill be taxable to a
holder as ordinary interest income in accordance with its
stated policy, managementthe holder's method of HEALTHSOUTH evaluates each acquisition
independentlytax
accounting at the time that such interest is accrued or (actually or
constructively) received.
Sale or Exchange of New Notes. In general, a holder of the New Notes will
recognize gain or loss upon the sale, redemption, retirement or other
disposition of the New Notes measured by the difference between the amount of
cash and the fair market value of any property received (except to determine the appropriate amortization period forextent
attributable to the payment of accrued interest which will be taxable as such)
and the holder's adjusted tax basis in the New Notes. A holder's tax basis in
the New Notes generally will equal 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
65
markets, lease terms where applicable, and the legal terms of partnership
agreements where applicable. Based on its preliminary evaluations, management of
HEALTHSOUTH has determined that the cost in excess of net asset value relatedOld Notes to the proposed Merger shouldholder
increased by the amount of market discount, if any, previously taken into income
by the holder or decreased by any bond premium theretofore amortized by the
holder with respect to the New Notes. Subject to the market discount rules
discussed below, the gain or loss on the
40
disposition of the New Notes will be amortized overcapital gain or loss and will be long-term
gain or loss if the New Notes have been held for more than one year at the time
of such disposition. For non-corporate taxpayers, the lower capital gain tax
rates enacted as part of the Taxpayer Relief Act of 1997 (the "1997 Act"), do
not apply to gains from the sale or exchange of the New Notes held for 18 months
or less. The pre-1997 Act 28% maximum tax rate continues to apply to gains from
the sale or exchange of capital assets held more than one year but not more than
18 months.
Market Discount. The resale of the New Notes may be affected by the "market
discount" provisions of the Code. For this purpose, the market discount on a
40-year periodNote will generally be equal to the amount, if any, by which the stated
redemption price at maturity of the New Notes immediately after its acquisition
exceeds the holder's tax basis in the New Notes. Subject to a de minimis
exception, these provisions generally require a holder of a New Note acquired at
a market discount to treat as ordinary income any gain recognized on the
disposition of such New Notes to the extent of the "accrued market discount" on
such New Notes at the time of disposition. In general, market discount on a New
Note will be treated as accruing on a straight-line basis over the term of such
New Notes, or, at the election of the holder, under a constant yield method.
Holders may elect to include accrued market discount in income currently with
respect to all market discount bonds acquired on or after the first day of the
first taxable year for which the election is effective and for any such bond on
either a straight-line or constant yield basis. BecauseIn the Merger is structured asabsence of such election,
a stock-for-stock merger,holder of New Notes acquired at a market discount may be required to defer the
amortizationdeduction of capitalized leasehold value, goodwill and other intangible
assets describeda portion of the interest on any indebtedness incurred or
maintained to acquire or carry the New Notes until the New Notes are disposed of
in a taxable transaction.
TAX CONSIDERATIONS APPLICABLE TO NON-U.S. HOLDERS
Interest on New Notes. Generally, interest paid on the New Notes 4 and 5 aboveto a
Non-U.S. Holder will not be deductible forsubject to United States federal income tax purposes. Therefore, no adjustmentif: (i)
such interest is not effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Holder; (ii) the Non-U.S.
Holder does not actually or constructively own 10% or more of the total voting
power of all classes of stock of the Issuer entitled to vote and is not a
controlled foreign corporation with respect to which the Issuer is a "related
person" within the meaning of the Code; and (iii) the beneficial owner, under
penalty of perjury, certifies that the owner is not a United States person and
provides the owner's name and address. If certain requirements are satisfied,
the certification described in clause (iii) above may be provided by a
securities clearing organization, a bank, or other financial institution that
holds customers' securities in the ordinary course of its trade or business. A
holder that is not exempt from tax under these rules will be subject to United
States federal income tax withholding at a rate of 30% unless the interest is
effectively connected with the conduct of a United States trade or business, in
which case the interest will be subject to the provision forUnited States federal income taxestax
on net income that applies to United States persons generally. Non-U.S. Holders
should consult applicable income tax treaties, which may provide different
rules.
Sales or Exchange of New Notes. A Non-U.S. Holder generally will not be
subject to United States federal income tax on gain recognized upon the sale or
other disposition of the New Notes unless (i) the gain is madeeffectively connected
with the conduct of a trade or business within the United States by the Non-U.S.
Holder, or (ii) in the accompanying pro forma income statement.
6. To adjust pro forma share amounts based on historical share amounts,
converting each outstanding share of Horizon/CMS Common Stock into 0.84338case of a shareNon-U.S. Holder who is a nonresident alien
individual and holds the New Notes as a capital asset, such holder is present in
the United States for 183 or more days in the taxable year and certain other
circumstances are present. If the Issuer is a "United States real property
holding corporation", a Non-U.S. Holder may be subject to federal income tax
with respect to gain realized on the disposition of HEALTHSOUTH Common Stock.
66such New Notes as if it were
effectively connected with a United States trade or business and the amount
realized would then be subject to withholding at the rate of 10%. The amount
withheld pursuant to these rules will be creditable against such Non-U.S.
Holder's United States federal income tax liability and may entitle such
Non-U.S. Holder to a refund upon furnishing the required information to the
Internal Revenue Service. Non-U.S. Holders should consult applicable income tax
treaties, which may provide different rules.
41
INFORMATION REPORTING AND BACKUP WITHHOLDING
U.S. Holders. Information reporting and backup withholding may apply to
payments of interest on or the proceeds of the sale or other disposition of the
New Notes with respect to certain non-corporate U.S. holders. Such U.S. holders
generally will be subject to backup withholding at a rate of 31% unless the
recipient of such payment supplies a taxpayer identification number, certified
under penalties of perjury, as well as certain other information, or otherwise
establishes, in the manner prescribed by law, an exemption from backup
withholding. Any amount withheld under backup withholding is allowable as a
credit against the U.S. holder's federal income tax liability, upon furnishing
the required information.
Non-U.S. Holders. Generally, information reporting and backup withholding
of United States federal income tax at a rate of 31% may apply to payments of
principal, interest and premium (if any) to Non-U.S. Holders if the payee fails
to certify that the holder is not a United States person or if the Issuer or its
paying agent has actual knowledge that the payee is a United States person. The
31% backup withholding tax generally will not apply to interest paid to foreign
holders outside the United States that are subject to 30% withholding as
discussed above (see "Tax Considerations Applicable to Non-U.S. Holders --
Interest on New Notes") or that are subject to a tax treaty that reduces such
withholding.
The payment of the proceeds on the disposition of New Notes to or through
the United States office of a United States or foreign broker will be subject to
information reporting and backup withholding unless the owner provides the
certification described above or otherwise establishes an exemption. The payment
of the proceeds of the disposition by a Non-U.S. Holder of New Notes to or
through a foreign office of a broker will not be subject to backup withholding.
However, if such broker is a U.S. person, a controlled foreign corporation for
United States tax purposes, or a foreign person 50% or more of whose gross
income from all sources for certain periods is from activities that are
effectively connected with a United States trade or business, information
reporting will apply unless such broker has documentary evidence in its files of
the owner's foreign status and has no actual knowledge to the contrary or unless
the owner otherwise establishes an exemption. Both backup withholding and
information reporting will apply to the proceeds from such dispositions if the
broker has actual knowledge that the payee is a U.S. Holder.
The Treasury Department recently promulgated final regulations regarding
the withholding and information reporting rules discussed above. In general, the
final regulations do not significantly after the substantive withholding and
information reporting requirements but rather unify current certification
procedures and forms and clarify reliance standards. As originally promulgated,
the final regulations were to be generally effective for payments made after
December 31, 1998, subject to certain transition rules; however, the Treasury
Department and the IRS subsequently announced that the December 31, 1998 date
would be extended to December 31, 1999. Non-U.S. Holders should consult their
own tax advisors with respect to the impact, if any, of the new final
regulations.
42
BUSINESS OF HEALTHSOUTH
GENERAL
HEALTHSOUTH is the nation's largest provider of outpatient surgery and
rehabilitative healthcare services. HEALTHSOUTHIt provides these services through its
national network of outpatient and inpatient rehabilitation facilities,
outpatient surgery centers, diagnostic centers, occupational medicalmedicine centers,
medical centers and other healthcare facilities. HEALTHSOUTH believes that it
provides patients, physicians and payors with high-quality healthcare services
at significantly lower costs than traditional inpatient hospitals. Additionally,
HEALTHSOUTH's national network, reputation for quality and focus on outcomes has
enabled it to secure contracts with national and regional managed care payors.
At June 30, 1997,1998, HEALTHSOUTH had over 1,2501,900 patient care locations in 50
states, and the United Kingdom.Kingdom and Australia.
In its outpatient and inpatient rehabilitation facilities, HEALTHSOUTH
provides interdisciplinary programs for the rehabilitation of patients
experiencing disability due to a wide variety of physical conditions, such as
stroke, head injury, orthopaedic problems, neuromuscular disease and
sports-related injuries. HEALTHSOUTH's rehabilitation services include physical
therapy, sports medicine, work hardening, neurorehabilitation, occupational
therapy, respiratory therapy, speech-language pathology and rehabilitation
nursing. Independent studies have shown that rehabilitation services like those
provided by HEALTHSOUTH can save money for payors and employers.
In addition to its rehabilitation facilities, HEALTHSOUTH operates one of
the
largest networksnetwork of free-standingfreestanding outpatient surgery centers in the United States.
HEALTHSOUTH's outpatient surgery centers provide the facilities and medical
support staff necessary for physicians to perform non-emergency surgical
procedures. While outpatient surgery is widely recognized as generally less
expensive than surgery performed in a hospital, HEALTHSOUTH believes that
outpatient surgery performed at a free-standingfreestanding outpatient surgery center is
generally less expensive than hospital-based outpatient surgery. ApproximatelyOver 80% of
HEALTHSOUTH's surgery center facilities are located in markets served by its
rehabilitative service facilities, enabling HEALTHSOUTHthe Issuer to pursue opportunities
for cross-referrals.
HEALTHSOUTH is also among the largest operators of outpatient diagnostic
centers and occupational medicine centers in the United States. Most of
HEALTHSOUTH's diagnostic centers and occupational medicine centers operate in
markets where HEALTHSOUTH also provides rehabilitative healthcare and outpatient
surgery services. HEALTHSOUTH believes that its ability to offer a comprehensive
range of its services in a particular geographic market makes HEALTHSOUTH more
attractive to both patients and payors in such market.
Over the last twothree years, HEALTHSOUTH has completed several significant
acquisitions in the rehabilitation business and has expanded into the surgery
center, diagnostic and occupational medicine businesses. HEALTHSOUTH believes
that these acquisitions complement its historical operations and enhance its
market position. HEALTHSOUTH further believes that its expansion into the
outpatient surgery, diagnostic and occupational medicine businesses provides it
with a platformplatforms for future growth. HEALTHSOUTH is continually evaluating
potential acquisitions in the outpatient and rehabilitative healthcare services
industry.
Company StrategyHEALTHSOUTH was organized as a Delaware corporation in February 1984.
HEALTHSOUTH's principal executive offices are located at One HealthSouth
Parkway, Birmingham, Alabama 35243, and its telephone number is (205) 967-7116.
HEALTHSOUTH STRATEGY
HEALTHSOUTH's principal objective is to be the provider of choice for
patients, physicians and payors alike for outpatient surgery and rehabilitative
healthcare services throughout the United States. HEALTHSOUTH's growth strategy
is based upon four primary elements: (i) the implementation of HEALTHSOUTH's
integrated service model in appropriate markets, (ii) successful marketing to
managed care organizations and other payors, (iii) the provision of
high-quality, cost-effective healthcare services, and (iv) the expansion of its
national network.
43
o Integrated Service Model. HEALTHSOUTH seeks, where appropriate, to provide
an integrated system of healthcare services, including outpatient
rehabilitation services, inpatient rehabilitation services, ambulatory
surgery services and outpatient diagnostic services. HEALTHSOUTH believes
that its integrated system offers payors the convenience of dealing with a
single provider for multiple services. Additionally, it believes that its
facilities can provide extensive cross-referral opportunities. For
example, HEALTHSOUTH estimates that approximately one-third of its
outpatient rehabilitation patients have had outpatient surgery, virtually
all inpatient rehabilitation 67
patients will require some form of outpatient
rehabilitation, and virtually all inpatient rehabilitation patients have
had some type of diagnostic procedure. HEALTHSOUTH has implemented its
integrated service modelIntegrated Service Model in certain of its markets, and intends to expand
the model into other appropriate markets.
o Marketing to Managed Care Organizations and Other Payors. Since the late
1980s, HEALTHSOUTH has focused on the development of contractual
relationships with managed care organizations, major insurance companies,
large regional and national employer groups and provider alliances and
networks. HEALTHSOUTH's documented outcomes and experience with several
hundred thousand patients in delivering quality healthcare services at
reasonable prices has enhanced its attractiveness to such entities and has
given HEALTHSOUTH a competitive advantage over smaller and regional
competitors. These relationships have increased patient flow to
HEALTHSOUTH's facilities and contributed to HEALTHSOUTH's same-store
growth.
o Cost-Effective Services. HEALTHSOUTH's goal is to provide high-quality
healthcare services in cost-effective settings. To that end, HEALTHSOUTH
has developed standardized clinical protocols for the treatment of its
patients. This results in "best practices" techniques being utilized at
all of HEALTHSOUTH's facilities, allowing the consistent achievement of
demonstrable, cost-effective clinical outcomes. HEALTHSOUTH's reputation
for its clinical programs is enhanced through its relationships with major
universities throughout the nation, and its support of clinical research
in its facilities. Further, independent studies estimate that, for every
dollar spent on rehabilitation, $11 to $35 is saved. Finally, surgical
procedures typically are less expensive in outpatient surgery centers than
in hospital settings. HEALTHSOUTH believes that outpatient and
rehabilitative healthcare services will assume increasing importance in
the healthcare environment as payors continue to seek to reduce overall
costs by shifting patients to more cost-effective treatment
settings.
o Expansion of National Network. As the largest provider of outpatient
surgery and rehabilitative healthcare services in the United States,
HEALTHSOUTH is able to realize economies of scale and compete successfully
for national contracts with large payors and employers while retaining the
flexibility to respond to particular needs of local markets. The national
network affords HEALTHSOUTH the opportunity to offer large national and
regional employers and payors the convenience of dealing with a single
provider, to utilize greater buying power through centralized purchasing,
to achieve more efficient costs of capital and labor and to more
effectively recruit and retain clinicians. HEALTHSOUTH believes that its
recent acquisitions in the outpatient surgery, and diagnostic imaging and
occupational medicine fields will further enhance its national presence by
broadening the scope of its existing services and providing new
opportunities for growth. These national benefits are realized without
sacrificing local market responsiveness. HEALTHSOUTH's objective is to
provide those outpatient and rehabilitative healthcare services needed
within each local market by tailoring its services and facilities to that
market's needs, thus bringing the benefits of nationally recognized
expertise and quality into the local setting.
RECENT DEVELOPMENTS
On July 1, 1998, HEALTHSOUTH acquired 33 ambulatory surgery centers from
Columbia/HCA Healthcare Corporation. The surgery centers are located in Alabama,
California, Iowa, Illinois, Kentucky, Louisiana, Minnesota, Mississippi, North
Carolina, Nevada, Oregon, Rhode Island and Texas.
44
Effective July 31, 1998, HEALTHSOUTH entered into certain other arrangements to
acquire substantially all of the economic benefit of Columbia/HCA's interest in
one additional surgery center. The transaction was valued at approximately
$550,000,000.
On July 22, 1998, HEALTHSOUTH acquired National Surgery Centers, Inc.,
adding 40 outpatient surgery centers in 14 states to HEALTHSOUTH's existing
network of outpatient surgery and rehabilitative healthcare facilities. The
value of the NSC transaction is approximately $590,000,000. Under the terms of
the NSC agreement, NSC stockholders will receive 1.0972 shares of HEALTHSOUTH
Common Stock. The NSC transaction is expected to be accounted for as a pooling
of interests and is intended to be a tax-free reorganization.
PATIENT CARE SERVICES: GENERALSERVICES
HEALTHSOUTH began its operations in 1984 with a focus on providing
comprehensive orthopaedic and musculoskeletal rehabilitation services on an
outpatient basis. Over the succeeding 1314 years, HEALTHSOUTH has consistently
sought and implemented opportunities to expand its services through acquisitions
and de novo development activities that complement its historic focus on
orthopaedic, sports medicine and occupational medicine services and that provide
independent platforms for growth. HEALTHSOUTH's acquisitions and internal growth
have enabled it to become the largest provider of rehabilitative healthcare
services, both inpatient and outpatient, in the United States.States, as well as the
largest operator of freestanding outpatient surgery centers. In addition,
HEALTHSOUTH has added outpatient surgerydiagnostic imaging services, diagnostic imagingoccupational medicine
services and other outpatient services which provide natural enhancements to its
rehabilitative healthcare locations and facilitate the implementation of its
integrated service model.Integrated Service Model. HEALTHSOUTH believes that these additional businesses
also provide opportunities for growth in other areas not directly related to the
rehabilitative business, and HEALTHSOUTH intends to pursue further expansion in
those businesses.
68
OUTPATIENT REHABILITATION SERVICESOutpatient Rehabilitation Services
HEALTHSOUTH operates the largest group of affiliated proprietary outpatient
rehabilitation facilities in the United States. HEALTHSOUTH's outpatient
rehabilitation centers offer a comprehensive range of rehabilitative healthcare
services, including physical therapy and occupational therapy, that are tailored
to the individual patient's needs, focusing predominantly on orthopaedic
injuries, sports injuries, work injuries, hand and upper extremity injuries,
back injuries, and various neurological and neurological/neuromuscular conditions. As of June 30,
1997,1998, HEALTHSOUTH provided outpatient rehabilitative healthcare services through
approximately 8301,240 outpatient locations, including freestanding outpatient
centers and their satellites, and outpatient satellites of inpatient facilities.facilities and
outpatient facilities managed under contract.
Inpatient Services
INPATIENT REHABILITATION SERVICESFACILITIES. At June 30, 1997,1998, HEALTHSOUTH operated
99131 inpatient rehabilitation facilities with 5,8697,717 beds in the United States,
representing the largest group of affiliated proprietary inpatient
rehabilitation facilities in the United States.nation, as well as a 71-bed rehabilitation
hospital in Australia. HEALTHSOUTH's inpatient rehabilitation facilities provide
high-quality comprehensive services to patients who require intensive
institutional rehabilitation care. Certain ofIn certain markets HEALTHSOUTH's
inpatient rehabilitation facilities alsohospitals may provide outpatient rehabilitation services for patients who have completedas a
complement to their inpatient course
of treatment but remain in need of additional therapy that can be accomplished
on an outpatient basis.services.
MEDICAL CENTERSCENTERS. At June 30, 1997,1998, HEALTHSOUTH operated four medical
centers with 800 licensed beds in four distinct markets. These facilities
which are licensed as
general, acute-care hospitals, provide general and specialty medical and surgical healthcare services,
emphasizing orthopaedics, sports medicine and rehabilitation.
SURGERY CENTERS
As a result of three acquisitions of major surgery center operators in 1995
and early 1996,Surgery Centers
HEALTHSOUTH became one ofis currently the largest operatorsoperator of outpatient surgery centers
in the United States. At June 30, 1997,1998, it operated approximately 142 free-standing176 freestanding surgery
centers, including five mobile lithotripsy units, in 34 states, and had an additional ten free-standing surgery
centers under development. Approximately36 states. Over 80% of
these facilities are located in markets served by HEALTHSOUTHHEALTHSOUTH's
45
outpatient and rehabilitative service facilities, enabling HEALTHSOUTH to pursue
opportunities for cross-referrals between surgery and rehabilitative facilities
as well as to centralize administrative functions. HEALTHSOUTH's surgery centers
provide the facilities and medical support staff necessary for physicians to
perform non-emergency surgical procedures that do
not generally require overnight hospitalization.procedures. Its typical surgery center is a
free-standingfreestanding facility with twothree to six fully equipped operating and procedure
rooms and ancillary areas for reception, preparation, recovery and
administration. Each of HEALTHSOUTH's surgery centers is available for use only
by licensed physicians, oral surgeons and podiatrists, and the centers generally do not
perform surgery on an emergency basis.
Outpatient surgery centers, unlike hospitals, have not historically
provided overnight accommodations, food services or other ancillary services.
Over the past several years, states have increasingly permitted the use of
extended-stay recovery facilities by outpatient surgery centers. As a result,
many outpatient surgery centers are adding extended recovery care capabilities
where permitted. Fifty-twoMost of HEALTHSOUTH's surgery centers currently provide for
extended recovery stays. HEALTHSOUTH'sThe Issuer's ability to develop such recovery care
facilities is dependent upon state regulatory environments in the particular
states where its centers are located.
DIAGNOSTIC CENTERSDiagnostic Centers
At June 30, 1997,1998, HEALTHSOUTH operated 77119 diagnostic centers in 18 states.25 states
and the United Kingdom. These centers provide outpatient diagnostic imaging
services, including magnetic resonance imaging ("MRI"), computerized tomography
("CT") services, X-ray services, ultrasound services, mammography services,
nuclear medicine services and fluoroscopy. Not all services are provided at all
sites; however, most of HEALTHSOUTH's diagnostic centers are multi-modality
centers.
69
TheBecause many patients at HEALTHSOUTH's rehabilitative healthcare and
outpatient surgery facilities require diagnostic procedures of the type
performed at its diagnostic centers, HEALTHSOUTH believes that its diagnostic
operations are a natural complement to its other services and enhance its
ability to market those services to patients and payors.
Occupational Health Services
At March 31, 1998, HEALTHSOUTH operated by HEALTHSOUTH include the centers acquired
in the March 3, 1997 acquisition of Health Images, Inc., which operated a total
of 55 diagnostic imaging centers, including six122 occupational health centers in
the United Kingdom.
The Health Images centers are located in 13 states, including seven states where
HEALTHSOUTH did not previously operate freestanding diagnostic imaging centers.
In addition, the Health Images acquisition provides HEALTHSOUTH with its first
sites in the United Kingdom.
OCCUPATIONAL MEDICINE SERVICES
HEALTHSOUTH's December 1996 acquisition of ReadiCare, Inc. brought it 37
freestanding occupational medicine centers in California and Washington.33 states. These centers provide cost-effective, outpatient primary medical care
and rehabilitation services to individuals for the treatment of work-related
medical problems.
WhileHEALTHSOUTH's occupational health centers market their services to large
and small employers, workers' compensation and health insurers and managed care
organizations. The services provided at HEALTHSOUTH's occupational health
centers include outpatient primary medical care for work-related injuries and
illnesses, work-related physical examinations, physical therapy services and
workers' compensation medical services, as well as other services primarily
aimed at work-related injuries or illnesses. Medical services at the centers are
provided by licensed physicians who are employed by or under contract with
HEALTHSOUTH has historically provided occupational medicineor affiliated medical practices. These centers also employ nurses,
therapists and other licensed professional staff as necessary for the services
through certain of its outpatient rehabilitation centers and associated
physicians,provided. HEALTHSOUTH believes that occupational health primary care services
are a strategic component of its business, and that the ReadiCare acquisition provides it with
an additional platform for growth, and HEALTHSOUTH intendsphysicians in its
occupational medicine centers can, in many cases, serve as "gatekeepers"
providing access to pursue additional
expansion in that arena.
OTHER PATIENT CARE SERVICESthe other services offered by HEALTHSOUTH.
Other Patient Care Services
In certain of its markets, HEALTHSOUTH provides other patient care
services, including home healthcare, diagnostic services, physician services and contract management
of hospital-based rehabilitative healthcare services. HEALTHSOUTH evaluates
market opportunities on a case-by-case basis in determining whether to provide
additional services of these types, which may be complementary to facility-based
services provided by HEALTHSOUTH or stand-alone businesses.
7046
LOCATIONS
The following table sets forth a listing of HEALTHSOUTH's patient care
services locations by state at June 30, 1997:
OUTPATIENT INPATIENT MEDICAL
REHABILITATION REHABILITATION CENTERS SURGERY DIAGNOSTIC OTHER
STATE CENTERS(1) FACILITIES (BEDS)(2) (BEDS)(2) CENTERS CENTERS SERVICES
- ---------------------- ---------------- ---------------------- ----------- --------- ------------ ---------
Alabama 20 9 (389) 1 (219) 5 5 10
Alaska 7 1 1
Arizona 29 3 (183) 2
Arkansas 1 1 (80) 2 6
California 52 1 (60) 24 36
Colorado 29 5 7 12
Connecticut 21 2 (40) 1
Delaware 7 2
District of Columbia 1 1
Florida 50 9 (653) 1 (285) 19 4 11
Georgia 23 1 (75) 3 8
Hawaii 6 1
Idaho 1 1
Illinois 47 2 3
Indiana 14 1 (80) 2 1
Iowa 3 1
Kansas 6 1
Kentucky 3 1 (40) 2
Louisiana 3 1 (43) 1 2 1
Maine 9 4 (155) 1
Maryland 15 1 (44) 3 4
Massachusetts 37 10 (639) 1 2 10
Michigan 4 1
Minnesota 11
Mississippi 2
Missouri 34 4 (107) 8 6
Montana 1
Nebraska 2
Nevada 4
New Hampshire 13 3 (148)
New Jersey 59 2 (170) 2 2 3
New Mexico 5 1 (60) 1 1
New York 43 1 (27) 1
North Carolina 14 3
North Dakota 1
Ohio 33 1 (24) 4 3
Oklahoma 11 1 (111) 2 1 1
Oregon 9 1
Pennsylvania 31 12 (1,041) 6 6
Rhode Island 3
South Carolina 9 4 (235) 2 5
South Dakota 1
Tennessee 16 7 (406) 7 5
Texas 75 10 (633) 1 (96) 13 16 14
Utah 1 1 (86) 1
Vermont 1 2 (52)
Virginia 14 2 (84) 1 (200) 1 3 10
Washington 39 2 3 13
West Virginia 4 (200) 1
Wisconsin 3 4
Wyoming 3
- ----------
(1) Includes freestanding outpatient centers and their satellites and outpatient
satellites of inpatient rehabilitation facilities.
