AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 17, 1998
                                                      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,zip code, and Telephone Number,telephone number, including Area Code,area code, of Registrant's Principal Executive Offices)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: ROBERT E. LEE GARNER, ESQ. WILLIAM W. HORTON, ESQ. STEVEN E. DUCOMMUN,FREDERIC T. SPINDEL, ESQ. F. HAMPTON MCFADDEN, JR., ESQ. BEALL D. GARY, JR., ESQ. WOON-WAH SIU, ESQ. Haskell SlaughterHEALTHSOUTH CORPORATION PILLSBURY MADISON & Young,SUTRO LLP HASKELL SLAUGHTER & YOUNG, L.L.C. ONE HEALTHSOUTH Corporation BELL, BOYD & LLOYDPARKWAY 1100 NEW YORK AVENUE, N.W. 1200 AmSouth/Harbert Plaza One HealthSouth Parkway Three First National PlazaAMSOUTH/HARBERT PLAZA BIRMINGHAM, ALABAMA 35243 NINTH FLOOR 1901 Sixth Avenue North Birmingham, Alabama 35243 70 West Madison Street, Suite 3300 Birmingham, Alabama 35203SIXTH AVENUE NORTH (205) 967-7116 Chicago, Illinois 60602WASHINGTON, D.C. 20005 BIRMINGHAM, ALABAMA 35203 (202) 861-3000 (205) 251-1000 (312) 372-1121
-------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If the securities being registered on this Formform are to bebeing 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
=========================================================================================================================================================================================================================================== TITLE OF EACH PROPOSED MAXIMUM PROPOSED MAXIMUM CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED TO BE REGISTERED(1)REGISTERED PER UNIT PRICE(2)OFFERING PRICE(1) REGISTRATION FEE(3) - - ---------------------------------------------------------------------------------------------------------------------------FEE(2) Common Stock, par value $.01 per share ......................... 23,623,673 shares N/A $ 568,320,823.75 $ 192,953.73 ===========================================================================================================================10-3/4% Senior Subordinated Notes due 2008 ............. $350,000,000 100% $350,000,000 $92,400 ========================= =======================================================================================
(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 18,617,279 shares of common stock, par value $.01 per share (the "NSC Common Stock"), of National Surgery Centers, Inc. outstanding as of June 15, 1998, 1,908,981 shares of NSC Common Stock that may be issued pursuant to outstanding options, warrants and convertible debt that may be exercised prior to the Effective Time of the Merger described herein and an Exchange Ratio of 1.1509 shares of HEALTHSOUTH Common Stock per share of NSC Common Stock, the maximum Exchange Ratio provided for in the Plan and Agreement of Merger among HEALTHSOUTH Corporation, Field Acquisition Corporation and National Surgery Centers, Inc., dated as of May 5, 1998 (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) $27.6875, representing the average of the high and low sales prices of NSC Common Stock as reported on June 15, 1998, and (b) 20,526,260, the maximum number of shares of NSC Common Stock to be acquired by the Registrant in connection with the acquisition of NSC pursuant to the Plan. (3)Act. (2) Calculated pursuant to Section 6(b) and Rule 457 of the Securities Act. $103,556 of such fee was paid at the time of the filing of the preliminary proxy materials for this matter. -------------- 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,SEC ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ NATIONAL SURGERY CENTERS, INC. 30 SOUTH WACKER DRIVE SUITE 2302 CHICAGO, ILLINOIS 60606 June 18, 1998 To Our Stockholders: YouSUBJECT TO COMPLETION, DATED NOVEMBER 9, 2000 PRELIMINARY PROSPECTUS [GRAPHIC OMITTED] OFFER TO EXCHANGE $350,000,000 PRINCIPAL AMOUNT OF OUR 10-3/4% SENIOR SUBORDINATED NOTES DUE 2008, WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, FOR ANY AND ALL OF OUR OUTSTANDING 10-3/4% SENIOR SUBORDINATED NOTES DUE 2008 -------------- MATERIAL TERMS OF THE EXCHANGE OFFER o The exchange offer expires at 5:00 p.m., New York City time, on __________, 2000, unless extended. o We will exchange all outstanding notes that are cordially invited to attend a Special Meeting of Stockholders of National Surgery Centers, Inc. ("NSC") at The Midland Hotel, 172 West Adams, Chicago, Illinois 60603 on July 22, 1998 at 10:00 a.m., local time (the "Special Meeting"). At the Special Meeting, you will be asked to considervalidly tendered and vote upon a proposal to approve and adopt the Plan and Agreement of Merger, dated as of May 5, 1998 (the "Plan"), providingnot validly withdrawn for the merger (the "Merger")an equal principal amount of a wholly-owned subsidiarynew series of HEALTHSOUTH Corporation ("HEALTHSOUTH") with and into NSC. The Plan provides that, upon consummationnotes which are registered under the Securities Act. o You may withdraw tenders of the Merger, each issued and outstanding share of Common Stock of NSC will be converted into the right to receive that fraction of a share of HEALTHSOUTH Common Stock determined by dividing $30.50 by the Base Period Trading Price (as defined herein), as may be adjusted as provided below, computed to four decimal places (the "Exchange Ratio"); provided, however, that if the Base Period Trading Price shall be greater than $35.00, the Exchange Ratio shall be .8714; and provided further, however, that if the Base Period Trading Price shall be less than $26.50, the Exchange Ratio shall be 1.1509. The term "Base Period Trading Price" means the average daily closing prices for the shares of HEALTHSOUTH Common Stock for the 20 consecutive trading days on which such shares are actually traded (as reported on the New York Stock Exchange Composite Transaction Tape as reported in the Wall Street Journal, Eastern Edition, or if not reported thereby,notes at any other authoritative source) ending at the close of trading on the second trading day immediately preceding the Closing Date. 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 NSC and recommends that you vote in favor of approval and adoption of the Plan. In making that determination, the Board of Directors has received and taken into account the opinions delivered on May 5, 1998 and June 17, 1998 by BT Alex. Brown Incorporated to the effect that, as of the date of such opinions, the consideration to be received by the NSC stockholders was fair, from a financial point of view, to the stockholders of NSC. The full text of the opinion of BT Alex. Brown Incorporated dated June 17, 1998 is attached to the accompanying Prospectus-Proxy Statement as Annex B and should be read carefully in its entirety. Regardless of whether 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, /s/ E. TIMOTHY GEARY E. Timothy Geary Chairman of the Board, Chief Executive Officer and President NATIONAL SURGERY CENTERS, INC. NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON JULY 22, 1998 To the Stockholders of National Surgery Centers, Inc.: A Special Meeting of Stockholders (the "Special Meeting") of National Surgery Centers, Inc., a Delaware corporation ("NSC"), will be held on July 22, 1998 at 10:00 a.m., local time at The Midland Hotel, 172 West Adams, Chicago, Illinois 60603, for the following purposes: 1. To consider and vote upon a proposal to approve and adopt the Plan and Agreement of Merger, dated as of May 5, 1998 (the "Plan"), among NSC, HEALTHSOUTH Corporation ("HEALTHSOUTH") and a wholly-owned subsidiary of HEALTHSOUTH (the "Subsidiary"). Pursuant to the Plan, the Subsidiary would merge with and into NSC (the "Merger") and, among other things, each issued and outstanding share of common stock, par value $.01 per share, of NSC ("NSC Common Stock"), would be converted in the Merger into the right to receive that fraction of a share of HEALTHSOUTH Common Stock determined by dividing $30.50 by the Base Period Trading Price (as defined herein), as may be adjusted as provided below, computed to four decimal places (the "Exchange Ratio"); provided, however, that if the Base Period Trading Price shall be greater than $35.00, the Exchange Ratio shall be .8714; and provided further, however, that if the Base Period Trading Price shall be less than $26.50, the Exchange Ratio shall be 1.1509 (in whichever case occurs, the "Exchange Ratio"), 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 orexchange offer expires. o The exchange of notes will not be a taxable event for U.S. federal income tax purposes. o We will not receive any adjournment thereof.proceeds from the exchange offer. o The Board of Directors has fixed the close of business on June 15, 1998 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 NSC 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 NSC in Chicago, Illinois during normal business hours by any NSC 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 /s/ BRYAN S. FISHER Secretary Chicago, Illinois June 18, 1998 PROSPECTUS-PROXY STATEMENT PROXY STATEMENT OF NATIONAL SURGERY CENTERS, INC. FOR THE SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON JULY 22, 1998 --------------- PROSPECTUS OF HEALTHSOUTH CORPORATION THIS PROSPECTUS RELATES TO UP TO 23,623,673 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, OPTION HOLDERS AND WARRANT HOLDERS OF NATIONAL SURGERY CENTERS, INC. (TOGETHER WITH ITS SUBSIDIARIES, AS APPLICABLE, "NSC") UPON CONSUMMATION OF THE MERGER (AS DEFINED BELOW). SUCH NUMBER OF SHARES REPRESENTS THE MAXIMUM NUMBER OF SHARES THAT MAY BE ISSUED TO NSC STOCKHOLDERS, OPTION HOLDERS AND WARRANT HOLDERS. THIS PROSPECTUS ALSO SERVES AS THE PROXY STATEMENT OF NSC FOR ITS SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON JULY 22, 1998, 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 NSC, pursuant to which HEALTHSOUTH will acquire NSC by means of the merger (the "Merger") of Field Acquisition Corporation, a wholly-owned subsidiary of HEALTHSOUTH (the "Subsidiary"), with and into NSC, with NSC being the surviving corporation (the "Surviving Corporation"). After the Merger, the combined operations of HEALTHSOUTH and NSC are expected to be conducted with NSC as a wholly-owned subsidiary of HEALTHSOUTH and the present subsidiaries of NSC continuing as subsidiaries of NSC 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 May 5, 1998, among HEALTHSOUTH, the Subsidiary and NSC (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 NSC 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 $.01 per share, of NSC, other than shares owned by NSC or any wholly-owned subsidiary of NSC (the "NSC Common Stock" or the "NSC Shares"), will be converted into the right to receive that fraction of a share of HEALTHSOUTH Common Stock determined by dividing $30.50 by the Base Period Trading Price (as defined herein), as may be adjusted as provided below, computed to four decimal places (the "Exchange Ratio"); provided, however, that if the Base Period Trading Price shall be greater than $35.00, the Exchange Ratio shall be .8714; and provided further, however, that if the Base Period Trading Price shall be less than $26.50, the Exchange Ratio shall be 1.1509. The term "Base Period Trading Price" means the average daily closing prices for the shares of HEALTHSOUTH Common Stock for the 20 consecutive trading days on which such shares are actually traded (as reported on the New York Stock Exchange Composite Transaction Tape as reported in the Wall Street Journal, Eastern Edition, or if not reported thereby, any other authoritative source) ending at the close of trading on the second trading day immediately preceding the Special Meeting. NSC 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". This Prospectus-Proxy Statementnew series of notes are substantially identical to those of the outstanding notes, except for transfer restrictions and registration rights relating to the formoutstanding notes. o You may tender outstanding notes only in denominations of Proxy are first being mailed to stockholders$1,000 and multiples of NSC on or about June 18, 1998. SEE$1,000. o Our affiliates may not participate in the exchange offer. -------------- PLEASE REFER TO "RISK FACTORS" BEGINNING ATON PAGE 1611 FOR A DISCUSSIONDESCRIPTION OF CERTAIN FACTORS THATTHE RISKS YOU SHOULD BE CONSIDERED BY NSC STOCKHOLDERS. --------------- THE SECURITIESCONSIDER WHEN EVALUATING THIS INVESTMENT. -------------- WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO BE ISSUED HAVE NOT BEEN APPROVED OR DISAPPROVED BYSEND US A PROXY. -------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION OR BYNOR ANY STATE SECURITIES COMMISSION NOR HAS APPROVED OR DISAPPROVED OF THE SECURITIES AND EXCHANGE COMMISSIONNOTES OR ANY STATE SECU- RITIES COMMISSION PASSED UPON THE ACCURACYDETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR ADEQUACY OF THIS PROSPECTUS-PROXY STATEMENT.COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------- THE DATE OF THIS PROSPECTUS-PROXYPROSPECTUS IS ___________, 2000. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS JUNE 18, 1998.EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. AVAILABLE INFORMATION HEALTHSOUTH has filed a Registration Statement on Form S-4 underTABLE OF CONTENTS
PAGE ----- WHERE YOU CAN FIND MORE INFORMATION ...................................................... 4 INCORPORATION BY REFERENCE OF SOME OF THE DOCUMENTS FILED BY US WITH THE SEC ............................................................................ 5 FORWARD-LOOKING INFORMATION .............................................................. 5 SUMMARY OF PROSPECTUS .................................................................... 6 The Company ............................................................................. 6 The Exchange Offer ...................................................................... 6 The Exchange Notes ...................................................................... 9 RISK FACTORS ............................................................................. 11 You Must Follow Certain Procedures to Tender Your Private Notes ......................... 11 You Will Be Subject to Transfer Restrictions if You Fail to Exchange Your Private Notes . 11 A Public Market for the Notes May Not Develop ........................................... 11 We Depend Upon Reimbursement by Third-Party Payors ...................................... 11 Our Operations Are Subject to Extensive Regulation ...................................... 12 Healthcare Reform Legislation May Affect Our Business ................................... 12 We Face National, Regional and Local Competition ........................................ 13 We Are Subject to Material Litigation ................................................... 13 You Should Take Into Account Certain Financing Considerations ........................... 13 The Notes Are Subordinated Obligations .................................................. 14 Our Ability to Repurchase the Notes Upon a Change of Control May Be Limited ............. 14 Holders of Our Debentures Have a Repurchase Right in Certain Circumstances In Which Holders of the Notes Do Not ........................................................... 14 RATIO OF EARNINGS TO FIXED CHARGES ....................................................... 15 THE EXCHANGE OFFER ....................................................................... 15 Purpose of the Exchange Offer ........................................................... 15 Resale of the Exchange Notes ............................................................ 15 Terms of the Exchange Offer ............................................................. 16 Expiration Date; Extensions; Amendments ................................................. 17 Interest on the Exchange Notes .......................................................... 17 Procedures for Tendering ................................................................ 17 Return of Notes ......................................................................... 19 Book-Entry Transfer ..................................................................... 19 Guaranteed Delivery Procedures .......................................................... 20 Withdrawal of Tenders ................................................................... 20 Conditions .............................................................................. 20 Termination of Rights ................................................................... 21 Shelf Registration ...................................................................... 21 Liquidated Damages ...................................................................... 21 Exchange Agent .......................................................................... 22 Fees and Expenses ....................................................................... 22 Consequence of Failures to Exchange ..................................................... 23 USE OF PROCEEDS .......................................................................... 23 CAPITALIZATION ........................................................................... 24
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DESCRIPTION OF EXCHANGE NOTES ......................................... 25 General .............................................................. 25 Subordination ........................................................ 25 Optional Redemption of the Exchange Notes ............................ 27 Change of Control .................................................... 28 Certain Covenants of the Company ..................................... 29 Events of Default .................................................... 34 Satisfaction and Discharge of Indenture; Defeasance .................. 35 Transfer and Exchange ................................................ 36 Amendment, Supplement and Waiver ..................................... 36 Concerning the Trustee ............................................... 38 Governing Law ........................................................ 38 Book-Entry; Delivery and Form ........................................ 38 Depositary Procedures ................................................ 38 Exchange of Book-Entry Notes for Certificated Notes .................. 40 Certain Definitions .................................................. 41 MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE ......... 51 Exchange of Private Notes for Exchange Notes ......................... 51 Tax Considerations Applicable to United States Persons ............... 51 Tax Considerations Applicable to Non-U.S. Holders .................... 52 Information Reporting and Backup Withholding ......................... 53 PLAN OF DISTRIBUTION .................................................. 54 EXPERTS ............................................................... 54 LEGAL MATTERS ......................................................... 54
3 We have not authorized any dealer, salesperson or other person to give any information or to make any representations to you other than 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 this prospectus. You must not rely on any information or representations not contained in this prospectus as if we had authorized it. This prospectus does not offer to sell or solicit any offer to buy any securities other than the Registration Statement. For furtherregistered notes to which it relates, nor does it offer to buy any of these notes in any jurisdiction to any person to whom it is unlawful to make such offer or solicitation in such jurisdiction. The information pertainingcontained in this prospectus is current only as of the date on the cover page of this prospectus, and may change after that date. We do not imply that there has been no change in the information contained in this prospectus or in our affairs since that date by delivering this prospectus. This prospectus incorporates important business and financial information about us that is not included in or delivered with this prospectus. This information is available without charge to you upon written or oral request. If you would like a copy of any of this information, please submit your request to HEALTHSOUTH Corporation, One HealthSouth Parkway, Birmingham, Alabama 35243, Attention: Legal Department, or call (205) 967-7116, and ask to speak to someone in our Legal Department. In addition, to obtain timely delivery of any information you request, you must submit your request no later than __________, 2000, which is five business days before the securities offered hereby, reference is made todate the Registration Statement. HEALTHSOUTH and NSCexchange offer expires. WHERE YOU CAN FIND MORE INFORMATION We are subject to the informationinformational requirements of the Securities Exchange Act of 1934 as amended (the "Exchange Act") (Commission(SEC File Nos. 1-10315 and 0-27162, respectively)No. 1-10315), and in accordance therewith file periodic reports, proxy statements and other information with the SEC relating to their respective businesses, financial statements and other matters. The Registration Statement, as well as suchSEC. These reports, proxy statements and other information may be inspected and copied at the public reference facilities maintained by the SEC at Room 1024,Judiciary Plaza, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the public reference facilities maintained byfollowing Regional offices of the SEC at its regional offices located at SevenSEC: Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center, Suite 1300, New York, New York 10048; and Citicorp Center, 500 West Madison Street, Room 1400, Chicago, Illinois 60661-2511.10048. Copies of such material canmay also be obtained at prescribed rates by writing tofrom the Public Reference Section of the SEC Public Reference Section,at 450 Fifth Street, N.W., Washington, D.C. 20549.20549, at prescribed rates. The SEC also maintains a webWorld Wide Web site that contains reports, proxy and information statements and other information regarding HEALTHSOUTH, NSC andregistrants (including us) that file electronically with the Registration Statement. The address of that web site isSEC (at http://www.sec.gov. The HEALTHSOUTH Common Stockwww.sec.gov). Our common stock is listed on the New York Stock Exchange (the "NYSE"), and the Registration StatementExchange. Reports, proxy statements and other information with respectrelating to HEALTHSOUTH are available for inspectionus can be inspected at the libraryoffices of the New York Stock Exchange, Inc., 20 Broad Street, 7th Floor, New York, New York 10005. Some of the documents we have filed with the SEC have been incorporated in this prospectus by reference. See "Incorporation by Reference of Some of the Documents Filed by Us with the SEC". Statements contained herein concerning the provisions of any document do not purport to be complete and, in each instance, are qualified in all respects by reference to the copy of such document filed with the SEC. Each such statement is subject to and qualified in its entirety by such reference. 4 INCORPORATION OF CERTAIN INFORMATION BY REFERENCE THIS PROSPECTUS-PROXY STATEMENT 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 NSC, 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 NATIONAL SURGERY CENTERS, INC., 30 SOUTH WACKER DRIVE, SUITE 2302, CHICAGO, ILLINOIS, TELEPHONE (312) 655-1400. IN ORDER TO ENSURE TIMELY DELIVERYSOME OF THE DOCUMENTS ANY REQUEST SHOULD BE MADE AT LEAST FIVE DAYS PRIOR TOFILED BY US WITH THE SPECIAL MEETING.SEC There are hereby incorporated by reference intoin this Prospectus-Proxy Statement and made a part hereofprospectus the following documents previously filed or to be filed by HEALTHSOUTH (Commissionus with the SEC pursuant to the Exchange Act (SEC File No. 1-10315): 1. HEALTHSOUTH'sOur Annual Report on Form 10-K for the fiscal year ended December 31, 1997.1999. 2. HEALTHSOUTH'sOur Quarterly ReportReports on Form 10-Q for the periodperiods ended March 31, 1998.2000, and June 30, 2000. 3. HEALTHSOUTH'sOur Proxy Statement on Schedule 14A filed April 17, 1998,14, 2000, in connection with HEALTHSOUTH's 1998our 2000 Annual Meeting of Stockholders. 4. HEALTHSOUTH's Current Report on Form 8-K filed January 15, 1998. 5. HEALTHSOUTH's Current Report on Form 8-K filed April 3, 1998. 6. HEALTHSOUTH's Current Report on Form 8-K filed May 28, 1998. 7. The description of HEALTHSOUTH's capital stock contained in HEALTHSOUTH's Registration Statement on Form 8-A filed August 26, 1989. 2 There are also hereby incorporated by reference into this Prospectus-Proxy Statement and made a part hereof the following documents or information filed by NSC (Commission File No. 0-27162): 1. NSC's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 2. The consolidated financial statements as of and for the three years ended December 31, 1997, and the report thereon by Ernst & Young, LLP, independent auditors, appearing in NSC's 1997 Annual Report to Shareholders. 3. NSC's Quarterly Report on Form 10-Q for the period ended March 31, 1998. 4. The description of NSC's capital stock contained in NSC's Form 8-A effective November 9, 1995. All documents filed by HEALTHSOUTH and NSCwe file pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus-Proxy Statementprospectus and prior tobefore the Special Meeting or any adjournment thereoftermination of the exchange offer shall be deemed to be incorporated by reference intoto this Prospectus-Proxy Statementprospectus and to be made a part hereof from the date of the filing of such documents. Any statement contained herein or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for the purpose hereofof this prospectus to the extent that a statement contained herein (or(with respect to a previously filed document) or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein)herein modifies or supersedes such statement. Any statementsuch statements so modified or superseded shall not be deemed, to constitute a part hereof, except as so modified or superseded. All information containedsuperseded, to constitute a part of this prospectus. FORWARD-LOOKING INFORMATION Some of the matters discussed in this Prospectus-Proxy Statementprospectus or incorporated herein by reference with respect to HEALTHSOUTH was supplied by HEALTHSOUTH, and allin the information contained in this Prospectus-Proxy Statement or incorporated herein by reference with respect to NSC was supplied by NSC. Although neither HEALTHSOUTH nor NSC 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 inaccuratemay constitute forward-looking statements. Some of these forward-looking statements can be identified by the use of forward-looking terminology such as "believes", "expects", "may", "will", "should", "seeks", "approximately", "intends", "plans", "estimates" or incomplete, neither HEALTHSOUTH nor NSC warrants"anticipates" or the accuracynegative thereof or completenessother comparable terminology, or by discussions of such statementsstrategy, plans or information as they relate to the other party. FORWARD-LOOKING INFORMATIONintentions. Statements relating to HEALTHSOUTH contained in this Prospectus-Proxy Statement thatprospectus which are not historical facts are forward-looking statements. Without limiting the generality of the preceding statement, all statements in this prospectus concerning or relating to estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results are forward-looking statements. In addition, HEALTHSOUTH,we, through itsour senior management, from time to time makesmake forward-looking public statements concerning itsour expected future operations and performance and other developments. SuchThese forward-looking statements are necessarily estimates reflecting HEALTHSOUTH'sour best judgment based upon current information and involve a number of risks and uncertainties, and thereuncertainties. There can be no assurance that other factors will not affect the accuracy of these forward-looking statements or that our actual results will not differ materially from the results anticipated in such forward-looking statements. While it is impossible to identify all such factors, factors which could cause actual results to differ materially from those estimated by HEALTHSOUTHus include, but are not limited to, changes in the regulation of the healthcare industry at either or both of the federal and state levels, changesdelays in reimbursement for HEALTHSOUTH'sour services by governmentgovernmental or private payors, changes to or delays in the implementation of the prospective payment system for inpatient rehabilitation services, competitive pressures in the healthcare industry and HEALTHSOUTH'sour response thereto, HEALTHSOUTH'sour ability to obtain and retain favorable arrangements with third-party payors, unanticipated delays in HEALTHSOUTH'sthe implementation of itsour Integrated Service Model or other strategies, general conditions in the economy and capital markets and other factors which may be identified from time to time in HEALTHSOUTH'sour SEC filings and other public announcements. Certain of the matters discussed in this Prospectus-Proxy Statement relating to NSC are forward-looking statements, and such statements involve risks and uncertainties. Although NSC 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 NSC 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, 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 STATEMENT NOR ANY DISTRIBUTION OF THE SECURITIES TO WHICH THIS PROSPECTUS-PROXY STATEMENT RELATES SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION CONCERNING HEALTHSOUTH OR NSC CONTAINED IN THIS PROSPECTUS-PROXY STATEMENT SINCE THE DATE OF SUCH INFORMATION. THIS PROSPECTUS-PROXY STATEMENT 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 STATEMENT IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT LAWFUL. 4 TABLE OF CONTENTS
PAGE AVAILABLE INFORMATION ................................................... 2 INCORPORATION OF CERTAIN INFORMATION BY REFERENCE ....................... 2 SUMMARY OF PROSPECTUS-PROXY STATEMENT ................................... 7 COMPARATIVE PER SHARE INFORMATION ....................................... 14 RISK FACTORS ............................................................ 16 THE SPECIAL MEETING ..................................................... 21 General ................................................................ 21 Date, Place and Time ................................................... 21 Record Date; Quorum .................................................... 21 Vote Required .......................................................... 22 Voting and Revocation of Proxies ....................................... 22 Solicitation of Proxies ................................................ 22 THE MERGER .............................................................. 23 Terms of the Merger .................................................... 23 Background of the Merger ............................................... 23 Reasons for the Merger; Recommendation of the Board of Directors of NSC 25 Opinion of BT Alex. Brown Incorporated ................................. 25 Effective Time of the Merger ........................................... 29 Exchange of Certificates ............................................... 29 Representations and Warranties ......................................... 30 Conditions to the Merger ............................................... 31 Regulatory Approvals ................................................... 32 Business Pending the Merger ............................................ 32 Waiver and Amendment ................................................... 33 Termination ............................................................ 33 Break-up Fee; Third-Party Bids ......................................... 34 Interests of Certain Persons in the Merger ............................. 34 Indemnification ........................................................ 34 Accounting Treatment ................................................... 34 Certain Federal Income Tax Consequences ................................ 35 Resale of HEALTHSOUTH Common Stock by Affiliates ....................... 36 No Appraisal Rights .................................................... 36 No Solicitation of Transactions ........................................ 36 Expenses ............................................................... 37 NYSE Listing ........................................................... 37 SELECTED CONSOLIDATED FINANCIAL DATA - HEALTHSOUTH ...................... 38 SELECTED CONSOLIDATED FINANCIAL DATA - NSC .............................. 40 BUSINESS OF HEALTHSOUTH ................................................. 41 General ................................................................ 41 Company Strategy ....................................................... 41 Recent Developments .................................................... 42 Patient Care Services .................................................. 43 Locations .............................................................. 45 BUSINESS OF NSC ......................................................... 46 General ................................................................ 46 Strategy ............................................................... 46 Operation of Surgery Centers ........................................... 47 Recent Developments .................................................... 48 DESCRIPTION OF CAPITAL STOCK OF HEALTHSOUTH ............................. 49 Common Stock ........................................................... 49
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PAGE Fair Price Provision .................................................... 49 Section 203 of the DGCL ................................................. 50 Preferred Stock ......................................................... 50 Transfer Agent .......................................................... 50 COMPARISON OF RIGHTS OF NSC AND HEALTHSOUTH STOCKHOLDERS ................. 51 Classes and Series of Capital Stock ..................................... 51 Size and Election of the Board of Directors ............................. 51 Removal of Directors .................................................... 51 Other Voting Rights ..................................................... 52 Conversion and Dissolution .............................................. 52 Business Combinations ................................................... 53 Amendment or Repeal of the Certificate of Incorporation ................. 53 Special Meeting of Stockholders ......................................... 54 Liability of Directors .................................................. 54 Indemnification of Directors and Officers ............................... 54 OPERATIONS AND MANAGEMENT OF HEALTHSOUTH AND NSC AFTER THE MERGER ........ 55 Operations .............................................................. 55 Management .............................................................. 55 EXPERTS .................................................................. 55 LEGAL MATTERS ............................................................ 56 ADDITIONAL INFORMATION ................................................... 56 ANNEXES: A. Plan and Agreement of Merger .......................................... A-1 B. Opinion of BT Alex. Brown Incorporated ................................ B-1
6 SUMMARY OF PROSPECTUS-PROXY STATEMENT The following is aPROSPECTUS This summary of certainhighlights information contained elsewhere in this Prospectus-Proxy Statement. Certain capitalized termsprospectus. It is not complete and may not contain all the information that you should consider before tendering your Private Notes in the exchange offer. You should read the entire prospectus carefully, including the "Risk Factors" section beginning on page 11. As used in this Summary are defined elsewhereprospectus: (1) the terms "HEALTHSOUTH", "Company", "we", "our" and "us" refer to HEALTHSOUTH Corporation and, in some cases, its subsidiaries; (2) the term "Private Notes" refers to our 10-3/4% senior subordinated notes due 2008 which were issued in a transaction exempt from registration under the Securities Act; (3) the term "Exchange Notes" refers to our 10-3/4% senior subordinated notes due 2008 which have been registered under the Securities Act pursuant to a registration statement of which this Prospectus-Proxy Statement. Referenceprospectus is madea part; (4) the term "Notes" refers to and this Summary is qualified in its entirety by, the more detailed information contained in this Prospectus-Proxy Statement, the Annexes heretoPrivate Notes and the documents incorporated by reference herein.Exchange Notes, collectively; and (5) the term "EBITDA" refers to income from continuing operations before depreciation and amortization, net interest expense, impairment of long-lived assets, minority interests in earnings of consolidated entities and income taxes and excludes unusual and nonrecurring expenses. THE COMPANIES HEALTHSOUTH. HEALTHSOUTH isCOMPANY We are the nation's largest provider of rehabilitative healthcare, outpatient surgery and rehabilitative healthcareoutpatient diagnostic services based upon number of staffed rehabilitation beds, number of facilities and revenues derived from those services. It provides these services through itsin the United States, with a national network of outpatientmore than 2,000 locations in all 50 states, Puerto Rico, the United Kingdom, Canada and inpatient rehabilitation facilities, outpatient surgery centers, diagnostic centers, occupational medicine centers, medical centers and other healthcare facilities. HEALTHSOUTH believesAustralia. We believe that it provideswe provide patients, physicians and payors with high-quality healthcare services at significantly lower costson a more cost-effective basis than traditional inpatientacute-care hospitals. Additionally, HEALTHSOUTH'sWe provide these services through our national network reputationof modern, well-maintained healthcare facilities. We enjoy a relatively favorable payor mix compared to other publicly-traded healthcare companies in that most of our revenues (approximately 65% for qualitythe year ended December 31, 1999) are derived from non-governmental sources. For the year ended December 31, 1999, we had revenues of $4,072,107,000 and focus on outcomes has enabled it to secure contracts with nationalEBITDA of $1,218,833,000. For the six months ended June 30, 2000, we had revenues of $2,057,658,000 and regional managed care payors. At March 31, 1998, HEALTHSOUTH had over 1,800 patient care locations in 50 states, the United Kingdom and Australia. See "BUSINESS OF HEALTHSOUTH". At March 31, 1998, HEALTHSOUTH had consolidated assetsEBITDA of approximately $5,791,806,000 and consolidated stockholders' equity of approximately $3,322,296,000 and employed approximately 58,000 persons. HEALTHSOUTH was$545,965,000. We were incorporated under the laws of Delaware in 1984. ItsOur principal executive offices are located at One HealthSouth Parkway, Birmingham, Alabama 35243, and itsour telephone number is (205) 967-7116. NSC. NSC ownsTHE EXCHANGE OFFER The Exchange Offer ......... We are offering to exchange our Exchange Notes for our outstanding Private Notes that are properly tendered and accepted. You may tender outstanding Private Notes only in denominations of $1,000 and multiples of $1,000. We will issue the Exchange Notes on or promptly after the expiration date of the exchange offer. As of the date of this prospectus, $350,000,000 principal amount of Private Notes is outstanding. Expiration Date ............ The exchange offer will expire at 5:00 p.m., New York City time, on __________, 2000, unless extended, in which case the expiration date will mean the latest date and time to which we extend the exchange offer.
6 Conditions to the Exchange Offer.. The exchange offer is not subject to conditions other than that (1) it shall not violate applicable law or any applicable interpretation of the staff of the SEC, (2) no action or proceeding shall have been instituted or threatened in any court or by any governmental agency which might materially impair our ability to proceed with the exchange offer, and no material adverse development shall have occurred in any existing action or proceeding with respect to us, and (3) all governmental approvals deemed necessary by us for the completion of the exchange offer shall have been obtained. The exchange offer is not conditioned upon any minimum principal amount of Private Notes being tendered for exchange. Procedures for Tendering Private Notes ................. If you wish to tender your Private Notes for Exchange Notes pursuant to the exchange offer, you must transmit to The Bank of New York, as exchange agent, on or before the expiration date, either: o a computer-generated message transmitted through The Depository Trust Company's Automated Tender Offer Program system and received by the exchange agent and forming a part of a confirmation of book-entry transfer in which you acknowledge and agree to be bound by the terms of the letter of transmittal; or o a properly completed and duly executed letter of transmittal, which accompanies this prospectus, or a facsimile of the letter of transmittal, together with your Private Notes and any other required documentation, to the exchange agent at its address listed in this prospectus and on the front cover of the letter of transmittal. If you cannot satisfy either of these procedures on a timely basis, then you should comply with the guaranteed delivery procedures described below. By executing the letter of transmittal, you will make the representations to us described under "The Exchange Offer-Procedures for Tendering". Special Procedures for Beneficial Owners ............. If you are a beneficial owner whose Private Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender your Private Notes in the exchange offer, you should contact the registered holder promptly and instruct the registered holder to tender on your behalf. If you wish to tender on your own behalf, you must either (1) make appropriate arrangements to register ownership of the Private Notes in your name or (2) obtain a properly completed bond power from the registered holder, before completing and executing the letter of transmittal and delivering your Private Notes.
7 Guaranteed Delivery Procedures... If you wish to tender your Private Notes and time will not permit the documents required by the letter of transmittal to reach the exchange agent before the expiration date, or the procedure for book-entry transfer cannot be completed on a timely basis, you must tender your Private Notes according to the guaranteed delivery procedure described in this prospectus under "The Exchange Offer-Guaranteed Delivery Procedures". Acceptance of Private Notes and Delivery of Exchange Notes ..... Subject to the satisfaction or waiver of the conditions to the exchange offer, we will accept for exchange any and all Private Notes which are validly tendered in the exchange offer and not withdrawn before 5:00 p.m., New York City time, on the expiration date. Withdrawal Rights ............... You may withdraw the tender of your Private Notes at any time before 5:00 p.m., New York City time, on the expiration date, by complying with the procedures for withdrawal described in this prospectus under "The Exchange Offer-Withdrawal of Tenders". Material U.S. Federal Income Tax Consequences .................. The exchange of Notes will not be a taxable event for United States federal income tax purposes. For a discussion of the material federal income tax consequences relating to the exchange of Notes, see "Material U.S. Federal Income Tax Consequences of the Exchange". Exchange Agent .................. The Bank of New York, the trustee under the indenture governing the Private Notes, is serving as the exchange agent. Consequence of Failure to Exchange Notes ................ If you do not exchange your Private Notes for Exchange Notes, you will continue to be subject to the restrictions on transfer provided in the Private Notes and in the indenture governing the Private Notes. In general, the Private Notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. We do not currently plan to register the Private Notes under the Securities Act. Registration Rights Agreement ... You are entitled to exchange your Private Notes for Exchange Notes with substantially identical terms. The exchange offer satisfies this right. After the exchange offer is completed, you will no longer be entitled to any exchange or registration rights with respect to your Private Notes. Under the circumstances described in the registration rights agreement, you may require us to file a shelf registration statement under the Securities Act.
We explain the exchange offer in greater detail beginning on page 15. 8 THE EXCHANGE NOTES The form and operates freestanding ambulatory surgery centersterms of the Exchange Notes are the same as the form and terms of the Private Notes, except that provide the medicalExchange Notes will be registered under the Securities Act and, administrative support necessarytherefore, the Exchange Notes will not be subject to the transfer restrictions, registration rights and provisions providing for physiciansan increase in the interest rate applicable to perform non-emergency surgical procedures. NSC believes that many physicians prefer the efficiencies of freestanding ambulatory surgery centers because they enhance physicians' productivity by providing them with greater scheduling flexibility, more consistent nurse staffingPrivate Notes. The Exchange Notes will evidence the same debt as the Private Notes and faster turnaround time between cases, allowing physicians to perform more surgeries in a defined period of time. In addition, new technology and advances in anesthesiaboth the Private Notes and the addition of overnight recovery have significantly expandedExchange Notes are governed by the numbersame indenture. Securities Offered .......... $350,000,000 principal amount of 10-3/4% senior subordinated notes due 2008. Issuer ...................... HEALTHSOUTH Corporation. Maturity Dates .............. October 1, 2008. Interest .................... Interest on the Exchange Notes will accrue from September 25, 2000 and be payable, at the rate of 10-3/4% per annum, on April 1 and October 1 of each year, commencing April 1, 2001. The payment of interest on Exchange Notes will be in lieu of payment of any accrued but unpaid interest on Private Notes tendered for exchange. Optional Redemption ......... We may redeem the Exchange Notes, in whole or in part, at any time on or after October 1, 2004, at a redemption price equal to 100% of the principal amount thereof plus a premium declining ratably to par plus accrued interest. In addition, at any time prior to October 1, 2003, we may redeem up to 35% of the aggregate principal amount of the Notes outstanding on the original date of issuance of the Private Notes with the net cash proceeds of one or more equity offerings at a redemption price equal to 110.750% of their principal amount, plus accrued and unpaid interest, provided that: o at least 65% of the original aggregate principal amount of the Notes remains outstanding immediately after the occurrence of the redemption; and o the redemption occurs within 60 days of the date of the closing of the equity offering. For more details, see "Description of Exchange Notes-Optional Redemption of the Exchange Notes". Ranking ..................... The Notes: o are part of our general unsecured obligations; o will be subordinated to all of our existing and future senior indebtedness; and o will be effectively subordinated to the indebtedness of our subsidiaries. Future Guaranties ........... None of our subsidiaries are required to guarantee the Notes.
9 Change of Control ......... If we go through a Change of Control, you have the right to require that we purchase your Notes, in whole or in part, at a purchase price of 101% of their principal amount, plus accrued interest to the date of purchase. The term "Change of Control" is defined in "Description of Exchange Notes". Certain Covenants ......... The indenture contains covenants that, among other things and subject to certain exceptions, restrict our ability and the ability of our subsidiaries to: o incur additional indebtedness and issue preferred stock; o make restricted payments, including dividends, other distributions and investments; o in the case of our subsidiaries, create or permit to exist dividend or payment restrictions with respect to us; o incur or permit to exist indebtedness by us senior to the Notes which is subordinated to any of our other indebtedness; o engage in transactions with our affiliates; o incur or permit to exist certain liens; o sell assets and subsidiary stock; and o sell all or substantially all of our assets or merge with or into other companies. For more details, see "Description of Exchange Notes". Use of Proceeds ........... We will not receive any cash proceeds from the exchange offer.
