SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[x] Preliminary Proxy Statement
[X] Confidential, for use of the Commission on only (as permitted
by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
HEALTHSOUTH Corporation
________________________________________________
(Name of Registrant as Specified In Its Charter)
________________________________________________
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1),
or 14a-6(j)(2).
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, par value .01 per share, of HEALTHSOUTH Corporation
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
47,572,548 shares
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: (Set forth the amount on which the
filing fee is calculated and state how it was determined.)
$27.5625(based upon the average of the high and low sales prices of the
Common Stock of HEALTHSOUTH Corporation as reported on the New York
Stock Exchange Composite Tape on November 2, 1995)
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$1,311,218,354
-----------------------------------------------------------------------
(5) Total fee paid:
$262,243.67
-----------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount previously paid:
_______________________________________________________________________
(2) Form, Schedule or Registration Statement No.:
_______________________________________________________________________
(3) Filing Party:
_______________________________________________________________________
(4) Date Filed:
_______________________________________________________________________
[HEALTHSOUTH LOGO]
, 199
Dear Stockholder:
I am pleased to enclose information relating to a Special Meeting of
Stockholders of HEALTHSOUTH Corporation to be held at the Company's offices at
Two Perimeter Park South, Birmingham, Alabama 35243, at 2:00 p.m., Central Time,
on , 1996.
The purpose of the Special Meeting of Stockholders is to approve and
adopt a Plan and Agreement of Merger, pursuant to which HEALTHSOUTH will acquire
Surgical Care Affiliates, Inc. Surgical Care Affiliates, Inc. operates 67
surgery centers in 24 states, with an additional 10 surgery centers under
development or construction. Many of those surgery centers are located in
markets in which HEALTHSOUTH has rehabilitation facilities. In addition, the
stockholders will consider a proposal to increase the number of authorized
shares of Common Stock of HEALTHSOUTH as outlined in the attached Notice of
Special Meeting.
We urge you to consider carefully these important matters, which are
described in the attached Prospectus-Joint Proxy Statement. In order to ensure
that your vote is represented at the Special Meeting, please indicate your
choice on the proxy form, date and sign it, and return it in the enclosed
envelope. A prompt response will be appreciated. If you are able to attend the
Special Meeting, you may revoke your Proxy and vote in person if you wish.
I look forward to seeing you at the Special Meeting.
Richard M. Scrushy
Chairman of the Board
and Chief Executive Officer
Two Perimeter Park South o Birmingham, AL 35243 o (205) 967-7116
HEALTHSOUTH Corporation
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
, 199
A Special Meeting of Stockholders of HEALTHSOUTH Corporation
("HEALTHSOUTH") will be held at HEALTHSOUTH's offices, Two Perimeter Park South,
Birmingham, Alabama 35243, on , 1996, at 2:00 p.m., Central Time, 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 October 9, 1995 (the "Plan"), among
HEALTHSOUTH, SCA Acquisition Corporation (the "Subsidiary") and Surgical
Care Affiliates, Inc. ("SCA"), pursuant to which the Subsidiary will be
merged into SCA, with SCA being the surviving corporation (the "Merger"),
and each outstanding share of Common Stock, par value $.25 per share, of
SCA (the "SCA Shares") will be cancelled and the holders of such shares
will be entitled to receive 1.22 shares of HEALTHSOUTH Common Stock, par
value $.01 per share, for each such SCA Share, subject to adjustment in
certain circumstances, as described in the accompanying Prospectus-Joint
Proxy Statement.
2. To vote on an Amendment to the Restated Certificate of Incorporation
of HEALTHSOUTH to increase the authorized Common Stock of HEALTHSOUTH to
250,000,000 shares of Common Stock, par value $.01 per share.
3. To transact such other business as may properly come before the
Special Meeting or any adjournment thereof.
Stockholders of record at the close of business on , 199 , are entitled
to notice of, and to vote at, the Special Meeting or any adjournment thereof.
If you cannot attend the Special Meeting in person, please date and
execute the accompanying Proxy and return it promptly to HEALTHSOUTH. If you
attend the Special Meeting, you may revoke your Proxy and vote in person if you
desire to do so, but attendance at the Special Meeting does not itself serve to
revoke your Proxy.
ANTHONY J. TANNER
Secretary
- --------------------------------------------------------------------------------
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY
PROMPTLY, REGARDLESS OF WHETHER YOU PLAN TO ATTEND
THE SPECIAL MEETING.
THE BOARD OF DIRECTORS OF HEALTHSOUTH
RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE APPROVAL AND
ADOPTION OF THE PLAN AND THE AMENDMENT TO INCREASE THE
NUMBER OF AUTHORIZED SHARES OF COMMON STOCK.
- --------------------------------------------------------------------------------
[SCA LOGO]
, 199
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders
of Surgical Care Affiliates, Inc. ("SCA") on [ ], 1996. Details as to the time
and place of the meeting are set forth in the accompanying Notice of Special
Meeting of Stockholders.
The purpose of the meeting is to consider and vote upon the approval
and adoption of a Plan and Agreement of Merger (the "Plan") providing for the
merger (the "Merger") of a wholly-owned subsidiary of HEALTHSOUTH Corporation
("HEALTHSOUTH") with and into SCA. If the Merger is consummated, SCA will become
a wholly-owned subsidiary of HEALTHSOUTH, and stockholders of SCA will be
entitled to receive 1.22 shares of HEALTHSOUTH Common Stock (subject to
adjustment as set forth in the attached Joint Proxy Statement-Prospectus) for
each share of their SCA Common Stock. The Board of Directors believes that
HEALTHSOUTH and SCA are strategically complementary and that the combined
companies will be able to compete more effectively in the changing healthcare
marketplace.
After careful consideration, your Board of Directors has unanimously
concluded that the proposed Merger is in the best interests of SCA stockholders
and recommends that you vote FOR the approval and adoption of the Plan.
The attached Joint Proxy Statement-Prospectus describes the Plan and
the proposed Merger more fully and includes other information about HEALTHSOUTH
and SCA. Please give this information your thoughtful attention.
Approval and adoption of the Plan by the stockholders of SCA requires
the affirmative vote of the holders of a majority of the outstanding shares of
SCA Common Stock. Therefore, you are urged to mark, sign, date and return
promptly the accompanying proxy card for the meeting even though you plan to
attend. You may vote in person at that time if you so desire.
Sincerely,
Joel C. Gordon
Chairman of the Board and
Chief Executive Officer
SURGICAL CARE AFFILIATES, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1996
To the Stockholders of Surgical Care Affiliates, Inc.:
Notice is hereby given that a Special Meeting of Stockholders of
Surgical Care Affiliates, Inc., a Delaware corporation ("SCA"), will be held at
Nashville, Tennesee on , 1996 at .m., Central Time, 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 October 9, 1995, among SCA, SCA
Acquisition Corporation, a Delaware corporation (the "Subsidiary") wholly
owned by HEALTHSOUTH Corporation, a Delaware corporation ("HEALTHSOUTH"),
and HEALTHSOUTH (as it may be amended, supplemented or otherwise modified
from time to time, the "Plan"), pursuant to which, among other things the
Subsidiary will be merged with and into SCA upon the terms and subject to
the conditions contained in the Plan (the "Merger"), and SCA will become a
wholly-owned subsidiary HEALTHSOUTH, as described in the accompanying
Prospectus-Joint Proxy Statement.
At the effective time of the Merger (the "Effective Time"), (i)
Subsidiary will be merged with and into SCA, with SCA surviving the Merger
as a wholly-owned subsidiary of HEALTHSOUTH, (ii) each share of common
stock, par value $.25 per share (the "SCA Common Stock"), of SCA issued and
outstanding immediately prior to the Effective Time (other than shares of
SCA Common Stock that are owned by SCA or its subsidiaries as treasury
stock) will be converted into the right to receive a number of shares (in
whole shares only) of common stock, par value $.01 per share, of
HEALTHSOUTH determined as provided in Section 2.1 of the Plan, and (iii)
each share of SCA Common Stock issued and outstanding immediately prior to
the Effective Time and owned by SCA or its subsidiaries will cease to be
outstanding, will be cancelled and retired without payment of any
consideration therefor, and will cease to exist.
2. To consider and act upon such other matters as may properly come
before the Special Meeting, including any adjournments or postponements
thereof.
The Board of Directors of SCA has fixed the close of business on as the
record date for the determination of stockholders entitled to notice of and to
vote at the Special Meeting, and only stockholders of record at such time will
be entitled to notice of and to vote at the Special Meeting.
A form of Proxy and a Prospectus-Joint Proxy Statement containing more
detailed information with respect to the matters to be considered at the Special
Meeting accompany this notice and form a part hereof.
You are cordially invited and urged to attend the Special Meeting in
person. Please complete, sign, date and promptly return the enclosed Proxy in
the enclosed self-addressed, postage pre-paid envelope. If you attend the
Special Meeting and desire to revoke your Proxy and vote in person, you may do
so. In any event, the Proxy may be revoked at any time before it is voted.
By Order of the Board of Directors,
Tarpley B. Jones
Secretary
, 199
Important Notices
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY, WHETHER OR NOT YOU
PLAN TO ATTEND THE SPECIAL MEETING. YOUR PROXY WILL BE REVOCABLE, EITHER IN
WRITING OR BY VOTING IN PERSON AT THE SPECIAL MEETING, AT ANY TIME PRIOR TO
ITS EXERCISE. PLEASE DO NOT SEND IN STOCK CERTIFICATES AT THIS TIME.
THE BOARD OF DIRECTORS OF SURGICAL CARE AFFILIATES, INC. UNANIMOUSLY
RECOMMENDS THAT STOCKHOLDERS VOTE TO APPROVE AND ADOPT THE PLAN.
Confidential -- For Use of the Commission Only
Prospectus-Joint Proxy Statement
JOINT PROXY STATEMENT
OF
HEALTHSOUTH SURGICAL CARE
Corporation AFFILIATES, INC.
for the Special Meeting of Stockholders for the Special Meeting of Stockholders
to be held on , 1996 to be held on , 1996
----------------------
PROSPECTUS
OF
HEALTHSOUTH Corporation
This Prospectus relates to up to shares of the Common Stock, par value
$.01 per share (the "HEALTHSOUTH Common Stock"), of HEALTHSOUTH Corporation
(together with its subsidiaries and controlled partnerships, as applicable,
"HEALTHSOUTH") issuable to the stockholders of Surgical Care Affiliates, Inc.
(together with its subsidiaries and controlled partnerships and limited
liability companies, as applicable, "SCA") upon consummation of the Merger (as
defined below). Such number of shares represents the maximum number of shares
that may be issued, assuming that the Base Period Trading Price (as defined
below) is equal to or less than $20.00 and that all outstanding options and
warrants to purchase shares of SCA Common Stock (as defined below) that are
exercisable prior to the closing of the Merger are exercised prior to the
closing of the Merger. This Prospectus also serves as the Proxy Statement of
each of HEALTHSOUTH and SCA for its special meeting of stockholders to be held
on , 1996, and any adjournments and postponements thereof (the
"Special Meetings"). See "THE SPECIAL MEETINGS".
-----------------------
This Prospectus-Joint Proxy Statement describes the terms of a proposed
business combination between HEALTHSOUTH and SCA, pursuant to which HEALTHSOUTH
will acquire SCA by means of the merger (the "Merger") of SCA Acquisition
Corporation, a wholly-owned subsidiary of HEALTHSOUTH formerly known as Cats
Acquisition Corporation (the "Subsidiary"), with and into SCA, with SCA being
the surviving corporation (the "Surviving Corporation"). After the Merger, the
combined operations of HEALTHSOUTH and SCA are expected to be conducted with SCA
as a wholly-owned subsidiary of HEALTHSOUTH and the present subsidiaries of SCA
continuing as subsidiaries of SCA and thus indirect subsidiaries of HEALTHSOUTH.
The Merger will be effective pursuant to the terms and subject to the conditions
of the Plan and Agreement of Merger, dated as of October 9, 1995, among
HEALTHSOUTH, the Subsidiary and SCA (as it may be amended, supplemented or
otherwise modified from time to time, the "Plan"). The Plan is attached to this
Prospectus-Joint Proxy Statement as Annex A and is incorporated herein by
reference. HEALTHSOUTH and SCA are hereinafter sometimes referred to 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 $.25 per share, of SCA, other than
shares owned by SCA or any subsidiary of SCA (the "SCA Common Stock" or the "SCA
Shares"), will be cancelled, and the holders of such SCA Shares will be entitled
to receive 1.22 shares (the "Exchange Ratio") of HEALTHSOUTH Common Stock for
each SCA Share so held (the "Merger Consideration"); provided, however, that if
the Base Period Trading Price (as defined below) is greater than $28.00, then
the Exchange Ratio shall be equal to the
quotient obtained by dividing $34.16 by the Base Period Trading Price, computed
to four decimal places; and provided further, that if the Base Period Trading
Price shall be less than $22.00, then the Exchange Ratio shall be equal to the
quotient obtained by dividing $26.84 by the Base Period Trading Price, computed
to four decimal places; and provided further, that the Exchange Ratio shall in
no event be greater than 1.342, except as set forth in the immediately following
sentences. SCA shall have the right to terminate the Plan if the Base Period
Trading Price is less than $20.00. If, in that circumstance, SCA proposes so to
terminate the Plan, HEALTHSOUTH shall have an opportunity to submit a final and
best offer (the "Final Offer") for a change in the Merger Consideration. If
SCA's Board of Directors (in consultation with its legal counsel and financial
advisors) accepts the Final Offer, the Plan shall be amended to reflect such
Final Offer.
The term "Base Period Trading Price" means the average of the daily
closing prices per share of HEALTHSOUTH Common Stock for the 20 consecutive
trading days on which such shares are actually traded ending on the second New
York Stock Exchange trading day immediately preceding the Closing of the Merger.
SCA 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-Joint Proxy Statement and the forms of Proxy are first
being mailed to stockholders of HEALTHSOUTH and SCA on or about , 1995.
See "Risk Factors" at page for a discussion of certain factors that
should be considered by holders of shares of SCA Common Stock.
-------------------
THE SECURITIES TO BE ISSUED HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION (THE "SEC") OR BY ANY STATE
SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS-JOINT PROXY STATEMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
----------------------
The date of this Prospectus-Joint Proxy Statement is , 1995.
2
AVAILABLE INFORMATION
HEALTHSOUTH has filed a Registration Statement on Form S-4 under the
Securities Act of 1933, as amended (the "Securities Act"), with the Securities
and Exchange Commission (the "SEC") covering the shares of HEALTHSOUTH Common
Stock to be issued in connection with the Merger (including exhibits and
amendments thereto, the "Registration Statement"). As permitted by the rules and
regulations of the SEC, this Prospectus-Joint Proxy Statement omits certain
information contained in the Registration Statement. For further information
pertaining to the securities offered hereby, reference is made to the
Registration Statement.
HEALTHSOUTH and SCA are subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), 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 such
reports, proxy statements and other information, may be inspected at the public
reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. and should be available for inspection and
copying at the regional offices of the SEC located at Seven World Trade Center,
New York, New York and Suite 1400, Citicorp Center, 500 West Madison Street,
Chicago, Illinois. Copies of such material can be obtained at prescribed rates
by writing to the SEC, Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Both the HEALTHSOUTH Common Stock and the SCA Common
Stock are listed on the New York Stock Exchange (the "NYSE"), and the
Registration Statement and other information with respect to HEALTHSOUTH and SCA
should be available for inspection at the library of the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
This Prospectus-Joint 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, Two Perimeter Park South,
Birmingham, Alabama 35243, telephone (205) 967-7116. Copies of such reports,
proxy statements and other information filed by SCA, 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 Surgical Care Affiliates, Inc., 102 Woodmont Boulevard, Suite 610,
Nashville, Tennessee 37205, telephone (615) 385-3541. In order to ensure timely
delivery of the documents, any request should be made by five days prior to the
Special Meetings.
There are hereby incorporated by reference into this Prospectus-Joint
Proxy Statement and made a part hereof the following documents filed by
HEALTHSOUTH:
1. HEALTHSOUTH's Annual Report on Form 10-K, as amended, for the fiscal
year ended December 31, 1994.
2. HEALTHSOUTH's Quarterly Reports on Form 10-Q, as amended, for the
quarters ended March 31, June 30 and September 30, 1995.
3. HEALTHSOUTH's Current Report on Form 8-K, as amended, filed January
13, 1995 (relating to the acquisition of ReLife, Inc.).
4. HEALTHSOUTH's Current Report on Form 8-K, as amended, filed February
1, 1995 (relating to the acquisition of Surgical Health Corporation).
5. HEALTHSOUTH's Current Report on Form 8-K, as amended, filed February
21, 1995 (relating to the NovaCare Rehabilitation Hospitals acquisition).
6. HEALTHSOUTH's Current Report on Form 8-K filed August 15, 1995
(relating to the acquisition of Surgical Health Corporation).
3
7. HEALTHSOUTH's Current Report on Form 8-K filed September 7, 1995
(relating to the acquisition of Sutter Surgery Centers, Inc.).
8. HEALTHSOUTH's Current Report on Form 8-K, as amended, filed October
20, 1995 (relating to the acquisition of SCA).
9. HEALTHSOUTH's Current Report on Form 8-K filed October 30, 1995
(relating to the acquisition of Caremark Orthopedic Services Inc.).
10. The description of HEALTHSOUTH's capital stock contained in
HEALTHSOUTH's Registration Statement on Form 8-A filed August 26, 1989.
There are also hereby incorporated by reference into this
Prospectus-Joint Proxy Statement and made a part hereof the following documents
filed by SCA:
1. SCA's Annual Report on Form 10-K for the fiscal year ended December
31, 1994.
2. SCA's Quarterly Reports on Form 10-Q for the quarters ended March
31, June 30 and September 30, 1995.
3. SCA's Current Report on Form 8-K filed October 16, 1995 (relating to
the acquisition by HEALTHSOUTH).
All documents filed by HEALTHSOUTH and SCA, respectively, pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus-Joint Proxy Statement and prior to the Special Meetings shall be
deemed to be incorporated by reference into this Prospectus-Joint Proxy
Statement and to be made a part hereof from the date of the filing of such
documents. Any statement contained in a document incorporated by reference
herein shall be deemed to be modified or superseded for the purpose hereof to
the extent that a statement contained herein (or in any other subsequently filed
document which also is incorporated by reference herein) is modified or
superseded by such statement. Any statement so modified or superseded shall not
be deemed to constitute a part hereof, except as so modified or superseded.
All information contained in this Prospectus-Joint Proxy Statement or
incorporated herein by reference with respect to HEALTHSOUTH was supplied by
HEALTHSOUTH, and all information contained in this Prospectus-Joint Proxy
Statement or incorporated herein by reference with respect to SCA was supplied
by SCA. Although neither HEALTHSOUTH nor SCA has actual knowledge that would
indicate that any statements or information (including financial statements)
relating to the other party contained or incorporated by reference herein are
inaccurate or incomplete, neither HEALTHSOUTH nor SCA warrants the accuracy or
completeness of such statements or information as they relate to the other
party.
No person is authorized to give any information or to make any
representation not contained in this Prospectus-Joint 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-Joint Proxy
Statement nor any distribution of the securities to which this Prospectus-Joint
Proxy Statement relates shall, under any circumstances, create any implication
that there has been no change in the information concerning HEALTHSOUTH or SCA
contained in this Prospectus-Joint Proxy Statement since the date of such
information. This Prospectus-Joint 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-Joint Proxy
Statement in any jurisdiction in which such an offer or solicitation is not
lawful.
4
TABLE OF CONTENTS
Page
AVAILABLE INFORMATION ............................................. 3
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE ................. 3
SUMMARY OF PROSPECTUS-JOINT PROXY STATEMENT........................ 7
RISK FACTORS....................................................... 19
THE SPECIAL MEETINGS .............................................. 19
General .......................................................... 19
Dates, Places and Times .......................................... 19
Record Dates; Quorums ............................................ 19
Votes Required ................................................... 20
Voting and Revocation of Proxies ................................. 21
Solicitation of Proxies .......................................... 21
THE MERGER......................................................... 23
Terms of the Merger .............................................. 23
Background of the Merger ......................................... 24
Reasons for the Merger; Recommendations of the Boards of Directors 24
Opinion of Smith Barney........................................... 25
Opinion of Bear Stearns .......................................... 26
Effective Time of the Merger ..................................... 29
Exchange of Certificates ......................................... 35
Representations and Warranties.................................... 35
Conditions to the Merger ......................................... 36
Regulatory Approvals ............................................. 37
Business Pending the Merger ...................................... 38
Waiver and Amendment ............................................. 39
Termination ...................................................... 39
Break-up Fee; Third Party Bids.................................... 40
Interests of Certain Persons in the Merger ....................... 40
Indemnification and Insurance..................................... 41
Accounting Treatment ............................................. 41
Certain Federal Income Tax Consequences .......................... 42
Resale of HEALTHSOUTH Common Stock by Affiliates ................. 43
No Appraisal Rights .............................................. 43
No Solicitation of Transactions................................... 43
Expenses.......................................................... 44
NYSE Listing...................................................... 44
SELECTED CONSOLIDATED FINANCIAL DATA--HEALTHSOUTH.................. 45
SELECTED CONSOLIDATED FINANCIAL DATA--SCA ......................... 46
PRO FORMA CONDENSED FINANCIAL INFORMATION ......................... 47
BUSINESS OF HEALTHSOUTH ........................................... 57
General........................................................... 57
Company Strategy.................................................. 57
Patient Care Services............................................. 58
Marketing of Facilities and Services.............................. 61
Sources of Revenues............................................... 62
Competition....................................................... 63
Regulation........................................................ 63
Insurance......................................................... 67
Employees......................................................... 67
Legal Proceedings................................................. 68
Properties........................................................ 68
5
BUSINESS OF SCA ................................................... 73
General........................................................... 73
Organizational Structure.......................................... 77
Management and Operations......................................... 78
Surgery Center Closings........................................... 80
Competition....................................................... 80
Regulation........................................................ 80
Insurance......................................................... 81
Employees......................................................... 81
Properties........................................................ 82
Legal Proceedings................................................. 83
PRINCIPAL STOCKHOLDERS OF SCA...................................... 84
AMENDMENT TO HEALTHSOUTH RESTATED CERTIFICATE OF INCORPORATION TO
INCREASE AUTHORIZED COMMON STOCK.................................. 85
General........................................................... 85
Increase in Authorized Common Stock............................... 85
DESCRIPTION OF CAPITAL STOCK OF HEALTHSOUTH ....................... 86
Common Stock ..................................................... 86
Fair Price Provision ............................................. 86
Section 203 of the DGCL........................................... 87
Preferred Stock .................................................. 87
Transfer Agent.................................................... 88
COMPARISON OF RIGHTS OF SCA AND HEALTHSOUTH STOCKHOLDERS ......... 89
Classes and Series of Capital Stock............................... 89
Size and Election of the Board of Directors ...................... 89
Removal of Directors ............................................. 90
Other Voting Rights............................................... 90
Dividends......................................................... 90
Conversion and Dissolution........................................ 90
Fair Price Provision ............................................. 91
Amendment or Repeal of the Certificate of Incorporation ......... 91
Special Meetings of Stockholders.................................. 91
Liability of Directors............................................ 91
Indemnification of Directors and Officers......................... 92
OPERATIONS AND MANAGEMENT OF HEALTHSOUTH AFTER THE MERGER ......... 93
Operations ....................................................... 93
Management ....................................................... 93
EXPERTS ........................................................... 93
LEGAL MATTERS...................................................... 94
ADDITIONAL INFORMATION............................................. 94
Other Business.................................................... 94
Stockholder Proposals............................................. 94
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS HEALTHSOUTH CORPORATION
AND SUBSIDIARIES.................................................. F-1
ANNEXES:
A. Plan and Agreement of Merger ................................... A-1
B. Opinion of Smith Barney Inc. ................................... B-1
C. Opinion of Bear, Stearns & Co. Inc.............................. C-1
6
SUMMARY OF PROSPECTUS-JOINT PROXY STATEMENT
The following is a summary of certain information contained elsewhere
in this Prospectus-Joint Proxy Statement. Certain capitalized terms
used in this Summary are defined elsewhere in this Prospectus-Joint
Proxy Statement. Reference is made to, and this Summary is qualified in
its entirety by, the more detailed information contained in this
Prospectus-Joint Proxy Statement, the Annexes hereto and the documents
incorporated by reference herein.
The Companies
HEALTHSOUTH. HEALTHSOUTH is the nation's largest provider of outpatient
and rehabilitative healthcare services. It provides these services through its
national network of outpatient and inpatient rehabilitation facilities,
outpatient surgery centers, medical centers and other health care facilities.
HEALTHSOUTH believes that it provides patients, physicians and payors with
high-quality health care 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 September 30, 1995, HEALTHSOUTH
had over 500 patient care locations in 39 states, the District of Columbia and
Ontario, Canada. See "BUSINESS OF HEALTHSOUTH".
At September 30, 1995, HEALTHSOUTH had consolidated assets of
approximately $2,150,680,000 and consolidated stockholders' equity of
approximately $547,547,000, and employed approximately 21,900 persons.
HEALTHSOUTH was incorporated under the laws of Delaware in 1984. Its
principal executives offices are located at Two Perimeter Park South,
Birmingham, Alabama 35243, and its telephone number is (205) 967-7116.
SCA. SCA develops, owns and operates outpatient surgical care centers,
which are outpatient facilities designed, equipped and staffed for performance
of surgical procedures which generally do not require overnight hospitalization.
SCA believes that outpatient surgical care centers help control healthcare costs
and that the fees charged by its centers are less than those charged by
hospitals for similar services performed on an outpatient basis. At September
30, 1995, SCA owned interests in and operated 67 outpatient surgery centers in
24 states. See "Business of SCA".
At September 30, 1995, SCA had consolidated assets of $371,421,991 and
consolidated stockholders' equity of $229,229,919, and employed approximately
2,500 persons.
SCA was incorporated under the laws of Tennessee in 1982 and was
reincorporated under the laws of Delaware in 1986. The principal executive
offices of SCA are located at 102 Woodmont Boulevard, Suite 610, Nashville,
Tennesee 37205, and its telephone number is (615) 385-3541.
SCA 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
Two Perimeter Park South, Birmingham, Alabama 35243, and its telephone number is
(205) 967-7116.
Recent Developments
On October 27, 1995, HEALTHSOUTH consummated the acquisition of Sutter
Surgery Centers, Inc. ("SSCI") in a transaction accounted for as a pooling of
interests. In the transaction, SSCI stockholders received an aggregate of
1,776,002 shares of HEALTHSOUTH Common Stock. SSCI operated 12 ambulatory
surgery centers located in California, Arizona and Utah.
On October 15, 1995, HEALTHSOUTH signed a definitive agreement to
acquire Caremark Orthopedic Services Inc. ("COSI"). Under the agreement, COSI's
sole stockholder will be paid $127,500,000 (plus certain additional amounts for
facility acquisition costs and working capital expenditures) for the transfer of
all of the issued and outstanding shares of COSI to HEALTHSOUTH. The transaction
is currently expected to close by year-end 1995.
7
The Special Meetings
HEALTHSOUTH. The Special Meeting of HEALTHSOUTH's stockholders (the
"HEALTHSOUTH Special Meeting") to consider and vote on (i) a proposal to approve
and adopt the Plan, and (ii) a proposal to approve and adopt an amendment to
HEALTHSOUTH's Restated Certificate of Incorporation (the "HEALTHSOUTH
Certificate") to increase the number of authorized shares of HEALTHSOUTH Common
Stock will be held on , 1996 at 2:00 p.m., Central Time, at the
executive offices of HEALTHSOUTH at Two Perimeter Park South, Birmingham,
Alabama 35243. Only holders of record of HEALTHSOUTH Common Stock at the close
of business on , 1995 (the "HEALTHSOUTH Record Date") will be entitled
to notice of and to vote at the HEALTHSOUTH Special Meeting. As of
such date, there wereoutstanding and entitled to vote shares of HEALTHSOUTH
Common Stock. Each issued and outstanding share of HEALTHSOUTH Common Stock is
entitled to one vote on each matter to be presented at the HEALTHSOUTH Special
Meeting.
SCA. The Special Meeting of SCA's stockholders (the "SCA Special
Meeting") to consider and vote on a proposal to approve and adopt the Plan will
be held on , 1996, at .m. Central Time at Nashville, Tennessee .
Only holders of record of SCA Shares at the close of business on , 1995
(the "SCA Record Date"), will be entitled to notice of and to vote at the SCA
Special Meeting. At such date, there were outstanding and entitled to vote
shares of SCA Common Stock. Each issued and outstanding SCA Share is entitled
to one vote on each matter to be presented at the SCA Special Meeting.
For additional information relating to the Special Meetings, see "THE
SPECIAL MEETINGS".
Votes Required
HEALTHSOUTH. Approval and adoption of the Plan by the stockholders of
HEALTHSOUTH is not required by state law, but is required pursuant to rules of
the NYSE because of the number of shares of HEALTHSOUTH Common Stock which are
expected to be issued in connection with the Merger. Such approval is being
sought solely to comply with such rules of the NYSE. Approval and adoption of
the Plan by the stockholders of HEALTHSOUTH requires the affirmative vote of
holders of a majority of the shares of HEALTHSOUTH Common Stock present or
represented and entitled to vote at the HEALTHSOUTH Special Meeting.
Approval and adoption of the Amendment to increase the number of
authorized shares of HEALTHSOUTH Common Stock to 250,000,000 shares requires the
affirmative vote of a majority of the issued and outstanding shares of
HEALTHSOUTH Common Stock. Accordingly, approval and adoption of the Amendment
will require the affirmative vote of the holders of shares of HEALTHSOUTH Common
Stock entitled to cast at least votes.
As of the HEALTHSOUTH Record Date, directors and executive officers of
HEALTHSOUTH and their affiliates beneficially owned an aggregate of shares
of HEALTHSOUTH Common Stock (excluding shares issuable upon exercise of options
and convertible securities) or approximately % of the shares of HEALTHSOUTH
Common Stock outstanding on such date. The directors and executive officers
of HEALTHSOUTH and their affiliates have indicated their intention to vote the
shares of HEALTHSOUTH Common Stock beneficially owned by them in favor of
approval and adoption of the Plan.
SCA. Approval and adoption of the Plan by the stockholders of SCA
requires the affirmative vote of the holders of a majority of the outstanding
shares of SCA Common Stock. Accordingly, approval and adoption of the Plan at
the SCA Special Meeting will require the affirmative vote of the holders of at
least shares of SCA Common Stock.
8
As of the SCA Record Date, directors and executive officers of SCA and
their affiliates beneficially owned an aggregate of shares of SCA Common
Stock (excluding shares issuable upon exercise of options and convertible
securities), or approximately %, of the SCA Shares outstanding on such date.
The directors and executive officers of SCA and their affiliates have
indicated their intentions to vote the SCA Shares beneficially owned by
them in favor of approval and adoption of the Plan.
In the event that the Plan is not approved and adopted by both the
HEALTHSOUTH and SCA stockholders, or in the event that the Amendment is not
approved and adopted by the HEALTHSOUTH stockholders, the Plan may be terminated
by HEALTHSOUTH or SCA in accordance with its terms. Such approvals are also a
condition to HEALTHSOUTH's and SCA's obligations to consummate the Merger. See
"THE SPECIAL MEETING -- Votes Required", "THE MERGER -- Conditions to the
Merger" and "-- Termination".
As a condition to entering into the Plan, HEALTHSOUTH required that
Joel C. Gordon, Chairman of the Board and Chief Executive Officer of SCA, and
certain of his affiliates enter into Proxy Agreements with HEALTHSOUTH, whereby
they agreed that until the date on which the Plan is terminated and following
such termination during such time as a Third Party Acquisition Event (as defined
herein) exists with respect to SCA, but in no event after the close of business
one year following the termination of the Plan, they will vote an aggregate of
1,358,170 shares of SCA Common Stock (a) in favor of adoption and approval of
the Plan and the Merger at every meeting of the stockholders of SCA at which
such matters are considered and at every adjournment thereof, and (b) against
any other proposal for any reorganization. The shares subject to the Proxy
Agreements represent approximately of the votes eligible to be cast at the
SCA Special Meeting as of the SCA Record Date. See "THE MERGER -- Interests
ofCertain Persons in the Merger".
The Merger
Terms of the Merger. SCA will be acquired by HEALTHSOUTH pursuant to
the Plan, which provides that at the effective time of the Merger (the
"Effective Time"), the Subsidiary will merge with and into SCA with SCA being
the Surviving Corporation. The Restated Certificate of Incorporation of SCA, as
amended and existing at the Effective Time in form satisfactory to HEALTHSOUTH,
and the Bylaws of the Subsidiary in effect at the Effective Time, will govern
the surviving corporation until amended or repealed in accordance with
applicable law. At the Effective Time, each outstanding SCA Share (excluding
shares held by SCA and any of its subsidiaries) will be converted into the right
to receive 1.22 shares (the "Exchange Ratio") of HEALTHSOUTH Common Stock (the
"Merger Consideration"); provided, however, that if the Base Period Trading
Price (as defined below) is greater than $28.00, then the Exchange Ratio shall
be equal to the quotient obtained by dividing $34.16 by the Base Period Trading
Price, computed to four decimal places; and provided further, that if the Base
Period Trading Price shall be less than $22.00, then the Exchange Ratio shall be
equal to the quotient obtained by dividing $26.84 by the Base Period Trading
Price, computed to four decimal places; and provided further, that the Exchange
Ratio shall in no event be greater than 1.342, except as set forth in the
immediately following sentences. SCA shall have the right to terminate the Plan
if the Base Period Trading Price is less than $20.00. If, in that circumstance,
SCA proposes so to terminate the Plan, HEALTHSOUTH shall have an opportunity to
submit a final and best offer (the "Final Offer") for a change in the Merger
Consideration. If SCA's Board of Directors (in consultation with its legal
counsel and financial advisors) accepts the Final Offer, the Plan shall be
amended to reflect such Final Offer.
The term "Base Period Trading Price" is defined in the Plan as the
average of the daily closing prices per share of HEALTHSOUTH Common Stock for
the 20 consecutive trading days on which such shares are actually traded ending
on the second New York Stock Exchange trading day
9
before the closing of the Merger. The daily closing price per share shall be the
closing price for NYSE-Composite Transactions as reported in The Wall Street
Journal-Eastern Edition or, if not reported therein, any other authoritative
source. Fractional shares of HEALTHSOUTH Common Stock will not be issuable in
connection with the Merger. SCA 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".
The following table indicates the Exchange Ratio assuming various Base
Period Trading Prices, with the resulting "value" to be received for each SCA
Share:
Value to be
Base Period received for
Trading Price Exchange Ratio each SCA Share
(Col. 1) (Col. 2) (Col. 1 x Col. 2)
-------- -------- ------------------
$19.00(1)...... 1.342 $25.50
20.00......... 1.342 26.84
21.00......... 1.2781 26.84
22.00......... 1.22 26.84
23.00......... 1.22 28.06
24.00......... 1.22 29.28
25.00......... 1.22 30.50
26.00......... 1.22 31.72
27.00......... 1.22 32.94
28.00......... 1.22 34.16
29.00......... 1.1779 34.16
30.00......... 1.1387 34.16
===============
(1) SCA will have the right to terminate the Plan if the Base Period Trading
Price is less than $20.00.
In addition, at the Effective Time, all options to purchase shares of
SCA Common Stock which are outstanding at such time, whether or not then
exercisable, will become immediately exercisable options to purchase HEALTHSOUTH
Common Stock, and HEALTHSOUTH will assume each such option (as adjusted to
reflect the Exchange Ratio). All warrants to purchase shares of SCA Common Stock
which are outstanding at such time shall become warrants to purchase HEALTHSOUTH
Common Stock, and HEALTHSOUTH will assume each such warrant (as adjusted to
reflect the Exchange Ratio).
Recommendations of the Boards of Directors. The Board of Directors of
each of HEALTHSOUTH and SCA has approved the Plan and has recommended a vote FOR
the Plan. Each Board of Directors believes the Plan is fair to and in the best
interests of the stockholders of its Company.
The Board of Directors of HEALTHSOUTH believes that the Merger is
desirable for the following reasons, among others: (i) SCA's position as the
largest independent operator of ambulatory surgery centers in the United States;
(ii) the experience and expertise of SCA's management team; (iii) the fact that
HEALTHSOUTH currently operates rehabilitation facilities in approximately 70% of
SCA's markets; (iv) the benefits to patients and payors from packaged pricing of
bundled services in such markets; (v) HEALTHSOUTH's belief that its managed care
relationships and national network would significantly enhance SCA's patient
volume; (vi) HEALTHSOUTH's belief that there is a natural strategic fit between
HEALTHSOUTH and SCA; (vii) HEALTHSOUTH's belief that the Merger would provide
significant operating synergies and would be accretive to 1996 earnings; and
(viii) the opinion of Smith Barney Inc. ("Smith Barney"), HEALTHSOUTH's
financial advisor, to the effect that, as of the date of such opinion and based
upon and subject to certain matters stated therein, the Exchange Ratio was fair,
from a financial point of view, to HEALTHSOUTH.
10
The Board of Directors of SCA believes that the Plan is in the best
interests of the SCA stockholders based on a number of factors, including,
without limitation and without assigning relative weights thereto, the following
factors: (i) the value of the consideration to be received by SCA stockholders,
including the fact that the method for determining the Exchange Ratio allows
holders of SCA Shares to receive up to $34.16 per share in value of HEALTHSOUTH
Common Stock in the event that the Base Period Trading Price of HEALTHSOUTH
Common Stock equals or exceeds $28.00; (ii) the terms and conditions of the
proposed Merger, including the parties' reciprocal representations, warranties
and covenants, the conditions to their respective obligations, and the
circumstances and terms under which SCA may terminate the Plan to accept a
higher offer; (iii) the fact that the Merger is expected to be treated as a
tax-free reorganization and that the Merger will be accounted for under the
"pooling-of-interests" method of accounting; (iv) the SCA Board's familiarity
with SCA's business, assets, financial condition, results of operations,
business strategy and prospects and current trends in the markets in which it
operates; (v) the opportunity for SCA stockholders to continue to share in the
potential for long-term gain in SCA through the ownership of HEALTHSOUTH Common
Stock after the Merger; (vi) the business reputation and capabilities of
HEALTHSOUTH and its management, HEALTHSOUTH's financial strength, prospects,
market position and strategic objectives, and the historical performance of
HEALTHSOUTH Common Stock; (vii) the oral opinion of Bear, Stearns & Co. Inc.
("Bear Stearns"), which served as financial advisor to SCA in connection with
the Merger, that, as of the date of the Plan, the Merger was fair, from a
financial point of view, to the stockholders of SCA; and (viii) the perceived
strengths of SCA and HEALTHSOUTH combined, the belief that SCA and HEALTHSOUTH
are strategically complementary, and the belief that the combined Companies will
be able to compete more effectively in the changing healthcare marketplace and
will be more attractive to managed care companies and other payors.
See "THE MERGER -- Reasons for the Merger; Recommendations of the
Boards of Directors".
Opinions of Financial Advisors.