(2) "Beds" refersPLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the number of beds for which a license or certificate of
need has been granted, which may vary materially from beds available for
use.
71
BUSINESS OF HORIZON/CMS
PATIENT CARE SERVICES: GENERAL OVERVIEW
Horizon/CMS is a leading provider of post-acute healthcare services
principally in the Midwest, Southwest and Northeast regions of the United
States. Post-acute care is the provision of a continuum of care to patients for
the twelve-month period following discharge from an acute care hospital.
Horizon/ CMS provides inpatient post-acute care services through freestanding
acute rehabilitation hospitals and managed rehabilitation units within acute
care hospitals in 14 states, specialty hospitals and subacute care units in 11
states, and outpatient post-acute care services including outpatient
rehabilitative services through 288 clinics in 25 states, home healthcare
agencies in four states, and home respiratory/home infusion therapy supplies and
services in nine states. Horizon/CMS also provides post-acute patient care
services to a variety of customers under contractual arrangements including
contract rehabilitation therapy services in 36 states, physician and allied
health professional placement/staffing services throughout the United States,
institutional pharmacy services in 16 states, a clinical laboratory, physician
practice management in three states, and mobile x-ray services in eight states.
The Company provides long-term care services (including Alzheimer's care,
assisted living services and hospice care) through 135 long-term care facilities
in 17 states and five assisted living facilities in three states.
INPATIENT CARE SERVICES
Acute Rehabilitation Hospitals/Unit Management. At May 31, 1997,
Horizon/CMS operated 30 freestanding comprehensive acute rehabilitation
hospitals with a total of 1,976 beds, 1,790 of which are licensed rehabilitation
beds, in 14 states. Horizon/CMS operates many of its rehabilitation hospitals
through joint ventures with local general acute care hospitals, physicians and
other investors. The acute rehabilitation hospitals also typically provide
on-site outpatient rehabilitation services.
In addition, Select Rehab, Horizon/CMS's rehabilitation unit management
group, operates inpatient and outpatient rehabilitation programs within acute
care hospitals. At May 31, 1997, Horizon/CMS managed 15 rehabilitation units
with more than 270 beds in such acute care hospitals.
Specialty Hospitals/Subacute Care Units. Horizon/CMS provides subacute care
to high acuity patients with medically complex conditions who require ongoing,
multi-disciplinary nursing and medical supervision and access to specialized
equipment and services but who do not require many other services provided by an
acute care hospital. Horizon/CMS provides subacute care services through its
specialty hospitals and subacute care units. Generally, these specialty
hospitals and subacute care units are located in separate areas within the
physical structures of the Company's long-term care facilities and are
supervised by separate nursing and administrative staffs employed by
Horizon/CMS. At May 31, 1997, Horizon/CMS operated 36 specialty hospitals and
subacute care units, including one freestanding specialty hospital, with 852
beds in 11 states.
Horizon/CMS's specialty hospitals each hold hospital licenses and are
certified for participation in the Medicare program as acute long-term care
hospitals. In contrast, Horizon/CMS's subacute care units are operated under
long-term care facility licenses and are certified for participation in the
Medicare program as skilled nursing facilities. The hospital licenses, and the
consequent acute long-term care hospital certifications, permit Horizon/CMS to
provide higher acuity services and to receive, where appropriate, higher
reimbursement rates than the subacute care units.
Long-Term Care Facilities. Horizon/CMS's long-term care facilities provide
routine basic patient services to geriatric and other patients with respect to
daily living activities and general medical needs. These basic patient services
include daily dietary services, recreational activities, social services,
housekeeping and laundry services, pharmaceutical and medical supplies and 24
hours-a-day access to registered nurses, licensed practical nurses and related
services prescribed by the patient's physician. At May 31, 1997, Horizon
operated 135 long-term care facilities (16,792 beds), of which 44 were owned
(5,577 beds) and 79 were leased (9,630 beds), and also managed 12 long-term care
facilities (1,585 beds), located in a total of 17 states.
72
Horizon/CMS announced on May 12, 1997Exchange Offer must acknowledge that it had agreed to terminate
certain agreements ("Management Agreements") between its wholly-owned
subsidiary, Horizon Facilities Management, Inc. ("HFM"), and Texas Health
Enterprises, Inc. and certain of its affiliates (collectively, the "HEA Group").
Under the Management Agreements, which were originally effective January 1,
1996, HFM provided management and administrative services for 126 nursing
facilities located in Texas, Oklahoma and Michigan.
Alzheimer's Care Units. Horizon/CMS offerswill deliver a specialized program for
persons diagnosed with Alzheimer's disease through its Alzheimer's centers. At
May 31, 1997, Horizon/CMS had instituted this program at 27 of its long-term
care facilities, with a total of 865 beds. Each Alzheimer's center is located in
a designated wing of a long-term care facility. Horizon/CMS designed its
Alzheimer's care program to address the problems of disorientation experienced
by Alzheimer's patients and to help reduce stress and agitation resulting from a
short attention span and hyperactivity.
Assisted Living Facilities. Horizon/CMS's assisted living facilities
provide a full array of services to people who can no longer live by themselves,
but who do not require the high level of nursing services provided by a
long-term care facility. Residents live in upscale studio or one or two bedroom
units and have a number of services available, including three meals, weekly
housekeeping, laundry, social and recreational activities, personal support and
health care services. Horizon/CMS currently operates five assisted living
facilities with 345 beds in three states.
Hospice Care. Horizon/CMS provides hospice care in Texas to
institutionalized, terminally ill patients. Hospice care includes the provision
of all durable medical equipment, intravenous therapies and pharmaceuticals
incident to such care.
OUTPATIENT CARE SERVICES
Outpatient Rehabilitation Clinics. Horizon/CMS provides rehabilitation
therapy services to ambulatory patients recovering from industrial injuries,
sports-related injuries and other general orthopaedic conditions. Horizon/CMS's
outpatient clinics provide rehabilitation programs dedicated to industrial
reconditioning, sports medicine, aquatic therapy, back stabilization, arthritis,
osteoporosis, pain management, total joint replacement and general
rehabilitation. At May 31, 1997, Horizon/CMS provided outpatient rehabilitation
services through 288 outpatient clinics in 25 states.
Home Healthcare. Horizon/CMS provides home healthcare services principally
in Nevada, Texas, Florida and Virginia. Horizon/CMS provides specialized home
nursing services, outpatient health care services, home medical equipment,
intravenous therapy and management and consulting services for hospital-home
care departments, skilled nursing facilities and rural health clinics.
Physician Practices. Horizon/CMS owns and operates ten orthopedic sites and
one neurology practice employing 23 physicians in South Florida as a complement
to its outpatient rehabilitative services in that geographic area.
Home Respiratory/Home Infusion. Horizon/CMS provides home respiratory care
services and supplies to home care patients in Texas, Oklahoma, Arkansas,
Louisiana, Tennessee and Kentucky through a physician referral base. Horizon/CMS
employs a fully-trained nursing staff to perform these services, which include
the provision of home infusion and intravenous therapies. Supplies provided by
Horizon/ CMS include gas and liquid oxygen cylinders, oxygen concentrators and
aerosol nebulizers.
PATIENT CARE SERVICES PROVIDED UNDER CONTRACT
Contract Rehabilitation Therapies. Horizon/CMS provides a comprehensive
range of rehabilitation therapies, including physical, occupational, respiratory
(including inpatient and outreach services) and speech therapy services to
skilled nursing facilities, general acute care hospitals, schools, home health
agencies, inpatient rehabilitation hospitals and outpatient clinics. As of May
31, 1997, Horizon/CMS provided these services through 1,453 contracts in 36
states, 156 of which are with Horizon/CMS operated long-term care facilities,
specialty hospitals and subacute facilities, and the remainder of which are with
third party long-term care facilities, home health agencies, hospitals,
outpatient clinics or schools systems.
73
Physician/Allied Health Professional Placement Services. Horizon/CMS
provides physician and allied health professional placement services ("locum
tenens" services) to institutional providers and physician practice groups
throughout the United States. Horizon/CMS recruits, credentials and places these
healthcare professionals in appropriate short-term, long-term or permanent
positions in most physician and allied healthcare specialties. Horizon/CMS also
provides credentialling assistance, recruitment outsourcing, staff planning
services and educational programs for physicians and healthcare executives.
Institutional Pharmacy. Horizon/CMS has established a network of 35
regionally located pharmacies in 22 states through which it provides a full
range of prescription drugs and infusion therapy services, such as antibiotic
therapy, pain management and chemotherapy, to facilities operated by Horizon/CMS
and by third parties. These facilities contain, in the aggregate, approximately
44,400 beds.
Physician Practice Management. Horizon/CMS provides physician practice
management services in Nevada, Arizona, New Jersey, California, Pennsylvania
and Southern Florida.
Clinical Laboratory Services. Horizon/CMS operates a comprehensive clinical
laboratory, located in Dallas, Texas, to serve the long-term care industry. The
clinical laboratory provides bodily fluid testing services to assist in
detecting, diagnosing and monitoring diseases. At May 31, 1997, the laboratory
provided services under contract to 108 facilities. Of these facilities, which
contain in the aggregate approximately 13,478 beds, 70 (containing 9,271 beds)
are operated by Horizon/CMS and 38 (containing 4,207 beds) are operated by third
parties.
Mobile X-Ray Services. Horizon/CMS provides portable x-ray services by way
of mobile units to patients in both the hospital and the skilled nursing
facility settings. Horizon/CMS provides these services in Arizona, Texas, New
Mexico, Florida, Oklahoma, Nevada, Georgia and Ohio.
74
FACILITIES
Certain information regarding the facilities operated or managed by
Horizon/CMS at May 31, 1997 is provided in the following table.
ACUTE OUTPATIENT
REHABILITATION SPECIALTY LONG-TERM REHABILITATION
HOSPITALS HOSPITALS SUBACUTE CARE CLINICS PHARMACY
--------------- -------------- -------------- ---------------- --------------- ---------
STATE UNITS BEDS UNITS BEDS UNITS BEDS UNITS BEDS UNITS UNITS
- ---------------------- ------- ------- ------- ------ ------- ------ ------- -------- --------------- ---------
Alabama ............ - - - - - - - - 1 -
Arizona ............ 1 60 - - - - - - 6 -
Arkansas ............ 3 170 - - 1 10 - - 12 2
California ......... - - - - - - - - 9 -
Colorado ............ 1 64 - - - - 2 362 10 -
Connecticut(1) ...... - - - - - - 3 585 - 1
Florida(2) ......... 1 60 - - 3 76 9 909 25 1
Georgia ............ - - - - - - - - 1 -
Hawaii ............... - - - - - - - - 5 -
Idaho ............... - - - - - - 2 224 - -
Illinois ............ - - - - - - - - 1 -
Indiana ............ 3 127 - - 3 53 - - 5 1
Kansas ............... 3 192 2 54 2 32 4 404 12 1
Kentucky ............ 1 40 - - - - - - 2 -
Louisiana ............ 4 234 - - 4 39 1 112 10 -
Maryland ............ 1 20 - - - - - - 11 -
Massachusetts ...... 1 187 - - 5 139 7 957 25 1
Michigan ............ - - - - 2 46 7 942 18 1
Mississippi ......... - - - - - - - - 5 -
Montana ............ - - - - - - 5 684 - 1
Nevada ............... 2 108 1 27 1 16 11 1,518 16 4
New Mexico ......... - - 1 25 - - 27 2,609 - 3
North Carolina ...... - - - - - - 1 125 - -
Ohio ............... - - - - - - 18 1,809 - 1
Oklahoma(3) ......... 1 46 2 74 1 14 4 388 1 2
Oregon ............... - - - - - - - - 16 -
Pennsylvania ......... - - - - - - 1 140 2 -
Rhode Island ......... - - - - - - - - - 1
Tennessee ............ 1 60 - - - - - - 19 1
Texas ............... 7 422 6 219 2 28 31 4,757 31 14
Virginia ............ - - - - - - - - 2 -
Washington ......... - - - - - - - - 43 -
Wisconsin(4) ......... - - - - - - 2 267 - -
--- ------ --- ---- --- ---- ---- ------- ---- ---
Totals ............
30 1,790 12 399 24 453 135 16,792 288 35
--- ------ --- ---- --- ---- ---- ------- ---- ---
- ----------
(1) Consists of three long-term care facilities operating 485 beds managed by
the Company.
(2) Includes seven long-term care facilities and one subacute care unit
operating 726 beds and 24 beds, respectively, managed by the Company.
(3) Includes 1 long-term care facility operating 118 beds managed by the
Company.
(4) Includes 1 long-term care facility operating 156 beds managed by the
Company.
75
DESCRIPTION OF CAPITAL STOCK OF HEALTHSOUTH
COMMON STOCK
HEALTHSOUTH is authorized by the HEALTHSOUTH Certificate to issue up to
501,500,000 shares of capital stock, of which 500,000,000 shares are designated
Common Stock, par value $.01 per share, and 1,500,000 shares are designated
Preferred Stock, par value $.10 per share. As of June 30, 1997, there were
343,214,133 shares of HEALTHSOUTH Common Stock outstanding (including shares
reserved for issuanceprospectus in
connection with HEALTHSOUTH's 1995, 1996 and 1997
mergers which had not yet been claimed by holders of the stock of the acquired
companies). In addition, there were outstanding options under HEALTHSOUTH's
stock option plans to purchase an additional 32,281,512 shares of HEALTHSOUTH
Common Stock. An additional 5,632,606 shares of HEALTHSOUTH Common Stock were
reserved for future option grants under such plans. Additionally, 362,807 shares
are reserved for issuance upon the exercise of outstanding warrants.
Holders of HEALTHSOUTH Common Stock are entitled to participate equally in
dividends when and as declared by the Board of Directors out of funds legally
available therefor and, in the event of liquidation or distribution of assets of
HEALTHSOUTH, are entitled to share ratably in such assets remaining after
payment of liabilities. Stockholders are entitled to one vote per share. Holders
of HEALTHSOUTH Common Stock have no conversion, preemptive or other subscription
rights, and there are no redemption or sinking fund provisions with respect to
such stock. The outstanding shares of HEALTHSOUTH Common Stock are fully paid
and nonassessable.
FAIR PRICE PROVISION
The HEALTHSOUTH Certificate contains certain provisions requiring
supermajority stockholder approval to effect specified extraordinary corporate
transactions unless certain conditions are met. The HEALTHSOUTH Certificate
requires the affirmative vote of 662/3% of all shares of HEALTHSOUTH entitled to
vote in the election of Directors to approve a "business combination" with any "other entity" that is the beneficial owner, directly or indirectly, of more
than 20% of the outstanding shares of HEALTHSOUTH entitled to vote in the
election of Directors. For purposes of this restriction, a "business
combination" includes: (a) the sale, exchange, lease, transfer or other
disposition by HEALTHSOUTH of all, or substantially all, of its assets or
business; (b) any merger or consolidation of HEALTHSOUTH; and (c) certain sales
of HEALTHSOUTH's Common Stock in exchange for cash, assets, securities or any
combination thereof. An "other entity" is defined to include, generally, any
corporation, person or entity, and any affiliate or associateresale of such corporation, person or entity.
The foregoing supermajority vote shall not be required where, in the
business combination, (i) HEALTHSOUTH's stockholders receive consideration per
share not less than the highest per share price paid by the other entity in
acquiring any of its holdings of HEALTHSOUTH's Common Stock (subject to certain
adjustments upward) and (ii) certain other requirements, designed to prevent the
other entity from receiving disproportionate gains in connection with the
business combination, are satisfied.
The provisions of the HEALTHSOUTH Certificate described in the preceding
paragraphs, and its Bylaws,New Notes. This Prospectus, as it may be
amended or repealed onlysupplemented from time to time, may be used by the affirmative
votea broker-dealer in
connection with resales of 662/3%New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of the shares entitled to vote thereon.
The effect of the foregoing provisions is to make it more difficult for a
person, entity or group to effect a change in control of HEALTHSOUTH through the
acquisition of a large block of HEALTHSOUTH's voting stock, or to effect a
mergermarket-making activities or other
acquisitiontrading activities. HEALTHSOUTH has agreed that is not approved by a majority of HEALTHSOUTH's
Directors serving in office priorit will make this Prospectus, as
amended or supplemented, available to the acquisition by the other entity of 5%
or more of HEALTHSOUTH's stock.
SECTION 203 OF THE DGCL
HEALTHSOUTH is subject to the provisions of Section 203 of the DGCL. That
section provides, with certain exceptions, that a Delaware corporation may not
engage in any of a broad range of business combinations with a person or
affiliate or associate of such person who is an "interested stockholder"
76
Participating Broker-Dealer for a
period of three years fromtime not to exceed 180 days after the Registration Statement is
declared effective (subject to extension under certain circumstances) for use in
connection with any such resale. In addition, until such date, that such person became an interested
stockholder unless: (i) the transaction resulting in a person's becoming an
interested stockholder, or the business combination, is approved by the board of
directors of the corporation before the person becomes an interested
stockholder, (ii) the interested stockholder acquires 85% or more of the
outstanding voting stock of the corporationall
broker-dealers effecting transactions in the same transaction that makes
it an interested stockholder (excluding shares heldNew Notes may be required to
deliver a prospectus.
HEALTHSOUTH will not receive any proceeds from any sale of New Notes by
directors, officers and
certain employee stock ownership plans); or (iii) on or after the date the
person becomes an interested stockholder, the business combination is approvedbroker-dealers. New Notes received by the corporation's board of directors and by the holders of at least 662/3% of
the corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. An "interested
stockholder" is defined to include any person, and the affiliates and associates
of such person, that (i) is the owner of 15% or more of the outstanding voting
stock of the corporation or (ii) is an affiliate or associate of the corporation
and was the owner of 15% or more of the outstanding voting stock of the
corporation at any time within the three-year period immediately priorbroker-dealers for their own account
pursuant to the date on which it is soughtExchange Offer may be sold from time to be determined whether such person is an interested
stockholder. It is anticipated that the provisions of Section 203 of the DGCL
may encourage companies or others interested in acquiring HEALTHSOUTH to
negotiate in advance with the HEALTHSOUTH Board of Directors, since the
stockholder approval requirement would be avoided if a majority of the directors
then in office approve either the business combination or the transaction which
results in the acquiror becoming an interested stockholder.
PREFERRED STOCK
The HEALTHSOUTH Certificate authorizes the issuance of up to 1,500,000
shares of Preferred Stock, par value $.10 per share (the "HEALTHSOUTH Preferred
Stock"). The Board of Directors has the authority to issue the HEALTHSOUTH
Preferred Stocktime in one or more
series andtransactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
fixsuch prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the rights, preferences,
privileges and restrictions, including the dividend rights, dividend rate,
conversion rights, voting rights, termsform of redemption, redemption pricecommissions or prices, liquidation preferences and the number of shares constitutingconcessions from any series
such
broker-dealer and/or the designationspurchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such series, withoutNew Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any further voteprofit on any such resale of New Notes and any
commissions or actionconcessions received by any such persons may be deemed to be
underwriting compensation under the stockholders. IssuanceSecurities Act. The Letter of sharesTransmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of HEALTHSOUTH Preferred Stock, while providing
flexibility in connection with possible acquisitionsthe Securities Act.
Starting on the Expiration Date, and other corporate
purposes, could have the effect of making it more difficult for a third partyperiod of 180 days thereafter,
HEALTHSOUTH will promptly send additional copies of this Prospectus and any
amendment or supplement to acquire,this Prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal. HEALTHSOUTH has agreed to pay
expenses incident to the Exchange Offer other than commissions or concessions of
discouraging a third party from acquiring, a majority of the
outstanding voting stock of HEALTHSOUTH. Any such issuance could also adversely
affect the voting power ofany brokers or dealers and will indemnify the holders of the HEALTHSOUTH Common Stock. The
Board of Directors of HEALTHSOUTH has no current intention of issuingNew Notes
(including any shares
of HEALTHSOUTH Preferred Stock.
TRANSFER AGENT
The transfer agent and registrar forbroker-dealers) against certain liabilities, including
liabilities under the HEALTHSOUTH Common Stock is
ChaseMellon Shareholder Services, New York, New York.
77
COMPARISON OF RIGHTS OF HORIZON/CMS
AND HEALTHSOUTH STOCKHOLDERS
BOTH HORIZON/CMS AND HEALTHSOUTH ARE INCORPORATED IN DELAWARE. HOLDERS OF
THE HORIZON/ CMS Shares will continue to have their rights and obligations as
stockholders of HEALTHSOUTH afterSecurities Act.
Based on interpretations by the Merger governed by Delaware law. Set forth
below is a summary comparisonstaff of the rights of a HEALTHSOUTH stockholder under
the HEALTHSOUTH Certificate and HEALTHSOUTH's Bylaws (the "HEALTHSOUTH Bylaws"),
on the one hand, and the rights of a Horizon/CMS stockholder under the
Horizon/CMS Certificate of Incorporation,Commission, as amended (the "Horizon/CMS
Certificate"), and Horizon/CMS's Bylaws, as amended (the "Horizon/CMS Bylaws"),
on the other hand. The information set forth below is qualified in
its entirety
by referenceno-action letters issued to third parties, including the Exchange Offer
No-Action Letters, HEALTHSOUTH Certificate, the HEALTHSOUTH Bylaws, the
Horizon/CMS Certificate and the Horizon/CMS Bylaws.
CLASSES AND SERIES OF CAPITAL STOCK
Horizon/CMS. Horizon/CMS is authorized by the Horizon/CMS Certificate to
issue up to 150,500,000 shares of capital stock, of which 150,000,000 shares are
designated Common Stock, par value $.001 per share, and 500,000 shares are
designated Preferred Stock, par value $.001 per share, of which 150,000 shares
have been designated as Series A Junior Participating Preferred Stock ("Series A
Preferred"). As of the Record Date, 52,713,226 shares of Horizon/CMS Common
stock were issued and outstanding. The Board of Directors of Horizon/CMS has
authority, without stockholder approval, to issue Horizon/CMS Preferred Stock in
one or more series and to determine the number of shares, designation, rights,
qualifications, limitations or restrictions of each such series. As of the
Record Date, there were no shares of Series A Preferred issued and outstanding.
The Board of Directors of Horizon/CMS has no present intention of issuing shares
of Horizon/CMS Preferred Stock.
HEALTHSOUTH. HEALTHSOUTH is authorized by the HEALTHSOUTH Certificate to
issue up to 501,500,000 shares of capital stock, of which 500,000,000 shares are
designated Common Stock, par value $.01 per share, and 1,500,000 shares are
designated Preferred Stock, par value $.10 per share. See "DESCRIPTION OF
CAPITAL STOCK OF HEALTHSOUTH." The Board of Directors of HEALTHSOUTH has the
authority to issue the HEALTHSOUTH Preferred Stock in one or more series and to
fix the rights, preferences, privileges and restrictions for each such series,
without any further vote or action by the stockholders. As of June 30, 1997,
there were no shares of HEALTHSOUTH Preferred Stock issued and outstanding, and
the Board of Directors of HEALTHSOUTH has no present intention of issuing shares
of HEALTHSOUTH Preferred Stock.
SIZE AND ELECTION OF THE BOARD OF DIRECTORS
Horizon/CMS. The Horizon/CMS Certificate and Bylaws provide for the
classification of the Board of Directors of Horizon/CMS into three classes, with
directors serving staggered three-year terms. The Horizon/CMS Certificate also
providesbelieves that the number of directors shall be five unless otherwise determined
by 80% of the then authorized number of directors. The foregoing provisions
cannot be altered, amended or repealed without the affirmative vote of the
holders of not less than 662/3% of the Voting Shares (as defined in the
Horizon/CMS Certificate). Currently, the number of Horizon/CMS directors is 12.
Directors in each class of directors of Horizon/CMS are elected by a
plurality of the votes cast at the annual meeting of stockholders. The
Horizon/CMS Certificate does not provide for cumulative voting rights under
current circumstances. If any stockholder attains ownership of 40% or more of
the shares of stock of any class or series entitled to vote for the election of
directors, stockholders would, however, have cumulative voting rights.
HEALTHSOUTH. The HEALTHSOUTH Bylaws provide that the HEALTHSOUTH Board of
Directors shall consist of at least one director and that the size of the
HEALTHSOUTH Board of Directors may be fixed by the directors then in office.
Directors of HEALTHSOUTH are elected by a plurality of votes cast at the annual
meeting of stockholders. The HEALTHSOUTH Certificate and the
78
HEALTHSOUTH Bylaws do not provide for cumulative voting. Vacancies in
HEALTHSOUTH's Board of Directors and newly created directorships resulting from
any increase in the authorized number of directors are filled by a majority of
directors then in office.
REMOVAL OF DIRECTORS
Horizon/CMS. The Horizon/CMS Certificate allows directors to be removed
only for cause and such removal must be approved by 662/3% of the outstanding
shares of Horizon/CMS Common Stock entitled to vote for the election of
directors.
HEALTHSOUTH. The HEALTHSOUTH Bylaws provide that a director may be removed
with or without cause by the vote of the holders of a majority of the shares of
capital stock entitled to vote thereon.