We explain the Exchange Notes in greater detail beginning on page 25. 10 RISK FACTORS Our business, operations and types of surgical procedures thatfinancial condition are being performed in ambulatory surgery centers. As of March 31, 1998, NSC operated a network of 40 surgery centers in 14 states. NSC provides alternate-site settings for high-quality surgical care that it believes is more cost-effective than hospital-based surgical care and that it believes is increasingly preferred by physicians, payors and patients. See "BUSINESS OF NSC". At March 31, 1998, NSC had consolidated assets of approximately $177,264,000 and consolidated stockholders' equity of approximately $140,988,000 and employed approximately 1,450 persons. NSC was incorporated under the laws of Illinois in 1987 under the name "Medical Venture Development Corp.". It changed its name to "National Surgery Centers, Inc." in 1991 and reincorporated in Delaware in 1995. Its principal executive offices are located at 30 South Wacker Drive, Suite 2302, Chicago, Illinois 60606, and its telephone number is (312) 655-1400. Field Acquisition Corporation. The Subsidiary is a direct, wholly-owned subsidiary of HEALTHSOUTH and has not engaged in any business activity unrelated to the Merger. The principal executive offices of the Subsidiary are located at One HealthSouth Parkway, Birmingham, Alabama 35243, and its telephone number is (205) 967-7116. 7 RECENT DEVELOPMENTS On April 16, 1998, HEALTHSOUTH announced that it had entered into a definitive agreement to acquire 34 ambulatory surgery centers from Columbia/HCA Healthcare Corporation for $550 million payable in cash at closing, which is expected to occur during the third quarter of 1998. The surgery centers are located in Alabama, California, Iowa, Illinois, Kentucky, Louisiana, Minnesota, Mississippi, North Carolina, Nevada, Oregon, Rhode Island and Texas. The transaction remains subject to various regulatory approvalsrisks. Some of these risks are described below, and you should take these risks into account in evaluating us or any investment decision involving us or in deciding whether to tender your Private Notes in the exchange offer. This section does not describe all risks applicable to us, our industry or our business, and it is intended only as a summary of certain material factors. The risk factors set forth below are generally applicable to the Private Notes as well as the Exchange Notes. YOU MUST FOLLOW CERTAIN PROCEDURES TO TENDER YOUR PRIVATE NOTES The Exchange Notes will be issued in exchange for Private Notes only after timely receipt by the exchange agent of the Private Notes, a properly completed and duly executed letter of transmittal and all other third-party consents. On May 22, 1998, NSC completed the acquisitions of majority interestsrequired documents. Therefore, if you desire to tender your Private Notes in ambulatory surgery centersexchange for Exchange Notes, you should allow sufficient time to ensure timely delivery. Your failure to follow these procedures may result in each of Jacksonville, Florida and St. Augustine, Florida for cash. THE SPECIAL MEETING The Special Meeting of NSC's stockholders to consider and votedelay in receiving Exchange Notes on a proposal to approve the Plan will be held on July 22, 1998, at 10:00 a.m., local time, at The Midland Hotel, 172 West Adams, Chicago, Illinois 60603. Only holderstimely basis or in your loss of record of NSC Shares at the close of business on June 15, 1998 (the "Record Date"), will be entitled to notice of and to vote at the Special Meeting. At such date, there were outstanding and entitled to vote 18,617,279 shares of NSC Common Stock. Each issued and outstanding NSC Share is entitled to one vote on each matter to be presented at the Special Meeting. For additional information relating to the Special Meeting, see "THE SPECIAL MEETING". VOTE REQUIRED Approval of the Plan by the stockholders of NSC requires the affirmative vote of the holders of a majority of the outstanding shares of NSC 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 9,308,640 shares of NSC Common Stock. As of the Record Date, directors and executive officers of NSC and their affiliates beneficially owned an aggregate of 1,433,015 shares of NSC Common Stock (excluding shares issuable upon exercise of options), or approximately 7.7% of the NSC Shares outstanding on such date. To NSC'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 NSC stockholders, the Plan may be terminated by HEALTHSOUTH or NSC in accordance with its terms. Such approval is also a condition to HEALTHSOUTH's and NSC's obligations to consummate the Merger. See "THE SPECIAL MEETING - Vote Required", "THE MERGER - Conditions to the Merger" and "- Termination". THE MERGER Terms of the Merger. NSC will be acquired by HEALTHSOUTH pursuant to and subject to the terms and conditions of the Plan, which provides that, at the effective time of the Merger (the "Effective Time"), the Subsidiary will merge with and into NSC with NSC being the Surviving Corporation. The Certificate of Incorporation of NSC, 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 NSC Share (excluding shares held by NSC and any of its subsidiaries) will be converted into the right to receive that fractionExchange Notes. Neither we nor the exchange agent is under any duty to give notification of defects or irregularities with respect to tenders of Private Notes for exchange. If you tender Private Notes in the exchange offer for the purpose of participating in a sharedistribution of HEALTHSOUTH Common Stock determined by dividing $30.50 by the Base Period Trading Price (as defined herein), as may be adjusted as provided below, computed to four decimal places (the "Exchange Ratio"); provided, however, that if the Base Period Trading Price shall be greater than $35.00, the Exchange Ratio shallNotes, you will be .8714;required to comply with the registration and provided further, however, that ifprospectus delivery requirements of the Base Period 8 Trading Price shall be less than $26.50, the Exchange Ratio shall be 1.1509. The term "Base Period Trading Price" means the average daily closing prices for the shares of HEALTHSOUTH Common Stock for the 20 consecutive trading days on which such shares are actually traded (as reported on the New York Stock Exchange Composite Transaction Tape as reported in the Wall Street Journal, Eastern Edition, or if not reported thereby, any other authoritative source) ending at the close of trading on the second trading day immediately preceding the Special Meeting. Fractional shares of HEALTHSOUTH Common Stock will not be issuableSecurities Act in connection with any resale transaction. Each broker-dealer that receives Exchange Notes for its own account in exchange for Private Notes, where the Merger. NSC stockholders will receive cash (without interest) in lieu of fractional shares of HEALTHSOUTH Common Stock. See "THE MERGER" and "DESCRIPTION OF CAPITAL STOCK OF HEALTHSOUTH". As of March 31, 1998, NSC had outstanding approximately $13,110,000 in long-term indebtedness (includingPrivate Notes were acquired by the current portion thereof), all of which will at the Effective Time become long-term indebtedness of the Surviving Corporation (being a subsidiary of HEALTHSOUTH)broker-dealer as a result of the Merger. Recommendationmarket-making activities or any other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of the BoardExchange Notes. See "The Exchange Offer-Procedures for Tendering" and "Plan of Directors. THE BOARD OF DIRECTORS OF NSC HAS ADOPTED AND APPROVED THE PLAN AND HAS RECOMMENDED A VOTE FOR APPROVAL OF THE PLAN. THE BOARD OF DIRECTORS BELIEVES THE PLAN IS FAIRDistribution". YOU WILL BE SUBJECT TO AND IN THE BEST INTERESTS OF THE STOCKHOLDERS OF NSC. In its deliberations with respectTRANSFER RESTRICTIONS IF YOU FAIL TO EXCHANGE YOUR PRIVATE NOTES If you do not exchange your Private Notes for Exchange Notes pursuant to the Merger, the Board of Directors of NSC consulted with management of NSC and the financial and legal advisersexchange offer, you will continue to NSC. The composite mix of information available to the Board of Directors with respect to the Merger included the information regarding the matters enumerated under "THE MERGER - Reasons for the Merger; Recommendation of the Board of Directors of NSC" below. Opinion of Financial Advisor to NSC. BT Alex. Brown Incorporated ("BT Alex. Brown") delivered to the Board of Directors of NSC on May 5, 1998, its oral opinion (subsequently confirmed in writing by opinions dated as of May 5, 1998 and June 17, 1998), to the effect that, as of the date of the opinions and based on andbe subject to the assumptions, factors and limitationsrestrictions on transfer of the Private Notes as set forth therein,in the consideration to be received by the stockholders of NSC pursuant to the Plan was fair, from a financial point of view, to such stockholders of NSC. The full text of the opinion of BT Alex. Brown dated as of June 17, 1998 which sets forth the assumptions made, matters considered and limitationslegend on the review undertaken by BT Alex. Brown, and which is attached hereto as Annex B, is directed toPrivate Notes. In general, the NSC Board, addresses only the fairness of the consideration to be received by the NSC stockholders from a financial point of view and does not constitute a recommendation to any stockholder as to how such stockholder should vote at the Special Meeting. The holders of NSC Common Stock are urged to read, and should read, this opinion in its entirety. Effective Time of the Merger. The Merger will become effective upon the filing of a Certificate of Merger by the parties 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 as soon as practical after the Closing Date as defined in the Plan or at such other time as may be agreed by HEALTHSOUTH and NSC. See "THE MERGER - - -Effective Time of 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 NSC Shares for use in exchanging such holder's stock certificates for certificates evidencing shares of HEALTHSOUTH Common 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. See "THE MERGER - Representations and Warranties". Conditions to the Merger. The obligation of each of HEALTHSOUTH, the Subsidiary and NSC to consummate the Merger is subject to certain conditions, including approval of the Plan by the NSC stockholders, certain regulatory approvals and confirmation by each of HEALTHSOUTH and NSC of 9 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. NSC 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 NSC 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)Private Notes may not be consummated until certain information has been furnishedoffered or sold unless registered under the Securities Act, or pursuant to an exemption from, or in a transaction not subject to, the Department of Justice (the "DOJ")Securities Act and applicable state securities laws. We do not currently intend to register the Federal Trade Commission (the "FTC") and certain waiting period requirements have been satisfied. On May 14, 1998, HEALTHSOUTH and NSC 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 expired on June 13, 1998. 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 actionPrivate Notes under the antitrust laws seeking to enjoinSecurities Act. To the consummation ofextent that Private Notes are tendered and accepted in the Merger or seekingexchange offer, the divestiture by HEALTHSOUTH of any part of its assets or all or any part of the stock or assets of NSC.trading market for untendered and tendered but unaccepted Private Notes could be adversely affected. A PUBLIC MARKET FOR THE NOTES MAY NOT DEVELOP There can be no assurance that a challenge topublic market for the Merger on antitrust groundsNotes will not be madedevelop or, if such a challengemarket develops, as to the liquidity of the market. If a market were to develop, the Notes could trade at prices that may be higher or lower than their principal amount. We do not intend to apply for listing of the Notes on any securities exchange or for quotation of the Notes on any automated quotation system. The initial purchasers have previously made a market in the Private Notes, and we have been advised that it would not be successful. The operations of each Company also are subjectthe initial purchasers currently intend to make a substantial body of federal, state, local and accrediting bodymarket in the Exchange Notes, as permitted by applicable laws rules and regulations, relatingafter consummation of the exchange offer. The initial purchasers are not obligated, however, 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 providedmake a market in the Plan, NSC will use its best efforts to preserve intact its present business organizationPrivate Notes or the Exchange Notes, and 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, NSC has agreed not to engage in certain types of transactions pending the Effective Time. Both HEALTHSOUTH and NSC have 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 Effective Time. See "THE MERGER - Business Pending the Merger". Amendment. The Plan provides that,market-making activity may be discontinued at any time prior towithout notice at 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 approvalsole discretion of the Plan by the stockholders of NSC, under certain circumstances that are set forth in the Plan. See "THE MERGER Termination". No Solicitation. The Plan provides that NSC and its representatives willinitial purchasers. If an active public market does not directlydevelop or indirectly, encourage, solicit, participate in or initiate discussions or negotiations with, or provide any information to, any entity other than HEALTHSOUTH or a HEALTHSOUTH affiliate concerning any merger, sale of assets, sale of or tender offer for shares of NSC Common Stock or similar transaction involving NSC (an "Acquisition Transaction"), except as may be permitted to allow the Board of Directors of NSC to satisfy it fiduciary duties under applicable law. Break-up Fee; Third Party Bids. If the Plan is terminated by the Board of Directors of NSC because, in the exercise of its fiduciary duties under applicable law, it has (i) determined not to recommend the Merger to the holders of NSC Common Stock, (ii) withdrawn such recommendation, (iii) approved, recommended or endorsed any Acquisition Transaction (as defined in the Plan) other than the Plan or (iv) resolved to take any of such actions, and within one year after the effective date of such termination NSC 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 NSC shall pay to HEALTHSOUTH a break-up fee of $15,000,000. See "THE MERGER - Break-up Fee; Third Party Bids". 10 Interests of Certain Persons in the Merger. In considering the recommendation of the Board of Directors of NSC with respect to the Plan and the transactions contemplated thereby, stockholders of NSC should be aware that certain members of the management of NSC and its Board of Directors have certain interests in the Merger in addition to the interests of stockholders generally. In connection with the Merger, HEALTHSOUTH anticipates that it will enter into Consulting and Noncompetition Agreements with E. Timothy Geary, Bryan S. Fisher, Dennis D. Solheim and Dennis Zamojski, pursuant to which each will individually act as a consultant to HEALTHSOUTH with respect to various matters, including transition issues, industry presentations, business development and strategic planning. In addition, pursuant to the terms of NSC's stock option plans, certain NSC 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 NSC management hold such options. HEALTHSOUTH has agreed to indemnify NSC's officers, directors and employees for any liability arising out of their status as officers, directors and employees of NSC or related to the Plan. See "THE MERGER - Interests of Certain Persons in the Merger". Accounting Treatment. It is intended that the Merger will be accounted for as a "pooling of interests". See "THE MERGER - Accounting Treatment". Certain Federal Income Tax Consequences. The Merger is intended to qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code (the "Code"). If the Merger so qualifies, no gain or loss will be recognized by holders of NSC Shares who hold such shares as capital assets upon their receipt of HEALTHSOUTH Common Stock in exchange for their NSC Shares, except with respect to cash received in lieu of fractional shares. The obligations of NSC and HEALTHSOUTH to consummate the Merger are conditioned upon their receipt 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 NSC 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 NSC 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 NSC 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 NSC 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 NSC 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 NSC 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". 11 MARKET AND MARKET PRICE HEALTHSOUTH Common Stock is listed under the symbol "HRC" on the NYSE. NSC Common Stock is listed under the symbol "NSCI" on the Nasdaq National Market System ("Nasdaq"). Set forth below are the closing prices per share of HEALTHSOUTH Common Stock and NSC Common Stock on the NYSE and Nasdaq, respectively, on (i) May 5, 1998, the last business day preceding public announcement of the Merger, and (ii) June 15, 1998:
CLOSING PRICE CLOSING PRICE PER SHARE OF PER SHARE OF HEALTHSOUTH NSC DATE COMMON STOCK COMMON STOCK ---- ------------ ------------ May 5, 1998 ........... $ 30.00 $ 28.00 June 15, 1998 ......... $ 27.44 $ 27.75
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 March 17, 1997.
HEALTHSOUTH COMMON STOCK ------------------------- HIGH LOW ---- --- 1996 First Quarter .................................. $19.07 $13.50 Second Quarter ................................. 19.32 16.16 Third Quarter .................................. 19.32 14.25 Fourth Quarter ................................. 19.88 17.57 1997 First Quarter .................................. $22.38 $17.94 Second Quarter ................................. 27.12 17.75 Third Quarter .................................. 28.94 23.12 Fourth Quarter ................................. 28.31 22.00 1998 First Quarter .................................. $30.06 $21.94 Second Quarter (through June 15, 1998) ......... 30.56 26.38
12 The following table sets forth certain information as to the high and low closing prices per share of NSC Common Stock for the periods indicated. The prices for NSC Common Stock are as reported on Nasdaq. No dividends were paid by NSC during the periods presented.
NSC COMMON STOCK ------------------------ HIGH LOW ---- --- 1996 First Quarter(1)(2) ............................ $ 14.67 $ 9.58 Second Quarter(1)(2) ........................... 21.00 12.42 Third Quarter(1) ............................... 20.17 15.00 Fourth Quarter(1) .............................. 25.33 16.50 1997 First Quarter(1) ............................... $ 24.00 $ 18.33 Second Quarter(1) .............................. 25.67 17.67 Third Quarter .................................. 23.33 18.00 Fourth Quarter ................................. 26.38 21.75 1998 First Quarter .................................. 26.25 20.63 Second Quarter (through June 15, 1998) ......... 29.875 25.5
- - ----------- (1) Adjusted to reflect a three-for-two stock split effected August 1997. (2) Adjusted to reflect a three-for-two stock split effected May 1996. As of June 15, 1998, there were approximately 6,395 record holders of HEALTHSOUTH Common Stock, excluding those shares held by depository companies for certain beneficial owners. As of the Record Date, there were approximately 610 record holders of NSC Common Stock. HOLDERS OF NSC SHARES ARE ADVISED TO OBTAIN CURRENT MARKET QUOTATIONS FOR HEALTHSOUTH COMMON STOCK AND NSC COMMON STOCK. No assurance can be given as tocontinue, 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, NSC will be a wholly-owned subsidiary of HEALTHSOUTH, and all of NSC'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. See "OPERATIONS AND MANAGEMENT OF HEALTHSOUTH AFTER THE MERGER". 13 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 pooling-of-interests basis, and (ii) for NSC 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 NSC Shares in accordance with the Exchange Ratio. This financial information should be read in conjunction with the historical consolidated financial statements of HEALTHSOUTH and NSC and the related notes thereto contained elsewhere herein or in documents incorporated herein by reference. See "INCORPORATION OF CERTAIN INFORMATION BY REFERENCE". Neither HEALTHSOUTH nor NSC has paid cash dividends since inception (although certain companies acquired by HEALTHSOUTH in pooling-of-interests mergers paid cash dividends in the past). It is anticipated that HEALTHSOUTH will retain all earnings for use in the expansionliquidity of the business and therefore does not anticipate paying any cash dividends in the foreseeable future. The payment of future dividends willNotes may 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.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------------ ----------------------- 1995 1996 1997 1997 1998 ---------- ---------- ---------- ---------- ---------- Income from continuing operations per share(3): HEALTHSOUTH(1) Historical (basic) ......................... $ 0.37 $ 0.59 $ 0.95 $ 0.20 $ 0.27 Historical (diluted)(2) .................... 0.35 0.55 0.91 0.18 0.27 Pro forma combined (primary) ............... 0.37 0.58 0.93 0.19 0.27 Pro forma combined (diluted)(2) ............ 0.35 0.55 0.89 0.18 0.26 NSC(4) Historical (basic) ......................... $ 0.38 $ 0.53 $ 0.70 $ 0.15 $ 0.20 Historical (diluted)(5) .................... 0.38 0.50 0.67 0.14 0.20 Pro forma equivalent (primary)(6) .......... 0.43 0.67 1.07 0.22 0.31 Pro forma equivalent (diluted)(6) .......... 0.40 0.63 1.02 0.21 0.30
AT MARCH 31, 1998 ------------- Book value per common share outstanding: HEALTHSOUTH - Historical ............................................................. $8.31 HEALTHSOUTH - pro forma combined ..................................................... 8.22 NSC - Historical ..................................................................... 7.59 NSC - pro forma equivalent(6) ........................................................ 9.46
- - ----------- (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) Diluted earnings per share in 1995, 1996, 1997 and for the three months ended March 31, 1997 reflect 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. Diluted earnings per share for the three months ended March 31, 1998 reflect shares reserved for issuance upon exercise of dilutive stock options and shares reserved for issuance upon conversion of HEALTHSOUTH's 3.25% Convertible Subordinated Debentures due 2003. 14 (3) Amounts represent income from continuing operations per common share and do not reflect the effects of an extraordinary loss of $9,056,000, net of tax, and a loss from discontinued operations of $1,162,000, net of tax, recorded by HEALTHSOUTH during the year ended December 31, 1995 and extraordinary losses of $253,000, $463,000 and $138,000, net of tax, recorded by NSC during the years ended December 31, 1995, 1996 and 1997, respectively. (4) Adjusted to reflect three-for-two stock splits effected in the form of 100% stock dividends paid on May 31, 1996 and August 29, 1997, respectively. (5) Diluted earnings per share in 1995, 1996, 1997 and for the three months ended March 31, 1997 and 1998 reflect shares reserved for issuance upon exercise of dilutive stock options and shares reserved for issuance upon conversion of NSC's Convertible Notes. (6) NSC pro forma equivalent per share data have been calculated by multiplying the pro forma HEALTHSOUTH amounts by 1.1509. 15 RISK FACTORS In addition to the other information in this Prospectus-Proxy Statement, the following should be considered carefully by holders of NSC Shares. Statements made herein should be considered as "forward-looking information". See "INCORPORATION OF CERTAIN INFORMATION BY REFERENCE - Forward-Looking Information".adversely affected. WE DEPEND UPON REIMBURSEMENT BY THIRD-PARTY PAYORS Substantially all of HEALTHSOUTH'sour revenues are derived from private and governmental third- party payors (in 1997,third-party payors. In 1999, approximately 36.9%33.0% of our revenues were derived from Medicare and approximately 63.1%67.0% from commercial insurers, managed care plans, workers' compensation payors and other private pay revenue sources).sources. There are increasing pressures from many payor sourcespayors to control healthcare costs and to reduce or limit increases in reimbursement rates for medical services. In the recent past, we have experienced a decrease in revenues primarily attributable to declines in government reimbursement as a result of the Balanced Budget Act of 1997. There can be no assurances that payments underfrom governmental and third-party payor programsor private payors will remain at levels comparable to present levels. In attempts to limit the federal budget deficit, there have 11 been, and HEALTHSOUTH expectswe expect that there will continue to be, a number of proposals to limit Medicare reimbursementsreimbursement for certainvarious services. HEALTHSOUTHWe 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.us. Further, Medicare reimbursement for inpatient rehabilitation services is changing from a cost-based reimbursement system to a prospective payment system ("PPS"), with the phase-in of the PPS currently scheduled to begin in April 2001. While we believe we are well-positioned and well-prepared for the transition, we cannot be certain what effect the adoption of inpatient rehabilitation PPS will have on us. In addition, a delay in the implementation of inpatient rehabilitation PPS, lower than expected reimbursement rates or our failure to successfully execute our planned response to this change could have a material adverse effect on our financial condition or results of operations. OUR OPERATIONS ARE SUBJECT TO EXTENSIVE REGULATION HEALTHSOUTH is subject, and the combined Companies will beOur operations are subject to various other types of regulation at the federal and state levels,governments, including licensure and certification laws, Certificate of Need laws and laws relating to financial relationships among providers of healthcare services, Medicare fraud and abuse and physician self-referral. The operation of HEALTHSOUTH'sour 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 assureensure 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.other government programs. Additionally, in many states, Certificates of Need or other similar approvals are required for expansion of HEALTHSOUTH'sour operations. HEALTHSOUTHWe could be adversely affected by the failure or inability toif we cannot obtain such approvals, by changes in the standards applicable to approvals and by possible delays and expenses associated with obtaining approvals. TheOur failure by HEALTHSOUTH to obtain, retain or renew any required regulatory approvals, licenses or certificates could prevent HEALTHSOUTHus from being reimbursed for or from, offering itsour services, or could materially adversely affect itsour results of operations. A wide array of Medicare/Medicaid fraud and abuse provisions apply to the operations of HEALTHSOUTH. HEALTHSOUTHOur business is subject to extensive federal and state regulation with respect to financial relationships among healthcare providers, physician self-referral arrangements and other fraud and abuse issues. Penalties for violation of federal and state laws and regulations include exclusion from participation in the Medicare/Medicare and Medicaid programs, asset forfeiture, civil penalties and criminal penalties.penalties, any of which could have a material adverse effect on our business, results of operations or financial condition. The Office of Inspector General of the Department of Health and Human Services, (the "OIG"), the DOJDepartment of Justice and other federal agencies interpret healthcare fraud and abuse provisions liberally and enforce them aggressively. See "INCORPORATION OF CERTAIN INFORMATION BY REFERENCE"."Business-Regulation" in our Annual Report on Form 10-K for the fiscal year ended December 31, 1999. HEALTHCARE REFORM LEGISLATION MAY AFFECT OUR BUSINESS In recent years, an increasing number ofmany legislative proposals have been introduced or proposed in Congress and in some state legislatures that would effect major changes in the healthcare system, either nationally or at the state level. Among the proposals which are currently being, or recently have been, under considerationconsidered 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. 16 The costs of certain proposals would be funded in significant part by reductions in paymentspayment by governmental programs, including Medicare and Medicaid, to healthcare providers. There continue to be federal and state proposals that would, and actions that do, impose more limitations on government and private payments to healthcare providers such as HEALTHSOUTHus 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 whichon us. That impact may be material on HEALTHSOUTHto our financial condition or on the combined Companies. COMPUTER TECHNOLOGIESour results of operations. 12 WE FACE NATIONAL, REGIONAL 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 mission-critical applications and if that code will produce accurate information with relation to date-sensitive calculations after the turn of the century. HEALTHSOUTH has completed a thorough review of its material computer applications and determined that such applications contain very few date-sensitive calculations. HEALTHSOUTH's computer applications are divided into two categories, those maintained internally by HEALTHSOUTH's Information Technology Group and those maintained externally by the applications' vendors. For internally maintained applications, revisions are currently being made and are expected to be implemented by the first quarter of 1999. HEALTHSOUTH expects that the total cost associated with these revisions will be less than $1,000,000. These costs will be primarily incurred during 1998 and be charged to expense as incurred. For externally maintained systems, HEALTHSOUTH has received written confirmation from the vendors that each system is currently year 2000 compliant or will be made year 2000 compliant during 1998. The cost to be incurred by HEALTHSOUTH related to externally maintained systems is expected to be minimal. HEALTHSOUTH has initiated a program to determine whether the computer applications of its significant payors and suppliers will be upgraded in a timely manner. HEALTHSOUTH has not completed this review; however, initial responses indicate that no significant problems are currently expected to arise. HEALTHSOUTH has also initiated a program to determine whether embedded applications which control certain medical and other equipment will be affected. The nature of HEALTHSOUTH's business is such that any failure to these type applications is not expected to have a material adverse effect on its business. Because of the many uncertainties associated with year 2000 compliance issues, and because HEALTHSOUTH's assessment is necessarily based on information from third party vendors, payors and suppliers, 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.LOCAL COMPETITION HEALTHSOUTH operatesWe operate in a highly competitive industry. HEALTHSOUTH generally operates its facilities in communities that alsoAlthough we are served by similar facilities operated by others. Although HEALTHSOUTH is the largest provider of rehabilitative healthcare, outpatient surgery and rehabilitation healthcareoutpatient diagnostic services on a nationwide basis,in the United States, in any particular market itwe may encounter competition from local or national entities with longer operating histories or other superior competitive advantages. There can be no assurance that suchthis competition, or other competition which HEALTHSOUTHwe may encounter in the future, will not adversely affect HEALTHSOUTH'sour financial condition or our results of operations. FAIR PRICE PROVISION HEALTHSOUTH's Restated Certificate of Incorporation (the "HEALTHSOUTH Certificate") contains certain provisions requiring supermajority stockholder approvalWE ARE SUBJECT TO MATERIAL LITIGATION We are, and may in the future be, subject to litigation which, if determined adversely to us, could have a material adverse effect specified extraordinary corporate transactions unless certain conditions are met. The HEALTHSOUTH Certificate requires the affirmative 17 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, directlyon our business or indirectly, of more than 20%financial condition. In addition, some 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". 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 NSC 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)companies and such holder's basis in the NSC Shares exchanged therefor. See "THE MERGER - Certain Federal Income Tax Consequences". CERTAIN HORIZON/CMS LITIGATION On October 29, 1997, HEALTHSOUTHbusinesses we have 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 ishave been subject to certain material litigation matters and disputes, which are described below, as well as various other litigation matters and disputes arising in the ordinary course of its business. HEALTHSOUTH is not itself a party to the litigation described below. SEC and NYSE Investigations The Division of Enforcement of the SEC is conducting a private investigation with respect to trading in the securities of Horizon/CMS and Continental Medical Systems, Inc. ("CMS"), which was acquired by Horizon/CMS in June 1995. In connection with that investigation, Horizon/CMS produced certain documents, and Neal M. Elliott, then Chairman of the Board, President and Chief Executive Officer of Horizon/CMS, and certain other former officers of Horizon/CMS have given testimony to the SEC. Horizon/CMS has also been informed that certain of its division office employees and an individual, affiliates of whom had limited business relationships with Horizon/CMS, have responded to subpoenas from the SEC. Mr. Elliott also produced certain documents in response to a subpoena from the SEC. In addition, Horizon/CMS and Mr. Elliott have responded to separate subpoenas from the SEC pertaining to trading in Horizon/CMS's common stock and various material press releases issued in 1996 by Horizon/CMS; Horizon/CMS's February 18, 1997 announcement that 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 HEALTHSOUTH possesses all the facts with respect to the matters under investigation. Although neither Horizon/CMS nor HEALTHSOUTH has been advised by the SEC that the SEC has concluded that any of Horizon/ CMS, Mr. Elliott or any other current or former officer of director of Horizon/CMS has been involved in any violation of the federal securities laws, theresimilar litigation. There can be no assurance as to the outcome of the investigationthat pending or the time of its conclusion. Both Horizon/CMS and HEALTHSOUTH have, to the extent requested to date, cooperated fully with the SEC in connection with the investigation. In March 1995, 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 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 has cooperated with the NYSE in its reviews and, to Horizon/CMS's knowledge, the reviews are ongoing. 18 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 was investigating one of its skilled nursing facilities. The facility, in Howell, Michigan, was owned and operated by Horizon/CMS from February 1994 until December 31, 1997. As widely reported in the press, the Attorney General seized a number of patient, financial and accounting records that were located at this facility. By order of a circuit judge in the county in which the facility is located, the Attorney General was ordered to return patient records to the facility for copying. Horizon/CMS advised the Michigan Attorney General that it was willing to cooperate fully in the investigation. The facility in question was sold by Horizon/CMS to 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 condition or operations of the facility (State of Michigan v. Horizon/CMS Healthcare Corp., et al., Case No. 98-630-FY, State of Michigan District Court 54B). The maximum fines chargeable against Horizon/CMS under the counts alleged in the complaint (exclusive of charges against the individual defendants, some of which charges may result in indemnification obligations for Horizon/CMS) aggregate $69,000. Horizon/CMS denies the allegations made in the complaint and expects to vigorously defend against the charges. Because such charges have only recently been filed, it is not possible to predict at this time the outcome or effect of thisfuture 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 breached their employment agreements with the companies. As a result of such alleged conduct, the plaintiffs assert that they are entitled to damages in an amount in excess of $27,000,000 from CMS and the other defendants. Horizon/CMS believes, based upon its evaluation of the legal and factual matters relating to the plaintiffs' assertions, that it has valid defenses to the plaintiffs' claims and, as a result, intends to vigorously contest such claims. Because this litigation remains at an early stage, HEALTHSOUTH cannot now predict the outcome or effect of such litigation or the length of time it will take to resolve such litigation. RehabOne Litigation In March 1997, Horizon/CMS was served with a lawsuit filed in the United States District Court for the Middle District of Pennsylvania, styled RehabOne, Inc. v. Horizon/CMS Healthcare Corporation, Continental Medical Systems, Inc. David Nation and Robert Ortenzio, No. CV-97-0292. In this lawsuit the plaintiff alleges violations of federal and state securities laws, fraud and negligent misrepresentation by Horizon/CMS and certain former officers of CMS in connection with the issuance of a warrant to 19 purchase 500,000 shares of Horizon/CMS Common Stock (the "Warrant"). The Warrant was issued to the plaintiff in connection with the settlement of certain prior litigation between the plaintiff and CMS. The plaintiff's complaint does not state the amount of damages sought. Horizon/CMS disputes the factual and legal assertions of the plaintiff in this litigation and intends to vigorously contest the plaintiff's claims. In May 1998, the parties reached an agreement in principle to settle this litigation by extending the exercise period of the Warrant by two years. The parties are currently in the process of negotiating and implementing definitive settlement documentation. EEOC Litigation In March 1997, the Equal Employment Opportunity Commission (the "EEOC") filed a complaint against Horizon/CMS alleging that Horizon/CMS had engaged in unlawful employment practices in respect of Horizon/CMS's employment policies related to pregnancies. Specifically, the EEOC asserts that Horizon/CMS's alleged refusal to provide pregnant employees with light-duty assignments to accommodate their temporary disabilities caused by pregnancy violates Sections 701(k) and 703(a) of Title VII, 42 U.S.C. (section)(section) 2000e-(k) and 2000e-2(a). In this lawsuit, the EEOC seeks, among other things, to permanently enjoin Horizon/CMS's employment practices in this regard. Horizon/CMS disputes the factual and legal assertions of the EEOC in this litigation and intends to vigorously contest the EEOC's claims. Because this litigation has just commenced, HEALTHSOUTH cannot predict the length of time it will take to resolve the litigation or the outcome or effect of the litigation. North Louisiana Rehabilitation Hospital Medicare Billing Investigation In August 1996, the United States Attorney for the Western District of Louisiana, without actually initiating litigation, apprised Horizon/CMS of alleged civil liability under the federal False Claims Act for what the government believes were false or fraudulent Medicare and other federal program claims submitted by Horizon/CMS's North Louisiana Rehabilitation Hospital ("NLRH") during the period from 1989 through 1992, including certain claims submitted by a physician who was a member of the medical staff and under contract to NLRH during the period. Specifically, the government alleges that NLRH facilitated the submission of false claims under Part B of the Medicare program by the physician and that NLRH itself submitted false claims under Part A of the Medicare program for services that were not medically necessary. In August 1996, the U.S. Attorney identified allegedly improper Part A and Part B billings, together with penalty provisions under the False Claims Act, ranging in the aggregate from approximately $1,700,000 to $2,200,000. The government does not dispute that the Medicare Part A services were rendered, but only whether they were medically necessary. Horizon/CMS has vigorously contested the allegation that any cases of disputed medical necessity in this matter constitute false or fraudulent claims under the civil False Claims Act. Moreover, Horizon/CMS denies that NLRH facilitated the submission of false claims under Medicare Part B. In late April 1997, Horizon/CMS received administrative subpoenas relating to the matter and has since then produced extensive materials with respect thereto. Without conceding liability for either the Medicare Part A or Part B claims, in May 1997, Horizon commenced preliminary settlement discussions with the government. In preparation for settlement meetings held in late June and mid-July 1997, Horizon/CMS and the government developed and then refined their respective analyses of any losses the government may have incurred in this regard. Following the July 1997 meetings, the government proposed to Horizon/CMS that the matter be settled by Horizon/CMS's paying the government $4,900,000 with respect to alleged Medicare Part A overpayments and that Horizon/CMS and certain individual physicians pay the government $820,000 with respect to Medicare Part B claims for physician services. In late July 1997, Horizon/CMS responded by offering to settle the matter for $3,700,000 for alleged Medicare Part A overpayments and $445,000 for alleged Medicare Part B claims for which Horizon/ CMS potentially could bear any responsibility. The government recently advised Horizon/CMS that it has accepted the latter's settlement offer in this regard, and the parties are currently in the process of negotiating and implementing definitive settlement documentation. Heritage Western Hills Litigation Since July 1996, Horizon/CMS has been a defendant in a lawsuit styled Lexa A. Auld, Administratrix of Martha Hary, Deceased v. Horizon/CMS Healthcare Corporation and Charles T. Maxvill, D.O., No. 48-- 20 165121, 48th Judicial District Court, Tarrant County, Texas. The case involved injuries allegedly suffered by a resident of the Heritage Western Hills nursing facility in Fort Worth, Texas. Horizon/CMS tendered the claim to its insurance carrier, which accepted coverage with a reservation of rights and provided a defense through the carrier's selected counsel in Dallas, Texas. The case went to trial on October 29, 1997, and on November 7, 1997, the jury rendered a verdict in favor of the plaintiff in the amount of $2,370,000 in compensatory damages and $90,000,000 in punitive damages. Counsel has advised Horizon/CMS that, under applicable Texas law, the punitive damages award is, at worst, limited to four times the amount of the compensatory damages (the "Punitive Damages Cap"), and thus that the maximum amount of an enforceable judgment in favor of the plaintiff is approximately $12,000,000. Counsel has also advised Horizon/CMS that there are, potentially, other and further caps on both the amount of compensatory damages available to the plaintiff and the amount of punitive damages. Horizon/CMS filed the required motions with the court to impose the Punitive Damages Cap. On February 20, 1998, the court reduced the jury's verdict and entered a judgment in the amount of approximately $11,237,000. Horizon/CMS also vigorously disputes the efficacy of the jury's verdict and has appealed the judgment. Horizon/CMS's insurance carrier continues to defend the matter subject to a reservation of rights. Horizon/CMS based upon an evaluation by its then-current internal counsel, after reviewing the findings contained in the jury verdict, the insurance policy at issue and the carrier's handling of the case, believes that the entirety of any judgment ultimately entered is covered by and payable from such insurance policy, less Horizon/CMS's self-insured retention of $250,000. On November 19, 1997, the insurance carrier sent Horizon/CMS a letter indicating its belief that certain policy exclusions might apply and requesting additional information which might affect its coverage determination. Horizon/CMS has retained separate counsel to analyze the coverage issues and advise Horizon/CMS on its position, and Horizon/CMS expects to continue to negotiate any coverage issues with its carrier. Settlement negotiations by Horizon/CMS's insurance carrier, in conjunction with HEALTHSOUTH's retained counsel, continue with the plaintiff. It is not possible at this time to predict the outcome of any post-trial motions or appeals, the resolution of any coverage issues, the outcome of any settlement negotiations or the ultimate amount of any liability which will be borne by Horizon/CMS. THE SPECIAL MEETING GENERAL This Prospectus-Proxy Statement is being furnished to holders of NSC Shares in connection with the solicitation of proxies by the Board of Directors of NSC 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 NSC 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 NSC 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 Midland Hotel, 172 West Adams, Chicago, Illinois 60603, on July 22, 1998 at 10:00 a.m., local time. RECORD DATE; QUORUM The Board of Directors of NSC has fixed the close of business on June 15, 1998, as the Record Date for the determination of holders of NSC Shares entitled to receive notice of and to vote at the Special Meeting. The presence, in person or by proxy, of the holders of a majority of the NSC Shares entitled to vote at the Special Meeting will constitute a quorum at the Special Meeting. 21 VOTE REQUIRED As of the Record Date, there were outstanding and entitled to vote 18,617,279 shares of NSC Common Stock. Each of such NSC 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 NSC 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 9,308,640 shares of NSC Common Stock. As of the Record Date, NSC's directors and executive officers and their affiliates beneficially owned an aggregate of 1,433,015 shares, or approximately 7.7%, of NSC Common Stock outstanding on such date (excluding shares issuable upon exercise of options). To NSC's knowledge, each of its directors and executive officers intends to vote in favor of the proposal to approve the Plan. By the vote of the members of the NSC Board of Directors at a special meeting held on May 5, 1998, the NSC Board of Directors determined that the proposed Merger, and the terms and conditions of the Plan, were in the best interests of NSC and its stockholders. The Plan and the Merger were adopted and approved unanimously by the members of the NSC Board of Directors, who also unanimously resolved to recommend that the stockholders of NSC vote FOR approval of the Plan. If the Plan is not approved by NSC stockholders, the Plan may be terminated in accordance with its terms. See "THE MERGER - Termination". VOTING AND REVOCATION OF PROXIES NSC 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 ANY VOTING INSTRUCTIONS, NSC 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 it at any time before the Proxy is voted by the filing of an instrument revoking it or of a duly executed Proxy bearing a later date with the Secretary of NSC prior 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 approval of the Plan constitute affirmative votes. Abstentions and broker non-votes with respect to the Plan will, therefore, have the same effect as votes against approval of the Plan. The Board of Directors of NSC 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 NSC, who will not be specifically compensated for such services, may solicit proxies from the stockholders of NSC, 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. 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". 