HEALTHSOUTH. Smith Barney has acted as financial advisor to HEALTHSOUTH
in connection with the Merger and has delivered a written opinion, dated October
9, 1995, to the Board of Directors of HEALTHSOUTH to the effect that, as of the
date of such opinion and based upon and subject to certain matters stated
therein, the Exchange Ratio was fair, from a financial point of view, to
HEALTHSOUTH. The full text of the written opinion of Smith Barney, which sets
forth the assumptions made, matters considered and limitations on the review
undertaken, is attached as Annex B to this Prospectus-Joint Proxy Statement and
should be read carefully in its entirety. Smith Barney's opinion is directed
only to the fairness of the Exchange Ratio from a financial point of view to
HEALTHSOUTH, does not address any other aspect of the Merger or related
transactions and does not constitute a recommendation to any stockholder as to
how such stockholder should vote at the HEALTHSOUTH Special Meeting. See "THE
MERGER -- Opinion of Smith Barney".
SCA. Bear Stearns, which has acted as financial advisor to SCA in
connection with the Merger, has rendered its opinion to SCA's Board of Directors
that, as of the date of such opinion, the Merger is fair, from a financial point
of view, to the stockholders of SCA. A copy of such opinion is attached as Annex
C to this Prospectus-Joint Proxy Statement. SCA stockholders are urged to, and
should, read such opinion carefully in its entirety in conjunction with this
Prospectus-Joint Proxy Statement for assumptions made, matters considered and
the limits of the review by Bear Stearns. See "THE MERGER -- Opinion of Bear
Stearns".
Effective Time of the Merger. The Merger will become effective upon the
filing of a Certificate of Merger by the Subsidiary and SCA 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, subject to satisfaction of the conditions to the respective
11
obligations of each party to consummate the Merger, no later than two business
days after satisfaction or waiver of the various conditions to the Merger set
forth in the Plan, or at such other time as may be agreed by HEALTHSOUTH and
SCA. See "THE MERGER -- Effective Time of the Merger" and "-- Conditions to the
Merger".
Exchange of Certificates. As soon as reasonably practicable after the
Effective Time, transmittal materials will be mailed to each holder of record of
SCA 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. See "THE
MERGER -- Representations and Warranties".
Conditions to the Merger. The obligation of each of HEALTHSOUTH, the
Subsidiary and SCA to consummate the Merger is subject to certain conditions,
including the requisite stockholder approvals. See "THE MERGER -- Conditions to
the Merger".
Regulatory Approvals. The HSR Act provides that certain business
mergers (including the Merger) may not be consummated until certain information
has been furnished to the Department of Justice (the "DOJ") and the Federal
Trade Commission (the "FTC") and certain waiting period requirements have been
satisfied. On November 1, 1995, HEALTHSOUTH and SCA made their respective
filings with the DOJ and the FTC with respect to the Plan. Under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), the filings commenced a 30-day waiting period during which the Merger
cannot be consummated, which waiting period will expire on December 1, 1995,
unless extended by a request for additional information. Notwithstanding the
expiration of the HSR Act waiting period, at any time before or after the
Effective Time, the FTC, the DOJ or others could take action under the antitrust
laws, including seeking to enjoin the consummation of the Merger or seeking the
divestiture by HEALTHSOUTH of all or any part of the stock or assets of SCA.
There can be no assurance that a challenge to the Merger on antitrust grounds
will not be made or, if such a challenge were made, that it would not be
successful.
The operations of each Company are subject to a substantial body of
federal, state, local and accrediting body laws, rules and regulations relating
to the conduct, licensing and development of healthcare businesses and
facilities. As a result of the Merger, certain of the licenses for facilities
operated by SCA will be deemed to have been transferred, requiring the consents
or approvals of various state licensing and/or health planning agencies. In some
instances, new licenses will be required to be obtained. In addition, certain of
the arrangements between SCA and third-party payors may be deemed to have been
transferred, requiring the approval and consent of such payors. See "THE MERGER
- -- Regulatory Approvals".
Business Pending the Merger. The Plan provides that, until the
Effective Time, except as provided in the Plan, SCA will use its reasonable best
efforts to preserve intact its present business organizations, 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. See "THE MERGER -- Business Pending the Merger".
Amendment. The Plan provides that, at any time prior to the Effective
Time, the parties may, under certain circumstances, amend or otherwise change
the Plan. See "THE MERGER -- Waiver and Amendment".
Termination. The Plan may be terminated at any time prior to the
Effective Time, whether before or after approval of the Plan by the stockholders
of SCA and the stockholders of HEALTHSOUTH under certain circumstances which are
set forth in the Plan. If, however SCA
12
proposes to exercise its right under the Plan to terminate the Plan because the
Base Period Trading Price is less than $20.00, SCA must first notify HEALTHSOUTH
in writing of its intent so to terminate. HEALTHSOUTH shall then have not less
than 48 hours from the time of receipt of such written notice to submit a final
and best offer (a "Final Offer") for a change in the Merger Consideration. If
such Final Offer is accepted by SCA (as determined by its Board of Directors
after consulting with its legal counsel and financial advisors), SCA,
HEALTHSOUTH and the Subsidiary shall amend the Plan to reflect such Final Offer
and shall make any appropriate amendments to this Prospectus-Joint Proxy
Statement. See "THE MERGER -- Termination".
Break-up Fee; Third Party Bids. If the Plan is terminated by SCA
pursuant to a determination by SCA's Board of Directors, in the exercise of its
fiduciary duties under applicable law, not to recommend the Merger to the
holders of SCA Shares, or the SCA Board shall have withdrawn such
recommendation, or shall have approved, recommended or endorsed any Acquisition
Transaction (as defined in the Plan) other than the Plan, and within one year
after the effective date of such termination SCA 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 SCA shall pay to HEALTHSOUTH a break-up fee
equal to 3.25% of the aggregate Merger Consideration (determined as it would
have been calculated on the effective date of termination of the Plan,
substituting the effective date of such termination for the Closing Date of the
Merger in calculating the Base Period Trading Price). See "THE MERGER --
Break-up Fee; Third Party Bids".
Interests of Certain Persons in the Merger. In considering the
recommendations of the Boards of Directors of HEALTHSOUTH and SCA with respect
to the Plan and the transactions contemplated thereby, stockholders of both
Companies should be aware that certain members of the management of HEALTHSOUTH
and SCA and the Boards of Directors of such Companies have certain interests in
the Merger in addition to the interests of such stockholders generally.
Concurrently with the execution of the Plan, HEALTHSOUTH entered into a
proxy agreement (the "Proxy Agreement"), a non-competition agreement (the
"Non-Competition Agreement") and a consulting agreement (the "Consulting
Agreement") with Joel C. Gordon, the Chairman of the Board of Directors and
Chief Executive Officer of SCA.
Mr. Gordon, William J. Hamburg, President and Chief Operating Officer
of SCA, and Tarpley B. Jones, Senior Vice President and Chief Financial Officer
of SCA, are parties to employment agreements with SCA (the "Employment
Agreements"), which provide that if SCA merges, consolidates or combines with
another business entity, then, at the employee's option, the new entity will
assume the employment agreement or SCA will pay the employee a lump sum equal to
three years' compensation.
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. It is a condition to the consummation of the
Merger that each of HEALTHSOUTH and SCA receive a letter from Ernst & Young LLP
to the effect that the Merger will be accounted for as a pooling of interests.
See "THE MERGER -- Accounting Treatment" and "PRO FORMA CONDENSED FINANCIAL
INFORMATION".
Certain Federal Income Tax Consequences. The Merger is intended to
qualify as a reorganization within the meaning Section 368(a) of the Code. If
the Merger so qualifies, no gain or loss will be recognized by holders of SCA
Shares upon their receipt of HEALTHSOUTH Common Stock in exchange for their SCA
Shares, except with respect to cash received in lieu of fractional shares. The
obligation of SCA and HEALTHSOUTH to consummate the Merger is 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 SCA Shares and each holder of options or warrants to
acquire SCA Shares is urged to consult his or her personal tax
13
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
SCA 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 SCA at the
time of the SCA Special Meeting may be resold by them only in certain permitted
circumstances. See "THE MERGER -- Resale of HEALTHSOUTH Common Stock by
Affiliates".
Appraisal Rights. Holders of SCA Shares and holders of HEALTHSOUTH
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 SCA stockholders in
the Merger. Although no assurance can be given that the NYSE will accept such
shares of HEALTHSOUTH Common Stock for listing, HEALTHSOUTH and SCA anticipate
that these shares will qualify for listing. It is a condition to the obligation
of HEALTHSOUTH, the Subsidiary and SCA 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".
Market and Market Price
HEALTHSOUTH Common Stock is listed under the symbol HRC on the NYSE.
Set forth below are the closing prices per share of HEALTHSOUTH Common Stock on
the NYSE on (i) October 9, 1995, the last business day preceding public
announcement of the Merger, and (ii) November 7, 1995:
Market Price
Per Share of
HEALTHSOUTH
Date Common Stock
---- ------------
October 9, 1995........... $24.50
November 7, 1995........... $29.00
SCA Common Stock is listed under the symbol SCA on the NYSE. Set forth
below is the closing price per share of SCA Common Stock on the NYSE on (i)
October 9, 1995, the last business day preceding public announcement of the
Merger, and (ii) November 7, 1995.
Market Price
Per Share of
Date SCA Common Stock
---- ----------------
October 9, 1995........... $23.00
November 7, 1995........... $31.38
14
The following table sets forth certain information as to the high and
low reported sale prices per share of HEALTHSOUTH Common Stock for the calendar
years and quarters 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. All prices shown have been adjusted for a
two-for-one stock split effected in the form of a 100% stock dividend paid on
April 17, 1995.
HEALTHSOUTH
Common Stock
High Low
1992 ...................................
First Quarter........................... $18.56 $12.00
Second Quarter.......................... 12.75 7.63
Third Quarter........................... 12.63 9.13
Fourth Quarter.......................... 13.25 8.00
1993 ...................................
First Quarter........................... $13.19 $7.13
Second Quarter.......................... 9.32 6.50
Third Quarter........................... 8.38 6.07
Fourth Quarter.......................... 12.82 7.63
1994 ...................................
First Quarter........................... $16.13 $11.69
Second Quarter.......................... 17.32 12.63
Third Quarter........................... 19.69 12.88
Fourth Quarter ......................... 19.32 16.13
1995 ...................................
First Quarter .......................... $20.44 $18.06
Second Quarter.......................... 21.63 16.32
Third Quarter........................... 25.75 17.25
Fourth Quarter (through November 7,
1995)................................... 29.00 22.50
15
The following table sets forth certain information as to the high and
low reported sale prices per share of SCA Common Stock for the periods
indicated, as reported on the NYSE Composite Transactions Tape. SCA paid a $.16
cash dividend during 1994 and an $.18 cash dividend during 1995.
Period High Low
1992 ....................................
First Quarter ........................... $43.35 $30.85
Second Quarter........................... 37.10 24.35
Third Quarter............................ 30.85 18.10
Fourth Quarter........................... 27.48 17.10
1993 ....................................
First Quarter............................ $29.73 $14.85
Second Quarter........................... 17.85 13.48
Third Quarter............................ 16.60 12.23
Fourth Quarter........................... 20.60 14.00
1994 ....................................
First Quarter............................ $20.00 $15.00
Second Quarter........................... 15.75 11.88
Third Quarter............................ 20.00 12.63
Fourth Quarter........................... 20.88 18.25
1995 .....................................
First Quarter............................ $24.50 $20.00
Second Quarter .......................... 24.50 20.38
Third Quarter ........................... 24.88 19.00
Fourth Quarter (through November 7,
1995) ................................... 31.50 22.00
As of the HEALTHSOUTH Record Date, there were approximately record
holders of HEALTHSOUTH Common Stock. As of the SCA Record Date, there were
approximately record holders of SCA Common Stock.
Stockholders are advised to obtain current market quotations for
HEALTHSOUTH Common Stock. No assurance can be given as to the market price of
HEALTHSOUTH Common Stock at the Effective Time or at any other time.
Operations and Management of HEALTHSOUTH After the Merger
Pursuant to the Plan, following the Effective Time, SCA will be a
wholly-owned subsidiary of HEALTHSOUTH, and all of SCA's subsidiaries will be
indirect subsidiaries of HEALTHSOUTH. HEALTHSOUTH will continue its operations
as prior to the Merger and will continue to be managed by the same Board of
Directors and executive officers, except that HEALTHSOUTH has agreed to cause
Joel C. Gordon, Chairman of the Board and Chief Executive Officer of SCA, to be
appointed to the Board of Directors of HEALTHSOUTH immediately following the
Effective Time. See "THE MERGER -- Interests of Certain Persons in the Merger"
and "OPERATIONS AND MANAGEMENT OF HEALTHSOUTH AFTER THE MERGER".
16
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) SCA on a historical basis in comparison
with its pro forma equivalent information after giving effect to the Merger,
assuming that 1.22 shares of HEALTHSOUTH Common Stock are issued in exchange for
each SCA Share in the Merger. This financial information should be read in
conjunction with the historical consolidated financial statements of HEALTHSOUTH
and SCA and the related notes thereto contained elsewhere herein or in documents
incorporated herein by reference, and in conjunction with the unaudited pro
forma financial information appearing elsewhere in this Prospectus-Joint Proxy
Statement. See "INCORPORATION OF CERTAIN INFORMATION BY REFERENCE", "PRO FORMA
CONDENSED FINANCIAL INFORMATION" and "CONSOLIDATED FINANCIAL STATEMENTS OF SCA".
HEALTHSOUTH has not paid cash dividends since inception. SCA paid a
$.16 cash dividend during 1994 and an $.18 cash dividend during 1995. It is
anticipated that HEALTHSOUTH will retain all earnings for use in the expansion
of the business and therefore does not anticipate paying any cash dividends in
the foreseeable future. The payment of future dividends will be at the
discretion of the Board of Directors of HEALTHSOUTH and will depend, among other
things, upon HEALTHSOUTH's earnings, capital requirements, financial condition
and debt covenants.
The following information is not necessarily indicative of the combined
results of operations or combined financial position that would have resulted
had the Merger been consummated at the beginning of the periods indicated, nor
is it necessarily indicative of the combined results of operations in future
periods or future combined financial position.
Nine Months Ended
Year Ended December 31, September 30,
1992 1993 1994 1994 1995
Net income per common share:
HEALTHSOUTH(1)
Historical (primary)...................... $ .47 $ .22 $ .59 $ .54 $ .51
Historical (fully diluted)(2)............. N/A N/A .59 N/A .51
Pro forma combined (primary).............. $ .52 $ .43 $ .59 $ .54 $ .57
Pro forma combined (fully diluted)(2) N/A N/A .59 N/A .57
SCA
Historical (primary)...................... $.78 $ .96 $ .75 $ .69 $ .84
Pro forma equivalent (primary) (3) ....... .63 .52 .72 .66 .70
Pro forma equivalent (fully diluted) (3).. N/A N/A .72 N/A .70
At September 30,
1995
Stockholders' equity per common share:
HEALTHSOUTH -- historical.............. $ 6.24
HEALTHSOUTH -- pro forma combined ..... 5.69
SCA -- historical...................... 5.85
SCA -- pro forma equivalent(3)......... 6.94
<FN>
(1) Adjusted to reflect a two-for-one stock split effected in the form of a
100% stock dividend paid on April 17, 1995.
(2) Fully diluted earnings per share in 1994 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.
(3) SCA pro forma equivalent per share data have been calculated by multiplying
the pro forma HEALTHSOUTH amounts by an assumed exchange ratio of 1.22,
which is based on an assumed Base Period Trading Price for the HEALTHSOUTH
Common Stock within the range of $22 to $28 per share.
</FN>
17
HEALTHSOUTH's and SCA's
SELECTED PRO FORMA FINANCIAL INFORMATION (Unaudited)
The following selected pro forma financial information for the combined
Companies gives effect to the Merger as a pooling of interests. All of the
following selected pro forma financial information should be read in conjunction
with the pro forma financial information, including the notes thereto, appearing
elsewhere in this Prospectus-Joint Proxy Statement. See "PRO FORMA CONDENSED
FINANCIAL INFORMATION". The pro forma financial information set forth in this
Prospectus-Joint Proxy Statement is not necessarily indicative of the results
that actually would have actually occurred had the Merger been consummated on
the dates indicated or that may be obtained in the future.
Nine Months
Year Ended December 31, Ended September 30,
1992 1993 1994(5) 1994 1995(5)
(In thousands, except per share data)
Income Statement Data(1):
Revenues .................................. $665,836 $877,695 $1,664,243 $1,102,066 $1,376,772
Operating expenses:
Operating units .......................... 457,855 590,371 1,175,709 782,696 940,792
Corporate general and administrative .... 21,158 30,473 54,070 36,024 34,519
Provision for doubtful accounts............ 14,873 19,015 31,976 21,720 26,348
Depreciation and amortization ............. 39,714 60,453 119,346 73,559 104,312
Interest expense........................... 16,077 22,707 93,214 50,653 78,647
Interest income............................ (8,177) (5,571) (6,198) (4,846) (6,060)
Terminated merger expense ................. 3,665 0 0 0 0
Merger expenses............................ 0 333 6,520 3,571 29,194
NME Selected Hospitals Acquisition related
expense .................................. 0 49,742 0 0 0
Gain on sale of partnership interest ..... 0 (1,400) 0 0 0
Gain on sale of MCA Stock.................. 0 0 (7,727) (6,882) 0
Loss on impairment of assets............... 0 0 10,500 0 11,192
Loss on abandonment of computer project .. 0 0 4,500 0 0
Loss on disposal of Surgery Centers ....... 0 0 13,197 0 0
545,165 766,123 1,495,107 956,495 1,218,944
Income before income taxes and minority
interests................................. 120,671 111,572 169,136 145,571 157,828
Provision for income taxes ................ 34,505 32,712 58,110 51,639 49,410
86,166 78,860 111,026 93,932 108,418
Minority interests......................... 25,911 29,308 31,729 21,307 30,027
Income from continuing operations.......... 60,255 49,552 79,297 72,625 78,391
Income from discontinued operations ....... 3,283 4,452 0 0 0
Net income................................. $ 63,538 $ 54,004 $ 79,297 $ 72,625 $ 78,391
Weighted average common and common
equivalent shares outstanding(2).......... 121,362 125,987 133,910 133,692 137,359
Net income per common and common
equivalent share(2) ...................... $ 0.52 $ 0.43 $ 0.59 $ 0.54 $ 0.57
Net income per common share--assuming full
dilution(2) (3)........................... N/A N/A $ 0.59 N/A $ 0.57
December 31, September 30,
1992 1993 1994 1995
Balance Sheet Data(1):
Cash and marketable securities $ 165,825 $ 136,607 $ 121,584 $ 137,535
Working capital................ 250,245 267,336 261,928 344,030
Total assets................... 1,066,027 1,787,961 2,119,283 2,559,392
Long-term debt(4).............. 388,648 979,890 1,111,900 1,487,772
Stockholders' equity........... 448,309 598,394 700,846 781,105
<FN>
(1) In addition to SCA, reflects combination of HEALTHSOUTH, ReLife, SHC and
SSCI for all periods presented, as HEALTHSOUTH acquired ReLife in December
1994, SHC in June 1995 and SSCI in October 1995 in transactions accounted
for as pooling of interests.
(2) Adjusted to reflect a two-for-one split effected in the form of a 100%
stock dividend paid on April 17, 1995.
(3) Fully-diluted earnings per share reflects shares reserved for issuance upon
conversion of HEALTHSOUTH's 5% Convertible Subordinated Debentures Due
2001, where applicable.
(4) Includes current portion of long-term debt.
(5) Gives effect to the NovaCare Rehabilitation Hospitals Acquisition as if the
purchase had occurred on January 1, 1994. See "PRO FORMA CONDENSED
FINANCIAL INFORMATION".
</FN>
18
RISK FACTORS
In addition to the other information in this Prospectus-Joint Proxy
Statement, the following should be considered carefully by holders of shares of
SCA Common Stock.
Regulation. As a result of the continued escalation of healthcare costs
and the inability of many individuals to obtain health insurance, numerous
proposals have been or may be introduced in the United States Congress and state
legislatures relating to healthcare reform. There can be no assurance as to the
ultimate content, timing or effect of any healthcare reform legislation, nor is
it possible at this time to estimate the impact of potential legislation, which
may be material, on HEALTHSOUTH or on the combined Companies. HEALTHSOUTH is
also subject, and the combined Companies will be subject, to various other types
of regulation at the federal and state levels, including, but not limited to,
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. See "BUSINESS OF HEALTHSOUTH --
Regulation" and "BUSINESS OF SCA -- Regulation".
THE SPECIAL MEETINGS
General
This Prospectus-Joint Proxy Statement is being furnished to holders of
HEALTHSOUTH Common Stock in connection with the solicitation of proxies by the
Board of Directors of HEALTHSOUTH for use at the HEALTHSOUTH Special Meeting to
consider and vote upon a proposal to approve and adopt the Plan and an amendment
(the "Amendment") to the HEALTHSOUTH Certificate to increase the number of
authorized shares of HEALTHSOUTH Common Stock from 150,000,000 shares to
250,000,000 shares, and to transact such other business as may properly come
before the HEALTHSOUTH Special Meeting or any adjournments or postponements
thereof.
This Prospectus-Joint Proxy Statement is also being furnished to
holders of SCA Shares in connection with the solicitation of proxies by the
Board of Directors of SCA for use at the SCA Special Meeting to consider and
vote upon a proposal to approve and adopt the Plan and to transact such other
business as may properly come before the SCA Special Meeting or any adjournments
or postponements thereof.
Each copy of this Prospectus-Joint Proxy Statement mailed to holders of
HEALTHSOUTH Common Stock is accompanied by a form of Proxy for use at the
HEALTHSOUTH Special Meeting, and each copy of this Prospectus-Joint Proxy
Statement mailed to holders of SCA Shares is accompanied by a form of Proxy to
be used at the SCA Special Meeting.
This Prospectus-Joint Proxy Statement is also furnished to holders of
SCA Shares as a Prospectus in connection with the issuance to them of the shares
of HEALTHSOUTH Common Stock upon consummation of the Merger.
Dates, Places and Times
The HEALTHSOUTH Special Meeting will be held at the executive offices
of HEALTHSOUTH at Two Perimeter Park South, HEALTHSOUTH Corporation, Birmingham,
Alabama 35243 on , 1995 at .m., Central Time.
The SCA Special Meeting will be held at Nashville, Tennesee, on
at .m., Central Time.
Record Dates; Quorums
The Board of Directors of HEALTHSOUTH has fixed the close of business
on as the HEALTHSOUTH Record Date for the determination of the holders
of HEALTHSOUTH Common Stock entitled to receive notice of and to vote at
the HEALTHSOUTH Special Meeting. The
19
presence, in person or by Proxy, of the holders of shares of HEALTHSOUTH Common
Stock entitled to cast a majority of the votes entitled to be cast at the
HEALTHSOUTH Special Meeting will constitute a quorum at the HEALTHSOUTH Special
Meeting.
The Board of Directors of SCA has fixed the close of business on ,
as the SCA Record Date for the determination of holders of SCA Shares entitled
to receive notice of and to vote at the SCA Special Meeting. The presence, in
person or by Proxy, of the holders of SCA Shares entitled to cast a majority of
the votes entitled to be cast at the SCA Special Meeting will constitute a
quorum at the SCA Special Meeting.
Votes Required
As of the HEALTHSOUTH Record Date, there were outstanding and entitled
to vote shares of HEALTHSOUTH Common Stock. Each share of HEALTHSOUTH
Common Stock is entitled to one vote on each matter that comes before the
HEALTHSOUTH Special Meeting.
Approval and adoption of the Plan by the stockholders of HEALTHSOUTH is
not required by state law, but is required pursuant to rules of the NYSE because
of the number of shares of HEALTHSOUTH Common Stock which are expected to be
issued in connection with the Merger. Such approval is being sought solely to
comply with such rules of the NYSE. The affirmative vote of the holders of
shares of HEALTHSOUTH Common Stock representing a majority of the votes cast at
the HEALTHSOUTH Special Meeting is required to approve and adopt the Plan.
Approval and adoption of the Amendment to increase the number of
authorized shares of HEALTHSOUTH Common Stock to 250,000,000 shares requires the
affirmative vote of a majority of the issued and outstanding shares of
HEALTHSOUTH Common Stock. Accordingly, approval and adoption of the Amendment
will require the affirmative vote of the holders of shares of HEALTHSOUTH Common
Stock entitled to cast at least votes. The number of shares of HEALTHSOUTH
Common Stock currently reserved for issuance, including those reserved for
issuance in connection with the Merger, when added to the number of shares
currently outstanding, exceeds the number of shares of HEALTHSOUTH Common Stock
currently authorized. Accordingly, unless the Amendment is approved and adopted,
there will not be a sufficient number of shares of HEALTHSOUTH Common Stock
available to consummate the Plan and the Merger.
As of the HEALTHSOUTH Record Date, directors and executive officers of
HEALTHSOUTH and their affiliates beneficially owned an aggregate of
shares of HEALTHSOUTH Common Stock (excluding shares issuable upon exercise of
options andconvertible securities), or approximately % of the shares of
HEALTHSOUTH Common Stock outstanding on such date. The directors and executive
officers of HEALTHSOUTH and their affiliates have indicated their intentions to
vote the shares of HEALTHSOUTH Common Stock beneficially owned by them in
favor of approval and adoption of the Plan.
By unanimous vote of the members of the Board of Directors of
HEALTHSOUTH at a special meeting held on October 6, 1995, the HEALTHSOUTH Board
of Directors approved and adopted the Plan and the Merger and recommended that
the stockholders of HEALTHSOUTH vote FOR approval and adoption of the Plan.
As of the SCA Record Date, there were outstanding and entitled to vote
shares of SCA Common Stock. Each of such SCA Shares is entitled to one vote on
each matter that comes before the SCA Special Meeting. Approval and adoption of
the Plan will require the affirmative vote of a majority of the votes entitled
to be cast by the holders of record of the issued and outstanding shares of SCA
Common Stock. Accordingly, approval and adoption of the Plan will require the
affirmative vote of the holders of at least shares of SCA Common Stock.
As of the SCA Record Date, SCA's directors and executive officers and
their affiliates beneficially owned an aggregate of _____________ shares, or
approximately ____%, of SCA Common Stock outstanding on such date (excluding
shares issuable upon exercise of options and warrants), by Joel C. Gordon,
Chairman of the Board of Directors and Chief Executive Officer of SCA, and
certain of his affiliates
20
have executed Proxy Agreements with HEALTHSOUTH, whereby they agreed that until
the date on which the Plan is terminated and following such termination during
such time as a Third Party Acquisition Event (as defined herein) exists with
respect to SCA, but in no event after the close of business one year following
the termination of the Plan, they will vote an aggregate of 1,358,170 shares of
SCA Common Stock (a) in favor of adoption and approval of the Plan and the
Merger at every meeting of the stockholders of SCA at which such matters are
considered and at every adjournment thereof, and (b) against any other proposal
for any reorganization. The shares subject to the Proxy Agreements represent
approximately of the votes eligible to be cast at the SCA Special Meeting as of
the SCA Record Date. See "THE MERGER -- Interests of Certain Persons in the
Merger".
By the unanimous vote of the members of the Board of Directors of SCA
at a special meeting held on October 9, 1995, the SCA Board of Directors
determined that the proposed Merger, and the terms and conditions of the Plan,
were in the best interests of SCA and its stockholders. The Plan and the Merger
were adopted and approved unanimously by the entire SCA Board of Directors,
which also unanimously resolved to recommend that the stockholders of SCA vote
FOR approval and adoption of the Plan.
In the event that the Plan is not approved and adopted by both the
HEALTHSOUTH and SCA stockholders, the Plan may be terminated in accordance with
its terms. See "THE MERGER -- Termination".
Voting and Revocation of Proxies
Shares of HEALTHSOUTH Common Stock and the SCA Shares represented by a
Proxy properly signed and received at or prior to the appropriate Special
Meeting, unless subsequently revoked, will be voted in accordance with the
instructions thereon. If a Proxy for the HEALTHSOUTH Special Meeting is properly
executed and returned without indicating any voting instructions, shares of
HEALTHSOUTH Common Stock represented by the Proxy will be voted for approval and
adoption of the Plan and approval and adoption of the Amendment. If a Proxy for
the SCA Special Meeting is properly executed and returned without indicating any
voting instructions, SCA Shares represented by the Proxy will be voted for
approval and adoption of the Plan. Any Proxy given pursuant to the 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 HEALTHSOUTH, for HEALTHSOUTH stockholders, or
with the Secretary of SCA, for SCA stockholders, prior to or at the appropriate
Special Meeting, or by voting in person at the appropriate Special Meeting.
Attendance at a Special Meeting will not in and of itself constitute a
revocation of a Proxy. Only votes cast for approval of the Plan or other matters
constitute affirmative votes. Abstentions and broker non-votes will, therefore,
have the same effect as votes against approval of the Plan with respect to the
SCA Special Meeting. Abstentions and broker non-votes will not affect the vote
on the Plan at the HEALTHSOUTH Special Meeting. Because the proposal to amend
the HEALTHSOUTH Certificate requires the affirmative vote of a majority of the
issued and outstanding shares of HEALTHSOUTH Common Stock, abstentions and
broker non-votes will be the equivalent of votes against this proposal.
The Boards of Directors of HEALTHSOUTH and SCA are not aware of any
business to be acted upon at the Special Meetings of their respective
stockholders other than as described herein. If, however, other matters are
properly brought before either Special Meeting, or any adjournments or
postponements thereof, the persons appointed as proxies will have discretion to
vote or act thereon according to their best judgment and subject to applicable
rules of the SEC or Delaware law.
Solicitation of Proxies
In addition to solicitation by mail, directors, officers and employees
of HEALTHSOUTH and SCA, who will not be specifically compensated for such
services, may solicit proxies from the stockholders of HEALTHSOUTH and SCA,
respectively, 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.
21
Each of HEALTHSOUTH and SCA has retained Morrow & Co. to assist in the
solicitation of proxies from its stockholders. The fees to be paid to Morrow &
Co. for such services by each of HEALTHSOUTH and SCA are not expected to exceed
approximately $6,000 plus reasonable out-of-pocket costs and expenses. Each of
HEALTHSOUTH and SCA will bear its own expenses in connection with the
solicitation of proxies for its Special Meeting, except that HEALTHSOUTH and SCA
each will pay one-half of the expenses incurred in printing this
Prospectus-Joint Proxy Statement, the forms of Proxies and other proxy
materials. See "THE MERGER -- Expenses".
STOCKHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY CARDS. THE
PROCEDURE FOR THE EXCHANGE OF SHARES AFTER THE MERGER IS CONSUMMATED IS SET
FORTH ELSEWHERE IN THIS PROSPECTUS-JOINT PROXY STATEMENT. SEE "THE MERGER --
EXCHANGE OF CERTIFICATES".
22
THE MERGER
The description of the Merger contained in this Prospectus-Joint 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. All stockholders are
urged to read Annex A in its entirety.
Terms of the Merger
The acquisition of SCA by HEALTHSOUTH will be effected by means of the
merger of the Subsidiary with and into SCA, with SCA being the Surviving
Corporation. The Certificate of Incorporation of SCA (the "SCA Certificate")
shall be amended and restated, effective at the Effective Time, in a manner
satisfactory to HEALTHSOUTH, and will govern the Surviving Corporation until
amended in accordance with applicable law. The Bylaws of the Subsidiary as in
effect at the Effective Time will govern the Surviving Corporation until amended
or repealed in accordance with applicable law. At the Effective Time, SCA shall
continue as the Surviving Corporation under the name "Surgical Care Affiliates,
Inc.".
At the Effective Time, each outstanding SCA Share not owned by SCA or a
subsidiary of SCA will be converted into the right to receive 1.22 shares (the
"Exchange Ratio") of HEALTHSOUTH Common Stock (the "Merger Consideration");
provided, however, that if the Base Period Trading Price (as defined below) is
greater than $28.00, then the Exchange Ratio shall be equal to the quotient
obtained by dividing $34.16 by the Base Period Trading Price, computed to four
decimal places; and provided further, that if the Base Period Trading Price
shall be less than $22.00, then the Exchange Ratio shall be equal to the
quotient obtained by dividing $26.84 by the Base Period Trading Price, computed
to four decimal places; and provided further, that the Exchange Ratio shall in
no event be greater than 1.342, except as set forth in the immediately following
sentences. SCA shall have the right to terminate the Plan if the Base Period
Trading Price is less than $20.00. If, in that circumstance, SCA proposes to so
terminate the Plan, HEALTHSOUTH shall have an opportunity to submit a final and
best offer (the "Final Offer") for a change in the Merger Consideration. If
SCA's Board of Directors (in consultation with its legal counsel and financial
advisors) accepts the Final Offer, the Plan shall be amended to reflect such
Final Offer.
The term "Base Period Trading Price" means the average of the daily
closing prices per share of HEALTHSOUTH Common Stock for the 20 consecutive
trading days on which such shares are actually traded ending on the second New
York Stock Exchange trading day immediately preceding the closing of the Merger.
The daily closing price per share shall be the closing price for NYSE-Composite
Transactions as reported in The Wall Street Journal-Eastern Edition or, if not
reported therein, any other authoritative source.
The following table indicates the Exchange Ratio assuming various Base
Period Trading Prices, with the resulting "value" to be received for each SCA
Share:
Value to be
Base Period received for
Trading Price Exchange Ratio each SCA Share
(Col. 1) (Col. 2) (Col. 1 x Col. 2)
$19.00(1)...... 1.342 $25.50
20.00......... 1.342 26.84
21.00......... 1.2781 26.84
22.00......... 1.22 26.84
23.00......... 1.22 28.06
24.00......... 1.22 29.28
25.00......... 1.22 30.50
26.00......... 1.22 31.72
27.00......... 1.22 32.94
28.00......... 1.22 34.16
29.00......... 1.1779 34.16
30.00......... 1.1387 34.16
- ------------------
(1) SCA will have the right to terminate the Plan if the Base Period Trading
Price is less than $20.00.
23
As of the Effective Time, all outstanding SCA Shares shall
automatically be cancelled and retired and shall cease to exist, and each holder
of a certificate representing such shares shall cease to have any rights with
respect thereto, except the right to receive shares of HEALTHSOUTH Common Stock,
cash (without interest) in lieu of fractional shares and any dividends or other
distributions to which such holder is entitled as a result of the Merger. Each
SCA Share that is owned by SCA or any subsidiary of SCA shall automatically be
cancelled and retired and shall cease to exist, and no consideration shall be
delivered in exchange therefor.
The Plan provides that, at the Effective Time, all outstanding options
to purchase SCA Common Stock which are outstanding at such time, whether or not
then exercisable, will become immediately exercisable options to purchase
HEALTHSOUTH Common Stock, and HEALTHSOUTH will assume each such option (with
exercise prices adjusted in accordance with the Exchange Ratio). All warrants to
purchase shares of SCA Common Stock which are outstanding at the Effective Time
shall become warrants to purchase shares of HEALTHSOUTH Common Stock, and
HEALTHSOUTH shall assume all such warrants (with exercise prices adjusted in
accordance with the Exchange Ratio).
Based upon the number of shares of HEALTHSOUTH Common Stock outstanding
upon exercise of options and convertible securities as of the HEALTHSOUTH Record
Date, the stockholders of SCA will receive in the aggregate approximately % of
the outstanding shares of HEALTHSOUTH Common Stock anticipated to be outstanding
immediately after the Effective Time, assuming an Exchange Ratio of 1.22.
Background of the Merger
Richard M. Scrushy, Chairman of the Board and Chief Executive Officer
of HEALTHSOUTH, and Joel C. Gordon, Chairman of the Board and Chief Executive
Officer of SCA, were familiar with each other and had met informally at various
times in the past at industry conferences and other business gatherings. In
early September 1995, Mr. Scrushy and Mr. Gordon met and discussed in a general
way whether there existed a basis for considering a possible business
combination between the two companies. On October 4, 1995, Mr. Scrushy called
Mr. Gordon to request a meeting to explore a potential transaction. On October
5, 1995, members of senior management of HEALTHSOUTH and SCA held detailed
discussions regarding the possible terms of a merger of the two companies,
including the structure, price and documentation of such a transaction.
Following these discussions, the Board of Directors of SCA met on October 6,
1995 to review the results of such discussions. Through October 9, 1995,
management of SCA and its legal and financial advisors negotiated the terms of
the Merger with HEALTHSOUTH and its legal and financial advisors. On October 6,
1995, the Board of Directors of HEALTHSOUTH held a meeting to consider the terms
of HEALTHSOUTH's offer and, after reviewing information about SCA and the
proposed Plan with HEALTHSOUTH's management and legal and financial advisors,
unanimously approved the Merger. The Board of Directors of SCA held a meeting on
the evening of October 9, 1995 attended by SCA's senior management and its legal
and financial advisors. At the October 9, 1995 meeting, senior management and
the financial and legal advisors made detailed presentations concerning material
aspects of the proposed Merger and related transactions. As discussed above, at
such October 9, 1995 meeting the SCA Board of Directors approved and adopted the
Plan. Following such approvals, HEALTHSOUTH, SCA and the Subsidiary executed the
definitive Plan.
Reasons for the Merger; Recommendations of the Boards of Directors
On October 6, 1995, the HEALTHSOUTH Board of Directors voted to approve
the Plan and the Merger.
In approving the Plan, HEALTHSOUTH's Board of Directors considered the
following factors, among others, without assigning relative weights thereto:
(i) The fact that SCA is the largest independent operator of ambulatory
surgery centers in the United States;
(ii) The experience and expertise of SCA's management team;
24
(iii) The fact the HEALTHSOUTH currently operates rehabilitation
facilities in approximately 70% of SCA's markets;
(iv) The benefits to be derived by both patients and payors from
packaged pricing of bundled surgical and rehabilitative healthcare services in
such overlapping markets;
(v) HEALTHSOUTH's belief that its existing managed care relationships
and national network would significantly enhance SCA's patient volume and make
SCA more competitive in its markets;
(vi) HEALTHSOUTH's belief that there is a natural strategic fit between
HEALTHSOUTH and SCA in view of the large number of surgical patients who require
rehabilitative healthcare services;
(vii) HEALTHSOUTH's belief that significant operating synergies would
exist in the areas of cost of capital, purchasing power and overheard reduction,
and that the Merger would produce immediate accretion to HEALTHSOUTH's 1996
earnings, thus benefiting HEALTHSOUTH's existing stockholders; and
(viii) The written opinion of Smith Barney dated October 9, 1995 to the
effect that, as of such date and based upon and subject to certain matters
stated in such opinion, the Exchange Ratio was fair, from a financial point of
view, to HEALTHSOUTH.
Based upon its analysis of the foregoing factors, among others, the
Board of Directors of HEALTHSOUTH recommends that the stockholders of
HEALTHSOUTH vote FOR the approval and adoption of the Plan.