OTHER VOTING RIGHTS
Horizon/CMS. The Horizon/CMS Common Stock is not divided into classes, and
Horizon/CMS has no classes or series of capital stockNew Notes issued or outstanding
other than the Horizon/CMS Common Stock. Each Horizon/CMS stockholder holding
shares of Horizon/CMS Common Stock entitled to vote on any matter, including the
election of directors, shall have one vote on each such matter submitted to a
vote at a meeting of stockholders for each such share of Horizon/CMS Common
Stock held by such stockholder as of the record date for such meeting. Except as
specifically provided otherwise by law or by the Horizon/CMS Certificate or the
Horizon/CMS Bylaws, the vote of the holders of a majority of the shares of
capital stock present or represented and entitled to vote is required for the
approval of any matter at a meeting of Horizon/CMS stockholders. For information
concerning provisions that require a higher percentage of votes to approve
certain business combinations with a Related Person or an Affiliate or Associate
thereof (as such terms are defined in the Horizon/CMS Certificate), see
"-Business Combinations".
HEALTHSOUTH. The HEALTHSOUTH Common Stock is not divided into classes, and
HEALTHSOUTH has no classes or series of capital stock issued or outstanding
other than the HEALTHSOUTH Common Stock. Each HEALTHSOUTH stockholder holding
shares of HEALTHSOUTH Common Stock entitled to be voted on any matter, including
the election of directors, shall have one vote on each such matter submitted to
vote at a meeting of stockholders for each such share of HEALTHSOUTH Common
Stock held by such stockholder as of the record date for such meeting. Except as
specifically provided otherwise by law or by the HEALTHSOUTH Certificate or the
HEALTHSOUTH Bylaws, the vote of the holders of a majority of the shares of
capital stock present or represented and entitled to vote is required for the
approval of any matter at a meeting of HEALTHSOUTH stockholders. For information
concerning provisions that, with certain exceptions, require a higher percentage
of votes to approve certain business combinations with any entity that
beneficially owns 20% or more of the outstanding shares of voting stock of
HEALTHSOUTH, see "-Business Combinations".
CONVERSION AND DISSOLUTION
Horizon/CMS. The holders of Horizon/CMS Common Stock have no preemptive,
subscription, redemptive or conversion rights. The outstanding shares are fully
paid and nonassessable. The rights, preferences and privileges of holders of
Horizon/CMS Common Stock may become subject to those of holders of Horizon/CMS
Preferred Stock, if Horizon/CMS should issue Horizon/CMS Preferred Stock in the
future. Horizon/CMS Preferred Stock may have such voting powers, preferences and
other special rights (including the right to convert the shares of such
Horizon/CMS Preferred Stock in the shares of Horizon/CMS Common Stock) as shall
be designated by the Horizon/CMS Board of Directors. If the Horizon/CMS Board of
Directors were to designate such a series of Horizon/CMS Preferred Stock, such
Horizon/CMS Preferred Stock could be entitled to preferential payments in the
event of liquidation, dissolution or winding up of Horizon/CMS.
79
HEALTHSOUTH. The HEALTHSOUTH Common Stock has no preemptive, subscription,
redemption or conversion features. The outstanding shares are fully paid and
nonassessable. The rights, preferences and privileges of holders of HEALTHSOUTH
Common Stock may become subject to those of holders of HEALTHSOUTH Preferred
Stock if HEALTHSOUTH should issue HEALTHSOUTH Preferred Stock in the future. The
HEALTHSOUTH Certificate authorizes 1,500,000 shares of Preferred Stock, par
value $.10 per share, and provides that such shares of HEALTHSOUTH Preferred
Stock may have such voting powers, preferences and other special rights
(including the right to convert the shares of such HEALTHSOUTH Preferred Stock
into shares of HEALTHSOUTH Common Stock) as shall be designated by the
HEALTHSOUTH Board of Directors . If the HEALTHSOUTH Board of Directors were to
designate such a series of HEALTHSOUTH Preferred Stock, such HEALTHSOUTH
Preferred Stock could be entitled to preferential payments in the event of
liquidation, dissolution or winding up of HEALTHSOUTH.
BUSINESS COMBINATIONS
Horizon/CMS. The Horizon/CMS Certificate requires the approval of at least
two-thirds of the holders of the outstanding shares of all classes or series of
capital stock entitled to vote on the election of directors for (i)(a) any
merger or consolidation of Horizon/CMS or any Horizon/CMS subsidiary with or
into, (b) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of any substantial part of the assets of Horizon/CMS or any
subsidiary of Horizon/CMS to or with, or (c) the issuance or transfer of
securities of Horizon/CMS or any subsidiary in exchange for cash, securities or
other property to, a Related Person. (ii) any reclassification of securities or
recapitalization of Horizon/CMS, merger or consolidation of Horizon/CMS with any
subsidiary or any similar transaction that has the effect of increasing the
proportionate interest of a Related Person or any Affiliate or Associate
thereof, or (iii) the adoption of a plan of liquidation or dissolution of
Horizon/CMS.
On September 12, 1994, the Board of Directors of Horizon/CMS declared a
dividend of one preferred share purchase right (a "Right") for each outstanding
share of Horizon/CMS Common Stock held of record on September 22, 1994 and
approved the further issuance of Rights with respect to all shares of
Horizon/CMS Common Stock subsequently issued. Each Right entitles the registered
holder to purchase from Horizon/CMS one-thousandth of a share of Series A
Preferred at a price of $110 per one-thousandth of a share, subject to customary
adjustments from time to time to prevent dilution. Until the occurrence of a
"Distribution Date", the Rights are not exercisable, will be evidenced by the
certificates for Horizon/CMS Common Stock and are not transferable apart from
the Horizon/CMS Common Stock. The Rights will separate from the Horizon/CMS
Common Stock and a Distribution Date will occur upon the earlier of (i) 10
business days following a public announcement that a person or group of
affiliated or associated persons has acquired beneficial ownership of 20% or
more of the outstanding Horizon/CMS Common Stock or (ii) 10 business days
following the commencement or announcement of an intention to commence a tender
offer or exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 20% or more of the outstanding Horizon/CMS. If
a person or group were to acquire 20% or more of the outstanding Horizon/CMS
Common Stock, each Right then outstanding (other than Rights beneficially owned
by such person or group, which would become null and void) would become a right
to buy that number of shares of Horizon/CMS Common Stock that at the time would
have a market value of two times the exercise price of the Right.
Pursuant to authority granted by the Board of Directors, Horizon/CMS
entered into an amendment of the agreement governing the Rights to exclude the
Merger from those events that would result in the occurrence of a Distribution
Date and to terminate the agreement (and the Rights) at the Effective Time. Upon
conversion of the Horizon/CMS Common Stock into HEALTHSOUTH Common Stock pursuant to
the Merger, no additional consideration will be paid for the Rights.
HEALTHSOUTH. The HEALTHSOUTH Certificate provides that the vote of the
holders of 66 2/3% of all shares of HEALTHSOUTH entitled to vote in the election
of directors is required for the approval and adoption of a business combination
(as defined in the HEALTHSOUTH Certificate) with any entity (as defined in the
HEALTHSOUTH Certificate) if, on the record date for the determination of
stockholders entitled to vote thereon, the other entity is the beneficial owner,
directly or indirectly, of more than
80
20% of the outstanding shares of HEALTHSOUTH entitled to vote in the election of
directors. The voting requirements of the "fair price" provision are not
applicable to a business combination involving a holder of 20% or more of
HEALTHSOUTH's voting stock in the business combination, if: (i) HEALTHSOUTH's
stockholders receive consideration per share not less than the highest per share
price paid by the other entity in acquiring any of its holdings of the
HEALTHSOUTH Common Stock (subject to certain upward adjustments); and (ii)
certain other requirements, designed to prevent the other entity from receiving
disproportionate gains in connection with the business combination, are
satisfied. See "DESCRIPTION OF CAPITAL STOCK OF HEALTHSOUTH - Fair Price
Provision".
Amendment or Repeal of the Certificate of Incorporation
Under Delaware law, unless its certificate of incorporation or by-laws
otherwise provide, amendments of a corporation's certificate of incorporation
generally require the approval of the holders of a majority of the outstanding
stock entitled to vote thereon, and if such amendment would increase or decrease
the number of authorized shares of any class or series or the par value of such
shares or would adversely affect the shares of such class or series, the
approval of a majority of the outstanding stock of such class or series.
Horizon/CMS. The Horizon/CMS Certificate contains a provision that requires
a higher percentage of stockholders to amend certain provisions of the
Horizon/CMS Certificate than would otherwise be required under the DGCL. The
Horizon/CMS BylawsExchange Offer may be amendedoffered for resale, resold or otherwise transferred by
the Board of Directors of Horizon/CMS or by
the holders of not lesseach holder thereof (other than 662/3% of the Voting Shares outstanding.
HEALTHSOUTH. Thea broker-dealer who acquires such New Notes
directly from HEALTHSOUTH Certificate requires approval by holders of at
least 66 2/3% of the outstanding shares entitledfor resale pursuant to vote thereon to repeal or
amend Article SIXTH of the HEALTHSOUTH Certificate (regarding the calling of
special meetings by the stockholders), Article SEVENTH of the HEALTHSOUTH
Certificate (regarding the "fair price" provision) and Article EIGHTH of the
HEALTHSOUTH Certificate (regarding the amendment of the HEALTHSOUTH
Certificate). The HEALTHSOUTH Certificate also provides that a majority of the
HEALTHSOUTH Board of Directors may make, alter or repeal the HEALTHSOUTH Bylaws.
SPECIAL MEETING OF STOCKHOLDERS
Horizon/CMS. The Horizon/CMS Certificate provides that a special meeting of
stockholders may be called by a majority of directors then in office or by the
holders of not less than 25% of the issued and outstanding shares of stock of
any class or series entitled to vote for the election of directors. In addition,
if the holders of any preferred stock of Horizon/CMS are entitled to elect one
or more directors separately as a class, the holders of 25% of such preferred
stock then outstanding may call a special meeting for limited purposes.
HEALTHSOUTH. The HEALTHSOUTH Bylaws provide that a special meeting of the
HEALTHSOUTH stockholders may be called by a majority of the Board of Directors
or by the holders of at least 20% of the outstanding shares of capital stock of
HEALTHSOUTH entitled to vote in the election of directors.
LIABILITY OF DIRECTORS
The DGCL permits a corporation to include a provision in its certificate of
incorporation eliminating or limiting the personal liability of a director or
officer to the corporation or its stockholders for monetary damages for breach
of the director's fiduciary duty, subject to certain limitations. Each of the
HEALTHSOUTH Certificate and the Horizon/CMS Certificate includes such a
provision, as set forth below, to the maximum effect permitted by law.
The HEALTHSOUTH Certificate provides that a director will not be personally
liable to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii)
81
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) under Section 174 of the DGCL, which
concerns unlawful payments of dividends, stock purchases or redemptions or (iv)
for any transaction from which the director derived an improper personal
benefit.
While these provisions provide directors with protection from awards of
monetary damages for breaches of their duty of care, they do not eliminate such
duty. Accordingly, these provisions will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's
breach of his or her duty of care. The provisions described above apply to an
officer of the corporation only if he or she is a director of the corporation
and is acting in his or her capacity as director, and do not apply to officers
of the corporation who are not directors.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The DGCL permits a corporation to indemnify officers, directors, employees
and agents for actions taken in good faith and in a manner they reasonably
believed to be in, or not opposed to, the best interests of the corporation and,
with respect to any criminal action, which they had no reasonable cause to
believe was unlawful. The DGCL provides that a corporation may advance expenses
of defense (upon receipt of a written undertaking to reimburse the corporation
if indemnification is not appropriate) and must reimburse a successful defendant
for expenses, including attorneys' fees, actually and reasonably incurred, and
permits a corporation to purchase and maintain liability insurance for its
directors and officers. The DGCL provides that indemnification may not be made
for any claim, issue or matter as to which a person has been adjudged by a court
of competent jurisdiction, after exhaustion of all appeals therefrom, to be
liable to the corporation, unless and only to the extent a court determines that
the person is entitled to indemnity for such expenses as the court deems proper.
The HEALTHSOUTH Bylaws provide that each person who is involved in any
actual or threatened action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he or she is or was
a director, officer, employee or agent of HEALTHSOUTH, or is or was serving at
the request of HEALTHSOUTH as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to an employee benefit plan, will be indemnified
by HEALTHSOUTH to the full extent permitted by the DGCL, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits HEALTHSOUTH to provide broader
indemnification rights than said law permitted prior to such amendment) or by
other applicable laws then in effect.
The Horizon/CMS Certificate and Bylaws provide for indemnification of each
person who is or was made a party to any actual or threatened civil, criminal,
administrative or investigative action, suit or proceeding because such person
is or was an officer or director of Horizon/CMS or is a person who is or was
serving at the request of Horizon/CMS as a director, officer, employee or agent
of another corporation or of a partnership, joint venture, trust or other
enterprise, including service relating to employee benefit plans, to the full
extent permitted by the DGCL as it existed at the time such indemnification
provisions were adopted or as it may be thereafter amended. The Horizon/CMS
Certificate and Bylaws expressly provide that they are not the exclusive methods
of indemnification. The Horizon/CMS Certificate and Bylaws also provide that
Horizon/CMS may maintain insurance, at its own expense, to protect itself and
any director, officer, employee or agent of Horizon/CMS or of another entity
against any expense, liability or loss, regardless of whether Horizon/CMS would
have the power to indemnify such person against such expense, liability or loss
under the DGCL.
Section 102(b)(7) of the DGCL provides that a certificate of incorporation
may contain a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, provided that such provision shall not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (relating to
liability for unauthorized acquisitions or redemptions of, or dividends on,
capital stock) or (iv) for any transaction from which the director derived an
improper personal benefit. The Horizon/CMS Certificate contains such a
provision.
82
The Plan provides that all rights to indemnification for acts or omissions
occurring prior to the Effective Time of the Merger existing in favor of the
current or former directors or officers of Horizon/ CMS as provided in the
Horizon/CMS Certificate or the Horizon/CMS Bylaws shall survive the Merger and
shall continue in full force and effect in accordance with their terms.
Insofar as indemnification for liabilities arisingRule 144A under the Securities
Act may be permitted to directors, officers or persons controlling HEALTHSOUTH or
Horizon/CMS pursuant to the foregoing provisions, HEALTHSOUTH and Horizon/CMS
have been informed that in the opinion of the SEC such indemnification is
against public policy as expressed inany other available exemption under the Securities Act and other than any
holder that is therefore
unenforceable.
OPERATIONS AND MANAGEMENT OF HEALTHSOUTH AFTER THE MERGER
OPERATIONS
Afteran "affiliate" (as defined in Rule 405 under the consummationSecurities Act)
of HEALTHSOUTH) without compliance with the registration and prospectus delivery
provisions of the Merger, Horizon/CMS will be a wholly-owned
subsidiarySecurities Act, provided that such New Notes are acquired in
the ordinary course of HEALTHSOUTH,such holder's business and all of Horizon/CMS's subsidiaries will be
indirect wholly-owned subsidiaries of HEALTHSOUTH. HEALTHSOUTH will continuesuch holder is not engaged in,
and does not intend to engage in, the businessa distribution of providing outpatient surgerysuch New Notes and rehabilitative
healthcare services as priorhas no
arrangement with any person to the Merger, working with the managementparticipate in a distribution of Horizon/CMS to operate and, as appropriate, continue to expand Horizon/CMS's
business in ways complementary to the overall strategy of the combined
Companies. In addition, HEALTHSOUTH may in the future explore alternatives with
respect to the disposition or combination of certain assets or businesses of
Horizon/CMS which HEALTHSOUTH determines are not complementary to such overall
strategy. See the information set forth herein and in the documents incorporated
herein by reference as set forth under "INCORPORATION OF CERTAIN INFORMATION BY
REFERENCE", "BUSINESS OF HEALTHSOUTH" and "BUSINESS OF HORIZON/CMS".
Management
After the consummation of the Merger, HEALTHSOUTH will be managed by the
same Board of Directors and executive officers as existed prior to the Merger,
except that Neal M. Elliott, Chairman of the Board, President and Chief
Executive Officer of Horizon/CMS, will join HEALTHSOUTH's Board of Directors.
83New Notes.
47
EXPERTS
The consolidated financial statements and schedule of HEALTHSOUTH Corporation at
December 31, 19961997 and 1995,1996, and for each of the three years in the period ended
December 31, 1996, incorporated by reference1997, appearing in this
Prospectus-Proxy Statement and Registration StatementHEALTHSOUTH's Annual Report on Form 10-K for the
year ended December 31, 1997, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon also
incorporated herein
by reference. Such consolidated financial statements and schedule have been
incorporated herein by reference in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The consolidated financial statements and financial statement schedules of
Horizon/CMS Healthcare Corporation as of May 31, 1997 and 1996 and for each of
the three years in the period ended May 31, 1997 incorporated by reference into
this Proxy Statement/Prospectus and Registration Statement have been audited by
Arthur Andersen LLP, independent accountants, as set forth in their reports
thereon incorporated by reference elsewhere herein which, as to the year 1995,
is based in part on the report of Ernst & Young LLP, independent auditors. The
financial statements and financial statement schedules referred to above have
been incorporated by reference herein in reliance upon said reports given upon
the authority of said firms as experts in accounting and auditing.
The consolidated financial statements and schedules of Health Images, Inc.
incorporated by reference in this Prospectus-Proxy Statement and Registration
Statement have been audited by Joseph Decosimo and Company, LLP, Atlanta,
Georgia, independent auditors, as indicated in their reports with respect
thereto, and are so included and incorporated by reference in reliance upon and
authority of said firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of HEALTHSOUTH Common StockNew Notes to be issued to the
stockholders of Horizon/CMS pursuant to the MergerExchange Offer
will be passed upon by Haskell Slaughter & Young, L.L.C.
ADDITIONAL INFORMATION
The Board of Directors of Horizon/CMS does not know of any matter to be
brought before its Special Meeting other than as described in the Notice of
Special Meeting accompanying this Prospectus-Proxy Statement. If any other
matter comes before the Special Meeting, it is the intention of the persons
named in the accompanying proxy to vote the proxy in accordance with their best
judgment with respect to such other matter.
If the Merger is not consummated because the Plan is not approved by the
Horizon/CMS stockholders at the Special Meeting or any adjournments or
postponements thereof or for any other reason, Horizon/CMS intends to hold its
next Annual Meeting of Stockholders as soon as practicable. Since such meeting
could not be held by October 10, 1997 (the date 30 days after the anticipated
date of such meeting), any stockholder of Horizon/CMS who desires to submit a
proposal for inclusion in the proxy material for presentation at such annual
meeting must submit such proposal to the Secretary of Horizon/ CMS a reasonable
time before the proxy solicitation is made with respect to such meeting.
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ANNEX A
PLAN AND AGREEMENT OF MERGER
PLAN AND AGREEMENT OF MERGER (this "Plan of Merger"), made and entered into
as of the 17th day of February, 1997, by and among HEALTHSOUTH CORPORATION, a
Delaware corporation ("HEALTHSOUTH"), REID ACQUISITION CORPORATION, a Delaware
corporation (the "Subsidiary"), and HORIZON/CMS HEALTHCARE CORPORATION, a
Delaware corporation ("Horizon/ CMS") (the Subsidiary and Horizon/CMS being
sometimes collectively referred to herein as the "Constituent Corporations").
W I T N E S S E T H:
WHEREAS, the respective Boards of Directors of HEALTHSOUTH, the Subsidiary
and Horizon/ CMS have approved the merger of the Subsidiary with and into
Horizon/CMS (the "Merger"), upon the terms and subject to the conditions set
forth in this Plan of Merger, whereby each share of Common Stock, par value
$.001 per share, of Horizon/CMS (the "Horizon/CMS Common Stock"), not owned
directly or indirectly by Horizon/CMS, will be converted into the right to
receive the Merger Consideration (as hereinafter defined);
WHEREAS, each of HEALTHSOUTH, the Subsidiary and Horizon/CMS desires to
make certain representations, warranties, covenants and agreements in connection
with the Merger and also to prescribe various conditions to the Merger; and
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization under the provisions of Section 368 of the
Internal Revenue Code of 1986, as amended.
NOW, THEREFORE, in consideration of the premises, and the mutual covenants
and agreements contained herein, the parties hereto do hereby agree as follows:
SECTION 1. THE MERGER.
1.1. The Merger. Upon the terms and conditions set forth in this Plan of
Merger, and in accordance with the Delaware General Corporation Law (the
"DGCL"), the Subsidiary shall be merged with and into Horizon/CMS at the
Effective Time (as defined in Section 1.3). At the Effective Time, the separate
corporate existence of the Subsidiary shall cease and Horizon/CMS shall continue
as the surviving corporation (the "Surviving Corporation") under the name
"Horizon/CMS Healthcare Corporation" and shall succeed to and assume all the
rights and obligations of the Subsidiary and Horizon/CMS in accordance with the
DGCL.
1.2 The Closing. The closing of the Merger (the "Closing") will take place
at 10:00 a.m. Central Time on a date to be specified by the parties (the
"Closing Date"), which (subject to satisfaction or waiver of the conditions set
forth in Sections 9.2 and 9.3) shall be no later than the second business day
after satisfaction or waiver of the conditions set forth in Section 9.1, at the
offices of Haskell Slaughter & Young, L.L.C., Birmingham, Alabama, unless
another date or place is agreed to in writing by the parties hereto.
1.3 Effective Time. Subject to the provisions of this Plan of Merger, the
parties shall file a certificate of merger (the "Certificate of Merger")
executed in accordance with the relevant provisions of the DGCL and shall make
all other filings or recordings required under the DGCL as soon as practicable
on or after the Closing Date. The Merger shall become effective at such time as
the Certificate of Merger is duly filed with the Delaware Secretary of State, or
at such other time as the Subsidiary and Horizon/ CMS shall agree should be
specified in the Certificate of Merger (the "Effective Time").
1.4 Effect of the Merger. The Merger shall have the effects set forth in
Section 259 of the DGCL.
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SECTION 2. EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
CORPORATIONS; EXCHANGE OF CERTIFICATES.
2.1 Effect on Capital Stock. As of the Effective Time, by virtue of the
Merger and without any action on the part of any holder of shares of Horizon/CMS
Common Stock or any shares of capital stock of the Subsidiary:
(a) Subsidiary Common Stock. Each share of capital stock of the
Subsidiary issued and outstanding immediately prior to the Effective Time
shall be converted into one fully paid and nonassessable share of common
stock of the Surviving Corporation.
(b) Cancellation of Treasury Stock. Each share of Horizon/CMS Common
Stock that is owned by Horizon/CMS or by any wholly-owned subsidiary of
Horizon/CMS shall automatically be canceled and retired and shall cease to
exist, and no Common Stock, par value $.01 per share, of HEALTHSOUTH
("HEALTHSOUTH Common Stock"), cash or other consideration shall be delivered
in exchange therefor.
(c) Conversion of Horizon/CMS Shares. Subject to Section 2.2(e), each
issued and outstanding share of Horizon/CMS Common Stock (other than shares
to be canceled in accordance with Section 2.1(b)) (collectively, the
"Exchanging Horizon/CMS Shares") shall be converted into 0.42169 (the
"Exchange Ratio") of a share of HEALTHSOUTH Common Stock, as may be adjusted
as provided in Section 2.1(e) below (the "Merger Consideration").
All Exchanging Horizon/ CMS Shares shall, upon conversion thereof into shares
of HEALTHSOUTH Common Stock at the Effective Time, cease to be outstanding
and shall automatically be cancelled and retired, and each certificate
previously evidencing Exchanging Horizon/CMS Shares outstanding immediately
prior to the Effective Time ("Certificates") shall thereafter be deemed, for
all purposes other than the payment of dividends or distributions, to
represent that number of shares of HEALTHSOUTH Common Stock determined
pursuant to the Exchange Ratio and, if applicable, the right to receive cash
pursuant to Section 2.2. The holders of certificates previously evidencing
Exchanging Horizon/ CMS Shares shall cease to have any rights with respect to
such Exchanging Horizon/CMS Shares except as otherwise provided herein or by
law.
(d) Stock Options, Warrants and Convertible Securities. At the Effective
Time, all rights with respect to Horizon/CMS Common Stock pursuant to any
Horizon/CMS stock options, stock purchase warrants or convertible securities
which are outstanding at the Effective Time (which, for purposes of this
Section 2.1(d), includes any rights to purchase Horizon/CMS Common Stock
pursuant to Horizon/CMS's 1996 Employee Stock Purchase Plan), whether or not
then exercisable, shall be converted into and become rights with respect to
HEALTHSOUTH Common Stock, and HEALTHSOUTH shall assume each Horizon/CMS
stock option, stock purchase warrant and convertible security, in accordance
with the terms of any stock option plan under which it was issued and any
stock option agreement, warrant agreement or convertible security by which
it is evidenced. It is intended that, unless otherwise agreed between
HEALTHSOUTH and a particular optionee, the foregoing provisions shall be
undertaken in a manner that will not constitute a "modification", as defined
in Section 424 of the Code, as to any stock option which is an "incentive
stock option". Each Horizon/CMS stock option, stock purchase warrant or
convertible security so assumed shall be exercisable for or convertible into
that number of shares of HEALTHSOUTH Common Stock equal to the number of
Horizon/CMS shares subject thereto multiplied by the Exchange Ratio, and
shall have an exercise price per share or conversion price per share equal
to the Horizon/CMS exercise price divided by the Exchange Ratio.