22 THE MERGER The description of the Merger contained in this Prospectus-Proxy Statement summarizes the principal provisions of the Plan; it is not complete and is qualified in its entirety by reference to the Plan, the full text of which is attached hereto as Annex A and which is incorporated by reference herein. All NSC stockholders are urged to read Annex A in its entirety. TERMS OF THE MERGER The acquisition of NSC by HEALTHSOUTH will be effected by means of the merger of the Subsidiary with and into NSC, with NSC being the Surviving Corporation. The Certificate of Incorporation of NSC (the "NSC Certificate"), will become the Certificate of Incorporation of the Surviving Corporation from and after the Effective Time and until thereafter amended in accordance with applicable law. The Bylaws 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, NSC will continue as the Surviving Corporation under the name "National Surgery Centers, Inc.". At the Effective Time, each outstanding NSC Share (excluding shares held by NSC and any of its subsidiaries, which will automatically be cancelled and retired) (collectively, the "Exchanging NSC Shares") will be converted into the right to receive that fraction of a share of HEALTHSOUTH Common Stock determined by dividing $30.50 by the Base Period Trading Price (as defined herein), as may be adjusted as provided below, computed to four decimal places (the "Exchange Ratio"); provided, however, that if the Base Period Trading Price shall be greater than $35.00, the Exchange Ratio shall be .8714; and provided further, however, that if the Base Period Trading Price shall be less than $26.50, the Exchange Ratio shall be 1.1509. The term "Base Period Trading Price" means the average daily closing prices for the shares of HEALTHSOUTH Common Stock for the 20 consecutive trading days on which such shares are actually traded (as reported on the New York Stock Exchange Composite Transaction Tape as reported in the Wall Street Journal, Eastern Edition, or if not reported thereby, any other authoritative source) ending at the close of trading on the second trading day immediately preceding the Special Meeting. Each certificate previously evidencing Exchanging NSC Shares outstanding immediately prior to the Effective Time ("Certificates") will 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 in lieu of any fractional shares. At the Effective Time of the Merger, all then-outstanding options and warrants to purchase NSC Common Stock, whether or not then exercisable, will, in accordance with the Plan, be assumed by HEALTHSOUTH and will become options 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 NSC Common Stock theretofore subject thereto by the Exchange Ratio and the exercise prices thereof will be determined by dividing the exercise price contained in such option or warrant by the Exchange Ratio. At June 15, 1998 options and rights to acquire approximately 1,861,766 shares of NSC Common Stock and warrants to acquire approximately 28,500 shares of NSC 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 as of the Record Date, the holders of NSC Shares will receive in the aggregate approximately 5.89% of the shares of HEALTHSOUTH Common Stock anticipated to be outstanding immediately after the Effective Time. BACKGROUND OF THE MERGER NSC historically expanded its business primarily through acquisitions of established ambulatory surgery centers and the development of new centers in select markets. In early 1998, the Company began considering its strategic alternatives in order to accelerate its growth rate, enhance its ability to contract with managed care payors and capitalize on changing industry dynamics. As managed care 23 payors often prefer contracting with an entity that can offer a broad range of healthcare services, the Company believes that adding related services or combining with a strategic business partner could significantly strengthen NSC's competitive position. In conjunction with its regularly scheduled quarterly board meeting on March 12, 1998, the Board of Directors of NSC discussed both the possibility of (i) internal growth into a variety of related businesses to allow integration of those businesses with the current business of NSC and (ii) a business combination with another publicly held company that had the financial capability and infrastructure to capitalize on opportunities in the changing industry structure, as an alternative to continued internal growth. The Board of Directors scheduled a follow up board meeting on April 27, 1998 to further discuss these alternatives. On April 8, 1998, E. Timothy Geary, Chairman of the Board and Chief Executive Officer of NSC, had telephone conversations with Richard M. Scrushy, Chairman of the Board and Chief Executive Officer of HEALTHSOUTH, and Michael D. Martin, Executive Vice President, Chief Financial Officer, and Treasurer of HEALTHSOUTH, about strategic alternatives for the two companies and agreed to meet one week later. On April 15, 1998, Mr. Geary and Bryan S. Fisher, Senior Vice President of Finance, Chief Financial Officer, Secretary, and Treasurer of NSC, met with Mr. Scrushy and Mr. Martin and had preliminary discussions about the possibility of a transaction between the Companies and shared information about the Companies. On April 27, 1998, prior to the NSC Board of Directors meeting scheduled to be held later that day, Mr. Geary contacted Mr. Scrushy by telephone to obtain an update regarding HEALTHSOUTH's continued interest in pursuing a possible transaction with NSC. Mr. Geary then convened a telephonic meeting of the Board of Directors of NSC to report the results of the discussions with HEALTHSOUTH. Mr. Geary reported that HEALTHSOUTH was interested in a merger with NSC, but that the parties had not agreed on a price of NSC Shares. The NSC Board of Directors then discussed the circumstances under which a transaction with HEALTHSOUTH would be beneficial to the NSC stockholders and authorized management to continue discussions with HEALTHSOUTH and, to the extent deemed appropriate, to retain a financial advisor to assist NSC in connection with the proposed transaction. Following the board meeting, Mr. Geary contacted Mr. Scrushy to indicate that the NSC Board of Directors had authorized NSC management to continue the negotiations. On April 28, 1998, Mr. Fisher and Mr. Martin had a telephone conversation in which Mr. Fisher gave Mr. Martin additional, more detailed financial information regarding NSC. On April 30, 1998, NSC retained BT Alex. Brown to act as its financial advisor and continued the negotiations with HEALTHSOUTH. On May 1, 1998, the NSC Board of Directors held a telephonic special meeting to review the status of the discussions with HEALTHSOUTH. The Board authorized the continuation of discussions with HEALTHSOUTH and requested that more definitive details of the proposed merger be discussed at the next meeting. From May 1, 1998 through May 5, 1998, the management of NSC and its legal and financial advisors negotiated the terms of the Merger with HEALTHSOUTH and the parties conducted due diligence investigations. The Board of Directors of NSC held a special meeting, attended by NSC's senior management, its legal advisors and BT Alex. Brown in New York, New York, on the evening of May 5, 1998. At the meeting, senior management, NSC's legal advisors and BT Alex. Brown made detailed presentations concerning material aspects of the proposed Merger and related transactions. Copies of the proposed definitive Plan of Merger and related documents were available and were summarized by legal counsel. The Board discussed the potential benefits and synergies to NSC of a business combination with HEALTHSOUTH as well as the potential risks related to such a transaction. In addition, senior management and representatives of BT Alex. Brown discussed valuation issues relevant to the determination of the consideration to be received by the NSC stockholders. BT Alex. Brown rendered its opinion to the effect that, as of the date of such opinion and based upon and subject to certain matters stated therein, the consideration to be received by the NSC stockholders was fair from a financial point of view to such stockholders, and reviewed with the NSC Board the financial analyses performed by BT Alex. Brown in connection with such opinion. The Board of Directors of NSC unanimously approved the Merger and adopted the Plan. Following the such approval, NSC and HEALTHSOUTH executed the definitive Plan. 24 REASONS FOR THE MERGER; RECOMMENDATION OF THE BOARD OF DIRECTORS OF NSC The Board of Directors of NSC believes that the terms of the Plan are fair to, and that the Merger is in the best interests of, NSC and its stockholders. Accordingly, the Board of Directors of NSC has approved the Merger upon the terms of the Plan and recommends approval thereof by the stockholders of NSC. In reaching its determination to approve and adopt the Plan, the NSC Board of Directors considered a number of factors and the potential synergies that would result from a merger with HEALTHSOUTH. Specifically, the NSC Board of Directors considered: (i) The value of the consideration to be received by NSC stockholders, including the fact that the method for determining the Exchange Ratio allows NSC stockholders to participate in gains in the price of HEALTHSOUTH Common Stock if the Base Period Trading Price is above $35.00 while offering downside protection if the Base Period Trading Price is between $26.50 and $35.00. (ii) The terms and conditions of the Merger, including the parties' reciprocal representations, warranties and covenants, the conditions to their respective obligations, and the circumstances and terms under which NSC may terminate the Plan to consider an alternative offer. (iii) That the Merger is expected to be treated as a tax-free reorganization and be accounted for under the "pooling-of-interests" method of accounting. (iv) The belief that, based on current conditions in the healthcare industry, the industry will continue to consolidate, and that the Merger will provide NSC stockholders with continued opportunities to participate in such consolidation. (v) The belief that, for NSC to continue to grow, NSC would require substantial financial and other resources. Although the Board of Directors believed that such resources would be available to NSC, a combination with HEALTHSOUTH would provide those resources through HEALTHSOUTH's financial position and experience in the healthcare industry. (vi) The complementary business operations of NSC and HEALTHSOUTH, which the NSC Board of Directors believes will enable NSC, on a post-Merger basis, to achieve a greater presence in its primary markets and secure more extensive relationships with third-party payors. (vii) The belief that the Merger would result in synergies due to, among other things, revenue enhancements, increased economies of scale from increased unit volumes and elimination of duplicative costs of operating two public companies. (viii) BT Alex. Brown's opinion delivered on May 5, 1998, that as of that date and subject to certain assumptions, factors and limitations set forth in such opinion, the consideration to be received by NSC stockholders in the Merger was fair, from a financial point of view, to the NSC stockholders. (ix) The belief that the terms and conditions of the Plan made prompt consummation of the Merger substantially likely. In view of the wide variety of factors considered in connection with its evaluation of the Merger, the NSC 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 NSC RECOMMENDS THAT NSC STOCKHOLDERS VOTE TO APPROVE AND ADOPT THE PLAN. OPINION OF BT ALEX. BROWN INCORPORATED NSC engaged BT Alex. Brown to act as its exclusive financial advisor in connection with the Merger based on BT Alex. Brown's long-standing relationship with NSC and its reputation, experience and expertise in similar transactions. On May 5, 1998, at a meeting of the NSC Board held to evaluate the proposed Merger, BT Alex. Brown rendered to the NSC Board an oral opinion (which opinion was 25 subsequently confirmed by delivery of written opinions dated May 5, 1998 and June 17, 1998) to the effect that, as of such date and based upon and subject to certain matters stated in such opinions, the consideration (the "Consideration") was fair, from a financial point of view, to the holders of NSC Common Stock. On May 5, and June 17, 1998, BT Alex. Brown delivered to the Board of Directors of NSC its written opinions dated as of such dates that, based on the assumptions, matters considered and limits of review set forth therein, the Consideration to be received by NSC stockholders was fair, from a financial point of view, to the stockholders of NSC. The June 17, 1998 opinion is substantially similar to the opinion dated May 5, 1998. No limitations were imposed by the NSC Board upon BT Alex. Brown with respect to the investigations made or the procedures followed by it in rendering its opinion. The full text of the written opinion of BT Alex. Brown dated as of June 17, 1998, which sets forth the assumptions made, matters considered and limitations of the review undertaken, is attached as Annex B to this Proxy Statement-Prospectus and is incorporated herein by reference. BT ALEX. BROWN'S OPINION IS DIRECTED TO THE NSC BOARD, ADDRESSES ONLY THE FAIRNESS OF THE CONSIDERATION FROM A FINANCIAL POINT OF VIEW, AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE SPECIAL MEETING. The summary of the opinion of BT Alex. Browndescribed in this Proxy Statement-Prospectus is qualified in its entirety by reference to the full text of such opinion. In connection with its opinion, BT Alex. Brown reviewed certain publicly available financial information and other information concerning NSC and HEALTHSOUTH and certain internal analyses and other information furnished to BT Alex. Brown by NSC and HEALTHSOUTH. BT Alex. Brown also held discussions with members of the senior management of NSC and HEALTHSOUTH regarding the businesses and prospects of their respective companies and the joint prospects of a combined company. In addition, BT Alex. Brown (i) reviewed the reported prices and trading activity for the NSC Common Stock and the HEALTHSOUTH Common Stock, (ii) compared certain financial and stock market information for NSC and HEALTHSOUTH with similar information for certain other companies whose securities are publicly traded, (iii) reviewed the financial terms of certain recent business combinations which BT Alex. Brown deemed comparable in whole or in part, (iv) reviewed the terms of the Plan and (v) performed such other studies and analyses and considered such other factors as BT Alex. Brown deemed appropriate. As described in its opinion, BT Alex. Brown has not independently verified the information described above and for purposes of its opinion has assumed the accuracy and completeness thereof. With respect to the information relating to the prospects of NSC and HEALTHSOUTH, BT Alex. Brown assumed that such information reflects the best currently available judgments and estimates of the managements of NSC and HEALTHSOUTH as to the likely future financial performances of their respective companies and of the combined entity. In addition, BT Alex. Brown has not made an independent evaluation or appraisal of the assets of NSC or HEALTHSOUTH, nor has it been furnished with any such evaluation or appraisal. BT Alex. Brown has assumed that the Mergerprospectus, will qualify as a tax-free transaction for the holders of NSC Common Stock. BT Alex. Brown's opinion is based on market, economic and other conditions as they exist and can be evaluated as of the date of the opinion letter. In arriving at its opinion, BT Alex. Brown was not authorized to solicit, and did not solicit, interest from any party with respect to the acquisition of NSC or any of its assets. The following is a summary of the material analyses and factors considered by BT Alex. Brown in connection with its opinion to the NSC Board of Directors dated May 5, 1998: Analysis of Selected Public Companies. BT Alex. Brown compared certain financial and stock market information for NSC and HEALTHSOUTH with similar information for the following selected publicly held companies in the healthcare industry: (i) in the case of NSC: AmSurg Corp.; American Oncology Resources, Inc.; Physician Reliance Network, Inc.; Renal Care Group, Inc.; and Total Renal Care Holdings, Inc. (the "NSC Selected Companies") and (ii) in the case of HEALTHSOUTH: Columbia/HCA Healthcare Corporation; Health Care & Retirement Corporation; Health Management Associates, Inc.; Manor Care, Inc.; Quorum Health Group, Inc.; Tenet Healthcare Corp.; and Universal Health Services, Inc. (the "HEALTHSOUTH Selected Companies" and, together with the NSC Selected Companies, the "Selected Companies"). BT Alex. Brown calculated share prices relative to each 26 company's earnings per share ("EPS") for the latest twelve months and calendar years 1998 and 1999, and adjusted market values (equity market value, plus debt, less cash and equivalents) relative to each company's latest twelve months revenues, earnings before interest, taxes, depreciation and amortization ("EBITDA"), and earnings before interest and taxes ("EBIT"). All multiples were based on closing stock prices on May 1, 1998. EPS estimates for HEALTHSOUTH and the Selected Companies were based on analysts' estimates as reported by I/B/E/S, a market research database. EPS estimates for NSC were based on NSC management estimates. This analysis indicated multiples for the NSC Selected Companies of latest twelve months EPS and estimated calendar 1998 and 1999 EPS of 31.4x to 59.4x (with a mean of 42.3x), 23.1x to 33.5x (with a mean of 27.6x) and 17.8x to 24.6x (with a mean of 20.8x), respectively and latest twelve months revenues, EBITDA and EBIT of 1.6x to 5.3x (with a mean of 3.2x), 12.0x to 28.0x (with a mean of 17.7x) and 19.0x to 36.0x (with a mean of 25.6x), respectively. This analysis indicated multiples for the HEALTHSOUTH Selected Companies of latest twelve months EPS and estimated calendar 1998 and 1999 EPS of 21.4x to 47.4x (with a mean of 31.0x), 18.3x to 37.5x (with a mean of 24.3x) and 15.8x to 30.3x (with a mean of 19.9x), respectively, and latest twelve months revenues, EBITDA and EBIT of 1.5x to 5.9x (with a mean of 2.4x), 9.8x to 24.1x (with a mean of 13.2x), and 13.7x to 29.0x (with a mean of 18.8x), respectively. These multiples compare with multiples of latest twelve months and estimated calendar 1998 and 1999 EPS and latest twelve months revenues, EBITDA and EBIT for HEALTHSOUTH of 32.8x, 26.6x, 21.8x, 4.8x, 15.9x and 22.0x, respectively. Based on the closing stock price of HEALTHSOUTH Common Stock on May 1, 1998, the Consideration equated to implied multiples for NSC of latest twelve months and estimated calendar 1998 and 1999 EPS and latest twelve months revenues, EBITDA and EBIT of 42.0x, 32.7x, 26.7x, 5.2x, 19.8x and 26.7x, respectively. Analysis of Selected Merger and Acquisition Transactions. BT Alex. Brown reviewed the purchase price and implied transaction multiples paid in the following selected merger and acquisition transactions in the ambulatory surgery center industry, consisting of (acquiror/target): HEALTHSOUTH Corporation / Columbia/HCA Healthcare Corporation surgery centers; HEALTHSOUTH Corporation / Surgical Care Affiliates, Inc.; HEALTHSOUTH Corporation / Sutter Surgery Centers, Inc.; HEALTHSOUTH Corporation / Surgical Health Corporation; and Columbia/HCA Healthcare Corporation / Medical Care America, Inc. (collectively, the "Selected Merger and Acquisition Transactions"). All multiples were based on publicly available information at the time of announcement of such transaction. This analysis indicated multiples for the Selected Merger and Acquisition Transactions of latest twelve months and one-year forward net income and latest twelve months revenues, EBITDA and EBIT of 20.8x to 56.8x (with a mean of 35.3x), 14.9x to 23.8x (with a mean of 19.3x), 1.3x to 4.8x (with a mean of 2.8x), 8.5x to 13.6x (with a mean of 10.3x), and 11.4x to 22.9x (with a mean of 17.9x), respectively. Based on the closing price of HEALTHSOUTH Common Stock on May 1, 1998, the Consideration equated to implied multiples for NSC of latest twelve months net income and one-year forward net income and latest twelve months revenues, EBITDA and EBIT of 43.1x, 30.4x, 5.2x, 19.8x and 26.7x, respectively. Discounted Cash Flow Analysis. BT Alex. Brown performed a discounted cash flow analysis of NSC to estimate the present value of the stand-alone, unlevered, after-tax free cash flows that NSC could generate over the periods March 31, 1998 through December 31, 2002 based on internal estimates of the management of NSC. The discounted cash flow analysis was determined by (i) adding (x) the present value at March 31, 1998 of NSC's projected free cash flows over the four-year and nine-month period from March 31, 1998 through December 31, 2002 and (y) the present value of the terminal value for NSC in 2002, and (ii) adding the net cash of NSC at March 31, 1998. The range of estimated terminal values for NSC at the end of 2002 was calculated by applying terminal value multiples ranging from 10.0x to 14.0x to the projected 2002 EBITDA of NSC, representing the estimated values of NSC beyond the year 2002. The cash flows and terminal values of NSC were discounted to present value using discount rates ranging from 12.0% to 16.0%. This analysis yielded equity reference ranges for NSC Common Stock of approximately $20.16 to $32.64 per share. Historical Exchange Ratio Analysis. BT Alex. Brown reviewed the historical trading volumes and market prices for NSC Common Stock and HEALTHSOUTH Common Stock and the implied historical exchange ratio of NSC Common Stock and HEALTHSOUTH Common Stock (the closing price of NSC Common Stock divided by the closing price of HEALTHSOUTH Common Stock) based on such 27 market prices as of the 20 trading days prior to and as of May 1, 1998. This analysis indicated average exchange ratios for NSC Common Stock and HEALTHSOUTH Common Stock as of the 20 trading days prior to and as of May 1, 1998 of approximately 0.9272x and 0.9182x, respectively. Contribution Analysis. BT Alex. Brown analyzed the relative contributions of NSC and HEALTHSOUTH to the estimated revenue, EBITDA, EBIT and net income of the pro forma combined company for the latest twelve months ended March 31, 1998 for NSC and December 31, 1997 for HEALTHSOUTH, to the estimated net income of the pro forma combined company for calendar years 1998 and 1999 based, in the case of NSC, on internal estimates of the management of NSC and, in the case of HEALTHSOUTH, on analysts' estimates as reported by I/B/E/S, and to the book value at March 31, 1998 for NSC and at December 31, 1997 for HEALTHSOUTH, and compared such contributions to the pro forma ownership of the holders of NSC Common Stock in the pro forma combined company. This analysis indicated that (i) for the latest twelve months, NSC would have contributed approximately 3.6% of the revenues, 3.1% of EBITDA, 3.2% of EBIT and 3.9% of the net income of the pro forma combined company, (ii) in calendar year 1998, NSC would contribute approximately 3.5% of the net income of the pro forma combined company, (iii) in calendar year 1999, NSC would contribute approximately 3.5% of the net income of the pro forma combined company, and (iv) as of March 31, 1998 for NSC and December 31, 1997 for HEALTHSOUTH, NSC would have contributed 4.3% of the book value of the pro forma combined company. Based on the Consideration at May 1, 1998, current holders of NSC Common Stock would own approximately 4.3% of the pro forma combined company upon consummation of the Merger. Accretion/Dilution Analysis. BT Alex. Brown analyzed the pro forma effect of the Merger on the EPS of HEALTHSOUTH in calendar years 1998 and 1999, based, in the case of NSC, on EPS estimates of the management of NSC and, in the case of HEALTHSOUTH, on EPS estimates as reported by I/B/E/S, both before and after giving effect to certain cost savings and other potential synergies anticipated by the managements of NSC and HEALTHSOUTH to result from the Merger (excluding non-recurring costs resulting from the Merger). This analysis indicated that the Merger could be dilutive to HEALTHSOUTH's EPS in calendar years 1998 and 1999 without giving effect to certain cost savings and other potential synergies anticipated by the managements of NSC and HEALTHSOUTH to result from the Merger and accretive to HEALTHSOUTH's EPS in calendar years 1998 and 1999 assuming certain levels of cost savings and other potential synergies were achieved (excluding non-recurring costs resulting from the Merger). The actual operating or financial results achieved by the pro forma combined company may vary from projected results and variations may be material as a result of business and market risks, the timing and amount of synergies, the cost associated with achieving such synergies and other factors. Historical and Pro Forma Comparison. In connection with its opinion, BT Alex. Brown also reviewed and considered, among other things: (i) historical financial information for NSC and HEALTHSOUTH; (ii) historical trading volumes and market prices for NSC Common Stock and HEALTHSOUTH Common Stock, and movements in NSC Common Stock relative to the S&P 500 Index and the common stock of the NSC Selected Companies and in HEALTHSOUTH Common Stock relative to the S&P 500 Index and the common stock of the HEALTHSOUTH Selected Companies; (iii) historical analysis of HEALTHSOUTH's forward price to earnings ratio relative to the S&P 500 forward price to earnings ratio; (iv) analysts' reports, including growth rate estimates, with respect to NSC and HEALTHSOUTH; and (iv) the ownership profiles of NSC and HEALTHSOUTH. The summary set for the above does not purport to be a complete description of the opinion of BT Alex. Brown to the NSC Board or the financial analyses performed and factors considered by BT Alex. Brown in connection with its opinion. The preparation of a fairness opinion is a complex analytical process involving various determinations as to the most appropriate and relevant methods of financial analyses and the application of those methods to the particular circumstances and, therefore, such an opinion is not readily susceptible to summary description. BT Alex. Brown believes that its analyses and the summary set forth above must be considered as a whole and that selecting portions of its analyses, without considering all analyses, or selecting portions of the above summary, without considering all factors and analyses, could create a misleading or incomplete view of the processes underlying such 28 analyses and opinion. In performing its analyses, BT Alex. Brown made numerous assumptions with respect to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of NSC and HEALTHSOUTH. No company, transaction or business used in such analyses as a comparison is identical to NSC, HEALTHSOUTH, or the proposed Merger, nor is an evaluation of the results of such analyses entirely mathematical; rather, such analyses involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the acquisition, public trading or other values of the companies, businesses or transactions being analyzed. The estimates contained in such analyses and the ranges of valuations resulting from any particular analysis are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than those suggested by such analyses. In addition, analyses relating to the value of businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold. Accordingly, such analyses and estimates are inherently subject to substantial uncertainty. BT Alex. Brown's opinion and financial analyses were only one of many factors considered by the NSC Board in its evaluation of the proposed Merger and should not be viewed as determinative of the views of the NSC Board or NSC's management with respect to the Consideration or the Merger. NSC selected BT Alex. Brown to serve as its exclusive financial advisor based on BT Alex. Brown's long-standing relationship with NSC and its reputation, experience and expertise in similar transactions. BT Alex. Brown is an internationally recognized investment banking firm and, as a customary part of its investment banking business, is engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, private placements and valuations for estate, corporate and other purposes. In the past, BT Alex. Brown has provided various financing services for HEALTHSOUTH and various financing and financial advisory services for NSC, for which services BT Alex. Brown has received customary fees. BT Alex. Brown maintains a market in the NSC Common Stock and regularly publishes research reports regarding the health care industry and the businesses and securities of NSC, HEALTHSOUTH and other publicly owned companies in the health care industry. In the ordinary course of business, BT Alex. Brown may actively trade the securities of NSC and HEALTHSOUTH for its own account and the accounts of its customers and, accordingly, may at any time hold a long or short position in securities of NSC and HEALTHSOUTH. Pursuant to a letter agreement dated May 4, 1998 between NSC and BT Alex. Brown, NSC has agreed to pay BT Alex. Brown $1.0 million for rendering its opinion, which amount will be credited against a transaction fee of $3.75 million payable upon consummation of the Merger. In addition, NSC has agreed to reimburse BT Alex. Brown for its reasonable out-of-pocket expenses, including reasonable fees and disbursements of counsel, and to indemnify BT Alex. Brown and certain related parties against certain liabilities, including certain liabilities under the federal securities laws, relating to, or arising out of, its engagement. THE SUMMARY OF THE BT ALEX. BROWN OPINION SET FORTH ABOVE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE BT ALEX. BROWN OPINION DATED JUNE 17, 1998 AND ATTACHED HERETO AS ANNEX B. NSC STOCKHOLDERS ARE URGED TO READ THE BT ALEX. BROWN OPINION IN ITS ENTIRETY FOR A COMPLETE DESCRIPTION OF THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS OF THE REVIEW UNDERTAKEN. EFFECTIVE TIME OF THE MERGER The Merger will become effective upon the filing of a Certificate of Merger by the Subsidiary and NSC under the DGCL, or at such later time as may be specified in such Certificate of Merger. 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 thereof to the Exchange Agent (as defined in the Plan), a certificate or 29 certificates representing the number of whole shares of HEALTHSOUTH Common Stock into which such holder's NSC Shares have been converted, cash in lieu of fractional shares and any dividends or other distributions 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) to each holder of record of NSC 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 will be no transfers on the stock transfer books of NSC 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 certificates or scrip therefor, or other evidence of ownership thereof, will be issued in the Merger; instead, HEALTHSOUTH will pay to each holder of NSC Shares who would otherwise be entitled to a fractional share cash in an amount equal to the value of such fractional share of HEALTHSOUTH Common Stock. See "- Terms of the Merger". 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 NSC Shares immediately prior to the Effective Time will cease to be, and will have no rights as, stockholders of NSC, other than the right to receive the shares of HEALTHSOUTH Common Stock into which such shares have been converted and any fractional share payment and any dividends or other distributions to which they may be entitled under the Plan. Holders of NSC 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 provided in the Plan. Neither HEALTHSOUTH nor NSC will be liable to any holder of NSC 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; (iii) the capitalization of HEALTHSOUTH; (iv) ownership of Subsidiary Common Stock by HEALTHSOUTH; (v) the fact that HEALTHSOUTH has furnished NSC with true and complete copies of certain reports, schedules, registration statements and proxy statements filed by HEALTHSOUTH with the SEC since January 1, 1998, 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) HEALTHSOUTH's investment intent with respect to the NSC Shares acquired; (vii) the absence of material legal proceedings against HEALTHSOUTH; (viii) the absence of certain material changes 30 relating to HEALTHSOUTH since the date of the HEALTHSOUTH's document last filed with the SEC; and (ix) the filing of HEALTHSOUTH's tax returns; (x) HEALTHSOUTH's compliance with laws in general; and (xi) HEALTHSOUTH's licenses, accreditations and regulatory approvals. The representations and warranties of NSC include representations and warranties as to: (i) the organization and good standing of NSC and its subsidiaries, (ii) the capitalization of NSC, (iii) foreign qualifications, (iv) the power and authority of NSC to execute, deliver and perform the Plan, (v) the fact that NSC has furnished HEALTHSOUTH with true and complete copies of certain reports, schedules, registration statements and proxy statements filed by NSC with the SEC since January 1, 1998, 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 NSC, (viii) the validity of NSC's material contracts, and (ix) the absence of certain material changes relating to NSC since the date of the NSC document last filed with the SEC. CONDITIONS TO THE MERGER The obligation of HEALTHSOUTH and the Subsidiary to consummate the Merger is subject to, among others, the following conditions: (i) NSC 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 NSC 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, Haskell Slaughter & Young, L.L.C., that the Merger constitutes a tax-free reorganization under the Code; and (iv) HEALTHSOUTH shall have received an opinion of NSC's counsel, Bell, Boyd & Lloyd, as to certain matters. The obligation of NSC 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) NSC shall have received the opinion of its counsel, Bell, Boyd & Lloyd, that the Merger constitutes a tax-free reorganization under the Code; and (iv) NSC shall have received an opinion of HEALTHSOUTH's counsel, Haskell Slaughter & Young, L.L.C., as to certain matters. The obligation of each of HEALTHSOUTH, the Subsidiary and NSC 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 NSC 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 NSC 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) The Merger shall have qualified for "pooling of interests" accounting treatment and HEALTHSOUTH and NSC shall have each received letters to that effect from Ernst & Young, dated as of the date of the mailing of the Prospectus-Proxy Statement and the Closing Date; (viii) 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 NSC facilities, unless the failure to obtain such transfer or approval would not have a material adverse effect on the Surviving Corporation; and (ix) HEALTHSOUTH and the Subsidiary shall have received all required consents, approvals and authori- 31 zations of third parties with respect to all material leases and management agreements to which NSC Subsidiariesour financial condition or NSC 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 May 14, 1998, HEALTHSOUTH and NSC 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 expired on June 13, 1998. 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 NSC. 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 NSC 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 NSC divest 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 NSC, or to obtain other relief. NSC 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 development, operations and licensing 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 NSC 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, NSC will conduct its businesses in the usual, regular and ordinary course in substantially the same manner as previously conducted and will use its best 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. 32 Under the Plan, NSC 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) encumber any asset or enter into any transaction or make any contract or commitment relating to the properties, assets and business of NSC, other than in the ordinary course of business or as otherwise disclosed in the Plan; (ii) enter into any employment contract which is not terminable upon notice of 30 days or less, at will, and without penalty to NSC except as provided in the Plan; (iii) enter into any contract or agreement (a) which cannot be performed within three months or less, or (b) which involves the expenditure of over $100,000; (iv) issue or sell, or agree to issue or sell, any shares of capital stock or other securities of NSC, except upon exercise of currently outstanding stock options or warrants or pursuant to the NSC Employee Stock Purchase Plan; (v) make any contribution, payment or distribution to the trustee under any bonus, pension, profit-sharing or retirement plan or incur any obligation to make any such payment or contribution which is not in accordance with NSC's usual past practice, or establish or enter into any other plan or contract or arrangement providing for bonuses, executive incentive compensation, pensions, deferred compensation, retirement payments, profit-sharing or the like, or terminate any Plan; (vi) extend credit to anyone, except in the ordinary course of business consistent with prior practices; (vii) guarantee the obligation of any person, firm or corporation, except in the ordinary course of business consistent with prior practices; (viii) amend its Certificate of Incorporation or Bylaws; (ix) 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 NSC's consolidated balance sheet at December 31, 1997 (the "NSC Balance Sheet") or (b) liabilities incurred in the ordinary course of business since the date of the NSC document last filed with the SEC which discharge or satisfaction would have a material adverse effect on NSC; (x) 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 NSC, except as relates to the consolidatedour results of operations of NSC since the date of the NSC Balance Sheet; or (xi) grant any general or uniform increaseoperations. See "Legal Proceedings" in the rates of pay of employees or grant any increase in salary payable or to become payable by NSC to any officer, employee, consultant or agent of NSC (other than normal merit increases) or by means of any bonus or pension plan, contract or other commitment, increase the compensation of any officer, employee, consultant or agent of NSC. WAIVER AND AMENDMENT The Plan provides that, at any time prior to the Effective Time, HEALTHSOUTH and NSC 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 NSC without 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 NSC 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 NSC: (i) by mutual written consent of HEALTHSOUTH and NSC; (ii) by either HEALTHSOUTH or NSC 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 NSC 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 NSC if the Merger has not been consummated on or before November 30, 1998 (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 33 party seeking to terminate the Plan; (v) by either HEALTHSOUTH or NSC if any required approval of the Plan by stockholders of NSC has not been obtained by the required votes at a duly held meeting of stockholders; (vi) by either HEALTHSOUTH or NSC if any of the conditions to the obligation of such party to effect the Merger is not capable of being satisfied prior to November 30, 1998, unless such period is extended; or (vii) by NSC, if the Board of Directors of NSC, in the exercise of its fiduciary duties under applicable law, has (w) determined not to recommend the Merger to the holders of NSC Common Stock, (x) withdrawn such recommendation, (y) approved, recommended or endorsed any Acquisition Transaction other than the Plan or (z) resolved to take any of such actions. For the purposes of clause (vii), an "Acquisition Transaction" means a merger, purchase of assets, purchase of or tender offer for shares of NSC stock or any similar transaction (other than the Merger). BREAK-UP FEE; THIRD PARTY BIDS If the Plan is terminated by NSC for the reason set forth in clause (vii) under "- Termination" above and within one year after the effective date of such termination NSC 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, NSC shall pay to HEALTHSOUTH a break-up fee of $15,000,000. INTERESTS OF CERTAIN PERSONS IN THE MERGER In considering the recommendations of the Board of Directors of NSC with respect to the Plan and the transactions contemplated thereby, stockholders of NSC should be aware that certain members of the management of NSC and the Board of Directors of NSC have certain interests in the Merger that are in addition to the interests of the stockholders generally. In connection with the Merger, HEALTHSOUTH anticipates that it will enter into Consulting and Non-Competition Agreements with each of E. Timothy Geary, Bryan S. Fisher, Dennis D. Solheim and Dennis Zamojski, pursuant to which they will act as consultants to HEALTHSOUTH with respect to various matters, including transition issues, industry presentations, business development and strategic planning. In addition, pursuant to the terms of NSC's stock option plans, certain NSC 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 NSC management hold such options. Further, under the Plan HEALTHSOUTH has agreed that after the Effective Time it will indemnify the current and former officers, directors and employees of NSC against any liabilities arising in whole or in part: (i) out of the fact that such person was an officer, director or employee of NSC; or (ii) out of, or pertaining to, the Plan. As part of such indemnification, HEALTHSOUTH has also agreed that after the Effective Time it will provide to any such indemnified party the indemnification rights that such party would have had under the NSC Certificate of Incorporation or NSC Bylaws immediately prior to the Effective Time, until any applicable statute of limitations shall have expired. INDEMNIFICATION The Plan provides that NSC 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 NSC 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 party 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 NSC and pertaining to a matter occurring or existing at or prior to the Effective Time. ACCOUNTING TREATMENT Consummation of the Merger is conditioned upon the receipt by HEALTHSOUTH and NSC of a letter from Ernst & Young LLP, HEALTHSOUTH's independent auditors, regarding that firm's concurrence with the conclusions of the managements of HEALTHSOUTH and NSC, respectively, as to 34 the appropriateness of pooling-of-interests accounting for the Merger under APB 16 if closed and consummated in accordance with the Plan. HEALTHSOUTH and NSC have agreed not to intentionally take or cause to be taken any action that would disqualify the Merger as a pooling of interests for accounting purposes. Under the pooling-of-interests method of accounting, the historical basis of the assets and liabilities of HEALTHSOUTH and NSC will be combined at the Effective Time and carried forward at their previously recorded amounts, the stockholders' equity accounts of HEALTHSOUTH and NSC will be combined on HEALTHSOUTH's consolidated balance sheet and no goodwill or other intangible assets will be created. Financial statements of HEALTHSOUTH issued after the Merger will be restated retroactively to reflect the consolidated operations of HEALTHSOUTH and NSC as if the Merger had taken place prior to the periods covered by such financial statements. CERTAIN FEDERAL INCOME TAX CONSEQUENCES The following is a discussion of the principal federal income tax consequences of the Merger to the holders of NSC 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 NSC Shares who hold their NSC Shares as capital assets. This summary does not discuss all aspects of income taxation that may be relevant to a particular holder of NSC 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 NSC 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. NSC has received an opinion regarding all material federal income tax consequences with respect to the Merger from its counsel, Bell, Boyd & Lloyd ("BB&L"), and HEALTHSOUTH has received a similar opinion from its counsel, Haskell Slaughter & Young, L.L.C. ("Haskell Slaughter", and together with BB&L, "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 NSC as a result of the Merger; (ii) no gain or loss will be recognized by the stockholders of NSC upon the exchange of their NSC Shares solely for shares of HEALTHSOUTH Common Stock pursuant to the Merger, except that a NSC 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 received, and such gain or loss will constitute capital gain or loss if such stockholder's NSC 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 NSC 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 NSC Shares exchanged therefor; and (iv) the holding period for HEALTHSOUTH Common Stock received in exchange for NSC Shares pursuant to the Merger will include the holding period of the NSC Shares exchanged therefor, provided such NSC Shares were held as a capital asset at the Effective Time. Neither HEALTHSOUTH nor NSC 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 has received and relied upon representations contained in certificates of HEALTHSOUTH, the Subsidiary, NSC and others. Tax Counsel's opinions are subject to 35 certain limitations and qualifications and are 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 NSC 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, FEDERAL 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 NSC Shares in connection with the Merger have been registered under the Securities Act. HEALTHSOUTH Common Stock received by the stockholders of NSC 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 NSC 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 NSC or HEALTHSOUTH at the time of the Special Meeting (generally, directors, certain executive officers and major stockholders). Affiliates of NSC 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) within any three-month period during such one-year 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. NSC has agreed to use its reasonable, good faith efforts to cause each holder of NSC Shares deemed to be an Affiliate of NSC to enter into an agreement providing that such Affiliate will not sell, pledge, transfer or otherwise dispose of shares of HEALTHSOUTH Common 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 NSC 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, NSC has agreed that it will not, and will not suffer any of its directors, officers, employees, agents or representatives to, directly or indirectly, (i) encourage, solicit, participate in or initiate discussions or negotiations with or (ii) provide any information to any entity concerning any merger, sale of assets, sale of or tender offer for shares of NSC Common Stock or similar transaction involving NSC from the date of the Plan through the Effective Time. 36 Notwithstanding the provisions described in the preceding paragraph, under the Plan, NSC may (i), directly or indirectly, furnish information and access, in response to an unsolicited request therefor, to any entity pursuant to appropriate confidentiality agreements, and (ii) participate in discussions and negotiate with an entity concerning any proposal to acquire NSC upon an Acquisition Transaction, if the Board of Directors of NSC determines in its good faith judgment in the exercise of its fiduciary duties or the exercise of its duties under Rule 14e-2 under the Exchange Act, after consultation with legal counsel and its financial advisors, that such action is appropriate in furtherance of the best interest of its stockholders. NSC shall promptly notify HEALTHSOUTH if it shall, on or after the date of the Plan, have entered into a confidentiality agreement with any third party in response to any unsolicited request for information and access in connection with a possible Acquisition Transaction involving such party, such notification to include the identity of such third party. 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 NSC. NYSE LISTING A listing application will be filed with the NYSE to list the shares of HEALTHSOUTH Common Stock to be issued to NSC 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. 37 SELECTED CONSOLIDATED FINANCIAL DATA - HEALTHSOUTH 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 Surgical Health Corporation ("SHC") and Sutter Surgery Centers, Inc. ("SSCI") acquisitions, the 1996 Surgical Care Affiliates, Inc. ("SCA") and Advantage Health Corporation ("Advantage Health") acquisitions and the 1997 Health Images, Inc. ("Health Images") acquisition, each of which was accounted for as a pooling of interests.
YEAR ENDED DECEMBER 31, ----------------------------------------- 1993 1994 1995 ------------- ------------- ------------- (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)(6) ................ 265,502 273,480 289,594 ========== ========== ========== Net income per common share: (3)(6) 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)(6) ....................................... 275,366 300,758 320,018 ========== ========== ========== Net income per common share - assuming dilution: (3)(4)(6) 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 ========== ========== ==========
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, --------------------------- -------------------- 1996 1997 1997 1998 ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Revenues ......................................................... $2,568,155 $3,017,269 $691,631 $907,663 Operating unit expenses .......................................... 1,667,248 1,888,435 438,289 561,491 Corporate general and administrative expenses .................... 79,354 82,757 17,849 26,424 Provision for doubtful accounts .................................. 58,637 71,468 14,713 21,753 Depreciation and amortization .................................... 207,132 250,010 57,371 73,382 Merger and acquisition related expenses (1) ...................... 41,515 15,875 15,875 - Loss on impairment of assets (2) ................................. 37,390 - - - Loss on abandonment of computer project .......................... - - - - Loss on disposal of surgery centers .............................. - - - - NME Selected Hospitals Acquisition related expense ............... - - - - Interest expense ................................................. 98,751 111,504 25,673 28,336 Interest income .................................................. (6,034) (4,414) (1,038) (1,641) Gain on sale of partnership interest ............................. - - - - Gain on sale of MCA Stock ........................................ - - - - ---------- ---------- -------- -------- 2,183,993 2,415,635 568,732 709,745 ---------- ---------- -------- -------- Income from continuing operations before income taxes, minority interests and extraordinary item ....................... 384,162 601,634 122,899 197,918 Provision for income taxes ....................................... 143,929 206,153 42,411 70,219 ---------- ---------- -------- -------- 240,233 395,481 80,488 127,699 Minority interests ............................................... 50,369 64,873 15,908 18,331 ---------- ---------- -------- -------- Income from continuing operations before extraordi- nary item ....................................................... 189,864 330,608 64,580 109,368 Income from discontinued operations .............................. - - - - Extraordinary item (2) ........................................... - - - - ---------- ---------- -------- -------- Net income ...................................................... $ 189,864 $ 330,608 $ 64,580 $109,368 ========== ========== ======== ======== Weighted average common shares outstanding (3)(6) ................ 321,367 346,872 327,727 398,496 ========== ========== ======== ======== Net income per common share: (3)(6) Continuing operations ........................................... $ 0.59 $ 0.95 $ 0.20 $ 0.27 Discontinued operations ......................................... - - - - Extraordinary item .............................................. - - - - ---------- ---------- -------- -------- $ 0.59 $ 0.95 $ 0.20 $ 0.27 ========== ========== ======== ======== Weighted average common shares outstanding - as- suming dilution(3)(4)(6) ....................................... 349,033 365,546 354,998 412,253 ========== ========== ======== ======== Net income per common share - assuming dilution: (3)(4)(6) Continuing operations ........................................... $ 0.55 $ 0.91 $ 0.18 $ 0.27 Discontinued operations ......................................... - - - - Extraordinary item .............................................. - - - - ---------- ---------- -------- -------- $ 0.55 $ 0.91 $ 0.18 $ 0.27 ========== ========== ======== ========
DECEMBER 31, ---------------------------------------------------------------- MARCH 31, 1993 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- ---- (IN THOUSANDS) BALANCE SHEET DATA: Cash and marketable securities ......... $ 153,011 $ 134,040 $ 159,793 $ 153,831 $ 152,399 $ 205,079 Working capital ........................ 300,876 308,770 406,601 564,529 566,751 915,553 Total assets ........................... 2,000,566 2,355,920 3,107,808 3,529,706 5,401,053 5,791,806 Long-term debt (5) ..................... 1,028,610 1,164,135 1,453,018 1,560,143 1,601,824 1,973,499 Stockholders' equity ................... 727,737 837,160 1,269,686 1,569,101 3,157,428 3,322,296
38 - - --------- (1) Expenses related to SHC's Ballas Merger in 1993, the ReLife and Heritage Acquisitions in 1994, the SHC, SSCI and NovaCare Rehabilitation Hospitals Acquisitions in 1995, the SCA, Advantage Health, PSCM and ReadiCare Acquisitions in 1996, and the Health Images Acquisition in 1997. (2) See "Notes to Consolidated Financial Statements". (3) Adjusted to reflect a two-for-one stock split effected in the form of a 100% stock dividend paid on April 17, 1995 and a two-for-one stock split effected in the form of a 100% stock dividend paid on March 17, 1997. (4) Diluted earnings per share in 1994, 1995, 1996 and 1997 reflect shares reserved for issuance upon conversion of HEALTHSOUTH's 5% Convertible Subordinated Debentures due 2001. Substantially all of such Debentures were converted into shares of HEALTHSOUTH's Common Stock in 1997. (5) Includes current portion of long-term debt. (6) Earnings per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, "Earnings Per Share". For further discussion, see Note 1 of "Notes to Consolidated Financial Statements". 39 SELECTED CONSOLIDATED FINANCIAL DATA - NSC The following statements of operations data and balance sheet data for the periods ended December 31, 1993 through December 31, 1997 have been derived from NSC's audited consolidated financial statements. The information set forth below is qualified by reference to and should be read in conjunction with the consolidated financial statements and related notes incorporated by reference herein.