By the unanimous vote of the the entire Board of Directors of SCA at a
special meeting held on October 9, 1995, the SCA Board of Directors determined
that the proposed Merger, and the terms and conditions of the Plan, were in the
best interests of SCA and its stockholders. The Plan and the Merger were adopted
and approved unanimously by the entire Board of Directors of SCA, who also
unanimously resolved to recommend that the stockholders of SCA vote FOR approval
and adoption of the Plan. See "-- Background of the Merger". In reaching its
conclusion to enter into the Plan and to recommend that the stockholders of SCA
vote for the approval and adoption of the Plan, the Board of Directors of SCA
considered a number of factors, including, without limitation and without
assigning relative weights thereto, the following:
(i) The value of the consideration to be received by SCA stockholders,
including the fact that the method for determining the Exchange Ratio allows
holders of SCA Shares to receive up to $34.16 per share in value of HEALTHSOUTH
Common Stock, if the Base Period Trading Price of HEALTHSOUTH Common Stock
equals or exceeds $28.00.
(ii) The terms and conditions of the proposed Merger, including the
parties' reciprocal representations, warranties and convenants, the conditions
to their respective obligations, and the circumstances and terms under which SCA
may terminate the Plan to accept a higher offer.
(iii) The fact that the Merger is expected to be treated as a tax-free
reorganization and that the Merger will be accounted for under the
"pooling-of-interests" method of accounting.
(iv) The SCA Board's familiarity with SCA's business, assets, financial
condition, results of operations, business strategy and prospects and current
trends in the markets in which it operates.
(v) The opportunity for SCA stockholders to continue to share in the
potential for long-term gains in SCA through the ownership of HEALTHSOUTH Common
Stock following the Merger.
(vi) The business reputation and capabilities of HEALTHSOUTH and its
management, HEALTHSOUTH's financial strength, prospects, market position and
strategic objectives, and the historical performance of HEALTHSOUTH Common
Stock.
(vii) The presentations of Bear Stearns delivered to the Board of
Directors of SCA at its meeting held on October 9, 1995 including the oral
opinion of Bear Stearns delivered on October 9, 1995, that the Merger was fair,
from a financial point of view, to the stockholders of SCA. Bear Stearns has
since
25
delivered an updated written opinion, dated as of the date of this
Prospectus-Joint Proxy Statement, to the effect that, as of the date of this
Prospectus-Joint Proxy Statement, the Merger is fair, from a financial point of
view, to such stockholders. See "--Opinions of Financial Advisors".
(viii) The perceived strengths of SCA and HEALTHSOUTH combined, the
belief that SCA and HEALTHSOUTH are strategically complementary and the belief
that the combined Companies will be able to compete more effectively in the
changing healthcare marketplace and will be more attractive to managed care
companies and other payors.
Opinion of Smith Barney
Smith Barney was retained by HEALTHSOUTH to act as its financial
advisor in connection with the Merger. In connection with such engagement,
HEALTHSOUTH requested that Smith Barney evaluate the fairness, from a financial
point of view, to HEALTHSOUTH of the consideration to be paid by HEALTHSOUTH in
the Merger. Smith Barney has delivered a written opinion, dated October 9, 1995,
to the Board of Directors of HEALTHSOUTH to the effect that, as of such date and
based upon and subject to certain matters stated in such opinion, the Exchange
Ratio was fair, from a financial point of view, to HEALTHSOUTH.
In arriving at its opinion, Smith Barney reviewed the Plan and held
discussions with certain senior officers, directors and other representatives
and advisors of HEALTHSOUTH and certain senior officers and other
representatives and advisors of SCA concerning the businesses, operations and
prospects of HEALTHSOUTH and SCA. Smith Barney examined certain publicly
available business and financial information relating to HEALTHSOUTH and SCA as
well as certain other financial information and data for HEALTHSOUTH and SCA
which were provided to or otherwise discussed with Smith Barney by the
respective managements of HEALTHSOUTH and SCA, including information relating to
certain strategic implications and operational benefits anticipated from the
Merger, certain financial forecasts of HEALTHSOUTH prepared by the management of
HEALTHSOUTH and analysts' estimates as to the future financial performance of
HEALTHSOUTH and SCA. Smith Barney reviewed the financial terms of the Merger as
set forth in the Plan in relation to, among other things: current and historical
market prices and trading volumes of the HEALTHSOUTH Common Stock; the
historical and projected earnings and other operating data of HEALTHSOUTH and
SCA; and the capitalization and financial condition of HEALTHSOUTH and SCA.
Smith Barney considered, to the extent publicly available, the financial terms
of similar transactions recently effected which Smith Barney considered relevant
in evaluating the Merger and analyzed certain financial, stock market and other
publicly available information relating to the businesses of other companies
whose businesses Smith Barney considered relevant in evaluating those of
HEALTHSOUTH and SCA. Smith Barney also evaluated the potential pro forma
financial impact of the Merger on HEALTHSOUTH. In addition to the foregoing,
Smith Barney conducted such other analyses and examinations and considered such
other financial, economic and market criteria as Smith Barney deemed appropriate
to arrive at its opinion. Smith Barney noted that its opinion was necessarily
based upon information available to, and financial, stock market and other
conditions and circumstances existing and disclosed to, Smith Barney as of the
date of its opinion.
In rendering its opinion, Smith Barney assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information publicly available or furnished to or otherwise reviewed
by or discussed with Smith Barney. With respect to certain financial information
and other data provided to or otherwise reviewed by or discussed with Smith
Barney, the managements of HEALTHSOUTH and SCA advised Smith Barney that such
information and other data reflected the best currently available estimates and
judgments of the respective managements of HEALTHSOUTH and SCA as to the future
financial performance of HEALTHSOUTH and SCA and the strategic implications and
operational benefits anticipated from the Merger. Smith Barney assumed, with the
consent of the Board of Directors of HEALTHSOUTH, that the Merger will be
treated as a pooling of interests in accordance with generally accepted
accounting principles and as a tax-free reorganization for federal income tax
purposes. Smith Barney's opinion relates to the relative values of HEALTHSOUTH
and SCA. Smith Barney did not express any opinion as to what the value of the
HEALTHSOUTH Common Stock actually will be when issued to SCA stockholders
pursuant to the Merger or the price at which the
26
HEALTHSOUTH Common Stock will trade subsequent to the Merger. In addition, Smith
Barney did not make or obtain an independent evaluation or appraisal of the
assets or liabilities (contingent or otherwise) of HEALTHSOUTH or SCA nor did
Smith Barney make any physical inspection of the properties or assets of
HEALTHSOUTH or SCA. Smith Barney was not asked to consider, and its opinion does
not address, the relative merits of the Merger as compared to any alternative
business strategies that might exist for HEALTHSOUTH or the effect of any other
transaction in which HEALTHSOUTH might engage. In addition, although Smith
Barney evaluated the Exchange Ratio from a financial point of view, Smith Barney
was not asked to and did not recommend the specific consideration payable in the
Merger. No limitations were imposed by HEALTHSOUTH on Smith Barney with respect
to the investigations made or procedures followed by Smith Barney in rendering
its opinion.
The full text of the written opinion of Smith Barney dated October 9,
1995, which sets forth the assumptions made, matters considered and limitations
on the review undertaken, is attached hereto as Annex B and is incorporated
herein by reference. HEALTHSOUTH stockholders are urged to read this opinion
carefully in its entirety. Smith Barney's opinion is directed only to the
fairness of the Exchange Ratio from a financial point of view, does not address
any other aspect of the Merger or related transactions and does not constitute a
recommendation to any stockholder as to how such stockholder should vote at the
HEALTHSOUTH Special Meeting. The summary of the opinion of Smith Barney set
forth in this Prospectus-Joint Proxy Statement is qualified in its entirety by
reference to the full text of such opinion.
In preparing its opinion to the Board of Directors of HEALTHSOUTH,
Smith Barney performed a variety of financial and comparative analyses,
including those described below. The summary of such analyses does not purport
to be a complete description of the analyses underlying Smith Barney's opinion.
The preparation of a fairness opinion is a complex analytic 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. Accordingly, Smith Barney believes that its analyses must
be considered as a whole and that selecting portions of its analyses and
factors, without considering all analyses and factors, could create a misleading
or incomplete view of the process underlying such analyses and its opinion. In
its analyses, Smith Barney made numerous assumptions with respect to
HEALTHSOUTH, SCA, industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
HEALTHSOUTH and SCA. The estimates contained in such analyses and the valuation
ranges resulting from any particular analysis are not necessarily indicative of
actual values or predictive of future results or values, 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.
Discounted Cash Flow Analysis. Smith Barney performed a discounted cash
flow analysis of the projected free cash flow of SCA for the fiscal years 1995
through 2000, assuming, among other things, discount rates of 12%, 14% and 16%,
terminal multiples of latest 12 months net income of 15.0x to 20.0x (with
particular focus on terminal multiples of 17.0x to 18.0x) and revenue growth for
SCA of approximately 15% in fiscal year 1995, 24.3% in fiscal year 1996 and 18%
per year in fiscal years 1997 through 2000. Utilizing terminal multiples of net
income of 17.0x to 18.0x, this analysis resulted in an equity reference range
for SCA of approximately $26.58 to $32.79 per share.
Contribution Analysis. Smith Barney analyzed the respective
contributions of HEALTHSOUTH and SCA to the adjusted revenue, adjusted earnings
before interest, taxes, depreciation and amortization ("EBITDA"), adjusted
earnings before interest and taxes ("EBIT") and net income of the combined
company for fiscal years 1995 through 1997 (with particular focus on fiscal
years 1995 and 1996), based on internal estimates of management in the case of
HEALTHSOUTH and estimates of selected investment banking firms in the case of
SCA. This analysis indicated that (i) in fiscal year 1995, HEALTHSOUTH would
contribute approximately 88.1% of adjusted revenue, 80.3% of adjusted EBITDA,
77.7% of adjusted EBIT and 69.1% of net income, and SCA would contribute
approximately
27
11.9% of adjusted revenue, 19.7% of adjusted EBITDA, 22.3% of adjusted EBIT and
30.9% of net income and (ii) in fiscal year 1996, HEALTHSOUTH would contribute
approximately 87.4% of adjusted revenue, 79.9% of adjusted EBITDA, 77.5% of
adjusted EBIT and 72.2% of net income, and SCA would contribute approximately
12.6% of adjusted revenue, 20.1% of adjusted EBITDA, 22.5% of adjusted EBIT and
27.8% of net income. Immediately following consummation of the Merger,
stockholders of HEALTHSOUTH and SCA would own approximately 69.5% and 30.5%,
respectively, of the combined Companies. Smith Barney noted that the operating
margins of SCA are higher than those of HEALTHSOUTH, and that the revenue
contributions of SCA relative to HEALTHSOUTH do not give effect to such margin
disparity. Smith Barney also noted that the capital structure of HEALTHSOUTH
includes more debt than does the capital structure of SCA, and that the revenue,
EBITDA and EBIT contributions of HEALTHSOUTH relative to SCA do not give effect
to the significant negative effect of HEALTHSOUTH interest expense on the pro
forma net income of the combined Companies. For these reasons, Smith Barney
viewed net income as a significant factor for purposes of its contribution
analysis.
Pro Forma Merger Analysis. Smith Barney analyzed certain pro forma
effects resulting from the Merger, including, among other things, the impact of
the Merger on the projected EPS of HEALTHSOUTH for the fiscal years ended 1995
through 1997. Based on EPS estimates of selected investment banking firms as to
SCA and internal estimates of HEALTHSOUTH management as to HEALTHSOUTH, the
results of the pro forma merger analysis suggested that the Merger would be
accretive to HEALTHSOUTH's EPS in each of the years analyzed assuming certain
cost savings and other potential synergies anticipated from the Merger were
achieved. The actual results achieved by the combined Companies may vary from
projected results and the variations may be material.
Selected Company Analysis. Using publicly available information, Smith
Barney analyzed, among other things, the market values and trading multiples of
SCA and the following selected companies in the dialysis services industry:
Renal Treatment Centers, Inc. and VIVRA Incorporated (the "Dialysis Companies"),
and the following selected companies in the physician practice management
industry: American Oncology Resources, Inc.; Apogee, Inc.; Coastal Healthcare
Group, Inc.; EmCare Holdings, Inc.; InPhyNet Medical Management, Inc.; Medcath,
Inc.; MedPartners, Inc.; Orthodontic Centers of America, Inc.; OccuSystems,
Inc.; Pacific Physicians Services, Inc.; PhyCor, Inc.; Physician Reliance
Network, Inc.; Physicians Resource Group, Inc.; and Sterling Healthcare Group,
Inc. (the "Physician Practice Management Companies" and, together with the
Dialysis Companies, the "Selected Companies"). Smith Barney compared market
values as multiples of latest 12 months and estimated net income, and adjusted
market values (equity market value, plus total debt, less cash and, in the case
of the Dialysis Services Companies, less capitalized rents) as multiples of
latest 12 months net revenue, EBIT and EBITDA. Smith Barney also compared the
debt to capitalization ratios, profit margins, historical revenue growth and
projected EPS growth of SCA and the Selected Companies. Net income and EPS
projections for the Selected Companies and SCA were based on estimates of
selected investment banking firms. All multiples were based on closing stock
prices as of October 6, 1995. This analysis resulted in an equity reference
range for SCA of approximately $22.40 to $32.38 per share based on the multiples
of the Dialysis Services Companies, and approximately $22.94 to $59.64 per share
based on the multiples of the Physician Practice Management Companies.
Selected Merger and Acquisition Transactions Analysis. Using publicly
available information, Smith Barney analyzed, among other things, the implied
transaction multiples paid in the following transactions: Columbia/HCA
Healthcare Corporation's acquisition of Medical Care America, Inc. (May 1994),
HEALTHSOUTH's acquisition of Surgical Health Corporation (January 1995) and
HEALTHSOUTH's acquisition of Sutter Surgery Centers, Inc. (August 1995) (the
"Selected Transactions"). Smith Barney compared transaction values of the
Selected Transactions as a multiple of, among other things, latest 12 months
EBITDA. All multiples for the Selected Transactions were based on information
available at the time of announcement of the Selected Transactions. This
analysis resulted in an equity reference range for SCA of approximately $14.55
to $25.28 per share based on multiples of latest 12 months EBITDA. In evaluating
the Selected Transactions, Smith Barney noted that this analysis did not take
into account, among other things, differences in stock market valuations, both
in general terms and specifically for the healthcare industry, as of the dates
of the Selected Transactions and the proposed
28
Merger, or differences in the size and national scope of the operations and
relative levels of operating profitability (i.e., EBIT and EBITDA expressed as a
percentage of revenue) of the target companies in the Selected Transactions as
compared with SCA.
No company, transaction or business used in the "Selected Company
Analysis" and "Selected Merger and Acquisition Transactions Analysis" as a
comparison is identical to HEALTHSOUTH, SCA or the Merger. Accordingly, an
analysis of the results of the foregoing is not entirely mathematical; rather,
it involves complex considerations and judgments concerning differences in
financial and operating characteristics and other factors that could affect the
acquisition, public trading or other values of the Selected Companies, Selected
Transactions or the business segment or company to which they are being
compared.
Other Factors and Comparative Analyses. In rendering its opinion, Smith
Barney considered certain other factors and conducted certain other comparative
analyses, including among other things, a review of (i) HEALTHSOUTH and SCA
historical and projected financial results; (ii) the history of trading prices
for HEALTHSOUTH Common Stock and SCA Common Stock; (iii) summary market and
financial information for HEALTHSOUTH and selected companies in the
rehabilitation industry; (iv) identifiable cost savings and other potential
synergies anticipated from the Merger; (v) the premiums paid in selected
stock-for-stock transactions; and (vi) the pro forma ownership of the combined
company.
Pursuant to the terms of Smith Barney's engagement, HEALTHSOUTH has
agreed to pay Smith Barney for its services in connection with the Merger an
aggregate financial advisory fee of $5,000,000. HEALTHSOUTH also has agreed to
reimburse Smith Barney for travel and other out-of-pocket expenses incurred by
Smith Barney in performing its services, including the fees and expenses of its
legal counsel, and to indemnify Smith Barney and related persons against certain
liabilities, including liabilities under the federal securities laws, arising
out of Smith Barney's engagement.
Smith Barney has advised HEALTHSOUTH that, in the ordinary course of
business, Smith Barney and its affiliates may actively trade the securities of
HEALTHSOUTH and SCA for their own account or for the account of customers and,
accordingly, may at any time hold a long or short position in such securities.
Smith Barney has in the past provided, and is currently providing, financial
advisory and investment banking services to HEALTHSOUTH unrelated to the Merger,
for which services Smith Barney has received, and will receive, compensation. In
addition, Smith Barney and its affiliates (including Travelers Group Inc. and
its affiliates) may maintain relationships with HEALTHSOUTH and SCA.
Smith Barney is a nationally recognized investment banking firm and was
selected by HEALTHSOUTH based on Smith Barney's experience, expertise and
familiarity with HEALTHSOUTH and its business. Smith Barney regularly engages in
the valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes.
Opinion of Bear Stearns
The Board of Directors of SCA initially retained Bear Stearns in
October 1994 to act as its financial advisor. On October 6, 1995, the Board of
Directors of SCA retained Bear Stearns to act as its financial advisor and to
render an opinion to the Board of Directors of SCA as to the fairness of the
Merger, from a financial point of view, to the stockholders of SCA. On October
9, 1995, Bear Stearns rendered its oral opinion to the Board of Directors of SCA
that the Merger was fair, from a financial point of view, to the stockholders of
SCA as of the date thereof. Bear Stearns subsequently issued its written opinion
to the Board of Directors of SCA which has been dated the date of this
Prospectus-Joint Proxy Statement (the "Bear Stearns Opinion").
The full text of the Bear Stearns Opinion is attached as Annex C to
this Prospectus-Joint Proxy Statement. SCA stockholders are urged to, and
should, read the Bear Stearns Opinion carefully in its entirety in conjunction
with this Prospectus-Joint Proxy Statement for assumptions made, matters
considered and limits of the review by Bear Stearns.
29
The Bear Stearns Opinion addresses only the fairness of the Merger,
from a financial point of view, to the stockholders of SCA and does not
constitute a recommendation to any stockholder of SCA as to how such stockholder
should vote with respect to the approval of the Plan. The summary of the Bear
Stearns Opinion set forth in this Prospectus-Joint Proxy Statement is qualified
in its entirety by reference to the full text of such opinion.
Although Bear Stearns evaluated the financial terms of the Merger and
participated in discussions concerning the consideration to be paid, Bear
Stearns did not recommend the specific consideration to be paid in the Merger.
The consideration to be received by SCA's stockholders as a result of the Merger
was determined by negotiations between SCA and HEALTHSOUTH after consultation by
each of such parties with their respective financial advisors. In connection
with rendering its opinion, Bear Stearns, among other things: (i) reviewed the
Prospectus-Joint Proxy Statement; (ii) reviewed SCA's Annual Reports to
Shareholders and Annual Reports on Form 10-K for the fiscal years December 31,
1992 through 1994, and its Quarterly Reports on Form 10-Q for the periods ended
June 30 and September 30, 1995; (iii) reviewed HEALTHSOUTH's Registration
Statement on Form S-3 dated September 27, 1995, its Annual Reports to
Shareholders and Annual Reports on Form 10-K for the fiscal years ended December
31, 1992 through 1994, and its Quarterly Reports on Form 10-Q for the periods
ended June 30 and September 30, 1995; (iv) reviewed certain operating and
financial information, including financial projections, provided to Bear Stearns
by the managements of SCA and HEALTHSOUTH relating to their respective business
and prospects; (v) met with certain members of the senior managements of SCA and
HEALTHSOUTH to discuss their respective operations, historical financial
statements and future prospects; (vi) reviewed the historical prices and trading
volume of the common shares of SCA and HEALTHSOUTH; (vii) reviewed publicly
available financial data and stock market performance data of companies which
Bear Stearns deemed generally comparable to SCA and HEALTHSOUTH; (viii) reviewed
the terms of recent mergers and acquisitions of companies which Bear Stearns
deemed generally comparable to the Merger, and (ix) conducted such other
studies, analyses, inquiries and investigations as Bear Stearns deemed
appropriate.
Bear Stearns relied upon and assumed without independent verification
(i) the accuracy and completeness of all of the financial and other information
provided to it by SCA and HEALTHSOUTH for purposes of its opinion and (ii) the
reasonableness of the assumptions made by the managements of SCA and HEALTHSOUTH
with respect to their projected financial results and potential synergies which
could be achieved upon consummation of the Merger. Bear Stearns further relied
upon the assurances of the managements of SCA and HEALTHSOUTH that they are
unaware of any facts that would make the information provided to Bear Stearns
incomplete or misleading. In addition, Bear Stearns did not make or seek to
obtain appraisals of SCA's or HEALTHSOUTH's assets and liabilities in rendering
its opinion. The Bear Stearns Opinion is also necessarily based upon the market,
economic and other conditions as in effect on, and the information made
available to it as of, the date thereof.
In connection with its opinion, Bear Stearns performed the following
analyses: (a) a contribution analysis based on (i) relative contribution
analysis and (ii) pro forma analysis to examine the effect of the Merger on
SCA's and HEALTHSOUTH's earnings per share and (b) a going concern analysis
based upon going concern value of SCA, based upon (i) an analysis of selected
publicly traded companies which it deemed to be comparable to SCA and (ii) an
analysis of selected merger and acquisition transactions which it deemed to be
comparable to the Merger, and going concern value of HEALTHSOUTH, based upon an
analysis of selected publicly traded companies which it deemed to be comparable
to HEALTHSOUTH.
The following is a brief summary of certain of the financial analyses
used by Bear Stearns in connection with providing its opinion to the Board of
Directors of SCA on October 9, 1995.
Contribution Analysis
Pro Forma Analysis. Bear Stearns analyzed the pro forma effects of the
Merger upon the earnings per share of SCA and HEALTHSOUTH. In its analysis, Bear
Stearns imputed the equivalent earnings per share of SCA based upon the pro
forma earnings per share of HEALTHSOUTH. Bear Stearns noted that each share of
SCA Common Stock would be exchanged for a certain number of shares of
30
HEALTHSOUTH Common Stock based upon the Exchange Ratio, and that the earnings
attributable to each share of SCA Common Stock would be equal to the pro forma
earnings per share of HEALTHSOUTH multiplied by the Exchange Ratio (the "SCA
Equivalent Pro Forma Earnings Per Share"). The pro forma analysis compared the
projected financial results of SCA and HEALTHSOUTH which reflected the
stand-alone prospects of each company assuming the Merger was not consummated
with the pro forma projected financial results for HEALTHSOUTH assuming it
consummated the Merger. The projected financial results for SCA and HEALTHSOUTH
used in the analysis were prepared by Bear Stearns and were based, in part, on
consensus estimates published by Wall Street research analysts as well as
discussions with the managements of SCA and HEALTHSOUTH regarding future
prospects of SCA and HEALTHSOUTH, respectively. The pro forma analysis reflected
certain assumptions made by Bear Stearns and by SCA, some of which may be beyond
the control of SCA and which may not necessarily reflect what will actually
occur upon the consummation of the Merger. The pro forma analysis assumed that
upon consummation of the Merger the newly combined entity would realize certain
benefits from the Merger (the "Merger Benefits") by (i) reducing operating
expenses at certain of HEALTHSOUTH's facilities, (ii) eliminating certain
duplicative corporate and regional overhead expenses, and (iii) generating
incremental revenue from the cross-referral of SCA's and HEALTHSOUTH's patients
into HEALTHSOUTH's and SCA's facilities. Such analysis did not take into account
the potential impact of the timing of the implementation of such Merger Benefits
on the newly combined entity's earnings. The pro forma analysis examined the
impact of such Merger Benefits on an annual basis and assumed that the Merger
had been consummated on January 1, 1995. In addition, the pro forma analysis did
not take into account the potential cost of implementation of any of the Merger
Benefits referenced above.
Giving effect to the Merger Benefits described above, as well as the
assumptions incorporated in the pro forma analysis, the pro forma earnings per
share of HEALTHSOUTH were $1.12 per share and $1.35 per share for the years
ending December 31, 1995 and 1996, respectively, which compared with projected
earnings per share of $1.08 per share and $1.35 per share for the years ending
December 31, 1995 and 1996, respectively, for HEALTHSOUTH assuming it did not
consummate the Merger. The imputed accretion to HEALTHSOUTH earnings per share
for the years ending December 31, 1995 and 1996 was 3% and 0%, respectively.
Bear Stearns noted, based upon the pro forma analysis, that the Merger could
potentially have a positive impact on HEALTHSOUTH's earnings per share.
Based upon the HEALTHSOUTH stock price of $25.00 as of October 6, 1995,
the Exchange Ratio was 1.22x pursuant to the Plan. Using the Exchange Ratio of
1.22x, the SCA Equivalent Pro Forma Earnings Per Share were $1.37 per share and
$1.65 per share for the years ending December 31, 1995 and 1996, respectively,
which compared with projected earnings per share of $1.18 per share and $1.39
per share for the years ending December 31, 1995 and 1996, respectively, for SCA
assuming it did not consummate the Merger. The imputed accretion to the SCA
Equivalent Pro Forma Earnings Per Share was 16% and 19%, respectively. Bear
Stearns noted, based upon the pro forma analysis, that the Merger could
potentially have a substantial positive impact on the SCA Equivalent Pro Forma
Earnings Per Share.
Relative Contribution Analysis. Bear Stearns reviewed and compared the
relative contribution of SCA and HEALTHSOUTH to the pro forma results of the
newly combined entity based upon net revenue, earnings before interest, taxes,
depreciation and amortization ("EBITDA"), earnings before interest and taxes
("EBIT") and total assets for the fiscal years ending December 31, 1995 and 1996
and compared these ratios to the relative contribution of SCA and HEALTHSOUTH of
total enterprise value (defined as the market value of equity plus the book
value of all debt less the book value of any cash and investments). Bear Stearns
also reviewed and compared the relative contribution of SCA and HEALTHSOUTH to
the pro forma results of the newly combined entity based upon net income and the
book value of stockholders' equity and compared these ratios to the ratios of
the pro forma ownership of the stockholders of SCA and HEALTHSOUTH of the newly
combined entity. Based upon the terms of the Merger, SCA would contribute
approximately 26% of the total enterprise value of the newly combined entity.
SCA would contribute approximately (i) 16% and 15% of 1995 and 1996 net revenue,
respectively, (ii) 25% of 1995 and 1996 EBITDA; (iii) 28% of 1995 and 1996 EBIT
and (iv) 16% of total assets of the newly combined entity. Bear Stearns noted
that SCA's percentage contribu-
31
tion to total enterprise value was greater than SCA's percentage contribution to
net revenue, EBITDA and total assets and was less than SCA's percentage
contribution to EBIT. Based upon the terms of the Merger, SCA stockholders would
own approximately 31% of the newly combined entity. SCA would contribute
approximately (i) 29% and 28% of 1995 and 1996 net income, respectively, and
(ii) 21% of book value of stockholders' equity of the combined entity. Bear
Stearns noted that the pro forma ownership of SCA's shareholders was greater
than SCA's percentage contribution to projected 1995 and 1996 net income and
total assets of the combined entity.
Based upon the contribution analysis, Bear Stearns concluded that the
Merger was fair, from a financial point of view, to the stockholders of SCA.
Going Concern Analysis
Going Concern Value of SCA -- Analysis of Selected Publicly Traded
Companies. Bear Stearns reviewed and compared the financial and market
performance of SCA to the financial and market performance of Apria Healthcare,
Inc.; VIVRA Incorporated; Lincare Holdings, Ltd.; Renal Treatment Centers, Inc.;
RoTech Medical Corporation; and American HomePatient, Inc., six publicly traded
companies engaged in the delivery of outpatient healthcare services that Bear
Stearns believed were comparable in certain respects to SCA (the "SCA Comparable
Companies"). Although the SCA Comparable Companies were considered similar to
SCA in some respects, none of such companies possessed a business profile or
other characteristics identical to those of SCA. For each of the SCA Comparable
Companies, Bear Stearns examined certain publicly available financial data,
including net revenue, gross margin, EBITDA, EBIT, selling, general and
administrative expenses, net income, earnings per share and profit and expense
margins. Bear Stearns examined balance sheet items, published earnings forecasts
and the trading performance of the common stock of each of the SCA Comparable
Companies. In addition, Bear Stearns calculated the ratio of the market price
(as of October 6, 1995) of SCA and of each of the SCA Comparable Companies'
stock in relation to each company's earnings per share and the ratio of the
enterprise value (the total market value of the common stock outstanding plus
the par value of total debt less cash and cash equivalents) of SCA and of each
of the SCA Comparable Companies in relation to each company's net revenue,
EBITDA and EBIT. Bear Stearns noted that SCA in comparison to the SCA Comparable
Companies (i) was the third largest company in terms of net revenue, (ii) had
the second highest EBITDA and EBIT and (iii) had the highest EBITDA and EBIT
margins. The ratios of the stock prices of the SCA Comparable Companies to
projected calendarized 1995 earnings per share ranged from 14.1x to 27.8x and
had a harmonic mean of 17.4x and a median of 16.7x. The ratios of the stock
prices of the SCA Comparable Companies to projected calendarized 1996 earnings
per share ranged from 10.5x to 21.9x and had a harmonic mean of 14.0x and a
median of 13.6x. The ratios of the enterprise value to latest twelve months
("LTM") net revenue of the SCA Comparable Companies ranged from 1.31x to 3.60x
and had a harmonic mean of 2.17x and a median of 2.30x. The ratios of the
enterprise value to LTM EBITDA of the SCA Comparable Companies ranged from 7.7x
to 15.2x and had a harmonic mean of 9.9x and a median of 9.7x. The ratios of the
enterprise value to LTM EBIT of the SCA Comparable Companies ranged from 10.2x
to 23.2x and had a harmonic mean of 13.4x and a median of 13.5x.
Based upon the then latest closing price of HEALTHSOUTH's Common Stock
of $25.00 per share (October 6, 1995), (i) the implied purchase price of SCA was
approximately $1.208 billion, (ii) the implied transaction value (defined as the
total purchase price of the common stock plus the par value of total debt less
cash and cash equivalents) of SCA was approximately $1.237 billion, (iii) the
ratio of the purchase price to SCA's projected fiscal 1995 net income and 1996
net income was 25.9x and 21.9x, respectively, and (iv) the ratio of the
transaction value to SCA's LTM net revenue, EBITDA and EBIT was 4.82x, 10.8x and
12.8x, respectively. Bear Stearns noted that, based upon these ratios, (i) the
ratio of SCA's transaction value to LTM net revenue was greater than the
harmonic mean and median ratios of the SCA Comparable Companies, (ii) the ratio
of SCA's transaction value to LTM EBITDA was greater than the harmonic mean and
median ratios of the SCA Comparable Companies, and (iii) the ratio of SCA's
purchase price to projected 1995 net income and 1996 net income was greater than
the harmonic mean and median of the ratios of stock price to projected 1995 and
1996 earnings per share of the SCA Comparable Companies.
32
Going Concern Value of SCA -- Analysis of Selected Merger and
Acquisition Transactions. Bear Stearns reviewed certain financial data and the
purchase prices paid in the following merger and acquisition transactions in the
health care services industry (target company/acquiring company): Rehability,
Inc./Living Centers of America, Inc., Continental Medical Systems, Inc./Horizon
Healthcare, Inc., Abbey Healthcare, Inc./Homedco Group, Inc., Hillhaven
Corporation/Vencor, Inc., HealthTrust, Inc. -- The Hospital Company/Columbia/HCA
Healthcare Corporation, Relife, Inc./HEALTHSOUTH Corporation, American Medical
Holding, Inc./National Medical Enterprises, Inc., Medical Care America,
Inc./Columbia/HCA Healthcare Corporation, Mediplex Group, Inc./Sun Healthcare
Group, Inc., Summit Health, Ltd./OrNda HealthCorp, American Healthcare
Management/OrNda HealthCorp, HCA--Hospital Corporation of America/Columbia
Healthcare Corporation and Galen Health Care, Inc./Columbia Healthcare
Corporation (the "Comparable Transactions").
For each of the target companies involved in the Comparable
Transactions, Bear Stearns examined certain publicly available financial data,
including net revenue, gross margin, selling, general and administrative
expenses, EBITDA, EBIT, net income, earnings per share and profit and expense
margins. Bear Stearns examined the balance sheet items and published earnings
forecasts of the common stock of each of the target companies involved in the
Comparable Transactions. In addition, Bear Stearns calculated the ratio of the
purchase price of the target company in relation to the target company's LTM and
projected net income (for the next calendar year) and the ratio of the
transaction value (the total purchase price of the equity plus the target
company's total debt at par less cash and cash equivalents) of each target
company to its LTM net revenue, LTM EBITDA and LTM EBIT. Bear Stearns noted that
ratios of the purchase price of the equity to LTM net income of the target
companies in the Comparable Transactions ranged from 12.0x to 32.9x and had a
harmonic mean of 21.6x and a median of 21.7x. The ratios of the purchase price
of the equity to projected net income of the target companies in the Comparable
Transactions ranged from 13.9x to 28.1x and had a harmonic mean of 18.2x and a
median of 18.8x. The ratios of the transaction value to LTM net revenue of the
target companies in the Comparable Transactions ranged from 0.70x to 2.70x and
had a harmonic mean of 1.30x and a median of 1.40x. The ratios of the
transaction value to LTM EBITDA of the target companies in the Comparable
Transactions ranged from 5.7x to 13.9x and had a harmonic mean of 8.9x and a
median of 9.9x. The ratios of the transaction value to LTM EBIT of the target
companies in the Comparable Transactions ranged from 8.4x to 19.8x and had a
harmonic mean of 12.6x and a median of 12.7x.
Bear Stearns noted that, based upon these ratios, (i) the ratio of
transaction value to SCA's LTM net revenue was greater than the harmonic mean
and median ratios of the Comparable Transactions, (ii) the ratio of transaction
value to SCA's LTM EBITDA was greater than the harmonic mean and median ratios
of the Comparable Transactions, (iii) the ratio of transaction value to SCA's
LTM EBIT was greater than the harmonic mean and median ratios of the Comparable
Transactions, (iv) the ratio of purchase price LTM net income of the Comparable
Transactions and (v) the ratio of purchase price to SCA's projected 1996 net
income was greater than the harmonic mean and median of the ratios of purchase
price to projected net income of the Comparable Transactions.
Going Concern Value of HEALTHSOUTH -- Analysis of Selected Publicly
Traded Companies. Bear Stearns reviewed and compared the financial and market
performance of HEALTHSOUTH to the financial and market performance of Novacare,
Inc., OccuSystems, Inc., Advantage Health Corporation, RehabCare Corporation,
Pacific Rehabilitation & Sports Medicine, Inc., U.S. Physical Therapy, Inc., and
Professional Sports Care Management, Inc.; seven publicly traded rehabilitation
service companies that Bear Stearns believed were comparable in certain respects
to HEALTHSOUTH (the "HEALTHSOUTH Comparable Companies"). Although the
HEALTHSOUTH Comparable Companies were considered similar to HEALTHSOUTH in some
respects, none of such companies possessed a business profile or other
characteristics identical to those of HEALTHSOUTH. For each of the HEALTHSOUTH
Comparable Companies, Bear Stearns examined certain publicly available financial
data including, net revenue, gross margin, EBITDA, EBIT, selling, general and
administrative expenses, net income, earnings per share and profit and expense
margins. Bear Stearns examined balance sheet items, published earnings forecasts
and the trading performance of the common stock of each of the HEALTHSOUTH
Comparable Companies. In addition, Bear Stearns calculated the ratio of the
market price (as of October 6, 1995) of HEALTHSOUTH and of each of the
HEALTHSOUTH Comparable Companies' stock
33
in relation to each companies' earnings per share and the ratio of the
enterprise value (the total market value of the common stock outstanding plus
the par value of total debt less cash and cash equivalents) of HEALTHSOUTH and
of each of the HEALTHSOUTH Comparable Companies in relation to each companies'
net revenue, EBITDA and EBIT. Bear Stearns noted that HEALTHSOUTH in comparison
to the HEALTHSOUTH Comparable Companies (i) was the largest company in terms of
net revenue, (ii) had the second highest EBITDA and EBIT and (iii) had the
highest EBITDA margins and third highest EBIT margins. The ratios of the stock
prices of the Comparable Companies to projected 1995 earnings per share ranged
from 10.6x to 46.3x and had a harmonic mean of 15.3x and a median of 14.2x. The
ratios of the stock prices of the Comparable Companies to projected calendarized
1996 earnings per share ranged from 8.3x to 30.6x and had a harmonic mean of
12.3x and a median of 12.3x. The ratios of the enterprise value to LTM net
revenue of the Comparable Companies ranged from 0.73x to 2.97x and had a
harmonic mean of 1.39x and a median of 1.50x. The ratios of the enterprise value
to LTM EBITDA of the Comparable Companies ranged from 3.9x to 19.6x and had a
harmonic mean of 6.6x and a median of 7.1x. The ratios of the enterprise value
to LTM EBIT of the Comparable Companies ranged from 5.3x to 26.6x and had a
harmonic mean of 8.7x and a median of 8.9x.
Based upon the then latest closing price of HEALTHSOUTH's Common Stock
of $25.00 per share (October 6, 1995), (i) the implied market equity value of
HEALTHSOUTH was approximately $2.283 billion, (ii) the implied enterprise value
(defined as the total market value of the common stock plus the par value of
total debt less cash and cash equivalents) of HEALTHSOUTH was approximately
$3.229 billion, (iii) the ratio of the equity value to HEALTHSOUTH's projected
fiscal 1995 net income and 1996 net income was 23.1x and 18.5x, respectively,
and (iv) thc ratio of the enterprise value to HEALTHSOUTH's LTM net revenue,
EBITDA and EBIT was 2.13x, 9.4x and 14.2x, respectively. Bear Stearns noted
that, based upon these ratios, (i) the ratio of HEALTHSOUTH's enterprise value
to LTM net revenue was greater than the harmonic mean and median ratios of the
HEALTHSOUTH Comparable Companies, (ii) the ratio of HEALTHSOUTH's enterprise
value to LTM EBITDA was greater than the harmonic mean and median ratios of the
HEALTHSOUTH Comparable Companies, and (iii) the ratio of HEALTHSOUTH's equity
value to projected 1995 net income and 1996 net income was greater than the
harmonic mean and median of the ratios of stock price to projected 1995 and 1996
earnings per share of the HEALTHSOUTH Comparable Companies.
Based upon the analysis of going concern values of SCA and HEALTHSOUTH,
Bear Stearns concluded that the Merger was fair, from a financial point of view,
to the stockholders of SCA.
Bear Stearns also reviewed the historical closing daily market price
and volume relating to SCA's Common Stock and noted the following, (i) on
October 9, 1995, the last trading day prior to public disclosure of the Merger,
the closing price was $23.00 per share, (ii) during the period from July 10,
1995 through October 9, 1995, SCA's Common Stock traded in a range of $18.00 to
$24.75; (iii) during the period from January 3, 1995 through October 9, 1995,
SCA's Common Stock traded in a range of $18.00 to $24.75; and (iv) during the
period from October 10, 1992 through October 9, 1995, SCA's Common Stock traded
in a range of $12.125 to $30.125.