(e) Anti-Dilution Provisions. If after the date hereof and prior to the
Effective Time HEALTHSOUTH shall have declared a stock split (including a
reverse split) of HEALTHSOUTH Common Stock, including the proposed
two-for-one split of the HEALTHSOUTH Common Stock scheduled for
consideration by the stockholders of HEALTHSOUTH at a meeting thereof
scheduled to be held on March 12, 1997, or a dividend payable in HEALTHSOUTH
Common Stock, or any other distribution of securities or dividend (in cash
or otherwise) to holders of HEALTHSOUTH Common Stock with respect to their
HEALTHSOUTH Common Stock or other change or reclas-
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sification of the HEALTHSOUTH Common Stock (including without limitation such
a distribution, dividend or other change or reclassification of the
HEALTHSOUTH Common Stock made in connection with a recapitalization,
reclassification, merger, consolidation, reorganization, or similar
transaction) then (i) the Exchange Ratio shall be appropriately adjusted to
reflect such stock split or dividend or other distribution of securities and
(ii) if such stock split, dividend or distribution has a record date prior to
the Effective Time, then the number of shares of HEALTHSOUTH Common Stock to
be issued upon conversion of a share of Horizon/CMS Common Stock pursuant to
Section 2.1(c) shall be appropriately adjusted to reflect such stock split,
dividend or other distribution of securities.
2.2 Exchange of Certificates. (a) Exchange Agent. Prior to the Effective
Time, HEALTHSOUTH shall enter into an agreement with such bank or trust company
as may be designated by HEALTHSOUTH (the "Exchange Agent") which shall provide
that HEALTHSOUTH shall deposit with the Exchange Agent as of the Effective Time,
for the benefit of the holders of Exchanging Horizon/CMS Shares, for exchange in
accordance with this Section 2, through the Exchange Agent, certificates
representing the shares of HEALTHSOUTH Common Stock (such shares of HEALTHSOUTH
Common Stock, together with any dividends or distributions with respect thereto
with a record date after the Effective Time and any other property issuable
pursuant to Section 2.1(e), being hereinafter referred to as the "Exchange
Fund") issuable pursuant to Section 2.1.
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, the Surviving Corporation shall cause the Exchange Agent to mail
to each holder of record of a Certificate or Certificates (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of
Certificates to the Exchange Agent and shall be in such form and have such other
provisions as HEALTHSOUTH may reasonably specify) and (ii) instructions for use
in effecting the surrender of Certificates in exchange for certificates
representing shares of HEALTHSOUTH Common Stock. Upon surrender of a Certificate
for cancellation to the Exchange Agent or to such other agent or agents as may
be appointed by HEALTHSOUTH, together with such letter of transmittal, duly
executed, and such other documents as may reasonably be required by the Exchange
Agent, the holder of such Certificate shall be entitled to receive in exchange
therefor a certificate representing that number of whole shares of HEALTHSOUTH
Common Stock which such holder has the right to receive pursuant to the
provisions of this Section 2, and the Certificate so surrendered shall forthwith
be canceled. In the event of a transfer of ownership of shares of Horizon/ CMS
Common Stock which is not registered in the transfer records of Horizon/CMS, a
certificate representing the proper number of shares of HEALTHSOUTH Common Stock
may be issued to a person other than the person in whose name the Certificate so
surrendered is registered, if such Certificate shall be properly endorsed or
otherwise be in proper form for transfer and the person requesting such payment
shall pay any transfer or other taxes required by reason of the issuance of
shares of HEALTHSOUTH Common Stock to a person other than the registered holder
of such Certificate or establish to the satisfaction of HEALTHSOUTH that such
tax has been paid or is not applicable.
(c) Distributions with Respect to Unexchanged Shares. No dividends or other
distributions with respect to HEALTHSOUTH Common Stock with a record date after
the Effective Time of the Merger shall be paid to the holder of any
unsurrendered Certificate with respect to the shares of HEALTHSOUTH Common Stock
represented thereby and no cash payment in lieu of fractional shares shall be
paid to any such holder pursuant to Section 2.2(e) until, in each such case, the
surrender of such Certificate in accordance with this Section 2. Subject to the
effect of applicable laws, following surrender of any such Certificate, there
shall be paid to the holder of the certificate representing whole shares of
HEALTHSOUTH Common Stock issued in exchange therefor, without interest, (i) at
the time of such surrender, the amount of any cash payable in lieu of a
fractional share of HEALTHSOUTH Common Stock to which such holder is entitled
pursuant to Section 2.2(e) and the amount of dividends or other distributions
with a record date after the Effective Time theretofore paid with respect to
such whole shares of HEALTHSOUTH Common Stock, and (ii) at the appropriate
payment date, the amount of dividends or other distributions with a record date
after the Effective Time but prior to such surrender and with a payment date
subsequent to such surrender payable with respect to such whole shares of
HEALTHSOUTH Common Stock.
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(d) No Further Ownership Rights in Exchanging Horizon/CMS Shares. All
shares of HEALTHSOUTH Common Stock issued upon the conversion of Horizon/CMS
Common Stock in accordance with the terms of this Section 2 (including any cash
paid pursuant to Section 2.2(c) or 2.2(e)) shall be deemed to have been issued
(and paid) in full satisfaction of all rights pertaining to the Exchanging
Horizon/CMS Shares. If, after the Effective Time, Certificates are presented to
the Surviving Corporation or the Exchange Agent for any reason, they shall be
canceled and exchanged as provided in this Section 2, except as otherwise
provided by law.
(e) No Fractional Shares. No certificates or scrip representing fractional
shares of HEALTHSOUTH Common Stock shall be issued upon the surrender for
exchange of Certificates, and such fractional share interests will not entitle
the owner thereof to vote or to any rights of a stockholder of HEALTHSOUTH.
Notwithstanding any other provision of this Plan of Merger, each holder of
Exchanging Horizon/CMS Shares who would otherwise have been entitled to receive
a fraction of a share of HEALTHSOUTH Common Stock (after taking into account all
Exchanging Horizon/CMS Shares delivered by such holder) shall receive, in lieu
thereof, cash (without interest) in an amount equal to such fractional part of a
share of HEALTHSOUTH Common Stock multiplied by the closing sale price per share
of HEALTHSOUTH Common Stock on the date on which the Effective Time occurs, as
reported on the New York Stock Exchange Composite Transactions Tape; provided,
however, that, if there is no sale of HEALTHSOUTH Common Stock on the New York
Stock Exchange on such date, then the closing sale price per share on the next
preceding trading day on which such a sale occurred.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the holders of the Certificates for six months after
the Effective Time shall be delivered to HEALTHSOUTH, upon demand, and any
holders of the Certificates who have not theretofore complied with this Section
2 shall thereafter look only to HEALTHSOUTH for payment of HEALTHSOUTH Common
Stock, any cash in lieu of fractional shares of HEALTHSOUTH Common Stock and any
dividends or distributions with respect to HEALTHSOUTH Common Stock.
(g) No Liability. None of HEALTHSOUTH, the Subsidiary, Horizon/CMS or the
Exchange Agent shall be liable to any person in respect of any shares of
HEALTHSOUTH Common Stock (or dividends or distributions with respect thereto) or
cash from the Exchange Fund delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law. If any Certificates shall
not have been surrendered prior to seven years after the Effective Time (or
immediately prior to such earlier date on which any shares of HEALTHSOUTH Common
Stock, any cash in lieu of fractional shares of HEALTHSOUTH Common Stock or any
dividends or distributions with respect to HEALTHSOUTH Common Stock in respect
of such Certificates would otherwise escheat to or become the property of any
governmental entity), any such shares, cash, dividends or distributions in
respect of such Certificates shall, to the extent permitted by applicable law,
become the property of the Surviving Corporation, free and clear of all claims
or interest of any person previously entitled thereto.
(h) Investment of Exchange Fund. The Exchange Agent may invest any cash
included in the Exchange Fund in deposit accounts or short-term money market
instruments, as directed by HEALTHSOUTH, on a daily basis. Any interest and
other income resulting from such investments shall be paid to HEALTHSOUTH.
HEALTHSOUTH shall deposit with the Exchange Agent as part of the Exchange Fund
cash in an amount equal to any loss of principal resulting from such investments
promptly after the incurrence of such a loss.
2.3 Certificate of Incorporation of Surviving Corporation. The Certificate
of Merger shall include such lawful amendments and restatement of the
Certificate of Incorporation of Horizon/CMS as HEALTHSOUTH may desire, such
amendments and restatement to become effective at the Effective Time. The
Certificate of Incorporation of Horizon/CMS, as so amended and restated, shall
become the Certificate of Incorporation of the Surviving Corporation from and
after the Effective Time and until thereafter amended as provided by law.
2.4 Bylaws of the Surviving Corporation. The Bylaws of the Subsidiary shall
be the Bylaws of the Surviving Corporation from and after the Effective Time and
until thereafter altered, amended or repealed in accordance with the laws of the
State of Delaware, the Certificate of Incorporation of the Surviving Corporation
and the said Bylaws.
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2.5 Directors of the Surviving Corporation. The Directors of the Subsidiary
immediately prior to the Effective Time shall be the Directors of the Surviving
Corporation, each to hold office in accordance with the Certificate of
Incorporation and Bylaws of the Surviving Corporation.
2.6 Assets, Liabilities, Reserves and Accounts. At the Effective Time, the
assets, liabilities, reserves and accounts of each of the Subsidiary and
Horizon/CMS shall be taken up on the books of the Surviving Corporation at the
amounts at which they respectively shall be carried on the books of said
corporations immediately prior to the Effective Time, except as otherwise set
forth in the Plan of Merger and subject to such adjustments, or elimination of
intercompany items, as may be appropriate in giving effect to the Merger in
accordance with generally accepted accounting principles.
2.7 Corporate Acts of the Subsidiary. All corporate acts, plans, policies,
approvals and authorizations of the Subsidiary, its sole stockholder, its Board
of Directors, committees elected or appointed by the Board of Directors, and all
officers and agents, valid immediately prior to the Effective Time, shall be
those of the Surviving Corporation and shall be as effective and binding thereon
as they were with respect to the Subsidiary.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF HORIZON/CMS.
Horizon/CMS hereby represents and warrants to HEALTHSOUTH and the
Subsidiary as follows:
3.1 Organization, Existence and Good Standing. Horizon/CMS is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware. Horizon/CMS has all necessary corporate power to own its
properties and assets and to carry on its business as presently conducted.
3.2 Horizon/CMS Capital Stock. Horizon/CMS's authorized capital consists of
150,000,000 shares of Horizon/CMS Common Stock, par value $.001 per share, of
which 52,157,806 shares were issued and outstanding as of January 31, 1997, and
641,413 shares were issued and held as treasury shares, and 500,000 shares of
Preferred Stock, par value $.001 per share, none of which shares are issued and
outstanding or held as treasury stock. All of the issued and outstanding shares
of Horizon/CMS Common Stock are duly and validly issued, fully paid and
nonassessable. Except as set forth on Exhibit 3.2 to the Disclosure Schedule
delivered by Horizon/CMS to HEALTHSOUTH simultaneously with the execution and
delivery hereof (the "Disclosure Schedule") or otherwise disclosed in the
Horizon/CMS Annual Report on Form 10-K for the fiscal year ended May 31, 1996
(the "Horizon/CMS 10-K") or the Horizon/CMS Quarterly Report on Form 10-Q for
the three months ended November 30, 1996, there are no options, warrants, or
similar rights granted by Horizon/CMS, securities convertible into or
exchangeable for Horizon/CMS Common Stock, or any other agreements to which
Horizon/CMS is a party providing for the issuance or sale by it of any
additional securities which would remain in effect after the Effective Time.
There is no liability for dividends declared or accumulated but unpaid with
respect to any of the shares of Horizon/CMS Common Stock.
3.3 Horizon/CMS Subsidiaries and Horizon/CMS Other Entities. (a) There is
included in the Disclosure Schedule, as Exhibit 3.3(a), a true and correct list
of all Subsidiaries of Horizon/CMS (individually, a "Horizon/CMS Subsidiary",
and collectively, the "Horizon/CMS Subsidiaries") and their states of
incorporation. Except as set forth on Exhibit 3.3(a), Horizon/CMS does not own
stock in and does not control, directly or indirectly, any other corporation,
association or business organization other than the Horizon/CMS Other Entities
(as defined below).
(b) There is included in the Disclosure Schedule, as Exhibit 3.3(b), a true
and correct list of all general or limited partnerships in which a general
partner is Horizon/CMS, a Horizon/CMS Subsidiary, a Horizon/CMS LLC (as defined
below) or another Horizon/CMS Partnership (individually, a "Horizon/ CMS
Partnership" and collectively, the "Horizon/CMS Partnerships"), and all limited
liability companies in which Horizon/CMS, a Horizon/CMS Subsidiary, another
Horizon/CMS LLC or a Horizon/CMS Partnership is a member (individually, a
"Horizon/CMS LLC" and collectively, the "Horizon/CMS LLCs") (the Horizon/CMS
Partnerships and the Horizon/CMS LLCs being collectively called the
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"Horizon/CMS Other Entities"), and their states of organization. Except as set
forth on Exhibit 3.3(b), neither Horizon/CMS nor any Horizon/CMS Subsidiary owns
an equity interest in, nor does such entity control, directly or indirectly, any
other joint venture, limited liability company or partnership.
3.4 Organization, Existence and Good Standing of Horizon/CMS Subsidiaries
and Horizon/CMS Other Entities. (a) Each Horizon/CMS Subsidiary is a corporation
duly organized, validly existing and in good standing under the laws of its
respective state of incorporation. Each Horizon/CMS Subsidiary has all necessary
corporate power to own its properties and assets and to carry on its business as
presently conducted.
(b) Each Horizon/CMS Partnership that is a limited partnership is validly
formed, each Horizon/ CMS Partnership that is a general partnership has been
duly organized, and each Horizon/CMS Partnership is in good standing under the
laws of its respective state of organization. Each Horizon/CMS Partnership has
all necessary partnership power to own its property and assets and to carry on
its business as presently conducted.
(c) Each Horizon/CMS LLC is a limited liability company validly formed and
in good standing under the laws of its respective state of organization. Each
Horizon/CMS LLC has all necessary organizational power to own its properties and
assets to carry on its business as presently conducted.
3.5 Foreign Qualifications. Horizon/CMS, each Horizon/CMS Subsidiary and
each Horizon/CMS Other Entity that is not a general partnership is qualified to
do business as a foreign corporation, foreign limited partnership or foreign
limited liability company, as the case may be, and is in good standing in each
jurisdiction in which the nature or character of the property owned, leased or
operated by it or the nature of the business transacted by it makes such
qualification necessary, except where the failure to so qualify would not have a
material adverse effect on Horizon/CMS.
3.6 Power and Authority. Subject to the satisfaction of the conditions
precedent set forth herein, Horizon/CMS has the corporate power to execute,
deliver and perform this Plan of Merger and all agreements and other documents
executed and delivered or to be executed and delivered by it pursuant to this
Plan of Merger, and, subject to the satisfaction of the conditions precedent set
forth herein, has taken all action required by its Certificate of Incorporation,
Bylaws or otherwise, to authorize the execution, delivery and performance of
this Plan of Merger and such related documents. The execution and delivery of
this Plan of Merger does not and, subject to the receipt of required stockholder
and regulatory approvals and any other required third-party consents or
approvals, the consummation of the Merger will not, violate any provisions of
any statute or other law, any rule or regulation of any governmental agency or
authority, the Certificate of Incorporation of Horizon/CMS or any provisions of,
or result in the acceleration of any obligation under, any mortgage, lien,
lease, agreement, instrument, order, arbitration award, judgment or decree, to
which Horizon/CMS or any Horizon/CMS Subsidiary or Horizon/CMS Other Entity is a
party, or by which it is bound, or violate any restrictions of any kind to which
it is subject which, if violated or accelerated, would have a material adverse
effect on Horizon/ CMS. The execution and delivery of this Plan of Merger has
been approved by the Board of Directors of Horizon/CMS. This Plan of Merger has
been duly executed and delivered by Horizon/CMS and, assuming this Plan of
Merger constitutes a valid and binding obligation of each of HEALTHSOUTH and the
Subsidiary, constitutes a valid and binding obligation of Horizon/CMS,
enforceable against Horizon/ CMS in accordance with its terms.
3.7 Horizon/CMS Public Information; Undisclosed Liabilities. (a)
Horizon/CMS has heretofore furnished HEALTHSOUTH with a true and complete copy
of each report, schedule, registration statement and definitive proxy statement
filed by it with the Securities and Exchange Commission (the "SEC") (as any such
documents have since the time of their original filing been amended, the
"Horizon/ CMS Documents") since January 1, 1995, which are all the documents
(other than preliminary material) that it was required to file with the SEC from
such date through the date of this Plan of Merger. Except as set forth in
Exhibit 3.7(a) to the Disclosure Schedule, as of their respective dates, the
Horizon/CMS Documents did not contain any untrue statements of material facts or
omit to state material facts required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading. As of their respective dates, the Horizon/CMS Documents
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complied in all material respects with the applicable requirements of the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated under such statutes. The
financial statements contained in the Horizon/CMS Documents, together with the
notes thereto, have been prepared in accordance with generally accepted
accounting principles consistently followed throughout the periods indicated
(except as may be indicated in the notes thereto, or, in the case of the
unaudited financial statements, as permitted by Form 10-Q), except as set forth
in Exhibit 3.7(a) to the Disclosure Schedule, reflect all known liabilities of
Horizon/CMS required to be stated therein, including all such known contingent
liabilities as of the end of each period reflected therein, and present fairly
the financial condition of Horizon/CMS at said dates and the consolidated
results of operations and cash flows of Horizon/CMS for the periods then ended.
The consolidated balance sheet of Horizon/CMS at November 30, 1996 included in
the Horizon/CMS Documents is herein sometimes referred to as the "Horizon/CMS
Balance Sheet".
(b) Except as disclosed in the Horizon/CMS Documents or as set forth in
Exhibit 3.7(b) to the Disclosure Schedule and except for liabilities and
obligations incurred in the ordinary course of business consistent with past
practices, since the date of the Horizon/CMS Balance Sheet, neither Horizon/CMS
nor any of the Horizon/CMS Subsidiaries or the Horizon/CMS Other Entities have
incurred any liabilities or obligations of any nature, whether or not accrued,
contingent or otherwise, that have, or would be reasonably likely to have, a
material adverse effect on Horizon/CMS. Except as disclosed in the Horizon/CMS
Documents or as set forth in Exhibit 3.7(b) to the Disclosure Schedule and
except for liabilities and obligations incurred in the ordinary course of
business consistent with past practices, since the date of the Horizon/CMS
Balance Sheet, neither Horizon/CMS nor any of the Horizon/CMS Subsidiaries or
the Horizon/CMS Other Entities have incurred any liabilities or obligations of
any nature, whether or not accrued, contingent or otherwise, that would be
required to be reflected or reserved against on a consolidated balance sheet of
Horizon/CMS (including the notes thereto) prepared in accordance with generally
accepted accounting principles as applied in preparing the Horizon/CMS Balance
Sheet.
3.8 Supporting Information. All consolidated historical financial
information provided by Horizon/ CMS to HEALTHSOUTH in connection with
HEALTHSOUTH's due diligence investigation prior to the date of this Plan of
Merger, and all such information provided to HEALTHSOUTH on or after the date of
this Plan of Merger, is supported by detailed information at the facility or
operating unit level and is in all respects consistent with and fairly
reflective of such detailed information.
3.9 Legal Proceedings. Except as disclosed in the Horizon/CMS Documents or
on Exhibit 3.9 to the Disclosure Schedule, there is no litigation, governmental
investigation or other proceeding pending or, so far as is known to Horizon/CMS,
threatened against or relating to Horizon/CMS or the Horizon/ CMS Subsidiaries
or the Horizon/CMS Other Entities, their respective properties or businesses, or
the transactions contemplated by this Plan of Merger, except for litigation,
governmental investigations or other proceedings that would not, individually or
in the aggregate, have a material adverse effect on Horizon/CMS.
3.10 Contracts, etc. (a) Except as set forth on Exhibit 3.10(a) to the
Disclosure Schedule, all material contracts, leases, agreements and arrangements
to which Horizon/CMS or any of the Horizon/ CMS Subsidiaries or Horizon/CMS
Other Entities is a party are legally valid and binding in accordance with their
terms and in full force and effect, and, to the knowledge of Horizon/CMS, no
party is in default thereunder, and no event has occurred which, but for the
passage of time or the giving of notice or both, would constitute a default
thereunder, except, in each case, where the invalidity or unenforceablity of the
lease, contract, agreement or arrangement or the default or breach thereunder or
thereof would not, individually or in the aggregate, have a material adverse
effect on Horizon/CMS.
(b) Except as set forth on Exhibit 3.10(b) to the Disclosure Schedule, no
contract or agreement to which Horizon/CMS or any Horizon/CMS Subsidiary or
Horizon/CMS Other Entity is a party will, by its terms, terminate as a result of
the transactions contemplated hereby or require any consent from any obligor
thereto in order to remain in full force and effect immediately after the
Effective Time, except for contracts or agreements which, if terminated or if
their enforceability were otherwise adversely affected, would not have a
material adverse effect on Horizon/CMS.
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(c) Except as set forth on Exhibit 3.10(c) to the Disclosure Schedule, none
of Horizon/CMS, any Horizon/CMS Subsidiary or any Horizon/CMS Other Entity has
granted any right of first refusal or similar right in favor of any third party
with respect to any material portion of its properties or assets or entered into
any non-competition agreement or similar agreement restricting in any material
manner its ability to engage in any material business in any location.
3.11 Subsequent Events. Except as (a) set forth on Exhibit 3.11 to the
Disclosure Schedule, (b) disclosed in the Horizon/CMS Documents (c) contemplated
by this Plan of Merger or (d) otherwise consented to in writing by HEALTHSOUTH,
none of Horizon/CMS, any Horizon/CMS Subsidiary nor any Horizon/CMS Other Entity
has, since the date of the Horizon/CMS Balance Sheet:
(i) Incurred any material adverse change;
(ii) except as required hereby, amended its Articles or Certificate of
Incorporation or Bylaws, if any;
(iii) extended credit to anyone or guaranteed the obligation of any
person, firm or corporation (other than Horizon/CMS or any Horizon/CMS
Subsidiary or Horizon/CMS Other Entity) in an amount that, in either case, is
material to Horizon/CMS except in the ordinary course of business consistent
with prior practice;
(iv) discharged or satisfied any material lien or encumbrance, or paid or
satisfied any material obligation or liability (absolute, accrued, contingent
or otherwise) other than (a) liabilities shown or reflected on the
Horizon/CMS Balance Sheet or (b) liabilities incurred since the date of the
Horizon/CMS Balance Sheet in the ordinary course of business, which discharge
or satisfaction would have a material adverse effect on Horizon/CMS;
(v) increased or established any reserve for taxes or any other liability
on its books or otherwise provided therefor which would have a material
adverse effect on Horizon/CMS, except as relates to the consolidated results
of operations of Horizon/CMS since the date of the Horizon/CMS Balance Sheet;
(vi) sold or transferred any of its material assets, tangible or
intangible, cancelled any material debts or claims held by it or waived any
of its material rights, except in the ordinary course of business;
(vii) mortgaged, pledged or subjected to any security interest any of its
material assets, tangible or intangible, other than as required under the
existing provisions of Horizon/CMS's primary credit facility;
(viii) entered into any employment contract which is not terminable upon
notice of 30 days or less, at will, and without penalty to Horizon/CMS except
as provided herein or granted any general or uniform increase in the rates of
pay of employees or granted any increase in salary payable or to become
payable by Horizon/CMS to any officer of Horizon/CMS or, by means of any
bonus or pension plan, contract or other commitment, increased the
compensation of any officer of Horizon/ CMS or entered into any agreements
providing for compensation to any officer or employee of Horizon/CMS, any
Horizon/CMS Subsidiary or any Horizon/CMS Other Entity based upon a change in
control of Horizon/CMS;
(ix) made any contribution, payment or distribution to the trustee under
any Horizon/CMS Plan (as such term is defined in Section 3.15 herein), other
than any such contribution, payment or distribution that is in accordance
with Horizon/CMS's past practice, or established or terminated any
Horizon/CMS Plan;
(x) issued any capital stock or other equity securities, other than stock
options granted to officers, employees, directors or consultants of
Horizon/CMS or warrants granted to third parties and shares of Horizon/CMS
Common Stock issuable upon the exercise thereof, all of which options and
warrants are disclosed on Exhibit 3.2 to the Disclosure Schedule or
reflected in the Horizon/ CMS Documents; or
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(xi) except for this Plan of Merger and any other agreement executed and
delivered pursuant to this Plan of Merger, entered into any material
transaction other than in the ordinary course of business or permitted under
other Sections hereof or entered into any contract or agreement in the
ordinary course of business (i) which cannot be performed within three months
or less or (ii) which involves the expenditure by Horizon/CMS of over
$250,000.
3.12 Accounts Receivable. (a) Since the date of the Horizon/CMS 10-K,
Horizon/CMS has not changed any material principle or practice with respect to
the recordation of accounts receivable or the calculation of reserves therefor,
or any material collection, discount or write-off policy or procedure.
Horizon/CMS (including the Horizon/CMS Subsidiaries and Horizon/CMS Other
Entities) is in compliance with the terms and conditions of all third-party
payor arrangements relating to its accounts receivable, except to the extent
that such noncompliance would not have a material adverse effect on Horizon/
CMS.
(b) Without limiting the generality of the foregoing, each of Horizon/CMS
and the Horizon/CMS Subsidiaries and the Horizon/CMS Other Entities is in
compliance with all Medicare and Medicaid provider agreements to which it is a
party, except to the extent that such noncompliance would not have a material
adverse effect on Horizon/CMS.
3.13 Tax Returns. Horizon/CMS and each of the Horizon/CMS Subsidiaries and
the Horizon/CMS Other Entities has filed all tax returns required to be filed by
it or requests for extensions to file such returns or reports have been timely
filed and granted and have not expired, except to the extent that such failures
to file, taken together, do not have a material adverse effect on Horizon/CMS.