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------- 1993 1994 1995 1996 1997 ------------ ------------ ------------ ------------ ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA:(1) Net revenues ................................... $ 35,230 $ 41,707 $ 53,165 $ 77,359 $ 102,632 Writedown of goodwill(2) ....................... (50,871) - - - - Operating income (loss)(2) ..................... (44,385) 7,566 10,237 17,205 26,920 Interest expense ............................... 4,016 4,186 4,139 2,616 1,025 Income (loss) before income taxes and ex- traordinary item(2) ........................... (49,463) 2,511 5,080 11,993 20,104 Income (loss) before extraordinary item(2) ..... (43,236) 1,493 3,099 7,377 12,589 Net income (loss)(2) ........................... (43,236) 1,120 2,846 6,914 12,451 Diluted income (loss) per common share: Income (loss) before extraordinary item(2) ..... $ (7.57) $ 0.23 $ 0.38 $ 0.50 $ 0.67 Extraordinary item ............................. - (0.06) (0.03) (0.03) (0.01) ---------- -------- -------- -------- --------- Net income (loss)(2) ........................... $ (7.57) $ 0.17 $ 0.35 $ 0.47 $ 0.66 ========== ======== ======== ======== ========= Diluted weighted average number of common and common equivalent shares outstanding. 5,715 6,404 8,186 15,204 18,834 THREE MONTHS ENDED MARCH 31, ------------------------- 1997 1998 ------------ ------------ STATEMENTS OF OPERATIONS DATA:(1) Net revenues ................................... $ 22,116 $ 31,034 Writedown of goodwill(2) ....................... - - Operating income (loss)(2) ..................... 5,215 8,854 Interest expense ............................... 153 314 Income (loss) before income taxes and ex- traordinary item(2) ........................... 4,161 6,123 Income (loss) before extraordinary item(2) ..... 2,611 3,766 Net income (loss)(2) ........................... 2,611 3,766 Diluted income (loss) per common share: Income (loss) before extraordinary item(2) ..... $ .14 $ .20 Extraordinary item ............................. - - -------- -------- Net income (loss)(2) ........................... $ .14 $ .20 ======== ======== Diluted weighted average number of common and common equivalent shares outstanding. 18,692 19,132
DECEMBER 31, MARCH 31, -------------------------------------------------------------- ------------ 1993 1994 1995 1996 1997 1998 ----------- --------- ---------- ---------- ---------- ------------ (IN THOUSANDS) BALANCE SHEET DATA:(1) Working capital ......................... $ 2,789 $ 6,300 $22,145 $ 59,968 $ 46,166 $ 39,013 Total assets ............................ 49,393 56,954 82,287 142,252 169,951 177,264 Long-term debt, less current installments 41,882 38,200 17,005 6,990 10,466 10,517 Shareholders' equity (deficit) .......... (3,134) 6,724 48,192 117,669 136,795 140,988
- - ---------- (1) NSC's financial statements for the periods presented are not strictly comparable due to the significant effect that acquisitions have on such statements. (2) Operating results for the year ended December 31, 1993, include a non-recurring charge of approximately $50.9 million ($43.8 million after tax benefit), principally incurred in connection with the writedown of goodwill. 40 BUSINESS OF HEALTHSOUTH GENERAL HEALTHSOUTH is the nation's largest provider of outpatient surgery and rehabilitative healthcare 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 March 31, 1998, HEALTHSOUTH had over 1800 patient care locations in 50 states, the United 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 the largest network of freestanding 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 freestanding outpatient surgery center is generally less expensive than hospital-based outpatient surgery. Over 80% of HEALTHSOUTH's surgery center facilities are located in markets served by its rehabilitative service facilities, enabling the Company 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 three 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 platforms for future growth. HEALTHSOUTH is continually evaluating potential acquisitions in the outpatient and rehabilitative healthcare services industry. HEALTHSOUTH 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. COMPANY 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. 41 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 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 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, 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 April 16, 1998, HEALTHSOUTH announced that it had entered into a definitive agreement to acquire 34 ambulatory surgery centers from Columbia/HCA Healthcare Corporation for $550,000,000 payable in cash at closing, which is expected to occur during the third quarter of 1998. The surgery centers are located in Alabama, California, Iowa, Illinois, Kentucky, Louisiana, Minnesota, Mississippi, North Carolina, Nevada, Oregon, Rhode Island and Texas. The transaction remains subject to various regulatory approvals and other third-party consents. 42 PATIENT CARE SERVICES HEALTHSOUTH began its operations in 1984 with a focus on providing comprehensive orthopaedic and musculoskeletal rehabilitation services on an outpatient basis. Over the succeeding 14 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, as well as the largest operator of freestanding outpatient surgery centers. In addition, HEALTHSOUTH has added diagnostic imaging services, occupational medicine services and other outpatient services which provide natural enhancements to its rehabilitative healthcare locations and facilitate the implementation of its Integrated Service Model. 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. Outpatient 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/neuromuscular conditions. As of March 31, 1998, HEALTHSOUTH provided outpatient rehabilitative healthcare services through approximately 1,200 outpatient locations, including freestanding outpatient centers and their satellites, outpatient satellites of inpatient facilities and outpatient facilities managed under contract. Inpatient Services INPATIENT REHABILITATION FACILITIES. At March 31, 1998, HEALTHSOUTH operated 133 inpatient rehabilitation facilities with 7,777 beds in the United States, representing the largest group of affiliated proprietary inpatient rehabilitation facilities in the nation, as well as a 71-bed rehabilitation hospital in Australia. HEALTHSOUTH's inpatient rehabilitation facilities provide high-quality comprehensive services to patients who require intensive institutional rehabilitation care. In certain markets HEALTHSOUTH's rehabilitation hospitals may provide outpatient rehabilitation services as a complement to their inpatient services. MEDICAL CENTERS. At March 31, 1998, HEALTHSOUTH operated four medical centers with licensed beds in four distinct markets. These facilities provide general and specialty medical and surgical healthcare services, emphasizing orthopaedics, sports medicine and rehabilitation. Surgery Centers HEALTHSOUTH is currently the largest operator of outpatient surgery centers in the United States. At March 31, 1998, it operated 176 freestanding surgery centers, including five mobile lithotripsy units, in 36 states. Over 80% of these facilities are located in markets served by HEALTHSOUTH's 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. Its typical surgery center is a freestanding facility with three to six fully equipped operating and procedure rooms and ancillary areas for reception, preparation, recovery and administration. Each of HEALTHSOUTH's surgery centers is available for use only by licensed physicians, oral surgeons and podiatrists, and the centers do not perform surgery on an emergency basis. 43 Outpatient surgery centers, unlike hospitals, have not historically provided overnight accommodations, food services or other ancillary services. Over the past several years, states have increasingly permitted the use of extended-stay recovery facilities by outpatient surgery centers. As a result, many outpatient surgery centers are adding extended recovery care capabilities where permitted. Most of HEALTHSOUTH's surgery centers currently provide for extended recovery stays. The Company's ability to develop such recovery care facilities is dependent upon state regulatory environments in the particular states where its centers are located. Diagnostic Centers At March 31, 1998, HEALTHSOUTH operated 113 diagnostic centers in 24 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. Because 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 Medicine Services At March 31, 1998, HEALTHSOUTH operated 108 occupational medicine centers in 31 states. These centers provide cost-effective, outpatient primary medical care and rehabilitation services to individuals for the treatment of work-related medical problems. HEALTHSOUTH's occupational medicine centers market their services to large and small employers, workers' compensation and health insurers and managed care organizations. The services provided at HEALTHSOUTH's occupational medicine centers include outpatient primary medical care for work-related injuries and illnesses, work-related physical examinations, physical therapy services and workers' compensation medical services, as well as other services primarily aimed at work-related injuries or illnesses. Medical services at the centers are provided by licensed physicians who are employed by or under contract with HEALTHSOUTH or affiliated medical practices. These centers also employ nurses, therapists and other licensed professional staff as necessary for the services provided. HEALTHSOUTH believes that occupational medicine primary care services are a strategic component of its business, and that the physicians in its occupational medicine centers can, in many cases, serve as "gatekeepers" providing access to the other services offered by HEALTHSOUTH. Other Patient Care Services In certain of its markets, HEALTHSOUTH provides other patient care services, including home healthcare, 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. 44 LOCATIONS The following table sets forth a listing of HEALTHSOUTH's patient care services locations at March 31, 1998:
OUTPATIENT INPATIENT MEDICAL REHABILITATION REHABILITATION CENTERS SURGERY DIAGNOSTIC OTHER STATE FACILITIES FACILITIES (BEDS)(2) (BEDS)(2) CENTERS CENTERS SERVICES ----- ---------- -------------------- --------- ------- ------- -------- Alabama ...................... 26 7 (336) 1 (219) 5 6 11 Alaska ....................... 8 1 1 4 Arizona ...................... 24 4 (243) 2 1 7 Arkansas ..................... 13 5 (278) 2 5 California ................... 59 1 (60) 36 1 31 Colorado ..................... 41 1 (64) 5 8 1 Connecticut .................. 35 1 (30) 5 3 Delaware ..................... 7 1 District of Columbia ......... 1 1 Florida ...................... 83 12 (735) 1 (285) 19 7 30 Georgia ...................... 30 1 (50) 3 10 4 Hawaii ....................... 12 1 Idaho ........................ 5 1 Illinois ..................... 51 5 3 1 Indiana ...................... 19 4 (260) 5 4 Iowa ......................... 3 1 Kansas ....................... 7 4 (231) 1 Kentucky ..................... 5 2 (80) 4 Louisiana .................... 4 6 (367) 1 3 2 Maine ........................ 7 4 (155) 4 Maryland ..................... 30 2 (66) 8 8 1 Massachusetts ................ 27 14 (806) 1 2 12 Michigan ..................... 24 1 (30) 1 2 Minnesota .................... 14 Mississippi .................. 7 Missouri ..................... 51 2 (86) 10 1 9 Montana ...................... 4 Nebraska ..................... 16 Nevada ....................... 19 2 (126) 1 2 New Hampshire ................ 10 3 (99) New Jersey ................... 73 1 (155) 1 2 1 New Mexico ................... 6 1 (61) 1 1 New York ..................... 49 1 (27) 1 1 North Carolina ............... 19 3 1 North Dakota ................. 2 Ohio ......................... 42 1 (30) 7 4 Oklahoma ..................... 17 3 (183) 1 1 1 Oregon ....................... 27 1 Pennsylvania ................. 58 15 (1,180) 9 6 6 Rhode Island ................. 3 South Carolina ............... 9 4 (235) 2 6 2 South Dakota ................. 2 4 Tennessee .................... 33 6 (362) 6 5 Texas ........................ 104 19 (1,116) 1 (96) 21 24 41 Utah ......................... 4 1 (86) 1 1 2 Vermont ...................... 1 Virginia ..................... 24 1 (40) 1 (200) 2 9 Washington ................... 85 2 1 17 West Virginia ................ 2 4 (200) 1 Wisconsin .................... 3 4 Wyoming ...................... 2
- - ---------- (1) Includes freestanding outpatient centers and their satellites, outpatient satellites of inpatient rehabilitation facilities and outpatient facilities managed under contract. (2) "Beds" refers to the number of beds for which a license or certificate of need has been granted, which may vary materially from beds available for use. In addition, at March 31, 1998, HEALTHSOUTH operated six diagnostic centers in the United Kingdom and one rehabilitation hospital in Australia. 45 BUSINESS OF NSC GENERAL NSC owns and operates freestanding ambulatory surgery centers that provide the medical and administrative support necessary for physicians to perform non-emergency surgical procedures. NSC also pursues opportunities to develop new ambulatory surgery facilities with hospitals and physician groups. As of March 31, 1998, NSC operated a network of 40 surgery centers in 14 states. NSC provides alternate-site settings for high-quality surgical care that it believes is more cost-effective than hospital-based surgical care and that it believes is increasingly preferred by physicians, payors and patients. NSC believes that many physicians prefer the efficiencies of freestanding ambulatory surgery centers because they enhance physicians' productivity by providing them with greater scheduling flexibility, more consistent nurse staffing and faster turnaround time between cases, allowing physicians to perform more surgeries in a defined period of time. In addition, new technology and advances in anesthesia and the addition of overnight recovery have significantly expanded the number and types of surgical procedures that are being performed in ambulatory surgery centers. STRATEGY NSC's objective is to establish a nationwide organization of freestanding ambulatory surgery centers in secondary and other selected markets by acquiring established centers and developing new centers. NSC seeks to provide a broad range of high-quality surgical services and to collaborate with other participants in local health care delivery systems. The key components of the NSC's strategy are as follows: (i) Focus on secondary and other selected markets where NSC can establish a significant local presence or play an important role in the development of local integrated delivery systems; (ii) Acquire established ambulatory surgery centers that are seeking affiliation with an experienced operator having access to capital and other resources; (iii) Develop new ambulatory surgery centers in markets where attractive acquisitions are not available or where the opportunity exists to increase NSC's presence in its existing markets; (iv) Develop joint ventures with hospitals and other providers to increase patient flow through joint marketing, access to managed care contracts and participation in a broader network of health care providers; and (v) Expand the range of services offered to physicians and payors by offering state-of-the-art technology, administrative conveniences, flexible pricing alternatives and cost-effective care. o Focus on Secondary and Other Selected Markets. NSC focuses on those markets where, either directly or through affiliation with physicians, payors or hospitals, it can establish a significant local presence or play an important role in the development of local integrated delivery systems. NSC generally views secondary markets as those metropolitan areas with fewer than 250,000 residents and one or two hospitals. NSC believes that in secondary markets its centers can more easily achieve the scale that allows them to become a significant local health care provider and a more attractive partner in such delivery systems. o Acquire Established Ambulatory Surgery Centers. The ambulatory surgery center industry is highly fragmented and is consolidating due to the increasing complexity of the regulatory and business aspects of health care, the growing influence of managed care, the rising cost of technology and the need for capital. In addition, physician operators of surgery centers are experiencing increasing practice demands. NSC believes that a significant opportunity exists to acquire ambulatory surgery centers that are seeking affiliation with experienced operators having access to capital and other resources. o Develop New Ambulatory Surgery Centers. NSC pursues new center development in markets where attractive acquisitions are not available or where the opportunity exists to increase NSC's presence in its existing markets. In the future, NSC's new center development efforts will generally be undertaken in partnership with physicians, hospitals and other local healthcare participants, including, where the opportunity presents itself, acquisitions of centers that are currently under development. NSC believes that such partnerships or acquisitions minimize the time required to become an established provider. 46 o Develop Joint Ventures with Hospitals, Physicians and Other Providers. NSC has established joint ventures, limited or general partnerships or limited liability companies in 36 of its network of 40 centers. NSC believes that such affiliations increase patient flow through joint marketing, access to managed care contracts and participation in a broader network of healthcare providers. As part of its joint venture strategy, NSC intends to manage the surgery centers in which it and other healthcare providers have an equity interest. o Expand Range of Services. NSC plans to continue to increase the number and types of surgeries performed at its centers. NSC is committed to adding programs and services for physicians and payors by providing state-of-the-art technology, administrative conveniences, flexible pricing alternatives and cost-effective care. NSC is also committed to offering extended recovery services wherever possible, enabling its centers to accommodate a wider range of higher-acuity procedures. OPERATION OF SURGERY CENTERS NSC operates a network of 40 surgery centers in 14 states and is developing three new surgery centers. NSC's surgery center network has a total of 121 operating rooms and 61 treatment rooms. NSC's surgery centers are typically owned through limited or general partnerships in which a wholly owned subsidiary of NSC owns a general partnership interest and is the managing general partner of the surgery center. Local physicians and the subsidiary generally own the limited partnership interests and, in five instances, hospitals also own limited partnership interests. Recently, NSC has also owned surgery centers through limited liability companies ("LLC") in which a wholly owned subsidiary of NSC owns a portion of the LLC and is its managing member. NSC's typical multi-specialty surgery center is a freestanding facility with three to five fully equipped operating rooms, one or two treatment rooms and ancillary areas for reception, pre-operative preparation, recovery and administration. NSC's typical endoscopy center, which performs primarily gastroenterological procedures, has two treatment rooms and ancillary areas for reception, pre-operation preparation, recovery and administration and may also have an operating room. NSC's surgery centers are generally located in close proximity to physicians' offices. Each of NSC's surgery centers is available for use only by licensed physicians who have been approved by the center's medical credentialling committee. NSC's multi-specialty surgery centers generally employ a staff of between 15 and 30 and its endoscopy centers generally employ a staff of between five and fifteen, depending on the size of the facility and the volume of cases. The staff includes a center administrator, a business manager, a clinical director, registered nurses, operating room technicians and clerical workers. The center administrator is responsible for general oversight of the center's operations, including liaison with physicians and coordination of marketing efforts and reports to a regional manager or corporate vice president. The business manager is responsible for the center's financial records and patient billing and collections. The clinical director is responsible for providing leadership and coordination for the professional and support staff and ensuring efficient scheduling and staffing for the physicians. NSC provides services to a wide range of specialties including: ophthalmology, orthopedic surgery, otorhinolaryngology (ear, nose and throat), gynecology, general surgery, gastroenterology, anesthesiology, neurosurgery, oral surgery, plastic surgery, podiatry and urology. Medicare currently approves over 2,400 types of surgical procedures that may be performed in ambulatory surgery centers, up from 1,500 types in 1992. Common procedures performed in the NSC's surgery centers include knee and shoulder arthroscopy, laparoscopy, hernia repair, tubal ligations and removal of cataracts. Fifteen of NSC's multi-specialty surgery centers currently provide for extended recovery stays. NSC intends to offer extended recovery services at its multi-specialty facilities if permitted by state law. NSC's ability to develop such recovery care facilities is dependent on state regulatory environments. 47 The following table sets forth information regarding each of the centers operated by the Company as of May 31, 1998:
DATE NUMBER OF NUMBER OF EXTENDED OPERATIONS PERCENTAGE OPERATING TREATMENT RECOVERY LOCATION BEGAN BY NSC OWNERSHIP(1) ROOMS ROOMS SERVICE -------- ------------ ------------ ----- ----- ------- Bremerton, WA October 1991 93.0 3 1 - Brownsville,TX November 1991 59.0 4 1 Fayetteville, NC November 1991 50.2 9 - - Norman, OK November 1991 50.5 41 - Greensboro, NC June 1992 100.0 11 3 - Seattle, WA June 1992 52.5 7 - - Provo, UT October 1992 100.0 5 - - Elizabethtown, KY November 1992 78.5 3 1 - Bakersfield, CA January 1993 87.0 2 1 Somerset, KY November 1993 87.5 2 1 - Las Vegas, NV August 1994 69.2 4 3 - Santa Monica, CA August 1994 88.9 5 3 - Las Vegas, NV February 1995 10.0 2 1 Oxnard, CA August 1995 88.2 4 1 - Greensboro, NC October 1995 80.3 2 - Billings, MT January 1996 100.0 3 1 Chula Vista, CA February 1996 51.0 - 2 Ft. Worth, TX February 1996 51.0 - 2 Long Beach, CA February 1996 50.0 - 3 Newport Beach, CA February 1996 70.0 - 2 San Diego, CA February 1996 51.3 - 3 Thousand Oaks, CA February 1996 51.0 - 2 Kent, OH April 1996 83.0 2 1 Atlanta, GA May 1996 67.0 3 - Cincinnati, OH May 1996 58.0 1 1 Houston, TX May 1996 65.8 3 1 - Miami, FL May 1996 51.0 4 3 Sarasota, FL May 1996 54.0 1 2 Humble, TX September 1996 65.0 4 2 - Auburn, CA November 1996 88.1 2 2 San Mateo, CA December 1996 38.5 - 2 Port St. Lucie, FL January 1997 80.0 2 1 Bakersfield, CA June 1997 80.0 2 - South Oklahoma City, OK June 1997 60.0 4 2 - Edmond, OK August 1997 60.0 4 1 - Hartford, CT August 1997 100.0 2 1 Midwest City, OK November 1997 84.4 2 1 Manahawkin, NJ December 1997 49.0 2 1 Norman, OK February 1998 81.0 - 2 Lancaster, CA March 1998 78.3 4 2 Jacksonville, FL May 1998 61.7 6 3 St. Augustine, FL May 1998 55.0 3 1
- - ---------- (1) Includes general partnership, limited partnership or limited liability company units. RECENT DEVELOPMENTS On May 22, 1998, NSC completed the acquisitions of majority interests in ambulatory surgery centers in each of Jacksonville, Florida and St. Augustine, Florida, for cash. 48 DESCRIPTION OF CAPITAL STOCK OF HEALTHSOUTH COMMON STOCK HEALTHSOUTH is authorized by the HEALTHSOUTH Certificate to issue up to 601,500,000 shares of capital stock, of which 600,000,000 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 15, 1998, there were 401,094,178 shares of HEALTHSOUTH Common Stock outstanding (including shares reserved for issuance 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, as of June 15, 1998, approximately (a) 15,501,707 shares of Common Stock were reserved for issuance upon conversion of HEALTHSOUTH 3.25% Convertible Subordinated Debentures due 2003, (b) 37,108,303 shares of Common Stock were reserved for issuance under HEALTHSOUTH's Stock Option Plans, under which options to purchase a total of 28,894,862 shares of Common Stock were outstanding, (c) 980,542 shares were reserved for issuance pursuant to the exercise of outstanding stock purchase warrants, and (d) 1,218,307 shares were reserved for issuance in connection with HEALTHSOUTH's pending acquisition of The Company Doctor, an occupational medicine provider. 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 66 2/3% 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 associate 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, may be amended or repealed only by the affirmative vote of 66 2/3% 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 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. 49 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" for a period of three years from the 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 corporation in the same transaction that makes it an interested stockholder (excluding shares held 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 approved by the corporation's board of directors and by the holders of at least 66 2/3% 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 prior to the date on which it is sought 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 Stock in one or more series and to fix the rights, preferences, privileges and restrictions, including the dividend rights, dividend rate, conversion rights, voting rights, terms of redemption, redemption price or prices, liquidation preferences and the number of shares constituting any series or the designations of such series, without any further vote or action by the stockholders. Issuance of shares of HEALTHSOUTH Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or 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 of the holders of the HEALTHSOUTH Common Stock. The Board of Directors of HEALTHSOUTH has no current intention of issuing any shares of HEALTHSOUTH Preferred Stock. TRANSFER AGENT The transfer agent and registrar for the HEALTHSOUTH Common Stock is ChaseMellon Shareholder Services, New York, New York. 50 COMPARISON OF RIGHTS OF NSC AND HEALTHSOUTH STOCKHOLDERS Both NSC and HEALTHSOUTH are incorporated in Delaware. Holders of the NSC Shares will continue to have their rights and obligations as stockholders of HEALTHSOUTH after the Merger governed by Delaware law. Set forth below is a summary comparison 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 NSC stockholder under the NSC Certificate of Incorporation, as amended (the "NSC Certificate"), and NSC's Bylaws, as amended (the "NSC Bylaws"), on the other hand. The information set forth below is qualified in its entirety by reference to the HEALTHSOUTH Certificate, the HEALTHSOUTH Bylaws, the NSC Certificate and the NSC Bylaws. CLASSES AND SERIES OF CAPITAL STOCK NSC. NSC is authorized by the NSC Certificate to issue up to 40,000,000 shares of capital stock, of which 20,000,000 shares are designated Common Stock, par value $.01 per share, 10,000,000 shares are designated Non-Voting Common Stock, par value $.01 per share, and 10,000,000 shares are designated Preferred Stock (the "NSC Preferred Stock"), par value $.01 per share. As of May 26, 1998, 18,616,716 shares of NSC Common Stock were outstanding and 33,750 warrants to purchase shares of NSC Common Stock were outstanding. There is currently no Non-Voting Common Stock outstanding. The Board of Directors of NSC has the authority to issue NSC 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 NSC stockholders. No NSC Preferred Stock has ever been issued. The Board of Directors of NSC has no present intention of issuing shares of NSC Preferred Stock. HEALTHSOUTH. HEALTHSOUTH is authorized by the HEALTHSOUTH Certificate to issue up to 601,500,000 shares of capital stock, of which 600,000,000 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 March 31, 1998, 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 NSC. The NSC Certificate provides that the NSC Board of Directors shall fix the number of directors from time to time, except that the minimum number of directors shall be three and the maximum number of directors shall be 15. The NSC Certificate provides that the NSC Board of Directors shall be classified into three classes, with staggered three-year terms. Pursuant to authority set forth in the NSC Certificate, the NSC Board of Directors has fixed the number of directors at six. Directors are elected by a plurality of votes cast at the annual meeting of stockholders. The NSC Certificate and the NSC Bylaws do not provide for cumulative voting. The NSC Board of Directors is authorized to, by the affirmative vote of a majority of the directors then in office, fill vacancies and newly created directorships resulting from an increase in the number of directors. 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 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 NSC. A director of NSC may resign by giving written notice to the chairman of the NSC Board of Directors. No acceptance of the NSC Board of Directors is required for such resignation to be effective. 51 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 NSC. The NSC Common Stock is not divided into classes and is the only class of capital stock issued and outstanding. Each share of NSC Common Stock entitles its holder of record as of the relevant record date to one vote on each matter, including the election of directors, submitted to a stockholder vote. The vote of the holders of a majority of the shares of NSC Common Stock present or represented by proxy entitled to vote is required to approve any matter at a meeting of NSC stockholders, except that (i) the affirmative vote of the holders of at least 80% of the voting power of all of the then outstanding shares of voting stock, voting together as a single class, shall be required to alter, amend, repeal, or adopt certain provisions of the NSC Certificate, (ii) the affirmative vote of at least two-thirds of the holders of voting power of all of the then outstanding shares of capital stock entitled to vote on all matters submitted to stockholder vote generally is required to amend certain other provisions of the NSC Certificate, and (iii) the affirmative vote or written consent of the holders of at least two-thirds of the then outstanding shares of Common Stock and Non-Voting Common Stock, voting together as a single class, shall be required for certain matters affecting the rights of the NSC Common Stock or the Non-Voting Common Stock. 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 NSC. The NSC Common Stock has no preemptive, subscription or redemption rights. Certain holders of NSC Common Stock are entitled to convert their NSC Common Stock to Non-Voting Common Stock on a one-for-one basis. The outstanding NSC Shares are fully paid and nonassessable. The rights, preferences and privileges of holders of NSC Common Stock may become subject to those of holders of NSC Preferred Stock, if any is issued in the future. The NSC Certificate authorizes the NSC Board of Directors to issue up to 10,000,000 shares of NSC Preferred Stock, par value $.01 per share, with such voting powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations and restrictions as the NSC Board may fix to the full extent permitted by law. If the NSC Board of Directors were to designate a series of NSC Preferred Stock, such NSC Preferred Stock could be entitled to preferential payments in the event of liquidation, dissolution or winding up of NSC. 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 52 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 NSC. Certain provisions in the NSC Certificate and NSC Bylaws may have the effect of discouraging, preventing or delaying a change in control of NSC. These provisions include a staggered board as described under "- Size and Election of the Board of Directors", super-majority vote for amendment of certain provisions of the NSC Certificate and NSC Bylaws as described under "Amendment or Repeal of the Certificate of Incorporation", and the procedure for calling a special meeting of stockholders described under "- Special Meeting of Stockholders". In addition, under certain circumstances, Section 203 of the Delaware General Corporation Law makes it more difficult for a person who would be an "interested stockholder" to effect various business combinations with a corporation for a three-year period. The provisions of Section 203 may also have the effect of preventing changes in control of NSC. It is possible that such provisions could make it more difficult to accomplish transactions that stockholders otherwise deem to be in their best interests. 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 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. NSC. Super-majority vote is required for certain amendments to the NSC Certificate. The affirmative vote of at least two-thirds of the holders of voting power of all of the then outstanding shares of capital stock entitled to vote on all matters submitted to stockholder vote generally is required to amend Article FIFTH of the NSC Certificate, which relates to stockholder meetings and business that can be conducted at such meetings. In addition, affirmative vote of the holders of at least 80% of the voting power of all of the then outstanding shares of voting stock, voting together as a single class, shall be required to alter, amend, repeal, or adopt any provision inconsistent with Article EIGHT of the NSC Certificate, which relates to the size, nomination, election and certain authority of the NSC Board of Directors. The NSC Certificate provides that a majority of the NSC Board of Directors may make, alter or repeal the NSC By-laws. The NSC By-laws provide that such By-laws may also be altered, amended or repealed by the NSC stockholders. 53 HEALTHSOUTH. The HEALTHSOUTH Certificate requires approval by holders of at least 66 2/3% of the outstanding shares entitled 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 NSC. The NSC Certificate provides that special meetings of stockholders of NSC may be called only by the chairman of the NSC Board of Directors pursuant to a resolution adopted by the affirmative vote of a majority of the entire Board of Directors. 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 NSC Certificate includes such a provision, to the maximum extent permitted by law. 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. Both the HEALTHSOUTH Certificate and NSC Certificate contain such a provision. 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. 54 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 NSC Bylaws provide that officers, directors, employees and agents of NSC will be indemnified to the maximum extent permitted by the DGCL. 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 NSC as provided in the NSC Certificate or the NSC Bylaws shall survive the Merger and shall continue in full force and effect in accordance with their terms. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling HEALTHSOUTH or NSC pursuant to the foregoing provisions, HEALTHSOUTH and NSC have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. OPERATIONS AND MANAGEMENT OF HEALTHSOUTH AND NSC AFTER THE MERGER OPERATIONS After the consummation of the Merger, NSC will be a wholly-owned subsidiary of HEALTHSOUTH, and all of NSC's subsidiaries will be indirect wholly-owned subsidiaries of HEALTHSOUTH. HEALTHSOUTH will continue to engage in the business of providing outpatient surgery and rehabilitative healthcare services as prior to the Merger, working with the management of NSC to operate and, as appropriate, continue to expand NSC's business in ways complementary to the overall strategy of the combined Companies. 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 NSC". 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. EXPERTS The consolidated financial statements and schedule of HEALTHSOUTH at December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, appearing in HEALTHSOUTH'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 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 of National Surgery Centers, Inc. incorporated by reference in National Surgery Center, Inc.'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 incorporated by reference therein and incorporated herein by reference. Such consolidated financial statements are incorporated herein by reference in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. 55 LEGAL MATTERS The validity of the shares of HEALTHSOUTH Common Stock to be issued to the stockholders of NSC pursuant to the Merger will be passed upon by Haskell Slaughter & Young, L.L.C. ADDITIONAL INFORMATION The Board of Directors of NSC 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 NSC stockholders at the Special Meeting or any adjournments or postponements thereof or for any other reason, NSC intends to hold its next Annual Meeting of Stockholders on or about September 30, 1998. Any stockholder of NSC 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 NSC on or before . 56 ANNEX A PLAN AND AGREEMENT OF MERGER PLAN AND AGREEMENT OF MERGER (the "Plan of Merger"), made and entered into as of the 5th day of May, 1998, by and among HEALTHSOUTH CORPORATION, a Delaware corporation ("HEALTHSOUTH"), FIELD ACQUISITION CORPORATION, a Delaware corporation (the "Subsidiary"), and NATIONAL SURGERY CENTERS, INC., a Delaware corporation ("NSC") (the Subsidiary and NSC 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 NSC have approved the merger of the Subsidiary with and into NSC (the "Merger"), upon the terms and conditions set forth in this Plan of Merger, whereby all shares of Common Stock, par value $.01 per share, of NSC (the "NSC Common Stock"), not owned directly or indirectly by NSC, will be converted into the right to receive the Merger Consideration (as hereinafter defined); WHEREAS, each of HEALTHSOUTH, the Subsidiary and NSC desires to make certain representations, warranties, covenants and agreements in connection with the Merger and also to prescribe various conditions to the Merger; 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 (the "Code"); and WHEREAS, for accounting purposes, it is intended that the Merger shall be accounted for as a "pooling of interests". 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 NSC at the Effective Time (as defined in Section 1.3). Following the Effective Time, the separate corporate existence of the Subsidiary shall cease and NSC shall continue as the surviving corporation (the "Surviving Corporation") under the name "NSC, Inc." and shall succeed to and assume all the rights and obligations of the Subsidiary and NSC 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 (other than Section 9.1(a), which shall be satisfied at the Closing Date), 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 NSC 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. A-1 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 NSC 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 NSC Common Stock that is owned by NSC or by any subsidiary of NSC shall automatically be canceled and retired and shall cease to exist, and none of the 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 NSC Shares. Subject to Section 2.2(e), each issued and outstanding share of NSC Common Stock (other than shares to be canceled in accordance with Section 2.1(b)) (collectively, the "Exchanging NSC Shares") shall be converted into the right to receive that fraction of a share of HEALTHSOUTH Common Stock determined by dividing $30.50 by the Base Period Trading Price (as defined below), as may be adjusted as provided below, computed to four decimal places (the "Exchange Ratio"); provided, however, that if the Base Period Trading Price shall be greater than $35.00, the Exchange Ratio shall be .8714; and provided further, however, that if the Base Period Trading Price shall be less than $26.50, the Exchange Ratio shall be 1.1509. The number of shares of HEALTHSOUTH Common Stock issuable with respect to each Exchanging NSC Share, as determined as set forth herein, is herein called the "Merger Consideration". For purposes of this Plan of Merger, the term "Base Period Trading Price" shall mean the average of the daily closing prices per share for the shares of HEALTHSOUTH Common Stock for the 20 consecutive trading days on which such shares are actually traded (as reported on the New York Stock Exchange Composite Transactions Tape as reported in The Wall Street Journal, Eastern Edition, or if not reported thereby, any other authoritative source) ending at the close of trading on the second New York Stock Exchange trading day immediately preceding the day of the Special Meeting (as defined in Section 7.3) (such period being herein called the "Base Period"). Promptly after the close of trading on such day, the parties shall issue joint press release publicly announcing the Exchange Ratio. As of the Effective Time, all such Exchanging NSC Shares shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a certificate representing any Exchanging NSC Shares shall cease to have any rights with respect thereto, except the right to receive the Merger Consideration and any cash in lieu of fractional shares of HEALTHSOUTH Common Stock to be issued or paid in consideration therefor upon surrender of such certificate in accordance with Section 2.2, without interest. (d) Stock Options, Warrants and Convertible Securities. At the Effective Time, all rights with respect to NSC Common Stock pursuant to any NSC stock options, stock purchase warrants and convertible securities which are outstanding at the Effective Time, whether or not then exercisable, shall be converted into and become rights with respect to HEALTHSOUTH Common Stock, and HEALTHSOUTH shall assume each NSC stock option, stock purchase warrant or convertible securities, in accordance with the terms of any stock option plan under which it was issued and any stock option agreement, warrant agreement, indenture or other instrument 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 NSC 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 NSC shares subject thereto multiplied by the Exchange Ratio, and shall have an exercise price or conversion price per share equal to the NSC exercise price or conversion 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 or a dividend payable in HEALTHSOUTH Common Stock, or any other distribution of securities A-2 or dividend (in cash or otherwise) to holders of HEALTHSOUTH Common Stock with respect to their HEALTHSOUTH Common Stock (including without limitation such a distribution or dividend made in connection with a recapitalization, reclassification, merger, consolidation, reorganization or similar transaction) then (i) the amounts $30.50, $35.00 and $26.50 referred to in Section 2.1(c), and 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 NSC 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 NSC 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, being hereinafter referred to as the "Exchange Fund") issuable pursuant to Section 2.1 in exchange for outstanding shares of NSC Common Stock. (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 which immediately prior to the Effective Time represented outstanding shares of NSC Common Stock (the "Certificates") whose shares were converted into the right to receive the Merger Consideration pursuant to Section 2.1, (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 the 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 the 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 NSC Common Stock which is not registered in the transfer records of NSC, 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 issuance 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. Until surrendered as contemplated by this Section 2.2, each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive upon such surrender the certificate representing shares of HEALTHSOUTH Common Stock and cash in lieu of any fractional shares of HEALTHSOUTH Common Stock as contemplated by this Section 2.2. No interest will be paid or will accrue on any cash payable in lieu of any fractional shares of HEALTHSOUTH Common Stock. To the extent permitted by law, former stockholders of record of NSC shall be entitled to vote after the Effective Time at any meeting of HEALTHSOUTH stockholders the number of whole shares of HEALTHSOUTH Common Stock into which their respective shares of NSC Common Stock are converted, regardless of whether such holders have exchanged their Certificates for certificates representing HEALTHSOUTH Common Stock in accordance with this Section 2.2. (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 A-3 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 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. (d) No Further Ownership Rights in Exchanging NSC Shares. All shares of HEALTHSOUTH Common Stock issued upon the surrender for exchange of Certificates 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 NSC Shares theretofore represented by such Certificates. 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 NSC Shares exchanged pursuant to the Merger who would otherwise have been entitled to receive a fraction of a share of HEALTHSOUTH Common Stock (after taking into account all Certificates 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 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. (f) Termination of Exchange Fund. Any portion of the Exchange Fund which remains undistributed to the holders of the Certificates 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, NSC 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 shall 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. 2.3 Certificate of Incorporation of Surviving Corporation. The Certificate of Incorporation of NSC shall be amended and restated, effective at the Effective Time, in a manner satisfactory to A-4 HEALTHSOUTH. The Certificate of Incorporation of NSC, 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 NSC and the said Bylaws. 2.5 Directors and Officers of the Surviving Corporation. The Directors and officers of the Subsidiary immediately prior to the Effective Time shall be the Directors and officers 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 NSC 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 this 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. The employees and agents of the Subsidiary shall become the employees and agents of the Surviving Corporation and continue to be entitled to the same rights and benefits which they enjoyed as employees and agents of the Subsidiary. Section 3. REPRESENTATIONS AND WARRANTIES OF NSC. NSC hereby represents and warrants to HEALTHSOUTH and the Subsidiary as follows: 3.1 Organization, Existence and Good Standing. NSC is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. NSC has all necessary corporate power to own its properties and assets and to carry on its business as presently conducted. NSC is not, and has not been within the two years immediately preceding the date of this Plan of Merger, a subsidiary or division of another corporation, nor has NSC within such time owned, directly or indirectly, any shares of HEALTHSOUTH Common Stock or Subsidiary Common Stock. 3.2 NSC Capital Stock. NSC's authorized capital consists of 40,000,000 shares of NSC Common Stock, of which 18,572,111 shares were issued and outstanding as of April 3, 1998, and no shares of which were issued and held as treasury shares, 10,000,000 shares of Non-Voting Common Stock, par value $.01 per share, none of which shares are issued and outstanding or held as treasury stock, and 10,000,000 shares of Preferred Stock, par value $.01 per share, none of which shares are issued and outstanding or held as treasury stock. All of the issued and outstanding shares of NSC 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 NSC to HEALTHSOUTH simultaneously with the execution and delivery hereof (the "Disclosure Schedule") or otherwise disclosed in the NSCour Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "NSC 10-K"), there are no options, warrants, convertible securities or similar rights granted by NSC or any other agreements1999. YOU SHOULD TAKE INTO ACCOUNT CERTAIN FINANCING CONSIDERATIONS Amount of Leverage As of June 30, 2000, we had approximately $3,259,997,000 of outstanding indebtedness (including the current portion of long-term debt and excluding obligations to trade creditors) and approximately $3,333,591,000 of stockholders' equity. Outstanding indebtedness was approximately 49.4% of our total capitalization, which NSC is a party providing forwas approximately $6,593,588,000 (including the issuance or sale by itcurrent portion of any additional securitieslong-term debt). On an as-adjusted basis, as of June 30, 2000, after giving effect to the offering of the Private Notes and the use of proceeds, we would have had approximately $3,271,065,000 of outstanding indebtedness, which would remainamount to approximately 49.5% of our total capitalization (including short-term borrowings and notes and the current portion of long-term debt) and approximately $3,333,181,000 of stockholders' equity. See "Capitalization". Restrictive Covenants Our $1,750,000,000 revolving credit facility with Bank of America, N.A., and other participating banks contains various covenants that limit our ability to engage in certain transactions. Those covenants, among other things: o limit our and our subsidiaries' ability to borrow and to place liens on our and their assets; o limit our investments and the sale of all or substantially all of our assets; o require us to maintain a minimum consolidated net worth; and o require us to comply with coverage ratio tests. The indentures governing our debt securities, including the Notes, include covenants of a similar nature. Our failure to comply with any of these covenants could result in an event of default under our indebtedness, including the Notes. That, in turn, could cause an event of default to occur under all or substantially all of our other indebtedness. See "Description of Exchange Notes-Certain Covenants". Effect on Our Ability to Finance Future Operations Our level of indebtedness relative to our total capitalization and the covenants described above may adversely affect our ability to finance our future operations. Those factors also could limit our ability to pursue business opportunities that may be in our interests. In particular, changes in medical technology, existing, proposed and future legislation, regulations and the interpretation thereof, and the requirements of payor contracts and other government reimbursement programs may require significant investments in facilities, equipment, personnel and services. Although we believe that cash generated from operations, amounts available under our bank credit facilities and our ability to access capital markets will be sufficient to allow us to make such investments, we cannot assure you that we will be able to obtain the funds necessary to make such investments. 13 THE NOTES ARE SUBORDINATED OBLIGATIONS The Notes are subordinate in right of payment to all of our current and future Senior Indebtedness (as defined in "Description of Exchange Notes"). Senior Indebtedness includes indebtedness under our bank credit facilities and all of our other indebtedness that is not expressly made subordinate to, or equal to, the Notes. At June 30, 2000, the aggregate amount of our Senior Indebtedness was approximately $2,187,068,000, as adjusted to give effect afterto the Effective Time. There is no liability for dividends declaredsale of the Private Notes and the application of the net proceeds of the offering of the Private Notes. See "Capitalization". After giving effect to the application of the proceeds of the sale of the Private Notes, we would have been entitled to borrow in excess of $312,932,000 under our existing credit facilities at June 30, 2000, which does not include any amounts under the new credit facility. Subject to certain limitations in the indenture, we may incur additional indebtedness in the future, including Senior Indebtedness. By reason of the subordination of the Notes, in the event of our insolvency, bankruptcy, liquidation, reorganization, dissolution or accumulated but unpaidwinding up of our business or upon default in payment with respect to any of our Senior Indebtedness, or an event of default with respect to such indebtedness resulting in the sharesacceleration thereof, our assets will be available to pay the amounts due on the Notes only after all of NSC Common Stock. NSCour Senior Indebtedness has been paid in full. See "Description of Exchange Notes". The majority of our operations are conducted through subsidiaries or partnerships, which are separate and distinct legal entities and have no obligations, contingent or otherwise, to pay any amounts due pursuant to the Notes or make any funds available therefor, whether by dividends, loans or other payments. The Notes effectively will be subordinated to all indebtedness and other liabilities and commitments (including trade payables and lease obligations) of our subsidiaries and partnerships. Any right we have to receive assets of any such subsidiary or partnership upon the liquidation or reorganization of any such subsidiary or partnership (and your consequent right as a holder of the Notes to participate in those assets) will be effectively subordinated to the claims of that subsidiary's or partnership's creditors. OUR ABILITY TO REPURCHASE THE NOTES UPON A CHANGE OF CONTROL MAY BE LIMITED In the event of a Change of Control, you will have the right, at your option, to require us to repurchase all or a portion of the Notes you hold at a purchase price equal to 101% of the aggregate principal amount of your Notes plus accrued interest thereon to the repurchase date. See "Description of Exchange Notes". Our ability to repurchase the Notes upon a Change of Control may be limited by the terms of our Senior Indebtedness and the subordination provisions of the indenture. Further, our ability to repurchase the Notes upon a Change of Control will be dependent on the availability of sufficient funds and our ability to comply with the applicable securities laws. Accordingly, there can be no assurance that we will be in a position to repurchase the Notes upon a Change of Control. The term "Change of Control" is limited to certified specified transactions and may not madeinclude other events that might adversely affect our financial condition or result in a downgrade of the credit rating (if any) of the Notes, nor would the requirement that we offer to repurchase the Notes upon a Change of Control necessarily afford holders of the Notes protection in the event of a highly leveraged reorganization. HOLDERS OF OUR DEBENTURES HAVE A REPURCHASE RIGHT IN CERTAIN CIRCUMSTANCES IN WHICH HOLDERS OF THE NOTES DO NOT In March 1998, we issued $567,750,000 of 3.25% convertible subordinated debentures due 2003. In general, the debentures rank equally with the Notes. However, the holders of the debentures have a right to require us to repurchase the debentures at a price equal to 100% of the principal amounts thereof, plus accrued and unpaid interest, in the event that our common stock is neither listed for trading on a United States national securities exchange nor approved for trading on an established over-the-counter trading market in the United States. The Notes do not have similar repurchase rights. Therefore, in the event that our common stock were not listed for trading as described above, the holders of the debentures might be able to receive payment ahead of the holders of the Notes even though the Notes and the debentures rank equally with one another. Our common stock has been listed for trading on the New York Stock Exchange since 1989, and we anticipate that this will continue to be the case. 14 RATIO OF EARNINGS TO FIXED CHARGES The following table sets forth our consolidated ratio of earnings to fixed charges for the periods shown.