Bear Stearns reviewed the historical closing daily market price and
volume relating to HEALTHSOUTH's Common Stock and noted the following: (i) on
October 9, 1995, the last trading day prior to public disclosure of the Merger,
the closing price was $24.50 per share, (ii) during the period from July 10,
1995 through October 9, 1995, HEALTHSOUTH's Common Stock traded in a range of
$19.00 to $25.50; (iii) during the period from January 3, 1995 through October
9, 1995, HEALTHSOUTH's Common Stock traded in a range of $16.75 to $25.50; and
(iv) during the period from October 10, 1992 through October 9, 1995,
HEALTHSOUTH's Common Stock traded in a range of $6.125 to $25.50.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analysis or of the summary set forth above, without considering
the analysis as a whole, could create an incomplete view of the processes
underlying the Bear Stearns Opinion. In arriving at its opinion, Bear Stearns
considered the results of all such analyses. The analyses were prepared solely
for purposes of providing its opinion as to the
34
fairness of the Merger, from a financial point of view, to the stockholders of
SCA and do not purport to be appraisals or necessarily reflect the prices at
which businesses or securities actually may be sold. Analyses based upon
forecasts of future results are not necessarily indicative of actual future
results, which may be significantly more or less favorable than suggested by
such analyses. As described above, Bear Stearns' opinion and presentation to the
Board of Directors of SCA was one of many factors taken into consideration by
the Board of Directors of SCA in making its determination to approve the Plan.
The foregoing summary does not purport to be a complete description of the
analyses performed by Bear Stearns.
In the ordinary course of its business, Bear Stearns may actively trade
the equity securities of SCA for its own accounts and for the accounts of
customers and, accordingly, may, at any time, hold a long or short position in
such securities.
Pursuant to a letter agreement, dated October 6, 1995, SCA agreed to
pay Bear Stearns a fee of $500,000 upon the rendering of its fairness opinion
relating to the Merger (the "Fairness Opinion Fee"). The Company also agreed to
pay Bear Stearns a fee equal to 0.5% of the total consideration paid to the
holders of SCA Common Stock, payable upon consummation of the Merger, against
which the Fairness Opinion Fee would be credited. Pursuant to the agreement
between SCA and Bear Stearns, such fee percentage was based upon a scale which
correlated to a range of values of the consideration to be paid to the holders
of SCA Common Stock. The Company also agreed to reimburse Bear Stearns for its
reasonable out-of-pocket expenses and to indemnify Bear Stearns and certain
related persons against certain liabilities in connection with the engagement of
Bear Stearns, including certain liabilities under federal securities laws.
Effective Time of the Merger
The Merger will become effective upon the filing of a Certificate of
Merger by the Subsidiary and SCA under the DGCL, or at such later time as may be
specified in such Certificate of Merger. The Plan requires that this filing be
made, subject to satisfaction of the separate conditions to the obligations of
each party to consummate the Merger, no later than two business days after
satisfaction of the various conditions to the Merger set forth in the Plan, or
at such other time as may be agreed by HEALTHSOUTH and SCA. It is presently
anticipated that such filing will be made as soon as reasonably possible after
the Special Meetings and after all regulatory approvals have been obtained, and
that the Effective Time will occur upon such filing. However, there can be 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 stock certificate,
which immediately prior to the Effective Time represented outstanding SCA Shares
(the "Certificates"), will be entitled to receive in exchange therefor, upon
surrender thereof to the Exchange Agent (as defined in the Plan), a certificate
or certificates representing the number of whole shares of HEALTHSOUTH Common
Stock into which such holder's SCA 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 soon as reasonably practicable after the Effective Time, HEALTHSOUTH
will deliver through the Exchange Agent to each holder of record of SCA 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 SCA
Shares which were issued and outstanding immediately prior to the Effective Time
and converted in the Merger. Outstanding shares of HEALTHSOUTH Common Stock at
the Effective Time will remain outstanding.
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 SCA Shares who would
otherwise be entitled to a fractional share an amount of cash determined by
multiplying such holder's fractional interest by the Base Period Trading Price.
See "-- Terms of the Merger".
35
The certificates representing shares of HEALTHSOUTH Common Stock, the
fractional share payment (if any) which any holder of SCA Shares is entitled to
receive, and any dividends or other distributions paid on such HEALTHSOUTH
Common Stock prior to the delivery to HEALTHSOUTH of the Certificates, will not
be delivered to such stockholder 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 shall be entitled to receive upon such delivery.
At the Effective Time, holders of SCA Shares immediately prior to the
Effective Time will cease to be, and shall have no rights as, stockholders of
SCA, 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 SCA 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 SCA will be liable to any holder of SCA 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, jointly and severally made, include, but are not limited to,
representations as to: (i) the corporate organization of the Subsidiary, (ii)
the power and authority of the Subsidiary to execute and perform the Plan and
(iii) the absence of contracts, liabilities and legal proceedings relating to or
affecting the Subsidiary.
The representations and warranties of HEALTHSOUTH include, but are not
limited to, 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) the fact that HEALTHSOUTH has
furnished SCA with a true and complete copy of each report, schedule,
registration statement and proxy statement filed by HEALTHSOUTH with the SEC,
(v) the absence of legal proceedings against HEALTHSOUTH, (vi) the validity of
HEALTHSOUTH's material contracts, (vii) the fact that HEALTHSOUTH has not
incurred any material adverse changes since June 30, 1995, (viii) the opinion of
HEALTHSOUTH's financial advisor, (ix) the filing of HEALTHSOUTH's tax returns,
(x) HEALTHSOUTH's employee benefits, (xi) HEALTHSOUTH's licenses, accreditation
and regulatory approvals, (xii) HEALTHSOUTH's compliance with laws in general
and (xiii) the absence of untrue representations by HEALTHSOUTH in the Plan or
in connection with the Merger.
The representations and warranties of SCA include, but are not limited
to: (i) the organization of SCA and its subsidiaries, (ii) the power and
authority of SCA to execute, deliver and perform the Plan, (iii) the fact that
SCA has furnished HEALTHSOUTH with a true and complete copy of each report,
schedule, registration statement and proxy statement filed by SCA with the SEC,
(iv) the absence of legal proceedings against SCA, (v) the validity of SCA's
material contracts, (vi) the fact that SCA has not incurred any material adverse
changes since the date of SCA's June 1995 Quarterly Report on Form 10-Q (the
"SCA June 10-Q"), (vii) the opinion of SCA's financial advisor, (viii) the
filing of SCA's tax returns, (ix) SCA's employee benefits, (x) SCA's licenses,
accreditation and regulatory approvals, (xi) SCA's compliance with laws in
general and (xii) the absence of untrue representations by SCA in the Plan or in
connection with the Merger.
Conditions to the Merger
The obligation of HEALTHSOUTH and the Subsidiary to consummate the
Merger is subject to, among others, the following conditions: (i) SCA shall have
performed all of its obligations as contemplated by the Plan at or prior to the
consummation date of the Merger; (ii) the representations and
36
warranties of SCA set forth in the Plan shall be true and correct as of the
dates specified in the Plan; (iii) HEALTHSOUTH shall have received the opinion
of its counsel that the Merger constitutes a tax-free reorganization under the
Code; (iv) HEALTHSOUTH shall have received an opinion of SCA's counsel
substantially in the form specified in the Plan; and (v) the Proxies in favor of
HEALTHSOUTH shall remain in full force and effect.
The obligation of SCA to consummate the Merger is subject to, among
others, the following conditions: (i) HEALTHSOUTH and the Subsidiary shall have
performed all of their obligations as contemplated by the Plan at or prior to
the consummation of the Merger; (ii) 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) SCA shall have received the opinion
of its counsel that the Merger constitutes a tax-free reorganization under the
Code; and (iv) SCA shall have received an opinion of HEALTHSOUTH's counsel
substantially in the form specified in the Plan.
The obligation of each of HEALTHSOUTH, the Subsidiary and SCA 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 SCA 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 SCA Shares entitled to vote thereon and the Merger
and the amendment of HEALTHSOUTH's Restated Certificate of Incorporation to
increase the number of authorized shares of HEALTHSOUTH Common Stock shall have
been approved by the requisite votes of the holders of outstanding shares of
HEALTHSOUTH Common Stock 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 and shall
have been issued pursuant to an effective registration statement (subject to no
stop order); (vii) the Merger shall qualify for "pooling of interests"
accounting treatment and HEALTHSOUTH and SCA each shall have received a letter
from Ernst & Young LLP to that effect dated the closing date of the Merger;
(viii) 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 SCA 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
authorizations of third parties with respect to all material leases and
management agreements to which any subsidiary of SCA, or any limited partnership
or limited liability company controlled by SCA, is a party, except when the
failure to obtain such consent, authorization or approval would not have a
material effect on the business of the Surviving Corporation.
Regulatory Approvals
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 November 1,
1995, HEALTHSOUTH and SCA made their respective filings with the DOJ and the FTC
with respect to the Plan. Under the HSR Act, the filings commenced a 30-day
waiting period during which the Merger could not be consummated, which waiting
period will expire on December 1, 1995, unless extended by a request for
additional information. Notwithstanding the termination of the HSR Act waiting
period, at any time before or after the Effective Time, the FTC, the DOJ or
others could take action under the antitrust laws, including seeking to enjoin
the consummation of the Merger or seeking the divestiture by HEALTHSOUTH of all
or any part of the stock or assets of SCA. 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.
37
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 SCA.
HEALTHSOUTH and SCA 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 resistance 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 SCA divest certain 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 SCA, or to obtain other relief.
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 is made,
that it would not be successful. Neither HEALTHSOUTH nor SCA intends to seek any
further stockholder approval or authorization of the Plan as a result of any
action that it may take to resist or resolve any FTC, DOJ or other objections,
unless required to do so by applicable law.
The operations of each Company are subject to a substantial body of
federal, state, local and accrediting body laws, rules and regulations relating
to the conduct, licensing and development of healthcare businesses and
facilities. As a result of the Merger, many of the arrangements between SCA and
third-party payors may be deemed to have been transferred, requiring the
approval and consent of such payors. In addition, a number of the facilities
operated by SCA may be deemed to have been transferred, requiring the consents
or approvals of various state licensing and/or health regulatory agencies. In
some instances, new licenses will be required to be obtained. It is anticipated
that, prior to the time this Prospectus-Joint Proxy Statement is mailed to the
stockholders of SCA and HEALTHSOUTH, all filings required to be made prior to
such date to obtain the consents and approvals required from federal and state
healthcare regulatory bodies and agencies will have been made. However, certain
of such filings cannot be made under the applicable laws, rules and regulations
until after the Effective Time. Although no assurances to this effect can be
given, it is anticipated that the Companies will be able to obtain any required
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, HEALTHSOUTH and SCA will
conduct their respective businesses in the usual, regular and ordinary course in
substantially the same manner as previously conducted, and SCA will use its
reasonable best efforts to preserve intact its present business organizations
and to preserve its relationships with customers, suppliers and others having
business dealings with it.
Under the Plan, SCA may not (other than as required pursuant to or
contemplated by the terms of the Plan and related documents), 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 its
properties, assets and business, 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 it, except as provided in the Plan; (iii) enter into any contract or
agreement which cannot be performed within three months or which involves the
expenditure of over $100,000; (iv) issue or sell, or agree to issue or sell, any
shares of its capital stock or other securities of SCA, except upon exercise of
currently outstanding stock options or warrants; (v) make any 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 SCA's usual past practice, or make any payment
or contributions or incur any obligation pursuant to or in respect of any other
plan or contract or arrangement providing for bonuses, executive incentive
compensation, pensions, deferred compensation, retirement payments, profit
sharing or the like, establish or enter into any
38
such plan, contract or arrangement, 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
liabilities shown or reflected on the consolidated balance sheet of SCA as of
June 30, 1995 (the "SCA Balance Sheet"), or liabilities incurred since the date
of the SCA June 10-Q in the ordinary course of business; (x) increase or
establish any reserve for taxes or any other liability on its books or otherwise
provide therefor which would have a material adverse effect on SCA, except as
may be required due to income or operations of SCA since the date of the SCA
June 10-Q; (xi) mortgage, pledge or subject 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 SCA; (xii) sell or
transfer any of the assets material to the consolidated business of SCA, cancel
any material debts or claims or waive any material rights, except in the
ordinary course of business; (xiii) grant any general or uniform increase in the
rates of pay of employees or any material increase in salary payable or to
become payable by SCA 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, increase in a material respect the compensation of any
officer, employee, consultant or agent; (xiv) except for the Plan and the other
agreements executed and delivered pursuant to the Plan, enter into any material
transaction other than in the ordinary course of business or permitted under the
Plan; (xv) issue any stock, bonds or other securities, other than stock issued
pursuant to options or warrants that are disclosed in the Plan; and (xvi) incur
any material adverse change.
Waiver and Amendment
The Plan provides that, at any time prior to the Effective Time,
HEALTHSOUTH and SCA 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) 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 SCA without the approval of stockholders of either Company,
except that after the Special Meetings no amendment may be made which by law
requires a further approval by the stockholders of either Company without such
further approval being obtained.
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 SCA and the
stockholders of HEALTHSOUTH: (i) by mutual written consent of HEALTHSOUTH and
SCA; (ii) by either HEALTHSOUTH or SCA 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 SCA if any governmental entity or court of competent
jurisdiction shall have issued a final, permanent order, enjoining or otherwise
prohibiting the Merger and such order shall have become non-appealable; (iv) by
either HEALTHSOUTH or SCA if the Merger has not been consummated on or before
March 31, 1996 (or such later date as may be determined under the Plan), unless
the failure to consummate the Merger by such time is due to the breach of the
Plan by the party seeking to terminate the Plan; (v) by either HEALTHSOUTH or
SCA if any required approval of the Plan by stockholders of SCA or stockholders
of HEALTHSOUTH has not been obtained by the required votes at a duly held
meeting of stockholders; (vi) by either HEALTHSOUTH or SCA if either party gives
notice of termination under the Plan due to the occurrence of a material change
in or a material addition to an Exhibit to the Plan which would have a material
adverse effect on the notifying party; (vii) by either HEALTHSOUTH or SCA if all
of the mutual conditions to the obligations of both parties to effect the Merger
under the Plan have been satisfied and any condition to the obligation of such
party to effect the Merger under the Plan is not capable of being satisfied
prior to March 31, 1996 (or such later date as
39
may be determined under the Plan); (viii) by SCA, if SCA's Board of Directors
shall have determined, in the exercise of its fiduciary duties under applicable
law, not to recommend the Merger to the stockholders of SCA or shall have
withdrawn such recommendation, or shall have approved, recommended or endorsed
any proposal to acquire SCA upon a merger, purchase of assets, purchase of or
tender offer for shares of SCA or similar transaction other than the Merger, or
shall have resolved to do any of the foregoing; (ix) by either HEALTHSOUTH or
SCA if such party has not received by the closing date of the Merger a letter
from Ernst & Young LLP to the effect that the Merger will be accounted for as a
pooling of interests and (x) by SCA, if the Base Period Trading Price of the
HEALTHSOUTH Common Stock shall be less than $20.00. If, however SCA proposes to
exercise its right under the Plan to terminate the Plan because the Base Period
Trading Price is less than $20.00, SCA must first notify HEALTHSOUTH in writing
of its intent so to terminate. HEALTHSOUTH shall then have not less than 48
hours from the time of receipt of such written notice to submit a final and best
offer (a "Final Offer") for a change in the Merger Consideration. If such Final
Offer is accepted by SCA (as determined by its Board of Directors after
consulting with its legal counsel and financial advisors), SCA, HEALTHSOUTH and
the Subsidiary shall amend the Plan to reflect such Final Offer and shall make
any appropriate amendments to this Prospectus-Joint Proxy Statement.
Break-up Fee; Third Party Bids
If the Plan is terminated by SCA because its Board of Directors has (i)
determined, in the exercise of its fiduciary duties under applicable law, not to
recommend the Merger to the holders of SCA Shares, or shall have withdrawn such
recommendation, or shall have approved, recommended or endorsed an Acquisition
Transaction (as defined in the Plan) other than the Plan, and within one year
after the effective date of such termination SCA 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 SCA shall pay to HEALTHSOUTH a break-up fee
equal to 3.25% of the aggregate Merger Consideration (determined as it would
have been calculated on the effective date of termination of the Plan,
substituting the effective date of such termination for the closing date of the
Merger in calculating the Base Period Trading Price.)
Interests of Certain Persons in the Merger
In considering the recommendations of the Boards of Directors of
HEALTHSOUTH and SCA with respect to the Plan and the transactions contemplated
thereby, stockholders of both Companies should be aware that certain members of
the management of HEALTHSOUTH and SCA and the Boards of Directors of such
Companies have certain interests in the Merger that are in addition to the
interests of such stockholders generally.
Concurrently with the execution of the Plan, HEALTHSOUTH entered into a
Proxy Agreement, a Non-Competition Agreement and a Consulting Agreement with
Joel C. Gordon, the Chairman of the Board of Directors and Chief Executive
Officer of SCA.
Pursuant to the Non-Competition Agreement, HEALTHSOUTH and Mr. Gordon
have agreed that, among other things, for ten years commencing as of the
Effective Time, Mr. Gordon will not, without the prior written consent of
HEALTHSOUTH, directly or indirectly, own, operate, manage, be employed by,
financially support or otherwise have an interest in any business which is
competitive with the outpatient surgical centers, diagnostic centers and
rehabilitative healthcare businesses of HEALTHSOUTH as currently conducted, in
any part of the United States and Canada.
In consideration for Mr. Gordon's agreement to not compete with
HEALTHSOUTH, HEALTHSOUTH agreed to pay Mr. Gordon an aggregate of $7,250,000, in
ten annual installments, to be paid on June 15 of each year commencing with June
15, 1996. Mr. Gordon will receive $850,000 in each of the first five years of
such agreement, followed by $600,000 in each of the last five years.
Pursuant to the Consulting Agreement, Mr. Gordon agreed, for five years
commencing as of the Effective Time, to make himself available to consult,
cooperate with and advise the Chief Executive Officer and the Board of Directors
of HEALTHSOUTH with respect to such matters involving the
40
business and affairs of HEALTHSOUTH. In consideration for Mr. Gordon's agreement
to act as aconsultant, HEALTHSOUTH will pay Mr. Gordon an annual fee of not less
than $250,000, paid in equal monthly installments over the five year period.
Furthermore, as an inducement to enter into and perform his duties under the
Consulting Agreement, Mr. Gordon will receive an option to purchase 50,000
shares of HEALTHSOUTH Common Stock. In addition, Mr. Gordon will be entitled to
participate in any benefit plan generally available to HEALTHSOUTH executives.
In addition, HEALTHSOUTH has agreed, as soon as practicable following the
Effective Time, to cause Gordon to be appointed to the Board of Directors of
HEALTHSOUTH.
As a condition of HEALTHSOUTH's willingness to enter into the Plan, Mr.
Gordon and certain of his affiliates entered into the Proxy Agreements. Pursuant
to such agreements, HEALTHSOUTH has the right to vote Mr. Gordon's and such
affiliates' shares of SCA Common Stock in any stockholder vote relating to the
consummation of the transactions contemplated under the Plan.
Mr. Gordon, William J. Hamburg, President and Chief Operating Officer
of SCA, and Tarpley B. Jones, Senior Vice President and Chief Financial Officer
of SCA, are parties to Employment Agreements with SCA, which provide that if SCA
merges, consolidates or combines with another business entity, then, at the
employee's option, the new entity will assume the employment agreement or SCA
will pay the employee a lump sum equal to three years' compensation.
Options granted pursuant to SCA's Incentive Stock Plan of 1986 will
become immediately exercisable upon the Merger. The Plan provides that all
options with respect to SCA Common Stock will become rights with respect to
HEALTHSOUTH Common Stock. Each option will, following the Merger, be exercisable
for that number of shares of HEALTHSOUTH Common Stock equal to the number of SCA
shares subject to such option multiplied by the Exchange Ratio, and shall have
an exercise price per share equal to the exercise price prior to the Merger
divided by the Exchange Ratio.
Indemnification and Insurance
The Plan provides that SCA 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 SCA 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 SCA, pertaining to a matter occurring or existing at or prior to
the Effective Time.
For a period of three years after the Effective Time, HEALTHSOUTH shall
cause to be maintained the current policies of directors and officers liability
insurance maintained by SCA with respect to claims arising from facts or events
which occurred at or prior to the Effective Time; provided, however, that
HEALTHSOUTH will not be required to spend more than 150% of the amount of SCA's
1995 annual premium.
Accounting Treatment
Consummation of the Merger is conditioned upon the receipt by
HEALTHSOUTH and SCA of an opinion from Ernst & Young LLP, HEALTHSOUTH's
independent auditors, to the effect that the Merger will qualify for
pooling-of-interests accounting treatment if consummated in accordance with the
Plan. HEALTHSOUTH and SCA 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 SCA will be combined at
the Effective Time and carried forward at their previously recorded amounts, the
stockholders' equity accounts of HEALTHSOUTH and SCA 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 SCA as if the Merger had taken place prior to the periods
covered by such financial statements.
41
The unaudited pro forma financial information contained in this
Prospectus-Joint Proxy Statement has been prepared using the
pooling-of-interests accounting method to account for the Merger. See "PRO FORMA
CONDENSED FINANCIAL INFORMATION".
Certain Federal Income Tax Consequences
The following is a discussion of the principal federal income tax
consequences of the Merger to the holders of SCA Shares. The discussion is based
on currently existing provisions of the Code, Treasury Regulations thereunder,
certain 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 SCA Shares who hold their SCA
Shares as capital assets. This summary does not discuss all aspects of income
taxation that may be relevant to a particular holder of SCA Shares in light of
such holders' 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 SCA
shares pursuant to the exercise of options or otherwise as compensation or
through a tax-qualified retirement plan), and it does not discuss any aspect of
state, local, foreign or other tax law.
It is a condition to the consummation of the Merger that SCA receive an
opinion from its counsel, Skadden, Arps, Slate, Meagher & Flom ("Skadden Arps"),
and that HEALTHSOUTH receive an opinion from its counsel, Haskell Slaughter
Young & Johnston, Professional Association ("Haskell Slaughter", and together
with Skadden Arps, "Tax Counsel"), substantially to the effect that for federal
income tax purposes the Merger constitutes a reorganization within the meaning
of Section 368(a) of the Code. Based upon such opinions, the material federal
income tax consequences of the Merger will be that: (i) no gain or loss will be
recognized by HEALTHSOUTH, Subsidiary or SCA as a result of the Merger, (ii) no
gain or loss will be recognized by the stockholders of SCA upon the exchange of
their SCA Shares solely for shares of HEALTHSOUTH Common Stock pursuant to the
Merger, except that a SCA 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 shareholder's SCA Shares with respect to which gain or loss is recognized
are held as a capital asset at the Effective Time, (iii) the aggregate tax basis
of the shares of the HEALTHSOUTH Common Stock received solely in exchange for
SCA 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 SCA Shares exchanged therefor, and (iv) the holding period for
HEALTHSOUTH Common Stock received in exchange for SCA Shares pursuant to the
Merger will include the holding period of the SCA Shares exchanged therefor,
provided such SCA Shares were held as a capital asset at the Effective Time.
Neither HEALTHSOUTH nor SCA 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 such opinions, Tax Counsel
may receive and will rely upon representations contained in certificates of
HEALTHSOUTH, Subsidiary, SCA and others. Tax Counsel's opinions will be subject
to certain limitations and qualifications and will be based upon the truth and
accuracy of these representations and upon certain factual assumptions and
represents 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. The Merger is intended to qualify as a reorganization under
Section 368(a) of the Code, with the result that neither HEALTHSOUTH, Subsidiary
nor SCA will be required to recognize gain as a result of the Merger and each
SCA stockholder will not be required to recognize gain or loss with respect to
each SCA Share equal to the difference between the stockholder's tax basis in
such share and the fair market value, as of the Effective Time, of the
HEALTHSOUTH Common Stock received in exchange therefor.
EACH HOLDER OF SCA SHARES IS URGED TO CONSULT SUCH HOLDER'S TAX ADVISOR
AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH HOLDER OF THE MERGER, INCLUDING THE
APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS.
42
Resale of HEALTHSOUTH Common Stock by Affiliates
HEALTHSOUTH Common Stock to be issued to stockholders of SCA in
connection with the Merger has been registered under the Securities Act.
HEALTHSOUTH Common Stock received by the stockholders of SCA 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" (as defined below)
of SCA 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 SCA or HEALTHSOUTH at the time of the Special
Meetings (generally, directors, certain executive officers and major
stockholders). Affiliates of SCA 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
two years 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 "broker
transactions" or in transactions directly with a "market maker," as such terms
are defined in Rule 144 under the Securities Act. Additionally, the number of
shares to be sold by an Affiliate (together with certain related persons and
certain persons acting in concert) during such two-year period within any
three-month period for purposes of Rule 145 may not exceed the greater of 1% of
the outstanding shares of HEALTHSOUTH Common Stock or the average weekly trading
volume of such stock during the four calendar weeks preceding such sale. Rule
145 would remain available to Affiliates only if HEALTHSOUTH remained current
with its information filings with the SEC under the Exchange Act. Two years
after the Effective Time, an Affiliate would be able to sell such HEALTHSOUTH
Common Stock without such manner of sale or volume limitations, provided that
HEALTHSOUTH were current with its Exchange Act information filings and such
Affiliate were not then an Affiliate of HEALTHSOUTH. Three years after the
Effective Time, an Affiliate would be able to sell such shares of HEALTHSOUTH
Common Stock without any restrictions so long as such Affiliate had not been an
Affiliate of HEALTHSOUTH for at least three months prior thereto.
SCA has agreed to use its reasonable, good faith efforts to cause each
holder of SCA Shares deemed to be an Affiliate of SCA 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, (i) except in compliance with the applicable provisions of the
Securities Act and the rules and regulations thereunder and (ii) until after
such time as results covering at least thirty days of post-Merger combined
operations of HEALTHSOUTH and SCA have been published. HEALTHSOUTH has agreed
that within 20 days after the first calendar month following at least 30 days
after the Effective Time, HEALTHSOUTH shall cause the publication of such
results.
No Appraisal Rights
Under the DGCL, holders of SCA Shares and holders of shares of
HEALTHSOUTH Common Stock will not be entitled to dissenters' rights of appraisal
in connection with the Merger.
No Solicitation of Transactions
SCA has agreed that it will not, and will direct each officer,
director, employee, representative and agent of SCA not to, directly or
indirectly, encourage, solicit, participate in or initiate discussions or
negotiations with or provide any information to any corporation, partnership,
person or other entity or group (other than HEALTHSOUTH or an affiliate,
associate or agent of HEALTHSOUTH) concerning any merger, sale of assets, sale
of or tender offer for SCA Shares or similar transactions involving SCA. Under
the Plan, SCA may furnish information concerning SCA to other corporations,
partnerships, persons or other entities or groups, and may participate in
discussions and negotiate with such entities concerning any proposal to acquire
SCA upon a merger, purchase of assets, purchase of or tender offer for SCA
Shares or similar transaction (an "Acquisition Transaction"), in response to
unsolicited requests therefor, if the Board of Directors of SCA determines in
its good faith judgment in the
43
exercise of its fiduciary duties or its duties under Rule 14e-2 under the
Exchange Act that such action is appropriate in furtherance of the best interest
of its stockholders. SCA has further agreed that it will notify HEALTHSOUTH if
it enters 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, including providing HEALTHSOUTH with the identity of
the third party.
Expenses
The Plan provides that 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-Joint Proxy Statement shall be shared equally by HEALTHSOUTH and SCA.
NYSE Listing
A listing application will be filed with the NYSE to list the shares of
HEALTHSOUTH Common Stock to be issued to SCA 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 and SCA anticipate
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.
44
SELECTED CONSOLIDATED FINANCIAL DATA -- HEALTHSOUTH
The consolidated income statement data set forth below for the years
ended December 31, 1990, 1991, 1992, 1993 and 1994 and the consolidated balance
sheet data at December 31, 1990, 1991, 1992, 1993 and 1994 are derived from
consolidated financial statements audited by HEALTHSOUTH's independent auditors.
The data for the nine months ended September 30, 1994 and 1995 and at September
30, 1995 are derived from the unaudited consolidated financial statements of
HEALTHSOUTH. In the opinion of HEALTHSOUTH, the consolidated income statement
data for the nine months ended September 30, 1994 and 1995, and the consolidated
balance sheet data at September 30, 1995, reflect all adjustments (which consist
of only normal recurring adjustments) necessary for a fair presentation of
results of interim periods. Operating results for the nine months ended
September 30, 1995, are not necessarily indicative of results for the full
fiscal year or for any future interim period. The consolidated income statement
data set forth below for the years ended December 31, 1992, 1993 and 1994 and
the consolidated balance sheet data at December 31, 1993 and 1994 are qualified
by reference to the audited consolidated financial statements included elsewhere
herein. The consolidated income statement data set forth below for the nine
months ended September 30, 1994 and 1995 and the consolidated balance sheet data
at September 30, 1995 are qualified by reference to the unaudited consolidated
financial statements included elsewhere herein. The financial information for
all periods set forth below has been restated to reflect the acquisition of
ReLife, Inc. ("ReLife") in December 1994 and the acquisition of Surgical Health
Corporation ("SHC") in June 1995, each of which has been accounted for as a
pooling of interests.
Nine Month Ended
Year Ended December 31, September 30,
1990 1991 1992 1993 1994 1994 1995
(In thousands, except per share data) (unaudited)
Income Statement Data: ......................
Revenues .................................. $207,390 $277,655 $501,046 $656,329 $1,236,190 $902,268 $1,109,689
Operating expenses:
Operating units .......................... 151,970 200,350 372,169 471,778 906,712 670,607 788,593
Corporate general and administrative ..... 7,025 10,901 16,878 24,329 45,895 29,831 28,463
Provision for doubtful accounts............ 5,608 6,092 13,254 16,181 23,739 16,691 20,520
Depreciation and amortization ............. 11,388 15,115 29,834 46,224 86,678 59,142 86,767
Interest expense........................... 12,058 10,507 12,623 18,495 65,286 45,632 68,697
Interest income............................ (4,166) (5,835) (5,415) (3,924) (4,308) (3,256) (4,529)
Merger expenses (1) ....................... -- -- -- 333 6,520 3,571 29,194
Loss on impairment of assets (2) .......... -- -- -- -- 10,500 -- 11,192
Loss on abandonment of computer project
(2)....................................... -- -- -- -- 4,500 -- --
NME Selected Hospitals Acquisition related
expense (2) .............................. -- -- -- 49,742 -- -- --
Terminated merger expense (2) ............. -- -- 3,665 -- -- -- --
Gain on sale of partnership interest ..... -- -- -- (1,400) -- -- --
183,883 237,130 443,008 621,758 1,145,522 822,218 1,028,897
Income before income taxes and minority
interests................................. 23,507 40,525 58,038 34,571 90,668 80,050 80,792
Provision for income taxes ................ 8,153 13,582 18,864 11,930 34,305 30,418 27,525
Income before minority interests........... 15,354 26,943 39,174 22,641 56,363 49,632 53,267
Minority interests......................... 929 1,272 4,245 5,444 6,402 4,276 8,357
Net income ............................... $ 14,425 $ 25,671 $ 34,929 $ 17,197 $ 49,961 $ 45,356 $ 44,910
Weighted average common and common
equivalent shares outstanding............. 41,337 57,390 74,214 77,709 84,687 84,509 87,773
Net income per common and common
equivalent share (3) ..................... $ 0.35 $ 0.45 $ 0.47 $ 0.22 $ 0.59 $ 0.54 $ 0.51
Net income per common share--assuming full
dilution (3) (4) ......................... $ 0.32 $ 0.43 $ 0.47 $ 0.22 $ 0.59 N/A $ 0.51
December 31, September 30,
1990 1991 1992 1993 1994 1995
(In thousands)
Balance Sheet Data:
Cash and marketable securities $ 74,774 $126,508 $111,524 $ 89,999 $ 85,363 $ 93,169
Working capital................ 114,761 184,729 204,065 211,063 231,327 299,157
Total assets................... 321,383 503,797 795,367 1,444,418 1,736,336 2,150,680
Long-term debt (5)............. 157,585 171,275 338,000 888,181 1,034,394 1,404,170
Stockholders' equity........... 132,009 299,097 386,244 418,298 489,920 547,547
(1) Expenses related to SHC's Ballas merger in 1993, the ReLife and Heritage
Acquisitions in 1994 and the SHC Acquisition and NovaCare Rehabilitation
Hospitals Acquisition in 1995.
(2) See "Notes to Consolidated Financial Statements".
(3) Adjusted to reflect a three-for-two stock split effected in the form of a
50% stock dividend paid on December 31, 1991 and a two-for-one stock split
effected in the form of a 100% stock dividend paid on April 17, 1995.
(4) Fully-diluted earnings per share in 1990 and 1991 reflect shares reserved
for issuance upon exercise of dilutive stock options and shares reserved
for issuance upon conversion of HEALTHSOUTH's 7 3/4 % Convertible
Subordinated Debentures due 2014, all of which were converted into Common
Stock prior to June 3, 1991. Fully diluted earnings per share in 1994 and
the nine months ended September 30, 1995 reflect shares reserved for
issuance upon conversion of HEALTHSOUTH's 5% Convertible Subordinated
Debentures due 2001.
(5) Includes current portion of long-term debt.
45
SELECTED CONSOLIDATED FINANCIAL DATA -- SCA
The consolidated income statement data set forth below for the years
ended December 31, 1990, 1991, 1992, 1993 and 1994 and the consolidated balance
sheet data at December 31, 1990, 1991, 1992, 1993 and 1994 are derived from
consolidated financial statements audited by SCA's independent auditors. The
data for the nine months ended September 30, 1994 and 1995 and at September 30,
1994 and 1995 are derived from the unaudited consolidated financial statements
of SCA. In the opinion of SCA, the consolidated income statement data for the
nine months ended September 30, 1994 and 1995 and the consolidated balance sheet
data at September 30, 1994 and 1995 reflect all adjustments (which consist of
only normal recurring adjustments) necessary for a fair presentation of results
of interim periods. Operating results for the nine months ended September 30,
1995 are not necessarily indicative of results for the full fiscal year or for
any future interim period. The consolidated income statement data set forth
below for the years ended December 31, 1992, 1993 and 1994 and the consolidated
balance sheet data at December 31, 1993 and 1994 are qualified by reference to
the audited consolidated financial statements incorporated by reference herein.
The consolidated income statement data set forth below for the nine months ended
September 30, 1994 and 1995 and the consolidated balance sheet data at September
30, 1994 and 1995 are qualified by reference to the unaudited consolidated
financial statements incorporated by reference herein.
Nine Months Ended
Year Ended December 31, September 30,
1990 1991 1992 1993 1994 1994 1995
(In thousands, except per share data)
Income Statement Data:
Net revenue .................................... $ 87,252 $120,680 $161,873 $197,976 $236,720 $ 169,973 $196,258
Operating costs: ...............................
Costs of providing healthcare services ........ 47,687 62,667 83,871 103,825 123,379 88,794 102,383
Depreciation and amortization .................. 5,056 6,956 9,695 12,626 17,392 12,506 12,640
Provision for doubtful accounts................. 1,163 1,867 1,442 1,068 3,061 2,079 2,381
Loss on disposal of surgery centers ............ -- -- -- -- 13,197 -- --
Totals ......................................... 53,906 71,490 95,008 117,519 157,029 103,379 117,404
Operating income ............................... 33,346 49,190 66,865 80,457 79,691 66,594 78,854
General, administrative and development
expenses ...................................... . 2,593 2,925 3,804 3,880 5,464 4,061 4,236
Interest and other expenses ..................... 4,355 3,972 3,410 3,600 7,294 6,025 3,413
Interest and other income ....................... (2,875) (3,929) (3,049) (2,513) (4,184) (2,699) (2,412)
Gain on sale of Medical Care America, Inc.
stock............................................ -- -- -- -- (7,727) (6,882) --
Income before minority interests and income
taxes ......................................... 29,273 46,222 62,700 75,490 78,844 66,089 73,617
Minority interests in earnings and partnerships (12,215) (17,374) (21,481) (22,624) (22,420) (15,144) (19,217)
Net income from continuing operations before
income taxes and cumulative effect of change in
accounting principle ........................... 17,058 28,848 41,219 52,866 56,424 50,945 54,400
Income tax provision ........................... (6,824) (11,077) (15,663) (20,650) (25,039) (22,084) (21,397)
Net income from continuing operations before
cumulative effect of change in accounting
principle ...................................... 10,234 17,771 25,556 32,216 31,385 28,861 33,003
Net income from discontinued operations ....... 1,258 2,971 3,283 4,452 -- -- --
Cumulative effect of change in accounting
principle, net of income tax benefit of $1,403 . -- -- -- -- (2,105) (2,105) --
Net income ..................................... $ 11,492 $ 20,742 $ 28,839 $ 36,668 $ 29,280 $ 26,756 $ 33,003
Net income per common and common equivalent
share
Continuing operations before cumulative effect
of change in accounting principle ............ $ .29 $ .49 $ .69 $ .85 $ .80 $ .74 $ .84
Discontinued operations ........................ .03 .08 .09 .11 -- -- --
Cumulative effect in change in accounting
principle ...................................... -- -- -- -- (.05) (.05) --
$ .32 $ .57 $ .78 $ .96 $ .75 $ .69 $ .84
Weighted average number of common and common
equivalent shares outstanding................... 35,531 36,674 37,191 38,117 38,892 38,859 39,189
DECEMBER 31, SEPTEMBER 30,
1990 1991 1992 1993 1994 1994 1995
Balance Sheet Data:
Cash and cash equivalents .......... $ 36,521 $ 42,026 $ 25,158 $ 23,877 $ 31,223 $ 27,144 $ 39,047
Working capital..................... 37,000 38,071 34,879 50,666 25,052 32,661 42,567
Total assets........................ 120,495 172,418 228,033 300,189 340,344 337,676 371,422
Long-term debt...................... 36,776 32,520 35,364 62,191 49,717 61,430 65,119
Shareholders' equity................ 52,641 88,502 136,268 166,583 196,623 198,211 229,230
Cash dividends paid per share of
common stock...................... $ .043 $ .093 $ .147 $ .16 $ .16 $ .12 .13
46
PRO FORMA CONDENSED FINANCIAL INFORMATION
The following pro forma condensed financial information and explanatory
notes are presented to reflect the effect of the Merger of SCA with the
Subsidiary on the historical financial statements of HEALTHSOUTH and SCA. The
Merger is reflected in the pro forma condensed financial information as a
pooling of interests. The HEALTHSOUTH historical amounts reflect the combination
of HEALTHSOUTH, ReLife, Inc. ("ReLife") and Surgical Health Corporation ("SHC")
for all periods presented, as HEALTHSOUTH acquired ReLife in December 1994 and
SHC in June 1995 in transactions accounted for as poolings of interests.
The pro forma condensed financial information also reflects the
acquisition by HEALTHSOUTH of Sutter Surgery Centers, Inc. ("SSCI") for all
periods presented. HEALTHSOUTH acquired SSCI in October 1995 in a transaction
that will be accounted for as a pooling of interests. SSCI operates 12 surgery
centers.