Horizon/ CMS or the applicable entity has made all payments shown as due on such
returns. Except as set forth on Exhibit 3.13 to the Disclosure Schedule, neither
Horizon/CMS nor any Horizon/CMS Subsidiary or Horizon/CMS Other Entity has been
notified that any tax returns of Horizon/CMS or any Horizon/CMS Subsidiary or
Horizon/CMS Other Entity are currently under audit by the Internal Revenue
Service or any state or local tax agency. No agreements have been made by
Horizon/CMS for the extension of time or the waiver of the statute of
limitations for the assessment or payment of any federal, state or local taxes.
3.14 Commissions and Fees. Except for fees payable to Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") as indicated in Exhibit
3.14 to the Disclosure Schedule, there are no valid claims for brokerage
commissions or finder's or similar fees in connection with the transactions
contemplated by this Plan of Merger which may be now or hereafter asserted
against HEALTHSOUTH resulting from any action taken by Horizon/CMS or its
officers or Directors, or any of them.
3.15 Employee Benefit Plans; Employment Matters. (a) Except as set forth in
Exhibit 3.15 to the Disclosure Schedule or as described in the Horizon/CMS
Documents, Horizon/CMS has neither established nor maintains nor is obligated to
make contributions to or under or otherwise participate in (a) any bonus or
other type of incentive compensation plan, program, agreement, policy,
commitment, contract or arrangement (whether or not set forth in a written
document), (b) any pension, profit-sharing, retirement or other plan, program or
arrangement, or (c) any other employee benefit plan, fund or program, including,
but not limited to, those described in Section 3(3) of ERISA. Except as set
forth in Exhibit 3.15 to the Disclosure Schedule, all such plans (individually,
a "Horizon/CMS Plan" and collectively, the "Horizon/CMS Plans") have been
operated and administered in accordance with, as applicable, ERISA, the Internal
Revenue Code of 1986, as amended, Title VII of the Civil Rights Act of 1964, as
amended, the Equal Pay Act of 1967, as amended, the Age Discrimination in
Employment Act of 1967, as amended, and the related rules and regulations
adopted by those federal agencies responsible for the administration of such
laws. No act or failure to act by Horizon/CMS has resulted in a "prohibited
transaction" (as defined in ERISA) with respect to the Horizon/CMS Plans that is
not subject to a statutory or regulatory exception. Except as set forth in
Exhibit 3.15 to the Disclosure Schedule, no "reportable event" (as defined in
ERISA) has occurred with respect to any of the Horizon/CMS Plans which is
subject to Title IV of ERISA. Except as set forth in Exhibit 3.15 to the
Disclosure Schedule, Horizon/CMS has not previously made, is not currently
making, and is not obligated in any way to make, any contributions to any
multi-employer plan within the meaning of the Multi-Employer Pension Plan
Amendments Act of 1980.
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(b) Except as set forth in Exhibit 3.15 to the Disclosure Schedule or
described in the Horizon/ CMS Documents, Horizon/CMS is not a party to any oral
or written (i) union, guild or collective bargaining agreement which agreement
covers employees in the United States (nor is it aware of any union organizing
activity currently being conducted in respect to any of its employees), (ii)
agreement with any executive officer or other key employee the benefits of which
are contingent, or the terms of which are altered, upon the occurrence of a
transaction of the nature contemplated by this Plan of Merger and which provides
for the payment of in excess of $50,000, or (iii) agreement or plan, including
any stock option plan, stock appreciation rights plan, restricted stock plan or
stock purchase plan, any of the benefits of which will be increased, or the
vesting the benefits of which will be accelerated, by the occurrence of any of
the transactions contemplated by this Plan of Merger or the value of any of the
benefits of which will be calculated on the basis of any of the transactions
contemplated by this Plan of Merger.
3.16 Compliance with Laws in General. Except as set forth on Exhibit 3.16
to the Disclosure Schedule or disclosed in the Horizon/CMS Documents,
Horizon/CMS has not received any notices of violations of any federal, state and
local laws, regulations and ordinances relating to its business and operations,
including, without limitation, the Occupational Safety and Health Act, the
Americans with Disabilities Act, the Medicare or applicable Medicaid statutes
and regulations and any Environmental Laws, which violation, if established,
would have a material effect on Horizon/CMS.
3.17 Licenses, Accreditation and Regulatory Approvals. Except as disclosed
in the Horizon/CMS Documents, Horizon/CMS and the Horizon/CMS Subsidiaries and
Horizon/CMS Other Entities hold all licenses, permits, certificates of need and
other regulatory approvals which are required by law with respect to their
businesses, operations and facilities as they are currently or presently
conducted or operated, except where the failure to possess such licenses would
not have a material adverse effect on Horizon/CMS (collectively, the
"Horizon/CMS Licenses"). Except with respect to those Horizon/CMS Licenses for
which renewal applications have been filed by Horizon/CMS, the Horizon/CMS
Subsidiaries or the Horizon/CMS Other Entities and which are being processed by
the applicable regulatory authorities, all such Horizon/CMS Licenses are in full
force and effect, and Horizon/CMS is in substantial compliance with all
conditions and requirements of the Horizon/CMS Licenses and with all rules and
regulations relating thereto. Horizon/CMS, the Horizon/CMS Subsidiaries and the
Horizon/CMS Other Entities are, to the extent applicable to their operations,
(i) eligible to receive payment under Titles XVIII and XIX of the Social
Security Act, (ii) providers under existing provider agreements with the
Medicare program through the applicable intermediaries and (iii) in substantial
compliance with the conditions of participation in the Medicare program except
for such matters as would not have a material adverse effect on Horizon/CMS.
Except to the extent that the failure to timely make such filings would not have
a material adverse effect on Horizon/CMS, and except as disclosed in the
Horizon/CMS Documents, Horizon/CMS, the Horizon/CMS Subsidiaries and the
Horizon/CMS Other Entities have timely filed all requisite claims and other
reports required to be filed in connection with the Medicare, Medicaid and other
governmental health programs due on or before the date hereof, all of which
were, when filed, complete and correct in all material respects. Except as set
forth on Exhibit 3.17 to the Disclosure Schedule, there are no current claims,
actions or appeals pending, and neither Horizon/CMS nor the Horizon/CMS
Subsidiaries nor the Horizon/CMS Other Entities have filed any claims or reports
which would result in such claims, actions or appeals, before any commission,
board or agency, including, without limitation, any intermediary or carrier, the
Provider Reimbursement Review Board or the Administrator of the Health Care
Financing Administration with respect to any Medicare claims, or any
disallowances in connection with any audit of claims, which would have a
material adverse effect on Horizon/CMS. The amounts established as provisions
for adjustments by Medicare, Medicaid and other third-party payors set forth in
the Horizon/CMS Balance Sheet are sufficient to pay any amounts for which
Horizon/CMS believes it will be liable. To the knowledge of Horizon/CMS, except
to the extent that alleged violations have been disclosed in the Horizon/CMS
Documents, neither Horizon/CMS nor the Horizon/CMS Subsidiaries nor the
Horizon/CMS Other Entities nor their respective employees have committed a
violation of the Medicare and Medicaid fraud and abuse provisions of the Social
Security Act or any similar provisions of any federal, state or local law
relating to referrals or billings for healthcare services. Except for such
litigation as would not, if resolved adversely to Horizon/CMS or any
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Horizon/CMS Subsidiary or Horizon/CMS Other Entity, have a material adverse
effect on Horizon/ CMS, any and all past litigation concerning such Horizon/CMS
Licenses, and all claims and causes of action raised therein, have been finally
adjudicated or settled. Except as indicated in Exhibit 3.17 to the Disclosure
Schedule, no such License has been revoked, conditioned (except as may be
customary) or restricted, and no action (equitable, legal or administrative),
arbitration or other process is pending, or to the knowledge of Horizon/CMS,
threatened, which in any way challenges the validity of, or seeks to revoke,
condition or restrict any such License. Subject to compliance with applicable
securities laws, the Hart Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), and state or local statutes, rules or regulations
requiring notice, approval, or other action upon the occurrence of a change in
control of Horizon/CMS or any of the Horizon/CMS Subsidiaries or any of the
Horizon/CMS Other Entities, the consummation of the Merger will not violate any
law or regulation to which Horizon/ CMS is subject which, if violated, would
have a material adverse effect on Horizon/CMS.
3.18 Vote Required. The affirmative vote of the holders of a majority of
the outstanding shares of the Horizon/CMS Common Stock entitled to vote thereon
is the only vote of the holders of any class or series of Horizon/CMS capital
stock necessary to approve this Plan of Merger, the Merger and the transactions
contemplated hereby.
3.19 Opinion of Financial Advisor. The Board of Directors of Horizon/CMS
has received the oral opinion of Merrill Lynch to the effect that, as of the
date of this Plan of Merger, the Exchange Ratio is fair to the holders of
Horizon/CMS Common Stock from a financial point of view, a written copy of which
opinion will be delivered by Horizon/CMS to HEALTHSOUTH prior to the date on
which the definitive proxy materials for the Proxy Statement (as defined in
Section 7.4(a)) are filed with the SEC.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE SUBSIDIARY AND HEALTHSOUTH.
The Subsidiary and HEALTHSOUTH, jointly and severally, hereby represent and
warrant to Horizon/CMS as follows:
4.1 Organization, Existence and Capital Stock. The Subsidiary is a
corporation duly organized and validly existing and is in good standing under
the laws of the State of Delaware. The Subsidiary's authorized capital consists
of 1,000 shares of Common Stock, par value $.01 per share, all of which shares
are issued and registered in the name of HEALTHSOUTH. The Subsidiary has not,
within the two years immediately preceding the date of this Plan of Merger,
owned, directly or indirectly, any shares of Horizon/CMS Common Stock.
4.2 Power and Authority. The Subsidiary has corporate power to execute,
deliver and perform this Plan of Merger and all agreements and other documents
executed and delivered, or to be executed and delivered, by it pursuant to this
Plan of Merger, and, subject to the satisfaction of the conditions precedent set
forth herein, has taken all actions required by law, its Certificate of
Incorporation, its Bylaws or otherwise, to authorize the execution and delivery
of this Plan of Merger and such related documents. The execution and delivery of
this Plan of Merger does not and, subject to the receipt of required stockholder
and regulatory approvals and any other required third-party consents or
approvals, the consummation of the Merger contemplated hereby will not, violate
any provisions of, any statute or other law, any rule or regulation of any
governmental agency or authority, the Certificate of Incorporation or Bylaws of
the Subsidiary, or mortgage, lien, lease, agreement, instrument, order,
arbitration award, judgment or decree to which the Subsidiary is a party or by
which it is bound, violate any restrictions of any kind to which the Subsidiary
is subject, or result in the creation of any lien, charge or encumbrance upon
any of the property or assets of the Subsidiary. The execution and delivery of
this Plan of Merger has been approved by the Board of Directors of the
Subsidiary.
4.3 No Subsidiaries. The Subsidiary does not own any equity interest in,
and does not control directly or indirectly, any other corporation, association
or business organization. The Subsidiary is not a party to any joint venture or
partnership.
4.4 Legal Proceedings. There are no actions, suits or proceedings pending
or threatened against the Subsidiary, at law or in equity, relating to or
affecting the Subsidiary, including the Merger. The Subsidiary does not know or
have any reasonable grounds to know of any justification for any such action,
suit or proceeding.
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4.5 No Contracts or Liabilities. Other than the obligations created under
this Plan of Merger, the Subsidiary is not obligated under any contracts,
claims, leases, liabilities (contingent or otherwise), loans or otherwise.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF HEALTHSOUTH.
HEALTHSOUTH hereby represents and warrants to Horizon/CMS as follows:
5.1 Organization, Existence and Good Standing. HEALTHSOUTH is a corporation
duly organized and validly existing and is in good standing under the laws of
the State of Delaware. HEALTHSOUTH has all necessary corporate power to own its
properties and assets and to carry on its business as presently conducted.
HEALTHSOUTH is duly qualified to do business and is in good standing in all
jurisdictions in which the character of the property owned, leased or operated
or the nature of the business transacted by it makes qualification necessary.
5.2 Power and Authority. HEALTHSOUTH has corporate power to execute,
deliver and perform this Plan of Merger and all agreements and other documents
executed and delivered, or to be executed and delivered, by it pursuant to this
Plan of Merger, and, subject to the satisfaction of the conditions precedent set
forth herein has taken all actions required by law, its Certificate of
Incorporation, its Bylaws or otherwise, to authorize the execution and delivery
of this Plan of Merger and such related documents. The execution and delivery of
this Plan of Merger does not and, subject to the receipt of required stockholder
and regulatory approvals and any other required third-party consents or
approvals, the consummation of the Merger contemplated hereby will not, violate
any provisions of, any statute or other law, any rule or regulation of any
governmental agency or authority, the Certificate of Incorporation or Bylaws of
HEALTHSOUTH, or any provision of, or result in the acceleration of any
obligation under, any mortgage, lien, lease, agreement, instrument, order,
arbitration award, judgment or decree to which HEALTHSOUTH or any HEALTHSOUTH
Subsidiary or HEALTHSOUTH Other Entity (as such terms are defined in Section
5.6(b)) is a party or by which it is bound, or violate any restrictions of any
kind to which HEALTHSOUTH is subject. The execution and delivery of this Plan of
Merger has been approved by the Board of Directors of HEALTHSOUTH, and no
approval by the holders of HEALTHSOUTH Common Stock is required by law, the
Certificate of Incorporation or Bylaws of HEALTHSOUTH, the rules of the New York
Stock Exchange, Inc. (the "Exchange") or otherwise. This Plan of Merger has been
duly executed and delivered by HEALTHSOUTH and the Subsidiary and, assuming this
Plan of Merger constitutes a valid and binding obligation of Horizon/CMS,
constitutes a valid and binding obligation of HEALTHSOUTH and the Subsidiary,
enforceable against HEALTHSOUTH and the Subsidiary in accordance with its terms.
5.3 HEALTHSOUTH Common Stock. On the Closing Date, HEALTHSOUTH will have a
sufficient number of authorized but unissued and/or treasury shares of its
Common Stock available for issuance to the holders of Horizon/CMS Common Stock
in accordance with the provisions of this Plan of Merger. The HEALTHSOUTH Common
Stock to be issued pursuant to this Plan of Merger will, when so delivered, be
duly and validly issued, fully paid and nonassessable, (ii) issued pursuant to
an effective registration statement under the Securities Act of 1933, as
amended, and (iii) authorized for listing on the Exchange upon official notice
of issuance.
5.4 Capitalization. HEALTHSOUTH's authorized capital stock consists of
1,500,000 shares of Preferred Stock, par value $.10 per share, of which no
shares are issued and outstanding, and no shares are held in treasury, and
250,000,000 shares of Common Stock, par value $.01 per share, of which
156,114,869 shares are issued and outstanding, and 93,000 shares are held in
treasury. HEALTHSOUTH has called a special meeting of its stockholders for March
12, 1997, to approve an amendment to its Certificate of Incorporation to
increase its authorized number of shares of HEALTHSOUTH Common Stock to
500,000,000. All of the issued and outstanding shares of HEALTHSOUTH Common
Stock have been duly and validly issued and are fully paid and non-assessable.
Except as disclosed in the HEALTHSOUTH Annual Report on Form 10-K for the fiscal
year ended December 31, 1995, as amended (the "HEALTHSOUTH 10-K"), and except
for shares of HEALTHSOUTH Common Stock reserved for issuance in connection with
(i) its pending acquisition of Health Images, Inc. and (ii) its proposed
two-for-one stock split to be effected March 13, 1997 in the form of a 100%
stock dividend
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(subject to the approval of the proposed amendment to its Certificate of
Incorporation described above), there are no options, warrants, convertible
debentures or similar rights granted by HEALTHSOUTH or any other agreements to
which HEALTHSOUTH is a party providing for the issuance or sale by it of any
additional securities, other than stock options granted in the ordinary course
since such date. There is no liability for dividends declared or accumulated but
unpaid with respect to any shares of HEALTHSOUTH Common Stock.
5.5 Subsidiary Common Stock. HEALTHSOUTH owns, beneficially and of record,
all of the issued and outstanding shares of Subsidiary Common Stock, which are
validly issued and outstanding, fully paid and nonassessable, free and clear of
all liens and encumbrances. HEALTHSOUTH has the corporate power to endorse and
surrender such Subsidiary Shares for cancellation pursuant to this Plan of
Merger. HEALTHSOUTH has taken all such actions as may be required in its
capacity as the sole stockholder of the Subsidiary to approve the Merger.
5.6 HEALTHSOUTH Documents. (a) HEALTHSOUTH has heretofore furnished
Horizon/CMS with a true and complete copy of each report, schedule, registration
statement and definitive proxy statement filed by it with the SEC (as any such
documents have since the time of their original filing been amended, the
"HEALTHSOUTH Documents") since January 1, 1995, which are all the documents
(other than preliminary material) that it was required to file with the SEC
since such date. As of their respective dates, the HEALTHSOUTH Documents did not
contain any untrue statements of material facts or omit to state material facts
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. As of
their respective dates, the HEALTHSOUTH Documents complied in all material
respects with the applicable requirements of the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated under such statutes. The financial statements contained
in the HEALTHSOUTH Documents, together with the notes thereto, have been
prepared in accordance with generally accepted accounting principles
consistently followed throughout the periods indicated (except as may be
indicated in the notes thereto, or, in the case of the unaudited financial
statements, as permitted by Form 10-Q), reflect all known liabilities of
HEALTHSOUTH required to be stated therein, including all known contingent
liabilities as of the end of each period reflected therein, and present fairly
the financial condition of HEALTHSOUTH at said dates and the consolidated
results of operations and cash flows of HEALTHSOUTH for the periods then ended.
The consolidated balance sheet of HEALTHSOUTH at September 30, 1996 included in
the HEALTHSOUTH Documents is herein sometimes referred to as the "HEALTHSOUTH
Balance Sheet".
(b) Except as disclosed in the HEALTHSOUTH Documents and except for
liabilities and obligations incurred in the ordinary course of business
consistent with past practices, since the date of the HEALTHSOUTH Balance Sheet,
neither HEALTHSOUTH nor any of the HEALTHSOUTH Subsidiaries or the HEALTHSOUTH
Other Entities have incurred any liabilities or obligations of any nature,
whether or not accrued, contingent or otherwise, that have, or would be
reasonably likely to have, a material adverse effect on HEALTHSOUTH or would be
required to be reflected or reserved against on a consolidated balance sheet of
HEALTHSOUTH (including the notes thereto) prepared in accordance with generally
accepted accounting principles as applied in preparing the HEALTHSOUTH Balance
Sheet. As used in this Plan of Merger, the term "HEALTHSOUTH Subsidiaries" means
Subsidiaries of HEALTHSOUTH, and the term "HEALTHSOUTH Other Entities" means any
general or limited partnerships in which HEALTHSOUTH, a HEALTHSOUTH Subsidiary,
or any other HEALTHSOUTH Other Entity is a general partner and any limited
liability companies in which HEALTHSOUTH, a HEALTHSOUTH Subsidiary or any other
HEALTHSOUTH Other Entity is a member.
5.7 Supporting Information. All consolidated historical financial
information provided by HEALTHSOUTH to Horizon/CMS in connection with
Horizon/CMS's due diligence investigation prior to the date of this Plan of
Merger, and all such information provided to Horizon/CMS on or after the date of
this Plan of Merger, is supported by detailed information at the facility or
operating unit level and is in all respects consistent with and fairly
reflective of such detailed information.
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5.8 Investment Intent. HEALTHSOUTH is acquiring the shares of Horizon/CMS
Common Stock hereunder for its own account and not with a view to the
distribution or sale thereof, and HEALTHSOUTH has no understanding, agreement or
arrangement to sell, distribute, partition or otherwise transfer or assign all
or any part of the shares of Horizon/CMS Common Stock to any other person, firm
or corporation.
5.9 Legal Proceedings. Except as disclosed in the HEALTHSOUTH Documents,
there is no material litigation, governmental investigation or other proceeding
pending or, so far as is known to HEALTHSOUTH, threatened against or relating to
HEALTHSOUTH, the HEALTHSOUTH Subsidiaries or the HEALTHSOUTH Other Entities,
their respective properties or businesses, or the transactions contemplated by
this Plan of Merger, except for litigation, governmental investigations or other
proceedings that would not, individually or in the aggregate, have a material
adverse effect on HEALTHSOUTH.
5.10 Subsequent Events. Except as disclosed in the HEALTHSOUTH Documents,
none of HEALTHSOUTH, any HEALTHSOUTH Subsidiary nor any HEALTHSOUTH Other
Entity has, since the date of the HEALTHSOUTH Balance Sheet:
(i) Incurred any material adverse change;
(ii) subject to the proposed amendment to HEALTHSOUTH's Certificate of
Incorporation described in Section 5.4 above, amended its Articles or
Certificate of Incorporation or Bylaws, if any;
(iii) extended credit to anyone or guaranteed the obligation of any
person, firm or corporation in an amount that, in either case, is material to
HEALTHSOUTH except in the ordinary course of business consistent with prior
practice;
(iv) discharged or satisfied any material lien or encumbrance, or paid or
satisfied any material obligation or liability (absolute, accrued, contingent
or otherwise) other than (a) liabilities shown or reflected on the
HEALTHSOUTH Balance Sheet or (b) liabilities incurred since the date of the
HEALTHSOUTH Balance Sheet in the ordinary course of business, which discharge
or satisfaction would have a material adverse effect on HEALTHSOUTH;
(v) increased or established any reserve for taxes or any other liability
on its books or otherwise provided therefor that would have a material
adverse effect on HEALTHSOUTH, except as relates to the consolidated results
of operations of HEALTHSOUTH since the date of the HEALTHSOUTH Balance Sheet;
(vi) sold or transferred any of its material assets, tangible or
intangible, cancelled any material debts or claims held by it or waived any
of its material rights, except in the ordinary course of business;
vii) mortgaged, pledged or subjected to any security interest any of its
material assets, tangible or intangible;
(viii) issued or agreed to issue any capital stock or other equity
securities with respect to any merger, consolidation or other business
combination with any corporation or other entity or the acquisition of all or
any significant part of the assets or capital stock or other equity interests
of any corporation or other entity, which merger, consolidation, business
combination or acquisition is material to HEALTHSOUTH; or
(ix) except for this Plan of Merger and any other agreement executed and
delivered pursuant to this Plan of Merger, entered into any material
transaction other than in the ordinary course of business or permitted under
other Sections hereof.
5.11 Tax Returns. HEALTHSOUTH and each of the HEALTHSOUTH Subsidiaries and
HEALTHSOUTH Other Entities has filed all tax returns required to be filed by it
or requests for extensions to file such returns or reports have been timely
filed and granted and have not expired, except to the extent that such failures
to file, taken together, do not have a material adverse effect on
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HEALTHSOUTH. HEALTHSOUTH or the applicable entity has made all payments shown as
due on such returns. Except for audits of HEALTHSOUTH's 1992 and 1993 federal
income tax returns and certain state and local tax audits not material to
HEALTHSOUTH, neither HEALTHSOUTH nor any HEALTHSOUTH Subsidiary or HEALTHSOUTH
Other Entity has been notified that any tax returns of HEALTHSOUTH or any
HEALTHSOUTH Subsidiary or HEALTHSOUTH Other Entity are currently under audit by
the Internal Revenue Service or any state or local tax agency. No agreements
have been made by HEALTHSOUTH for the extension of time or the waiver of the
statute of limitations for the assessment or payment of any federal, state or
local taxes.
5.12 Accounts Receivable. (a) Since the date of the HEALTHSOUTH 10-K,
HEALTHSOUTH has not changed any material principle or practice with respect to
the recordation of accounts receivable or the calculation of reserves therefor,
or any material collection, discount or write-off policy or procedure.
HEALTHSOUTH (including the HEALTHSOUTH Subsidiaries and HEALTHSOUTH Other
Entities) is in compliance with the terms and conditions of all third-party
payor arrangements relating to its accounts receivable, except to the extent
that such noncompliance would not have a material adverse effect on HEALTHSOUTH.
(b) Without limiting the generality of the foregoing, each of HEALTHSOUTH
and the HEALTHSOUTH Subsidiaries and the HEALTHSOUTH Other Entities is in
compliance with all Medicare and Medicaid provider agreements to which it is a
party, except to the extent that such noncompliance would not have a material
adverse effect on HEALTHSOUTH.
5.13 Employee Benefit Plans; Employment Matters. (a) Except as described in
the HEALTHSOUTH Documents, HEALTHSOUTH has neither established nor maintains nor
is obligated to make contributions to or under or otherwise participate in (a)
any bonus or other type of incentive compensation plan, program, agreement,
policy, commitment, contract or arrangement (whether or not set forth in a
written document), (b) any pension, profit-sharing, retirement or other plan,
program or arrangement, or (c) any other employee benefit plan, fund or program,
including, but not limited to, those described in Section 3(3) of ERISA. All
such plans (individually, a "HEALTHSOUTH Plan" and collectively, the
"HEALTHSOUTH Plans") have been operated and administered in accordance with, as
applicable, ERISA, the Internal Revenue Code of 1986, as amended, Title VII of
the Civil Rights Act of 1964, as amended, the Equal Pay Act of 1967, as amended,
the Age Discrimination in Employment Act of 1967, as amended, and the related
rules and regulations adopted by those federal agencies responsible for the
administration of such laws. No act or failure to act by HEALTHSOUTH has
resulted in a "prohibited transaction" (as defined in ERISA) with respect to the
HEALTHSOUTH Plans that is not subject to a statutory or regulatory exception. No
"reportable event" (as defined in ERISA) has occurred with respect to any of the
HEALTHSOUTH Plans which is subject to Title IV of ERISA. Except with respect to
certain employees at its Toms River, New Jersey inpatient facility, HEALTHSOUTH
has not previously made, is not currently making, and is not obligated in any
way to make, any contributions to any multi-employer plan within the meaning of
the Multi-Employer Pension Plan Amendments Act of 1980.