YEAR ENDED DECEMBER 31, --------------------------------------------------------- SIX MONTHS 1995 1996 1997 1998 1999 JUNE 30, 2000 --------- --------- --------- --------- --------- -------------- Ratio of earnings to fixed charges ......... 3.0x 4.6x 5.4x 5.5x 3.9x 2.9x
The ratio of earnings to fixed charges was calculated by (1) dividing earnings from continuing operations, before income taxes, fixed charges and unusual and nonrecurring charges by (2) fixed charges, which consist of interest expense incurred, including amortization of debt expense and discount, and the portion of rental expense under operating leases estimated to be representative of the interest factor. THE EXCHANGE OFFER PURPOSE OF THE EXCHANGE OFFER We issued the Private Notes on September 25, 2000, to UBS Warburg LLC, Deutsche Bank Securities Inc., Chase Securities Inc. and First Union Securities, Inc., the initial purchasers, pursuant to a purchase agreement. The initial purchasers subsequently sold the Private Notes to "qualified institutional buyers", as defined in Rule 144A under the Securities Act, in reliance on Rule 144A, and outside the United States under Regulation S of the Securities Act. As a condition to the sale of the Private Notes, we entered into a registration rights agreement with the initial purchasers on September 25, 2000. Pursuant to the registration rights agreement, we agreed that we would: (1) file a registration statement with the SEC with respect to the Exchange Notes within 60 days after the date of initial issuance of the Private Notes; (2) use our reasonable best efforts to cause the registration statement to be declared effective by the SEC on or prior to 120 days after the date of initial issuance of the Private Notes; (3) use our reasonable best efforts to consummate the exchange offer on or prior to 150 days after the date of initial issuance of the Private Notes; and (4) keep the exchange offer open for not less than 20 business days. Upon the effectiveness of the registration statement, we will offer the Exchange Notes in exchange for the Private Notes. We filed a copy of the registration rights agreement as an exhibit to the registration statement. RESALE OF THE EXCHANGE NOTES Based upon an interpretation by the staff of the SEC contained in no-action letters issued to third parties, we believe that you may exchange Private Notes for Exchange Notes in the ordinary course of business. For further information on the SEC's position, see Exxon Capital Holdings Corporation, available May 13, 1988, Morgan Stanley & Co. Incorporated, available June 5, 1991 and Shearman & Sterling, available July 2, 1993, and other interpretive letters to similar effect. You will be allowed to resell Exchange Notes to the public without further registration under the Securities Act and without delivering to purchasers of the Exchange Notes a prospectus that satisfies the requirements of Section 10 of the Securities Act so long as you do not participate, do not intend to participate, and have no arrangement with any distributionsperson to participate, in a distribution of the Exchange Notes. However, the foregoing does not apply to you if you are: o a broker-dealer who purchases the Exchange Notes directly from us to resell pursuant to Rule 144A or any other available exemption under the Securities Act; or o an "affiliate" of ours within the meaning of Rule 405 under the Securities Act. 15 In addition, if: o you are a broker-dealer; or o you acquire Exchange Notes in the exchange offer for the purpose of distributing or participating in the distribution of the Exchange Notes, you cannot rely on the position of the staff of the SEC contained in the no-action letters mentioned above and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction, unless an exemption from registration is otherwise available. Each broker-dealer that receives Exchange Notes for its own account in exchange for Private Notes, which the broker-dealer acquired as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of the Exchange Notes. The letter of transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. A broker-dealer may use this prospectus, as it may be amended or supplemented from time to time, in connection with resales of Exchange Notes received in exchange for Private Notes which the broker-dealer acquired as a result of market-making or other trading activities. TERMS OF THE EXCHANGE OFFER Upon the terms and subject to the conditions described in this prospectus and in the letter of transmittal, we will accept any and all Private Notes validly tendered and not withdrawn before the expiration date. We will issue $1,000 principal amount of Exchange Notes in exchange for each $1,000 principal amount of outstanding Private Notes surrendered pursuant to the exchange offer. You may tender Private Notes only in integral multiples of $1,000. The form and terms of the Exchange Notes are the same as the form and terms of the Private Notes except that: o we have registered the Exchange Notes under the Securities Act and, therefore, the Exchange Notes will not bear legends restricting their transfer; and o holders of the Exchange Notes will not be entitled to any holders of NSC Common Stock or participated in or effected any issuance, exchange or retirement of shares of NSC Common Stock, or otherwise changed the equity interestsrights of holders of NSC Common Stock, in contemplationPrivate Notes under the registration rights agreement, which rights will terminate upon the completion of effecting the Merger withinexchange offer. The Exchange Notes will evidence the two years immediately precedingsame debt as the Private Notes and will be issued under the same indenture, so the Exchange Notes and the Private Notes will be treated as a single class of debt securities under the indenture. As of the date of this Planprospectus, $350,000,000 in aggregate principal amount of Merger. Any sharesthe Private Notes is outstanding and registered in the name of NSC Common Stock that NSC has re-acquired during the two years immediately A-5 preceding the date of this Plan of Merger have been so re-acquired only for purposes other than "business combinations"Cede & Co., as such term is defined in Accounting Principles Board Opinion No. 16,nominee for The Depository Trust Company. Only registered holders of the Private Notes, or their legal representative or attorney-in-fact, as amended ("Business Combinations"). 3.3 Subsidiaries and Affiliated Partnerships. (a) Attached toreflected on the Disclosure Schedule as Exhibit 3.3 is a listrecords of all corporate subsidiaries of NSC (individually, a "NSC Subsidiary", and collectively, the "NSC Subsidiaries") and their states of incorporation. Except as set forth on Exhibit 3.3, NSC does not own stock in and does not control, directly or indirectly, any other corporation, association or business organization other than the NSC Other Entities (as defined below). (b) Also disclosed on Exhibit 3.3 is a list of all general or limited partnerships in which a general partner is NSC, a NSC Subsidiary or another NSC Partnership (individually, a "NSC Partnership" and collectively, the "NSC Partnerships"), and all limited liability companies in which NSC, a NSC Subsidiary or a NSC Partnership is a member (individually, a "NSC LLC" and collectively, the "NSC LLCs") (the NSC Partnerships and the NSC LLCs being collectively called the "NSC Other Entities"), and their states of organization. Except as set forth on Exhibit 3.3, neither NSC nor any NSC 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 NSC Subsidiaries and NSC Other Entities. (a) Each NSC Subsidiary is a corporation duly organized, validly existing and in good standingtrustee under the lawsindenture, may participate in the exchange offer. We will not set a fixed record date for determining registered holders of its respective state of incorporation, except where the failurePrivate Notes entitled to beparticipate in good standing wouldthe exchange offer. You do not have a material adverse effect on NSC. Each NSC Subsidiary has all necessary corporate power to own its properties and assets and to carry on its business as presently conducted. (b) Each NSC Partnership that is a limited partnership is validly formed, each NSC Partnership that is a general partnership has been duly organized, and each NSC Partnership is in good standingany appraisal or dissenters' rights under the laws of its respective state of organization, except whereindenture in connection with the failureexchange offer. We intend to beconduct the exchange offer in good standing would not have a material adverse effect on NSC. Each NSC Partnership has all necessary power to own its property and assets and to carry on its business as presently conducted. (c) Each NSC LLC is a limited liability company validly formed and in good standing underaccordance with the laws of its respective state of organization, except where the failure to be in good standing would not have a material adverse effect on NSC. Each NSC LLC has all necessary power to own its property and assets to carry on its business as presently conducted. 3.5 Foreign Qualifications. NSC, each NSC Subsidiary and each NSC 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 where 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 or be in good standing would not have a material adverse effect on NSC. 3.6 Power and Authority. Subject to the satisfaction of the conditions precedent set forth herein, NSC 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. Except as set forth on Exhibit 3.6 to the Disclosure Schedule, 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 the Certificate of Incorporation of NSC or any provisions of, or result in the acceleration of any obligation under, any material mortgage, lien, lease,registration rights agreement instrument, order, arbitration award, judgment or decree, to which NSC or any NSC Subsidiary or NSC 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 NSC. The execution and delivery of this Plan of Merger has been approved A-6 by the Board of Directors of NSC. This Plan of Merger has been duly executed and delivered by NSC and, assuming this Plan of Merger constitutes a valid and binding obligation of HEALTHSOUTH and the Subsidiary, as the case may be, constitutes a valid and binding obligation of NSC, enforceable against NSC in accordance with its terms. 3.7 NSC Public Information. NSC 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 "NSC Documents") since January 1, 1998, 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. As of their respective dates, the NSC 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 NSC 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 promulgatedof the SEC. We will be deemed to have accepted validly tendered Private Notes when, as and if we had given oral or written notice of acceptance to the exchange agent. The exchange agent will act as your agent for the purposes of receiving the Exchange Notes from us. 16 If you tender Private Notes in the exchange offer, you will not be required to pay brokerage commissions or fees or, subject to the instructions in the letter of transmittal, transfer taxes with respect to the exchange of Private Notes pursuant to the exchange offer. We will pay all charges and expenses, other than the applicable taxes described below, in connection with the exchange offer. EXPIRATION DATE; EXTENSIONS; AMENDMENTS The term "expiration date" will mean 5:00 p.m., New York City time, on ______________, 2000, unless we, in our sole discretion, extend the exchange offer, in which case the term "expiration date" will mean the latest date and time to which we extend the exchange offer. To extend the exchange offer, we will: o notify the exchange agent of any extension orally or in writing; and o notify the registered holders of the Private Notes by means of a press release or other public announcement, each before 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date. We reserve the right, in our reasonable discretion: o to delay accepting any Private Notes; o to extend the exchange offer; or o if any conditions listed below under such statutes."-Conditions" are not satisfied, to terminate the exchange offer by giving oral or written notice of the delay, extension or termination to the exchange agent. We will follow any delay in acceptance, extension or termination as promptly as practicable by oral or written notice to the registered holders. If we amend the exchange offer in a manner we determine constitutes a material change, we will promptly disclose the amendment in a prospectus supplement that we will distribute to the registered holders. INTEREST ON THE EXCHANGE NOTES The Exchange Notes will accrue interest from September 25, 2000 at the rate of 10-3/4%, and, commencing April 1, 2001, cash interest on the Exchange Notes will accrue and be payable, at a per annum rate of 10-3/4%, semi-annually in arrears on each April 1 and October 1. The payment of interest on Exchange Notes will be in lieu of payment of any accrued but unpaid interest on Private Notes tendered for exchange. PROCEDURES FOR TENDERING You may tender Private Notes in the exchange offer only if you are a registered holder of Private Notes. To tender in the exchange offer, you must: o complete, sign and date the letter of transmittal or a facsimile of the letter of transmittal; o have the signatures guaranteed if required by the letter of transmittal; and o mail or otherwise deliver the letter of transmittal or the facsimile of the letter of transmittal to the exchange agent at the address listed below under "-Exchange Agent" for receipt before the expiration date. In addition, either: o the exchange agent must receive certificates for the Private Notes along with the letter of transmittal into its account at the depositary pursuant to the procedure for book-entry transfer described below before the expiration date; o the exchange agent must receive a timely confirmation of a book-entry transfer of the Private Notes, if the procedure is available, into its account at the depositary pursuant to the procedure for book-entry transfer described below before the expiration date; or o you must comply with the guaranteed delivery procedures described below. 17 Your tender, if not withdrawn before the expiration date, will constitute an agreement between you and us in accordance with the terms and subject to the conditions described in this prospectus and in the letter of transmittal. The method of delivery of Private Notes and the letter of transmittal and all other required documents to the exchange agent is at your election and risk. We recommend that instead of delivery by mail, you use an overnight or hand delivery service, properly insured. In all cases, you should allow sufficient time to assure delivery to the exchange agent before the expiration date. You should not send letters of transmittal or Private Notes to us. You may request your respective brokers, dealers, commercial banks, trust companies or nominees to effect the transactions described above for you. If you are a beneficial owner of Private Notes whose Private Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender your Private Notes, you should contact the registered holder promptly and instruct the registered holder to tender on your behalf. If you wish to tender on your own behalf, before completing and executing the letter of transmittal and delivering the Private Notes you must either: o make appropriate arrangements to register ownership of the Private Notes in your name; or o obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time. Unless the Private Notes are tendered: (1) by a registered holder who has not completed the box entitled "Special Issuance Instructions" or the box entitled "Special Delivery Instructions" on the letter of transmittal; or (2) for the account of: o a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc.; o a commercial bank or trust company located or having an office or correspondent in the United States; or o an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act that is a member of one of the recognized signature guarantee programs identified in the letter of transmittal, an eligible guarantor institution must guarantee the signatures on a letter of transmittal or a notice of withdrawal described below under "-Withdrawal of Tenders". If the letter of transmittal is signed by a person other than the registered holder, the Private Notes must be endorsed or accompanied by a properly completed bond power, signed by the registered holder as the registered holder's name appears on the Private Notes. If the letter of transmittal or any Private 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, they should so indicate when signing, and unless waived by us, they must submit evidence satisfactory to us of their authority to so act with the letter of transmittal. The exchange agent and the depositary have confirmed that any financial statementsinstitution that is a participant in the depositary's system may utilize the depositary's Automated Tender Offer Program to tender Notes. We will determine in our sole discretion all questions as to the validity, form, eligibility, including time of receipt, acceptance and withdrawal of tendered Private Notes, which determination will be final and binding. We reserve the absolute right to reject any and all Private Notes not properly tendered or any Private Notes our acceptance of which would, in the opinion of our counsel, be unlawful. We also reserve the right to waive any defects, irregularities or conditions of tender as to particular Private Notes. Our interpretation of the terms and conditions of the exchange offer, including the instructions in the letter of 18 transmittal, will be final and binding on all parties. Unless waived, you must cure any defects or irregularities in connection with tenders of Private Notes within the time we determine. Although we intend to notify you of defects or irregularities with respect to tenders of Private Notes, neither we, the exchange agent nor any other person will incur any liability for failure to give you that notification. Unless waived, we will not deem tenders of Private Notes to have been made until you cure the defects or irregularities. While we have no present plan to acquire any Private Notes that are not tendered in the exchange offer or to file a registration statement to permit resales of any Private Notes that are not tendered in the exchange offer, we reserve the right in our sole discretion to purchase or make offers for any Private Notes that remain outstanding after the expiration date. We also reserve the right to terminate the exchange offer, as described below under "-Conditions", and, to the extent permitted by applicable law, purchase Private Notes in the open market, in privately negotiated transactions or otherwise. The terms of any of those purchases or offers could differ from the terms of the exchange offer. If you wish to tender Private Notes in exchange for Exchange Notes in the exchange offer, we will require you to represent that: o you are not an affiliate of ours; o you will acquire any Exchange Notes in the ordinary course of your business; and o at the time of completion of the exchange offer, you have no arrangement with any person to participate in the distribution of the Exchange Notes. In addition, in connection with the resale of Exchange Notes, any participating broker-dealer who acquired the Private Notes for its own account as a result of market-making or other trading activities must deliver a prospectus meeting the requirements of the Securities Act. The SEC has taken the position that participating broker-dealers may fulfill their prospectus delivery requirements with respect to the Exchange Notes, other than a resale of an unsold allotment from the original sale of the Notes, with the prospectus contained in the NSC Documents,registration statement. RETURN OF NOTES If we do not accept any tendered Private Notes for any reason described in the terms and conditions of the exchange offer or if you withdraw any tendered Private Notes or submit Private Notes for a greater principal amount than you desire to exchange, we will return the unaccepted, withdrawn or non-exchanged Private Notes without expense to you as promptly as practicable. In the case of Private Notes tendered by book-entry transfer into the exchange agent's account at the depositary pursuant to the book-entry transfer procedures described below, we will credit the Private Notes to an account maintained with the depositary as promptly as practicable. BOOK-ENTRY TRANSFER The exchange agent will make a request to establish an account with respect to the Private Notes at the depositary for purposes of the exchange offer within two business days after the date of this prospectus, and any financial institution that is a participant in the depositary's systems may make book-entry delivery of Private Notes by causing the depositary to transfer the Private Notes into the exchange agent's account at the depositary in accordance with the depositary's procedures for transfer. However, although delivery of Private Notes may be effected through book-entry transfer at the depositary, you must transmit and the exchange agent must receive, the letter of transmittal or a facsimile of the letter of transmittal, with any required signature guarantees and any other required documents, at the address below under "-Exchange Agent" on or before the expiration date or pursuant to the guaranteed delivery procedures described below. GUARANTEED DELIVERY PROCEDURES If you wish to tender your Private Notes, but time will not permit a letter of transmittal, certificates representing the Private Notes to be tendered or other required documents to reach the exchange agent before the expiration date, you may effect a tender if: 19 (a) the tender is made by or through an eligible guarantor institution; (b) before the expiration date, the exchange agent receives from the eligible guarantor institution a properly completed and duly executed notice of guaranteed delivery, substantially in the form provided by us, that: o states the name and address of the holder of the Private Notes, the name(s) in which the Private Notes are registered and the principal amount of Private Notes tendered, o states that the tender is being made by that notice of guaranteed delivery, and o guarantees that, within three New York Stock Exchange trading days after the expiration date, the eligible guarantor institution will deposit with the exchange agent the letter of transmittal, together with the notes thereto,certificates representing the Private Notes in proper form for transfer or a confirmation of a book-entry transfer, as the case may be, and any other documents required by the letter of transmittal; and (c) within three New York Stock Exchange trading days after the expiration date, the exchange agent receives a properly executed letter of transmittal, as well as the certificates representing all tendered Private Notes in proper form for transfer and all other documents required by the letter of transmittal. Upon request, the exchange agent will send to you a notice of guaranteed delivery if you wish to tender your Private Notes according to the guaranteed delivery procedures described above. WITHDRAWAL OF TENDERS Except as otherwise provided in this prospectus, you may withdraw tenders of Private Notes at any time before 5:00 p.m., New York City time, on the expiration date. To withdraw a tender of Private Notes in the exchange offer, the exchange agent must receive a written or facsimile transmission notice of withdrawal at its address listed in this prospectus before the expiration date. Any notice of withdrawal must: o specify the name of the person who deposited the Private Notes to be withdrawn; o identify the Private Notes to be withdrawn, including the principal amount of the Private Notes; and o be signed in the same manner as the original signature on the letter of transmittal by which the Private Notes were tendered, including any required signature guarantees. We will determine in our sole discretion all questions as to the validity, form and eligibility of the notices, and our determination will be final and binding on all parties. We will not deem any properly withdrawn Private Notes to have been preparedvalidly tendered for purposes of the exchange offer, and we will not issue Exchange Notes with respect to those Private Notes, unless you validly re-tender the withdrawn Private Notes. You may re-tender properly withdrawn Private Notes by following one of the procedures described above under "-Procedures for Tendering" at any time before the expiration date. CONDITIONS Notwithstanding any other term of the exchange offer, we will not be required to accept for exchange, or exchange the Exchange Notes for, any Private Notes, and may terminate the exchange offer as provided in this prospectus before the acceptance of the Private Notes, if: (1) the exchange offer violates applicable law, rules or regulations or an applicable interpretation of the staff of the SEC; (2) an action or proceeding has been instituted or threatened in any court or by any governmental agency which might materially impair our ability to proceed with the exchange offer; (3) a material adverse development shall have occurred in any existing action or proceeding with respect to us; or (4) all governmental approvals which we deem necessary for the completion of the exchange offer have not been obtained. 20 If we determine in our reasonable discretion that any of these conditions are not satisfied, we may: o refuse to accept any Private Notes and return all tendered Private Notes to you; o extend the exchange offer and retain all Private Notes tendered before the exchange offer expires, subject, however, to your rights to withdraw the Private Notes; or o waive the unsatisfied conditions with respect to the exchange offer and accept all properly tendered Private Notes that have not been withdrawn. If the waiver constitutes a material change to the exchange offer, we will promptly disclose the waiver by means of a prospectus supplement that we will distribute to the registered holders of the Private Notes. TERMINATION OF RIGHTS All of your rights under the registration rights agreement will terminate upon consummation of the exchange offer, except with respect to our continuing obligations: o to indemnify you and parties related to you against liabilities, including liabilities under the Securities Act; and o to provide, upon your request, the information required by Rule 144A(d)(4) under the Securities Act to permit resales of the Notes pursuant to Rule 144A. SHELF REGISTRATION In the event that: (1) any changes in law or SEC policy do not permit us to effect the exchange offer; (2) the exchange offer is not consummated within 150 days of the date of initial issuance of the Private Notes; (3) any holder of Private Exchange Notes (as defined in the registration rights agreement) so requests; or (4) a holder participating in the exchange offer does not receive Exchange Notes on the date of the exchange that may be sold without restriction under the federal securities laws (other than due solely to the status of the holder as our affiliate within the meaning of that term under the Securities Act), we will file with the SEC a shelf registration statement to register for public resale the transfer-restricted securities held by you if you provide us with the necessary information for inclusion in the shelf registration statement. LIQUIDATED DAMAGES If: (1) we do not file the registration statement with the SEC on or prior to the 60th day following the date of initial issuance of the Private Notes; (2) we do not cause the registration statement to become effective on or prior to the 120th day following the date of initial issuance of the Private Notes; (3) we do not complete the exchange offer on or prior to the 150th day following the date of initial issuance of the Private Notes; (4) we are obligated to file a shelf registration statement and we do not file the shelf registration statement with the SEC on or prior to the 45th day following the date on which we have notice of the filing obligation; 21 (5) we are obligated to file a shelf registration statement and the SEC does not declare the shelf registration statement effective on or prior to the later of the 60th day following the date on which the filing obligation arises or the 150th day following the date of initial issuance of the Private Notes; or (6) the registration statement or the shelf registration statement, as the case may be, is declared effective but thereafter ceases to be effective or useable in connection with resales of the Registrable Notes (as defined in the registration rights agreement) for the time of non-effectiveness or nonusability, with each of items (1) through (6) constituting a "registration default", we agree to pay you liquidated damages in cash on each April 1 and October 1 in an amount equal to 0.25% per annum of the aggregate principal amount of the Registrable Notes, with respect to the first 90-day period immediately following the occurrence of the registration default. The amount of the liquidated damages will increase by an additional 0.25% to a maximum of 1.0% per annum of the aggregate principal amount of the Registrable Notes for each subsequent 90-day period until the registration default has been cured. We will not be required to pay liquidated damages for more than one registration default at any given time. Following the cure of all registration defaults, the accrual of liquidated damages will cease. EXCHANGE AGENT We have appointed The Bank of New York as exchange agent for the exchange offer. You should direct questions and requests for assistance, requests for additional copies of this prospectus or the letter of transmittal and requests for a notice of guaranteed delivery to the exchange agent addressed as follows: BY REGISTERED OR CERTIFIED MAIL: BY FACSIMILE: BY HAND/OVERNIGHT DELIVERY: The Bank of New York __________ The Bank of New York 101 Barclay Street 101 Barclay Street New York, New York 10286 New York, New York 10286 Reorganization Department, 7 East Reorganization Department, 7 East FOR INFORMATION CALL: __________
Delivery to an address other than the one stated above or transmission via a facsimile number other than the one stated above will not constitute a valid delivery. FEES AND EXPENSES We will bear the expenses of soliciting tenders. We are making the principal solicitation by mail; however, our officers and regular employees may make additional solicitations by facsimile, telephone or in person. We have not retained any dealer manager in connection with the exchange offer and will not make any payments to brokers, dealers or others soliciting acceptances of the exchange offer. We will, however, pay the exchange agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses. We will pay the cash expenses incurred in connection with the exchange offer, which we estimate to be approximately $__________. These expenses include registration fees, fees and expenses of the exchange agent and the trustee, accounting and legal fees and printing costs, among others. We will pay all transfer taxes, if any, applicable to the exchange of Notes pursuant to the exchange offer. If, however, a transfer tax is imposed for any reason other than the exchange of the Private Notes pursuant to the exchange offer, then you must pay the amount of the transfer taxes. If you do not submit satisfactory evidence of payment of the taxes or exemption from payment with the letter of transmittal, we will bill the amount of the transfer taxes directly to you. 22 CONSEQUENCE OF FAILURES TO EXCHANGE Participation in the exchange offer is voluntary. We urge you to consult your financial and tax advisors in making your decisions on what action to take. Private Notes that are not exchanged for Exchange Notes pursuant to the exchange offer will remain restricted securities. Accordingly, those Private Notes may be resold only: o to a person whom the seller reasonably believes is a qualified institutional buyer in a transaction meeting the requirements of Rule 144A under the Securities Act; o in a transaction meeting the requirements of Rule 144 under the Securities Act; o outside the United States to a foreign person in a transaction meeting the requirements of Rule 903 or 904 of Regulation S under the Securities Act; o in accordance with generally accepted accounting principles consistently followed throughoutanother exemption from the periods indicated (except asregistration requirements of the Securities Act and based upon an opinion of counsel if we so request; o to us; or o pursuant to an effective registration statement. In each case, the Private Notes may be indicatedresold only in accordance with any applicable securities laws of any state of the United States or any other applicable jurisdiction. USE OF PROCEEDS There will be no cash proceeds payable to us from the issuance of the Exchange Notes pursuant to the exchange offer. We used the proceeds from the sale of the Private Notes to repay a portion of our existing indebtedness and for general corporate purposes. In consideration for issuing the Exchange Notes as contemplated in this prospectus, we will receive in exchange the Private Notes in like principal amount, the terms of which are identical in all material respects to the Exchange Notes. The Private Notes surrendered in exchange for the Exchange Notes will be retired and cancelled and cannot be reissued. Accordingly, the issuance of the Exchange Notes will not result in any increase in our indebtedness. 23 CAPITALIZATION The following table sets forth, as of June 30, 2000: (i) our actual capitalization, and (ii) our capitalization as adjusted to give effect to the sale of the Private Notes and the application of the net proceeds from the offering of the Private Notes to the repayment of our 9.5% senior subordinated notes due 2001 and the repayment of all outstanding amounts under our $250,000,000 short-term revolving credit facility and applying the remaining net proceeds to repaying amounts under our $1,750,000,000 revolving credit facility.
JUNE 30, 2000 ------------------------------------ ACTUAL AS ADJUSTED ------------- -------------------- (IN THOUSANDS) Cash and cash equivalents ................................................... $ 170,957 $ 170,957 ========== ============ Current portion of long-term debt: Advances under the $250,000,000 Short-Term Revolving Credit Facility........ $ 51,000 $ -- 9.5% Senior Subordinated Notes due 2001 .................................... 250,000 -- Other long-term debt ....................................................... 54,578 54,578 ---------- ------------ Total current portion of long-term debt .................................. $ 355,578 $ 54,578 ---------- ------------ Long-term debt (net of current maturities): Advances under the $1,750,000,000 Revolving Credit Facility................. $1,725,000 $ 1,687,068 3.25% Convertible Subordinated Debentures due 2003 ......................... 567,750 567,750 6.875% Senior Notes due 2005 ............................................... 250,000 250,000 7.0% Senior Notes due 2008 ................................................. 250,000 250,000 Other long-term debt ....................................................... 111,669 111,669 10-3/4% Senior Subordinated Notes due 2008 ................................. -- 350,000 ---------- ------------ Total long-term debt ..................................................... 2,904,419 3,216,487 ---------- ------------ Stockholders' equity: Preferred Stock, $.10 par value, 1,500,000 shares authorized; no shares outstanding .............................................................. -- -- Common Stock, $.01 par value, 600,000,000 shares authorized; 424,150,000 shares outstanding (1) ................................................... 4,241 4,241 Additional paid-in capital ................................................. 2,585,676 2,585,676 Retained earnings .......................................................... 1,075,354 1,074,944 (2) Treasury stock ............................................................. (280,523) (280,523) Receivable from Employee Stock Ownership Plan .............................. (5,415) (5,415) Notes receivable from stockholders, officers and management employees ...... (45,742) (45,742) ---------- ------------ Total stockholders' equity ............................................... 3,333,591 3,333,181 ---------- ------------ Total capitalization .................................................... $6,593,588 $ 6,604,246 ========== ============
- ---------- (1) Outstanding shares do not include a total of 37,944,557 shares of Common Stock subject to options outstanding under our stock option plans. An additional 693,693 shares of Common Stock are reserved for future option grants under such plans. Outstanding shares also do not include 67,801 shares of Common Stock reserved for issuance pursuant to outstanding warrants, and 15,501,707 shares of Common Stock initially reserved for issuance upon conversion of our 3.25% convertible subordinated debentures due 2003. (2) Adjusted to reflect the after-tax effect of the write-off of unamortized debt issue costs on our 9.5% senior subordinated notes due 2001. 24 DESCRIPTION OF EXCHANGE NOTES The Private Notes were issued, and the Exchange Notes offered hereby will be issued, pursuant to an indenture, dated as of September 25, 2000 (the "Indenture"), between us and The Bank of New York, 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 is hereby made for a full description of such provisions, including the definition of certain terms used herein, and for other information regarding the Exchange Notes. Wherever particular sections or defined terms of the Indenture are referred to, such sections or defined terms are incorporated herein by reference as part of the statement made, and the statement is qualified in its entirety by such reference. GENERAL The Exchange Notes will be general unsecured obligations of the Company, subordinated in right of payment to all existing and future Senior Indebtedness of the Company (including the Company's obligations under the Credit Agreements) as described below under "-Subordination". The Company issued $350,000,000 aggregate principal amount of Private Notes in the notes thereto,initial issuance of the Private Notes. The securities that may be issued pursuant to the Indenture will not be limited in amount, and additional amounts may be issued in one or more series from time to time under the Indenture, subject to the limitations on the incurrence of Indebtedness set forth under "-Certain Covenants of the Company-Limitations on Additional Indebtedness and Subsidiary Preferred Stock" and restrictions contained in the Credit Agreements. The Exchange Notes will bear interest from September 25, 2000 at the rate of 10-3/4% per year, payable semiannually in arrears on April 1 and October 1 of each year, commencing on April 1, 2001, to holders of record at the close of business on March 15 or September 15, as the case may be, immediately preceding the relevant interest payment date. The payment of interest on Exchange Notes will be in lieu of payment of any accrued but unpaid interest on Private Notes tendered for exchange. Interest on the Exchange Notes will be calculated on the basis of a 360-day year of twelve 30-day months. The Exchange Notes will mature on October 1, 2008 and will be issued in registered form, without coupons, and in denominations of $1,000 and integral multiples thereof. The Exchange Notes will be payable as to principal, premium, if any, and interest at the office or agency of the Company maintained for such purpose within the City and State of New York or, at the option of the Company, by wire transfer of immediately available funds or, in the case of certificated securities only, by mailing a check to the unaudited financial statements, as permittedregistered address of the holders of the Exchange Notes (the "Holders"). See "-Book-Entry; Delivery and Form". Until otherwise designated by Form 10-Q), reflectthe Company, the Company's office or agency in New York will be the office of the Trustee maintained for such purpose. SUBORDINATION The payment of principal of, and premium, if any, and interest on the Exchange Notes will be subordinated to the extent and in the manner provided in the Indenture to the prior payment in full in cash when due of the principal of, and premium, if any, and accrued and unpaid interest on and all knownother amounts owing in respect of, all existing and future Senior Indebtedness of the Company. At June 30, 2000, on a pro forma basis after giving effect to the offering of the Private Notes, the Company would have had approximately $2,187,068,000 of Senior Indebtedness outstanding (exclusive of unused commitments under the Credit Agreements). Subject to certain limitations, the Company and its Subsidiaries may incur additional Indebtedness in the future, including Senior Indebtedness. See "-Certain Covenants of the Company-Limitations on Additional Indebtedness and Subsidiary Preferred Stock". The Indenture provides that, upon any payment or distribution to creditors of the Company of the assets of the Company of any kind or character in a total or partial liquidation or dissolution of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company, whether voluntary or involuntary (including any assignment for the benefit of creditors and proceedings for marshaling of assets and liabilities of NSC required to be stated therein, includingthe Company), the holders of all such known contingent liabilities asSenior Indebtedness of the endCompany then outstanding will be entitled to payment in full in cash before the 25 Holders are entitled to receive any payment (other than payments made from a trust previously established pursuant to provisions described under "-Satisfaction and Discharge of each period reflected therein,Indenture; Defeasance") on or with respect to the Exchange Notes and, present fairlyuntil all Senior Indebtedness receives payment in full in cash, any distribution to which the financial conditionHolders would be entitled will be made to holders of NSC at said dates andSenior Indebtedness. Upon the consolidated resultsoccurrence of operations and cash flows of NSC for the periods then ended. The consolidated balance sheet of NSC at December 31, 1997 includedany default in the NSC Documents is herein sometimes referred to aspayment of any principal of or interest on or other amounts due on any Senior Indebtedness of the "NSC Balance Sheet". 3.8 Legal Proceedings. Except as disclosedCompany in excess of $5,000,000 beyond any applicable grace period (a "Payment Default"), no payment of any kind or character shall be made by the NSC Documents orCompany (or by any other Person on Exhibit 3.9its behalf) with respect to the Disclosure Schedule, so far as is knownExchange Notes unless and until (i) such Payment Default shall have been cured or waived in accordance with the instruments governing such Senior Indebtedness or shall have ceased to NSC there is no litigation, governmental investigationexist, (ii) such Senior Indebtedness shall have been discharged or other proceeding pendingpaid in full in cash in accordance with the instruments governing such Senior Indebtedness or threatened against(iii) the benefits of this sentence have been waived by the holders of such Senior Indebtedness or their representative, immediately after which the Company must resume making any and all required payments, including missed payments, in respect of its obligations under the Exchange Notes. Upon (1) the occurrence and continuance of an event of default (other than a Payment Default) relating to NSC, its properties or business, orDesignated Senior Indebtedness of the transaction contemplated by this PlanCompany, as such event of Merger other than litigation, governmental investigations or other proceedings which would not individuallydefault is defined therein or in the aggregate, haveinstrument or agreement under which it is outstanding, which event of default, pursuant to the instruments governing such Designated Senior Indebtedness, entitles the holders (or a material adverse effect on NSC, and, so far as is known to NSC, no basis for any such action exists which action would, individually or in the aggregate, have a material adverse effect on NSC. 3.9 Contracts, etc. (a) All material contracts, leases, agreements and arrangements to which NSC or anyspecified portion of the NSC Subsidiariesholders) of such Designated Senior Indebtedness or NSC Other Entities is a party are legally valid and binding in accordancetheir designated representative to accelerate (either immediately or with their terms and in full force and effect (assuming such contracts, leases and arrangements are enforceable against the other parties to such contracts, leases, agreements and arrangements), and to the knowledge of NSC, 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,both) the Stated Maturity of such Designated Senior Indebtedness (whether or not such acceleration has actually occurred) (a "Non-Payment Default") and (2) the receipt by the Trustee and the Company from the trustee or other representative of holders of such Designated Senior Indebtedness of written notice (a "Payment Blockage Notice") of such occurrence, no payment is permitted to be made by the Company (or by any other Person on its behalf) in each case, where the invalidityrespect of the lease, contract, agreementExchange Notes for a period (a "Payment Blockage Period") commencing on the date of receipt by the Trustee of such notice and ending on the earliest to occur of the following events (subject to any blockage of payments that may then be in effect due to a Payment Default on Senior Indebtedness): (v) the acceleration of the maturity of any Indebtedness (other than Senior Indebtedness) by virtue of the event that resulted in such Payment Blockage Period; (w) such Non-Payment Default has been cured or arrangementwaived or has ceased to exist; (x) a 179-consecutive-day period commencing on the date such written notice is received by the Trustee has elapsed; (y) such Payment Blockage Period has been terminated by written notice to the Trustee from the trustee or other representative of holders of such Designated Senior Indebtedness, whether or not such Non-Payment Default has been cured or waived or has ceased to exist; and (z) such Designated Senior Indebtedness has been discharged or paid in full in cash, immediately after which, in the case of clause (v), (w), (x), (y) or (z), the Company must resume making any and all required payments, including missed payments, in respect of its obligations under the Exchange Notes. Notwithstanding the foregoing, (a) not more than one Payment Blockage Period may be commenced in any period of 365 consecutive days and (b) no default or breach thereunder or thereof would not, individually or in the aggregate, have a material adverse effect on NSC. (b) Except as set forth on Exhibit 3.9(b) to the Disclosure Schedule, no contract or agreement to which NSC or any NSC Subsidiary or NSC Other Entity is a party will, by its terms, terminate as a resultevent 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, would not have a material adverse effect on NSC. (c) Except as set forth on Exhibit 3.9(c) to the Disclosure Schedule, none of NSC, any NSC Subsidiary or any NSC Other Entity has granted any right of first refusal or similar right in favor of any third partydefault with respect to any material portionthe Designated Senior Indebtedness of its propertiesthe Company that was the subject of a Payment Blockage Notice which existed or assets or entered into any non-competition agreement or similar agreement restricting its ability to engage in any business in any location. 3.10 Subsequent Events. Except as set forthwas continuing on Exhibit 3.10 to the Disclosure Schedule or disclosed in the NSC Documents, NSC has not, since the date of the NSC 10-K: (a) Incurredgiving of any material adverse change. A-7Payment Blockage Notice shall be or serve as the basis for the giving of a subsequent Payment Blockage Notice whether or not within a period of 365 consecutive days unless such default or event of default shall have been cured or waived for a period of at least 90 consecutive days after such date. In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company, whether in cash, property or securities, shall be received by the Trustee or the Holders at a time when such payment or distribution is prohibited by the foregoing provisions, such payment or 26 (b) Dischargeddistribution shall be segregated from other funds or satisfied any material lien or encumbrance, orassets and held in trust for the benefit of the holders of Senior Indebtedness of the Company, and shall be paid or satisfieddelivered by the Trustee or such Holders, as the case may be, to the holders of the Senior Indebtedness of the Company remaining unpaid or unprovided for or their representative or representatives, or to the trustee or trustees under any material obligationindenture pursuant to which any instruments evidencing any of such Senior Indebtedness of the Company may have been issued, ratably according to the aggregate amounts remaining unpaid on account of the Senior Indebtedness of the Company held or liability (absolute, accrued, contingentrepresented by each, for application to the payment of all Senior Indebtedness of the Company remaining unpaid, to the extent necessary to pay or otherwise) other than (i) liabilities shownto provide for the payment in full in cash of all such Senior Indebtedness after giving effect to any concurrent payment or reflecteddistribution to the holders of such Senior Indebtedness. Notwithstanding the foregoing, Holders may receive and retain payment from the money or the proceeds held in any defeasance trust described under "-Satisfaction and Discharge of Indenture; Defeasance" below, and no such receipt or retention will be contractually subordinated in right of payment to any Senior Indebtedness or subject to the restrictions described in this "Subordination" section. If the Company fails to make any payment on the NSC Balance SheetExchange Notes when due or (ii) liabilities incurred sincewithin any applicable grace period, whether or not such failure is on account of the subordination provisions referred to above, such failure would constitute an Event of Default under the Indenture and would enable the Holders to accelerate the Stated Maturity of the Exchange Notes. See "-Events of Default". By reason of the subordination provisions contained in the Indenture, in the event of bankruptcy, liquidation, insolvency or other similar proceedings, creditors of the Company who are holders of Senior Indebtedness may recover more, ratably, than the Holders, and creditors of the Company who are not holders of Senior Indebtedness may recover less, ratably, than holders of Senior Indebtedness and may recover more, ratably, than the Holders. OPTIONAL REDEMPTION OF THE EXCHANGE NOTES The Exchange Notes will be subject to redemption at the option of the Company, in whole or in part, at any time on or after October 1, 2004, at the following redemption prices (expressed as percentages of principal amount), together with accrued and unpaid interest thereon to the redemption date, if redeemed during the twelve-month period beginning October 1 of the years indicated: OPTIONAL YEAR REDEMPTION DATE ------------------------------- ---------------- 2006 ........................ 105.375% 2005 ........................ 103.583% 2006 ........................ 101.792% 2007 and thereafter ......... 100.000% Notwithstanding the foregoing, at any time prior to October 1, 2003, the Company may redeem up to 35% of the aggregate principal amount of the Notes outstanding on the Issue Date with the net cash proceeds of one or more Equity Offerings at a redemption price equal to 110.750% of the principal amount thereof, plus accrued and unpaid interest to the redemption date; provided that (a) at least 65% of the original aggregate principal amount of the Notes remains outstanding immediately after the occurrence of such redemption and (b) such redemption occurs within 60 days of the date of the last-filed NSC Documentclosing of any such Equity Offering. If less than all of the Exchange Notes are to be redeemed at any time, selection of the Exchange Notes to be redeemed will be made by the Trustee from among the outstanding Exchange Notes on a pro rata basis, by lot or by any other method permitted in the ordinary courseIndenture. Notice of business, which dischargeredemption will be mailed at least 30 days but not more than 60 days before the redemption date to each Holder whose Exchange Notes are to be redeemed at the registered address of such Holder. On and after the redemption date, interest will cease to accrue on the Exchange Notes or satisfaction wouldportions thereof called for redemption. The Exchange Notes will not be entitled to any sinking fund. 27 CHANGE OF CONTROL If a Change of Control shall occur at any time, then each Holder will have the right to require that the Company purchase such Holder's Exchange Notes, in whole or in part in integral multiples of $1,000, at a material adverse effect on NSC. (c) Increased or establishedpurchase price (the "Change of Control Purchase Price") in cash in an amount equal to 101% of the principal amount thereof, plus accrued interest, if any, reserve for taxes or any other liability on its books or otherwise provided therefor which would have a material adverse effect on NSC, except as may have been required due to consolidated income or operations of NSC since the date of the NSC 10-K. (d) Mortgaged, pledged or subjected to any lien, charge or other encumbrance anypurchase (the "Change of the assets, tangible or intangible, which assets are materialControl Purchase Date"), pursuant to the consolidated business or financial conditionoffer described below (the "Change of NSC. (e) Sold or transferred any of the assets material to the consolidated business of NSC, canceled any material debts or claims or waived any material rights, except in the ordinary course of business. (f) Granted any general or uniform increase in the rates of pay of employees or any material increase in salary payable or to become payable by NSC to any officer or employee, consultant or agent (other than normal merit increases), or by means of any bonus or pension plan, contract or other commitment, increased in a material respect the compensation of any officer, employee, consultant or agent. (g) 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. (h) Issued any stock, bonds or other securities, other than stock options granted to employees, directors or consultants of NSC or warrants granted to third parties, all of which are disclosed on Exhibit 3.2 to the Disclosure Schedule or reflected in the NSC Documents. 3.11 Accounts Receivable. (a) Since the date of the NSC 10-K, NSC 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. NSC (including the NSC Subsidiaries and NSC 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 NSC. (b) Without limiting the generality of the foregoing, each of NSCControl Offer") and the NSC Subsidiaries and the NSC 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 NSC. 3.12 Tax Returns. NSC 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 NSC. NSC has made all payments shown as due on such returns, except to the extent that the failure to make such payments would not have material adverse effect on NSC. Except as set forth on Exhibit 3.12 to the Disclosure Schedule, NSC has not been notified that any tax returns of NSC are currently under audit by the Internal Revenue Service or any state or local tax agency, except for local tax audits that in the aggregate are not material. No agreements have been made by NSC 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. 