In addition, the pro forma condensed financial information reflects the
impact of HEALTHSOUTH's acquisition, effective April 1, 1995, from NovaCare,
Inc. ("NovaCare") of 11 rehabilitation hospitals, 12 other facilities and two
Certificates of Need (the "NovaCare Rehabilitation Hospitals Acquisition") on
the results of operations for the year ended December 31, 1994 and the nine
months ended September 30, 1995.
The pro forma condensed balance sheet assumes that the Merger was
consummated on September 30, 1995, and the pro forma condensed income statements
assume that the Merger was consummated on January 1, 1992. The assumptions are
described in the accompanying Notes to Pro Forma Condensed Financial
Information.
All HEALTHSOUTH shares outstanding and per share amounts have been
adjusted to reflect a two-for-one stock split effected in the form of a 100
percent stock dividend payable on April 17, 1995.
The pro forma information should be read in conjunction with the
historical financial statements of HEALTHSOUTH and SCA and the related notes
thereto appearing elsewhere in this Prospectus-Joint Proxy Statement. The pro
forma financial information is presented for informational purposes only and is
not necessarily indicative of the results of operations or combined financial
position that would have resulted had the Merger been consummated at the date
indicated, nor is it necessarily indicative of the results of operations of
future periods or future combined financial position.
47
HEALTHSOUTH Corporation and Subsidiaries
Pro Forma Condensed Combined Balance Sheet (Unaudited)
September 30, 1995
Pro Forma Pro Forma Pro Forma
HEALTHSOUTH SSCI Adjustments SCA Adjustments Combined
(In thousands)
ASSETS
Current assets: ................................
Cash and cash equivalents..................... $ 86,952 $ 5,024 $ 0 $ 39,047 $ 0 $ 131,023
Other marketable securities .................. 6,217 0 0 295 0 6,512
Accounts receivable........................... 298,178 4,047 0 30,764 0 332,989
Other receivables ............................ 0 0 0 587 (587)(3) 0
Supplies ..................................... 0 0 0 5,159 (5,159)(3) 0
Inventories, prepaid expenses and other
current assets............................... 102,906 2,714 0 1,277 15,006 (3) 121,903
Deferred income taxes......................... 0 0 0 9,260 (9,260)(3) 0
Total current assets............................ 494,253 11,785 0 86,389 0 592,427
Other assets.................................... 58,127 0 0 2,262 0 60,389
Deferred income taxes .......................... 7,559 0 (509)(3) 0 (3,846)(4) 3,204
Property, plant and equipment, net.............. 1,049,375 14,630 0 158,501 0 1,222,506
Intangible assets, net.......................... 541,366 15,230 0 124,270 0 680,866
Total assets.................................... $ 2,150,680 $ 41,645 $ (509) $371,422 $ (3,846) $2,559,392
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $ 83,246 $ 1,391 $ 3,000(1) $ 4,441 $15,000 (1) $ 107,078
Salaries and wages payable.................... 44,668 947 0 0 963 (3) 46,578
Accrued interest payable and other
liabilities.................................. 49,462 361 (1,170)(1) 10,530 (5,850)(1) 73,493
20,160 (3)
Accrued loss on disposal of surgery centers . 0 0 0 741 (741)(3) 0
Current portion of long-term debt............ 17,720 2,799 0 729 21,248
Income taxes payable......................... 0 0 0 20,382 (20,382)(3) 0
Distributable to minority interests ........ 0 0 0 7,000 (7,000)(3) 0
Total current liabilities...................... 195,096 5,498 1,830 43,823 2,150 248,397
Long-term debt................................. 1,386,450 14,955 0 65,119 0 1,466,524
Deferred income taxes.......................... 0 509 (509)(3) 3,846 (3,846)(4) 0
Other long-term liabilities.................... 5,470 0 0 0 0 5,470
Deferred revenue............................... 7,137 0 0 0 0 7,137
Minority interests............................. 8,980 5,375 0 29,404 7,000(3) 50,759
Stockholders' equity:
Preferred Stock, $.10 par value.............. 0 0 0 0 0 0
Common Stock, $.01 par value ................ 954 196 (178)(2) 9,867 (9,385)(2) 1,454
Additional paid-in capital................... 719,296 18,905 178 (2) 96,126 9,385 (2) 843,890
Retained earnings............................ 178,929 1,481 (1,830)(1) 129,288 (9,150)(1) 298,718
Common stock subscription receivable ........ (335,423) 0 0 0 0 (335,423)
Treasury stock............................... (323) 0 0 (6,051) 0 (6,374)
Receivable from Employee Stock Ownership
Plan........................................ (15,886) 0 0 0 0 (15,886)
Notes receivable from stockholders............ 0 (5,274) 0 0 0 (5,274)
Total stockholders' equity..................... 547,547 15,308 (1,830) 229,230 (9,150) 781,105
Total liabilities and stockholders' equity .... $ 2,150,680 $41,645 $ (509) $371,422 $ (3,846) $2,559,392
See accompanying notes.
48
HEALTHSOUTH Corporation and Subsidiaries
Pro Forma Condensed Combined Income Statement (Unaudited)
Year Ended December 31, 1994
Acquisition
Pro Forma Pro Forma Pro Forma Pro Forma Pro Forma
HEALTHSOUTH NovaCare Adjustments Combined SSCI Adjustments SCA Adjustments Combined
(In thousands, except per share amounts)
Revenues........... $1,236,190 $ 142,548 $ 8,058 (5) $1,386,796 $38,175 $ 0 $236,720 $ 2,552 (3) $1,664,243
Operating expenses:
Operating units.. 906,712 128,233 (12,406)(2) 1,022,539 24,133 0 123,379 5,658 (3) 1,175,709
Corporate general and
administrative... 45,895 0 0 45,895 2,711 0 5,464 0 54,070
Provision for doubtful
accounts............ 23,739 1,269 0 25,008 3,907 0 3,061 0 31,976
Depreciation and
amortization ...... 86,678 7,041 (1,918)(1) 99,327 2,627 0 17,392 0 119,346
7,526 (3)
Interest expense..... 65,286 11,096 10,100 (4) 86,482 1,588 0 7,294 (2,150)(3) 93,214
Interest income...... (4,308) 0 0 (4,308) (258) 0 (4,184) 2,552(3) (6,198)
Merger expenses...... 6,520 0 0 6,520 0 0 0 0 6,520
Gain on sale of MCA
Stock ..... 0 0 0 0 0 0 (7,727) 0 (7,727)
Loss on impairment of
assets .. 10,500 0 0 10,500 0 0 0 0 10,500
Loss on abandonment of
computer project...... 4,500 0 0 4,500 0 0 0 0 4,500
Loss on disposal of
Surgery Centers....... 0 0 0 0 0 0 13,197 0 13,197
1,145,522 147,639 3,302 1,296,463 34,708 0 157,876 6,060 1,495,107
Income before income
taxes and minority
interests.... 90,668 (5,091) 4,756 90,333 3,467 0 78,844 (3,508) 169,136
Provision for income
taxes .............. 34,305 (1,084) 780(6) 34,001 473 0 25,039 (1,403)(3) 58,110
56,363 (4,007) 3,976 56,332 2,994 0 53,805 (2,105) 111,026
Minority interests... 6,402 445 0 6,847 2,462 0 22,420 0 31,729
Income before
cumulative effect of
change in accounting
principle.......... 49,961 (4,452) 3,976 49,485 532 0 31,385 (2,105) 79,297
Cumulative effect of
change in accounting
principle, net of
income tax benefit
of $1,403........... 0 0 0 0 0 0 2,105 (2,105)(3) 0
Net income........... $ 49,961 $ (4,452) $ 3,976 $ 49,485 $ 532 $ 0 $ 29,280 $ 0 $ 79,297
Weighted average common
and common equivalent
shares outstanding... 84,687 N/A N/A 84,687 19,612 (17,837)(2) 38,892 8,556 (2) 133,910
Net income per common
and common equivalent
share.............. $ 0.59 N/A N/A $ 0.58 $ 0.03 N/A $ 0.75 N/A $ 0.59
Net income per common
share -- assuming full
dilution.......... $ 0.59 N/A N/A $ 0.58 N/A N/A N/A N/A $ 0.59
See accompanying notes.
49
HEALTHSOUTH Corporation and Subsidiaries
Pro Forma Condensed Combined Income Statement (Unaudited)
Year Ended December 31, 1993
Pro Forma Pro Forma Pro Forma
HEALTHSOUTH SSCI Adjustments SCA Adjustments Combined
(In thousands, except per share amounts)
Revenues............................................... $656,329 $22,096 $ 0 $197,976 $1,294(3) $877,695
Operating expenses:
Operating units........................................ 471,778 14,768 0 103,825 0 590,371
Corporate general and administrative................... 24,329 2,264 0 3,880 0 30,473
Provision for doubtful accounts........................ 16,181 1,766 0 1,068 0 19,015
Depreciation and amortization.......................... 46,224 1,603 0 12,626 0 60,453
Interest expense....................................... 18,495 612 0 3,600 0 22,707
Interest income........................................ (3,924) (428) 0 (2,513) 1,294(3) (5,571)
Merger expense......................................... 333 0 0 0 0 333
NME Selected Hospitals Acquisition related expense .... 49,742 0 0 0 0 49,742
Gain on sale of partnership interest................... (1,400) 0 0 0 0 (1,400)
621,758 20,585 0 122,486 1,294 766,123
Income before income taxes and minority interests ..... 34,571 1,511 0 75,490 0 111,572
Provision for income taxes............................. 11,930 132 0 20,650 0 32,712
22,641 1,379 0 54,840 0 78,860
Minority interests..................................... 5,444 1,240 0 22,624 0 29,308
Income from continuing operations...................... 17,197 139 0 32,216 0 49,552
Income from discontinued operations.................... 0 0 0 4,452 0 4,452
Net income............................................. $ 17,197 $ 139 $ 0 $ 36,668 $ 0 $ 54,004
Weighted average common and common equivalent shares
outstanding............................................ 77,709 19,608 (17,833)(2) 38,117 8,386(2) 125,987
Net income per common and common equivalent share ..... $ 0.22 $ 0.01 N/A $ 0.96 N/A $ 0.43
See accompanying notes.
50
HEALTHSOUTH Corporation and Subsidiaries
Pro Forma Condensed Combined Income Statement (Unaudited)
Year Ended December 31, 1992
Pro Forma Pro Forma Pro Forma
HEALTHSOUTH SSCI Adjustments SCA Adjustments Combined
(In thousands, except per share amounts)
Revenues............................................ $501,046 $ 2,611 $ 0 $161,873 $ 306(3) $ 665,836
Operating expenses:
Operating units................................... 372,169 1,815 0 83,871 0 457,855
Corporate general and administrative.............. 16,878 476 0 3,804 0 21,158
Provision for doubtful accounts..................... 13,254 177 0 1,442 0 14,873
Depreciation and amortization....................... 29,834 185 0 9,695 0 39,714
Interest expense.................................... 12,623 44 0 3,410 0 16,077
Interest income..................................... (5,415) (19) 0 (3,049) 306(3) (8,177)
Terminated merger expense........................... 3,665 0 0 0 0 3,665
443,008 2,678 0 99,173 306 545,165
Income (loss) before income taxes and minority
interests......................................... 58,038 (67) 0 62,700 0 120,671
Provision for income taxes.......................... 18,864 (22) 0 15,663 0 34,505
39,174 (45) 0 47,037 0 86,166
Minority interests.................................. 4,245 185 0 21,481 0 25,911
Income from continuing operations................... 34,929 (230) 0 25,556 0 60,255
Income from discontinued operations................. 0 0 0 3,283 0 3,283
Net income.......................................... $ 34,929 $ (230) $ 0 $ 28,839 $ 0 $ 63,538
Weighted average common and common equivalent
shares outstanding................................ 74,214 19,608 (17,833)(2) 37,191 8,182(2) 121,362
Net income (loss) per common and common equivalent
share............................................... $ 0.47 $ (0.01) N/A $ 0.78 N/A $ 0.52
See accompanying notes.
51
HEALTHSOUTH Corporation and Subsidiaries
Pro Forma Condensed Combined Income Statement (Unaudited)
Nine Months Ended September 30, 1995
Acquisition Pro
Pro Forma Pro Forma Forma Pro Forma Pro Forma
HEALTHSOUTH NovaCare Adjustments Combined SSCI Adjustments SCA Adjustments Combined
(In thousands, except per share amounts)
Revenues.......................$1,109,689 $37,942 $1,860 (5) $1,149,491 $29,868 $ 0 $196,258 $1,155(3) $1,376,772
Operating expenses:
Operating units.............. 788,593 33,065 (910)(2) 820,748 17,661 0 102,383 0 940,792
Corporate general
and administrative.......... 28,463 0 0 28,463 1,820 0 4,236 0 34,519
Provision for doubtful accounts 20,520 322 0 20,842 3,125 0 2,381 0 26,348
Depreciation and amortization . 86,767 1,996 (999)(1) 89,646 2,026 0 12,640 0 104,312
1,882 (3)
Interest expense............... 68,697 2,595 2,684 (4) 73,976 1,258 0 3,413 0 78,647
Interest income................ (4,529) 0 0 (4,529) (274) 0 (2,412) 1,155(3) (6,060)
Merger cost.................... 29,194 0 0 29,194 0 0 0 0 29,194
Loss on impairment of assets .. 11,192 0 0 11,192 0 0 0 0 11,192
1,028,897 37,978 2,657 1,069,532 25,616 0 122,641 1,155 1,218,944
Income before income taxes and
minority interests........... 80,792 (36) (797) 79,959 4,252 0 73,617 0 157,828
Provision for income taxes .... 27,525 (101) (259)(6) 27,165 848 0 21,397 0 49,410
53,267 65 (538) 52,794 3,404 0 52,220 0 108,418
Minority interests............. 8,357 89 0 8,446 2,364 0 19,217 0 30,027
Net income.....................$ 44,910 $ (24) $(538) $ 44,348 $1,040 $ 0 $ 33,003 $ 0 $ 78,391
Weighted average common and
common equivalent shares
outstanding.................. 87,773 N/A N/A 87,773 19,615 (17,840)(2) 39,189 8,622(2) 137,359
Net income per common and common
equivalent share.............$ 0.51 N/A N/A $ 0.51 $ 0.05 N/A $ 0.84 N/A $ 0.57
Net income per common share --
assuming full dilution.......$ 0.51 N/A N/A $ 0.51 N/A N/A N/A N/A $ 0.57
See accompanying notes.
52
HEALTHSOUTH Corporation and Subsidiaries
Pro Forma Condensed Combined Income Statement (Unaudited)
Nine Months Ended September 30, 1994
Pro Forma Pro Forma Pro Forma
HEALTHSOUTH SSCI Adjustments SCA Adjustments Combined
(In thousands, except per share amounts)
Revenues................................................ $902,268 $28,357 $ 0 $169,973 $ 1,468 (3)$1,102,066
Operating expenses:
Operating units......................................... 670,607 17,637 0 88,794 5,658 (3) 782,696
Corporate general and administrative.................... 29,831 2,132 0 4,061 0 36,024
Provision for doubtful accounts......................... 16,691 2,950 0 2,079 0 21,720
Depreciation and amortization........................... 59,142 1,911 0 12,506 0 73,559
Interest expense........................................ 45,632 1,146 0 6,025 (2,150)(3) 50,653
Interest income......................................... (3,256) (359) 0 (2,699) 1,468 (3) (4,846)
Merger costs............................................ 3,571 0 0 0 0 3,571
Gain on sale of MCA stock............................... 0 0 0 (6,882) 0 (6,882)
822,218 25,417 0 103,884 4,976 956,495
Income before income taxes and minority interests ...... 80,050 2,940 0 66,089 (3,508) 145,571
Provision for income taxes.............................. 30,418 540 0 22,084 (1,403)(3) 51,639
49,632 2,400 0 44,005 (2,105) 93,932
Minority interests...................................... 4,276 1,887 0 15,144 0 21,307
Net income before cumulative effect of change in
accounting principle.................................... 45,356 513 0 28,861 (2,105) 72,625
Cumulative effect of change in accounting principle,
net of income tax benefit of $1,403..................... 0 0 0 2,105 (2,105)(3) 0
Net income.............................................. $ 45,356 $ 513 $ 0 $ 26,756 $ 0 $ 72,625
Weighted average common and common equivalent shares
outstanding............................................. 84,509 19,610 (17,835)(2) 38,859 8,549 (2) 133,692
Net income per common and common equivalent share ...... $ 0.54 $ 0.03 N/A $ 0.69 N/A $ 0.54
See accompanying notes.
53
HEALTHSOUTH Corporation and Subsidiaries
Notes to Pro Forma Condensed Financial Information
A. The NovaCare Rehabilitation Hospitals Acquisition
Effective April 1, 1995 HEALTHSOUTH completed the acquisition of the
rehabilitation hospitals division of NovaCare, Inc. ("NovaCare"), consisting of
11 rehabilitation hospitals, 12 other facilities, and certificates of need to
build two additional facilities (the "NovaCare Rehabilitation Hospitals
Acquisition"). The purchase price was approximately $234,807,000. The
transaction was accounted for as a purchase and, accordingly, the results of the
acquired NovaCare facilities are included in HEALTHSOUTH'S historical financial
statements from the effective date of the acquisition. HEALTHSOUTH financed the
cost of the NovaCare Rehabilitation Hospitals Acquisition through additional
borrowings under its existing credit facilities, as amended.
The accompanying pro forma income statements for the year ended
December 31, 1994 and the nine months ended September 30, 1995 assume that the
transaction was consummated at the beginning of the periods presented.
Certain assets and liabilities of Rehab Systems Company (a wholly owned
subsidiary of NovaCare, Inc.) were excluded from the NovaCare Rehabilitation
Hospitals Acquisition. The excluded assets and liabilities are as follows (in
thousands):
Cash and cash equivalents........................... 4,973
Accounts receivable................................. 259
Other current assets................................ 42
Equipment, net...................................... 4,719
Intangible assets, net.............................. 56,321
Other assets (primarily investments in
subsidiaries)...................................... 40,637
Accounts payable.................................... (454)
Other current liabilities........................... (275)
Current portion of long term debt................... (146)
Long term debt...................................... (38,620)
Payable to affiliates............................... (92,377)
Net excluded (liability)....................... $(24,921)
The following pro forma adjustments are necessary for the NovaCare
Rehabilitation Hospitals Acquisition:
1. To exclude historical depreciation and amortization expense related
to the excluded assets described above. The total expense excluded amounts to
$1,918,000 for the year ended December 31, 1994 and $999,000 for the nine months
ended September 30, 1995.
2. To eliminate intercompany management fees and royalty fees totaling
$12,406,000 for the year ended December 31, 1994 and $910,000 for the nine
months ended September 30, 1995 of the acquired NovaCare facilities.
3. To adjust depreciation and amortization expense to reflect the
allocation of the excess purchase price over the net tangible asset value as
follows (in thousands):
Purchase Price
Allocation Useful Annual Quarterly
Adjustment Life Amortization Amortization
Leasehold
value........ 128,333 20 years 6,417 1,605
Goodwill....... 44,365 40 years 1,109 277
$7,526 $1,882
No additional adjustments to NovaCare's historical depreciation and
amortization are necessary. The remaining net assets acquired approximate their
fair value.
54
HEALTHSOUTH Corporation and Subsidiaries
Notes to Pro Forma Condensed Financial Information - Continued
Because NovaCare's results of operations before intercompany items
(described in Note 2 above) are profitable, both on a historical and pro forma
basis, the 40-year amortization period for goodwill is appropriate and
consistent with HEALTHSOUTH policy. Leasehold value is being amortized over the
weighted average remaining terms of the leases, which is 20 years.
4. To increase interest expense by $19,559,000 for the year ended
December 31, 1994 and $4,889,000 for the nine months ended September 30, 1995 to
reflect pro forma borrowings of $234,807,000, described above, at a 8.33%
variable interest rate, which represents HEALTHSOUTH's weighted average cost of
debt, as if they were outstanding for the entire period, and to decrease
interest expense by $9,459,000 for the year ended December 31, 1994 and
$2,205,000 for the nine months ended September 30, 1995, which represents
interest on NovaCare debt not assumed by HEALTHSOUTH. A .125% variance in the
assumed interest rate would change annual pro forma interest expense by
approximately $294,000.
5. To adjust estimated Medicare reimbursement for the changes in
reimbursable expenses described in items 1, 2, 3 and 4 above. These changes are
as follows (in thousands);
Year Ended
December 31, Nine months ended
1994 September 30, 1995
Depreciation and amortization (Note 1)..... $(1,918) $ (999)
Intercompany management fees (Note 2)...... (4,196) (910)
Depreciation and amortization (Note 3)..... 7,526 1,882
Interest expense (Note 4).................. 10,100 2,684
11,512 2,657
Assumed Medicare utilization............... 70% 70%
Increased reimbursement.................... $8,058 $1,860
The Medicare utilization rate of 70% assumes a slight improvement in NovaCare's
historical Medicare percentage of 78% as a result of bringing these facilities
into the HEALTHSOUTH network.
6. To adjust the NovaCare provision for income taxes to an effective
rate of 39% (net of minority interests).
B. The SSCI Merger
The SSCI Merger was completed in October, 1995 and will be accounted
for as a pooling of interests. The pro forma condensed income statements assume
that the SSCI Merger was consummated on January 1, 1992. The pro forma condensed
balance sheet assumes that the SSCI Merger was consummated on September 30,
1995.
The pro forma condensed financial information contains no adjustments
to conform the accounting policies of the two companies because any such
adjustments have been determined to be immaterial by the management of
HEALTHSOUTH.
The following pro forma adjustments are necessary for the SSCI Merger:
1. The pro forma condensed income statements do not reflect
non-recurring costs resulting directly from the SSCI Merger. The management of
HEALTHSOUTH estimates that these costs will approximate $3,000,000 and will be
charged to operations in the quarter the SSCI Merger is consummated. The amount
includes costs to merge the two companies and professional fees. However, this
estimated expense, net of taxes of $1,170,000, has been charged to retained
earnings in the accompanying pro forma balance sheet.
2. To adjust pro forma share amounts based on historical share amounts,
converting each outstanding SSCI Share into .0905 shares of HEALTHSOUTH Common
Stock.
3. To net SSCI's net deferred tax liability against HEALTHSOUTH's net
deferred tax asset.
55
HEALTHSOUTH Corporation and Subsidiaries
Notes to Pro Forma Condensed Financial Information - Continued
C. The SCA Merger
The proposed SCA Merger is intended to be accounted for as a pooling of
interests. The pro forma condensed income statements assume that the SCA Merger
was consummated on January 1, 1992. The pro forma condensed balance sheet
assumes that the SCA Merger was consummated on September 30, 1995.
The pro forma condensed financial information contains no adjustments
to conform the accounting policies of the two companies because any such
adjustments have been determined to be immaterial by the management of
HEALTHSOUTH.
The following pro forma adjustments are necessary for the SCA Merger:
1. The pro forma income statements do not reflect non-recurring costs
resulting directly from the SCA Merger. The management of HEALTHSOUTH estimates
that these costs will approximate $15,000,000 and will be charged to operations
in the quarter the SCA Merger is consummated. The amount includes costs to merge
the two companies and professional fees. However, this estimated expense, net of
taxes of $5,850,000, has been charged to retained earnings in the accompanying
pro forma balance sheet.
2. To adjust pro forma share amounts based on historical share amounts,
converting each outstanding SCA Share, par value $.25, into 1.22 shares of
HEALTHSOUTH Common Stock, par value $.01. The conversion ratio is based upon an
assumed Base Period Trading Price for HEALTHSOUTH's Common Stock ranging from
$22 to $28 per share.
3. To reclassify certain balance sheet and income statement amounts
from the SCA historical financial statements in order to conform to the
HEALTHSOUTH method of presentation.
4. To net SCA's net deferred tax liability against HEALTHSOUTH's net
deferred tax asset.
56
BUSINESS OF HEALTHSOUTH
General
HEALTHSOUTH is the nation's largest provider of outpatient and
rehabilitative healthcare services. HEALTHSOUTH provides these services through
its national network of outpatient and inpatient rehabilitation facilities,
outpatient surgery 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 the Company to secure contracts
with national and regional managed care payors. HEALTHSOUTH has over 500 patient
care locations in 39 states, the District of Columbia and Ontario, Canada.
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.
HEALTHSOUTH operates the third largest network of free-standing
outpatient surgery centers in the United States. HEALTHSOUTH's outpatient
surgery centers provide the facilities and medical support staff necessary for
physicians to perform non-emergency surgical procedures. While outpatient
surgery is widely recognized as generally less expensive than surgery performed
in a hospital, HEALTHSOUTH believes that outpatient surgery performed at a
free-standing outpatient surgery center is generally less expensive than
hospital-based outpatient surgery. Approximately 95% of HEALTHSOUTH's surgery
center facilities are located in markets served by its rehabilitative service
facilities, enabling HEALTHSOUTH to pursue opportunities for cross-referrals.
Over the last two years, HEALTHSOUTH has completed several significant
acquisitions in the rehabilitation business and has expanded into the surgery
center business. HEALTHSOUTH believes that these acquisitions complement its
historical operations and enhance its market position. HEALTHSOUTH further
believes that its expansion into the outpatient surgery business provides it
with a platform for future growth.
Company Strategy
HEALTHSOUTH's principal objective is to be the provider of choice for
patients, physicians and payors alike for outpatient 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.
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 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.
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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
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 and
pending acquisitions in the outpatient surgery and diagnostic imaging
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.
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 11 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. In addition,
HEALTHSOUTH has added outpatient surgery services, diagnostic imaging 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.
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Rehabilitative Services: General
When a patient is referred to one of HEALTHSOUTH's rehabilitation
facilities, he undergoes an initial evaluation and assessment process that
results in the development of a rehabilitation care plan designed specifically
for that patient. Depending upon the patient's disability, this evaluation
process may involve the services of a single discipline, such as physical
therapy for a knee injury, or of multiple disciplines, as in the case of a
complicated stroke patient. HEALTHSOUTH has developed numerous rehabilitation
programs, which include stroke, head injury, spinal cord injury, neuromuscular
and work injury, that combine certain services to address the needs of patients
with similar disabilities. In this way, all of the facilities' patients,
regardless of the severity and complexity of their disabilities, can receive the
level and intensity of those services necessary for them to be restored to as
productive, active and independent a lifestyle as possible.
Outpatient Rehabilitation Services
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 September 30, 1995, HEALTHSOUTH provided outpatient rehabilitative healthcare
services through 340 outpatient locations, including freestanding outpatient
centers and their satellites and outpatient satellites of inpatient facilities.
The continuing emphasis on containing the increases in healthcare
costs, as evidenced by Medicare's prospective payment system, the growth in
managed care and the various alternative healthcare reform proposals, results in
the early discharge of patients from acute-care facilities. As a result, many
hospital patients do not receive the intensity of services that may be necessary
for them to achieve a full recovery from their diseases, disorders or traumatic
conditions. HEALTHSOUTH's outpatient rehabilitation services play a significant
role in the continuum of care because they provide hospital-level services, in
terms of intensity, quality and frequency, in a more cost-efficient setting.
Patients treated at HEALTHSOUTH's outpatient centers will undergo
varying courses of therapy depending upon their needs. Some patients may only
require a few hours of therapy per week for a few weeks, while others may spend
up to five hours per day in therapy for six months or more, depending on the
nature, severity and complexity of their injuries.
In general, HEALTHSOUTH initially establishes an outpatient center in a
given market, either by acquiring an existing private therapy practice or
through de novo development, and institutes its clinical protocols and programs
in response to the community's general need for services. HEALTHSOUTH will then
establish satellite clinics that are dependent upon the main facility for
management and administrative services. These satellite clinics generally
provide a specific evaluative or specialty service/program, such as hand therapy
or foot and ankle therapy, in response to specific market demands. HEALTHSOUTH's
outpatient rehabilitation facilities range in size from 1,200 square feet for
specialty clinics to 20,000 square feet for large, full-service facilities.
Currently, the typical outpatient facility configuration ranges in size from
2,000 to 5,000 square feet and costs less than $500,000 to build and equip.
Patient utilization of HEALTHSOUTH's outpatient rehabilitation
facilities cannot be measured in the conventional manner applied to acute-care
hospitals, nursing homes and other healthcare providers which have a fixed
number of licensed beds and serve patients on a 24-hour basis. Utilization
patterns in outpatient rehabilitation facilities will be affected by the market
to be served, the types of injuries treated, the patient mix and the number of
available therapists, among other factors. Moreover, because of variations in
size, location, hours of operation, referring physician base and services
provided and other differences among each of HEALTHSOUTH's outpatient
facilities, it is not possible to accurately assess patient utilization against
a norm.
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Inpatient Services
Inpatient Rehabilitation Facilities. At September 30, 1995, HEALTHSOUTH
operated 77 inpatient rehabilitation facilities with 4,618 beds, representing
the largest group of affiliated proprietary inpatient rehabilitation facilities
in the United States. HEALTHSOUTH's inpatient rehabilitation facilities provide
high-quality comprehensive services to patients who require intensive
institutional rehabilitation care.
Inpatient rehabilitation patients are typically those who are
experiencing significant physical disabilities due to various conditions, such
as head injury, spinal cord injury, stroke, certain orthopaedic problems and
neuromuscular disease. HEALTHSOUTH's inpatient rehabilitation facilities provide
the medical, nursing, therapy and ancillary services required to comply with
local, state and federal regulations as well as accreditation standards of the
Joint Commission on Accreditation of Healthcare Organizations (the "JCAHO") and
the Commission on Accreditation of Rehabilitation Facilities.
All of HEALTHSOUTH's inpatient rehabilitation facilities utilize an
interdisciplinary team approach to the rehabilitation process and involve the
patient and family, as well as the payor, in the determination of the goals for
the patient. Internal case managers monitor each patient's progress and provide
documentation of patient status, achievement of goals, functional outcomes and
efficiency.
HEALTHSOUTH acquires or develops inpatient rehabilitation facilities in
those communities where it believes there is a demonstrated need for
comprehensive inpatient rehabilitation services. Depending upon the specific
market opportunity, these facilities may be licensed as rehabilitation hospitals
or skilled nursing facilities. HEALTHSOUTH believes that it can provide
high-quality rehabilitation services in either type of facility, but prefers to
utilize the rehabilitation hospital form.
In certain markets where the it does not provide free-standing
outpatient facilities, HEALTHSOUTH's rehabilitation hospitals may provide
outpatient rehabilitation services as a complement to their inpatient services.
Typically, this opportunity arises when patients complete their inpatient course
of treatment but remain in need of additional therapy that can be accomplished
on an outpatient basis. Depending upon the demand for outpatient services and
physical space constraints, the rehabilitation hospital may establish the
services either within its building or in a satellite location. In either case,
the clinical protocols and programs developed for use in the free-standing
outpatient centers will be utilized by these facilities.
HEALTHSOUTH's Nashville, Tennessee (Vanderbilt University), Memphis,
Tennessee (Methodist Hospitals), Dothan, Alabama (Southeast Alabama Medical
Center) and Charleston, South Carolina (North Trident Regional Medical Center)
hospital facilities have been developed in conjunction with local tertiary-care
facilities. This strategy of developing effective referral and service networks
prior to opening results in improved operating efficiencies for the new
facilities. HEALTHSOUTH is utilizing this same concept in rehabilitation
hospitals under development with the University of Missouri and the University
of Virginia.
Medical Centers. HEALTHSOUTH operates five medical centers with 912
licensed beds in four distinct markets. These facilities provide general and
specialty medical and surgical healthcare services, emphasizing orthopaedics,
sports medicine and rehabilitation.
HEALTHSOUTH acquired its five medical centers as outgrowths of its
rehabilitative healthcare services. Often, patients require medical and surgical
interventions prior to the initiation of their rehabilitative care. In each of
the markets in which HEALTHSOUTH has acquired a medical center, HEALTHSOUTH had
well-established relationships with the medical communities serving each
facility. In addition, each of the facilities enjoyed well-established
reputations in orthopaedics and/or sports medicine prior to their acquisition by
HEALTHSOUTH. Following the acquisition of each of its medical centers,
HEALTHSOUTH has provided the resources to improve upon the physical plant and
expand services through the introduction of new technology. HEALTHSOUTH has also
developed additional relationships between these facilities and certain
university facilities, including the University of Miami, Auburn University and
the University of Alabama at Birmingham. Through these relationships, the influx
of celebrity athletes and personalities and the acquisition of new technology,
all five medical centers have improved their operating efficiencies and enhanced
census.
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Each of the five medical center facilities is licensed as an acute-care
hospital, is accredited by the JCAHO and participates in the Medicare
prospective payment system. See "Business -- Regulation".
Inpatient Facility Utilization. In measuring patient utilization of
HEALTHSOUTH's inpatient facilities, various factors must be considered. Due to
market demand, demographics, start-up status, renovation, patient mix and other
factors, HEALTHSOUTH may not treat all licensed beds in a particular facility as
available beds, which sometimes results in a material variance between licensed
beds and beds actually available for utilization at any specific time.
HEALTHSOUTH is in a position to increase the number of available beds at such
facilities as market conditions dictate. During the year ended December 31,
1994, HEALTHSOUTH's inpatient facilities achieved an overall utilization, based
on patient days and available beds, of 61.0%.
Surgery Centers
As a result of the SHC acquisition, HEALTHSOUTH became the third
largest operator of outpatient surgery centers in the United States. It
currently operates 43 free-standing surgery centers, including five mobile
lithotripsy units, in 12 states, and has an additional five free-standing
surgery centers under development. Approximately 95% of these facilities are
located in markets served by HEALTHSOUTH outpatient and rehabilitative service
facilities, enabling HEALTHSOUTH to pursue opportunities for cross-referrals
between surgery and rehabilitative facilities as well as to centralize
administrative functions. HEALTHSOUTH's surgery centers provide the facilities
and medical support staff necessary for physicians to perform non-emergency
surgical procedures that do not generally require overnight hospitalization. Its
typical surgery center is a free-standing facility with two 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.
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. Seventeen of HEALTHSOUTH's surgery centers currently provide
for extended recovery stays. HEALTHSOUTH's ability to develop such recovery care
facilities is dependent upon state regulatory environments in the particular
states where its centers are located.
HEALTHSOUTH's outpatient surgery centers implement quality control
procedures to evaluate the level of care provided the centers. Each center has a
medical advisory committee of three to ten physicians which reviews the
professional credentials of physicians applying for medial staff privileges at
the center.
Other Patient Care Services
In certain of its markets, HEALTHSOUTH provides other patient care
services, including home healthcare, diagnostic services, physician services and
contract management of hospital-based rehabilitative healthcare services.
HEALTHSOUTH evaluates market opportunities on a case-by-case basis in
determining whether to provide additional services of these types, which may be
complementary to facility-based services provided by HEALTHSOUTH or stand-alone
businesses.
Marketing of Facilities and Services
HEALTHSOUTH markets its facilities, and their services and programs, on
local, regional and national levels. Local and regional marketing activities are
typically coordinated by facility-based marketing personnel, whereas large-scale
regional and national efforts are coordinated by corporate-based personnel.
In general, HEALTHSOUTH develops a marketing plan for each facility
based on a variety of factors, including population characteristics, physician
characteristics and incidence of disability statistics, in order to identify
specific service opportunities. Facility-oriented marketing programs are focused
61
on increasing the volume of patient referrals to the specific facility and
involve the development of ongoing relationships with area schools, businesses
and industries as well as physicians, health maintenance organizations and
preferred provider organizations.
HEALTHSOUTH's larger-scale marketing activities are focused more
broadly on efforts to generate patient referrals to multiple facilities and the
creation of new business opportunities. Such activities include the development
and maintenance of contractual relationships or national pricing agreements with
large third-party payors, such as CIGNA, Metrahealth or other national insurance
companies, with national HMO/PPO companies, such as
Healthcare-COMPARE/AFFORDABLE, Hospital Network of America and Multiplan, with
national case management companies, such as INTRACORP and Crawford & Co., and
with national employers, such as Wal-Mart, Georgia-Pacific Corporation, Dillard
Department Stores, Goodyear Tire & Rubber and Winn-Dixie. In addition, since the
facilities acquired by HEALTHSOUTH during the past two years had very limited
contractual relationships with payors, managed care providers, employers and
others, HEALTHSOUTH is expanding its existing payor relationships to include
these facilities.
HEALTHSOUTH carries out broader programs designed to further enhance
its public image. Among these is the HEALTHSOUTH Sports Medicine Council, headed
by Bo Jackson, which is dedicated to developing educational programs focused on
athletics for use in high schools. Healthsouth has ongoing relationships with
the Ladies Professional Golf Association, the Southeastern Conference and more
than 400 universities, colleges and high schools to provide sports medicine
coverage of events and rehabilitative healthcare services for injured athletes.
In addition, HEALTHSOUTH has established relationships with or provided
treatment services for athletes from some 35 to 40 major professional sports
teams, as well as providing sports medicine services for Olympic and amateur
athletes.
HEALTHSOUTH is a national sponsor of the United Cerebral Palsy
Association and the National Arthritis Foundation and supports many other
charitable organizations on national and local levels. Through these endeavors,
HEALTHSOUTH provides its employees with opportunities to support their
communities.
Sources of Revenues
Private pay revenue sources represent the majority of HEALTHSOUTH's
revenues. The following table sets forth the percentages of HEALTHSOUTH's
revenues from various sources for the periods indicated:
Year Ended Year Ended
December 31, 1993 December 31, 1994
Source
Medicare............................... 30.6% 41.0%
Commercial (1)......................... 36.3 34.1
Workers' Compensation.................. 16.4 10.9
All Other Payors (2)................... 16.7 14.0
100.0% 100.0%
- --------------
(1) Includes commercial insurance, HMOs, PPOs and other managed care plans.
(2) Medicaid is included in this category, but is insignificant in amount.
The above table does not reflect the ReLife facilities or the SHC
facilities for either period. The NME Selected Hospitals are included in the
1994 figures only. Comparable information for the ReLife and SHC facilities is
not available and is not reflected in either year in the table. The percentage
of revenues derived from Medicare increased in 1994 as a result of the NME
Selected Hospitals Acquisition. HEALTHSOUTH has expanded its existing payor
relationships to include the former NME and ReLife facilities.
See "-- Regulation -- Medicare Participation and Reimbursement" for a
description of the reimbursement regulations applicable to the Company's
facilities.
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Competition
HEALTHSOUTH competes in the geographic markets in which its facilities
are located. In addition, HEALTHSOUTH's rehabilitation facilities compete on a
regional and national basis with other providers of specialized services such as
sports medicine and work hardening, and specific concentrations such as head
injury rehabilitation and orthopaedic surgery. The competition faced in each of
these markets is similar, with variations arising from the number of healthcare
providers in the given metropolitan area. The primary competitive factors in the
rehabilitation services business are quality of services, projected patient
outcomes, charges for services, responsiveness to the needs of the patients,
community and physicians, and ability to tailor programs and services to meet
specific needs of the patients. Competitors and potential competitors include
hospitals, private practice therapists, rehabilitation agencies and others. Some
of these competitors may have greater patient referral support and financial and
personnel resources in particular markets than HEALTHSOUTH. Management believes
that HEALTHSOUTH competes successfully within the marketplace based upon its
reputation for quality, competitive prices, positive rehabilitation outcomes,
innovative programs, clean and bright facilities and responsiveness to needs.