(b) Except as described in the HEALTHSOUTH Documents, HEALTHSOUTH is not a
party to any oral or written union, guild or collective bargaining agreement
which agreement covers employees in the United States (nor is it aware of any
union organizing activity currently being conducted in respect to any of its
employees), other than a collective bargaining agreement covering certain of its
employees at its Toms River, New Jersey inpatient facility.
5.14 Compliance with Laws in General. Except as disclosed in the
HEALTHSOUTH Documents, HEALTHSOUTH has not received any notices of violations of
any federal, state and local laws, regulations and ordinances relating to its
business and operations, including, without limitation, the Occupational Safety
and Health Act, the Americans with Disabilities Act, the Medicare or applicable
Medicaid statutes and regulations and any Environmental Laws, which violation,
if established, would have a material effect on HEALTHSOUTH.
5.15 Licenses, Accreditation and Regulatory Approvals. Except as disclosed
in the HEALTHSOUTH Documents, HEALTHSOUTH and the HEALTHSOUTH Subsidiaries and
HEALTHSOUTH Other Entities hold all licenses, permits, certificates of need and
other regulatory approvals which are
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required by law with respect to their businesses, operations and facilities as
they are currently or presently conducted or operated, except where the failure
to possess such licenses would not have a material adverse effect on HEALTHSOUTH
(collectively, the "HEALTHSOUTH Licenses"). Except with respect to those
HEALTHSOUTH Licenses for which renewal applications have been filed by
HEALTHSOUTH, the HEALTHSOUTH Subsidiaries or the HEALTHSOUTH Other Entities and
which are being processed by the applicable regulatory authorities, all such
HEALTHSOUTH Licenses are in full force and effect, and HEALTHSOUTH is in
substantial compliance with all conditions and requirements of the HEALTHSOUTH
Licenses and with all rules and regulations relating thereto. HEALTHSOUTH, the
HEALTHSOUTH Subsidiaries and the HEALTHSOUTH Other Entities are, to the extent
applicable to their operations, (i) eligible to receive payment under Titles
XVIII and XIX of the Social Security Act, (ii) providers under existing provider
agreements with the Medicare program through the applicable intermediaries and
(iii) in substantial compliance with the conditions of participation in the
Medicare program except for such matters as would not have a material adverse
effect on HEALTHSOUTH. Except to the extent that the failure to timely make such
filings would not have a material adverse effect on HEALTHSOUTH, HEALTHSOUTH,
the HEALTHSOUTH Subsidiaries and the HEALTHSOUTH Other Entities have timely
filed all requisite claims and other reports required to be filed in connection
with the Medicare, Medicaid and other governmental health programs due on or
before the date hereof, all of which were, when filed, complete and correct in
all material respects. There are no current claims, actions or appeals pending,
and neither HEALTHSOUTH nor the HEALTHSOUTH Subsidiaries nor the HEALTHSOUTH
Other Entities have filed any claims or reports which would result in such
claims, actions or appeals, before any commission, board or agency, including,
without limitation, any intermediary or carrier, the Provider Reimbursement
Review Board or the Administrator of the Health Care Financing Administration
with respect to any Medicare claims, or any disallowances in connection with any
audit of claims, which would have a material adverse effect on HEALTHSOUTH. The
amounts established as provisions for adjustments by Medicare, Medicaid and
other third-party payors set forth in the HEALTHSOUTH Balance Sheet are
sufficient to pay any amounts for which HEALTHSOUTH believes it will be liable.
To the knowledge of HEALTHSOUTH, neither HEALTHSOUTH nor the HEALTHSOUTH
Subsidiaries nor the HEALTHSOUTH Other Entities nor their respective employees
have committed a violation of the Medicare and Medicaid fraud and abuse
provisions of the Social Security Act or any similar provisions of any federal,
state or local law relating to referrals or billings for healthcare services.
Except for such litigation as would not, if resolved adversely to HEALTHSOUTH or
any HEALTHSOUTH Subsidiary or HEALTHSOUTH Other Entity, have a material adverse
effect on HEALTHSOUTH, any and all past litigation concerning such HEALTHSOUTH
Licenses, and all claims and causes of action raised therein, have been finally
adjudicated or settled. No such License has been revoked, conditioned (except as
may be customary) or restricted, and no action (equitable, legal or
administrative), arbitration or other process is pending, or to the knowledge of
HEALTHSOUTH, threatened, which in any way challenges the validity of, or seeks
to revoke, condition or restrict any such License. Subject to compliance with
applicable securities laws, the HSR Act, and state or local statutes, rules or
regulations requiring notice, approval, or other action upon the occurrence of a
change in control of Horizon/CMS or any of the Horizon/CMS Subsidiaries or any
of the Horizon/CMS Other Entities, the consummation of the Merger will not
violate any law or regulation to which HEALTHSOUTH is subject which, if
violated, would have a material adverse effect on HEALTHSOUTH.
SECTION 6. ACCESS TO INFORMATION AND DOCUMENTS.
6.1 Access to Information. Between the date hereof and the Closing Date,
each of Horizon/CMS and HEALTHSOUTH will give to the other party and its
counsel, accountants and other representatives full access to all the personnel,
properties, documents, contracts, personnel files and other records of such
party and shall furnish the other party with copies of such documents and with
such information with respect to the affairs of such party as the other party
may from time to time reasonably request. Each party will disclose and make
available to the other party and its representatives all books, contracts,
accounts, personnel records, letters of intent, papers, records, communications
with regulatory authorities and other documents relating to the business and
operations of such party. In addition, Horizon/CMS shall make available to
HEALTHSOUTH all such banking, investment and financial
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information as shall be necessary to allow for the efficient integration of
Horizon/CMS banking, investment and financial arrangements with those of
HEALTHSOUTH at the Effective Time.
6.2 Return of Records. If the transactions contemplated hereby are not
consummated and this Plan of Merger terminates, each party agrees to promptly
return all documents, contracts, records or properties of the other party and
all copies thereof furnished pursuant to this Section 6 or otherwise. All
information disclosed by any party or any affiliate or representative of any
party shall be deemed to be "Confidential Information" under the terms of the
Confidentiality Agreement dated January 27, 1997, between Horizon/CMS and
HEALTHSOUTH, (the "Confidentiality Agreement").
6.3 Effect of Access. (a) Nothing contained in this Section 6 shall be
deemed to create any duty or responsibility on the part of either party to
investigate or evaluate the value, validity or enforceability of any contract,
lease or other asset included in the assets of the other party.
(b) With respect to matters as to which any party has made express
representations or warranties herein, the other party or parties shall be
entitled to rely upon such express representations and warranties irrespective
of any investigations made by such party or parties, except to the extent that
such investigations result in actual knowledge by such party or parties of the
inaccuracy or falsehood of particular representations and warranties.
SECTION 7. COVENANTS.
7.1 Preservation of Business. Horizon/CMS will use its commercially
reasonable efforts to preserve the business organization of Horizon/CMS intact,
to keep available to HEALTHSOUTH and the Surviving Corporation the services of
the present key employees of Horizon/CMS, and to preserve for HEALTHSOUTH and
the Surviving Corporation the goodwill of the suppliers, customers and others
having business relations with Horizon/CMS.
7.2 Material Transactions. From the date hereof until the Effective Time,
Horizon/CMS will not (other than as required pursuant to the terms of this Plan
of Merger and the related documents, and other than with respect to (i)
transactions for which binding commitments have been entered into prior to the
date hereof which are described on Exhibit 7.2 to the Disclosure Schedule and
(ii) such other matters as are described on Exhibit 7.2 to the Disclosure
Schedule), without first obtaining the written consent of HEALTHSOUTH, take any
action of a character described in Sections 3.11(ii) to 3.11(xi), inclusive.
7.3 Meeting of Horizon/CMS Stockholders. Horizon/CMS will take all steps
necessary in accordance with its Certificate of Incorporation and Bylaws to
call, give notice of, convene and hold a meeting of its stockholders (the
"Special Meeting") as soon as practicable after the effectiveness of the
Registration Statement (as defined in Section 7.4 hereof), for the purpose of
considering the approval of this Plan of Merger and the Merger and for such
other purposes as may be necessary. Unless this Plan of Merger shall have been
validly terminated as provided herein, the Board of Directors of Horizon/CMS
(subject to the provisions of Section 8.1(d) hereof) will (i) recommend to
Horizon/CMS stockholders the approval of this Plan of Merger, the transactions
contemplated hereby and any other matters to be submitted to the stockholders in
connection therewith, to the extent that such approval is required by applicable
law in order to consummate the Merger, and (ii) use reasonable, good faith
efforts to obtain the approval by Horizon/CMS' stockholders of this Plan of
Merger and the transactions contemplated hereby.
7.4 Registration Statement. (a) HEALTHSOUTH shall prepare and file with the
SEC and any other applicable regulatory bodies, as soon as reasonably
practicable, a Registration Statement on Form S-4 with respect to the shares of
HEALTHSOUTH Common Stock to be issued in the Merger (the "Registration
Statement"), and will otherwise proceed promptly to satisfy the requirements of
the Securities Act of 1933 (the "Securities Act"), including Rule 145
thereunder. Such Registration Statement shall contain a proxy statement of
Horizon/CMS (the "Proxy Statement") containing the information required by the
Securities Exchange Act of 1934 (the "Exchange Act"). HEALTHSOUTH shall take all
reasonable steps to cause the Registration Statement to be declared effective
and to maintain such effectiveness until all of the shares covered thereby have
been distributed. HEALTHSOUTH shall
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promptly amend or supplement the Registration Statement to the extent necessary
in order to make the statements therein not misleading or to correct any
misstatements which have become false or misleading. HEALTHSOUTH shall provide
Horizon/CMS with copies of all filings made pursuant to this Section 7.4 and
shall consult with Horizon/CMS on responses to any comments made by the Staff of
the SEC with respect thereto.
(b) The information specifically designated as being supplied by
Horizon/CMS for inclusion in the Registration Statement shall not, at the time
the Registration Statement is declared effective, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not misleading. The
information specifically designated as being supplied by Horizon/CMS for
inclusion in the Proxy Statement shall not, at the date the Proxy Statement (or
any amendment thereof or supplement thereto) is first mailed to holders of
Horizon/CMS Common Stock, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they are made, not misleading. If at any time prior to the Effective Time
any event or circumstance relating to Horizon/CMS, or its officers or directors,
should be discovered by Horizon/CMS that is required, under the applicable
provisions of the Securities Act or Exchange Act or the rules and regulations of
the SEC thereunder to be set forth in an amendment to the Registration Statement
or a supplement to the Proxy Statement, Horizon/CMS shall promptly so inform
HEALTHSOUTH. All documents, if any, that Horizon/CMS is responsible for filing
with the SEC in connection with the transactions contemplated herein will comply
as to form and substance in all material respects with the applicable
requirements of the Securities Act and the rules and regulations thereunder and
the Exchange Act and the rules and regulations thereunder.
(c) The information specifically designated as being supplied by
HEALTHSOUTH for inclusion in the Registration Statement shall not, at the time
the Registration Statement is declared effective, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not misleading. The
information specifically designated as being supplied by HEALTHSOUTH for
inclusion in the Proxy Statement to be sent to the holders of Horizon/CMS Common
Stock in connection with the Special Meeting shall not, at the date the Proxy
Statement (or any amendment thereof or supplement thereto) is first mailed to
holders of Horizon/CMS Common Stock, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading. If at any time prior to
the Effective Time any event or circumstance relating to HEALTHSOUTH or its
officers or directors, should be discovered by HEALTHSOUTH that is required,
under the applicable provisions of the Securities Act or Exchange Act or the
rules and regulations of the SEC thereunder to be set forth in an amendment to
the Registration Statement or a supplement to the Proxy Statement, HEALTHSOUTH
shall promptly inform Horizon/CMS and shall promptly file such amendment to the
Registration Statement. All documents that HEALTHSOUTH is responsible for filing
with the SEC in connection with the transactions contemplated herein will comply
as to form and substance in all material respects with the applicable
requirements of the Securities Act and the rules and regulations thereunder and
the Exchange Act and the rules and regulations thereunder.
(d) Prior to the Closing Date, HEALTHSOUTH shall use its reasonable, good
faith efforts to cause the shares of HEALTHSOUTH Common Stock to be issued
pursuant to the Merger to be registered or qualified under all applicable
securities or Blue Sky laws of each of the states and territories of the United
States, and to take any other actions which may be necessary to enable the
Common Stock to be issued pursuant to the Merger to be distributed in each such
jurisdiction.
(e) Prior to the Closing Date, HEALTHSOUTH shall file an additional listing
application (the "Listing Application") with the Exchange relating to the shares
of HEALTHSOUTH Common Stock to be issued in connection with the Merger, and
shall use its reasonable, good faith efforts to cause such shares of HEALTHSOUTH
Common Stock to be approved for listing on the Exchange, upon official notice of
issuance, prior to the Closing Date.
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(f) Horizon/CMS shall furnish all information to HEALTHSOUTH with respect
to Horizon/CMS and the Horizon/CMS Subsidiaries and Horizon/CMS Other Entities
as HEALTHSOUTH may reasonably request for inclusion in the Registration
Statement, the Proxy Statement and the Listing Application, and shall otherwise
cooperate with HEALTHSOUTH in the preparation and filing of such documents.
7.5 Exemption from State Takeover Laws; Horizon/CMS Rights. Horizon/CMS
shall take all reasonable steps necessary to (a) exempt the Merger from the
requirements of any state takeover statute or other similar state law which
would prevent or impede the consummation of the transactions contemplated
hereby, by action of Horizon/CMS's Board of Directors or otherwise, and (b) to
redeem the outstanding preferred share purchase rights ("Rights") of Horizon/CMS
or otherwise cause the Merger to be a transaction which does not trigger the
detachment and distribution of the Rights (otherwise than by issuing shares of
Horizon/CMS Common Stock or preferred stock in exchange for the Rights).
7.6 HSR Act Compliance. HEALTHSOUTH and Horizon/CMS shall promptly make
their respective filings, and shall thereafter use their reasonable, good faith
efforts to promptly make any required submissions, under the HSR Act with
respect to the Merger and the transactions contemplated hereby. HEALTHSOUTH and
Horizon/CMS will use their respective reasonable, good faith efforts to obtain
all other permits, authorizations, consents and approvals from third parties and
governmental authorities necessary to consummate the Merger and the transactions
contemplated hereby.
7.7 Public Disclosures. HEALTHSOUTH and Horizon/CMS will consult with each
other before issuing any press release or otherwise making any public statement
with respect to the transactions contemplated by this Plan of Merger, and shall
not issue any such press release or make any such public statement prior to such
consultation except as may be required by applicable law or requirements of the
Exchange. The parties shall issue a joint press release or simultaneous separate
press releases, mutually acceptable to HEALTHSOUTH and Horizon/CMS, promptly
upon execution and delivery of this Plan of Merger.
7.8 Resignation of Horizon/CMS Directors. On or prior to the Closing Date,
Horizon/CMS shall deliver to HEALTHSOUTH evidence satisfactory to HEALTHSOUTH of
the resignation of the Directors of Horizon/CMS, such resignations to be
effective on the Closing Date. At the Effective Time, Neal M. Elliott shall be
added to the HEALTHSOUTH Board of Directors.
7.9 Notice of Subsequent Events. Each party hereto shall notify the other
parties of any changes, additions or events which would cause any material
change in or material addition to any Exhibit to the Disclosure Schedule
delivered by the notifying party under this Plan of Merger, promptly after the
occurrence of the same. If the effect of such change or addition would,
individually or in the aggregate with the effect of changes or additions
previously disclosed pursuant to this Section 7.9, constitute a material adverse
effect on the notifying party, the non-notifying party may, within ten days
after receipt of such notice, elect to terminate this Plan of Merger. If the
non-notifying party does not give written notice of such termination within such
10-day period, the non-notifying party shall be deemed to have consented to such
change or addition and shall not be entitled to terminate this Plan of Merger by
reason thereof.
7.10 No Solicitations. (a) Subject to the provisions of Section 7.10(b)
below, Horizon/CMS shall not, and shall not suffer any of the Horizon/CMS
Subsidiaries or the Horizon/CMS Other Entities or any of their respective
directors, officers, employees, agents or representatives to, directly or
indirectly (i) solicit or initiate (including by way of furnishing or publishing
nonpublic information) any inquiries or the making of any proposal with respect
to any merger, consolidation or other business combination involving Horizon/CMS
or any Horizon/CMS Subsidiary or Horizon/CMS Other Entity or the acquisition of
all or any significant part of the assets or capital stock or other equity
interests of Horizon/CMS or any Horizon/CMS Subsidiary or Horizon/CMS Other
Entity or any similar transaction (an "Acquisition Transaction"), (ii)
negotiate, explore or otherwise engage in discussions with any persons (other
than HEALTHSOUTH and its representatives) with respect to any Acquisition
Transaction or which may reasonably be expected to lead to a proposal for an
Acquisition Transaction or (iii) enter into any agreement, arrangement or
understanding with respect to any such Acquisition Transaction or which
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would require Horizon/CMS to abandon, terminate or fail to consummate the Merger
or any other transaction contemplated by this Agreement. Except as may be
required by the fiduciary duties of Horizon/CMS's Board of Directors under
applicable law, Horizon/CMS agrees that, as of the date hereof, Horizon/CMS and
the Horizon/CMS Subsidiaries and the Horizon/CMS Other Entities and their
respective directors, officers, employees, agents and representatives shall
immediately cease and cause to be terminated any existing activities,
discussions or negotiations conducted heretofore with respect to any Acquisition
Transaction.
(b) Notwithstanding the provisions of Section 7.10(a) above, Horizon/CMS
may (i), directly or indirectly, furnish information and access, in response to
an unsolicited written proposal for a Superior Transaction (as defined below),
to the same extent permitted by Section 6.1, to any corporation, partnership,
person or other entity or group (in each case, a "person"), pursuant to
appropriate confidentiality agreements, and may participate in discussions and
negotiate with such corporation, partnership, person or other entity or group
concerning any proposal for a Superior Transaction, if the Board of Directors of
Horizon/CMS determines in its good faith judgment in the exercise of its
fiduciary duties, after consultation with legal counsel and its financial
advisors, that such action is appropriate in furtherance of the best interest of
its stockholders and (ii) comply with Rule 14e-2 promulgated under the Exchange
Act with regard to an Acquisition Transaction. Horizon/CMS shall promptly advise
HEALTHSOUTH of the existence of any inquiries or proposals received by, any
requests for such information from, or any negotiations or discussions initiated
or continued with, Horizon/CMS or any of the Horizon/CMS Subsidiaries or the
Horizon/CMS Other Entities or any of their respective directors, officers,
employees, agents or representatives, in each case from or by a person (other
than HEALTHSOUTH and its representatives) with respect to an Acquisition
Transaction and the identity of such person and, except as may otherwise be
required pursuant to the fiduciary duties of Horizon/ CMS's Board of Directors
under applicable law, the terms, the proposed form of consideration and the
general terms of any financing arrangement or commitment in connection with such
Acquisition Transaction. As used herein, the term "Superior Proposal" means a
bona fide, written and unsolicited proposal or offer made by any person (other
than HEALTHSOUTH) with respect to an Acquisition Transaction on terms which the
Board of Directors of Horizon/CMS determines in good faith, and in the exercise
of reasonable judgment (based upon the advice of independent financial advisors
and legal counsel), to be more favorable to Horizon/CMS and its stockholders
than the Merger (including taking into account the consideration to be provided
and any financing thereof).
7.11 Other Actions. Subject to the provisions of Section 7.10 hereof, none
of Horizon/CMS, HEALTHSOUTH and the Subsidiary shall knowingly or intentionally
take any action, or omit to take any action, if such action or omission would,
or reasonably might be expected to, result in any of its representations and
warranties set forth herein being or becoming untrue in any material respect, or
in any of the conditions to the Merger set forth in this Plan of Merger not
being satisfied, or (unless such action is required by applicable law) which
would materially adversely affect the ability of Horizon/CMS or HEALTHSOUTH to
obtain any consents or approvals required for the consummation of the Merger
without imposition of a condition or restriction which would have a material
adverse effect on the Surviving Corporation or which would otherwise materially
impair the ability of Horizon/CMS or HEALTHSOUTH to consummate the Merger in
accordance with the terms of this Plan of Merger or materially delay such
consummation.
7.12 Accounting Methods. Neither HEALTHSOUTH nor Horizon/CMS shall change,
in any material respect, its methods of accounting in effect at its most recent
fiscal year end, except as required by changes in generally accepted accounting
principles as concurred in such parties' independent accountants.
7.13 Tax-Free Reorganization Treatment. Neither HEALTHSOUTH nor Horizon/CMS
shall take or cause to be taken any action, whether on or before the Effective
Time, which would disqualify the Merger as a "reorganization" within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended, which action
is taken with the intention of disqualifying the Merger as a reorganization.
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7.14 Affiliate Agreements. Horizon/CMS will use its reasonable, good faith
efforts to cause each of its Directors and executive officers and each of its
"affiliates" (within the meaning of Rule 145 under the Securities Act of 1933,
as amended) to execute and deliver to HEALTHSOUTH as soon as practicable an
agreement in the form attached hereto as Exhibit 7.14 relating to the
disposition of shares of Horizon/CMS Common Stock and shares of HEALTHSOUTH
Common Stock held by such person and the shares of HEALTHSOUTH Common Stock
issuable pursuant to this Plan of Merger.
7.15 Cooperation. (a) HEALTHSOUTH and Horizon/CMS shall together, or
pursuant to an allocation of responsibility agreed to between them, (i)
cooperate with one another in determining whether any filings are required to be
made or consents are required to be obtained in any jurisdiction prior to the
Effective Time in connection with the consummation of the transactions
contemplated hereby and in making any such filings promptly and in seeking to
obtain timely any such consents, (ii) use all commercially reasonable efforts to
cause to be lifted any injunction prohibiting the Merger, or any part thereof,
or the other transactions contemplated hereby, and (iii) furnish to one another
and to one another's counsel all such information as may be required to effect
the foregoing actions.
(b) Subject to the terms and conditions herein provided, and unless this
Plan of Merger shall have been validly terminated as provided herein, each of
HEALTHSOUTH and Horizon/CMS shall use all commercially reasonable efforts (i) to
take, or cause to be taken, all actions necessary to comply promptly with all
legal requirements which may be imposed on such party (or any subsidiaries or
affiliates of such party) with respect to this Plan of Merger and to consummate
the transactions contemplated hereby, subject to the vote of Horizon/CMS's
stockholders described above, and (ii) to obtain (and to cooperate with the
other party to obtain) any consent, authorization, order or approval of, or any
exemption by, any governmental entity or any other public or private third party
which is required to be obtained by such party or any of its subsidiaries or
affiliates in connection with this Plan of Merger and the transactions
contemplated hereby. Each of HEALTHSOUTH and Horizon/CMS will promptly cooperate
with and furnish information to the other in connection with any such burden
suffered by, or requirement imposed upon, either of them or any of their
subsidiaries or affiliates in connection with the foregoing.
7.16 Horizon/CMS Stock Options, Warrants and Convertible Securities. (a) As
soon as reasonably practicable after the Effective Time of the Merger,
HEALTHSOUTH shall deliver to the holders of Horizon/CMS stock options (which,
for purposes of this Section 7.16, includes any rights to purchase Horizon/CMS
Common Stock pursuant to Horizon/CMS's 1996 Employee Stock Purchase Plan),
warrants and convertible securities appropriate notices setting forth such
holders' rights pursuant to any stock option plans under which such Horizon/CMS
stock options were issued, any stock option agreements or warrant agreements
evidencing such options or warrants and any instruments governing such
convertible securities, which shall continue in full force and effect on the
same terms and conditions (subject to the adjustments required by Sections
2.1(d) or this Section 7.16 after giving effect to the Merger and the assumption
of such options, warrants and convertible securities by HEALTHSOUTH as set forth
herein) as in effect immediately prior to the Effective Time. HEALTHSOUTH shall
comply with the terms of the stock option plans, the stock option agreements,
the warrant agreements and the instruments governing such convertible securities
as so adjusted, and shall use its reasonable, good faith efforts to ensure, to
the extent required by, and subject to the provisions of, such plans or
agreements, that the Horizon/CMS stock options which qualified as incentive
stock options prior to the Effective Time shall continue to qualify as incentive
stock options after the Effective Time.
(b) HEALTHSOUTH shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of HEALTHSOUTH Common Stock for delivery
upon exercise of the Horizon/CMS stock options and warrants and conversion of
convertible securities assumed by HEALTHSOUTH in accordance with Section 2.1(d).
As soon as practicable after the Effective Time, HEALTHSOUTH shall file with the
SEC a registration statement on Form S-8 with respect to shares of HEALTHSOUTH
Common Stock subject to such Horizon/CMS stock options and shall use its best
efforts to maintain the effectiveness of such registration statement (and to
maintain the current status of the prospectus or prospectus contained therein)
for so long as such Horizon/CMS stock options and warrants remain outstanding.
HEALTHSOUTH shall administer the plans assumed pursuant to Section 2.1(d) hereof
in a manner that complies with Rule 16b-3 promulgated under the Exchange Act to
the extent the applicable plan complied with such rule prior to the Merger.
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(c) Except to the extent otherwise agreed to by the parties, all
restrictions or limitations on transfer with respect to the Horizon/CMS stock
options awarded under any plan, program, or arrangement of Horizon/CMS or any of
its subsidiaries, to the extent that such restrictions or limitations shall not
have already lapsed, shall remain in full force and effect with respect to such
options after giving effect to the Merger and the assumption by HEALTHSOUTH as
set forth above.