3.13 Commissions and Fees. Except as set forth in Exhibit 3.13 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 NSC or its stockholders, officers or Directors, or any of them. A-8 3.14 Employee Benefit Plans; Employment Matters. (a) Except as described in the NSC Documents or set forth on Exhibit 3.14(a) to the Disclosure Schedule, NSC 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 "Plan" and collectively, the "Plans") have been operated and administered in all material respects 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 NSC has resulted in a "prohibited transaction" (as defined in ERISA) with respect to the 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 Plans which is subject to Title IV of ERISA. NSC 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 NSC Documents or set forth on Exhibit 3.14(b) to the Disclosure Schedule, NSC 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 materially 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 of 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. 3.15 Compliance with Laws in General. Except as set forth on Exhibit 3.15 to the Disclosure Schedule or disclosed in the NSC Documents, NSC has not received any notices of material violations of any federal, state and local laws, regulations and ordinances relating to its business and operations, including, without limitation, the Federal Environmental Protection Act, the Occupational Safety and Health Act, the Americans with Disabilities Act, the Medicare or applicable Medicaid statutes and regulations and any Environmental Laws, and no notice of any pending inspection or violation of any such law, regulation or ordinance has been received by NSC which, if it were determined that a violation had occurred, would have a material effect on NSC. 3.16 Licenses, Accreditation and Regulatory Approvals. Except as disclosed in the NSC Documents or set forth on Exhibit 3.16 to the Disclosure Schedule, NSC and the NSC Subsidiaries and NSC Other Entities hold all licenses, permits, certificates of need and other regulatory approvals which are needed or required by law with respect to their businesses, operations and facilities as they are currently or presently conducted (collectively, the "Licenses"), except where the failure to possess such Licenses does not have a material adverse effect on NSC. All such Licenses are in full force and effect, and NSC is in compliance with all conditions and requirements of the Licenses and with all rules and regulations relating thereto, except for such noncompliance as does not have a material adverse effect on NSC. NSC, the NSC Subsidiaries and the NSC 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 compliance with the conditions of participation in the Medicare program except where such inability in the case of either items (i) or (ii) or noncompliance in item (iii) does not have a material adverse effect on NSC. Except to the extent that the failure to make or to timely make such filings would not have a material adverse effect on NSC, NSC, the NSC Subsidiaries and the NSC 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 A-9 of which were, when filed, complete and correct except to the extent that such failure to be complete and correct would not have a material adverse effect on NSC. There are no current claims, actions or appeals pending, and neither NSC nor the NSC Subsidiaries nor the NSC 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 in any such case would have a material adverse effect on NSC. The amounts established as provisions for adjustments by Medicare, Medicaid and other third-party payors on the financial statementsprocedures set forth in the last-filed NSC Document areIndenture. Within 30 days following any Change of Control, the Company shall notify the Trustee thereof and give written notice of such Change of Control to each Holder by first-class mail, postage prepaid, at the address of such Holder appearing in the security register, stating, among other things, (i) the Change of Control Purchase Price and the Change of Control Purchase Date, which shall be a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed; (ii) that any Note not tendered will continue to accrue interest; (iii) that, unless the Company defaults in the payment of the Change of Control Purchase Price, any Exchange Notes accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Purchase Date; and (iv) certain other procedures that a Holder must follow to accept a Change of Control Offer or to withdraw such acceptance. The occurrence of certain of the events constituting a Change of Control under the Indenture may result in an event of default in respect of the Credit Agreements and other Indebtedness of the Company and its Subsidiaries and, consequently, the lenders thereof will have the right to require repayment of such Indebtedness in full. If a Change of Control Offer is made, there can be no assurance that the Company will have available funds sufficient to pay any material amountsthe Change of Control Purchase Price for which NSC believes it will be liable. To the knowledge of NSC, neither NSC nor the NSC Subsidiaries nor the NSC Other Entities nor their respective employees have committed a violationall of the MedicareExchange Notes that might be delivered by Holders seeking to accept the Change of Control Offer and Medicaid fraudother amounts that might become due and abusepayable in respect of other Indebtedness of the Company. The failure of the Company to make or consummate the Change of Control Offer or pay the Change of Control Purchase Price when due would result in an Event of Default and would give the Trustee and the Holders the rights described under "-Events of Default". One of the events which constitutes a Change of Control under the Indenture is the sale of "all or substantially all" of the Company's assets. This term has not been interpreted under New York law (which is the governing law of the Indenture) to represent a specific quantitative test. As a consequence, in the event Holders elect to require the Company to purchase the Exchange Notes and the Company elects to contest such election, there can be no assurance as to how a court interpreting New York law would interpret the phrase. The existence of a Holder's right to require the Company to purchase such Holder's Exchange Notes upon a Change of Control may deter a third party from acquiring the Company in a transaction that constitutes a Change of Control. The definition of "Change of Control" in the Indenture is limited in scope. The provisions of the Social Security Act, which violation would haveIndenture may not afford Holders the right to require the Company to purchase such Exchange Notes in the event of a material adverse effect on NSC. Any and all past litigation concerninghighly leveraged transaction or a reorganization, restructuring, merger or similar transaction involving the Company that may adversely affect Holders, if such Licenses and all claims and causestransaction is not a transaction defined as a Change of action raised therein, has been finally adjudicated. 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 NSC, threatened, which inControl. The Company will comply with any way challenges the validity of, or seeks to revoke, condition or restrict any such License where such invalidity, revocation, condition or restriction would have a material adverse effect on NSC. Subject to compliance with applicable securities laws and regulations in connection with a Change of Control Offer. 28 CERTAIN COVENANTS OF THE COMPANY The Indenture contains, among others, the Hart-Scott-Rodino Antitrust Improvements Actfollowing covenants: Limitations on Additional Indebtedness and Subsidiary Preferred Stock. (a) After the Issue Date, (i) the Company will not, and will not permit any of 1976, as amended (the "HSR Act"its Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee, extend the Stated Maturity of, or otherwise become liable with respect to (collectively, "incur"), any Indebtedness (including, without Imitation, Acquired Indebtedness) and state or local statutes, rules or regulations requiring notice, approval, or other action upon(ii) the occurrenceCompany will not permit any of a change in control of NSCits Subsidiaries to issue (except to the Company or any of its Wholly Owned Subsidiaries) or create any Preferred Stock or permit any Person (other than the NSCCompany or a Wholly Owned Subsidiary) to own or hold any interest in any Preferred Stock of any such Subsidiary; provided, however, that the Company may incur Indebtedness and the Company may permit its Subsidiaries to issue or NSC Other Entities,create Preferred Stock if after giving effect thereto, the consummationCompany's EBITDA Coverage Ratio on the date thereof would be at least 2.5 to 1, determined on a pro forma basis as if the incurrence of such additional Indebtedness or the issuance of such Preferred Stock (declared to have an aggregate principal amount equal to the aggregate liquidation value of such Preferred Stock), as the case may be, and the application of the Merger willnet proceeds therefrom, had occurred at the beginning of the four-quarter period used to calculate the Company's EBITDA Coverage Ratio. (b) Notwithstanding the foregoing, and irrespective of the EBITDA Coverage Ratio, in addition to Existing Indebtedness: (i) the Company may incur Indebtedness pursuant to the Private Notes issued on the Issue Date and the Exchange Notes issued in exchange for Private Notes; (ii) the Company may incur Indebtedness under the New Credit Agreement in an aggregate principal amount at any time not violateto exceed $400,000,000; (iii) the Company and its Subsidiaries may incur Refinancing Indebtedness; (iv) the Company may incur any law or regulation to which NSC is subject which, if violated, would have a material adverse effect on NSC. 3.17 Retirement or Re-Acquisition of HEALTHSOUTH Common Stock. NSC is not a partyIndebtedness to any agreementSubsidiary or any Subsidiary may incur any Indebtedness to the effect of which would be to require HEALTHSOUTH directlyCompany or indirectly to retire or re-acquire all or part of the shares of HEALTHSOUTH Common Stock issued pursuant to Section 2.1 hereof. 3.18 Disposition of Assets of Surviving Corporation. NSC is not a party to any plan to disposeSubsidiary; (v) the Company and its Subsidiaries may incur any Indebtedness evidenced by letters of a significant part of the assets of the Surviving Corporation within two years after the Closing Date, other than dispositionscredit which are used in the ordinary course of business of the Surviving CorporationCompany and dispositions intendedits Subsidiaries to eliminate duplicate facilities or excess capacity. 3.19 Vote Required. The affirmative votesecure workers' compensation and other insurance coverages; (vi) the Company and its Subsidiaries may incur Capitalized Lease Obligations and Attributable Indebtedness, in each case excluding Existing Indebtedness, in an aggregate principal amount at any one time outstanding not to exceed 10% of Consolidated Tangible Assets; and (vii) the Subsidiaries of the holdersCompany may incur Indebtedness, excluding Existing Indebtedness, in an aggregate principal amount at any time outstanding not to exceed $250,000,000, in addition to Indebtedness permitted to be incurred by Subsidiaries of the Company pursuant to the foregoing clauses (iii)-(vi). (c) Notwithstanding the foregoing, the Company may permit any Subsidiary which is a partnership formed to operate a single healthcare facility to issue or create Preferred Stock, provided that the aggregate amount of all such Preferred Stock outstanding after giving effect to such issuance or creation shall not exceed 1% of Consolidated Tangible Assets as of the date of such issuance or creation. Limitations on Restricted Payments. The Company will not, and will not permit any of its Subsidiaries, directly or indirectly, to make any Restricted Payment if at the time of such Restricted Payment: (i) a Default or Event of Default shall have occurred and be continuing or shall occur as a consequence thereof; 29 (ii) after giving effect to the proposed Restricted Payment, the amount of such Restricted Payment, when added to the aggregate amount of all Restricted Payments made after the Issue Date, exceeds the sum of: (a) 50% of the Company's Consolidated Net Income accrued during the period (taken as a single period) commencing on July 1, 1997 to and including the fiscal quarter ended immediately prior to the date of such Restricted Payment (or, if such aggregate Consolidated Net Income shall be a deficit, minus 100% of such aggregate deficit), (b) the net cash proceeds from the issuance and sale of the Company's Capital Stock (other than to a Subsidiary of the Company) that is not Disqualified Stock during the period (taken as a single period) commencing with the Issue Date, and (c) $50,000,000; or (iii) the Company would not be able to incur an additional $1.00 of Indebtedness under the EBITDA Coverage Ratio in the "Limitations on Additional Indebtedness and Subsidiary Preferred Stock" covenant. Notwithstanding the foregoing, the Company may; (w) pay any dividend within 60 days after the date of declaration thereof if the payment thereof would have complied with the limitations of this "Limitations on Restricted Payments" covenant on the date of declaration; (x) retire shares of the Company's Capital Stock or the Company's or a Subsidiary of the Company's Indebtedness out of the proceeds of a substantially concurrent sale (other than to a Subsidiary of the Company) of shares of the Company's Capital Stock (other than Disqualified Stock); (y) make Investments in Joint Ventures, when added to the aggregate amount of all such other Investments made pursuant to this clause (y) after the Issue Date, not exceeding at any time 5% of Consolidated Tangible Assets (with each such Investment being valued as of the date made and without regard to subsequent changes in value); and (z) make Investments, when added to the aggregate amount of all such other Investments made pursuant to this clause (z) after the Issue Date, not exceeding at any time 2.5% of Consolidated Tangible Assets (with each such Investment being valued as of the date made and without regard to subsequent changes in value); provided, however, that each Restricted Payment described in clauses (w) and (x) above shall be taken into account for purposes of computing the aggregate amount of all Restricted Payments pursuant to clause (ii) of the immediately preceding paragraph. Limitations on Restrictions on Distributions from Subsidiaries. The Company will not, and will not permit any of its Subsidiaries to, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction (other than encumbrances or restrictions imposed by law or by judicial or regulatory action or by provisions in leases or other agreements that restrict the assignability thereof) on the ability of any Subsidiary of the Company to (i) pay dividends or make any other distributions on its Capital Stock or any other interest or participation in, or measured by, its profits, owned by the Company or any of its other Subsidiaries, or pay interest on or principal of any Indebtedness owed to the Company or any of its other Subsidiaries, (ii) make loans or advances to the Company or any of its other Subsidiaries or (iii) transfer any of its properties or assets to the Company or any of its other Subsidiaries, in each case except for encumbrances or restrictions existing under or by reason of (a) applicable law, 30 (b) the Credit Agreements, (c) Existing Indebtedness, (d) any restrictions under any agreement evidencing any Acquired Indebtedness that was permitted to be incurred pursuant to the Indenture and which was not incurred in anticipation or contemplation of the related acquisition, provided that such restrictions and encumbrances only apply to assets that were subject to such restrictions and encumbrances prior to the acquisition of such assets by the Company or its Subsidiaries, (e) restrictions or encumbrances replacing those permitted by clause (b), (c) or (d) above which, taken as a whole, are not materially more restrictive, (f) the Indenture, (g) any restrictions and encumbrances arising in connection with Refinancing Indebtedness; provided, however, that any restrictions or encumbrances of the type described in this paragraph that arise under such Refinancing Indebtedness are not, taken as a whole, materially more restrictive than those under the agreement creating or evidencing the Indebtedness being refunded or refinanced, (h) any restrictions with respect to a Subsidiary of the Company imposed pursuant to an agreement that has been entered into for the sale or other disposition of all or substantially all of the Capital Stock or assets of such Subsidiary, (i) any agreement restricting the sale or other disposition of property securing Indebtedness if such agreement does not expressly restrict the ability of a Subsidiary of the Company to pay dividends or make loans or advances and (j) customary restrictions in purchase money debt or leases relating to the property covered thereby. Limitations on Certain Other Subordinated Indebtedness. The Company shall not create, incur, assume or suffer to exist any Indebtedness that is subordinate in right of payment to any Senior Indebtedness unless such Indebtedness by its terms or the terms of the instrument creating or evidencing such Indebtedness is subordinate in right of payment to, or ranks pari passu with, the Exchange Notes. Limitations on Transactions with Affiliates. Neither the Company nor any of its Subsidiaries will, directly or indirectly, in one transaction or a series of transactions, make any loan, advance, guarantee or capital contribution to, or for the benefit of, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or for the benefit of, or purchase or lease any property or assets from, or enter into or amend any contract, agreement or understanding with, or for the benefit of, any Affiliate of the Company or any of its Subsidiaries or any Person (or any Affiliate of such Person) holding 10% or more of the Common Equity of the Company or any of its Subsidiaries, other than transactions in the ordinary course between the Company and its Subsidiaries or among Subsidiaries of the Company (an "Affiliate Transaction"), unless (i) the terms of such Affiliate Transactions are fair and reasonable to the Company or such Subsidiary, as the case may be, and are at least as favorable as the terms which could be obtained by the Company or such Subsidiary, as the case may be, in a comparable transaction made on an arm's-length basis between unaffiliated parties; (ii) with respect to any such Affiliate Transaction involving aggregate payments in excess of $5,000,000, the Company delivers an Officers' Certificate to the Trustee certifying that such Affiliate Transaction complies with clause (i) above and a Secretary's Certificate which sets forth and authenticates a resolution that has been adopted by a vote of a majority of the outstanding sharesdisinterested members of the NSC Common Stock entitled to vote thereon is the only vote of the holders of any class or series of NSC capital stock necessary to approve this Plan of Merger, the Merger and the transactions contemplated hereby. 3.20 Opinion of Financial Advisor. The Board of Directors approving such Affiliate Transaction; and (iii) with respect to any such Affiliate Transaction involving aggregate payments in excess of NSC has received$25,000,000, the oralCompany delivers to the Trustee the certificates specified in clause (ii) above and an opinion of BT Alex. Brown Incorporated toan independent investment banking firm of national standing in the effectUnited States, stating that as of the date of this Plan of Merger, the consideration to be received by the holders of NSC Common Stocksuch Affiliate Transaction is fair to such holders from a financial point of view to the Company or such Subsidiary, as the case may be; 31 provided, however, that the foregoing clauses (ii) and (iii) shall not apply to transactions between the Company or any of its Subsidiaries and MedCenterDirect.com, Inc. or any entity to which the Company transfers all or substantially all of the rights to its HEALTHSOUTH Clinical Automation Program. Limitations on Liens. The Company will not create or suffer to exist any Lien (including any Lien created to secure the Company's obligation to repay Senior Subordinated Indebtedness other than any amounts owing on or in respect of the Exchange Notes), other than Permitted Liens, on any of its assets unless all payments due under the Indenture and the Exchange Notes are secured on an equal and ratable basis with the obligation so secured until such time as such obligation is no longer secured by a written copyLien. Limitations on Asset Sales. (a) The Company will not, and will not permit any of its Subsidiaries to, consummate any Asset Sale unless (i) the Company or such Subsidiary receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the assets included in such Asset Sale, (ii) immediately before and immediately after giving effect to such Asset Sale, no Default or Event of Default shall have occurred and be continuing and (iii) at least 75% of the consideration received by the Company or such Subsidiary therefor is in the form of cash paid at the closing thereof, provided, however, that this clause (iii) shall not apply if, after giving effect to such Asset Sale, the aggregate principal amount of all notes or similar debt obligations and Fair Market Value of all equity securities received by the Company from all Asset Sales since the Issue Date (other than such notes or similar debt obligations and such equity securities converted into or otherwise disposed of for cash and applied in accordance with the second succeeding sentence) would not exceed 2.5% of Consolidated Tangible Assets. The amount (without duplication) of any (x) Indebtedness (other than Subordinated Indebtedness) of the Company or such Subsidiary that is expressly assumed by the transferee in such Asset Sale and with respect to which opinionthe Company or such Subsidiary, as the case may be, is unconditionally released by the holder of such Indebtedness and (y) any notes, securities or similar obligations or items of property received from such transferee that are immediately converted, sold or exchanged by the Company or such Subsidiary for cash (to the extent of the cash actually so received), shall be deemed to be cash for purposes of this "Limitations on Asset Sales" covenant. If at any time any non-cash consideration received by the Company or such Subsidiary, as the case may be, in connection with any Asset Sale is converted into or sold or otherwise disposed of for cash (other than interest received with respect to any such non-cash consideration), then the date of such conversion or disposition shall be deemed to constitute the date of an Asset Sale hereunder and the Net Proceeds thereof shall be applied in accordance with this "Limitations on Asset Sales" covenant. A transfer of assets by the Company to a Wholly Owned Subsidiary or by a Wholly Owned Subsidiary to the Company or to another Wholly Owned Subsidiary will not be deemed to be an Asset Sale and a transfer of assets that constitutes a Restricted Payment and that is permitted under the covenant described under "Limitations on Restricted Payments" will not be deemed to be an Asset Sale. (b) If the Company or any Subsidiary engages in an Asset Sale, the Company or such Subsidiary shall, no later than 360 days after such Asset Sale, (i) apply all or any of the Net Proceeds therefrom to repay Senior Indebtedness in accordance with the applicable provisions thereof, (ii) invest all or any part of the Net Proceeds therefrom in the lines of business of the Company or any of its Subsidiaries immediately prior to such investment, or (iii) any combination of clauses (i) and (ii) above. The amount of such Net Proceeds not applied or invested as provided in this paragraph will constitute "Excess Proceeds". 32 (c) When the aggregate amount of Excess Proceeds equals or exceeds $5,000,000, the Company will be delivered by NSCrequired to HEALTHSOUTH priormake an offer to purchase (an "Asset Sale Offer") from all Holders, an aggregate principal amount of Exchange Notes equal to the amount of such Excess Proceeds as follows: (i) The Company will make an Asset Sale Offer to all Holders in accordance with the procedures set forth in the Indenture to purchase the maximum principal amount (expressed as a multiple of $1,000) of Exchange Notes that may be purchased out of the amount (the "Asset Sale Payment Amount") of such Excess Proceeds. (ii) The offer price for the Exchange Notes will be payable in cash in an amount equal to 100% of the principal amount of the Exchange Notes tendered pursuant to such Asset Sale Offer, plus accrued and unpaid interest to the date on which the definitive proxy materials for the Proxy Statement (as definedsuch Asset Sale Offer is consummated (the "Asset Sale Purchase Price"), in Section 7.4(a)) are filedaccordance with the SEC. Section 4. REPRESENTATIONS AND WARRANTIES OF THE SUBSIDIARY AND HEALTHSOUTH.procedures set forth in the Indenture. To the extent that the aggregate Asset Sale Purchase Price of Exchange Notes tendered pursuant to an Asset Sale Offer is less than the Asset Sale Payment Amount relating thereto (such shortfall constituting a "Net Proceeds Deficiency"), the Company may use such Net Proceeds Deficiency, or a portion thereof, for general corporate purposes. (iii) If the aggregate Asset Sale Purchase Price of Exchange Notes validly tendered and not withdrawn by holders thereof exceeds the Asset Sale Payment Amount, Exchange Notes to be purchased will be selected on a pro rata basis. (iv) Upon completion of such Asset Sale Offer in accordance with the foregoing provisions, the amount of Excess Proceeds with respect to which such Asset Sale Offer was made shall be deemed to be zero. In the event that any other Indebtedness of the Company which ranks pari passu with the Exchange Notes ("Other Debt") requires an offer to purchase to be made to repurchase such Other Debt upon the consummation of an Asset Sale, the Company may apply the Excess Proceeds to both purchase such Other Debt and to make an Asset Sale Offer, provided, that the purchase price of such other debt does not exceed 100% of the aggregate principal amount or accreted value thereof plus interest thereon. With respect to any Excess Proceeds, the Company shall make the Asset Sale Offer in respect thereof at the same time as the analogous offer to purchase is made pursuant to any Other Debt and the purchase date in respect thereof shall be the same as the purchase date in respect thereof pursuant to any Other Debt. With respect to any Asset Sale Offer effected pursuant to this "Limitations on Asset Sales" covenant, to the extent the aggregate principal amount of Exchange Notes and Other Debt, if any, tendered pursuant to such Asset Sale Offer and the concurrent offer to purchase with respect to such Other Debt, exceeds the Excess Proceeds, such Exchange Notes and Other Debt, if any, shall be purchased pro rata based on the aggregate principal amount of such Exchange Notes and such Other Debt tendered by each holder thereof. The SubsidiaryCompany will comply with any applicable securities laws and HEALTHSOUTH, jointlyregulations in connection with an Asset Sale Offer. Limitations on Mergers and severally, hereby represent and warrantConsolidations. The Company will not consolidate or merge with or into, or sell, lease, convey or otherwise dispose of all or substantially all of its assets, or assign any of its obligations under the Exchange Notes or the Indenture, to NSC as follows: 4.1 Organization, Existence and Capital Stock. The Subsidiaryany Person unless: (i) the Person formed by or surviving such consolidation or merger (if other than the Company), or to which such sale, lease, conveyance or other disposition or assignment shall be made (collectively, the "Successor"), is a corporation duly organized and validly existing and is in good standing under the laws of the United States or any State thereof or the District of Delaware. The Subsidiary's authorized capital consists of 1,000 shares of Common Stock, par value $.01 per share,Columbia, and the Successor assumes by supplemental indenture in a form satisfactory to the Trustee all of which shares are issuedthe obligations of the Company under the Exchange Notes and registeredthe Indenture; (ii) immediately after giving effect to such transaction and the use of any net proceeds therefrom on a pro forma basis, no Default or Event of Default shall have occurred and be continuing; 33 (iii) immediately after giving effect to such transaction and the use of any net proceeds therefrom on a pro forma basis, the Consolidated Net Worth of the Company or the Successor, as the case may be, would be at least equal to the Consolidated Net Worth of the Company immediately prior to such transaction; (iv) immediately after giving effect to such transaction and the use of any net proceeds therefrom on a pro forma basis, the EBITDA Coverage Ratio of the Company or the Successor, as the case may be, would be such that the Company or the Successor, as the case may be, would be entitled to incur at least $1.00 of additional Indebtedness under the EBITDA Coverage Ratio test in the name"Limitations on Additional Indebtedness and Subsidiary Preferred Stock" covenant; and (v) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of HEALTHSOUTH.Counsel, each stating that such consolidation, merger, sale, lease, conveyance or other disposition or assignment complies with the provisions of the Indenture. Reports. Whether or not required by the rules and regulations of the SEC, so long as any Exchange Notes are outstanding, the Company will file with the SEC, to the extent such filings are accepted by the SEC, and will furnish (within 15 days after such filing) to the Trustee and to the Holders all quarterly and annual reports and other information, documents and reports that would be required to be filed with the SEC pursuant to Section 13 of the Exchange Act if the Company were required to file under such section. In addition, the Company will make such information available to prospective purchasers of the Exchange Notes, securities analysts and broker-dealers who request it in writing. EVENTS OF DEFAULT An "Event of Default" is defined in the Indenture as: (i) failure by the Company to pay interest on any of the Exchange Notes when it becomes due and payable and the continuance of any such failure for 30 days (whether or not prohibited by the terms of the Indenture described under "-Subordination" above); (ii) failure by the Company to pay the principal of (or premium, if any, on) the Exchange Notes when it becomes due and payable, whether at its Stated Maturity, upon redemption, upon acceleration or otherwise (whether or not prohibited by the terms of the Indenture described under "-Subordination" above); (iii) failure by the Company to comply with its obligations or covenants described under the captions "-Change of Control", "-Certain Covenants of the Company-Limitations on Asset Sales" or "-Certain Covenants of the Company-Limitations on Mergers and Consolidations" above (whether or not prohibited by the terms of the Indenture described under "-Subordination" above); (iv) failure by the Company to comply with any covenant in the Indenture (except the covenants referred to in clauses (i), (ii) and (iii) hereto) and continuance of such failure for 30 days after notice of such failure has been given to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Notes then outstanding; (v) any acceleration of the Stated Maturity of Indebtedness of the Company or any of its Significant Subsidiaries having an outstanding principal amount of at least $25,000,000 or a failure to pay such Indebtedness at its Stated Maturity, provided that such acceleration or failure to pay is not cured within 10 days after such acceleration or failure to pay; (vi) a final judgment or final judgments that exceed $25,000,000 for the payment of money have been entered by a court or courts of competent jurisdiction against the Company and/or any Significant Subsidiary of the Company and such judgment or judgments have not been discharged within 30 days after all rights to appeal have been exhausted; and (vii) certain events of bankruptcy, insolvency or reorganization involving the Company or any Significant Subsidiary of the Company. 34 If an Event of Default (other than an Event of Default specified in clause (vii) above relating to the Company) shall have occurred and be continuing under the Indenture, the Trustee, by written notice to the Company, or the Holders of at least 25% in aggregate principal amount of the Notes then outstanding by written notice to the Company and the Trustee, may declare all amounts owing under the Exchange Notes to be due and payable. Upon effectiveness of such acceleration, the aggregate principal of, premium, if any, and interest on the outstanding Exchange Notes shall immediately become due and payable. If an Event of Default specified in clause (vii) above relating to the Company occurs, all outstanding Exchange Notes shall become due and payable without any further action or notice. In certain cases, the Holders of a majority in aggregate principal amount of the Notes then outstanding may waive an existing Default or Event of Default and its consequences, except a default in the payment of principal of, premium, if any, and interest on the Exchange Notes. The Subsidiary hasHolders may not withinenforce the two years immediately precedingprovisions of the Indenture or the Exchange Notes except as provided in the Indenture. Subject to certain limitations, Holders of a majority in principal amount of the Notes then outstanding may direct the Trustee in its exercise of any trust or power; provided, however, that such direction does not conflict with the terms of the Indenture. The Trustee may withhold from the Holders notice of any continuing Default or Event of Default (except any Default or Event of Default in payment of principal of, premium, if any, or interest on the Exchange Notes) if the Trustee determines that withholding such notice is in the Holders' interest. The Company is required to deliver to the Trustee annually a statement regarding compliance with the Indenture and, upon any Officer of the Company becoming aware of any Default or Event of Default, a statement specifying such Default or Event of Default and what action the Company is taking or proposes to take with respect thereto. SATISFACTION AND DISCHARGE OF INDENTURE; DEFEASANCE The Company may, at its option by a resolution of the Board of Directors, at any time, elect to have the obligations of the Company discharged with respect to the outstanding Exchange Notes ("Legal Defeasance") under the Indenture. Such defeasance means that the Company will be deemed to have paid and discharged the entire Indebtedness represented by the outstanding Exchange Notes and to have satisfied all its other obligations under the Exchange Notes and the Indenture insofar as the Exchange Notes are concerned except for (i) the rights of Holders of outstanding Exchange Notes to receive payments in respect of the principal of, premium, if any, and interest on the Exchange Notes when such payments are due on the Stated Maturity thereof (or, upon redemption, if applicable) from the trust fund established to effect such defeasance, (ii) the Company's obligations to issue temporary Exchange Notes, register the transfer or exchange of any such Exchange Notes, replace mutilated, destroyed, lost or stolen Exchange Notes, maintain an office or agency for payments in respect of such Exchange Notes and segregate and hold such payments in trust, (iii) the rights, powers, trusts, duties and immunities of the Trustee, and (iv) the defeasance provisions of the Indenture. In addition, the Company may, at its option by a resolution of the Board of Directors, at any time, elect to have the obligations of the Company released with respect to certain covenants set forth in the Indenture, and any omission to comply with such obligations will not constitute a Default or an Event of Default with respect to the Exchange Notes ("Covenant Defeasance"). In order to exercise either Legal Defeasance or Covenant Defeasance under the Indenture: (i) the Company must irrevocably deposit or cause to be deposited with the Trustee, as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the Holders, cash in U.S. dollars, or U.S. government obligations, or, in the case of Covenant Defeasance, corporate obligations rated at least "A" by Standard & Poor's Ratings Group or at least "A" by 35 Moody's Investors Service, Inc. or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay and discharge the principal of, premium, if any, and interest on the outstanding Exchange Notes on the Stated Maturity thereof (or upon redemption, if applicable) of such principal, premium, if any, or installment of interest; (ii) no Default or Event of Default with respect to the Exchange Notes will have occurred and be continuing on the date of this Plansuch deposit or, insofar as an event of Merger, owned, directly or indirectly,bankruptcy under clause (vii) of "-Events of Default" above is concerned, at any A-10 shares of NSC Common Stock. The Subsidiary has (i) not engaged directly or indirectly in any business or activities of any type or kind whatsoever nor entered into any agreements or arrangements with any person or entity, or become subject to or bound by any obligation or undertaking which is not contemplated by this Agreement and (ii) not created, granted or suffered to exist any lien upon its properties or assets which would attach to any properties or assets of HEALTHSOUTH ortime during the Surviving Corporationperiod ending on the 91st day after the Effective Time. 4.2 Power and Authority. The Subsidiary has corporate power to execute, deliver and perform this Plandate of Merger and all agreements and other documents executed and delivered,such deposit; (iii) such Legal Defeasance 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 herebyCovenant Defeasance will not violate any provisionsresult in a breach or violation of, or constitute a default under, the Certificate of Incorporation or Bylaws of the Subsidiary,Indenture or any material agreement instrument, order, judgment or decreeinstrument to which the SubsidiaryCompany is a party or by which it is bound, violate any restrictions of any kind to which the Subsidiary is subject, or resultbound; (iv) in the creationcase of any lien, chargeLegal Defeasance, the Company shall have delivered to the Trustee an Opinion of Counsel stating that the Company has received from, or encumbrance upon anythere has been published by, the Internal Revenue Service a ruling, or since the Issue Date, there has been a change in applicable federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the Holders of the propertyoutstanding Notes of such series will not recognize income, gain or assetsloss for federal income tax purposes as a result of the Subsidiary. 4.3 No Subsidiaries. The Subsidiary does not own stock in,such defeasance 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. 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 NSC 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. HEALTHSOUTH is not, and has not been within the two years immediately preceding the date of this Plan of Merger, a subsidiary or division of another corporation, nor has HEALTHSOUTH within such time owned, directly or indirectly, any shares of NSC Common Stock. 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 towill be executed and delivered, by it pursuant to this Plan of Merger, and, subject to federal income tax on the satisfactionsame amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred; (v) in the case of Covenant Defeasance, 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, subjectCompany shall have delivered to the receiptTrustee an Opinion of required regulatory approvals and any other required third-party consents or approvals,Counsel to the consummation of the Merger contemplated hereby will not, violate any provisions of 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 is a party or by which it is bound, or violate any restrictions of any kind to A-11 which HEALTHSOUTH is subject. The execution and delivery of this Plan of Merger has been approved by the Board of Directors of HEALTHSOUTH. 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 NSC, constitutes a valid and binding obligation of HEALTHSOUTH and the Subsidiary, enforceable against HEALTHSOUTH and the Subsidiary in accordance with its terms. No vote ofeffect that the holders of any classoutstanding Notes of such series will not recognize income, gain or seriesloss for federal income tax purposes as a result of HEALTHSOUTH capital stock is necessarysuch defeasance and will be subject to approve this Plan of Merger,federal income tax on the Mergersame amounts, in the same manner and at the transactions contemplated hereby. 5.3 HEALTHSOUTH Common Stock. Onsame times as would have been the Closing Date, HEALTHSOUTH willcase if such defeasance had not occurred; and (vi) the Company shall have a sufficient number of authorized but unissued and/or treasury shares of its Common Stock available for issuancedelivered to the holdersTrustee an Officers' Certificate and an Opinion of NSC Common StockCounsel, each stating that all conditions precedent provided for relating to either the Legal Defeasance or the Covenant Defeasance, as the case may be, have been complied with. TRANSFER AND EXCHANGE A Holder will be able to register the transfer of or exchange Exchange Notes only in accordance with the provisions of this Planthe Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. Without the prior consent of Merger. The HEALTHSOUTH Common Stockthe Company, the Registrar is not required (i) to be issued pursuantregister the transfer of or exchange any Exchange Note selected for redemption, (ii) to this Planregister the transfer of Merger will, when so delivered, be (i) dulyor exchange any Exchange Note for a period of 15 days before the mailing of a notice of redemption 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 listingending on the New York Stockdate of such mailing, or (iii) to register the transfer or exchange of an Exchange Inc. (the "Exchange") upon official noticeNote between a record date and the next succeeding interest payment date. The registered Holder will be treated as the owner 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 heldsuch Exchange Note for all purposes. AMENDMENT, SUPPLEMENT AND WAIVER Subject to certain exceptions, the Indenture or the Exchange Notes may be amended or supplemented with the consent (which may include consents obtained in treasury, and 500,000,000 shares of Common Stock, par value $.01 per share, of which 399,952,852 shares were issued and outstanding as of March 30, 1998, and 186,000 shares are held in treasury. Allconnection with a tender offer or exchange offer for Notes) of the issued and outstanding sharesHolders of HEALTHSOUTH Common Stock have been duly and validly issued and are fully paid and non-assessable. Except as discloseda majority in the HEALTHSOUTH Annual Report on Form 10-K for the fiscal year ended December 31, 1997, as amended (the "HEALTHSOUTH 10-K"), 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, up to 8,579,627 shares of HEALTHSOUTH Common Stock to be issued pursuant to a Plan and Agreement of Merger, as amended, between HEALTHSOUTH, Chandler Acquisition Corporation and The Company Doctor, and HEALTHSOUTH's $567,750,000 principal amount of 3.25% Convertible Subordinated Debentures due 2003. There is no liability for dividends declaredthe Notes then outstanding, and any existing Default under, or accumulated but unpaidcompliance with respect to any shares of HEALTHSOUTH Common Stock. HEALTHSOUTH has not made any distributions to any holder of HEALTHSOUTH Common Stock or participated in or effected any issuance, exchange or retirement of HEALTHSOUTH Common Stock, or otherwise changed the equity interests of holders of HEALTHSOUTH Common Stock, in contemplation of effecting the Merger within the two years immediately preceding the date of this Plan of Merger. Any shares of HEALTHSOUTH Common Stock that HEALTHSOUTH has re-acquired during the two years immediately preceding the date of this Plan of Merger have been so re-acquired only for purposes other than Business Combinations. 5.5 Subsidiary Common Stock. HEALTHSOUTH owns, beneficially and of record, allprovision 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 asIndenture may be requiredwaived (other than any continuing Default or Event of Default in its capacity as the sole stockholderpayment of the Subsidiary to approveprincipal of, premium, if any, or interest on the Merger. 5.6 HEALTHSOUTH Documents. HEALTHSOUTH has heretofore furnished NSCExchange Notes) with the consent (which may include consents 36 obtained in connection with a true and complete copytender offer or exchange offer for Notes) of the Holders of a majority in principal amount of the Notes then outstanding; provided that without the consent of each report, schedule, registration statementHolder affected, the Company and definitive proxy statement filed by it with the SEC (asTrustee may not: (i) change the Stated Maturity of the principal of, or any installment of interest on, such documents have sinceExchange Note or alter the optional redemption provisions thereof; (ii) reduce the principal amount of, or premium, if any, or interest on, such Exchange Note or extend the time of their original filing been amended,payments under the "HEALTHSOUTH Documents") since January 1, 1998, which are allExchange Notes; (iii) modify the documents (other than preliminary material) that it was requiredsubordination provisions in the Indenture in a manner adverse to file with the SEC since such date. As of their respective dates, the HEALTHSOUTH Documents did not containHolder (including 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 lightmodification of the circumstances under which they were made, not misleading. Asdefinition of their respective dates,Senior Indebtedness); (iv) change the HEALTHSOUTH Documents complied in all material respects with the applicable requirementsplace or currency of the Securities Actpayment of 1933, as amended, and the Securities Exchange Act of 1934, as amended, and the rules A-12 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. 5.7 Investment Intent. HEALTHSOUTH is acquiring the shares of NSC 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 NSC Common Stock to any other person, firm or corporation. 5.8 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, its properties or business, or the transaction contemplated by this Plan of Merger and, so far as is known to HEALTHSOUTH, no basis for any such action exists. 5.9 Compliance with Laws in General. Except as disclosed in the HEALTHSOUTH Documents, HEALTHSOUTH has not received any notices of material violations of any federal, state and local laws, regulations and ordinances relating to its business and operations, including, without limitation, the Federal Environmental Protection Act, the Occupational Safety and Health Act, the Americans with Disabilities Act, the Medicare or applicable Medicaid statutes and regulations and any Environmental Laws, and no notice of any pending inspection or violation of any such law, regulation or ordinance has been received by HEALTHSOUTH which, if it were determined that a violation had occurred, would have a material effect on HEALTHSOUTH. 5.10 Licenses, Accreditation and Regulatory Approvals. Except as disclosed in the HEALTHSOUTH Documents, HEALTHSOUTH and its subsidiaries (the "HEALTHSOUTH Subsidiaries") and controlled general or limited partnerships and limited liability companies (the "HEALTHSOUTH Other Entities") hold all Licenses which are needed or required by law with respect to their businesses, operations and facilities as they are currently or presently conducted, except where the failure to possess such Licenses does not have a material adverse effect on HEALTHSOUTH. All such Licenses are in full force and effect, and HEALTHSOUTH is in compliance with all conditions and requirements of the Licenses and with all rules and regulations relating thereto, except for such noncompliance as does not have a material adverse effect on HEALTHSOUTH. 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 compliance with the conditions of participation in the Medicare program except where such inability in the case of either items (i) or (ii) or noncompliance in item (iii) does not have a material adverse effect on HEALTHSOUTH. Except to the extent that the failure to make or 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 except to the extent that such failure to be complete and correct would not have a material adverse effect on HEALTHSOUTH. 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 in any such case would have a material adverse effect on HEALTHSOUTH. The amounts established as provisions A-13 for adjustments by Medicare, Medicaid and other third-party payors on the financial statements set forth in the HEALTHSOUTH 10-K are sufficient to pay any material 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, which violation would have a material adverse effect on HEALTHSOUTH. Any and all past litigation concerning such Licenses and all claims and causes of action raised therein, has been finally adjudicated. 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 validityprincipal of, or seeks to revoke, conditionpremium, if any, or restrict anyinterest on, such License where such invalidity, revocation, condition or restriction would have a material adverse effect on HEALTHSOUTH. Subject to compliance with applicable securities laws,Exchange Note; (v) alter 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 NSC or any of the NSC Subsidiaries or NSC 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. 5.11 Subsequent Events. Except as disclosed in the HEALTHSOUTH 10-K, HEALTHSOUTH has not, since the date of the HEALTHSOUTH 10-K: (a) Incurred any material adverse change. (b) Discharged or satisfied any material lien or encumbrance, or paid or satisfied any material obligation or liability (absolute, accrued, contingent or otherwise) other than (i) liabilities shown or reflected on the December 31, 1997 Balance Sheet contained in the HEALTHSOUTH 10-K or (ii) liabilities incurred since the date of the HEALTHSOUTH 10-K in the ordinary course of business, which discharge or satisfaction would have a material adverse effect on HEALTHSOUTH. (c) 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 HEALTHSOUTH, except as may have been required due to income or operations of HEALTHSOUTH since December 31, 1997. (d) Mortgaged, pledged or subjected to any lien, charge or other encumbrance any of the assets, tangible or intangible, which assets are material to the consolidated business or financial condition of HEALTHSOUTH. (e) Sold or transferred any of the assets material to the consolidated business of HEALTHSOUTH, canceled any material debts or claims or waived any material rights, except in the ordinary course of business. (f) Granted any general or uniform increase in the rates of pay of employees or any material increase in salary payable or to become payable by HEALTHSOUTH to any officer or employee, consultant or agent (other than normal merit increases), or by means of any bonus or pension plan, contract or other commitment, increased in a material respect the compensation of any officer, employee, consultant or agent. (g) 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. (h) Issued any stock, bonds or other securities, other than stock options granted to employees or consultants of HEALTHSOUTH or warrants granted to third parties, all of which are described in the HEALTHSOUTH Documents. 5.12 Retirement or Re-Acquisition of HEALTHSOUTH Common Stock. HEALTHSOUTH has not agreed directly or indirectly to retire or re-acquire all or part of the shares of HEALTHSOUTH Common Stock issued pursuant to Section 2.1 hereof. A-14 5.13 Disposition of Assets of Surviving Corporation. HEALTHSOUTH does not intend or plan to dispose of, or to cause the Surviving Corporation to dispose of, a significant part of the assets of the Surviving Corporation within two years after the Effective Time, other than dispositions in the ordinary course of business of the Surviving Corporation and dispositions intended to eliminate duplicate facilities or excess capacity. Section 6. ACCESS TO INFORMATION AND DOCUMENTS. 6.1 Access to Information. Between the date hereof and the Closing Date, each of NSC and HEALTHSOUTH will give to the other party and its counsel, accountants and other representatives full access to all the 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 informationprovisions with respect to the affairsobligation of such party as the other party may from timeCompany to time reasonably request. Each party will disclose and make availablea Change of Control Offer in accordance with "-Change of Control" above or to make an Asset Sale Offer in accordance with "-Certain Covenants-Limitations on Asset Sales" above; (vi) impair the other party and its representatives all books, contracts, accounts, personnel records, letters of intent, papers, records, communications with regulatory authorities and other documents relatingright to the business and operations of such party. In addition, NSC shall make available to HEALTHSOUTH all such banking, investment and financial information as shall be necessary to allowinstitute suit for the efficient integrationenforcement of NSC banking, investment and financial arrangementsany payment on or with thoserespect to such Exchange Note; or (vii) reduce the percentage in principal amount of HEALTHSOUTH atoutstanding Exchange Notes, the Effective Time. 6.2 Returnconsent 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, recordswhose Holders is required for modification or propertiesamendment of the other party and all copies thereof furnished pursuant to this Section 6Indenture or otherwise. All information disclosed by any partyfor waiver of compliance with certain provisions of the Indenture or any affiliatefor waiver of certain Defaults or representativeEvents of Default. Without the consent of any party shall be deemedHolder, the Company and the Trustee may amend or supplement the Indenture or the Exchange Notes: (i) to be "Evaluation Material" under the terms of the Confidentiality Agreements dated April 30, 1998, between NSC and HEALTHSOUTH and May 1, 1998, between HEALTHSOUTH and NSC (the "Confidentiality Agreements"). 6.3 Effect of Access. (a) Nothing contained in this Section 6 shall be deemedcure any ambiguity, or to createcorrect or supplement 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 includedprovision in the assets ofIndenture or the Exchange Notes or make any other party. (b) Withprovisions with respect to matters as to which any party has made express representations or warranties herein,questions arising under the partiesIndenture or the Exchange Notes; provided that, in each case, such provisions shall be entitled to rely upon such express representations and warranties irrespective of any investigations made by such parties, except tonot adversely affect the extent that such investigations result in actual knowledgeinterest of the inaccuracyHolders; (ii) to provide for uncertificated Exchange Notes in addition to or falsehoodin place of particular representations and warranties. Section 7. COVENANTS. 