HEALTHSOUTH's medical centers are located in four urban areas of the
country, all with well-established healthcare services provided by a number of
proprietary, not-for-profit, and municipal hospital facilities. HEALTHSOUTH's
facilities compete directly with these local hospitals as well as various
nationally recognized centers of excellence in orthopaedics, sports medicine and
other specialties. Because HEALTHSOUTH's facilities enjoy a national and
international reputation for orthopaedic surgery and sports medicine,
HEALTHSOUTH believes that its medical centers' level of service and continuum of
care enable them to compete successfully, both locally and nationally.
HEALTHSOUTH's surgery centers compete primarily with hospitals and
other operators of freestanding surgery centers in attracting physicians and
patients, and in developing new centers and in acquiring existing centers. The
primary competitive factors in the outpatient surgery business are convenience,
cost, quality of service, physician loyalty and reputation. Hospitals have many
competitive advantages in attracting physicians and patients, including
established standing in a community, historical physician loyalty and
convenience for physicians making rounds or performing inpatient surgery in the
hospital. However, HEALTHSOUTH believes that its national market system and its
historical presence in many of the markets where the SCA facilities are located
will enhance HEALTHSOUTH's ability to operate these facilities successfully.
HEALTHSOUTH potentially faces competition any time it initiates a
Certificate of Need ("CON") project or seeks to acquire an existing facility or
CON. See "-- Regulation". This competition may arise either from competing
companies, national or regional, or from local hospitals which file competing
applications or oppose the proposed CON project. The necessity for these
approvals serves as a barrier to entry and has the potential to limit
competition by creating a franchise to provide services to a given area. To date
HEALTHSOUTH has been successful in obtaining each of the CONs or similar
approvals which it has sought, although there can be no assurance that it will
achieve similar success in the future.
Regulation
The healthcare industry is subject to regulation by federal, state and
local governments. The various levels of regulatory activity affect
HEALTHSOUTH's business activities by controlling its growth, requiring licensure
or certification of its facilities, regulating the use of its properties and
controlling the reimbursement to HEALTHSOUTH for services provided.
Licensure, Certification and Certificate of Need Regulations
Capital expenditures for the construction of new facilities, the
addition of beds or the acquisition of existing facilities may be reviewable by
state regulators under a statutory scheme which is sometimes referred to as a
CON program. States with CON programs place limits on the construction and
acquisition
63
of healthcare facilities and the expansion of existing facilities and services.
In such states, approvals are required for capital expenditures exceeding
certain amounts which involve inpatient rehabilitation facilities or services.
Outpatient rehabilitation facilities and services do not require such approvals
in a majority of states.
State CON statutes generally provide that, prior to the addition of new
beds, the construction of new facilities or the introduction of new services, a
state health planning designated agency (a "SHPDA") must determine that a need
exists for those beds, facilities or services. The CON process is intended to
promote comprehensive healthcare planning, assist in providing high quality
healthcare at the lowest possible cost and avoid unnecessary duplication by
ensuring that only those healthcare facilities that are needed will be built.
Typically, the provider of services submits an application to the
appropriate SHPDA with information concerning the area and population to be
served, the anticipated demand for the facility or service to be provided, the
amount of capital expenditure, the estimated annual operating costs, the
relationship of the proposed facility or service to the overall state health
plan and the cost per patient day for the type of care contemplated. Whether the
CON is granted is based upon a finding of need by the SHPDA in accordance with
criteria set forth in CON statutes and state and regional health facilities
plans. If the proposed facility or service is found to be necessary and the
applicant to be the appropriate provider, the SHPDA will issue a CON containing
a maximum amount of expenditure and a specific time period for the holder of the
CON to implement the approved project.
Licensure and certification are separate, but related, regulatory
activities. The former is usually a state or local requirement and the latter is
a federal requirement. In almost all instances, licensure and certification will
follow specific standards and requirements that are set forth in readily
available public documents. Compliance with the requirements is monitored by
annual on-site inspections by representatives of various government agencies.
All of HEALTHSOUTH's inpatient rehabilitation facilities and medical centers and
substantially all of HEALTHSOUTH's surgery centers are currently required to be
licensed, but only the outpatient rehabilitation facilities located in Alabama,
Arizona, Connecticut, Maryland, Massachusetts and New Hampshire currently must
satisfy such a licensing requirement.
Medicare Participation and Reimbursement
In order to participate in the Medicare program and receive Medicare
reimbursement, each facility must comply with the applicable regulations of the
United States Department of Health and Human Services relating to, among other
things, the type of facility, its equipment, its personnel and its standards of
medical care, as well as compliance with all state and local laws and
regulations. All of HEALTHSOUTH's inpatient facilities, except for the St. Louis
head injury center, participate in the Medicare program. Ninety-two of
HEALTHSOUTH's outpatient rehabilitation facilities currently participate in, or
are awaiting the assignment of a provider number to participate in, the Medicare
program. All of HEALTHSOUTH's surgery centers are certified (or awaiting
certification) under the Medicare program. Its Medicare-certified facilities,
inpatient and outpatient, undergo annual on-site Medicare certification surveys
in order to maintain their certification status. Failure to comply with the
program's conditions of participation may result in loss of program
reimbursement or other governmental sanctions. All such facilities have been
deemed to be in satisfactory compliance on all applicable surveys. HEALTHSOUTH
has developed its operational systems to assure compliance with the various
standards and requirements of the Medicare program and has established ongoing
quality assurance activities to monitor compliance. HEALTHSOUTH believes that
all of such facilities currently meet all applicable Medicare requirements.
As a result of the Social Security Act Amendments of 1983, Congress
adopted a prospective payment system ("PPS") to cover the routine and ancillary
operating costs of most Medicare inpatient hospital services. Under this system,
the Secretary of Health and Human Services has established fixed payment amounts
per discharge based on diagnosis-related groups ("DRGs"). With limited
exceptions, a hospital's payment for Medicare inpatients is limited to the DRG
rate, regardless of the number of services provided to the patient or the length
of the patient's hospital stay. Under PPS, a hospital may
64
retain the difference, if any, between its DRG rate and its operating costs
incurred in furnishing inpatient services, and is at risk for any operating
costs that exceed its DRG rate. HEALTHSOUTH's medical center facilities are
generally subject to PPS with respect to Medicare inpatient services.
The PPS program has been beneficial for the rehabilitation segment of
the healthcare industry because of the economic pressure on acute-care hospitals
to discharge patients as soon as possible. The result has been increased demand
for rehabilitation services for those patients discharged early from acute-care
hospitals. Outpatient rehabilitation services and free-standing inpatient
rehabilitation facilities are currently exempt from PPS, and inpatient
rehabilitation units within acute-care hospitals are eligible to obtain an
exemption from PPS upon satisfaction of certain federal criteria.
Currently, four of HEALTHSOUTH's outpatient centers are
Medicare-certified Comprehensive Outpatient Rehabilitation Facilities ("CORFs")
and 88 are Medicare-certified rehabilitation agencies. CORFs have been
designated cost-reimbursed Medicare providers since 1982. Under the regulations,
CORFs are reimbursed reasonable costs (subject to certain limits) for services
provided to Medicare beneficiaries. Outpatient rehabilitation facilities
certified by Medicare as rehabilitation agencies are reimbursed on the basis of
the lower of reasonable costs for services provided to Medicare beneficiaries or
charges for such services. Outpatient rehabilitation facilities which are
physician-directed clinics, as well as outpatient surgery centers, are
reimbursed by Medicare on a fee screen basis; that is, they receive a fixed fee,
which is determined by the geographical area in which the facility is located,
for each procedure performed. HEALTHSOUTH's outpatient rehabilitation facilities
submit monthly bills to their fiscal intermediaries for services provided to
Medicare beneficiaries, and HEALTHSOUTH files annual cost reports with the
intermediaries for each such facility. Adjustments are then made if costs have
exceeded payments from the fiscal intermediary or vice versa.
HEALTHSOUTH's inpatient facilities (other than the medical center
facilities) either are not currently covered by PPS or are exempt from PPS, and
are also cost-reimbursed, receiving the lower of reasonable costs or charges.
Typically, the fiscal intermediary pays a set rate based on the prior year's
costs for each facility. As with outpatient facilities subject to cost-based
reimbursement, annual cost reports are filed with HEALTHSOUTH's fiscal
intermediary and payment adjustments are made, if necessary.
Congress has directed the United States Department of Health and Human
Services to develop regulations, which could subject inpatient rehabilitation
hospitals to PPS in place of the current "reasonable cost within limits" system
of reimbursement. In addition, informal proposals have been made for a
prospective payment system for Medicare outpatient care. Other proposals for a
prospective payment system for rehabilitation hospitals are also being
considered by the federal government. Therefore, HEALTHSOUTH cannot predict at
this time the effect that any such changes may have on its operations.
Regulations relating to prospective payment or other aspects of reimbursement
may be developed in the future which could adversely affect reimbursement for
services provided by HEALTHSOUTH.
Over the past several years an increasing number of healthcare
providers have been accused of violating the federal False Claims Act. That Act
prohibits the knowing presentation of a false claim to the United States
government. Because HEALTHSOUTH performs thousands of similar procedures a year
for which it is reimbursed by Medicare and there is a relatively long statute of
limitations, a billing error could result in significant civil penalties.
HEALTHSOUTH does not believe that it is or has been in violation of the False
Claims Act.
Relationships with Physicians and Other Providers
Various state and federal laws regulate relationships among providers
of healthcare services, including employment or service contracts and investment
relationships. These restrictions include a federal criminal law prohibiting (i)
the offer, payment, solicitation or receipt of remuneration by individuals or
entities, to induce referrals of patients for services reimbursed under the
Medicare or Medicaid programs or (ii) the leasing, purchasing, ordering,
arranging for or recommending the lease, purchase or order of any item, good,
facility or service covered by such programs (the "Fraud and Abuse Law"). In
addition to federal criminal sanctions, violators of the Fraud and Abuse Law may
be subject to significant civil sanctions, including fines and/or exclusion from
the Medicare and/or Medicaid programs.
65
In 1991, the Office of the Inspector General ("OIG") of the United
States Department of Health and Human Services promulgated regulations
describing compensation arrangements which are not viewed as illegal
remuneration under the Fraud and Abuse Law (the "Safe Harbor Rules"). The Safe
Harbor Rules create certain standards ("Safe Harbors") for identified types of
compensation arrangements which, if fully complied with, assure participants in
the particular arrangement that the OIG will not treat such participation as a
criminal offense under the Fraud and Abuse Law or as the basis for an exclusion
from the Medicare and Medicaid programs or an imposition of civil sanctions. The
OIG closely scrutinizes health care joint ventures involving physicians and
other referral sources. In 1989, the OIG published a Fraud Alert that outlined
questionable features of "suspect" joint ventures.
In 1992, regulations were published in the Federal Register
implementing the OIG sanction and civil money penalty provisions established in
the Fraud and Abuse Law. The regulations (the "Exclusion Regulations") provide
that the OIG may exclude a Medicare provider from participation in the Medicare
Program for a five-year period upon a finding that the Fraud and Abuse Law has
been violated. The regulations expressly incorporate a test adopted by three
federal circuit courts providing that if one purpose of remuneration that is
offered, paid, solicited or received is to induce referrals, then the statute is
violated. The regulations also provide that after the OIG establishes a factual
basis for excluding a provider from the program, the burden of proof shifts to
the provider to prove that the Fraud and Abuse Law has not been violated.
HEALTHSOUTH operates five of its rehabilitation hospitals and almost
all of its outpatient rehabilitation facilities as limited partnerships. Three
of the rehabilitation hospital partnerships involve physician investors, and two
of the rehabilitation hospital partnerships involve other institutional
healthcare providers. Seven of the outpatient partnerships currently have a
total of 21 physician limited partners, some of whom refer patients to the
partnerships. Those partnerships which are providers of services under the
Medicare program, and their limited partners, are subject to the Fraud and Abuse
Law. A number of the relationships established by HEALTHSOUTH with physicians
and other healthcare providers do not fit within any of the Safe Harbors. The
Safe Harbor Rules do not expand the scope of activities that the Fraud and Abuse
Law prohibits, nor do they provide that failure to fall within a Safe Harbor
constitutes a violation of the Fraud and Abuse Law; however, the OIG has
informally indicated that failure to fall within a Safe Harbor may subject an
arrangement to increased scrutiny.
Most of HEALTHSOUTH's surgery centers are owned by limited
partnerships, which include as limited partners physicians who perform surgical
procedures at such centers. Subsequent to the promulgation of the Safe Harbor
Rules in 1991, the Department of Health and Human Services issued for public
comment additional proposed Safe Harbors, one of which specifically addresses
surgeon ownership interests in ambulatory surgery centers (the "Proposed ASC
Safe Harbor"). As proposed, the Proposed ASC Safe Harbor would protect payments
to be made to surgeons as a return on investment interest in a surgery center
if, among other conditions, all the investors are surgeons who are in a position
to refer patients directly to the center and perform surgery on such referred
patients. Since a subsidiary of HEALTHSOUTH is an investor in each limited
partnership which owns a surgery center, HEALTHSOUTH's arrangements with
physician investors do not fit within the Proposed ASC Safe Harbor as currently
proposed. HEALTHSOUTH is unable at this time to predict whether the Proposed ASC
Safe Harbor will become final, and if so, whether the language and requirements
will remain as currently proposed, or whether changes will be made prior to
becoming final. There can be no assurance that HEALTHSOUTH will ever meet the
criteria under the Proposed ASC Safe Harbor as proposed or as it may be adopted
in final form. HEALTHSOUTH believes, however, that its arrangements with
physicians with respect to its surgery center facilities should not fall within
the activities prohibited by the Fraud and Abuse Law.
While several federal court decisions have aggressively applied the
restrictions of the Fraud and Abuse Law, they provide little guidance as to the
application of the Fraud and Abuse Law to HEALTHSOUTH's limited partnerships.
HEALTHSOUTH believes that it is in compliance with the current requirements of
applicable federal and state law, but no assurances can be given that a federal
or state agency charged with enforcement of the Fraud and Abuse Law and similar
laws might not assert a contrary position or that new federal or state laws, or
new interpretations of existing laws, might not
66
adversely affect relationships established by HEALTHSOUTH with physicians or
other healthcare providers or result in the imposition of penalties on
HEALTHSOUTH or certain of its facilities. Even the assertion of a violation
could have a material adverse effect upon HEALTHSOUTH.
The so-called "Stark II" provisions of the Omnibus Budget
Reconciliation Act of 1993 amend the federal Medicare statute to prohibit the
making by a physician of referrals for "designated health services" (including
physical therapy and occupational therapy) to an entity in which the physician
has an investment interest or other financial relationship, subject to certain
exceptions. Such prohibition took effect on January 1, 1995 and applies to all
of HEALTHSOUTH's outpatient rehabilitation facility partnerships with physician
limited partners. In addition, a number of states have passed or are considering
statutes which prohibit or limit physician referrals of patients to facilities
in which they have an investment interest. In response to these regulatory
activities, HEALTHSOUTH has restructured most of its rehabilitation facility
partnerships which involve physician investors, in order to eliminate physician
ownership interests not permitted by applicable law. HEALTHSOUTH intends to take
such actions as may be required to cause the remaining partnerships to be in
compliance with applicable laws and regulations, including, if necessary, the
prohibition of physician partners from referring patients. HEALTHSOUTH believes
that this restructuring has not adversely affected and will not adversely affect
the operations of its facilities.
Ambulatory surgery is not identified as a "designated health service",
and HEALTHSOUTH does not believe that ambulatory surgery is subject to the
restrictions set forth in Stark II. However, lithotripsy facilities operated by
HEALTHSOUTH frequently operate on hospital campuses, and it is possible to
conclude that such services are "inpatient and outpatient hospital services" --
a category of proscribed services within the meaning of Stark II. Similarly,
physicians frequently perform endoscopic procedures in the procedure rooms of
HEALTHSOUTH's surgery centers, and it is also possible to construe these
services to be "designated health services". While HEALTHSOUTH does not believe
that Stark II was intended to apply to such services, if that were determined to
be the case, HEALTHSOUTH intends to take steps necessary to cause the operation
of its facilities to comply with the law.
HEALTHSOUTH cannot predict whether other regulatory or statutory
provisions will be enacted by federal or state authorities which would prohibit
or otherwise regulate relationships which HEALTHSOUTH has established or may
establish with other healthcare providers or the possibility of materially
adverse effects on its business or revenues arising from such future actions.
Management of HEALTHSOUTH believes, however, that HEALTHSOUTH will be able to
adjust its operations so as to be in compliance with any regulatory or statutory
provision as may be applicable. See "-- Patient Care Services" and "-- Sources
of Revenues".
Insurance
Beginning December 1, 1993, HEALTHSOUTH became self-insured for
professional liability and comprehensive general liability. HEALTHSOUTH
purchased coverage for all claims incurred prior to December 1, 1993. In
addition, HEALTHSOUTH purchased underlying insurance which would cover all
claims once established limits have been exceeded. It is the opinion of
management that as of September 30, 1995, HEALTHSOUTH had adequate reserves to
cover losses on asserted and unasserted claims.
Employees
As of September 30, 1995, HEALTHSOUTH employed 21,915 persons, of whom
14,356 were full-time employees and 7,559 were part-time employees. Of the above
employees, 443 were employed at HEALTHSOUTH's headquarters in Birmingham,
Alabama. Except for approximately 100 employees at one rehabilitation hospital
(about 20% of that facility's workforce), none of HEALTHSOUTH's employees are
represented by a labor union, and HEALTHSOUTH is not aware of any current
activities to organize its employees at other facilities. Management of
HEALTHSOUTH considers the relationship between HEALTHSOUTH and its employees to
be good.
67
Legal Proceedings
In the ordinary course of its business, HEALTHSOUTH may be subject,
from time to time, to claims and legal actions by patients and others.
HEALTHSOUTH does not believe that any such pending actions, if adversely
decided, would have a material adverse effect on its financial condition. See "
- -- Insurance" for a description of HEALTHSOUTH's insurance coverage
arrangements.
From time to time, HEALTHSOUTH appeals decisions of various rate-making
authorities with respect to Medicare rates established for HEALTHSOUTH's
facilities. These appeals are initiated in the ordinary course of business.
Management believes that adequate reserves have been established for possible
adverse decisions on any pending appeals and that the outcomes of currently
pending appeals, either individually or in the aggregate, will have no material
adverse effect on HEALTHSOUTH's operations.
Properties
HEALTHSOUTH's executive offices currently occupy approximately 120,000
square feet of leased space in Birmingham, Alabama. In August 1995, HEALTHSOUTH
announced plans to construct new executive offices on property acquired by it
earlier in the year. The expanded executive offices are expected to be fully
available by December 1996. All of HEALTHSOUTH's outpatient operations are
carried out in leased facilities, except for its outpatient rehabilitation
facilities located in Birmingham and Montgomery, Alabama, Orlando, Florida and
one of its facilities in Baltimore, Maryland. HEALTHSOUTH owns 33 of its
inpatient rehabilitation facilities and leases or operates under management
contracts 44 of its inpatient rehabilitation facilities. HEALTHSOUTH constructed
its rehabilitation hospitals in Florence and Columbia, South Carolina, Kingsport
and Nashville, Tennessee, Concord, New Hampshire, and Dothan, Alabama on
property leased under long-term ground leases. The property on which
HEALTHSOUTH's Memphis, Tennessee rehabilitation hospital is located is owned in
partnership by HEALTHSOUTH and Methodist Hospitals of Memphis. HEALTHSOUTH owns
its four medical center facilities in Birmingham, Alabama, Richmond, Virginia
and Miami, Florida and leases its medical center facility in Dallas, Texas.
HEALTHSOUTH currently owns, and from time to time may acquire, certain other
improved and unimproved real properties in connection with its business. See
Notes 4 and 6 of "Notes to Consolidated Financial Statements" for information
with respect to the properties owned by HEALTHSOUTH and certain indebtedness
related thereto.
In management's opinion, HEALTHSOUTH's physical properties are adequate
for HEALTHSOUTH's needs for the foreseeable future, and are consistent with its
expansion plans described elsewhere in this Prospectus-Joint Proxy Statement.
68
The following table sets forth a listing of HEALTHSOUTH's patient care
services locations at September 30, 1995:
Inpatient
Outpatient Rehabilitation Medical
Rehabilitation Facilities Centers Surgery Diagnostic Other
State Market Centers(1) (Beds) (2) (Beds)2) Centers Centers Services
Alabama Birmingham 4 6 (225) 1 (219) 6
Dothan 1 (34)
Auburn 1
Valley 1
Opelika 1
Florence 2
Gadsden 2
Huntsville 3 1 (50)
Mobile 2
Montgomery 1 1 (80)
Muscle Shoals 1
Tuscaloosa 1 1
Arizona Tucson 2 1 (80)
Phoenix 4 1 (60) 1
Prescott 1
Scottsdale 3 1 (43)
Arkansas Fort Smith 1 (80)
Little Rock 1
California Bakersfield 1 (60)
Fresno 2
Huntington 2 1
Marina Del Rey 1 2
Newport Beach 1
Redding 1
San Carlos 1
San Diego 2 3
San Francisco 1 1
Santa Rosa 2
Van Nuys 2
Woodland Hills 1
Colorado
Colorado Springs 6
Englewood 3
Longmont 1
Wheat Ridge 4
Denver 3 2
Fort Collins 2
Connecticut Fairfield 1
District of
Columbia Washington 1 1
Florida Boca Raton 2 2
Fort Lauderdale 1 1 (108) 1
Jacksonville 2
Lake Worth 1
Largo 1 (40)
Melbourne 3 1 (80) 1
Merritt Island 3
Panama City 3
Coral Gables 2
Miami 2 2 (165) 2 (397) 1 2
Naples 1
Ocala 2
Ocoee 2 1
Orlando 7 2
Palm Bay 2
Port St. Lucie 3 1
Sarasota 2 1 (60) 1
Tallahassee 2 1 (70)
Tampa 4
Tarpon Springs 1
Vero Beach 1 1 (70) 1
69
Inpatient
Outpatient Rehabilitation Medical
Rehabilitation Facilities Centers Surgery Diagnostic Other
State Market Centers(1) (Beds) (2) (Beds)2) Centers Centers Services
West Palm Beach 2 1
Georgia Atlanta 6 1 (14) 3 1
Columbus 1
Macon 2 2 (75)
Idaho Boise 1 (3)
Illinois Carbondale 1
Palos Heights 2
Wilmette 2 1
Arlington
Heights 4 1
Elgin 3
DuPage 2
Columbia 2
Indiana Evansville 1 (80)
Muncie 8
Iowa Des Moines 3
Kansas Leawood 1 1
Kansas City 2
Great Bend 1
Kentucky Edgewood 1 (40)
Louisville 2
Louisiana Baton Rouge 1 1 (43)
Metairie 1
Shreveport 1
Maine Bangor 2
Maryland Baltimore 10 1
Barlow 1
Chevy Chase 1
Rockville 1 1
Salisbury 1 (44)
Massachusetts Abington 1
Michigan Monroe 1
Mississippi Jackson 1
Pascagoula 1
Meridian 1
Missouri Cape Girardeau 3
Columbia 3
Blue Springs 1
Kansas City 2 (21)
Lake Ozark 1
Springfield 3
St. Louis 15 1 (26) 4 2
Nebraska Omaha 2
Nevada Las Vegas 2
New Hampshire Bedford 3
Dover 2
Manchester 1
Concord 1 1 (100)
New Jersey Atlantic City 1
Bridgewater 1 1
Brunswick 1 1 (15)
Edison 2
Emerson 2
Haddonfield 1
Linden 2
Madison 1
Manahawkin 1
70
Inpatient
Outpatient Rehabilitation Medical
Rehabilitation Facilities Centers Surgery Diagnostic Other
State Market Centers(1) (Beds) (2) (Beds)2) Centers Centers Services
North Bergen 1
Newton 1
Paramus 2
Tinton Falls 1
Toms River 1 1 (155)
Upper Saddle
River 2
Washington 1
New Mexico Albuquerque 3 1 (60)
New York Syracuse 1
Liverpool 1
Monsey 1
Pulaski 1
Huntington 1
North
Carolina Asheville 1
Charlotte 1
Kinston 1 (17)
Concord 1
Statesville 1
Ohio Ashtabula 1
Cincinnati 1
Dayton 1
Toledo 1
Lorain 5
Oklahoma Oklahoma City 4 1 (111) 2 1
Ada 2
Tulsa 2
Weatherford 1
Ontario,
Canada Etabicoke 1
Pennsylvania Altoona 2 1 (66)
Erie 1 2 (207)
Harrisburg 3
Mechanicsburg 2 2 (201)
Pittsburgh 6 1 (89)
Pleasant Gap 4 1 (88)
York 3 1 (88)
South
Carolina Charleston 1 (36)
Columbia 2 1 (89)
Florence 1 1 (88)
Lancaster 2 (54)
Tennessee Chattanooga 3 1 (80) 1
Clarksville 1
Kingsport 1 (50)
Knoxville 2
Dyersburg 1
Collierville 1
Union City 1
Martin 1 (40)
Memphis 4 1 (80)
Nashville 2 1 (80) 2
Texas Amarillo 1
Arlington 2 1 (60)
Austin 5 1 (80) 1
Beaumont 1
Dallas 3 3 (173) 1 (96) 1 1
El Paso 1
Fort Worth 2 1 (60) 1
Houston 11 2 (186) 5 1 1
Midland 1 (60)
San Antonio 10 3 (127) 1 5
Texarkana 1 1 (60)
Waco 2
Victoria 1
71
Inpatient
Outpatient Rehabilitation Medical
Rehabilitation Facilities Centers Surgery Diagnostic Other
State Market Centers(1) (Beds) (2) (Beds)2) Centers Centers Services
Utah Sandy 1 1 (86)
Virginia Alexandria 1
Arlington 1
Richmond 2 3 (84) 1 (200) 1 1
Roanoke 1
Tyson 1
Virginia Beach 3
Warrenton 1
West Virginia Huntington 1 (40)
Morgantown 1 (80)
Parkersburg 1 (40)
Princeton 1 (40)
Wisconsin Green Bay 1
(1) Includes freestanding outpatient centers and their satellites and
outpatient satellites of inpatient rehabilitation facilities.
(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.
(3) Under construction.
72
BUSINESS OF SCA
General
SCA develops, owns and operates outpatient surgical care centers. An
outpatient (or ambulatory) surgical care center is a facility that is designed,
equipped and staffed for performance of surgical procedures which generally do
not require overnight hospitalization and which the treating physician chooses
not to or cannot perform in his or her office. Approximately 500 types of
surgical procedures can be performed in SCA's centers. SCA believes that
outpatient surgical care centers help control health care costs. In the areas
where SCA centers operate, SCA believes that the fees charged by its outpatient
surgical centers are less than those charged by hospitals for similar services
performed on an outpatient basis. Because of the cost advantages of ambulatory
surgical care centers and continuing cost containment pressures, private health
insurers and Medicare and Medicaid programs have added ambulatory surgery as a
covered benefit.
SCA's ownership interest in surgical care centers typically consists of
all the capital stock of corporations which are general partners of a limited or
general partnership which owns and operates the center. In some instances,
separate partnerships have been formed to own or lease the real estate and
equipment. The other general and limited partners of the partnerships are
physicians who practice in the communities where the surgical care center is
located or, in the case of joint ventures, other local health care providers.
SCA and participating partners share the center's operating income or loss and
receive distributions of any excess cash on a quarterly basis.
At September 30, 1995, SCA owned interests in and operated 67
outpatient surgery centers in 24 states. SCA is currently building five centers
and expects to build or acquire a total of six centers in 1995. SCA anticipates
that during 1996 10 centers will become operational.
The table below sets forth certain information concerning each of the
outpatient surgery centers owned at September 30, 1995:
# of % of SCA's # of
Centers Owned and Date Operations Operating Ownership in Physician
Fully Operated Began By SCA Rooms Partnership Owners(1)
Lexington Surgery Center
Lexington, KY...................... June 1983 5 65 43
Surgicenter of Louisville
Louisville, KY..................... September 1983 4 68 34
Surgery Center of Ft. Worth Ft.
Worth, TX.......................... October 1983 5 59 31
Mobile Surgery Center Mobile, AL.... October 1984 4 88 13
Chattanooga Surgery Center
Chattanooga, TN.................... December 1984 4 81 28
Evansville Surgery Center
Evansville, IN..................... December 1984 5 61 42
Cabell Huntington Surgery Center
Huntington, WV..................... December 1984 5 47 37
Memphis Surgery Center Memphis,
TN................................. December 1984 4 40 33
Freeway Surgery Center Little
Rock, AR........................... March 1985 5 39 28
Charlotte Surgery Center
Charlotte, NC...................... March 1985 5 62 46
Lancaster Surgery Center
Lancaster, PA...................... June 1985 6 60 41
73
# of % of SCA's # of
Centers Owned and Date Operations Operating Ownership in Physician
Fully Operated Began By SCA Rooms Partnership Owners(1)
Greenpark Surgery Center Houston,
Texas.............................. June 1985 4 82 20
Arlington Surgery Center
Arlington, TX...................... July 1985 4 67 22
Sarasota Surgery Center Sarasota,
FL................................. September 1985 6 73 23
Eau Claire Surgery Center Eau
Claire, WI......................... March 1986 4 26 31
Montgomery Surgery Center
Rockville, MD...................... April 1986 4 36 39
Greenville Surgery Center Dallas,
TX................................. August 1986 4 65 19
San Antonio Surgery Center San
Antonio, TX........................ February 1987 4 98 3
Maple Surgery Center Springfield,
MA................................. April 1987 4 61 21
Wauwatosa Surgery Center
Wauwatosa, WI...................... May 1987 4 67 17
Charleston Surgery Center
Charleston, SC..................... March 1988 4 57 23
Grandview Surgery Center
Harrisburg, PA..................... May 1989 4 27 30
East El Paso Surgery Center El
Paso, TX........................... August 1989 4 50 18
Tampa Outpatient Surgical Facility
Tampa, FL.......................... July 1989 4 52 30
St. Petersburg Surgery Center St.
Petersburg, FL..................... November 1989 5 61 40
Surgery Center of Albuquerque
Albuquerque, NM.................... December 1989 4 77 28
Inland Surgery Center Redlands,
CA................................. April 1990 4 36 29
Central Maryland Surgery Center
Baltimore, MD...................... June 1990 5 51 10
Forest Surgery Center San Jose,
CA................................. June 1990 4 73 31
Scranton Surgery Center Scranton,
PA................................. September 1990 5 36 21
Colorado Springs Surgery Center
Colorado Springs, CO............... March 1991 4 83 18
North Indianapolis Surgery Center
Indianapolis, IN................... March 1991 4 100 0
Central Delaware Surgery Center
Dover, DE.......................... August 1991 4 50 0
San Luis Obispo Surgery Center San
Luis Obispo, CA.................... August 1991 3 72 24
Physicians Surgery Center Ft.
Myers, FL.......................... September 1991 5 33 34
Surgery Center of Fort Collins
Fort Collins, CO................... October 1991 4 78 23
74
# of % of SCA's # of
Centers Owned and Date Operations Operating Ownership in Physician
Fully Operated Began By SCA Rooms Partnership Owners(1)
Surgical Center of South Jersey
Mt. Laurel, NJ..................... December 1991 5 71 44
Nashville Surgery Center
Nashville, TN...................... January 1992 5 83 21
Gadsden Surgery Center Gadsden,
AL................................. February 1992 4 72 28
Surgecenter of Wilson Wilson, NC .. April 1992 4 87 13
Oshkosh Surgery Center Oshkosh,
WI................................. August 1992 5 97 3
Knoxville Surgery Center
Knoxville, TN...................... September 1992 5 70 31
Aurora Surgery Center Aurora, CO ... September 1992 5 73 25
Pueblo Surgery Center Pueblo, CO ... October 1992 5 74 27
Center for Day Surgery Ft. Smith,
AR................................. October 1992 4 86 19
Yuma Outpatient Surgery Center
Yuma, AZ........................... October 1992 3 77 13
Westmoreland Surgery Center Mt.
Pleasant, PA....................... October 1992 4 96 3
Surgicare of Hawaii Honolulu,
Hawaii............................. December 1992 4 81 32
Roseland Surgery Center Roseland,
NJ................................. December 1992 5 100 0
Blue Ridge Day Surgery Center
Raleigh, NC........................ June 1993 4 65 17
Denver West Surgery Center Golden,
CO................................. August 1993 5 60 30
Emerald Coast Surgery Center Ft.
Walton Beach, FL................... September 1993 5 51 34
Physicians' Surgical Care Center
Winter Park, FL.................... October 1993 4 46 13
The Surgery Center Santa Rosa, CA .. December 1993 4 95 26
Wausau Surgery Center Wausau, WI ... January 1994 4 79 23
Dothan Surgery Center Dothan, AL ... February 1994 4 94 22
Citrus Regional Surgery Center
Lecanto, FL........................ March 1994 3 78 22
Conroe Surgery Center Conroe, TX .. March 1994 3 73 17
Greenville Surgery Center
Greenville, SC..................... April 1994 4 80 19
Sutter Street Surgery Center San
Francisco, CA...................... April 1994 3 100 --
Northeast Alabama Surgery Center
Florence, AL....................... May 1994 2 81 19
75
# of % of SCA's # of
Centers Owned and Date Operations Operating Ownership in Physician
Fully Operated Began By SCA Rooms Partnership Owners(1)
The Surgery Center St. Joseph, MO ... August 1994 4 42 19
Paoli Surgery Center Paoli, PA ...... September 1994 5 36 28
Green River Surgical Center
Auburn, WA.......................... June 1995 3 100 0
Lake Forest Surgical Center New
Orleans, LA.......................... June 1995 4 83 8
Glenwood Surgical Center
Riverside, CA....................... June 1995 3 75 0
Physicians' Plaza Surgical Center
Bakersfield, CA..................... June 1995 4 100 0
<FN>
- --------
(1) Includes direct and indirect ownership interests.
</FN>
SCA's historical growth has resulted from development of new centers,
joint arrangements with hospitals, health maintenance organizations ("HMOs") and
other healthcare providers and acquisition of existing centers. These facilities
are typically freestanding either on the hospital campus or located in the
surrounding medical community. All operations of the center are separate and
distinct from the internal operations of the hospital or HMO. SCA has the
responsibility of developing, financing and operating these centers with the
hospital or HMO owning an interest in the operating entity as well as the
physical facility. SCA has developed the following centers through such joint
arrangements:
Center Date Opened Partners
Eau Claire Surgery Center.......... March 1986 Hospital Sisters Services Incorporated, an affiliate of
Hospital Sisters of the Third Order of St. Francis, and local
physicians
Montgomery Surgery Center.......... April 1986 MD-IPA, a Maryland HMO, and local physicians
Grandview Surgery Center........... May 1989 Holy Spirit Ventures, Inc., a subsidiary of Sisters of
Christian Charity Health Care Corporation
Inland Surgery Center.............. April 1990 RSI, Inc., a subsidiary of Redlands Community Hospital, and
local physicians
Central Maryland Surgery Center ... June 1990 HCCA Services, Inc., a division of Care-First, Inc., and
local physicians
Central Delaware Surgery Center ... August 1991 Central Delaware Health Care Corporation, owner of Kent
General Hospital
The Surgery Center................. August 1994 Heartland Hospital and local physicians
Paoli Surgery Center............... September 1994 Mainline Health Systems, Inc.
Gainesville Surgery Center......... anticipated December 1995 Northeast Georgia Health Resources, Inc. and local physicians
McKenzie Surgery Center............ anticipated March 1996 Pacific Hospital Association and McKenzie-Willamette Hospital
Marquette Surgery Center........... anticipated April 1996 Marquette General Hospital
Ukiah Surgery Center............... anticipated September 1996 Santa Rosa Memorial Hospital
Santa Rosa Surgery Center.......... anticipated September 1996 Santa Rosa Memorial Hospital
76
Additionally, SCA has contributed the following centers to joint ventures
with the following hospitals:
Center Date of Venture Partner
Cabell-Huntington Surgery Center ... June 1986 Mountain Regional Services, Inc., a
subsidiary of Cabell-Huntington Hospital, Inc.
Little Rock Surgery Center........... July 1994 St. Vincent Infirmary Medical Center
Evansville Surgery Center............ September 1994 Deaconess Hospital
Memphis Surgery Center............... October 1994 Baptist Memorial Health Care System
Physicians' Surgical Care Center .... December 1994 Florida Hospital
Physicians Surgery Center............ December 1994 Lee Memorial Hospital
El Paso Surgery Center............... January 1995 Columbia Medical Center-East and Columbia Medical
Center-West
Scranton Surgery Center.............. June 1995 The Mercy Hospital of Scranton
North Indianapolis Surgery Center ... September 1995 St. Vincent Community Health Network
Acquisition of Existing Centers. The acquisition of existing centers
has provided SCA with an entry into new markets and an immediate source of
revenues and cash flow. During the year ended December 31, 1994 and the nine
months ended September 30, 1995, SCA purchased five and four centers,
respectively.
Organizational Structure
In connection with the development of outpatient surgical care centers,
SCA generally forms a limited or general partnership to operate the center. A
subsidiary of SCA is typically a general partner, and local physicians or health
care providers are limited or general partners in such partnerships. SCA sells
partnership interests in these partnerships to physicians who utilize SCA's
surgical care centers but typically maintains a majority interest in the
partnerships operating each center. The proceeds from the sale of the
partnership interests provide the partnership with the necessary equity to
offset a portion of the capital investment in the surgical center and also
provide initial working capital. Management believes that the partnership
structure generates local medical community support for a surgical care center
by providing physicians with a continuing participation in the center.
Management believes that, in order to fully realize these objectives, at least
15 physicians should initially own partnership interests in each of its surgical
care centers.
SCA provides each of its outpatient health care centers a full range of
development and operating services from the corporate headquarters, including
the following:
o Capitalization -- SCA provides up to $300,000 in working capital
on an as-needed basis to fund anticipated start-up losses and
loans or guarantees loans to fund property and equipment
expansion.
o Systems -- SCA provides standardized information systems to each
center, including programs for financial reporting and accounting,
claims processing and accounts receivable, inventory, accounts
payable, and patient records.
o Site Development -- SCA provides comprehensive site development
services, including the review of local market conditions to
assist in site selection, land acquisition and zoning, building
design and construction management.
o Administration -- SCA implements operational planning and control
policies, analyzes patient and staff flows and conducts
utilization reviews for each center.
o Marketing Services -- SCA supports local marketing activities,
including the analysis of market conditions and patient referral
patterns and the development of prices and services which are
competitive with those offered by other health care providers in
the locality.
77
o Purchasing -- SCA, where appropriate, executes master agreements
for purchasing ambulatory care equipment and supplies to provide
to each center the economies available through volume purchases.
o Licensure Support -- SCA conducts necessary feasibility studies,
prepares and files applications for certificates of need and
develops local support for each application, as well as for
Medicare certification and local Department of Health licensure.
o Corporate Supervision and Problem Solution -- Drawing upon the
extensive backgrounds of SCA senior management in the development
and successful operation of large proprietary health care systems,
SCA provides ongoing management and supervision of each center.