7.17 Certain Operations of Horizon/CMS. HEALTHSOUTH hereby covenants and
agrees that, from and for a period of at least one year after the Closing Date,
the following existing operating divisions of Horizon/CMS shall be operated and
managed by the Surviving Corporation at or through Horizon/CMS's existing
corporate offices and, subject to the provisions of any applicable employment
agreements and to such standards of performance as are customarily imposed by
HEALTHSOUTH on its managerial employees, existing management in Albuquerque, New
Mexico and their current divisional operating locations, subject to reasonable
restraints on managerial overhead: Long-Term Care Division, Specialty Hospital
Division, Meridian Healthcare Management Division, Contract Rehab Therapy
Division, Horizon Medical Management Division, Institutional Pharmacy Division,
Diagnostic Group/Clinical Lab Division, Medical Specialty Services Division,
Medical Innovations Division, Physician Services Division, Horizon Facilities
Management Division and the Cimarron HMO investment. Moreover, HEALTHSOUTH
covenants and agrees that, from and after the Closing Date, (i) it shall cause
the Surviving Corporation to complete the development and construction of
Horizon/CMS's corporate headquarters office building project currently under
development and construction in Albuquerque, New Mexico (the "Alameda Project"),
and to take occupancy of the Alameda Project at such time as it is available for
occupancy and (ii) the operation of the aircraft currently under contract with
Horizon/CMS shall be managed by Horizon/CMS's existing management in
Albuquerque, New Mexico.
7.18 Horizon/CMS Employees. HEALTHSOUTH shall retain all employees of
Horizon/CMS who are employed at the Effective Time as employees-at-will (except
to the extent that such employees are parties to contracts providing for other
employment terms, in which case such employees shall be retained in accordance
with the terms of such contracts) and shall provide such employees with the same
customary employee benefits as HEALTHSOUTH provides its existing employees,
except as may otherwise be agreed between HEALTHSOUTH and Horizon/CMS.
7.19 Certain Information. For as long as any affiliate (as defined for
purposes of Rule 145 under the Securities Act of 1933) of Horizon/CMS holds
shares of HEALTHSOUTH Common Stock issued in the Merger (but not for a period in
excess of two years from the date of consummation of the Merger), HEALTHSOUTH
shall file with the Securities and Exchange Commission or otherwise make
publicly available all information about HEALTHSOUTH required pursuant to Rule
144(c) under the Securities Act of 1933 to enable such affiliate to resell such
shares under the provisions of Rule 145(d) under the Securities Act of 1933.
7.20 Indemnification. (a) Horizon/CMS shall, and from and after the
Effective Time HEALTHSOUTH and the Surviving Corporation shall, indemnify,
defend and hold harmless each person who is now, or has been at any time prior
to the date of this Plan of Merger or who becomes prior to the Effective Time,
an officer, director or employee of Horizon/CMS or any of its subsidiaries (the
"Indemnified Parties") against (i) all losses, claims, damages, costs, expenses,
liabilities or judgments, or amounts that are paid in settlement with the
approval of the indemnifying party (which approval shall not be unreasonably
withheld) of, or in connection with, any claim, action, suit, proceeding or
investigation based in whole or in part on or arising in whole or in part out of
the fact that such person is or was a director, officer or employee of
Horizon/CMS or any of its subsidiaries, whether pertaining to any matter
existing or occurring at or prior to, or at or after, the Effective Time
("Indemnified Liabilities") and (ii) all Indemnified Liabilities based in whole
or in part on, or arising in whole or in part out of, or pertaining to this Plan
of Merger, the Merger or any other transactions contemplated hereby or thereby,
in each case to the full extent a corporation is permitted under the DGCL to
indemnify its own directors, officers and employees, as the case may be (and
HEALTHSOUTH and the Surviving Corporation, as the case may be, will pay expenses
in advance of the final disposition of any such action or proceeding to each
Indemnified Party to the full extent permitted by law upon receipt of any
undertaking contemplated by Section 145(e) of the DGCL). Without limiting the
foregoing, in the event any such claim,
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action, suit, proceeding or investigation is brought against any Indemnified
Party (whether arising before or after the Effective Time), (i) the Indemnified
Parties may retain counsel satisfactory to them and Horizon/CMS (or them and
HEALTHSOUTH and the Surviving Corporation after the Effective Time), (ii)
Horizon/CMS (or after the Effective Time, HEALTHSOUTH and the Surviving
Corporation) shall pay all reasonable fees and expenses of such counsel for the
Indemnified Parties promptly as statements therefor are received and (iii)
Horizon/CMS (or after the Effective Time, HEALTHSOUTH and the Surviving
Corporation) will use all reasonable efforts to assist in the vigorous defense
of any such matter, provided that none of Horizon/CMS, HEALTHSOUTH or the
Surviving Corporation shall be liable for any settlement of any claim effected
without its written consent, which consent, however, shall not be unreasonably
withheld. Any Indemnified Party wishing to claim indemnification under this
Section 10.4, upon learning of any such claim, action, suit, proceeding or
investigation, shall notify Horizon/ CMS, HEALTHSOUTH or the Surviving
Corporation (but the failure so to notify an Indemnifying Party shall not
relieve it from any liability which it may have under this Section 10.4 except
to the extent such failure prejudices such party), and shall deliver to
Horizon/CMS (or after the Effective Time, HEALTHSOUTH and the Surviving
Corporation) the undertaking contemplated by Section 145(e) of the DGCL. The
Indemnified Parties as a group may retain only one law firm to represent them
with respect to such matter unless there is, under applicable standards of
professional conduct, a conflict on any significant issue between the positions
of any two or more Indemnified Parties.
(b) HEALTHSOUTH shall cause to be maintained in effect until six years from
the Effective Time the current policies of directors' and officers' liability
insurance maintained by Horizon/CMS (or substitute policies providing at least
the same coverage and limits and containing terms and conditions that are not
materially less advantageous) with respect to claims arising from facts or
events which occurred before the Effective Time; provided, however, that in no
event shall HEALTHSOUTH or the Surviving Corporation be required to expend more
than 200 percent of the current annual premiums paid by Horizon/CMS for such
insurance; provided, further, that, if HEALTHSOUTH or the Surviving Corporation
is unable to obtain insurance for any period for 200 percent of the current
annual premiums, then the obligation of HEALTHSOUTH and the Surviving
Corporation pursuant hereto shall be to obtain the best coverage reasonably
available under the circumstances subject to the foregoing limitations on
premiums.
(c) The provisions of this Section 7.20 are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party and his or her heirs and
representatives.
7.21 Certain Change in Control Agreements. HEALTHSOUTH hereby agrees that,
at the Closing, it will deliver to each of the officers of Horizon/CMS listed in
Exhibit 7.21 to the Disclosure Schedule a written acknowledgment that, at the
Effective Time, both of the conditions set forth in the sections of the Change
of Control Agreements of such officers specified in Exhibit 7.21 to the
Disclosure Schedule shall have been fulfilled and that, if such officer's
employment by the Surviving Corporation is terminated by HEALTHSOUTH or the
Surviving Corporation or the officer within 18 months after the Effective Time,
the amounts specified in the Change of Control Agreements shall be paid by the
Surviving Corporation to the officer in accordance with the terms thereof.
7.22 Assumption of Employment Agreement. At the Closing, HEALTHSOUTH shall
assume the obligations of Horizon/CMS under that certain Employment and Change
of Control Agreement dated as of January 1, 1997, between Horizon/CMS and Neal
M. Elliott.
SECTION 8. TERMINATION, AMENDMENT AND WAIVER.
8.1 Termination. This Plan of Merger may be terminated at any time prior to
the Effective Time, whether before or after approval of matters presented in
connection with the Merger by the holders of shares of Horizon/CMS Common Stock:
(a) by mutual written consent of HEALTHSOUTH and Horizon/CMS;
(b) by either HEALTHSOUTH or Horizon/CMS:
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(i) if, upon a vote at a duly held meeting of stockholders or any
adjournment thereof, any required approval of this Plan of Merger and
the Merger by the holders of shares of Horizon/CMS Common Stock shall
not have been obtained;
(ii) if the Merger shall not have been consummated on or before
December 31, 1997, unless the failure to consummate the Merger is the
result of a willful and material breach of this Plan of Merger by the
party seeking to terminate this Plan of Merger; provided, however, that
the passage of such period shall be tolled for any part thereof (but not
exceeding 60 days in the aggregate) during which any party shall be
subject to a nonfinal order, decree, ruling or action of any court of
competent jurisdiction or other governmental agency or authority
restraining, enjoining or otherwise prohibiting the consummation of the
Merger or the calling or holding of a meeting of stockholders;
(iii) if any court of competent jurisdiction or other governmental
agency or authority shall have issued an order, decree or ruling or
taken any other action permanently enjoining, restraining or otherwise
prohibiting the Merger and such order, decree, ruling or other action
shall have become final and nonappealable;
(iv) in the event of a breach by the other party of any
representation, warranty, covenant or other agreement contained in this
Plan of Merger which (A) would give rise to the failure of a condition
set forth in Section 9.2(a) or (b) or Section 9.3(a) or (b), as
applicable, and (B) cannot be or has not been cured within 30 days after
the giving of written notice to the breaching party of such breach (a
"Material Breach") (provided that the terminating party is not then in
Material Breach of any representation, warranty, covenant or other
agreement contained in this Plan of Merger); or
(v) if either HEALTHSOUTH or Horizon/CMS gives notice of termination
as a non-notifying party pursuant to Section 7.9;
(c) By either HEALTHSOUTH or Horizon/CMS if any of the conditions to the
obligation of such party to effect the Merger set forth in Section 9.1,
Section 9.2 (in the case of HEALTHSOUTH) or Section 9.3 (in the case of
Horizon/CMS) is not capable of being satisfied prior to the end of the
period referred to in Section 8.1(b)(ii); or
(d) By Horizon/CMS, if Horizon/CMS's Board of Directors shall have (i)
determined, in the exercise of its fiduciary duties under applicable law,
not to recommend the Merger to the holders of Horizon/CMS Common Stock or
shall have withdrawn such recommendation or (ii) approved, recommended or
endorsed any Acquisition Transaction (as defined in Section 7.10) other than
this Plan of Merger or (iii) resolved to do any of the foregoing.
8.2 Effect of Termination. In the event of termination of this Plan of
Merger as provided in Section 8.1, this Plan of Merger shall forthwith become
void and have no effect, without any liability or obligation on the part of any
party, other than the provisions of Sections 6.2, 8.2 and 8.6, and except to the
extent that such termination results from the willful and material breach by a
party of any of its representations, warranties, covenants or other agreements
set forth in this Plan of Merger.
8.3 Amendment. This Plan of Merger may be amended by the parties at any
time before or after any required approval of matters presented in connection
with the Merger by the holders of shares of Horizon/CMS Common Stock; provided,
however, that, after any such approval, if any amendment pursuant to Section
251(d) of the DGCL requires further approval by such stockholders, the Merger
shall not be consummated without the further approval of such stockholders. This
Plan of Merger may not be amended except by an instrument in writing signed on
behalf of each of the parties.
8.4 Extension; Waiver. At any time prior to the Effective Time of the
Merger, the parties may (a) extend the time for the performance of any of the
obligations or other acts of the other parties, (b) waive any inaccuracies in
the representations and warranties contained in this Plan of Merger or in any
document delivered pursuant to this Plan of Merger or (c), subject to the
proviso of Section 8.3, and except for the provisions of subsections (a) through
(f) of Section 9.1, waive compliance with any of the
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agreements or conditions contained in this Plan of Merger. Any agreement on the
part of a party to any such extension or waiver shall be valid only if set forth
in an instrument in writing signed on behalf of such party. The failure of any
party to this Plan of Merger to assert any of its rights under this Plan of
Merger or otherwise shall not constitute a waiver of such rights, except as
otherwise provided in Section 7.9.
8.5 Procedure for Termination, Amendment, Extension or Waiver. A
termination of this Plan of Merger pursuant to Section 8.1, an amendment of this
Plan of Merger pursuant to Section 8.3, or an extension or waiver pursuant to
Section 8.4 shall, in order to be effective, require in the case of HEALTHSOUTH,
the Subsidiary or Horizon/CMS, action by its Board of Directors or the duly
authorized designee of the Board of Directors.
8.6 Expenses; Break-up Fees. (a) All costs and expenses incurred in
connection with this Plan of Merger and the transactions contemplated hereby
shall be paid by the party incurring such expense, except that expenses (other
than legal, accounting and investment banking costs, which shall be paid by the
party incurring such expenses, subject to the provisions of Section 8.6(b)(i)
below) incurred in connection with preparing, filing, printing and mailing the
Proxy Statement and the Registration Statement shall be shared equally by
Horizon/CMS and HEALTHSOUTH.
(b) (i) If this Plan of Merger is terminated by Horizon/CMS pursuant to
Section 8.1(d), and within one year after the effective date of such termination
Horizon/CMS is the subject of a Third Party Acquisition Event with any Person
(as defined in Sections 3(a)(9) and 13(d)(3) of the Exchange Act) (other than a
party hereto), then at the time of consummation of such a Third Party
Acquisition Event, Horizon/CMS shall pay to HEALTHSOUTH a break-up fee of
$35,000,000 in immediately available funds, which fee represents the parties'
best estimates of the out-of-pocket costs incurred by HEALTHSOUTH and the value
of management time, overhead, opportunity costs and other unallocated costs of
HEALTHSOUTH incurred by or on behalf of HEALTHSOUTH in connection with this Plan
of Merger, and shall further pay, or reimburse HEALTHSOUTH for, Expenses (as
defined below), actually incurred by HEALTHSOUTH up to $5,000,000. Horizon/CMS
shall not enter into any agreement with respect to any Third Party Acquisition
Event which does not, as a condition precedent to the consummation of such Third
Party Acquisition Event, require such break-up fee and Expenses to be paid to
HEALTHSOUTH upon such consummation.
(ii) As used herein, the term "Third Party Acquisition Event" shall mean
either of the following:
(A) Horizon/CMS shall enter into any agreement for, or otherwise be
the subject of, any Acquisition Transaction (as defined in Section 7.10)
which is consummated (regardless of whether such consummation occurs
within the one-year period described in Section 8.6(b)(i)); or
(B) any Person (other than a party hereto or its affiliates) shall
have acquired beneficial ownership (as such term is defined in Rule
13d-3 under the Exchange Act) or the right to acquire beneficial
ownership of, or a new group has been formed which beneficially owns or
has the right to acquire beneficial ownership of, 30% or more of the
outstanding Horizon/CMS Common Stock.
(iii) As used herein, the term "Expenses" shall include all reasonable
out-of-pocket expenses (including without limitation all reasonable fees
and expenses of counsel, accountants, investment bankers, experts and
consultants) incurred by or on behalf of HEALTHSOUTH in connection with or
related to the authorization, preparation, negotiation, execution and
performance of this Plan of Merger, the preparation, printing, filing and
mailing of the Registration Statement and the Proxy Statement, and all
other matters related to the consummation of the transactions contemplated
hereby.
(c) Horizon/CMS acknowledges that the provisions for the payment of
break-up fees and Expenses contained in this Section 8.6 are an integral part of
the transactions contemplated by this Plan of Merger and that, without these
provisions, HEALTHSOUTH would not have entered into this Plan of
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Merger. Accordingly, if a break-up fee and Expenses shall become due and payable
by Horizon/CMS, and Horizon/CMS shall fail to pay such amount when due pursuant
to this Section, and, in order to obtain such payment, suit is commenced which
results in a judgment against Horizon/CMS therefor, Horizon/CMS shall pay
HEALTHSOUTH reasonable costs and expenses (including reasonable attorneys' fees)
in connection with such suit, together with interest computed on any amounts
determined to be due pursuant to this Section (computed from the date upon which
such amounts were due and payable pursuant to this Section) and such costs
(computed from the date incurred) at the prime rate of interest announced from
time to time by NationsBank, N.A. (South). The obligations of Horizon/CMS under
this Section 8.6 shall survive any termination of this Plan of Merger.
SECTION 9. CONDITIONS TO CLOSING.
9.1 Mutual Conditions. The respective obligations of each party to effect
the Merger shall be subject to the satisfaction, at or prior to the Closing Date
of the following conditions (any of which may be waived in writing by
HEALTHSOUTH and Horizon/CMS):
(a) None of HEALTHSOUTH, the Subsidiary or Horizon/CMS nor any of their
respective subsidiaries shall be subject to any order, decree or injunction
by a court of competent jurisdiction or governmental agency or authority
which (i) prevents or materially delays the consummation of the Merger or
(ii) would impose any material limitation on the ability of HEALTHSOUTH
effectively to exercise full rights of ownership of the Common Stock of the
Surviving Corporation or any material portion of the assets or business of
Horizon/CMS, the Horizon/CMS Subsidiaries and the Horizon/CMS Other
Entities, taken as a whole.
(b) No statute, rule or regulation shall have been enacted by the
government (or any governmental agency) of the United States or any state,
municipality or other political subdivision thereof that makes the
consummation of the Merger and any other transaction contemplated hereby
illegal.
(c) Any waiting period (and any extension thereof) applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated.
(d) The Registration Statement shall have been declared effective and no
stop order with respect to the Registration Statement shall be in effect.
(e) The holders of Horizon/CMS Common Stock shall have approved the
adoption of this Plan of Merger and any other matters submitted to them in
accordance with the provisions of Section 7.3 hereof.
(f) The shares of HEALTHSOUTH Common Stock to be issued in connection
with the Merger shall have been approved for listing on the Exchange.
(g) HEALTHSOUTH and the Subsidiary shall have obtained, or obtained the
transfer of, any Licenses necessary to allow the Surviving Corporation to
operate the Horizon/CMS facilities, unless the failure to obtain such
transfer or approval would not have a material adverse effect on the
Surviving Corporation.
(h) HEALTHSOUTH and the Subsidiary shall have received all consents,
approvals and authorizations of third parties with respect to all material
leases and management agreements to which the Horizon/CMS Subsidiaries and
the Horizon/CMS Other Entities are parties, which consents, approvals and
authorizations are required of such third parties by such documents, in form
and substance acceptable to HEALTHSOUTH, except where the failure to obtain
such consent, approval or authorization would not have a material effect on
the business of the Surviving Corporation.
9.2 Conditions to Obligations of HEALTHSOUTH and the Subsidiary. The
obligations of HEALTHSOUTH and the Subsidiary to consummate the Merger and the
other transactions contemplated hereby shall be subject to the satisfaction, at
or prior to the Closing Date, of the following conditions (any of which may be
waived by HEALTHSOUTH and the Subsidiary):
A-26
(a) Each of the agreements of Horizon/CMS to be performed at or prior to
the Closing Date pursuant to the terms hereof shall have been duly performed
in all material respects.
(b) The representations and warranties of Horizon/CMS set forth in
Section 3.11(a) shall be true and correct as of the date of this Plan of
Merger and as of the Closing Date. Each other representation and warranty of
Horizon/CMS set forth in this Plan of Merger that is qualified as to
materiality shall be true and correct, and each representation and warranty
that is not so qualified shall be true and correct in all material respects,
as of the date of this Plan of Merger and as of the Closing as though made
at and as of such time, except to the extent that any such representation
and warranty expressly relates to an earlier date (in which case any such
representation and warranty that is qualified as to materiality shall be
true and correct, and any such representation and warranty that is not so
qualified shall be true and correct in all material respects, as of such
earlier date); provided, however, that Horizon/CMS shall not be deemed to be
in breach of any such representations or warranties by taking any action
permitted (or approved by HEALTHSOUTH) under Section 7.2. For purposes of
the foregoing sentence only, each sentence in this Plan of Merger that is a
representation and warranty of Horizon/CMS shall be deemed to be a separate
representation and warranty. HEALTHSOUTH and the Subsidiary shall have been
furnished with a certificate, executed by a duly authorized officer of
Horizon/CMS, dated the Closing Date, certifying in such detail as
HEALTHSOUTH and the Subsidiary may reasonably request as to the fulfillment
of the foregoing conditions.
(c) HEALTHSOUTH shall have received an opinion from Haskell Slaughter &
Young, L.L.C., to the effect that the merger will constitute a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended, which opinion may be based upon reasonable
representations of fact provided by officers of HEALTHSOUTH, Horizon/CMS and
the Subsidiary.
(d) HEALTHSOUTH shall have received an opinion from Vinson & Elkins
L.L.P., substantially to the effect set forth in Exhibit 9.2(d) hereto.
9.3 Conditions to Obligations of Horizon/CMS. The obligations of
Horizon/CMS to consummate the Merger and the other transactions contemplated
hereby shall be subject to the satisfaction, at or prior to the Closing Date, of
the following conditions (any of which may be waived by Horizon/CMS):
(a) Each of the agreements of HEALTHSOUTH and the Subsidiary to be
performed at or prior to the Closing Date pursuant to the terms hereof shall
have been duly performed in all material respects.
(b) The representations and warranties of HEALTHSOUTH set forth in
Section 5.10(a) shall be true and correct as of the date of this Plan of
Merger and as of the Closing Date. Each other representation and warranty of
HEALTHSOUTH or the Subsidiary set forth in this Plan of Merger that is
qualified as to materiality shall be true and correct, and each
representation and warranty that is not so qualified shall be true and
correct in all material respects, as of the date of this Plan of Merger and
as of the Closing as though made at and as of such time, except to the
extent that any such representation and warranty expressly relates to an
earlier date (in which case any such representation and warranty that is
qualified as to materiality shall be true and correct, and any such
representation and warranty that is not so qualified shall be true and
correct in all material respects, as of such earlier date). For purposes of
the foregoing sentence only, each sentence in this Plan of Merger that is a
representation and warranty of HEALTHSOUTH or the Subsidiary shall be deemed
to be a separate representation and warranty. HEALTHSOUTH and the Subsidiary
shall have been furnished with a certificate, executed by a duly authorized
officer of Horizon/CMS, dated the Closing Date, certifying in such detail as
HEALTHSOUTH and the Subsidiary may reasonably request as to the fulfillment
of the foregoing conditions.
(c) Horizon/CMS shall have received an opinion from Vinson & Elkins
L.L.P. to the effect that the Merger will constitute a reorganization with
the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended, which opinion may be based upon reasonable representations of fact
provided by officers of HEALTHSOUTH, Horizon/CMS and the Subsidiary.
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(d) Horizon/CMS shall have received an opinion from Haskell Slaughter &
Young, L.L.C., substantially to the effect set forth in Exhibit 9.3(d)
hereto.
SECTION 10. MISCELLANEOUS.
10.1 Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Plan of Merger or in any instrument
delivered pursuant to this Plan of Merger shall survive the Effective Time.
10.2 Notices. Any communications required or desired to be given hereunder
shall be deemed to have been properly given if sent by hand delivery or by
facsimile and overnight courier to the parties hereto at the following
addresses, or at such other address as either party may advise the other in
writing from time to time:
If to HEALTHSOUTH:
HEALTHSOUTH Corporation
One HealthSouth Parkway
Birmingham, Alabama 35243
Attention: Michael D. Martin
Facsimile: (205) 969-4719
with a copy to:
William W. Horton
HEALTHSOUTH Corporation
One HealthSouth Parkway
Birmingham, Alabama 35243
Facsimile: (205) 969-4732
If to Horizon/CMS:
Horizon/CMS Healthcare Corporation
6001 Indian School Road, N.E.
Suite 530
Albuquerque, New Mexico 87110
Attention: Scot Sauder
Facsimile: (505) 881-5097
with a copy to:
William E. Joor III, Esq.
Vinson & Elkins L.L.P.
3600 First City Tower
1001 Fannin
Houston, Texas 77002-6760
Facsimile:
All such communications shall be deemed to have been delivered on the date of
hand delivery or on the next business day following the deposit of such
communications with the overnight courier.
10.3 Further Assurances. Each party hereby agrees to perform any further
acts and to execute and deliver any documents which may be reasonably necessary
to carry out the provisions of this Plan of Merger.
10.4 Governing Law. This Plan of Merger shall be interpreted, construed and
enforced in accordance with the laws of the State of Delaware, applied without
giving effect to any conflicts-of-law principles.
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10.5 "Including". The word "including", when following any general
statement, term or matter, shall not be construed to limit such statement, term
or matter to the specific terms or matters as provided immediately following the
word "including" or to similar items or matters, whether or not non-limiting
language (such as "without limitation", "but not limited to", or words of
similar import) is used with reference to the word "including" or the similar
items or matters, but rather shall be deemed to refer to all other items or
matters that could reasonably fall within the broadest possible scope of the
general statement, term or matter.
10.6 "Knowledge". "To the knowledge", "to the best knowledge, information
and belief", or any similar phrase shall be deemed to refer to the knowledge of
the Chairman of the Board, Chief Executive Officer, Chief Operating Officer or
Chief Financial Officer of a party and to include the assurance that such
knowledge is based upon a reasonable investigation, unless otherwise expressly
provided.
10.7 "Material", "material adverse change" or "material adverse effect".
"Material" means, when used in connection with one or more entities, material to
the business, prospects, assets, properties, operations, results of operations
or condition (financial or other) of such entity or entities and all other
entities with which such entity or entities are consolidated for financial
accounting purposes, taken as a whole. "Material adverse change" or "material
adverse effect" means, when used in connection with one or more entities, any
change, effect, event, circumstance or occurrence that has, or is reasonably
likely to have, individually or in the aggregate, a material adverse impact on
the business, prospects, assets, properties, operations, results of operations
or condition (financial or other) of such entity or entities and all other
entities with which such entity or entities are consolidated for financial
accounting purposes, taken as a whole; provided, however, that "material adverse
change" and "material adverse effect" shall be deemed to exclude the impact of
(i) changes in generally accepted accounting principles, (ii) the public
announcement of the Merger and compliance with the provisions of this Plan of
Merger, and (iii) any changes resulting from any restructuring or other similar
charges or write-offs taken by Horizon/CMS in its consolidated financial
statements with the consent of HEALTHSOUTH.