7.1 Preservation of Business. Priorcertificated Exchange Notes; (iii) to provide for the Effective Time, NSC will use its best efforts to preserve the business organization of NSC intact, to keep available to HEALTHSOUTH and the Surviving Corporation the servicesassumption by a successor corporation of the present employees of NSC, andCompany's obligations under the Indenture; (iv) to preserve for HEALTHSOUTH and the Surviving Corporation the goodwill of the suppliers, customers and others having business relations with NSC. 7.2 Material Transactions. Prior to the Effective Time, NSC 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 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), without first obtaining the written consent of HEALTHSOUTH: (a) Encumber any asset or enter into any transaction or make any contract or commitment relating to the properties, assets and business of NSC, other than in the ordinary course of business or as otherwise disclosed herein. (b) Enter into any employment contract which is not terminable upon notice of 30 days or less, at will, and without penalty to NSC except as provided herein. A-15 (c) Enter into any contract or agreement (i) which cannot be performed within three months or less, or (ii) which involves the expenditure of over $100,000. (d) Issue or sell, or agree to issue or sell, any shares of capital stock or other securities of NSC, except upon exercise of currently outstanding stock options or warrants or pursuant to the NSC Employee Stock Purchase Plan. (e) Make any contribution, payment or distribution to the trustee under any bonus, pension, profit-sharing or retirement plan or incur any obligation to make any such payment or contribution which is not in accordance with NSC's usual past practice, or establish or enter into any other plan or contract or arrangement providing for bonuses, executive incentive compensation, pensions, deferred compensation, retirement payments, profit-sharing or the like, or terminate any Plan. (f) Extend credit to anyone, except in the ordinary course of business consistent with prior practices. (g) Guarantee the obligation of any person, firm or corporation, except in the ordinary course of business consistent with prior practices. (h) Amend its Certificate of Incorporation or Bylaws. (i) Take any action of a character described in Section 3.10(b) to 3.10(h), inclusive. 7.3 Meeting of NSC Stockholders. (a) NSC 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 approving this Plan of 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 NSC (subject to the exercise of its fiduciary duties under applicable law) will (i) recommend to NSC 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 NSC's stockholders of this Plan of Merger and the transactions contemplated hereby. (b) Nothing contained herein shall affect the right of NSC to take action by written consent in lieu of meeting to the extent permitted by applicable law and its Certificate of Incorporation and Bylaws. 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-4add guarantees with respect to the shares of HEALTHSOUTH Common StockExchange Notes; (v) to be issued insecure the Merger (the "Registration Statement"), and will otherwise proceed promptlyExchange Notes; (vi) to satisfyadd to the requirementscovenants of the Securities ActCompany or the Events of 1933, as amended (the "Securities Act"), including Rule 145 thereunder. Such Registration Statement shall contain a proxy statementDefault for the benefit of NSC (the "Proxy Statement") containingHolders; (vii) to surrender any right or power conferred on the information required by the Securities Exchange Act of 1934, as amended (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 promptly amendCompany; or supplement the Registration Statement to the extent necessary in order(viii) to make any other change that does not adversely affect the statements therein not misleadingrights of any Holder or to correctcomply with any misstatements which have become false or misleading. HEALTHSOUTH shall use its reasonable, good faith efforts to have the Registration Statement declared effective by the SEC under the provisionsrequirement of the Securities Act and the Exchange Act. HEALTHSOUTH shall provide NSC with copies of all filings made pursuant to this Section 7.4 and shall consult with NSC on responses to any comments made by the Staff of the SEC with respect thereto. (b) The information specifically designated as being supplied by NSC for inclusion in the Registration Statement shall not, at the time the Registration Statement is declared effective and at the time the Proxy Statement is first mailed to holders of NSC 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 A-16 make the statements therein not misleading. The information specifically designated as being supplied by NSC 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 NSC 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 NSC, or its officers or directors, should be discovered by NSC which should be set forth in an amendment to the Registration Statement or a supplement to the Proxy Statement, NSC shall promptly inform HEALTHSOUTH. All documents, if any, that NSC 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 requirementsqualification of the Securities Act andIndenture under the rules and regulations thereunder andTrust Indenture Act. The consent of Holders will not be necessary under the Exchange Act andIndenture to approve the rules and regulations thereunder. (c) The information specifically designated as being supplied by HEALTHSOUTH for inclusion inparticular form of any proposed amendment. It is sufficient if such consent approves the Registration Statement shall not, at the time the Registration Statement is declared effective and at the time the Proxy Statement is first mailed to holders of NSC 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 not misleading. The information specifically designated as being supplied by HEALTHSOUTH for inclusion in the Proxy Statement to be sent to the holders of NSC 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 NSC 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 lightsubstance 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 which should be set forth in an amendment to the Registration Statement or a supplement to the Proxy Statement, HEALTHSOUTH shall promptly inform NSC 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 whichproposed amendment. The Company 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. (f) NSC shall furnish all information to HEALTHSOUTH with respect to NSC and the NSC Subsidiaries and NSC 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; NSC Rights. NSC 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 NSC's Board of Directors or otherwise, and (b) to redeem the outstanding preferred share purchase rights (the "Rights") of NSC 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 NSC Common Stock or preferred stock in exchange for the Rights). A-17 7.6 HSR Act Compliance. HEALTHSOUTH and NSC 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 NSC 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 NSC 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 or Nasdaq, as applicable. The parties shall issue a joint press release, mutually acceptable to HEALTHSOUTH and NSC, promptly upon execution and delivery of this Plan of Merger. 7.8 Resignation of NSC Directors. On or prior to the Closing Date, NSC shall deliver to HEALTHSOUTH evidence satisfactory to HEALTHSOUTH of the resignation of the Directors of NSC, such resignations to be effective on the Closing Date. 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 andbut shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to terminate this Planconsent to any amendment, supplement or waiver. If a record date is fixed, then those Persons who were Holders at such record date (or their duly designated proxies), and only those Persons, shall be entitled to revoke any consent previously given, whether or not such Persons shall continue to be Holders after such record date. 37 CONCERNING THE TRUSTEE The Bank of MergerNew York is the Trustee under the Indenture and has been appointed by reason thereof. 7.10 No Solicitations. (a) Subjectthe Company as Registrar and Paying Agent with regard to the provisions of Section 7.10(b) below, NSC shall not, and shall not suffer anyExchange Notes. The Indenture contains certain limitations on the rights of the NSC SubsidiariesTrustee, should it become a creditor of the Company, to obtain payment of claims in certain cases, or the NSC 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 makingrealize on certain property received in respect of any proposal with respectsuch claim as security or otherwise. The Trustee will be permitted to engage in other transactions; provided, however, if the Trustee acquires any merger, consolidationconflicting interest (as defined in the Indenture), it must eliminate such conflict or other business combination involving NSC or the acquisitionresign. The Holders of all or any significant part, including by way of merger, acquisition or other business combination,a majority in principal amount of the assets or capital stock or other equity intereststhen outstanding Notes will have the right to direct the time, method and place of NSC or ofconducting any NSC Subsidiaries or NSC Other Entities which, individually or in the aggregate constitute a significant part of the consolidated assets of NSC orproceeding for exercising 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 NSC to abandon, terminate or fail to consummate the Merger or any other transaction contemplated by this Plan of Merger. Except as may be required by the fiduciary duties of NSC's Board of Directors under applicable law, NSC agrees that, as of the date hereof, NSC and the NSC Subsidiaries and the NSC 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, NSC may (i), directly or indirectly, furnish information and access, in response to an unsolicited written proposal for an Acquisition Transaction,remedy available to the same extent permitted by Section 6.1,Trustee, subject to any corporation, partnership, person or other entity or group (in eachcertain exceptions. The Indenture provides that, in case a "person"), pursuant to appropriate confidentiality agreements,an Event of Default occurs and may participate in discussions and negotiate with such corporation, partnership, person or other entity or group concerning any proposal for an Acquisition Transaction, ifis not cured, the Board of Directors of NSC determines in its good faith judgmentTrustee will be required, in the exercise of its fiduciary duties, after consultation with legal A-18 counsel and its financial advisors, that such action is appropriatepower, to use the degree of care of a prudent person in furtherancesimilar circumstances in the conduct 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. NSC 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, NSC or any of the NSC Subsidiaries or the NSC 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 NSC'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. 7.11 Other Actions.his own affairs. Subject to the provisions of Sections 7.3 and 7.10 hereof, none of NSC, 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 NSC 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 NSC 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 NSC 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 any such parties' independent accountants. 7.13 Pooling and Tax-Free Reorganization Treatment. Neither HEALTHSOUTH nor NSC shall intentionally take or cause to be taken any action, whether on or before the Effective Time, which would disqualify the Merger as a "pooling of interests" for accounting purposes or as a "reorganization" within the meaning of Section 368(a) of the Code. 7.14 Affiliate and Pooling Agreements. NSC 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) 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 NSC 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 NSC 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 cooperate in making any such filings promptly and in seeking to obtain timely any such consents, (ii) use their respective best 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 NSC shall use all 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 NSC'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 and/or any other public or private third party which is required to be obtained or made by such party or any of A-19 its subsidiaries or affiliates in connection with this Plan of Merger and the transactions contemplated hereby. Each of HEALTHSOUTH and NSC 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 NSC Stock Options and Warrants. (a) As soon as reasonably practicable after the Effective Time of the Merger, HEALTHSOUTH shall deliver to the holders of NSC stock options and warrants appropriate notices setting forth such holders' rights pursuant to any stock option plans under which such NSC stock options were issued and any stock option agreements or warrant agreements evidencing such options or warrants, which shall continue in full force and effect on the same terms and conditions (subject to the adjustments required by Section 2.1(d) or this Section 7.16 after giving effect to the Merger and the assumption of such options and warrants 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 and the warrant agreements 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 NSC 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 NSC stock options and warrants 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 NSC stock options and shall use its best efforts to maintain the effectiveness of such registration statement (and maintain the current status of the prospectus or prospectuses contained therein) for so long as such NSC stock options 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. (c) Except to the extent otherwise agreed to by the parties, all restrictions or limitations on transfer with respect to the NSC stock options awarded under any plan, program, or arrangement of NSC 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 Publication of Combined Results. HEALTHSOUTH agrees that within 25 days after the end of the first calendar month following at least 30 days after the Effective Time, HEALTHSOUTH shall cause publication of the combined results of operations of HEALTHSOUTH and NSC. For purposes of this Section 7.17, the term "publication" shall have the meaning provided in SEC Accounting Series Release No. 135. 7.18 NSC Employees. HEALTHSOUTH shall retain all employees of NSC 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. HEALTHSOUTH shall give employees of NSC credit for their respective periods of employment with NSC prior to the Effective Time for purposes of determining their eligibility for and level of participation in any employee benefit program, plan or arrangement which the Surviving Corporation adopts, maintains or contributes to following the Effective Time. In addition, HEALTHSOUTH agrees that it will execute and deliver on the Closing Date agreements with the employees designated on Exhibit 7.18 to the Disclosure Schedule providing the benefits set forth on such Exhibit 7.18 to those employees. 7.19 Certain Information. For as long as any affiliate (as defined for purposes of Rule 145 under the Securities Act) of NSC 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 A-20 shall file with the SEC 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 Tax Treatment. HEALTHSOUTH and NSC agree to treat the Merger as a reorganization within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code. During the period from the date of this Agreement through the Effective Time, unless the parties shall otherwise agree in writing, none of HEALTHSOUTH, NSC or any of their respective Subsidiaries shall knowingly take or fail to take any action which action or failure to act would jeopardize qualification of the Merger as a reorganization under such provisions, of the Code. 7.21 Conduct of Business of the Subsidiary Pending the Merger. PriorTrustee will be under no obligation to the Effective Time and subject to any applicable regulatory approvals, HEALTHSOUTH shall cause the Subsidiary to (i) perform its obligations under this Agreement in accordance with the terms hereof and take all other actions necessary or appropriate for the consummation of the transactions contemplated hereby, (ii) not incur, directly or indirectly, any liabilities or obligations except those incurred in connection with the performance of its obligations under this Agreement and the consummation of the transactions contemplated hereby, (iii) not engage directly or indirectly in any business or activities of any type or kind whatsoever and not enter into any agreements or arrangements with any person or entity, or be subject to or be bound by any obligation or undertaking which is not contemplated by this Agreement, and (iv) not create, grant or suffer to exist any lien upon its properties or assets which would attach to any properties or assets of HEALTHSOUTH or the Surviving Corporation after the Effective Time. 7.22 Consulting and Noncompetition Agreements. HEALTHSOUTH and each of E. Timothy Geary, Bryan S. Fisher, Dennis D. Solheim and Dennis Zamojski will execute and deliver prior to the Closing Date Consulting and Noncompetition Agreements in the respective forms set forth on Exhibit 7.22 to the Disclosure Schedule. 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 NSC Common Stock: (a) by mutual written consent of HEALTHSOUTH and NSC; (b) by either HEALTHSOUTH or NSC: (i) if, upon a vote at a duly held meeting of stockholders or any adjournment thereof, any required approval of the holders of shares of NSC Common Stock shall not have been obtained; (ii) if the Merger shall not have been consummated on or before November 30, 1998, 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 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 entity shall have issued an order, decree or ruling or taken any other action permanently enjoining, restraining or otherwise prohibited 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 breach- A-21 ing 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 NSC gives notice of termination as a non-notifying party pursuant to Section 7.9; (c) By either HEALTHSOUTH or NSC in the event that (i) all of the conditions to the obligation of such party to effect the Merger set forth in Section 9.1 shall have been satisfied and (ii) any condition to the obligation of such party to effect the Merger set forth in Section 9.2 (in the case of HEALTHSOUTH) or Section 9.3 (in the case of NSC) is not capable of being satisfied prior to the end of the period referred to in Section 8.1(b)(ii); or (d) By NSC, if NSC'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 NSC 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 NSC Common Stock; provided, however, that after any such approval, there shall be made no amendment that pursuant to Section 251(d) of the DGCL requires further approval by such stockholders 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, waive compliance with any of the 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 NSC, 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 incurred in connection with printing and mailing the Proxy Statement and the Registration Statement shall be shared equally by NSC and HEALTHSOUTH. (b) (i) If this Plan of Merger is terminated by NSC pursuant to Section 8.1(d), and within one year after the effective date of such termination NSC 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, NSC shall pay to HEALTHSOUTH a break-up fee of $15,000,000 in immediately available funds, which fee represents A-22 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. Such break-up fee shall be due and payable on the earliest of (i) the date on which NSC enters into any definitive agreement for an Acquisition Transaction, (ii) the date on which an Acquisition Transaction is consummated, or (iii) the earliest date on which NSC has notice of an event described in Section 8.6(b)(ii)(B). NSC shall not enter into any agreement with respect to any Third Party Acquisition Event which does not, as a condition precedent to the effectiveness of such agreement, require such break-up fee to be paid to HEALTHSOUTH upon the execution of such agreement. (ii) As used herein, the term "Third Party Acquisition Event" shall mean the occurrence of either of the following within the one-year period specified in Section 8.6(b)(i): (A) NSC shall enter into any definitive agreement for any Acquisition Transaction (regardless of whether such Acquisition Transaction is consummated), or shall otherwise be the subject of an Acquisition Transaction 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 HEALTHSOUTH or its affiliates) shall have acquired beneficial ownership (as such term is defined in Rule 13d-3powers 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 NSC Common Stock. (c) NSC acknowledges that the provisions for the payment of break-up fees and allocation of 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 Merger. Accordingly, if a break-up fee shall become due and payable by NSC, and NSC 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 NSC therefor, NSC shall pay HEALTHSOUTH's reasonable costs and expenses (including reasonable attorneys' fees) incurred 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 NSC 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 NSC): (a) None of HEALTHSOUTH, the Subsidiary or NSC nor any of their respective subsidiaries shall be subject to any order, decree or injunction by a court of competent jurisdiction 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 NSC, the NSC Subsidiaries and the NSC 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. A-23 (e) The holders of NSC 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) The Merger shall qualify for "pooling of interests" accounting treatment, and HEALTHSOUTH and NSC shall each have received letters to that effect from Ernst & Young, LLP, independent accountants for HEALTHSOUTH, dated (i) the date of the mailing of the Proxy Statement and (ii) the Closing Date. (h) HEALTHSOUTH and the Subsidiary shall have obtained, or obtained the transfer of, any licenses, certificates of need and other regulatory approvals necessary to allow the Surviving Corporation to operate the NSC facilities, unless the failure to obtain such transfer or approval would not have a material adverse effect on the Surviving Corporation. (i) 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 NSC Subsidiaries and the NSC 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 adverse 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) Each of the agreements of NSC to be performed at or prior to the Closing Date pursuant to the terms hereof shall have been duly performed in all material respects, and NSC shall have performed, in all material respects, all of the acts required to be performed by it at or prior to the Closing Date by the terms hereof. (b) The representations and warranties of NSC set forth in Section 3.10(a) shall be true and correct as of the date of this Plan of Merger and as of the Closing Date. The representations and warranties of NSC set forth in this Plan of Merger that are qualified as to materiality shall be true and correct, and those that are 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 such representations and warranties expressly relate to an earlier date (in which case such representations and warranties that are qualified as to materiality shall be true and correct, and those that are not so qualified shall be true and correct in all material respects, as of such earlier date); provided, however, that NSC 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. HEALTHSOUTH and the Subsidiary shall have been furnished with a certificate, executed by a duly authorized officer of NSC, 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 Code, which opinion may be based upon reasonable representations of fact provided by officers of HEALTHSOUTH, NSC and the Subsidiary. (d) HEALTHSOUTH shall have received an opinion from Bell, Boyd & Lloyd substantially to the effect set forth in Exhibit 9.2(d) hereto. 9.3 Conditions to Obligations of NSC. The obligations of NSC 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 NSC): A-24 (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, and HEALTHSOUTH and the Subsidiary shall have performed, in all material respects, all of the acts required to be performed by them at or prior to the Closing Date by the terms hereof. (b) The representations and warranties of HEALTHSOUTH set forth in Section 5.11(a) shall be true and correct as of the date of this Plan of Merger and as of the Closing Date. The representations and warranties of HEALTHSOUTH set forth in this Plan of Merger that are qualified as to materiality shall be true and correct, and those that are 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 such representations and warranties expressly relate to an earlier date (in which case such representations and warranties that are qualified as to materiality shall be true and correct, and those that are not so qualified shall be true and correct in all material respects, as of such earlier date). NSC shall have been furnished with a certificate, executed by duly authorized officers of HEALTHSOUTH and the Subsidiary, dated the Closing Date, certifying in such detail as NSC may reasonably request as to the fulfillment of the foregoing conditions. (c) NSC shall have received an opinion from Bell, Boyd & Lloyd to the effect that the Merger will constitute a reorganization with the meaning of Section 368(a) of the Code, which opinion may be based upon reasonable representations of fact provided by officers of HEALTHSOUTH, NSC and the Subsidiary. (d) NSC 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) 969-4620 with a copy to: William W. Horton, Esq. HEALTHSOUTH Corporation One HealthSouth Parkway Birmingham, Alabama 35243 Facsimile: (205) 969-4730 If to NSC: National Surgery Centers, Inc. 30 South Wacker Drive Suite 2302 Chicago, Illinois 60606 Attention: E. Timothy Geary Facsimile: A-25 with a copy to: Steven E. Ducommun, Esq. Bell, Boyd & Lloyd Three First National Plaza 70 West Madison Street, Suite 3300 Chicago, Illinois 60602-4207 Facsimile: (312) 372-2098 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 Indemnification. (a) NSC 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 NSC 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 NSC or any of its subsidiaries, or is or was servingIndenture at the request of NSC as a director, officer employee or agent of any other corporation, partnership, joint venture or other enterprise, 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 caseHolder, unless such Holder shall have offered to the full extent a corporation is permitted underTrustee security and indemnity satisfactory to the DGCL to indemnify its own directors, officers and employees, as the case may be (and HEALTHSOUTHTrustee. GOVERNING LAW The Indenture and the Surviving Corporation, as the case mayExchange Notes provide that they will be will pay expenses in advance of the final disposition of any such action or proceeding to each Indemnified Party to the full extent permittedgoverned 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, 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 NSC (or them and HEALTHSOUTH and the Surviving Corporation after the Effective Time), (ii) NSC (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) NSC (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 NSC, 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 NSC, 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 NSC (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) Until such time as the applicable statute of limitations shall have expired, HEALTHSOUTH shall, and shall cause the Surviving Corporation to, provide with respect to each of the Indemnified Parties the indemnification rights which such Indemnified Party had, whether from NSC or any NSC A-26 Subsidiary, immediately prior to the Effective Time, whether under the Certificate or Articles of Incorporation or Bylaws of NSC or such NSC Subsidiary or otherwise, except as otherwise provided in Section 10.4(a). (c) Immediately following the Effective Time, HEALTHSOUTH shall cause to be in effect the current policies of directors' and officers' liability insurance maintained by NSC or any NSC Subsidiary (provided that HEALTHSOUTH may substitute therefor policies of at least the same coverage and limits containing terms and conditions that are substantially as advantageous) with respect to claims arising from facts or events which occurred at or before the Effective Time, and HEALTHSOUTH shall maintain such coverage for a period of six years after the Effective Time; provided, however, that in no event shall HEALTHSOUTH or the Surviving Corporation be required to expend more than 200% of the current annual premiums paid by NSC for such insurance. (d) This Section 10.4 shall survive the Closing and is intended to benefit NSC, the Surviving Corporation and each of the Indemnified Parties and his or her heirs and representatives (each of whom shall be entitled to enforce this Section 10.4 against HEALTHSOUTH and the Surviving Corporation, as the case may be) and shall be binding upon all successor and assigns of HEALTHSOUTH and the Surviving Corporation. 10.5 Governing Law. This Plan of Merger shall be interpreted, construed and enforced in accordance with, the laws of the State of Delaware, appliedNew York. BOOK-ENTRY; DELIVERY AND FORM The Exchange Notes will be represented by one or more permanent global certificates in definitive, fully registered form without giving effect to any conflicts-of-law principles. 10.6 "Including"interest coupons (the "Global Notes"). The word "including"Global Notes will be deposited upon issuance with the Trustee as custodian for The Depository Trust Company ("DTC"), when following any general statement, termin New York, New York, and registered in the name of DTC or matter, shallits nominee for credit to an account of a direct or indirect participant in DTC as described below. Except as set forth below, the Global Notes may be transferred, in whole and not in part, only to another nominee of DTC or to a successor of DTC or its nominee. Beneficial interests in the Global Notes may not be construed to limit such statement, term or matterexchanged for Exchange Notes in certificated form except in the limited circumstances described below. See "-Exchange of Book-Entry Notes for Certificated Notes". Transfer of beneficial interests in the Global Notes will be subject to the specific termsapplicable rules and procedures of DTC and its direct or mattersindirect participants (including, if applicable, those of the Euroclear System ("Euroclear") and Clearstream Banking societe anonyme ("Clearstream")), which may change from time to time. DEPOSITARY PROCEDURES DTC is a limited-purpose trust company created to hold securities for its participating organizations (collectively, the "Participants") and to facilitate the clearance and settlement of transactions in those securities between Participants through electronic book-entry changes in accounts of its Participants. The Participants include securities brokers and dealers (including the initial purchasers), banks, trust companies, clearing corporations and certain other organizations. Access to DTC's system is also available to other entities such as providedbanks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Participant, either directly or indirectly (collectively, the "Indirect Participants"). Persons who are not Participants may beneficially own securities held by or on behalf of DTC only through the Participants or the Indirect Participants. The ownership interests and transfer of ownership interests of each actual purchaser of each security held by or on behalf of DTC are recorded on the records of the Participants and Indirect Participants. Pursuant to procedures established by DTC: (i) upon deposit of the Global Notes, DTC will credit the accounts of Participants designated by the initial purchasers with portions of the principal amount of the Global Notes, and 38 (ii) ownership of such interests in the Global Notes will be maintained by DTC (with respect to the Participants) or by the Participants and the Indirect Participants (with respect to other owners of beneficial interests in the Global Notes). Investors in the Global Notes may hold their interests therein directly through DTC, if they are Participants in such system, or indirectly through organizations (including Euroclear and Clearstream) which are Participants in such system. All interests in a Global Note, including those held through Euroclear or Clearstream, will be subject to the procedures and requirements of DTC. Those interests held through Euroclear or Clearstream will also be subject to the procedures and requirements of these systems. The laws of some states require that certain persons take physical delivery in definitive form of securities that they own. Consequently, the ability to transfer beneficial interests in a Global Note to such persons will be limited to that extent. Because DTC can act only on behalf of Participants, which in turn act on behalf of Indirect Participants, the ability of a person having beneficial interests in a Global Note to pledge such interests to persons or entities that do not participate in the DTC system, or otherwise take actions in respect of such interests, may be affected by the lack of a physical certificate evidencing such interests. For certain other restrictions on the transferability of the Exchange Notes, see "-Exchange of Book-Entry Notes for Certificated Notes". EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTES WILL NOT HAVE EXCHANGE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF EXCHANGE NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE. Payments in respect of the principal of and premium, if any, and interest on a Global Note registered in the name of DTC or its nominee will be payable by the Trustee to DTC in its capacity as the registered holder under the Indenture. The Company and the Trustee will treat the persons in whose names the Exchange Notes, including the Global Notes, are registered as the owners thereof for the purpose of receiving such payments and for any and all other purposes whatsoever. Consequently, neither the Company, the Trustee nor any agent of the Company or the Trustee has or will have any responsibility or liability for: (i) any aspect of DTC's records or any Participant's or Indirect Participant's records relating to or payment made on account of beneficial ownership interests in the Global Notes, or for maintaining, supervising or reviewing any of DTC's records or any Participant's or Indirect Participant's records relating to the beneficial ownership interests in the Global Notes or (ii) any other matter relating to the actions and practices of DTC or any of its Participants or Indirect Participants. DTC has advised the Company that its current practice, upon receipt of any payment in respect of securities such as the Exchange Notes (including principal and interest), is to credit the accounts of the relevant Participants with the payment on the payment date, in amounts proportionate to their respective holdings in the principal amount of beneficial interests in the relevant security as shown on the records of DTC unless DTC has reason to believe it will not receive payment on such payment date. Payments by the Participants and the Indirect Participants to the beneficial owners of Exchange Notes will be governed by standing instructions and customary practices and will be the responsibility of the Participants or the Indirect Participants and will not be the responsibility of DTC, the Trustee or the Company. Neither the Company nor the Trustee will be liable for any delay by DTC or any of its Participants in identifying the beneficial owners of the Exchange Notes, and the Company and the Trustee may conclusively rely on and will be protected in relying on instructions from DTC or its nominee for all purposes. Except for trades involving only Euroclear and Clearstream participants, interests in the Global Notes are expected to be eligible to trade in DTC's Same-Day Funds Settlement System and secondary market trading activity in such interests will therefore settle in immediately available funds, subject in all cases to the rules and procedures of DTC and its Participants. Transfers between Participants in DTC will be effected in accordance with DTC's procedures, and will be settled in same-day funds, and transfers between participants in Euroclear and Clearstream will be affected in the ordinary way in accordance with their respective rules and operating procedures. 39 Cross-market transfers between the Participants in DTC, on the one hand, and Euroclear or Clearstream participants, on the other hand, will be effected through DTC in accordance with DTC 's rules on behalf of Euroclear and Clearstream, as the case may be, by their depositories. Cross-market transactions will require delivery of instructions to Euroclear or Clearstream, as the case may be, by the counterparty in that system in accordance with the rules and procedures and within the established deadlines (Brussels time) of that system. Euroclear or Clearstream, as the case may be, will, if the transaction meets its settlement requirements, deliver instructions to its respective depositories to take action to effect final settlement on its behalf by delivering or receiving interests in the relevant Global Note in DTC, and making or receiving payment in accordance with normal procedures for same-day funds settlement applicable to DTC. Euroclear and Clearstream participants may not deliver instructions directly to the depositories for Euroclear or Clearstream. Because of time zone differences, the securities account of a Euroclear or Clearstream participant purchasing an interest in a Global Note from a Participant in DTC will be credited and reported to the relevant Euroclear or Clearstream participant, during the securities settlement processing day (which must be a business day for Euroclear and Clearstream) immediately following the word "including"settlement date of DTC. DTC has advised the Company that cash received in Euroclear or Clearstream as a result of sales of interests in a Global Note by or through a Euroclear or Clearstream participant to a Participant in DTC will be received with value on the settlement date of DTC but will be available in the relevant Euroclear or Clearstream cash account only as of the business day of Euroclear or Clearstream following DTC's settlement date. DTC has advised the Company that it will take any action permitted to be taken by a Holder of Exchange Notes only at the direction of one or more Participants to whose account with DTC interests in the Global Notes are credited and only in respect of such portion of the aggregate principal amount of the Exchange Notes as to which such Participant or Participants has or have given such direction. If there is an Event of Default under the Exchange Notes, DTC reserves the right to exchange the Global Notes for legended Exchange Notes in certificated form, and to distribute the Exchange Notes to its Participants. Although DTC, Euroclear and Clearstream have agreed to the foregoing procedures to facilitate transfers of interests in the Global Notes among participants in DTC, Euroclear and Clearstream, they are under no obligation to perform 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 referencecontinue to perform such procedures, and the word "including" orprocedures may be discontinued at any time. Neither the similar items or matters, but rather shall be deemed to refer to all other items or matters that could reasonably fall withinCompany nor the broadest possible scope of the general statement, term or matter. 10.7 "Knowledge". "To the knowledge", "to the best knowledge, information and belief", orTrustee will have 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 (or persons performing comparable functions for such party, irrespective of title) and to include the assurance that such knowledge is based upon a reasonable investigation, unless otherwise expressly provided. 10.8 "Material adverse change" or "material adverse effect". "Material adverse change" or "material adverse effect" means, when used in connection with NSC or HEALTHSOUTH, any change, effect, event or occurrence that has, or is reasonably likely to have, individually or in the aggregate, a material adverse impact on the business or financial position of such party and its subsidiaries and other consolidated entities 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 and (ii) the public announcement of the Merger and compliance with the provisions of this Plan of Merger, (iii) any changes resulting from any restructuring or other similar charges or write-offs taken by NSC with the consent of HEALTHSOUTH, provided, however, that no such charges or write-offs will be taken if such would adversely affect pooling-of-interests accounting treatmentresponsibility for the Merger, (iv)performance by DTC, Euroclear or Clearstream or their respective Participants or Indirect Participants of their respective obligations under the termination or failurerules and procedures governing their operations. According to be consummated or completed of any acquisition, joint venture, development project or other transaction which was not consummated or completed prior toDTC, the execution and delivery of this Plan of Merger, (v) any change in the Social Security Act, Medicare, Medicaid or other similar laws, rules or regulations of generally applicability or interpretations thereof by courts or governmental authorities, and (vi) any change in general economic conditions, in interest rates or in conditions affecting the healthcare or ambulatory surgery industries generally. 10.9 "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 A-27 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 10.10) regardless of the quantity of any such material. 10.10 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. 10.11 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 Plan of Merger, the term "tax return" shall mean any return, report,foregoing information return or other document (including any related or supporting information) with respect to taxes. 10.12 Captions.DTC has been provided for informational purposes only and is not intended to serve as a representation, warranty, or contract modification of any kind. The captions or headingsinformation in this Plansection concerning DTC, Euroclear and Clearstream and their book-entry systems has been obtained from sources that the Company believes to be reliable, but the Company takes no responsibility for the accuracy thereof. EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES A Global Note is exchangeable for Exchange Notes in registered certificated form (a "Certificated Note") if: (i) DTC (1) notifies the Company that it is unwilling or unable to continue as depositary for the Global Note and the Company fails to appoint a successor depositary within 60 days, or (2) has ceased to be a clearing agency registered under the Exchange Act, or (ii) at the request of Merger are madea holder, if there shall have occurred and be continuing an Event of Default with respect to the Exchange Notes. In all cases, Certificated Notes delivered in exchange for convenienceany Global Note or beneficial interests therein will be registered in the names, and general reference only and shall not be construed to describe, defineissued in any approved denominations, requested by or limit the scope or intenton behalf of the provisionsdepositary (in accordance with its customary procedures), unless the Company determines otherwise in accordance with the Indenture and in compliance with applicable law. 40 CERTAIN DEFINITIONS Set forth below is a summary of this Plancertain of Merger. 10.13 Integrationthe defined terms used in the Indenture. Reference is made to the Indenture for the full definition of Exhibits. All Exhibits attachedall such terms used in the Indenture. "Acquired Indebtedness" means (i) with respect to this Planany Person that becomes a Subsidiary of Merger are integral partsthe Company after the Issue Date, Indebtedness of this Plansuch Person and its Subsidiaries existing at the time such Person becomes a Subsidiary of Merger as if fully set forth herein,the Company and all statements appearing therein shall be deemed disclosed for all purposes and not only(ii) with respect to the Company or any of its Subsidiaries, any Indebtedness assumed by the Company or any of its Subsidiaries in connection with the specific representationacquisition of an asset from another Person. "Affiliate" of any specified Person means any other Person directly or indirectly controlling, controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Asset Sale" for any Person means the sale, lease, conveyance or other disposition (including, without limitation, by merger or consolidation, and whether by operation of law or otherwise) of any of that Person's assets (including, without limitation, the sale or other disposition of Capital Stock of any Subsidiary of such Person, whether by such Person or by such Subsidiary), whether owned on the Issue Date or subsequently acquired, in one transaction or a series of related transactions, in which they are explicitly referenced. 10.14 Entire Agreement. This instrument, includingsuch Person and/or its Subsidiaries sell, lease, convey or otherwise dispose of: (i) all Exhibits attached hereto, togetheror substantially all of the Capital Stock of any of such Person's Subsidiaries, (ii) assets which constitute all or substantially all of any division or fine of business of such Person or any of its Subsidiaries, or (iii) any other assets of such Person or any of its Subsidiaries, other than in the ordinary course of business, provided, that the Fair Market Value thereof shall be at least 1% of Consolidated Tangible Assets; provided, however, that the following shall not constitute Asset Sales: (a) transactions between the Company and any of its Wholly Owned Subsidiaries or among such Wholly Owned Subsidiaries; (b) any transaction not prohibited by the covenant described under "Limitations on Restricted Payments" or that constitutes a Permitted Investment; (c) any transfer of assets (including Capital Stock) that is governed by and in accordance with the Confidentiality Agreements, containsprovisions described under "Limitations on Mergers and Consolidations" or the entire agreementcreation of any Lien not prohibited by the covenant described under "Limitations on Liens"; or (d) sales of damaged, worn-out or obsolete equipment or assets that, in the Company's reasonable judgment, are no longer either used or useful in the business of the partiesCompany or its Subsidiaries. "Attributable Indebtedness" when used with respect to any Sale and supersedesLeaseback Transaction means, as at the time of determination, the present value (discounted at a rate equivalent to the interest rate implicit in the lease, compounded on a semiannual basis) of the total obligations of the lessee for rental payments, after excluding all amounts required to be paid on account of maintenance and repairs, insurance, taxes, utilities and other similar expenses payable by the lessee pursuant to the terms of the lease, during the remaining term of the lease included in any such Sale and Leaseback Transaction or until the earliest date on which the lessee may terminate such lease without penalty or upon payment of a penalty (in which case the rental payments shall include such penalty); provided, that the Attributable Indebtedness with respect to a Sale and Leaseback Transaction shall be no less than the fair market value of the property subject to such Sale and Leaseback Transaction. 41 "Bank Debt" means all obligations of the Company and its Subsidiaries, now or hereafter existing under (i) the Credit Agreements, whether for principal, interest, reimbursement of amounts drawn under letters of credit issued pursuant thereto, guarantees in respect thereof, fees, expenses, premiums, indemnities or otherwise, and (ii) any Indebtedness incurred by the Company to extend, refund or refinance, in whole or in part, the Bank Debt, including any interest and premium on any such Indebtedness. "Capital Stock" of any Person means any and all priorshares, rights to purchase, warrants or contemporaneous agreements betweenoptions (whether or not currently exercisable), participation or other equivalents of or interest in (however designated) the parties, writtenequity (including without limitation common stock, preferred stock and partnership, joint venture and limited liability company interests) of such Person (excluding any debt securities that are convertible into, 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 enforcementexchangeable for, such equity). "Capitalized Lease Obligations" of any waiver, change, modification, extension, dischargePerson means the obligation of such Person to pay rent or terminationother amounts under a lease that is sought. 10.15 Counterparts. This Planrequired to be capitalized for financial reporting purposes in accordance with GAAP, and the amount of Merger may be executed in several counterparts, each of which, when so executed,such obligation shall be deemedthe capitalized amount thereof determined in accordance with GAAP. "Change of Control" means the occurrence of any of the following: (i) all or substantially all of the Company's assets are sold as an entirety to be an original, and such counterparts shall, together, constitute and be one and the same instrument. 10.16 Binding Effect. This Planany person or related group of Mergerpersons; (ii) there shall be binding on, and shall inure to the benefitconsummated any consolidation or merger of the parties hereto, and their respective successors and assigns, and, except as providedCompany (A) in Sections 2, 7.16, 7.18 and 10.4, no other person shall acquirewhich the Company is not the continuing or have any right undersurviving corporation (other than a consolidation or by virtue of this Plan of Merger. No party may assign any right or obligation hereunder without the prior written consentmerger with a wholly owned subsidiary of the other parties. 10.17 No Rule of Construction. The parties acknowledge that this Plan of Merger was initially prepared by HEALTHSOUTH, and thatCompany in which 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. A-28 IN WITNESS WHEREOF, HEALTHSOUTH, the Subsidiary and NSC 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 asshares of the day and year first above written. NATIONAL SURGERY CENTERS, INC. By /s/ E. Timothy Geary -------------------------------------------- E. Timothy Geary Chairman of the Board, Chief Executive Officer and President ATTEST: /s/ Bryan S. Fisher - - ----------------------------- Bryan S. Fisher Secretary [CORPORATE SEAL] HEALTHSOUTH CORPORATION By /s/ Michael D. Martin --------------------------------------------- Michael D. Martin Executive Vice President, Chief Financial Officer and Treasurer ATTEST: /s/ William W. Horton - - ---------------------------- William W. Horton Assistant Secretary [CORPORATE SEAL] FIELD ACQUISITION CORPORATION By /s/ Michael D. Martin --------------------------------------------- Vice President ATTEST: /s/ William W. Horton - - ----------------------------- William W. Horton Assistant Secretary [CORPORATE SEAL] A-29 ANNEX B [BT Alex. Brown Logo] [BANKERS TRUST LOGO] June 17, 1998 Board of Directors National Surgery Centers, Inc. 30 South Wacker Drive Suite 2302 Chicago, IL 60606 Dear Sirs: National Surgery Centers, Inc. ("NSC"), HEALTHSOUTH Corporation ("HEALTHSOUTH") and Field Acquisition Corporation, a wholly-owned subsidiary of HEALTHSOUTH ("Subsidiary"), have entered into an Agreement and Plan of Merger dated as of May 5, 1998 (the "Agreement"). Pursuant to the Agreement, the consummation of which is subject to several conditions, including approval by the stockholders of NSC, Subsidiary shall be merged with and into NSC (the "Merger") and each share of the common stock, par value $.01 per share of NSC ("NSCCompany's Common Stock") issued andEquity outstanding immediately prior to the effective time ofeffectiveness thereof are changed into or exchanged for the Merger willsame consideration) or (B) pursuant to which the Company's Common Equity would be converted into the right to receive shares of common stock, par value $.01 per share, of HEALTHSOUTH ("HEALTHSOUTH Common Stock"). As set forth more fullycash, securities or other property, in the Agreement, each issued and outstanding share of NSC Common Stock shall be converted into the right to receive that number of shares of HEALTHSOUTH Common Stock obtained by dividing $30.50 by the Base Period Trading Price (as defined below), computed to four decimal places (the "Exchange Ratio"); provided, however, that if the Base Period Trading Price shall be greatercase other than $35.00, the Exchange Ratio shall be .8714; and provided, further, however, that if the Base Period Trading Price shall be less than $26.50, the Exchange Ratio shall be 1.1509. The term "Base Period Trading Price" shall mean the averagea consolidation or merger of the daily closing price per share for the shares of HEALTHSOUTH Common Stock for the 20 consecutive trading days onCompany in which such shares are actually traded ending at the close of trading on the second trading day immediately preceding the day of the NSC stockholders' meeting. You have requested our opinion regarding the fairness, from a financial point of view, of the consideration to be received by the holders of NSCthe Company's Common Stock pursuantEquity immediately prior to the Agreement. BT Alex. Brown Incorporated ("BT Alex. Brown"), asconsolidation or merger have, directly or indirectly, at least a customary partmajority of its investment banking business, is engagedthe total voting power of all classes of Capital Stock entitled to vote generally in the valuationelection of businesses anddirectors of the continuing or surviving corporation immediately after such consolidation or merger in substantially the same proportion as their securitiesownership of the Company's Common Equity immediately before such transaction; (iii) any person, or any persons acting together which would constitute a "group" for purposes of Section 13(d) of the Exchange Act, together with any affiliates thereof, shall beneficially own (as defined in connection with mergers and acquisitions, negotiated underwritings, private placements and valuations for estate, corporate and other purposes. We have acted as financial advisorRule 13d-3 under the Exchange Act) at least 50% of the total voting power of all classes of Capital Stock of the Company entitled to vote generally in the election of directors of the Company; (iv) at any time during any consecutive two-year period, individuals who at the beginning of such period constituted the Board of Directors of NSC in connectionthe Company (together with any new directors whose election by such Board of Directors or whose nomination for election by the transaction described above and will receive a fee for our services, a portion of which is contingent upon the consummationstockholders of the Merger. In the past, we have provided financing and advisory services to NSC and financing services to HEALTHSOUTH. BT Alex. Brown maintainsCompany was approved by a market in the NSC Common Stock and regularly publishes research reports regarding the health care industry and the businesses and securitiesvote of NSC, HEALTHSOUTH and other publicly traded companies in the health care industry. In the ordinary course of business, BT Alex. Brown may actively trade the securities of NSC and HEALTHSOUTH for our own account and the account of our customers and, accordingly, may at any time hold a long or short position in securities of NSC and HEALTHSOUTH. In connection with this opinion, we have reviewed certain publicly available financial information and other information concerning NSC and HEALTHSOUTH and certain internal analyses and other information furnished to us by NSC and HEALTHSOUTH. We have also held discussions with the B-1 members66-2/3% of the senior managementdirectors then still in office who were either directors at the beginning of NSC and HEALTHSOUTH regarding the business and prospects of their respective companies and the joint prospects ofsuch period or whose election or nomination for election was previously so approved) cease for any reason to constitute a combined company. In addition, we have (i) reviewed the reported prices and trading activity for the NSC Common Stock and the HEALTHSOUTH Common Stock, (ii) compared certain financial and stock market information for NSC and HEALTHSOUTH with similar information for certain other companies whose securities are publicly traded, (iii) reviewed the financial terms of certain recent business combinations which we deemed comparable in whole or in part, (iv) reviewed the terms of the Agreement, and (v) performed such other studies and analyses and considered such other factors as we deemed appropriate. We have not independently verified the information described above and for purposes of this opinion have assumed the accuracy and completeness thereof. With respect to the information relating to the prospects of NSC and HEALTHSOUTH, we have assumed that such information reflects the best currently available judgments and estimates of the management of NSC and HEALTHSOUTH as to the likely future financial performance of their respective companies and of the combined entity. In addition, we have not made an independent evaluation or appraisal of the assets of NSC or HEALTHSOUTH, nor have we been furnished with any such evaluation or appraisal. We have assumed that the Merger will qualify as a tax-free transaction for the holders of NSC Common Stock. Our opinion is based on market, economic and other conditions as they exist and can be evaluated as of the date of this letter. In connection with our engagement, we were not authorized to solicit, and did not solicit, interest from any party with respect to the acquisition of NSC or any of its assets. Our advisory services and the opinion expressed herein were prepared for the usemajority of the Board of Directors of NSCthe Company then in office; or (v) the Company is liquidated or dissolved or adopts a plan of liquidation or dissolution. "Common Equity" of any Person means 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 dopolicies of such Person. "Company" means HEALTHSOUTH Corporation, or, subject to the Indenture, its successors and assigns. 