SCA and participating physicians receive a pro rata share, based on
their ownership interest in a surgical care center, of the center's operating
income or loss and receive distributions of any excess cash on a quarterly
basis. The participating physicians may also own interests in the real property
and equipment relating to SCA's centers and are allocated a corresponding amount
of the depreciation related thereto. SCA enters into a management agreement with
each operating partnership pursuant to which SCA provides management,
administrative and purchasing services and support, and financial guarantees.
SCA charges a management fee for these services based on a percentage of annual
charges ranging from 5% to 7%. For the years ended December 31, 1992, 1993 and
1994 and the nine months ended September 30, 1995, SCA recorded management fees
of $10,273,866, $13,260,505, $16,933,346 and $14,668,823, respectively.
Management and Operations
The typical SCA surgical care center is a freestanding facility of
8,500 to 12,500 square feet with four to six fully equipped operating rooms and
ancillary areas for reception, preparation, recovery and administration. SCA's
centers are normally open weekdays from 6:00 a.m. to 4:00 p.m. SCA estimates
that a four-operating room surgical care center can accommodate up to 6,000
procedures per year.
Each of SCA's centers is available for use only by licensed physicians,
oral surgeons and podiatrists who have admitting privileges in nearby hospitals.
Most centers have a medical advisory committee responsible for reviewing the
professional credentials of physicians applying for staff privileges and the
quality of care at the center. SCA's surgical care centers generally require a
staff of between 10 and 25 employees, depending on case load. The staff includes
one or more medical directors, anesthesiologists, registered nurses, operating
room technicians, a business manager/bookkeeper and clerical workers. The
medical director is usually a practicing surgeon who is responsible for and
supervises the quality of medical care provided at the center. SCA believes that
attracting personnel of high professional standing in the local community is
crucial to the success of the individual center.
The decision to use one of SCA's centers is generally made by the
patient's physician after discussion with the patient. An evaluation of the
procedure and the patient's overall health must also be made by the center's
anesthesiology staff. Patients arrive at the center approximately one hour
before scheduled surgery to allow time for admitting, laboratory tests and
medical history. After completion of surgery, patients usually spend up to three
hours in the recovery area before release by the center's anesthesiology staff.
The patient is called on the day following the surgery to check on the patient's
condition. When a surgical center patient requires an extended period for
recuperation, the patient is transferred to a hospital.
Approximately 500 different types of procedures can be performed in
SCA's centers, all of which are nonemergency, low-risk procedures and most of
which require only a local or general anesthetic. The procedures most commonly
performed at SCA's surgical care centers within various specialties are:
o Ear, nose and throat--removal of tonsils and adenoids and
insertion of ear drainage tubes.
o Gynecology--laparoscopy, tubal ligation, and dilation and
curettage.
o Orthopedic--arthroscopy, fracture repair and tendon repair.
o Oral-wisdom teeth extraction and dental restoration.
78
o General surgery--hernia repair, biopsy and removal of lesions of
the female breast and pilonidal cysts.
o Plastic surgery--facelifts, rhinoplasty, eyelid surgery and breast
augmentation.
o Urology--cystoscopy, vasectomy and circumcision.
o Ophthalmology--removal of cataracts and lens implantation.
o Neurosurgery--hand surgery and nerve repair.
o Podiatry--foot surgery.
In recent years, the medical technology and equipment used by
physicians during surgery has improved dramatically. As a result of the
perfection of the laparoscope and arthroscope, each of which allows certain
invasive procedures to be performed on an outpatient basis, certain procedures,
such as gallbladder removal, ligament reconstruction and rotator cuff repair,
are now being performed on an outpatient basis. Other surgeries starting to be
performed on an outpatient basis include vaginal hysterectomies, oophorectomy
(removal of the ovaries), ablation of endometriosis (laser treatment of abnormal
uterine tissue), modified radical mastectomies (excision of breast tissue), and
thyroidectomy (removal of thyroid glands). SCA expects these technologies to
continue to be perfected in the future resulting in a larger percentage of
surgery being performed on an outpatient basis.
SCA currently has 35 centers with a total of 90 overnight recovery
rooms in which certain patients can remain overnight, but, because of licensing
regulations, no longer than 23-1/2 hours. This allows the attending physicians
to perform more intensive procedures which may require overnight recovery and
observation. SCA expects to add overnight recovery rooms to existing centers and
include them in new centers where allowed by the applicable state law. Medicare
patients cannot be kept overnight by regulation.
SCA centers' fees range between $600 and $4,000 for each procedure. The
center's fee does not include either the anesthesiologist's charges or the
charges of the patient's physician, both of which are billed separately. SCA
collects fees in a variety of ways, usually in accordance with a contract
between SCA and a third-party payor. In a majority of situations, SCA bills the
payor a negotiated amount. This negotiated fee arrangement applies to patients
covered under Medicare, Medicaid, some Blue Cross plans and patients enrolled in
health maintenance or preferred provider organizations. SCA seeks to minimize
bad debts by verifying insurance coverage or by advance collection from the
patient. The following table summarizes the payor mix for the periods indicated:
December 31, September 30,
1994 1995
Medicare.............................. 31% 30%
HMO/PPO............................... 21 24
Commercial insurance.................. 20 17
Blue Cross............................ 11 10
Medicaid/CHAMPUS/Worker's
compensation.......................... 10 11
Self-pay.............................. 7 8
Under the Medicare program, the largest single payor to SCA, the
Secretary of Health and Human Services determines amounts prospectively for
categories of procedures performed at outpatient surgery centers. On October 1,
1992, Medicare increased its reimbursement rates to surgery centers by 3.5%.
Reimbursement rates were not increased to reflect cost of living increases for
the fiscal years beginning October 1, 1993 and 1994. The reimbursement rates for
the fiscal year beginning October 1, 1995 were increased by an average of 3.2%.
A reduction in the rates set by Medicare could have an adverse effect
on SCA. Other kinds of cost controls or limits on the ability to raise prices
could also have a negative impact. SCA does believe, however, that it is a low
cost provider of surgery. To the extent that higher cost providers of surgery,
79
namely hospitals, also see their reimbursement rates lowered, there could be a
movement of cases from the outpatient units at hospitals to surgery centers.
This could increase the profits of SCA since variable costs on incremental
volume are lower than average costs. SCA believes that its experienced
management team and low cost structure will allow it to remain competitive
regardless of changes in health care practices.
Surgery Center Closings
In 1995, SCA closed its centers in Coral Springs, Florida and Plano,
Texas, and SCA will close its center in San Francisco, California by the end of
1995. Additionally, SCA closed one center in Indianapolis, Indiana in 1994. SCA
recorded a charge in the fourth quarter of 1994 to provide for losses expected
to occur as a result of this decision. Of the four centers closed, or to be
closed, two were acquired in previous years. SCA was unable to improve the
performance of these centers, largely because the centers were built in
locations that were inconvenient to doctors and patients. Both facilities were
leased, and the rental rates were too high to allow for profitable operations.
The other two centers were built in locations where competition from other
providers was intense. The centers also were unable to obtain managed care
contracts. SCA does not anticipate the need to close any additional centers
based on existing market conditions.
Competition
In obtaining physician and patient utilization of its centers,
obtaining certificates of need, developing new outpatient surgical care centers
and acquiring existing centers, SCA competes with major hospitals and large
proprietary hospital corporations, outpatient surgery corporations and local
physician groups. Certain of these competitors, such as Medical Care America,
Inc., a larger company than SCA and a wholly-owned subsidiary of Columbia/HCA
Healthcare Corporation, possess substantially greater personnel and financial
resources than SCA. In addition, local hospitals and physicians may oppose a
certificate of need application. SCA also competes with several other
corporations which are attempting to acquire existing surgical care centers.
In competing for physician and patient utilization, important
competitive factors are convenience, cost, quality, physician loyalty and
community relations. Hospitals have many competitive advantages in attracting
physicians and ambulatory patients, including established community position,
physician loyalty, potential price competitiveness through cost controls or
cross-subsidies and convenience for physicians making rounds or performing
inpatient surgery in the hospital.
Regulation
General. Operations of surgical care centers are subject to federal,
state and local government regulations. Licensing of new surgical care centers
is subject to various governmental requirements. Surgical care centers are also
subject to periodic inspection by state licensing agencies to determine whether
the standards of medical care, patient safety, equipment and cleanliness are
being met. It is anticipated that governmental regulation will become more
comprehensive in the future, but the extent and resultant impact on SCA's
operations, earnings and construction and acquisition programs cannot be
determined at this time.
Certain states in which SCA operates or intends to operate have
statutes requiring certificates of need as a prior condition to surgical care
center construction, acquisition, expansion or introduction of new services.
These statutes may limit SCA's ability to develop outpatient surgical care
centers.
Certain states have adopted hospital rate review legislation which
generally provides that a state commission must monitor, review or approve the
rates for various hospital and, in certain states, surgical care or diagnostic
center services. Such rate review programs have not had an adverse effect on
SCA's operations. No assurances can be given of the future significance of such
programs or whether similar legislation will be adopted in other states in which
SCA may operate.
80
Fraud and Abuse. Limited partners in SCA-affiliated partnerships
receive cash distributions based upon the available cash flow, if any, of such
partnerships. Since many of the limited partners are physicians or other
entities in a position to make or influence referrals, the distribution of
available cash flow could come under scrutiny under the Fraud and Abuse Law. SCA
has determined that SCA-sponsored partnerships generally do not meet all of the
criteria of the "investment interest" Safe Harbor as set forth in the Safe
Harbor Rules. In addition, because not all of the investors in an SCA-sponsored
partnership are surgeons, the Proposed ASC Safe Harbor would not provide
protection if that criterion is read to exclude non-physician investors such as
an SCA subsidiary. SCA is unable to predict whether the Proposed ASC Safe Harbor
will become final and, if so, in what form. SCA believes that its activities are
being conducted in compliance with the Fraud and Abuse Law. Because of the
changing interpretations of such laws, however, no assurance can be given in
this regard.
Stark II does not specifically prohibit referrals by physicians with an
ownership interest in, or financial relationship with, an ambulatory surgery
center, provided that the surgery services are not provided as "outpatient
hospital services." Should legislation be implemented prohibiting physicians
from referring patients to any health care facility in which the physician has
any beneficial interest, SCA's operations could be adversely impacted.
Congress is currently considering a variety of proposals to reform the
Medicare and Medicaid programs, which if enacted would severely scale back the
restrictions contained in OBRA '93 and the Fraud and Abuse Law. The legislative
proposals currently before Congress would also trim in the range of $270,000,000
from Medicare expenditures, and $182,000,000 in Medicaid expenditures, over a
seven year period. SCA is unable to predict what, if any, provisions will be
enacted. Significant cuts in government reimbursement programs could adversely
affect the financial performance of centers operated by SCA.
Some of the limited partnership agreements contain a provision which
allows SCA to purchase the interest of each limited partner for an amount equal
to a multiple of the partner's allocation of taxable income in the most recent
calendar year. SCA may issue cash or stock, including unregistered stock, at its
option to purchase the limited partners' interests. SCA believes that it has the
financial resources necessary to buy out all of its limited partners if
required.
In June 1994, the American Medical Association severely restricted the
ability of physicians to refer to entities in which such physicians have
ownership, except when the physician directly provides care or services at the
facility and in very limited circumstances such as lack of available capital
from non-physician sources and situations in which the facility is an extension
of the physician's practice. In the event that the American Medical Association
changes its ethical requirements to preclude all referrals by physicians and
such ethical requirements are applied retroactively to facilities which, at the
time of adoption, are owned in whole or in part by referring physicians,
physician referrals to centers owned by SCA could be adversely affected.
It is possible that a prohibition on physician ownership could
adversely affect SCA's future operations. SCA believes that a majority of its
current physician limited partners utilize the surgery centers because they are
highly efficient and convenient to the physicians' practice of medicine. For
these reasons, SCA believes that the majority of physicians would continue to
perform surgery at the surgery centers even if they were no longer limited
partners. It is possible, however, that some physicians would perform surgery
elsewhere if ownership is no longer allowed.
Insurance
SCA maintains professional coverage for all centers on a claims made
basis with limits of coverage which SCA believes are adequate.
Employees
On September 30, 1995, SCA had approximately 2,500 full-time and
part-time employees. Of these, 27 are corporate personnel. The remaining
employees, most of whom are nurses and office personnel, work at the surgery
centers. None of SCA's employees are covered by a collective bargaining
agreement.
81
Properties
SCA's corporate headquarters occupy approximately 11,000 square feet of
an office building located in Nashville, Tennessee, under a lease expiring in
January 1996. SCA also leases certain of the buildings in which its centers
operate and the equipment used in certain of its centers, either from limited
partnerships comprised of a subsidiary of SCA as general partner and local
physicians as limited partners or from physicians who sold the center to SCA.
SCA owns interests ranging from 1% to 60% in the operations of these real estate
partnerships and in some instances may participate in any net proceeds from the
sale of the properties. In some cases, SCA's limited partnerships lease their
property from unaffiliated parties.
The following table sets forth the location and type of property leased
and the duration of the leases as of September 30, 1995:
Expiration Rent During
Location Date Type of Property Leased 1995
Arlington, Texas............. July 2010 Surgical Center and Equipment $ 134,000
Charlotte, North Carolina ... March 2001 Surgical Center 104,000
Chattanooga, Tennessee ...... December 2001 Surgical Center and Equipment 125,000
Ft. Worth, Texas............. November 1998 Surgical Center and Equipment 116,000
Houston, Texas............... May 1997 Surgical Center 209,000
Huntington, West Virginia.. . December 2001 Surgical Center and Equipment 244,000
Camp Hill, Pennsylvania ..... January 1999 Surgical Center and Equipment 155,000
Lancaster, Pennsylvania ..... Month to Month Surgical Center 143,000 (1)
Lexington, Kentucky.......... May 2011 Surgical Center 78,000
Lexington, Kentucky.......... June 1996 Surgical Equipment 24,000
Little Rock, Arkansas ....... March 2001 Surgical Center and Equipment 205,000
Louisville, Kentucky......... January 2002 Surgical Center 145,000
Memphis, Tennessee........... December 2001 Surgical Center and Equipment 145,000
Sarasota, Florida............ September 2001 Surgical Center and Equipment 167,000
Mobile, Alabama.............. October 2001 Surgical Center and Equipment 187,000
Rockville, Maryland.......... Month to Month Surgical Center 114,000
Dallas, Texas................ December 1995 Surgical Center 161,000
Eau Claire, Wisconsin ....... November 2004 Surgical Center 19,000
Springfield, Massachusetts... March 1997 Surgical Center 180,000
Tampa, Florida............... July 2004 Surgical Center and Equipment 280,000
Albuquerque, New Mexico ..... October 2009 Surgical Center and Equipment 161,000
Redlands, California......... August 2008 Land 41,000
San Jose, California......... November 1999 Surgical Center and Equipment 288,000
Baltimore, Maryland.......... March 2003 Surgical Center 48,000
Indianapolis, Indiana ....... July 2002 Land, Surgical Center, and Equipment 168,000
Indianapolis, Indiana ....... February 1997 Land, Surgical Center and Equipment 206,000
San Luis Obispo, California... February 2000 Surgical Center 69,000
Mt. Laurel, New Jersey ...... June 2006 Surgical Center 124,000
Gadsden, Alabama............. October 1999 Surgical Center 111,000
Ft. Smith, Arkansas.......... October 2007 Surgical Center 131,000
82
Expiration Rent During
Location Date Type of Property Leased 1995
Honolulu, Hawaii........... December 1995 Surgical Center 133,000
Coral Springs, Florida .... December 2001 Surgical Center 127,000
Winter Park, Florida....... September 2013 Surgical Center 136,000
Golden, Colorado........... December 2002 Surgical Center 142,000
Roseland, New Jersey....... September 2002 Surgical Center 178,000
Aurora, Colorado........... February 2002 Surgical Center 43,000
Santa Rosa, California .... December 1997 Surgical Center 72,000
San Francisco, California . December 1995 Surgical Center 88,000
St Joseph, Missouri........ April 2004 Surgical Center 123,000
Paoli, Pennsylvania........ October 2008 Land 25,000
Riverside, California ..... January 1999 Surgical Center 57,000
Auburn, Washington......... October 2000 Surgical Center 46,000
Tampa, Florida............. December 2001 Surgical Center 106,000
Tampa, Florida............. September 2001 Surgical Center 32,000
<FN>
___________
(1) Does not include insurance, taxes and maintenance.
</FN>
The remainder of SCA's properties are owned and subject to mortgage.
SCA believes that its facilities are adequate for its immediate needs.
In 1985, SCA purchased a building containing approximately 53,000
square feet in Lancaster, Pennsylvania. SCA developed the property as a medical
office building and sold the building at its cost to a limited partnership
having as its general partner an SCA subsidiary and as its limited partners
physicians who use the Lancaster Surgery Center and tenants in the medical
office building. The Lancaster Surgery Center leases approximately 13,700 square
feet of the building.
Legal Proceedings
There are no legal proceedings which could have, in the judgment of
management, a material adverse effect upon SCA's financial position or results
of operations taken as a whole.
83
PRINCIPAL STOCKHOLDERS OF SCA
The following table sets forth certain information with respect to the
beneficial ownership of SCA Common Stock as of September 30, 1995, by (i) each
person who is known by SCA to beneficially own more than five percent of SCA
Common Stock, (ii) the executive officers of SCA, (iii) each director of SCA and
(iv) all of SCA's executive officers and directors as a group.
SCA Common Stock
Number of Percent
Name(1) Shares(2) Owned(3)
Joel C. Gordon................................. 1,560,616(4) 4.0%
William J. Hamburg............................. 113,943 *
Tarpley B. Jones............................... 873 *
Dan E. Bruhl, M.D. ............................ 238,614 *
Lucius E. Burch III............................ 114,945 *
Robert J. Fraiman.............................. 110,600 *
Kenneth J. Melkus.............................. 48,182 *
Andrew W. Miller............................... 2,434,460(5) 6.2
Edwin J. Nighbert, M.D......................... 189,685 *
Sister Josepha Schaeffer, O.S.F................ -- --
The Equitable Companies Incorporated........... 4,519,200(6) 11.6
All directors and executive officers as a
group (10 persons) .......................... 4,811,918 12.3
<FN>
- ----------
* Indicates less than 1% ownership.
(1) The address for Messrs. Gordon, Hamburg, Jones, Burch, Fraiman, Melkus and
Miller, Drs. Bruhl and Nighbert, and Sister Schaeffer is 102 Woodmont
Boulevard, Suite 610, Nashville, Tennessee 37205. The address for The
Equitable Companies Incorporated is 787 Seventh Avenue South, New York, New
York 10019.
(2) Beneficial ownership is deemed to include shares of SCA Common Stock which
an individual has a right to acquire within 60 days of September 30, 1995
upon the exercise of options or warrants or conversion of convertible
securities. The table includes options granted under SCA's Incentive Stock
Plan of 1986 and 1990 Non-Qualified Stock Option Plan for Non-Employee
Directors. These shares are deemed to be outstanding for the purposes of
computing the percentage ownership of that individual, but are not deemed
outstanding for the purposes of computing the percentage of any other
person. Unless otherwise noted in the following footnotes, the persons as
to whom information is given had sole voting and investment power over the
shares of SCA Common Stock shown as beneficially owned.
(3) Computation based upon 38,993,892 shares outstanding as September 30, 1995.
(4) Includes 1,186,192 shares with respect to which Mr. Gordon has sole voting
and investment rights. Also includes 174,715 shares held by his wife, and
85,404 shares held in trust for his grandchildren, as to which shares Mr.
Gordon disclaims beneficial ownership. Also includes 115,305 shares held by
a partnership as to which Mr. Gordon has sole voting and investment power.
(5) Includes 2,326,960 shares as to which Mr. Miller has sole voting and
investment rights. Also includes 107,500 shares held in a private
foundation with respect to which Mr. Miller has sole voting and investment
control.
(6) According to a Form 13G filed with the SEC dated August 9, 1995, AXA, The
Equitable Companies Incorporated (through three of its subsidiaries) and
the following five French mutual insurance companies (as a group): AXA
Assurances I.A.R.D. Mutuelle, AXA Assurances Vie Mutuelle, Alpha Assurances
I.A.R.D Mutuelle, Alpha Assurances Vie Mutuelle and Uni Europe Assurance
Mutuelle (collectively, the "AXA Companies") reported ownership of the
shares listed in the foregoing table.
</FN>
84
AMENDMENT TO HEALTHSOUTH RESTATED CERTIFICATE OF INCORPORATION
TO INCREASE AUTHORIZED COMMON STOCK
General
At a meeting on October 12, 1995, the HEALTHSOUTH Board of Directors
approved an amendment (the "Amendment") to Article FOURTH of the HEALTHSOUTH
Certificate to increase the number of authorized shares of HEALTHSOUTH Common
Stock from 150,000,000 to 250,000,000 shares of Common Stock, par value $.01 per
share. Such approval was subject to the approval of the holders of a majority of
the outstanding shares of HEALTHSOUTH Common Stock. Approval and adoption of the
Amendment is a condition to the obligations of HEALTHSOUTH and SCA to consummate
the Merger.
In connection with the Amendment, the following resolution will be
introduced at the HEALTHSOUTH Special Meeting:
RESOLVED, that the first paragraph of Article FOURTH of the
Restated Certificate of Incorporation of this Corporation be
amended to read as follows:
"FOURTH. The total number of shares of stock which the
Corporation shall have authority to issue is Two Hundred
Fifty-One Million Five Hundred Thousand (251,500,000) shares,
consisting of Two Hundred Fifty Million (250,000,000) shares
of Common Stock, par value One Cent ($.01) per share, and One
Million Five Hundred Thousand (1,500,000) shares of Preferred
Stock, par value Ten Cents ($.10) per share."
Increase in Authorized Common Stock
The Board of Directors recommends that HEALTHSOUTH stockholders approve
the Amendment to increase the authorized Common Stock of HEALTHSOUTH to
250,000,000 shares of Common Stock, par value $.01 per share, because it
considers such proposal to be in the best long-term and short-term interests of
HEALTHSOUTH and its stockholders. Under the HEALTHSOUTH Certificate, HEALTHSOUTH
presently has authority to issue 150,000,000 shares of Common Stock, par value
$.01 per share, of which 97,360,497 shares were issued and outstanding on
November 1, 1995. In addition, as of November 1, 1995, approximately (a)
16,021,358 shares of Common Stock were reserved for issuance under HEALTHSOUTH's
Stock Option Plans, under which options to purchase a total of 14,499,954 shares
of Common Stock were outstanding, (b) 76,639 shares were reserved for issuance
upon the exercise of outstanding warrants, and (c) 6,112,956 shares were
reserved for issuance upon conversion of HEALTHSOUTH's 5% Convertible
Subordinated Debentures due 2001 (the "Debentures"). The number of shares of
HEALTHSOUTH Common Stock currently reserved for issuance, including those
reserved for issuance in connection with the Merger, when added to the number of
shares currently outstanding, exceeds the number of shares of HEALTHSOUTH Common
Stock currently authorized.
The proposed increase in the number of shares of authorized Common
Stock will ensure that a sufficient number of shares will be available, if
needed, for issuance in connection with the Merger, the outstanding commitments
referred to in the immediately preceding paragraph, and any possible future
transactions approved by HEALTHSOUTH Board of Directors, including, among
others, stock splits, stock dividends, acquisitions, financings and other
corporate purposes. The HEALTHSOUTH Board of Directors believes that the
availability of the additional shares of HEALTHSOUTH Common Stock for such
purposes without delay or the necessity for a special stockholders' meeting
(except as may be required by applicable law or regulatory authorities or by the
rules of any stock exchange on which HEALTHSOUTH's securities may then be
listed) will be beneficial to HEALTHSOUTH by providing it with the flexibility
required to consider and respond to future business opportunities and needs as
they arise. The availability of additional authorized shares of HEALTHSOUTH
Common Stock will also
85
enable HEALTHSOUTH to act promptly when the Board of Directors determines that
the issuance of additional shares of HEALTHSOUTH Common Stock is advisable. It
is possible that shares of HEALTHSOUTH Common Stock may be issued at a time and
under circumstances that may increase or decrease earnings per share and
increase or decrease the book value per share of shares presently held.
Except for issuance in connection with the Merger, the Company does not
have any immediate plans, agreements, arrangements, commitments or
understandings with respect to the issuance of any of the remaining additional
shares of HEALTHSOUTH Common Stock which would be authorized by the Amendment.
The HEALTHSOUTH Board of Directors recommends that stockholders vote
FOR the approval and adoption of the Amendment to the HEALTHSOUTH Certificate to
increase the authorized shares of HEALTHSOUTH Common Stock to 250,000,000 shares
of HEALTHSOUTH Common Stock, par value $.01 per share. The affirmative vote of
the holders of a majority of the outstanding shares of HEALTHSOUTH Common Stock
entitled to vote at the HEALTHSOUTH Special Meeting will be necessary for the
approval of the Amendment to the HEALTHSOUTH Restated Certificate of
Incorporation.
DESCRIPTION OF CAPITAL STOCK OF HEALTHSOUTH
HEALTHSOUTH is authorized by the HEALTHSOUTH Certificate to issue up to
151,500,000 shares of capital stock, of which 150,000,000 shares are designated
Common Stock, par value $.01 per share, and 1,500,000 shares are designated
Preferred Stock, par value $.10 per share. Following approval and adoption of
the Amendment, HEALTHSOUTH will be authorized to issue up to 251,500,000 shares
of capital stock, of which 250,000,000 shares will be designated Common Stock
and 1,500,000 shares will be designated Preferred Stock.
Common Stock
As of November 1, 1995, there were 97,360,497 shares of HEALTHSOUTH
Common Stock outstanding. In addition, there were outstanding options under
HEALTHSOUTH's stock option plans to purchase an additional 14,499,954 shares of
HEALTHSOUTH Common Stock. An additional 1,521,404 shares of HEALTHSOUTH Common
Stock were reserved for future option grants under such plans. Additionally,
6,112,956 shares are currently reserved for issuance upon conversion of the
Debentures, and 76,639 shares were reserved for issuance upon the exercise of
outstanding warrants.
Holders of HEALTHSOUTH Common Stock are entitled to participate equally
in dividends when and as declared by the Board of Directors out of funds legally
available therefor and, in the event of liquidation or distribution of assets of
HEALTHSOUTH, are entitled to share ratably in such assets remaining after
payment of liabilities. Stockholders are entitled to one vote per share. Holders
of HEALTHSOUTH Common Stock have no conversion, preemptive or other subscription
rights, and there are no redemption or sinking fund provisions with respect to
such stock. The outstanding shares of HEALTHSOUTH Common Stock are fully paid
and nonassessable.
Fair Price Provision
The HEALTHSOUTH Certificate contains certain provisions requiring
supermajority stockholder approval to effect specified extraordinary corporate
transactions unless certain conditions are met. The HEALTHSOUTH Certificate
requires the affirmative vote of 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 of 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.
86
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. In addition, holders of the Debentures have the
right to require HEALTHSOUTH to redeem the Debentures at 100% of the principal
amount thereof, plus accrued interest, upon the occurrence of certain events
involving a sale or merger of HEALTHSOUTH, unless holders of HEALTHSOUTH's
Common Stock shall receive an amount per share at least equal to the conversion
price of the Debentures in effect on the date such sale or merger is
consummated. Such holders' redemption option may impede certain forms of
takeovers if the potential acquiror is unable to finance the redemption of the
Debentures.
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
87
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
Chemical Bank, New York, New York.
88
COMPARISON OF RIGHTS OF SCA
AND HEALTHSOUTH STOCKHOLDERS
Both SCA and HEALTHSOUTH are incorporated in Delaware. Holders of the
SCA 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 an SCA stockholder under the SCA Restated
Certificate of Incorporation, as amended (the "SCA Certificate"), and SCA's
Bylaws (the "SCA 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 SCA Certificate and the SCA Bylaws.
Classes and Series of Capital Stock
SCA. The authorized capital stock of SCA consists of a total of
100,000,000 shares of Common Stock, par value $.25 per share. As of September
30, 1995, there were 38,993,892 shares of SCA Common Stock outstanding. The SCA
Certificate does not authorize the issuance of any shares of preferred stock. In
addition, there were outstanding options under SCA stock option plans to
purchase an additional 1,204,026 shares of SCA Common Stock. An additional
1,691,417 shares of SCA Common Stock were reserved for future option grants
under such plans. Furthermore, there were outstanding warrants exercisable for
222,464 shares of SCA Common Stock. An additional 666,311 shares of SCA Common
Stock were reserved for outstanding warrants not exercisable at such date.
HEALTHSOUTH. HEALTHSOUTH is authorized by the HEALTHSOUTH Certificate
to issue up to 151,500,000 shares of capital stock, of which 150,000,000 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 November 1, 1995,
there were 97,360,497 shares of HEALTHSOUTH Common Stock outstanding. In
addition, there were outstanding options under HEALTHSOUTH stock option plans to
purchase an additional 14,499,954 shares of HEALTHSOUTH Common Stock. An
additional 1,521,404 shares of HEALTHSOUTH Common Stock were reserved for future
option grants under such plans. Furthermore, 6,112,956 shares are currently
reserved for issuance upon conversion of the Debentures, and 76,639 shares were
reserved for issuance upon the exercise of outstanding warrants. 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 September 30, 1995, 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
SCA. The SCA Bylaws provide that the SCA Board of Directors shall
consist of at least three members. This number may be increased or decreased by
action of the Board of Directors or the stockholders. Directors are elected by
the stockholders at each annual meeting of stockholders. Vacancies on the Board
of Directors resulting from an increase in the number of Directors or the
removal of Directors may be filled by a majority vote of the Directors then in
office. All other vacancies are filled by the stockholders. The SCA Bylaws also
provide for the election of a maximum of three Advisory Directors by a majority
of the Board of Directors. Such Advisory Directors, who are to assist the Board
of Directors in its conduct of the affairs of SCA, hold office for such term as
determined by the Board 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. Vacancies in the 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.
89
Removal of Directors
SCA. The SCA Bylaws provide that Directors may be removed, with or
without cause, by a majority vote of the shares entitled to vote at an election
of Directors.
HEALTHSOUTH. The HEALTHSOUTH Bylaws provide that a director may be
removed with or without cause by the vote of the holders of a majority of the
shares of capital stock entitled to vote thereon.
Other Voting Rights
SCA. The SCA Common Stock is not divided into classes, and SCA has no
classes or series of capital stock issued or outstanding other than the SCA
Common Stock. Each SCA stockholder holding shares of SCA 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 SCA Common Stock held by such stockholder as of the record date
for such meeting. Except as specifically provided otherwise by law or by the SCA
Certificate or the SCA 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 stockholders.
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.
Dividends
SCA. The SCA Certificate grants the Board of Directors the power to
distribute to the stockholders, without a vote of the stockholders, a portion of
the assets of SCA out of the capital surplus of SCA. The SCA Certificate also
provides that if at any time SCA has more than one class of authorized or
outstanding stock, the Board of Directors has the power to pay dividends in
shares of any class to the holders of shares of any class, without the vote of
the stockholders of the class in which the payment is made. SCA currently has
only one class of stock authorized and outstanding.
HEALTHSOUTH. The HEALTHSOUTH Certificate contains no provisions similar
to the dividend provisions of the SCA Certificate set forth above.
Conversion and Dissolution
SCA. The SCA Common Stock has no conversion features, and no shares of
preferred stock are authorized by the SCA Certificate.
HEALTHSOUTH. The HEALTHSOUTH Common Stock has no conversion features.
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, without limitation, the right to convert the shares of such
HEALTHSOUTH Preferred Stock into shares of HEALTHSOUTH Common Stock) as shall be
stated in the HEALTHSOUTH Certificate or resolutions providing for the issuance
of HEALTHSOUTH Preferred Stock. If the 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 dissolution of HEALTHSOUTH.
90
Fair Price Provision
SCA. Neither the SCA Certificate nor the SCA Bylaws contain any
provisions dealing with approval and adoption of a business combination similar
to those contained in the HEALTHSOUTH Certificate set forth below.
HEALTHSOUTH. The HEALTHSOUTH Certificate provides that the vote of the
holders of 662/3% 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.
SCA. The SCA Certificate does not contain any provisions dealing with
the amendment of the SCA Certificate. The SCA Certificate and the SCA Bylaws
provide that the SCA Bylaws may be altered, amended or repealed by a majority
vote of the Board of Directors or by a majority vote of the outstanding stock of
SCA.
HEALTHSOUTH. The HEALTHSOUTH Certificate requires approval by holders
of at least 662/3% 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 Meetings of Stockholders
SCA. The SCA Bylaws provide that a special meeting of stockholders may
be called by the President of SCA and shall be called by the Secretary or any
other officer of SCA at the request in writing of a majority of the Board of
Directors or the holders of at least one-tenth (1/10) of all shares entitled to
vote at the meeting.
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
91
damages for breach of the director's fiduciary duty, subject to certain
limitations. Each of the HEALTHSOUTH Certificate and the SCA Certificate
includes such a provision, as set forth below, to the maximum effect permitted
by law.
Each of the HEALTHSOUTH Certificate and the SCA Certificate provides
that a director will not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL, which concerns unlawful payments of dividends, stock
purchases or redemptions or (iv) for any transaction from which the director
derived an improper personal benefit.
While these provisions provide directors with protection from awards of
monetary damages for breaches of their duty of care, they do not eliminate such
duty. Accordingly, these provisions will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's
breach of his or her duty of care. The provisions described above apply to an
officer of the corporation only if he or she is a director of the corporation
and is acting in his or her capacity as director, and do not apply to officers
of the corporation who are not directors.
Indemnification of Directors and Officers
The DGCL permits a corporation to indemnify officers, directors,
employees and agents for actions taken in good faith and in a manner they
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and with respect to any criminal action, which they had no
reasonable cause to believe was unlawful. The DGCL provides that a corporation
may advance expenses of defense (upon receipt of a written undertaking to
reimburse the corporation if indemnification is not appropriate) and must
reimburse a successful defendant for expenses, including attorneys' fees,
actually and reasonably incurred, and permits a corporation to purchase and
maintain liability insurance for its directors and officers. The DGCL provides
that indemnification may not be made for any claim, issue or matter as to which
a person has been adjudged by a court of competent jurisdiction, after
exhaustion of all appeals therefrom, to be liable to the corporation, unless and
only to the extent a court determines that the person is entitled to indemnity
for such expenses as the court deems proper.
The HEALTHSOUTH Bylaws provide that each person who is involved in any
actual or threatened action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he or she is or was
a director, officer, employee or agent of HEALTHSOUTH, or is or was serving at
the request of HEALTHSOUTH as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to an employee benefit plan, will be indemnified
by HEALTHSOUTH to the full extent permitted by the DGCL, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits HEALTHSOUTH to provide broader
indemnification rights than said law permitted prior to such amendment) or by
other applicable laws then in effect. The SCA Bylaws also provide for
indemnification to the full extent permitted by the DGCL for officers and
directors.
The Plan provides that all rights to indemnification for acts or
omissions occurring prior to the Effective Time of the Merger now existing in
favor of the current or former directors or officers of SCA as provided in its
respective certificate of incorporation or 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
pursuant to the foregoing provisions, HEALTHSOUTH has 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.
92
OPERATIONS AND MANAGEMENT
OF HEALTHSOUTH AFTER THE MERGER
Operations
After the consummation of the Merger, SCA will be a wholly-owned
subsidiary of HEALTHSOUTH, and all of SCA's subsidiaries will be indirect
wholly-owned subsidiaries of HEALTHSOUTH. SCA will operate under the name
Surgical Care Affiliates, Inc. HEALTHSOUTH will continue to engage in the
business of providing rehabilitative healthcare services as prior to the Merger,
working with the management of SCA to operate and continue to expand SCA's
business. As noted elsewhere in this Prospectus-Joint Proxy Statement,
HEALTHSOUTH currently operates rehabilitation facilities in approximately 70% of
SCA's markets, and HEALTHSOUTH, by virtue of its national network, has existing
managed care relationships that it anticipates will enhance SCA's patient volume
and make it more competitive in the markets which it serves. Management of
HEALTHSOUTH believes that, because of the movement toward increased utilization
of outpatient surgery and the need of many of such surgery patients for
rehabilitative healthcare services, significant cross-referral business will
create operating synergies that will benefit both Companies and result in
benefits to patients and payors from packaged pricing of bundled surgical and
rehabilitative healthcare services in these common markets. In addition, it is
believed that significant operating synergies in the areas of cost of capital,
purchasing power and overhead reduction will result in more efficient operations
and management for both HEALTHSOUTH and SCA. As SCA is the largest independent
operator of outpatient surgery centers in the United States, HEALTHSOUTH
believes that its accelerated growth program for SCA's business will provide
another avenue of growth for HEALTHSOUTH's business independent of, but
complementary to, its rehabilitative healthcare business. No material
disposition or restructuring of either of HEALTHSOUTH or SCA or any material
part thereof is contemplated as a result of the Merger. 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 SCA".
Management
After the consummation of the Merger, HEALTHSOUTH will be managed by
the same Board of Directors and executive officers as existed prior to the
Merger, except that Joel C. Gordon is expected to be elected to the HEALTHSOUTH
Board of Directors.
Mr. Gordon has been Chariman of the Board of Directors of SCA since its
founding in 1982 and has served as its Chief Executive Officer since 1987. Mr.
Gordon serves on the Boards of Directors of Genesco, Inc., an apparel
manufacturer; HealthWise of America, Inc., an owner and operator of health
maintenance organizations; and SunTrust Bank of Nashville, N.A., a bank in
Nashville, Tennessee.
EXPERTS
The consolidated financial statements and schedule of HEALTHSOUTH
Corporation, the consolidated financial statements of Surgical Health
Corporation, the consolidated financial statements of Rehab Systems Company and
the consolidated financial statements of Relife, Inc. appearing or incorporated
by reference in this Prospectus-Joint Proxy Statement and Registration Statement
have been audited by Ernst & Young LLP, independent auditors, to the extent
indicated in their reports thereon also appearing elsewhere herein and in the
Registration Statement or incorporated by reference. Such consolidated financial
statements have been included herein or incorporated by reference in reliance
upon such reports given upon the authority of such firm as experts in accounting
and auditing.
The consolidated financial statements and the related financial
statement schedule incorporated in this Prospectus-Joint Proxy Statement by
reference from SCA's Annual Report on Form 10-K for the year ended December 31,
1994 have been audited by Deloitte & Touche LLP, independent auditors, as stated
in their reports, which are incorporated herein by reference, and have been so
incorporated in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
93
LEGAL MATTERS
The validity of the shares of HEALTHSOUTH Common Stock to be issued to
the stockholders of SCA pursuant to the Merger will be passed upon by Haskell
Slaughter Young & Johnston, Professional Association. As of the date of this
Prospectus-Joint Proxy Statement, attorneys in that firm owned a total of 9,930
shares of HEALTHSOUTH Common Stock, and held currently-exercisable options to
acquire an additional 15,000 shares of HEALTHSOUTH Common Stock.