10.8 "Hazardous Materials". The term "Hazardous Materials" means any
material which has been determined by any applicable governmental authority to
be harmful to the health or safety of human or animal life or vegetation,
regardless of whether such material is found on or below the surface of the
ground, in any surface or underground water, airborne in ambient air or in the
air inside any structure built or located upon or below the surface of the
ground or in building materials or in improvements of any structures, or in any
personal property located or used in any such structure, including, but not
limited to, all hazardous substances, imminently hazardous substances, hazardous
wastes, toxic substances, infectious wastes, pollutants and contaminants from
time to time defined, listed, identified, designated or classified as such under
any Environmental Laws (as defined in Section 10.9) regardless of the quantity
of any such material.
10.9 "Environmental Laws". The term "Environmental Laws" means any federal,
state or local statute, regulation, rule or ordinance, and any judicial or
administrative interpretation thereof, regulating the use, generation, handling,
storage, transportation, discharge, emission, spillage or other release of
Hazardous Materials or relating to the protection of the environment.
10.10 "Taxes". For purposes of this Agreement, the term "tax" or "taxes"
shall mean all taxes, charges, fees, levies, penalties or other assessment
imposed by any United States federal, state, local or foreign taxing authority,
including, but not limited to, income, excise, property, sales, transfer,
franchise, payroll, withholding, Social Security or other taxes, including any
interest, penalties or additions attributable thereto. For purposes of this
Agreement, the term "tax return" shall mean any return, report, information
return or other document (including any related or supporting information) with
respect to taxes.
10.11 "Subsidiary". For purposes of this Agreement, the term "Subsidiary"
shall mean a corporation of which 50% or more of the class of capital stock
having voting power in the election of directors is owned, directly or
indirectly, by Horizon/CMS or HEALTHSOUTH.
10.12 Captions. The captions or headings in this Plan of Merger are made
for convenience and general reference only and shall not be construed to
describe, define or limit the scope or intent of the provisions of this Plan of
Merger.
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10.13 Integration of Exhibits. All Exhibits attached to this Plan of Merger
are integral parts of this Plan of Merger as if fully set forth herein, and all
statements appearing therein shall be deemed disclosed for all purposes and not
only in connection with the specific representation in which they are explicitly
referenced.
10.14 Entire Agreement. This instrument, including all Exhibits attached
hereto, together with the Confidentiality Agreement, contains the entire
agreement of the parties and supersedes any and all prior or contemporaneous
agreements between the parties, written or oral, with respect to the
transactions contemplated hereby. It may not be changed or terminated orally,
but may only be changed by an agreement in writing signed by the party or
parties against whom enforcement of any waiver, change, modification, extension,
discharge or termination is sought.
10.15 Counterparts. This Plan of Merger may be executed in several
counterparts, each of which, when so executed, shall be deemed to be an
original, and such counterparts shall, together, constitute and be one and the
same instrument.
10.16 Binding Effect. This Plan of Merger shall be binding on, and shall
inure to the benefit of, the parties hereto, and their respective successors and
assigns, and, except as provided in Sections 7.16 and 7.20, no other person
shall acquire or have any right under or by virtue of this Plan of Merger. No
party may assign any right or obligation hereunder without the prior written
consent of the other parties.
10.17 No Rule of Construction. The parties acknowledge that this Plan of
Merger was initially prepared by HEALTHSOUTH, and that all parties have read and
negotiated the language used in this Plan of Merger. The parties agree that,
because all parties participated in negotiating and drafting this Plan of
Merger, no rule of construction shall apply to this Plan of Merger which
construes ambiguous language in favor of or against any party by reason of that
party's role in drafting this Plan of Merger.
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IN WITNESS WHEREOF, HEALTHSOUTH, the Subsidiary and Health Images have
caused this Plan and Agreement of Merger to be executed by their respective duly
authorized officers, and have caused their respective corporate seals to be
hereunto affixed, all as of the day and year first above written.
HORIZON/CMS HEALTHCARE
CORPORATION
By /s/ Neal M. Elliott
----------------------------------
Its President
ATTEST:
/s/ Scot Sauder
- -------------------------------------
Secretary
[ CORPORATE SEAL ]
HEALTHSOUTH CORPORATION
By /s/ Michael D. Martin
----------------------------------
Its Executive Vice President
and Treasurer
ATTEST:
/s/ William W. Horton
- -------------------------------------
William W. Horton
Assistant Secretary
[ CORPORATE SEAL ]
REID ACQUISITION CORPORATION
By /s/ Michael D. Martin
----------------------------------
Its Vice President
ATTEST:
/s/ William W. Horton
- -------------------------------------
William W. Horton
Assistant Secretary
[ CORPORATE SEAL ]
A-31
FIRST AMENDMENT
TO
PLAN AND AGREEMENT OF MERGER
THIS FIRST AMENDMENT ("Amendment") to that certain Plan and Agreement of
Merger (the "Plan of Merger") dated as of February 17, 1997 by and among
HEALTHSOUTH Corporation, a Delaware corporation ("HEALTHSOUTH"), Reid
Acquisition Corporation, a Delaware corporation (the "Subsidiary"), and
Horizon/CMS Healthcare Corporation, a Delaware corporation ("Horizon/ CMS") (the
Subsidiary and Horizon/CMS being sometimes collectively referred to herein as
the "Constituent Corporations"), is itself dated as of the 15th day of
September, 1997 and is by and among HEALTHSOUTH, the Subsidiary and Horizon/CMS.
W I T N E S S E T H:
WHEREAS, subsequent to the execution and delivery of the Plan of Merger,
HEALTHSOUTH requested Horizon/CMS to amend the provisions of the Plan of Merger
in order to delete therefrom Section 7.17; and
WHEREAS, following discussions between Horizon/CMS and HEALTHSOUTH
regarding the provision of certain benefits for employees of Horizon/CMS who may
have been affected by the provisions of Section 7.17 of the Plan of Merger,
Horizon/CMS is willing to accede to such request based on the recognition of
those benefits pursuant to the provisions of that certain letter agreement dated
September 5, 1997 among the parties to the Plan of Merger ; and
WHEREAS, the Boards of Directors of each of the parties hereto have
authorized the execution and delivery of this Amendment for, in the name of and
on behalf of such party.
NOW, THEREFORE, in consideration of the premises, the mutual covenants and
agreements contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged by the parties hereto,
the parties hereto do hereby agree as follows:
Section 1. Capitalized terms used but not defined herein are defined in the
Plan of Merger and are used herein with the same meanings as ascribed to them
therein.
Section 2. Section 7.17 of the Plan of Merger is hereby amended so as to be
and read in its entirety as follows:
HEALTHSOUTH covenants and agrees that, from and after the Closing Date,
the operation
of the aircraft currently under contract with Horizon/CMS shall be managed
by Horizon/ CMS's existing management in Albuquerque, New Mexico, subject to
review of utilization and maintenance by HEALTHSOUTH.
Section 3. Section 10.14 of the Plan of Merger is hereby amended so as to
be and read in its entirety as follows:
10.14 Entire Agreement. This instrument, including all Exhibits attached
hereto, together with the Confidentiality Agreement and the letter agreement
dated September 5, 1997 among the parties to this Plan of Merger, contains
the entire agreement of the parties and supersedes any and all prior or
contemporaneous agreements among the parties, written or oral, with respect
to the transactions contemplated hereby. It may not be changed or terminated
orally, but may only be changed by an agreement in writing signed by the
party or parties against whom enforcement of any waiver, change,
modification, extension, discharge or termination is sought.
Section 4. Except to the extent of the amendments expressly set forth
herein, no waiver, change, modification, extension, discharge or termination
shall be inferred from the provisions hereof. Except as expressly amended
hereby, the Plan of Merger and each and every term and provision thereof shall
remain in full force and effect.
A-32
IN WITNESS WHEREOF, HEALTHSOUTH, the Subsidiary and Horizon/CMS have caused
this Amendment to be executed by their respective duly authorized officers, and
have caused their respective corporate seals to be hereunto affixed, all as of
the day and year first above written.
HORIZON/CMS HEALTHCARE
CORPORATION
By /s/ Ernest A. Schofield
----------------------------------
Its Senior Vice President
ATTEST:
/s/ Scot Sauder
- -------------------------------------
Secretary
[Corporate Seal]
HEALTHSOUTH CORPORATION
By /s/ Michael D. Martin
----------------------------------
Its Executive Vice President
ATTEST:
/s/ Anthony J. Tanner
- -------------------------------------
Secretary
[Corporate Seal]
REID ACQUISITION CORPORATION
By /s/ Michael D. Martin
----------------------------------
Its Vice President
ATTEST:
/s/ Anthony J. Tanner
- -------------------------------------
Secretary
[Corporate Seal]
A-33
September ___, 1997
Board of Directors
Horizon/CMS Healthcare Corporation
6001 Indian School Road, N.E.
Albuquerque, NM 87110
Members of the Board:
Horizon/CMS Healthcare Corporation (the "Company"), HEALTHSOUTH Corporation
(the "Acquiror") and Reid Acquisition Corporation, a newly formed wholly owned
subsidiary of the Acquiror (the "Acquisition Sub"), have entered into a Plan and
Agreement of Merger dated as of February 17, 1997(the "Agreement"), as amended
by the First Amendment to Plan and Agreement of Merger dated September 15, 1997
(the "First Amendment"), pursuant to which the Acquisition Sub will be merged
with the Company in a transaction (the "Merger") in which each outstanding share
of the Company's common stock, par value $0.001 per share (the "Company
Shares"), will be converted into the right to receive 0.42169 shares (the
"Exchange Ratio") of the common stock of the Acquiror, par value $0.01 per share
(the "Acquiror Shares"). On March 17, 1997, the Acquiror effected a two-for-one
stock split in the form of a 100% stock dividend, and the Exchange Ratio was
adjusted accordingly to 0.84338 Acquiror Shares.
You have asked us whether, in our opinion, the Exchange Ratio is fair from
a financial point of view to the holders of the Company Shares.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed certain publicly available business and financial
information relating to the Company and the Acquiror that we deemed
to be relevant;
(2) Reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets, liabilities
and prospects of the Company and the Acquiror, furnished to us by
the Company and the Acquiror, respectively, as well as the amount
and timing of the cost savings and related expenses and synergies
expected to result from the Merger (the "Expected Savings and
Synergies") furnished to us by the Acquiror (which we have been
advised by the Company and the Acquiror reflects discussions of such
matters between the Company and the Acquiror);
(3) Conducted discussions with members of senior management and
representatives of the Company and the Acquiror concerning the
matters described in clauses (1) and (2) above, as well as their
respective businesses and prospects before and after giving effect
to the Merger, and, with respect to discussions with members of
senior management and representatives of the Acquiror, the Expected
Savings and Synergies;
(4) Reviewed the historical market prices and trading activity for the
Company Shares and the Acquiror Shares and compared them with those
of certain publicly traded companies that we deemed to be relevant;
(5) Compared the historical and projected results of operations of the
Company and the Acquiror with those of certain companies that we
deemed to be relevant;
(6) Compared the proposed financial terms of the Merger with the
financial terms of certain other transactions that we deemed to be
relevant;
B-1
(7) Evaluated the potential pro forma impact of the Merger;
(8) Reviewed the Agreement and the First Amendment; and
(9) Reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our
assessment of general economic, market and monetary conditions.
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us or
publicly available, and we have not assumed any responsibility for independently
verifying such information or undertaken an independent evaluation or appraisal
of any of the assets or liabilities of the Company or the Acquiror or been
furnished with any such evaluation or appraisal. In addition, we have not
conducted any physical inspection of the properties or facilities of the Company
or the Acquiror. With respect to (i) the financial forecast information
furnished to or discussed with us by the Company or the Acquiror and (ii) the
Expected Savings and Synergies furnished to or discussed with us by the Acquiror
(which we have been advised by the Company and the Acquiror reflects discussions
of such matters between the Company and the Acquiror), we have assumed that they
have been reasonably prepared and reflect the best currently available estimates
and judgment of the Company's management (with respect to financial forecast
information furnished to or discussed with us by the Company) and of the
Acquiror's management (with respect to financial forecast information and the
Expected Savings and Synergies furnished to or discussed with us by the
Acquiror) as to the expected future financial performance of the Company or the
Acquiror, as the case may be, and the Expected Savings and Synergies.
Additionally, we have assumed that the Merger will be consummated as
contemplated by the Agreement and will qualify as a tax-free reorganization for
U.S. federal income tax purposes.
Our opinion is necessarily based upon market, economic and other conditions
as they exist and can be evaluated on the date hereof. In rendering our opinion,
we have assumed with your consent that in the course of obtaining the necessary
regulatory or other consents or approvals for the Merger, no restrictions,
including any divestiture requirements or amendments or modifications, will be
imposed that will have a material adverse effect on the contemplated benefits of
the Merger.
We are acting as financial advisor to the Company in connection with the
Merger and will receive a fee from the Company for our services, a significant
portion of which is contingent upon the consummation of the Merger. In addition,
the Company has agreed to indemnify us for certain liabilities arising out of
our engagement. We have, in the past, provided financial advisory and financing
services to the Company and the Acquiror and/or their respective affiliates and
have received fees for the rendering of such services. In addition, in the
ordinary course of our business, we may actively trade the Company Shares and
the Acquiror Shares and other securities of the Acquiror, for our own account
and for the accounts of customers and, accordingly, may at any time hold a long
or short position in such securities.
This opinion is for the use and benefit of the Board of Directors of the
Company. Our opinion does not address the merits of the underlying decision by
the Company to engage in the Merger, and does not constitute a recommendation to
any shareholder as to how such shareholder should vote on the proposed Merger.
We are not expressing any opinion herein as to the prices at which the
Acquiror Shares will trade following the announcement or consummation of the
Merger.
On the basis of, and subject to the foregoing, we are of the opinion that,
as of the date hereof, the Exchange Ratio is fair from a financial point of view
to the holders of the Company Shares.
Very truly yours,
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
B-2Alabama.
48
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102(b)(7) of the Delaware General Corporation Law ("DGCL") grants
corporations the right to limit or eliminate the personal liability of their
directors in certain circumstances in accordance with provisions therein set
forth. Article NineNINTH of the HEALTHSOUTH Certificate filed in the Office of the
Secretary of the State of Delaware on June 13, 1995, contains a provision
eliminating or limiting director liability to HEALTHSOUTH and its stockholders
for monetary damages arising from acts or omissions in the director's capacity
as a director. The provision does not, however, eliminate or limit the personal
liability of a director (i) for any breach of such director's duty of loyalty to
HEALTHSOUTH or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
the Delaware statutory provision making directors personally liable, under a
negligence standard, for unlawful dividends or unlawful stock purchases or
redemptions, or (iv) for any transaction from which the director derived an
improper personal benefit. This provision offers persons who serve on the Board
of Directors of HEALTHSOUTH protection against awards of monetary damages
resulting from breaches of their duty of care (except as indicated above). As a
result of this provision, the ability of HEALTHSOUTH or a stockholder thereof to
successfully prosecute an action against a director for a breach of his duty of
care is limited. However, the provision does not affect the availability of
equitable remedies such as an injunction or rescission based upon a director's
breach of his duty of care. The SEC has taken the position that the provision
will have no effect on claims arising under the Federal securities laws.
Section 145 of the DGCL grants corporations the right to indemnify their
directors, officers, employees and agents in accordance with the provisions
therein set forth. Article NineNINTH of the HEALTHSOUTH Certificate and Article IX
of the HEALTHSOUTH Bylaws provide for mandatory indemnification rights, subject
to limited exceptions, to any director, officer, employee, or agent of
HEALTHSOUTH who, by reason of the fact that he or she is a director, officer,
employee, or agent of HEALTHSOUTH, is involved in a legal proceeding of any
nature. Such indemnification rights include reimbursement for expenses incurred
by such director, officer, employee, or agent in advance of the final
disposition of such proceeding in accordance with the applicable provisions of
the DGCL.
HEALTHSOUTH has entered into agreements with all of its directors and its
executive officers pursuant to which HEALTHSOUTH has agreed to indemnify such
directors and executive officers against liability incurred by them by reason of
their services as a director or executive officer to the fullest extent
allowable under applicable law.
See Item 22 of this Registration Statement on Form S-4.
II-1
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Exhibits:EXHIBITS.
EXHIBIT
NO. DESCRIPTION
- -------- ------------------------------------------------------------------------------------------------- -----------
(2) Plan and(1) Purchase Agreement, of Merger, dated FebruaryJune 17, 1997,1998, among EALTHSOUTH Corpo-
ration, Reid AcquisitionHEALTHSOUTH
Corporation and Horizon/CMS Healthcare Corporation attachedSalomon Brothers Inc, Goldman, Sachs & Co., J.P.
Morgan Securities Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Morgan Stanley & Co. Incorporated, NationsBanc
Montgomery Securities LLC, Bear, Stearns & Co. Inc., Credit Suisse
First Boston Corpora- tion, Deutsche Bank Securities Inc.,
PaineWebber Incorporated and Scotia Capital Markets (U.S.A.) Inc.
relating to the Prospectus-Proxy StatementIssuer's 6.875% Senior Notes due 2005 and 7.0%
Senior Notes due 2008.
(3)-1 Restated Certificate of Incorporation of HEALTHSOUTH Corporation,
filed as Annex A,Exhibit (3)-1 to the Issuer's Current Report on Form 8-K,
dated May 28, 1998, is hereby incorporated by reference.
(4)-1 Indenture, dated June 22, 1998, between HEALTHSOUTH Corporation and
PNC Bank, National Association, as Trustee, filed as Exhibit 4.1 to
the Issuer's Quarterly Report on Form 10-Q for the three months
ended June 30, 1998, is hereby incorporated herein by reference.
(4)-2 Officer's Certificate pursuant to Sections 2.3 and 11.5 of the
Indenture, dated June 22, 1998, between HEALTHSOUTH Corporation and
PNC Bank, National Association, as Trustee, relating to the
Issuer's 6.875% Senior Notes due 2005 and 7.0% Senior Notes due
2008, filed as Exhibit 4.2 to the Issuer's Quarterly Report on Form
10-Q for the three months ended June 30, 1998, is hereby
incorporated herein by reference.
(4)-3 Registration Rights Agreement, dated June 22, 1998, among
HEALTHSOUTH Corporation and Salomon Brothers Inc, Goldman, Sachs &
Co., J.P. Morgan Securities Inc., Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Morgan Stanley & Co. Incorporated, NationsBanc
Montgomery Securities LLC, Bear, Stearns & Co. Inc., Credit Suisse
First Boston Corpora- tion, Deutsche Bank Securities Inc.,
PaineWebber Incorporated and Scotia Capital Markets (U.S.A.) Inc.
relating to the Issuer's 6.875% Senior Notes due 2005 and 7.0%
Senior Notes due 2008, filed as Exhibit 4.3 to the Issuer's
Quarterly Report on Form 10-Q for the three months ended June 30,
1998, is hereby incorporated herein by reference. (4)-4 Form of
6.875% Senior Notes due 2005. (4)-5 Form of 7.0% Senior Notes due
2008. (4)-6 Form of Officer's Certificate pursuant to Sections 2.3
and 11.5 of the Indenture, dated June 22, 1998, between HEALTHSOUTH
Corporation and PNC Bank, National Association, as Trustee,
relating to the new 6.875% Senior Notes due 2005 and the new 7.0%
Senior Notes due 2008.
(5) Opinion of Haskell Slaughter & Young, L.L.C. as to the, regarding legality of
the sharesNew Notes.
(12) Computation of HEALTHSOUTH Common Stock being registered.
(8)-1 OpinionRatio of Haskell Slaughter & Young, L.L.C. asEarnings to the description in the Prospectus-Proxy
Statement of certain federal income tax consequences of the Merger.
(8)-2 Opinion of Vinson & Elkins L.L.P. as to the description in the Prospectus-Proxy Statement
of certain federal income tax consequences of the Merger.Fixed Charges.
(23)-1 Consent of Ernst & Young LLP.
(23)-2 Consent of Arthur Andersen LLP.
(23)-3 Consents of Haskell Slaughter & Young, L.L.C. (included in the
opinions filed as Exhibits (5)
and (8)-1).
(23)-4 Consent of Vinson & Elkins L.L.P. (included in the opinion filed as Exhibit (8)-2)(5)).
(23)-5 Consent of Joseph Decosimo and Company, LLP.
(23)-6 Consent of Ernst & Young LLP.
(23)-7 Consent of Merrill Lynch, Pierce Fenner & Smith Incorporated
(23)-8 Consent of Neal M. Elliott
(24) Powers of Attorney (SeeAttorney. See signature pages.
(25)-1 Statement of Eligibility and Qualification under the signature pagesTrust
Indenture Act of 1939 of a Corporation Designated to this Registration Statement).Act as Trustee
on Form T-1, relating to PNC Bank, National Association.
(99) Horizon/CMS Healthcare Corporation Proxy.-1 Form of Letter of Transmittal.
(99)-2 Form of Notice of Guaranteed Delivery.
(99)-3 Form of Letter to Clients.
(99)-4 Form of Letter to Depository Trust Company Participants.
(99)-5 Instruction to Book-Entry Transfer Participant.
II-2
(99)-6 Form of Exchange Agent Agreement.
ITEM 22. UNDERTAKINGS.
(a)The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:registration statement:
(i) To include any prospectus required by sectionSection 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statementregistration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement.registration statement. Notwithstanding the forgoing,foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in the volume and
price represent no more than a 20%20 percent change in the maximum aggregate
offering priceprices set forth in the "Calculation of Registration Fee" table in
the effective registration statement.statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statementregistration statement or any
material change to such information in the Registration
Statement.
II-2
registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to section 13(a) or section 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(c) The undersigned Registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use
of a prospectus which is part of this registration statement, by any person
or party who is deemed to be an underwriter within the meaning of Rule
145(c), the issuer undertakes that such reoffering prospectus will contain
the information called for by the applicable registration form with respect
to reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(d) The Registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (c) immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(e) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrantregistrant pursuant to the foregoing provisions, or otherwise, the Registrantregistrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrantregistrant of expenses incurred
or paid by a director, officer or controlling person of the Registrantregistrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling
II-3
person in connection with the securities being registered, the Registrantregistrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(f) The undersigned Registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day
of receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
Registration Statement through the date of responding to the request.
(g) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not subject of and
included in the Registration Statement when it became effective.
II-3II-4
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Birmingham, State of
Alabama, on September 25, 1997.August 14, 1998.
HEALTHSOUTH CORPORATION
By /s/ RICHARD M. SCRUSHY
------------------------------------
Richard M. Scrushy
Chairman of the Board and
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard M. Scrushy and Aaron Beam, Jr.,Michael D. Martin, and
each of them, his attorney-in-fact with powers of substitution for him in any
and all capacities, to sign any amendments, supplements, subsequent registration
statements relating to the offering to which this Registration Statement
relates, or other instruments he deems necessary or appropriate, and to file the
same, with exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact or his substitute may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLECAPACITY DATE
- --------------------------------- ------------------------------ ---------------------------- -------- ----
/s/
RICHARD M. SCRUSHY Chairman of the Board September 25, 1997
-----------------------------
and Chief August 14, 1998
- ------------------------- Executive Officer and Director
Richard M. Scrushy
and Director
/s/ AARON BEAM, JR.MICHAEL D. MARTIN Executive Vice President, and September 25, 1997
-----------------------------August 14, 1998
- ------------------------- Chief Financial Officer, Aaron Beam, Jr.
/s/Treasurer
Michael D. Martin and Director
WILLIAM T. OWENS Group Senior Vice President September 25, 1997
-----------------------------President- August 14, 1998
- ------------------------- Finance and Controller (Principal
William T. Owens Accounting Officer)
/s/ JAMES P. BENNETT Director September 25, 1997
-----------------------------August 14, 1998
- -------------------------
James P. Bennett
/s/
ANTHONY J. TANNER Director September 25, 1997
-----------------------------August 14, 1998
- -------------------------
Anthony J. Tanner
/s/
P. DARYL BROWN Director September 25, 1997
-----------------------------August 14, 1998
- -------------------------
P. Daryl Brown
/s/
PHILLIP C. WATKINS, M.D. Director September 25, 1997
-----------------------------August 14, 1998
- -------------------------
Phillip C. Watkins, M.D.
II-4II-5
/s/SIGNATURE CAPACITY DATE
- --------------------------- ---------- ----------------
GEORGE H. STRONG -----------------------------Director August 14, 1998
- -------------------------
George H. Strong Director September 25, 1997
/s/
C. SAGE GIVENS Director September 25, 1997
-----------------------------August 14, 1998
- -------------------------
C. Sage Givens
/s/
CHARLES W. NEWHALL III Director September 25, 1997
-----------------------------August 14, 1998
- -------------------------
Charles W. Newhall III
/s/ LARRY R. HOUSE Director September 25, 1997
-----------------------------
Larry R. House
/s/ JOHN S. CHAMBERLIN Director September 25, 1997
-----------------------------August 14, 1998
- -------------------------
John S. Chamberlin
/s/ RICHARD F. CELESTE Director September 25, 1997
-----------------------------
Richard F. Celeste
/s/
JOEL C. GORDON Director September 25, 1997
-----------------------------August 14, 1998
- -------------------------
Joel C. Gordon
EDWIN M. CRAWFORD Director August 14, 1998
-------------------------
Edwin M. Crawford
II-5II-6