42 "Consolidated Amortization Expense" of any Person for any period means the amortization expense of such Person and its Subsidiaries for such period (to the extent included in the computation of Consolidated Net Income of such Person), determined on a consolidated basis in accordance with GAAP. "Consolidated Depreciation Expense" of any Person means the depreciation expense of such Person and its Subsidiaries for such period (to the extent included in the computation of Consolidated Net Income of such Person), determined on a consolidated basis in accordance with GAAP. "Consolidated EBITDA" of any Person means, with respect to any determination date, Consolidated Net Income, plus (i) Consolidated Income Tax Expense, plus (ii) Consolidated Depreciation Expense, plus (iii) Consolidated Amortization Expense, plus (iv) Consolidated Interest Expense, plus (v) all other unusual non-cash items or non-recurring non-cash items reducing Consolidated Net Income of such Person and its Subsidiaries, determined on a consolidated basis in accordance with GAAP, and less all non-cash items increasing Consolidated Net Income of such Person and its Subsidiaries, determined on a consolidated basis in accordance with GAAP, in each case, for such Person's prior four full fiscal quarters for which financial results have been reported immediately preceding the determination date. "Consolidated Income Tax Expense" means, for any Person for any period, the provision for taxes based on income and profits of such Person and its Subsidiaries to the extent such provision for income taxes was deducted in computing Consolidated Net Income of such Person for such period, determined on a consolidated basis in accordance with GAAP. "Consolidated Interest Expense" of any Person for any period means, without duplication, (i) the Interest Expense of such Person and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP, plus (ii) (to the extent not otherwise included within the definition of Interest Expense as imputed interest) one-third of the rental expense on Attributable Indebtedness of such Person for such period determined on a consolidated basis, plus (iii) the dividend requirements of such Person and its Subsidiaries with respect to Disqualified Stock and with respect to all other Preferred Stock of Subsidiaries of such Person (in each case whether in cash or otherwise (except dividends payable solely in shares of Capital Stock (other than Disqualified Stock) of such Person or such Subsidiary)) paid, accrued or accumulated during such period times a fraction the numerator of which is one and the denominator of which is one minus the then effective consolidated Federal, state and local tax rate of such Person, expressed as a decimal. "Consolidated Net Income" of any Person for any period means the net income (or loss) of such Person and its Subsidiaries for such period determined on a consolidated basis in accordance with GAAP; provided that there shall be excluded from such net income (to the extent otherwise included therein), without duplication: (i) the net income (or loss) of any Person (other than a Subsidiary of the referent Person) in which any Person other than the referent Person has an ownership interest, except to the extent that any such income has actually been received by the referent Person or any of its Wholly Owned Subsidiaries in the form of dividends or similar distributions during such period; (ii) except to the extent includible in the consolidated net income of the referent Person pursuant to the foregoing clause (i), the net income (or loss) of any Person that accrued prior to the date that (a) such Person becomes a Subsidiary of the referent Person or is merged into or consolidated with the referent Person or any of its Subsidiaries or (b) the assets of such Person are acquired by the referent Person or any of its Subsidiaries; (iii) the net income of any Subsidiary of the referent Person (other than a Wholly Owned Subsidiary) to the extent that the declaration or payment of dividends or similar distributions by such Subsidiary of that income is not permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary during such period; (iv) any gain (or loss), together with any related provisions for taxes on any such gain, realized during such period by the referent Person or any of its Subsidiaries upon (a) the acquisition of any securities, or the extinguishment of any Indebtedness, of the referent Person or any of its Subsidiaries or (b) any Asset Sale by the referent Person or any of its Subsidiaries; 43 (v) any extraordinary gain or extraordinary loss, together with any related provision for taxes or tax benefit resulting from any such extraordinary gain or extraordinary loss, realized by the referent Person or any of its Subsidiaries during such period; and (vi) in the case of a successor to such Person by consolidation, merger or transfer of its assets, any earnings of the successor prior to such merger, consolidation or transfer of assets. "Consolidated Net Worth" of any Person as of any date means the stockholders' equity (including any preferred stock that is classified as equity under GAAP, other than Disqualified Stock) of such Person and its Subsidiaries (excluding any equity adjustment for foreign currency translation for any period subsequent to the Issue Date) on a consolidated basis at such date, as determined in accordance with GAAP, less all write-ups subsequent to the Issue Date in the book value of any asset owned by such Person or any of its Subsidiaries. "Consolidated Tangible Assets" of any Person as of any date means the total assets of such Person and its Subsidiaries (excluding any assets that would be classified as "intangible assets" under GAAP) on a consolidated basis at such date, as determined in accordance with GAAP, less all write-ups subsequent to the Issue Date in the book value of any asset owned by such Person or any of its Subsidiaries. "Credit Agreements" means (i) the Credit Agreement dated as of June 23, 1998 by and among the Company, as borrower, Nationsbank, National Association, as Administrative Agent and Arranger, J.P. Morgan Securities Inc., Deutsche Bank AG and Scotiabanc, Inc., as Syndication Agents and Co-Arrangers, and the other lenders party thereto from time to time, together with the related documents thereto, including, without limitation, any security documents, if any, and all exhibits and schedules thereto and any agreement or agreements relating to any extension, refunding, refinancing, successor or replacement facility, whether or not with the same lender, and whether or not the principal amount or amount of letters of credit outstanding thereunder or the interest rate payable in respect thereof shall be thereby increased, in each case as amended and in effect from time to time and (ii) the New Credit Agreement. "Default" means any event, act or condition that is, or after notice or the passage of time or both would be, an Event of Default. "Designated Senior Indebtedness" means (i) the Bank Debt, without regard to the amounts outstanding thereunder, and (ii) any Senior Indebtedness which, at the time of determination, has an aggregate principal amount outstanding of at least $20,000,000 and is specifically designated in the instrument evidencing such Senior Indebtedness as "Designated Senior Indebtedness" by the Company. "Disqualified Stock" means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the option of the holder thereof, in whole or in part, on or prior to the Stated Maturity date of the Notes. "EBITDA Coverage Ratio" with respect to any period means the ratio of (i) Consolidated EBITDA of the Company to (ii) the aggregate amount of Consolidated Interest Expense of the Company for such period; provided, however, that if any calculation of the Company's EBITDA Coverage Ratio requires the use of any quarter prior to the Issue Date, such calculation shall be made on a pro forma basis, giving effect to the issuance of the Private Notes and the use of the net proceeds therefrom as if the same had occurred at the beginning of the four-quarter period used to make such calculation; and provided further that if any such calculation requires the use of any quarter prior to the date that any Asset Sale was consummated, or that any Indebtedness was incurred, or that any acquisition of a hospital or other healthcare facility or any assets purchased outside the ordinary course of business was effected, by the Company or any of its Subsidiaries, such calculation shall be made on a pro forma basis, giving effect to each such Asset Sale, incurrence of Indebtedness or acquisition, as the case may be, and the use of any proceeds therefrom, as if the same had occurred at the beginning of the four-quarter period used to make such calculation. "Eligible Investments" of any Person means Investments of such Person in: (i) direct obligations of, or obligations the payment of which is guaranteed by, the United States of America or an interest in any trust or fund that invests solely in such obligations or repurchase agreements, properly secured, with respect to such obligations; 44 (ii) direct obligations of agencies or instrumentalities of the United States of America having a rating of A or higher by Standard & Poor's Corporation or A2 or higher by Moody's Investors Service, Inc.; (iii) a certificate of deposit issued by, or other interest-bearing deposits with, a bank having its principal place of business in the United States of America and having equity capital of not less than $250,000,000; (iv) a certificate of deposit by, or other interest-bearing deposits with, any other bank organized under the laws of the United States of America or any state thereof, provided that such deposit is either (a) insured by the Federal Deposit Insurance Corporation or (b) properly secured by such bank by pledging direct obligations of the United States of America having a market value of not less than the face amount of such deposits; (v) prime commercial paper maturing within 270 days of the acquisition thereof and, at the time of acquisition, having a rating of A-1 or higher by Standard & Poor's Corporation, or P-1 or higher by Moody's Investors Service, Inc.; or (vi) eligible banker's acceptances, repurchase agreements and tax-exempt municipal bonds having a maturity of less than one year, in each case having a rating, or that is the full recourse obligation of a person whose senior debt is rated A or higher by Standard & Poor's Corporation or A2 or higher by Moody's Investors Service, Inc. "Equity Offering" means a primary offering of Capital Stock of the Company (other than Disqualified Stock or Preferred Stock) pursuant to a registration statement filed with the SEC in accordance with the Securities Act and declared effective by the staff of the SEC. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Existing Indebtedness" means all of the Indebtedness of the Company and its Subsidiaries that is outstanding on the Issue Date. "Fair Market Value" of any asset or items means the fair market value of such asset or items as determined in good faith by the Board of Directors and evidenced by a resolution of the Board of Directors. "GAAP" means 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. "Hedging Obligations" of any Person means the obligations of such Person pursuant to any interest rate swap agreement, foreign currency exchange agreement, interest rate collar agreement, option or futures contract or other similar agreement or arrangement relating to interest rates or foreign exchange rates. "Indebtedness" of any Person at any date means, without duplication: (i) all indebtedness of such Person for borrowed money (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof); (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; (iii) all obligations of such Person in respect of letters of credit or other similar instruments (or reimbursement obligations with respect thereto); (iv) all obligations of such Person with respect to Hedging Obligations (other than those that fix the interest rate on variable rate indebtedness otherwise permitted by the Indenture or that protect the Company and/or its Subsidiaries against changes in foreign exchange rates); (v) all obligations of such Person to pay the deferred and unpaid purchase price of property or services, except trade payables and accrued expenses incurred in the ordinary course of business; 45 (vi) all Capitalized Lease Obligations of such Person; (vii) all Indebtedness of others secured by a Lien on any asset of such Person, whether or not such Indebtedness is assumed by such Person; (viii) all Indebtedness of others guaranteed by such Person to the extent of such guarantee; (ix) all Attributable Indebtedness; and (x) all Disqualified Stock of such Person and its Subsidiaries and all other Preferred Stock of Subsidiaries of such Person valued at the greater of (a) the voluntary or involuntary liquidation preference of such Disqualified Stock or such Preferred Stock, as the case may be, and (b) the aggregate amount payable upon purchase, redemption, defeasance or payment of such Disqualified Stock or such Preferred Stock, as the case may be. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations plus past due interest as described above, the maximum liability of such Person for any such contingent obligations at such date and, in the case of clause (vii), the amount of the Indebtedness secured. "Interest Expense" of any Person for any period means the aggregate amount of interest which, in accordance with GAAP, would be set opposite the caption "interest expense" or any like caption on an income statement for such Person (including, without limitation or duplication, imputed interest included in Capitalized Lease Obligations, all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, the net costs associated with Hedging Obligations, amortization of financing fees and expenses, the interest portion of any deferred payment obligation, amortization of discount and all other non-cash interest expense other than interest amortized to cost of sales) plus the aggregate amount, if any, by which such interest expense was reduced as a result of the amortization of deferred debt restructuring credits for such period. "Investments" of any Person means: (i) all investments by such Person in any other Person in the form of loans, advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business); (ii) all guarantees of Indebtedness or other obligations of any other Person by such Person; (iii) all purchases (or other acquisitions for consideration) by such Person of Indebtedness, Capital Stock or other securities of any other Person; and (iv) all other items that would be classified as investments (including, without limitation, purchases of assets outside the ordinary course of business) on a balance sheet of such Person prepared in accordance with GAAP. "Issue Date" means September 25, 2000, the date the Private Notes were initially issued. "Joint Venture" means any Person at least a majority of whose revenues result from healthcare related businesses or facilities. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or other similar encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including, without limitation, any conditional sale or other title retention agreement, and any financing lease in the nature thereof, any agreement to sell, and any filing of, or agreement to give, any financing statement (other than notice filings not perfecting a security interest) under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "Net Proceeds" with respect to any Asset Sale means (i) cash (in U.S. dollars or freely convertible into U.S. dollars) received by the Company or any of its Subsidiaries from such Asset Sale (including, without limitation, cash received as consideration for the assumption or incurrence of liabilities incurred in connection with or in anticipation of such Asset Sale), after (a) provision for all income or other taxes measured by or 46 resulting from such Asset Sale or the transfer of the proceeds of such Asset Sale to the Company or any of its Subsidiaries, (b) payment of all commissions and other fees and expenses related to such Asset Sale and (c) deduction of an appropriate amount to be provided by the Company or any of its Subsidiaries as a reserve, in accordance with GAAP, against any liabilities associated with the assets sold or otherwise disposed of in such Asset Sale and retained by the Company or any of its Subsidiaries after such Asset Sale (including, without limitation, pension and other post-employment benefit liabilities and liabilities related to environmental matters) or against any indemnification obligations associated with the sale or other disposition of the assets sold or otherwise disposed of in such Asset Sale and (ii) all non-cash consideration received by the Company or any of its Subsidiaries from such Asset Sales upon the liquidation or conversion of such consideration into cash. "New Credit Agreement" means the $400,000,000 senior credit facility recently entered into by the Company, together with the related documents thereto, including, without limitation, any security documents, if any, and all exhibits and schedules thereto and any agreement or agreements relating to any extension, refunding, refinancing, successor or replacement facility, whether or not with the same lender, and whether or not the principal amount or amount of letters of credit outstanding thereunder or the interest rate payable in respect thereof shall be thereby increased, in each case as amended and in effect from time to time. "Officers' Certificate" means a certificate signed by the Chairman of the Board, any Vice Chairman of the Board, the Chief Executive Officer, the President or any Vice President and by the Treasurer, any Assistant Treasurer, the Secretary or any Assistant Secretary of the Company in their official (and not individual) capacities; provided, however, that every Officers' Certificate with respect to the compliance with a condition precedent to the taking of any action under the Indenture shall include (i) a statement that the officers making or giving such Officers' Certificate have read such condition and any definitions or other provisions contained in the Indenture relating thereto and (ii) a statement as to whether, in the opinion of the signers, such condition has been complied with. "Opinion of Counsel" means a written opinion from legal counsel (such counsel may be an employee of or counsel to the Company or the Trustee) that complies with the requirements of the Indenture. "Permitted Investments" means: (i) capital contributions, advances or loans to the Company by any Subsidiary or by the Company or any of its Subsidiaries to a Subsidiary of the Company; (ii) the acquisition and holding by the Company and each of its Subsidiaries of receivables owing to the Company and such Subsidiary, if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; (iii) the acquisition and holding by the Company and its Subsidiaries of cash and Eligible Investments; (iv) Investments in any Person as a result of which such other Person becomes a Subsidiary of the Company or is merged into or consolidated with or transfers all or substantially an of its assets to the Company or any of its Subsidiaries; and (v) the making of an Investment by the Company, directly or through a Wholly Owned Subsidiary, in a Wholly Owned Subsidiary formed solely for the purpose of insuring the healthcare business and facilities owned or operated by the Company or a Subsidiary and any physician employed by or on the staff of any such business or facility (the "Insurance Subsidiary"), provided that the amount invested in such Insurance Subsidiary does not exceed $15,000,000. "Permitted Liens" means: (i) Liens for taxes, assessments or governmental charges or claims that either (a) are not yet delinquent or (b) are being contested in good faith by appropriate proceedings; (ii) statutory Liens of landlords and carriers', warehousemen's, mechanics', suppliers', materialmen's, repairmen's or other like Liens arising in the ordinary course of business and with respect to amounts that either (a) are not yet delinquent or (b) are being contested in good faith by appropriate proceedings and as to which appropriate reserves or other provisions have been made in accordance with GAAP; 47 (iii) Liens (other than any Lien imposed by the Employee Retirement Income Security Act of 1974, as amended) incurred or deposits due in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security; (iv) Liens incurred or deposits made to secure the performance of tenders, bids, leases, statutory obligations, surety and appeal bonds, progress payments, government contracts and other obligations of like nature (exclusive of obligations for the payment of borrowed money), in each case, incurred in the ordinary course of business; (v) attachment or judgment Liens not giving rise to a Default or an Event of Default; (vi) easements, rights-of-way, restrictions and other similar charges or encumbrances not interfering with the ordinary conduct of the business of the Company or any of its Subsidiaries; (vii) leases or subleases granted to others not interfering with the ordinary conduct of the business of the Company or any of its Subsidiaries; (viii) Liens with respect to any Acquired Indebtedness; provided that such Liens only extend to assets that were subject to such Liens prior to the acquisition of such assets by the Company or its Subsidiaries and, with respect to Indebtedness other than Senior Indebtedness, not incurred in anticipation or contemplation of such acquisition; (ix) Liens securing Senior Indebtedness or Refinancing Indebtedness; provided, in the case of Refinancing Indebtedness, that such Liens only extend to the assets securing the Indebtedness being refinanced and such refinanced Indebtedness was previously secured by such assets; (x) purchase money mortgages (including Capitalized Lease Obligations); (xi) Liens existing on the Issue Date; (xii) Liens on assets of any Subsidiary of the Company securing Indebtedness of such Subsidiary, provided that such Indebtedness is permitted to be incurred by the terms of the Indenture; (xiii) bankers' liens with respect to the right of set-off arising in the ordinary course of business against amounts maintained in bank accounts or certificates of deposit in the name of the Company or any Subsidiary; (xiv) the interest of any issuer of a letter of credit in any cash or Eligible Investment deposited with or for the benefit of such issuer as collateral for such letter of credit; provided that the Indebtedness so collateralized is permitted to be incurred by the terms of the Indenture; (xv) any Lien consisting of a right of first refusal or option to purchase the Company's ownership interest in any Subsidiary or to purchase assets of the Company or any Subsidiary of the Company, which right of first refusal or option is entered into in the ordinary course of business; and (xvi) the Lien granted to the Trustee pursuant to the trust created pursuant to "-Satisfaction and Discharge of Indenture; Defeasance" above and any substantially equivalent Lien granted to the respective trustees under the indentures for other debt securities of the Company. "Person" means any individual, corporation, partnership, joint venture, incorporated or incorporated association, joint-stock company, trust, unincorporated organization or government or other agency or political subdivision thereof or other entity of any kind. "Preferred Stock" means with respect to any Person all Capital Stock of such Person which has a preference in liquidation or a preference with respect to the payment of dividends or distributions of rating profit or cash. "Refinancing Indebtedness" means Indebtedness that is applied to refund, refinance or extend any Existing Indebtedness (other than Indebtedness under the New Credit Agreement), provided that: 48 (i) the Refinancing Indebtedness is the obligation of the same Person (or if the Indebtedness being refinanced is an obligation of one or more Subsidiaries of the Company, such Refinancing Indebtedness may be incurred by the Company or one or more other Subsidiaries of the Company) and is subordinated to the Notes, if at all, to the same extent as the Indebtedness being refunded, refinanced or extended; (ii) the Refinancing Indebtedness is scheduled to mature no earlier than the Indebtedness being refunded, refinanced or extended; (iii) the Refinancing Indebtedness has a Weighted Average Life to Maturity at the time such Refinancing Indebtedness is incurred that is equal to or greater than the Weighted Average Life to Maturity of the portion of the Indebtedness being refunded, refinanced or extended; (iv) the Refinancing Indebtedness is secured only to the extent, if at all, and by the assets that the Indebtedness being refunded, refinanced or extended is secured; and (v) such Refinancing Indebtedness is in an aggregate principal amount that is equal to or less than the aggregate principal amount then outstanding under the Indebtedness being refunded, refinanced or extended (except for issuance costs and increases in Attributable Indebtedness due solely to increases in the present value calculations resulting from renewals or extensions of the terms of the underlying leases in effect on the Issue Date). "Restricted Payment" means with respect to any Person: (i) the declaration of any dividend or the making of any other payment or distribution of cash, securities or other property or assets in respect of such Person's Capital Stock (except that a dividend payable solely in Capital Stock (other than Disqualified Stock) of such Person shall not constitute a recommendationRestricted Payment); (ii) any payment on account of the purchase, redemption, retirement or other acquisition for value of such Person's or such Person's Subsidiaries' Capital Stock or any other payment or distribution made in respect thereof, either directly or indirectly; (iii) any payment on account of the purchase, redemption, retirement, defeasance or other acquisition for value, prior to any scheduled principal payment, sinking fund payment or Stated Maturity, of Subordinated Indebtedness of the Company or its Subsidiaries; (iv) the incurrence, creation or assumption of any guarantee of Indebtedness of any Affiliate (other than a Subsidiary of the Company); or (v) the making of any Investment in any Person (other than Permitted Investments); provided, however, that with respect to the stockholdersCompany and its Subsidiaries, Restricted Payments shall not include any payment described in clause (i), (ii) or (iii) above made (1) to the Company or any of NSCits Wholly Owned Subsidiaries by any of the Company's Subsidiaries or (2) by the Company to any of its Wholly Owned Subsidiaries or (3) by any Subsidiary, provided that the Company or another Subsidiary receives its proportionate share thereof. "Sale and Leaseback Transaction" means, with respect to any Person, an arrangement with any bank, insurance company or other lender or investor or to which such lender or investor is a party, providing for the leasing by such Person or any of its Subsidiaries of any property or asset of such person or any of its Subsidiaries which has been or is being sold or transferred by such Person or such Subsidiary to such lender or investor or to any Person to whom funds have been or are to be advanced by such lender or investor on the security of such property or asset. "SEC" means the Securities and Exchange Commission, as from time to how they should votetime constituted, created under the Exchange Act, or if at any stockholders' meetingtime after the execution of the Indenture such SEC is not existing and performing the duties now assigned to it under the Trust Indenture Act, the body performing such duties at the time. 49 "Secretary's Certificate" means a certificate signed by the Secretary or any Assistant Secretary of the Company in his or her official (and not individual) capacity. "Securities Act" means the Securities Act of 1933, as amended. "Senior Indebtedness" means the principal of and premium, if any, and interest on and other amounts due on or in connection with any Indebtedness of the Company existing on the Issue Date or any Indebtedness of the Company thereafter created, incurred or assumed and permitted under the "Limitations on Additional Indebtedness and Subsidiary Preferred Stock" covenant, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such Indebtedness shall not be senior in right of payment to the Notes. "Senior Subordinated Indebtedness" means the Notes and any other indebtedness, guarantee or obligation of the Company that (in the case of such other Indebtedness) specifically provides that such indebtedness, guarantee or obligation is to rank pari passu with other Senior Subordinated Indebtedness of the Company and is not subordinated by its terms to any indebtedness, guarantee or obligation of the Company which is not Senior Indebtedness. "Significant Subsidiary" means a Subsidiary of the Company which at the time of determination either (i) had tangible assets which, as of the Company's most recent quarterly consolidated balance sheet, constituted at least 5% of Consolidated Tangible Assets as of such date, or (ii) had revenues for the 12-month period ending on the date of the Company's most recent quarterly consolidated statement of income which constituted at least 5% of the Company's total consolidated revenues for such period. "Stated Maturity" when used with respect to any security or any installment of interest thereon, means that date specified in such security as the fixed date on which the principal of such security or such installment of interest is due and payable. "Subordinated Indebtedness" of any Person means any Indebtedness of such Person that is subordinated in right of payment to the Notes. "Subsidiary" of any Person means (i) any corporation of which Common Equity having ordinary voting power to elect a majority of the directors of such corporation is owned by such Person directly or through one or more other 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. "Weighted Average Life to Maturity" means, when applied to any Indebtedness or portion thereof at any date, the number of years obtained by dividing (i) the then outstanding principal amount of such Indebtedness or portion thereof (if applicable) into (ii) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payment of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment. "Wholly Owned Subsidiary" of any person means (i) a Subsidiary of which 100% of the Common Equity (except for director's qualifying shares or certain minority interests owned by other Persons solely due to local law requirements that there be more than one stockholder, but which interest is not in excess of what is required for such purpose) is owned directly by such Person or through one or more other Wholly Owned Subsidiaries of such Person and (ii) any entity other than a corporation in which such Person, directly or indirectly, owns all of the Common Equity of such entity. 50 MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE The following is a general discussion of certain United States federal income tax considerations to holders of the Exchange 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 Exchange 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 holders (such as certain financial institutions, insurance companies, tax-exempt entities, dealers in securities or persons who hold the Exchange Notes in connection with a straddle, hedge, conversion transaction or any similar or hybrid financial instrument) that may be subject to special rules. This discussion assumes that each holder holds the Exchange Notes as a capital asset within the meaning of section 1221 of the Code. 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 resident of the United States, a corporation or partnership (including any entity taxed as a partnership for United States federal income tax purposes) 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 administration of the trust and (ii) one or more United States persons have the authority to control all substantial decisions of the trust. HOLDERS OF THE EXCHANGE 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 EXCHANGE NOTES AND THE EFFECT THAT THEIR PARTICULAR CIRCUMSTANCES MAY HAVE ON SUCH TAX CONSEQUENCES. EXCHANGE OF PRIVATE NOTES FOR EXCHANGE NOTES The terms of the Exchange Notes are identical to those of the Private Notes, except that the Exchange Notes are registered under applicable federal securities laws. Under applicable Treasury Regulations, the exchange of Private Notes for Exchange Notes pursuant to the exchange offer should not be treated as an "exchange" for federal income tax purposes and holders of the Private Notes should not recognize any gain or loss on such exchange. If, however, the exchange of Private Notes for Exchange 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 Private Notes should not recognize any gain or loss on such exchange. The term "Exchange Notes" utilized in the following sections means, in certain contexts, the Private Notes and Exchange Notes considered as one and the same evidences of indebtedness in applying the federal income tax rule in question. TAX CONSIDERATIONS APPLICABLE TO UNITED STATES PERSONS Interest on Exchange Notes. Interest paid on the Exchange Notes will be taxable to a holder as ordinary interest income at the time that such interest is accrued or received (actually or constructively) in accordance with the holder's method of tax accounting and in the amount of each payment. Sale or Exchange of Exchange Notes. In general, a holder of the Exchange Notes will recognize gain or loss upon the sale, redemption, retirement or other disposition of the Exchange Notes measured by the difference between the amount of cash and the fair market value of any property received (except to the extent attributable to the payment of accrued interest which will be taxable as such) and the holder's adjusted tax basis in the Exchange Notes. A holder's tax basis in the Exchange Notes generally will equal the cost of the Private Notes to the holder increased by the amount of market discount, if any, previously 51 taken into income by the holder or decreased by any bond premium theretofore amortized by the holder with respect to the Exchange Notes. Subject to the market discount rules discussed below, the gain or loss on the disposition of the Exchange Notes will be capital gain or loss and will be long-term gain or loss if the Exchange Notes have been held for more than one year at the time of such disposition. Market Discount. The resale of the Exchange Notes may be affected by the "market discount" provisions of the Code. For this purpose, the market discount on an Exchange Note will generally be equal to the amount, if any, by which the stated redemption price at maturity of the Exchange Notes immediately after its acquisition exceeds the holder's tax basis in the Exchange Notes. Subject to a de minimis exception, these provisions generally require a holder of an Exchange Note acquired at a market discount to treat as ordinary income any gain recognized on the disposition of such Exchange Notes to the extent of the "accrued market discount" on such Exchange Notes at the time of disposition. In general, market discount on an Exchange Note will be treated as accruing on a straight-line basis over the term of such Exchange 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. In the absence of such election, a holder of Exchange Notes acquired at a market discount may be required to defer the deduction of a portion of the interest on any indebtedness incurred or maintained to acquire or carry the Exchange Notes until the Exchange Notes are disposed of in a taxable transaction. TAX CONSIDERATIONS APPLICABLE TO NON-U.S. HOLDERS Interest on Exchange Notes. Generally, interest paid on the Exchange Notes to a Non-U.S. Holder will not be subject to United States federal income tax if: (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 Company entitled to vote and is not a controlled foreign corporation with respect to which the Company 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. Under United States Treasury Department regulations generally effective for payments made after December 31, 2000, subject to certain transition rules, the certification described in clause (iii) above also may be provided by a qualified intermediary on behalf of one or more beneficial owners (or other intermediaries), provided that such intermediary has entered into a withholding agreement with the IRS and certain other conditions are met. 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 United States federal income tax on net income that applies to United States persons generally. Corporate Non-U.S. Holders that receive interest income that is effectively connected with the conduct of a trade or business within the United States may also be subject to an additional "branch profits" tax on such income. Non-U.S. Holders should consult applicable income tax treaties, which may provide different rules. Sale or Exchange of Exchange 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 Exchange Notes unless (i) the gain is effectively connected with the conduct of a trade or business within the United States by the Non-U.S. Holder, or (ii) in the case of a Non-U.S. Holder who is a nonresident alien individual and holds the Exchange 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; or (iii) the Non-U.S. Holder is subject to tax pursuant to the provisions of United States federal income tax law applicable to certain United States expatriates. 52 Federal Estate Tax. An Exchange Note beneficially owned by an individual who is a Non-U.S. Holder at the time of his or her death generally will not be subject to United States federal estate tax as a result of such individual's death, provided that (i) such individual does not actually or constructively own 10% or more of the total combined voting power of all classes of stock of the Company entitled to vote within the meaning of section 871(h)(3) of the Code and (ii) interest payments with respect to such Exchange Note would not have been, if received at the time of such individual's death, effectively connected with the conduct of a United States trade or business by such individual. INFORMATION REPORTING AND BACKUP WITHHOLDING United States Persons. Information reporting and backup withholding may apply to payments of interest on or the proceeds of the sale or other disposition of the Exchange Notes with respect to certain non-corporate United States persons. Such United States persons 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 United States person's federal income tax liability, upon furnishing the required information to the IRS. 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 Company 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 Non-U.S. 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 Exchange Notes") or that perfect their eligibility for the benefits of a tax treaty that reduces or eliminates such withholding. The payment of the proceeds on the disposition of Exchange 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 Exchange Notes to or through a foreign office of a broker will not be subject to backup withholding. However, if such broker is a United States 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 or, with respect to payments made after December 31, 2000, a foreign partnership in which United States persons hold more than 50% of the income or capital interests or which is engaged in a United States trade or business at any time during its tax year, information reporting will apply unless such broker has documentary evidence of the owner's foreign status as a Non-U.S. Holder 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 the disposition if the broker has actual knowledge that the payee is a United States person. United States Treasury Department regulations generally effective for payments made after December 31, 2000, subject to certain transition rules, alter the foregoing rules in certain respects. Among other things, such regulations provide presumptions under which a Non-U.S. Holder is subject to information reporting and backup withholding at the rate of 31% unless the Company receives certification from the holder of its status as a Non-U.S. Holder. Depending on the circumstances, this certificate will need to be provided (i) directly by the Non-U.S. Holder; (ii) in the case of a Non-U.S. Holder that is treated as a partnership or other fiscally transparent entity, by the partners, shareholders or other beneficiaries of such entity; or (iii) by certain qualified financial institutions or other qualified entities on behalf of the Non-U.S. Holder. 53 PLAN OF DISTRIBUTION Each broker-dealer that receives Exchange Notes for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of the Exchange Notes. Broker-dealers may use this prospectus, as it may be amended or supplemented from time to time, in connection with the Merger. Boardresale of Directors Based upon and subjectExchange Notes received in exchange for Private Notes where the broker-dealer acquired the Private Notes as a result of market-making activities or other trading activities. We have agreed that for a period of up to the foregoing, it is our opinion that, as of180 days after the date on which the registration statement is declared effective (subject to extension under certain circumstances), we will make this prospectus, as amended or supplemented, available to any broker-dealer that requests it in the letter of this letter, the consideration to betransmittal for use in connection with any such resale. We will not receive any proceeds from any sale of Exchange Notes by broker-dealers or any other persons. Broker-dealers may sell Exchange Notes received by the holders of NSC Common Stockbroker-dealers for their own account pursuant to the Agreementexchange offer from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the Exchange Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to the prevailing market prices or negotiated prices. Broker-dealers may resell Exchange Notes directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any broker-dealer and/or the purchasers of the Exchange Notes. Any broker-dealer that resells Exchange 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 the Exchange Notes may be deemed to be "underwriters" within the meaning of the Securities Act, and any profit on any resale of Exchange Notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The letter of transmittal 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 fairan "underwriter" within the meaning of the Securities Act. We have agreed to pay all expenses incident to our performance of, or compliance with, the registration rights agreement and will indemnify you against liabilities under the Securities Act. By its acceptance of the exchange offer, any broker-dealer that receives Exchange Notes pursuant to the exchange offer agrees to notify us before using the prospectus in connection with the sale or transfer of Exchange Notes. The broker-dealer further acknowledges and agrees that, upon receipt of notice from us of the happening of any event which makes any statement in the prospectus untrue in any material respect or which requests the making of any changes in the prospectus to make the statements in the prospectus not misleading or which may impose upon us disclosure obligations that may have a material adverse effect on us, which notice we agree to deliver promptly to the broker-dealer, the broker-dealer will suspend use of the prospectus until we have notified the broker-dealer that delivery of the prospectus may resume and have furnished copies of any amendment or supplement to the prospectus to the broker-dealer. EXPERTS Ernst & Young LLP, independent auditors, have audited our consolidated financial pointstatements and schedule included in our Annual Report on Form 10-K for the year ended December 31, 1999, as set forth in their report, which is incorporated by reference in this prospectus and elsewhere in the registration statement. Our financial statements and schedule are incorporated by reference in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing. LEGAL MATTERS The validity of viewthe Exchange Notes to such stockholders. Very truly yours, BT Alex. Brown Incorporated /s/ Harris Hyman IV ---------------------------------------- Harris Hyman IV Managing Director B-2be issued pursuant to the exchange offer will be passed upon by Haskell Slaughter & Young, L.L.C., Birmingham, Alabama. 54 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.ITEM 21. EXHIBITS.
EXHIBIT NO. DESCRIPTION - -------- --------------------------------------------------------------------------------------- (1) -- Purchase Agreement, dated September 20, 2000, among HEALTHSOUTH Corporation and UBS Warburg LLC, Deutsche Bank Securities Inc., Chase Securities Inc. and First Union Securities, Inc., relating to the Company's 10-3/4%senior subordinated notes due 2008. (3)-1 -- Restated Certificate of Incorporation of HEALTHSOUTH Corporation, filed as Exhibit (3)-1 to the Company's Current Report on Form 8-K, dated May 28, 1998, is hereby incorporated by reference. (3)-2 -- By-laws of HEALTHSOUTH Corporation, filed as Exhibit (3)-2 to the Company's Current Report on Form 8-K, dated May 28, 1998, are hereby incorporated by reference. (4)-1 -- Indenture, dated September 25, 2000, between HEALTHSOUTH Corporation and The Bank of New York, as Trustee.
II-1 ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. Exhibits: EXHIBIT NO. DESCRIPTION --- ----------- (2) Plan and Agreement of Merger, dated May 5, 1998, among HEALTHSOUTH Corporation, Field Acquisition Corporation and National Surgery Centers, Inc. attached to the Prospectus- Proxy Statement as a part of Annex A, is hereby incorporated herein by reference. (5) Opinion of Haskell Slaughter & Young, L.L.C. as to the legality of the shares of HEALTHSOUTH Common Stock being registered. (8)-1 Opinion of Haskell Slaughter & Young, L.L.C. as to the description in the Prospectus-Proxy Statement of certain federal income tax consequences of the Merger. (8)-2 Opinion of Bell, Boyd & Lloyd as to the description in the Prospectus-Proxy Statement of certain federal income tax consequences of the Merger. (23)-1 Consent of Ernst & Young LLP. (23)-2 Consent of Ernst & Young 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 Bell, Boyd & Lloyd (included in the opinion filed as Exhibit (8)-2). (23)-5 Consent of BT Alex. Brown Incorporated. (24) Powers of Attorney (See the signature pages to this Registration Statement). (99) NSC Proxy. (4)-2 -- Registration Rights Agreement, dated September 25, 2000, among HEALTHSOUTH Corporation and UBS Warburg LLC, Deutsche Bank Securities Inc., Chase Securities Inc. and First Union Securities, Inc., relating to the Company's 10-3/4% senior subordinated notes due 2008. (5) -- Opinion of Haskell Slaughter & Young, L.L.C., regarding legality of the Exchange Notes. (12) -- Statement of Computation of Ratio of Earnings to Fixed Charges. (23)-1 -- Consent of Ernst & Young LLP. (23)-2 -- Consent of Haskell Slaughter & Young, L.L.C. (included in the opinion filed as Exhibit (5)). (24) -- Powers of Attorney. See signature pages of this registration statement. (25) -- Statement of Eligibility under the Trust Indenture Act of 1939 of a Corporation Designated to Act as Trustee on Form T-1, relating to The Bank of New York. (99)-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. (99)-6 -- Form of Exchange Agent Agreement. (99)-7 -- Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9.
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 sectionSection 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 sectionSection 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. (b) The undersigned Registrantregistrant hereby undertakes as follows:to respond to requests for information that prioris incorporated by reference into the prospectus pursuant to any public reofferingItem 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 securities registered hereunderregistration statement through usethe date of responding to the request. The undersigned registrant hereby undertakes to supply by means of a prospectuspost-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 is part ofoffers or sales are being made, a post-effective amendment to this registration statement,statement: (i) To include any prospectus required 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. (c) 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 Securities Act and is usedof 1933; (ii) To reflect in connection with an offeringthe prospectus any facts or events arising after the effective date of securities subject to Rule 415, will be filed as a part of an amendment to the registration 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 II-2 statement. Notwithstanding the 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 willany deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering prices set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not be used untilpreviously disclosed in the registration statement or any material change to such amendment is effective, and that,information in the registration statement. (2) That, for purposesthe 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. (d)(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. 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 II-2 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 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. (e) 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. (f) 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-3 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 June 17, 1998.November 9, 2000. HEALTHSOUTH CORPORATION By /s/ RICHARDRichard M. SCRUSHY ------------------------------------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 Michael D. Martin,William T. Owens, 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 TITLE DATE --------- ----- ----- --------------------------------- ------------------------------- ----------------- /s/ RICHARDRichard M. SCRUSHYScrushy Chairman of the Board June 17, 1998November 9, 2000 ----------------------------- and Chief Executive Officer Richard M. Scrushy and Director /s/ MICHAEL D. MARTINWilliam T. Owens Executive Vice President June 17, 1998November 9, 2000 ----------------------------- and Chief Financial Officer Michael D. Martin Treasurer and DirectorWilliam T. Owens /s/ WILLIAM T. OWENS GroupWeston L. Smith Senior Vice President-Finance June 17, 1998November 9, 2000 ----------------------------- and Controller Weston L. Smith (Principal William T. Owens Accounting Officer) /s/ JAMES P. BENNETPhillip C. Watkins Director June 17, 1998 ----------------------------- James P. Bennett /s/ ANTHONY J. TANNER Director June 17, 1998 ----------------------------- Anthony J. Tanner /s/ P. DARYL BROWN Director June 17, 1998 ----------------------------- P. Daryl Brown /s/ PHILLIP C. WATKINS, M.D. Director June 17, 1998November 9, 2000 ----------------------------- Phillip C. Watkins M.D./s/ George H. Strong Director November 9, 2000 ----------------------------- George H. Strong /s/ C. Sage Givens Director November 9, 2000 ----------------------------- C. Sage Givens /s/ Charles W. Newhall III Director November 9, 2000 ----------------------------- Charles W. Newhall III /s/ John S. Chamberlin Director November 9, 2000 ----------------------------- John S. Chamberlin
II-4
SIGNATURE TITLE DATE --------- ----- ----- --------------------------------- ---------- ----------------- /s/ GEORGE H. STRONGJoel C. Gordon Director June 17, 1998 ----------------------------- George H. Strong /s/ C. SAGE GIVENS Director June 17, 1998 ----------------------------- C. Sage Givens /s/ CHARLES W. NEWHALL III Director June 17, 1998 ----------------------------- Charles W. Newhall III /s/ JOHN S. CHAMBERLIN Director June 17, 1998 ----------------------------- John S. Chamberlin /s/ JOEL C. GORDON Director June 17, 1998November 9, 2000 ----------------------------- Joel C. Gordon /s/ EDWIN M. CRAWFORDJan L. Jones Director June 17, 1998November 9, 2000 ----------------------------- Edwin M. CrawfordJan L. Jones /s/ Larry D. Striplin, Jr. Director November 9, 2000 ----------------------------- Larry D. Striplin, Jr.
II-5 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION --- ----------- (2) Plan and Agreement of Merger, dated May 5, 1998, among HEALTHSOUTH Corporation, Field Acquisition Corporation and National Surgery Centers, Inc. attached to the Prospectus- Proxy Statement as a part of Annex A, is hereby incorporated herein by reference. (5) Opinion of Haskell Slaughter & Young, L.L.C. as to the legality of the shares of HEALTHSOUTH Common Stock being registered. (8)-1 Opinion of Haskell Slaughter & Young, L.L.C. as to the description in the Prospectus-Proxy Statement of certain federal income tax consequences of the Merger. (8)-2 Opinion of Bell, Boyd & Lloyd as to the description in the Prospectus-Proxy Statement of certain federal income tax consequences of the Merger. (23)-1 Consent of Ernst & Young LLP. (23)-2 Consent of Ernst & Young 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 Bell, Boyd & Lloyd (included in the opinion filed as Exhibit (8)-2). (23)-5 Consent of BT Alex. Brown Incorporated. (24) Powers of Attorney (See the signature pages to this Registration Statement). (99) NSC Proxy.