ADDITIONAL INFORMATION
Other Business
The Board of Directors of each of HEALTHSOUTH and SCA does not know of
any matter to be brought before its Special Meeting other than described in the
Notice of Special Meeting accompanying this Prospectus-Joint Proxy Statement
mailed to the stockholders of such Company. If any other matter comes before
such 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.
Stockholder Proposals
Stockholders' proposals intended to be presented at the 1996 Annual
Meeting of Stockholders of HEALTHSOUTH must be received by HEALTHSOUTH no later
than February 7, 1996, for inclusion in HEALTHSOUTH's proxy statement and form
of proxy relating to that meeting. Stockholders' proposals intended to be
presented at the 1996 Annual Meeting of Stockholders of SCA must be received by
SCA no later than December 1, 1995, for inclusion in SCA's proxy statement and
form of proxy relating to that meeting.
94
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Financial Statements Page
Years ended December 31, 1992, 1993 and 1994
Report of Independent Auditors .......................... F-2
Consolidated Balance Sheets ............................. F-3
Consolidated Statements of Income ....................... F-4
Consolidated Statements of Stockholders' Equity ........ F-5
Consolidated Statements of Cash Flows ................... F-6
Notes to Consolidated Financial Statements............... F-8
Nine months ended September 30, 1994 and 1995
Consolidated Balance Sheet (unaudited).................. F-24
Consolidated Statements of Income (unaudited).. ........ F-25
Consolidated Statements of Cash Flows (unaudited) ...... F-26
Notes to Consolidated Financial Statements (unaudited).. F-28
F-1
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors
HEALTHSOUTH Corporation
We have audited the accompanying consolidated balance sheets of
HEALTHSOUTH Corporation and Subsidiaries as of December 31, 1993 and 1994, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
HEALTHSOUTH Corporation and Subsidiaries at December 31, 1993 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Birmingham, Alabama
March 1, 1995, except for
Notes 2 and 17, as to
which the date is June 13, 1995
F-2
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Balance Sheets
December 31
1993 1994
(In thousands)
Assets
Current assets:
Cash and cash equivalents (Note 3)................................. $ 81,031 $ 68,735
Other marketable securities (Note 3)............................... 8,968 16,628
Accounts receivable, net of allowances for doubtful accounts and
contractual adjustments of $120,810,000 in 1993 and $144,427,000
in 1994........................................................... 179,761 242,659
Inventories......................................................... 24,078 26,151
Prepaid expenses and other current assets........................... 44,674 71,029
Total current assets............................................ 338,512 425,202
Other assets:
Loans to officers................................................... 1,488 1,240
Other (Note 4)...................................................... 23,983 41,834
25,471 43,074
Property, plant and equipment, net (Note 5)........................... 791,097 857,372
Intangible assets, net (Note 6) ...................................... 289,338 410,688
Total assets.......................................................... $1,444,418 $1,736,336
Liabilities and stockholders' equity
Current liabilities:
Accounts payable.................................................... $ 50,432 $ 87,153
Salaries and wages payable.......................................... 28,229 34,102
Accrued interest payable and other liabilities...................... 33,614 55,922
Current portion of long-term debt and leases (Note 7) .............. 15,174 16,698
Total current liabilities............................................. 127,449 193,875
Long-term debt (Note 7)............................................... 873,007 1,017,696
Deferred income taxes (Note 11)....................................... 10,853 8,595
Deferred revenue (Note 15)............................................ -- 7,526
Other long-term liabilities (Note 16)................................. 3,285 8,398
Minority interests-limited partnerships (Note 9)...................... 11,526 10,326
Commitments and contingent liabilities (Notes 12 and 17) .............
Stockholders' equity:
Preferred Stock, $.10 par value-1,500,000 shares authorized;
issued and outstanding-none....................................... -- --
Common Stock, $.01 par value-100,000,000 shares authorized;
issued-74,896,000 in 1993 and 76,991,000 in 1994.................. 749 770
Additional paid-in capital.......................................... 347,163 369,186
Retained earnings................................................... 89,641 137,764
Treasury stock, at cost (91,000 shares)............................. (323) (323)
Receivable from Employee Stock Ownership Plan (Note 13) ............ (18,932) (17,477)
Total stockholders' equity............................................ 418,298 489,920
Total liabilities and stockholders' equity............................ $1,444,418 $1,736,336
See accompanying notes.
F-3
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Statements of Income
Year ended December 31
1992 1993 1994
(In thousands, except for
per share amounts)
Revenues........................................... $501,046 $656,329 $1,236,190
Operating expenses: ...............................
Operating units.................................. 372,169 471,778 906,712
Corporate general and administrative............. 16,878 24,329 45,895
Provision for doubtful accounts.................... 13,254 16,181 23,739
Depreciation and amortization...................... 29,834 46,224 86,678
Interest expense................................... 12,623 18,495 65,286
Interest income.................................... (5,415) (3,924) (4,308)
Merger expenses (Note 2)........................... -- 333 6,520
Loss on impairment of assets (Note 16)............. -- -- 10,500
Loss on abandonment of computer project (Note 16) . -- -- 4,500
NME Selected Hospitals Acquisition related expense
(Note 10)......................................... -- 49,742 --
Terminated merger expense (Note 14)................ 3,665 -- --
Gain on sale of partnership interest............... -- (1,400) --
443,008 621,758 1,145,522
Income before income taxes and minority interests . 58,038 34,571 90,668
Provision for income taxes (Note 11)............... 18,864 11,930 34,305
39,174 22,641 56,363
Minority interests................................. 4,245 5,444 6,402
Net income......................................... $ 34,929 $ 17,197 $ 49,961
Weighted average common and common equivalent
shares outstanding................................. 74,214 77,709 84,687
Net income per common and common equivalent share . $ 0.47$ .22 $ .59
Net income per common share-assuming full
dilution......................................... $ N/A $ N/A $ .59
See accompanying notes.
F-4
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
Additional Total
Common Common Paid-In Retained Treasury Receivable Stockholders'
Shares Stock Capital Earnings Stock from ESOP Equity
(In thousands)
Balance at December 31, 1991 ..... 64,993 649.6 $257,660.8 $ 53,925.1 $ (60.0)$ (10,000.0) $302,175.5
Proceeds from issuance of common
shares.......................... 6,436 64.4 60,286.3 -- -- -- 60,350.7
Proceeds from exercise of
options......................... 1,917 19.2 6,871.9 -- -- -- 6,891.1
Income tax benefits related to
Incentive Stock Options......... -- -- 5,634.7 -- -- -- 5,634.7
Common shares exchanged in the
exercise of options............. (8) -- (95.6) -- -- -- (95.6)
Loan to Employee Stock Ownership
Plan............................ -- -- -- -- -- (10,000.0) (10,000.0)
Reduction in Receivable from
Employee Stock Ownership
Plan............................ -- -- -- -- -- 358.0 358.0
Purchase of limited partnership
units........................... 42 .4 499.6 (11,318.4) -- -- (10,818.4)
Net income........................ -- -- -- 34,929.0 -- -- 34,929.0
Balance at December 31, 1992...... 73,380 733.6 330,857.7 77,535.7 (60.0) (19,642.0) 389,425.0
Proceeds from exercise of
options......................... 462 4.6 1,732.9 -- -- -- 1,737.5
Proceeds from issuance of common
shares.......................... 1,074 10.7 13,987.9 -- -- -- 13,998.6
Income tax benefits related to
Incentive Stock Options.......... -- -- 584.7 -- -- -- 584.7
Reduction in Receivable from
Employee Stock Ownership
Plan............................ -- -- -- -- -- 710.1 710.1
Purchase of limited partnership
units........................... -- -- -- (5,091.7) -- -- (5,091.7)
Purchase of treasury stock ....... (20) -- -- -- (263.0) -- (263.0)
Net income........................ -- -- -- 17,197.0 -- -- 17,197.0
Balance at December 31, 1993 ..... 74,896 748.9 347,163.2 89,641.0 (323.0) (18,931.9) 418,298.2
Proceeds from issuance of common
shares at $27.17 per share ..... 38 .4 532.6 -- -- -- 533.0
Proceeds from exercise of
options......................... 2,079 20.8 15,341.8 -- -- -- 15,362.6
Income tax benefits related to
Incentive Stock Options......... -- -- 6,469.6 -- -- -- 6,469.6
Common shares exchanged in the
exercise of options............. (22) (.2) (321.2) -- -- -- (321.4)
Reduction in receivable from
Employee Stock Ownership
Plan ........................... -- -- -- -- -- 1,455.0 1,455.0
Purchase of limited partnership
units........................... -- -- -- (1,838.0) -- -- (1,838.0)
Net income........................ -- -- -- 49,961.0 -- -- 49,961.0
Balance at December 31, 1994 ..... $76,991 $ 769.9 $369,186.0 $137,764.0 $(323.0) $(17,476.9) $489,920.0
See accompanying notes.
F-5
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31,
1992 1993 1994
(In thousands)
Operating activities
Net income............................................................. $ 34,929 $ 17,197 $ 49,961
Adjustments to reconcile net income to net cash provided by
operating activities: ...............................................
Depreciation and amortization........................................ 29,834 46,224 86,678
Provision for doubtful accounts...................................... 13,254 16,181 23,739
Provision for losses on impairment of assets......................... -- -- 10,500
Provision for losses on abandonment of computer project ............. -- -- 4,500
NME Selected Hospitals Acquisition related expense................... -- 49,742 --
Income applicable to minority interests of limited partnerships ..... 4,245 5,444 6,402
Provision (benefit) for deferred income taxes........................ 4,596 (5,685) (1,541)
Provision for deferred revenue....................................... (279) (49) (164)
Gain on sale of property, plant and equipment........................ -- -- (627)
Gain on sale of partnership interests................................ -- (1,400) --
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable.................................................. (38,503) (28,965) (74,636)
Inventories, prepaid expenses and other current assets............... (13,660) (18,054) (21,757)
Accounts payable and accrued expenses................................ 9,236 (7,673) 62,766
Net cash provided by operating activities.............................. 43,652 72,962 145,821
Investing activities
Purchases of property, plant and equipment........................... (98,343) (131,222) (160,785)
Proceeds from sale of property, plant and equipment.................. -- -- 68,317
Additions to intangible assets, net of effects of acquisitions ...... (25,206) (39,156) (59,307)
Assets obtained through acquisitions, net of liabilities assumed .... (75,487) (454,013) (89,266)
Changes in other assets.............................................. 192 (9,582) (23,020)
Proceeds received on sale of other marketable securities ............ 14,041 20,554 1,660
Investments in other marketable securities........................... (13,000) (6,000) (9,126)
Net cash used in investing activities................................ (197,803) (619,419) (271,527)
F-6
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Statements of Cash Flows--(Continued)
Year ended December 31
1992 1993 1994
(In thousands)
Financing activities
Proceeds from borrowings......................... $181,076 $553,258 $1,045,263
Principal payments on long-term debt and leases . (65,221) (32,239) (937,872)
Proceeds from exercise of options................ 6,788 1,736 13,895
Proceeds from issuance of common stock........... 46,519 13,999 342
Purchase of treasury stock....................... -- (263) --
Loans to Employee Stock Ownership Plan........... (10,000) -- --
Reduction in Receivable from Employee Stock
Ownership Plan................................... 358 710 1,455
Proceeds from investment by minority interests .. 2,886 6,476 2,252
Purchase of limited partnership interests ....... (11,495) (3,784) (1,090)
Payment of cash distributions to limited
partners....................................... (5,873) (5,913) (10,835)
Net cash provided by financing activities ....... 145,038 533,980 113,410
Decrease in cash and cash equivalents ........... (9,113) (12,477) (12,296)
Cash and cash equivalents at beginning of year .. 102,621 93,508 81,031
Cash and cash equivalents at end of year ........ $ 93,508 $ 81,031 $ 68,735
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest......................................... $ 14,174 $ 16,241 $ 51,778
Income taxes..................................... 10,466 22,144 29,129
Non-cash investing activities:
The Company assumed liabilities of $57,091,000, $88,566,000 and $24,659,000
during the years ended December 31, 1992, 1993 and 1994, respectively, in
conjunction with its acquisitions. During the years ended December 31, 1992,
1993 and 1994, the Company issued 1,182,000, 69,000 and 19,000 common shares,
respectively, with a market value of $12,853,000, $954,000 and $533,000,
respectively, as consideration for acquisitions.
Non-cash financing activities:
The Company received a tax benefit from the disqualifying disposition of
incentive stock options of $5,635,000, $585,000 and $6,470,000 for the years
ended December 31, 1992, 1993 and 1994, respectively.
During the years ended December 31, 1992 and 1994, respectively, 4,000 and
11,000 common shares were exchanged in the exercise of options. The shares
exchanged had market values on the date of exchange of $95,600 and $321,400,
respectively.
See accompanying notes.
F-7
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1994
1. Significant Accounting Policies
The significant accounting policies followed by HEALTHSOUTH Corporation
(formerly HEALTHSOUTH Rehabilitation Corporation) and its subsidiaries (the
Company) are presented as an integral part of the consolidated financial
statements.
Principles of Consolidation
The consolidated financial statements include the accounts of
HEALTHSOUTH Corporation (HEALTHSOUTH) and its wholly-owned subsidiaries, as well
as its limited partnerships (see Note 9). All significant intercompany accounts
and transactions have been eliminated in consolidation.
HEALTHSOUTH Corporation is engaged in the business of providing
comprehensive rehabilitative and clinical healthcare services on an inpatient
and outpatient basis.
Marketable Securities
Marketable equity securities and debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, if material, reported as a separate
component of stockholders' equity, net of tax. The adjusted cost of the specific
security sold method is used to compute gain or loss on the sale of securities.
Interest and dividends on securities classified as available-for-sale are
included in investment income. Marketable equity securities and debt securities
of the Company have maturities of less than one year.
Accounts Receivable and Third-Party Reimbursement Activities
Receivables from patients, insurance companies and third-party
contractual insured accounts (Medicare and Medicaid) are based on payment
agreements which generally result in the Company collecting an amount different
from the established rates. Final determination of the settlement is subject to
review by appropriate authorities. Adequate allowances are provided for doubtful
accounts and contractual adjustments. Uncollectible accounts are written off
against the allowance for doubtful accounts after adequate collection efforts
are made. Net accounts receivable include only those amounts estimated by
management to be collectible.
The concentration of net accounts receivable from third-party
contractual payors and others, as a percentage of total net accounts receivable,
was as follows:
December 31
1993 1994
Medicare...... 33% 36%
Medicaid...... 4 6
Other......... 63 58
100% 100%
Inventories
Inventories are stated at the lower of cost or market using the
specific identification method.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Upon sale or
retirement of property, plant or equipment, the cost and related accumulated
depreciation are eliminated from the respective account and the resulting gain
or loss is included in the results of operations.
F-8
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1994 - Continued
Interest cost incurred during the construction of a facility is
capitalized. The Company incurred interest of $14,644,000, $21,159,000 and
$67,680,000 of which $2,021,000, $2,664,000 and $2,394,000 was capitalized
during 1992, 1993 and 1994, respectively.
Depreciation and amortization is computed using the straight-line
method over the estimated useful lives of the assets or the term of the lease,
as appropriate. The estimated useful life of buildings is 30-40 years and the
general range of useful lives for leasehold improvements, furniture, fixtures
and equipment is 10-15 years.
Intangible Assets
Cost in excess of net asset value of purchased facilities is amortized
over 20 to 40 years using the straight-line method. Organization and start-up
costs incurred prior to opening a new facility and partnership formation costs
are deferred and amortized on a straight-line basis over a period of 36 months.
Organization, partnership formation and start-up costs for a project that is
subsequently abandoned are charged to operations in that period. Debt issue
costs are amortized over the term of the debt. Noncompete agreements are
amortized using the straight-line method over the term of the agreements.
Minority Interests
The equity of minority investors in limited partnerships of the Company
is reported on the balance sheet as minority interests. Minority interests
reported in the income statement reflect the respective shares of income or loss
of the limited partnerships attributable to the minority investors, the effect
of which is removed from the results of operations of the Company.
Revenues
Revenues include net patient service revenues and other operating
revenues. Net patient service revenues are reported at the estimated net
realizable amounts from patients, third-party payors and others for services
rendered, including estimated retroactive adjustments under reimbursement
agreements with third-party payors.
Income Per Common and Common Equivalent Share
Income per common and common equivalent share is computed based on the
weighted average number of common shares and common equivalent shares
outstanding during the periods, as adjusted for the two-for-one stock split
declared subsequent to year end (see Note 17). Common equivalent shares include
dilutive employees' stock options, less the number of treasury shares assumed to
be purchased from the proceeds using the average market price of the Company's
common stock. Fully diluted earnings per share (based on 89,409,000 shares in
1994) assumes conversion of the 5% Convertible Subordinated Debentures due 2001
(see Note 7).
Impairment of Assets
Long-lived assets, such as property, plant and equipment and
identifiable intangible assets are reviewed for impairment losses when certain
impairment indicators exist. If an impairment exists, the related asset is
adjusted to the lower of book value or estimated future undiscounted cash flows
from the use and eventual disposal of the asset.
With respect to the carrying value of the excess of cost over net asset
value of purchased facilities and other intangible assets, the Company
determines on a quarterly basis whether an impairment event has occurred by
considering factors such as: the market value of the asset; a significant
adverse change in legal factors or in the business climate; adverse action by a
regulator; a history of operating or cash flow
F-9
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1994 - Continued
losses or a projection of continuing losses associated with an operating entity.
The carrying value of net asset value of purchased facilities and other
intangible assets will be evaluated if the facts and circumstances suggest that
it has been impaired. If this evaluation indicates that the value of the asset
will not be recoverable, as determined based on the undiscounted cash flows of
the entity acquired over the remaining amortization period, the Company's
carrying value of the asset will be reduced by the estimated shortfall of cash
flows.
2. Mergers
Effective December 29, 1994, the Company merged with ReLife, Inc.
("ReLife") and in connection therewith issued 11,025,290 shares of its Common
Stock for all of ReLife's outstanding common stock. ReLife provides a system of
rehabilitation services and operates 31 inpatient facilities with an aggregate
of approximately 1,100 licensed beds, including nine free-standing
rehabilitation hospitals, nine acute rehabilitation units, five sub-acute
rehabilitation units, seven transitional living units and one residential
facility and provides outpatient rehabilitation services at twelve outpatient
centers.
The merger was accounted for as a pooling of interests and,
accordingly, the Company's financial statements have been restated to include
the results of ReLife for all periods presented. Prior to the merger, ReLife
reported on a fiscal year ending on September 30. The accompanying financial
statements are based on a combination of the Company's results for its December
31 fiscal year and ReLife's results for its September 30 fiscal year for all
periods presented. Costs and expenses of $2,949,000 incurred by HEALTHSOUTH in
connection with the merger have been recorded in operations in 1994 and reported
as merger expenses in the accompanying consolidated statements of income.
Effective June 13, 1995, the Company merged with Surgical Health
Corporation ("SHC") and in connection therewith issued 8,531,480 shares of its
Common Stock for all of SHC's common and preferred stock. SHC operates a network
of 41 freestanding surgery centers (including four mobile lithotripters) in
eleven states, with an aggregate of 156 operating and procedure rooms.
The merger of the Company and SHC was accounted for as a pooling of
interests and, accordingly, the Company's financial statements have been
restated to include the results of SHC for all periods presented. Costs and
expenses of approximately $29,194,000 incurred by the Company in connection with
the SHC merger have been recorded in operations during the quarter ended June
30, 1995.
SHC merged with Ballas Outpatient Management, Inc. and Midwest
Anesthesia, Inc. on February 11, 1993 in a transaction accounted for as a
pooling of interests. SHC recorded merger costs of $333,000 in connection with
this transaction in 1993. SHC merged with Heritage Surgical Corporation on
January 18, 1994 in a transaction accounted for as a pooling of interests. SHC
recorded merger costs of $3,571,000 in connection with this transaction in 1994.
SHC's historical financial statements for the periods prior to the two mergers
described above have been restated to include the results of the acquired
companies for all periods presented.
F-10
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1994 - Continued
Combined and separate results of the Company, ReLife and SHC are as
follows (in thousands):
HEALTHSOUTH ReLife SHC Combined
Year ended December 31, 1992
Revenues.................... $ 406,968 $ 57,320 $ 36,758 $ 501,046
Net income.................. 29,738 4,856 335 34,929
Year ended December 31, 1993
Revenues.................... 482,304 93,042 80,983 656,329
Net income.................. 6,687 6,905 3,605 17,197
Year ended December 31, 1994
Revenues.................... 1,008,567 118,874 108,749 1,236,190
Net income (loss)........... 54,047 (822) (3,264) 49,961
There were no transactions among the Company, ReLife and SHC prior to
the respective mergers. The effects of conforming the accounting policies of the
companies are not material.
3. Cash, Cash Equivalents and Other Marketable Securities
Cash, cash equivalents and other marketable securities consisted of the
following:
December 31
1993 1994
(In thousands)
Cash...................................................... $52,616 $59,635
Municipal put bonds....................................... 9,800 2,100
Tax advantaged auction preferred stocks................... 4,000 7,000
Municipal put bond mutual funds........................... 2,000 --
Money market funds........................................ 8,410 --
United States Treasury bills.............................. 4,205 --
Total cash and cash equivalents........................... 81,031 68,735
United States Treasury notes.............................. -- 1,004
Certificates of deposit................................... 1,108 2,135
Municipal put bonds....................................... 1,860 3,975
Municipal put bond mutual funds........................... 5,000 8,514
Collateralized mortgage obligations....................... 1,000 1,000
Total other marketable securities......................... 8,968 16,628
Total cash, cash equivalents and other marketable
securities (approximates market value).................. $89,999 $85,363
For purposes of the consolidated balance sheets and statements of cash
flows, marketable securities purchased with an original maturity of ninety days
or less are considered cash equivalents.
F-11
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1994 - Continued
4. Other Assets
Other assets consisted of the following:
December 31
1993 1994
(In thousands)
Notes and accounts receivable..................... $ 3,280 $15,104
Investment in Caretenders Health Corp. ........... 7,382 7,370
Investments in other unconsolidated subsidiaries.. 4,460 6,007
Real estate investments........................... 3,023 10,022
Escrow funds...................................... 394 --
Other............................................. 5,444 3,331
$23,983 $41,834
The Company has a 24% ownership interest in Caretenders Health Corp.
("Caretenders"). Accordingly, the Company's investment is being accounted for
using the equity method of accounting. The investment was initially valued at
$7,250,000. The Company's equity in earnings of Caretenders for the years ended
December 31, 1992, 1993 and 1994 was not material to the Company's results of
operations.
It was not practicable to estimate the fair value of the Company's
various investments in other unconsolidated subsidiaries (involved in operations
similar to those of the Company) because of the lack of a quoted market price
and the inability to estimate fair value without incurring excessive costs. The
carrying amount at December 31, 1994 represents the original cost of the
investments, which management believes is not impaired.
5. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
December 31
1993 1994
(In thousands)
Land.......................................... $ 65,857 $ 55,511
Buildings..................................... 473,239 491,372
Leasehold improvements........................ 27,224 43,410
Furniture, fixtures and equipment............. 254,047 335,959
Construction in progress...................... 37,385 45,709
857,752 971,961
Less accumulated depreciation and
amortization.................................. 66,655 114,589
$ 791,097 $857,372
F-12
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1994 - Continued
6. Intangible Assets
Intangible assets consisted of the following:
December 31
1993 1994
(In thousands)
Organization, partnership formation and start-up
costs............................................. $ 53,342 $ 93,499
Debt issue costs.................................... 1,653 18,848
Noncompete agreements............................... 24,862 35,253
Cost in excess of net asset value of purchased
facilities........................................ 243,303 323,608
323,160 471,208
Less accumulated amortization....................... 33,822 60,520
$ 289,338 $410,688
7. Long-Term Debt
Long-term debt consisted of the following:
December 31
1993 1994
(In thousands)
Notes and bonds payable:
Advances under a $390,000,000 credit agreement with a bank .... $ 370,000 $ --
Advances under a $550,000,000 credit agreement with a bank .... -- 510,000
9.5% Senior Subordinated Notes due 2001........................ -- 250,000
5% Convertible Subordinated Debentures due 2001................ -- 115,000
11.5% Senior Subordinated Notes due 2004....................... -- 75,000
Due to National Medical Enterprises, Inc....................... 361,164 --
Notes payable to banks and various other notes payable, at
interest rates from 5.5% to 9.0%............................. 99,988 34,680
Noncompete agreements payable with payments due at varying
intervals through December 2004................................ 12,050 17,610
Hospital revenue bonds payable................................... 24,862 24,763
Other............................................................ 20,117 7,341
888,181 1,034,394
Less amounts due within one year................................ 15,174 16,698
$ 873,007 $1,017,696
The fair value of total long-term debt approximates book value at
December 31, 1994 and 1993. The fair values of the Company's long-term debt are
estimated using discounted cash flow analyses, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
During 1994, the Company entered into a Credit Agreement with
NationsBank of North Carolina, N.A. and other participating banks (the 1994
Credit Agreement) which consists of a $550,000,000 revolving facility and term
loan. The 1994 Credit Agreement replaced a previous $390,000,000 Credit
Agreement with NationsBank. Interest is paid quarterly based on LIBOR rates plus
a predetermined margin, a base rate, or competitively bid rates from the
participating banks. The Company is required to pay a
F-13
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1994 - Continued
fee on the unused portion of the 1994 revolving credit facility ranging from
0.25% to 0.5%, depending on certain defined ratios. The principal amount is
payable in 15 equal quarterly installments beginning on June 30, 1997. The
Company has provided a negative pledge of all its assets and has granted a first
priority security interest in and lien on all shares of stock of its
subsidiaries and rights and interests in its partnerships. At December 31, 1994,
the effective interest rate associated with the 1994 Credit Agreement was
approximately 6.75%.
The amount shown as Due to National Medical Enterprises, Inc. at
December 31, 1993 was subsequently repaid from proceeds of other notes and
bonds.
On March 24, 1994, the Company issued $250,000,000 principal amount of
9.5% Senior Subordinated Notes due 2001 (the Notes). Interest is payable on
April 1 and October 1. The Notes are senior subordinated obligations of the
Company and as such will be subordinated to all existing and future senior
indebtedness of the Company, and also will be effectively subordinated to all
existing and future liabilities of the Company's subsidiaries and partnerships.
The Notes rank senior to all subordinated indebtedness of the Company, including
the 5% Convertible Subordinated Debentures due 2001 described below. The Notes
mature on April 1, 2001.
Also on March 24, 1994, the Company issued $100,000,000 principal
amount of 5% Convertible Subordinated Debentures due 2001 (the Convertible
Debentures). An additional $15,000,000 principal amount of Convertible
Debentures was issued in April 1994 to cover underwriters' over allotments.
Interest is payable on April 1 and October 1. The Convertible Debentures are
convertible into Common Stock of the Company at the option of the holder at a
conversion price of $18.8125 per share, subject to adjustment in the occurrence
of certain events.
The net proceeds from the issuance of the Notes and Convertible
Debentures were used by the Company to pay down indebtedness outstanding under
its other existing credit facilities.
In June, 1994, Surgical Health Corporation (see Note 2) issued $75
million of 11.5% Senior Subordinated Notes due July 15, 2004 (the "SHC Notes").
The proceeds of the SHC Notes were used by SHC to pay down indebtedness
outstanding under its other existing credit facilities. Subsequent to December
31, 1994, the Company purchased the entire $75,000,000 outstanding principal
amount of the SHC Notes for 115% of their face value. Because the SHC Notes were
purchased using proceeds from the Company's other long-term credit facilities,
the entire balance of the SHC Notes is classified as non-current in the
accompanying balance sheet.
Principal maturities of long-term debt are as follows:
Year ending December 31 (In thousands)
1995...................... $ 16,698
1996...................... 14,262
1997...................... 113,303
1998...................... 143,816
1999...................... 149,626
After 1999................ 596,689
$1,034,394
F-14
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1994 - Continued
8. Stock Options
The Company has various stockholder-approved stock option plans which
provide for the grant of options to Directors, officers and other key employees
to purchase common stock at 100% of the fair market value as of the date of
grant. The Board of Directors administers the stock option plans. Options may be
granted as incentive stock options or as non-qualified stock options. Incentive
stock options vest 25% annually, commencing upon completion of one year of
employment subsequent to the date of grant. Non-qualified stock options
generally are not subject to any vesting provisions. The options expire at dates
ranging from five to ten years from the date of grant.
The following table summarizes activity in the stock option plans:
1992 1993 1994
Options outstanding January 1:...................... 6,737,142 11,357,490 14,807,500
Granted........................................... 6,207,272 3,944,252 944,246
Exercised......................................... 1,535,922 374,602 1,976,874
Cancelled......................................... 51,002 119,640 744,174
Options outstanding at
December 31....................................... 11,357,490 14,807,500 13,030,698
Option price range for options granted during the
period............................................ $1.50-$9.94 $6.75-$8.44 $13.94-$18.25
Option price range for options exercised during
the period........................................ $1.50-$10.71 $1.50-$9.59 $1.50-$8.44
Options exercisable at December 31................ 8,311,634 10,665,880 10,882,308
Options available for grant at December 31 ....... 1,092,100 649,100 1,100,408
9. Limited Partnerships
HEALTHSOUTH and its subsidiaries operate a number of rehabilitation and
surgery centers as limited partnerships. HEALTHSOUTH serves as the general
partner. These limited partnerships are included in the consolidated financial
statements (as more fully described in Note 1 under "Minority Interests"). The
limited partners share in the profit or loss of the partnerships based on their
respective ownership percentage (ranging from 1% to 50% at December 31, 1994)
during their ownership period.
Beginning in 1992, due to federal and state regulatory requirements,
the Company began the process of buying back selected partnership interests of
its physician limited partners. The buyback prices for the interests were in
general based on a predetermined multiple of projected cash flows of the
partnerships. The excess of the buyback price over the book value of the limited
partners' capital amounts was charged to the Company's retained earnings.
F-15
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1994 - Continued
10. Acquisitions
At various dates during 1994, the Company acquired 53 separate
outpatient rehabilitation operations located throughout the United States. The
combined purchase price of these acquired outpatient operations was
approximately $53,947,000. The Company also acquired a specialty medical center
in Dallas, Texas, a contract therapist provider and a diagnostic imaging
company. The combined purchase price of these three operations was approximately
$25,861,000. The form of consideration comprising the total purchase prices of
$79,808,000 was approximately $68,359,000 in cash, $10,916,000 in notes payable
and approximately 19,000 shares of Common Stock valued at $533,000. In
connection with the acquisition of the contract therapist provider, there is
additional contingent consideration payable of up to $9,000,000 if the acquired
company achieves certain levels of future earnings. Such contingency payments
will be paid to the former owners each fiscal year in which the acquired
company's annual pretax income exceeds a certain threshold. The contingent
payments will cease upon the earlier of the payment of the maximum amount of
contingent payments allowed or ten years. The Company accrues, as an operating
expense, for this contingency in accordance with Statement of Financial
Accounting Standards No. 5, "Accounting for Contingencies." As of December 31,
1994, the Company has accrued $99,000 in contingent consideration.
In connection with these transactions, the Company entered into
non-compete agreements with former owners totaling $10,814,000. In general these
non-compete agreements are payable in monthly or quarterly installments over
periods ranging from five to ten years.
The fair value of the total net assets relating to the 1994
acquisitions described above was approximately $11,087,000. The total cost for
1994 acquisitions exceeded the fair value of the net assets acquired by
approximately $68,721,000. The Company evaluated each acquisition,
independently, to determine the appropriate amortization period for the cost in
excess of net asset value of purchased facilities. Each evaluation included an
analysis of historic and projected financial performance, evaluation of the
estimated useful life of buildings and fixed assets acquired, the indefinite
life of Certificates of Need and licenses acquired, the competition within local
markets, lease terms where applicable, and the legal term of partnerships where
applicable. Based on these evaluations, the Company determined that the cost in
excess of net asset value of purchased facilities relating to the 1994
acquisitions should be amortized over periods ranging from twenty-five to forty
years on a straight line basis. No other identifiable intangible assets were
recorded in the acquisitions described above.
All of the 1994 acquisitions described above were accounted for as
purchases and, accordingly, the results of operations of the acquired businesses
(not material individually or in the aggregate) are included in the accompanying
consolidated financial statements from their respective dates of acquisition.
Effective December 31, 1993, the Company completed an acquisition from
National Medical Enterprises, Inc. (NME) of 28 inpatient rehabilitation
facilities and 45 outpatient rehabilitation centers, which constituted
substantially all of NME's rehabilitation services division (the NME Selected
Hospitals Acquisition). The purchase price was approximately $296,661,000 cash,
plus net working capital of $64,503,000, subject to certain adjustments, the
assumption of approximately $16,313,000 of current liabilities and the
assumption of approximately $17,111,000 in long-term debt.
The Company's pro forma 1993 revenues, net income and net income per
common and common equivalent share giving effect to the NME acquisiton were
$1,111,598,000, $25,076,000 and $.32, respectively.
As a result of the NME Selected Hospitals Acquisition, HEALTHSOUTH
recognized an expense of approximately $49,742,000 during the year ended
December 31, 1993. This expense represents management's estimate of the cost to
consolidate operations of thirteen existing HEALTHSOUTH facilities (three
inpatient facilities and ten outpatient facilities) into the operations of
certain facilities acquired
F-16
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1994 - Continued
from NME. This plan was formulated by HEALTHSOUTH management in order to more
efficiently provide services in markets where multiple locations now exist as a
result of the acquisition. The plan of consolidation calls for the affected
operations to be merged into the operations of the acquired facilities over a
period of twelve to twenty-four months from the date of the NME Selected
Hospitals Acquisition. Due to the single-use nature of these properties, the
consolidation plan does not provide for the sale of these facilities.
The total expense of $49,742,000 consists of several components. First,
approximately $39,000,000 relates to the writedown of the assets of the affected
HEALTHSOUTH facilities to their estimated net realizable value. Of this
$39,000,000, approximately $31,500,000 relates to the assets of the three
inpatient facilities and approximately $7,500,000 relates to the assets of the
ten outpatient facilities. The $39,000,000 is broken down into the following
asset categories (net of any related accumulated depreciation or amortization):
Inpatient Outpatient
Facilities Facilities Total
(In thousands)
Land............. $ 2,898 $ -- $ 2,898
Buildings........ 16,168 -- 16,168
Equipment........ 4,326 2,920 7,246
Intangible
assets........... 6,111 3,455 9,566
Other assets..... 1,997 1,125 3,122
$ 31,500 $ 7,500 $39,000
During the year ended December 31, 1994, management discontinued
operations in two of the inpatient facilities and three of the outpatient
facilities affected by the plan and merged them into the operations of the
acquired facilities. Accordingly, assets with a net book value of approximately
$17,911,000 were written off in 1994 against the reserves established at
December 31, 1993. The two inpatient facilities and three outpatient facilities
affected by the plan in 1994 had revenues of approximately $11,441,000,
$8,640,000 and $9,125,000 for the years ended December 31, 1992, 1993 and 1994,
respectively. These same facilities had net operating income (loss) before
income taxes of $(489,000), $(844,000) and $67,000 for the years ended December
31, 1992, 1993 and 1994, respectively. Operations at the remaining inpatient
facility and the remaining seven outpatient facilities identified in the plan
will be discontinued during 1995.
Second, $7,700,000 relates to the write-off of certain capitalized
development projects. These projects relate to planned facilities that, if
completed, would be in direct competition with certain of the acquired NME
facilities. These development projects were written off in 1994 against the
reserves established at December 31, 1993.
Finally, approximately $3,000,000 was accrued for costs of employee
separations, relocations and other direct costs related to the planned
consolidation of the affected operations. During the second quarter of 1994,
management revised its estimate of the cost of the employee separations and
relocations. The revised estimate calls for approximately 150 employees to be
affected by separations and approximately 400 to be affected by relocations.
Separation benefits under the revised plan range from one month's to one year's
compensation and total approximately $2,188,000. Relocation benefits are
estimated to be $2,000 per employee and total $800,000. An additional $350,000
has been provided for additional direct administrative costs associated with the
implementation of the plan, including outplacement services, travel and legal
fees. Accordingly, the total revised estimated cost of employee separations and
relocations is $3,338,000. The difference between the initial estimate and the
revised estimate was treated as a change in accounting estimate and charged to
operations in the second quarter of 1994.
F-17
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1994 - Continued
During the year ended 1994, a total of 208 employees were affected by
terminations and relocations at a cost of approximately $758,000. This cost is
the only cash expense included in the acquisition-related expense.
It is management's opinion that remaining accrual at December 31, 1994
of $23,669,000, is adequate to complete the plan of consolidation of the
affected operations.
Also at various dates during 1993, the Company acquired 27 separate
outpatient rehabilitation operations located throughout the United States. The
total consideration paid for these acquired outpatient rehabilitation operations
was approximately $23,943,000, consisting of $21,634,000 in cash and $2,309,000
in notes payable. The fair value of the net assets acquired was approximately
$5,196,000. The total cost of the 1993 outpatient rehabilitation acquisitions
exceeded the fair value of the net assets acquired by approximately $18,747,000.
The Company also acquired nine outpatient surgery center operations during 1993.
The total consideration paid for these acquired outpatient surgery center
operations was approximately $33,494,000, consisting of $26,901,000 in cash,
$5,639,000 in notes payable and common stock value at $954,000. The total cost
of the 1993 outpatient surgery acquisitions exceeded the fair value of the net
assets acquired by approximately $3,832,000. Based on the evaluation of each
acquisition, utilizing the criteria described above, the Company determined that
the cost in excess of net asset value of purchased facilities relating to the
1993 acquisitions should be amortized over a forty-year period on a straight
line basis. No other identifiable intangible assets were recorded in the
acquisitions described above.
Also during 1993, the Company acquired 100% of the stock of Rebound,
Inc. (Rebound) for net consideration of approximately $14,000,000 in cash.
Rebound operates 293 beds in thirteen facilities. The purchase price exceeded
the fair value of the net assets acquired by approximately $11,200,000, which
was allocated to excess of cost over net asset value of purchased facilities.
Effective February 1, 1992, the Company acquired substantially all of
the assets and/or stock of Dr. John T. Macdonald Health Systems, Inc. and
Subsidiaries (collectively, JTM Health Systems). JTM Health Systems includes two
general acute-care hospitals and other healthcare-related entities located in
the Miami, Florida metropolitan area. The total purchase price paid was
approximately $16,893,000 in cash.
Also in 1992 the Company acquired 100% of the stock of Renaissance
America, Inc. (Renaissance) for net consideration of approximately $5,996,000
consisting of $649,000 cash and $5,347,000 in the Company's Common Stock
(214,885 shares).
Also at various dates during 1992, the Company acquired 28 separate
outpatient rehabilitation operations located throughout the United States. The
combined purchase price of these acquired outpatient rehabilitation operations
was approximately $25,964,000. The Company also acquired 14 outpatient surgery
centers during 1992. The combined purchase price of these acquired surgery
center operations was approximately $50,014,000.
The fair value of the net assets acquired in 1992 was approximately
$38,330,000. The total cost of the 1992 acquisitions exceeded the fair value of
the assets acquired by approximately $60,537,000, which is being amortized over
a forty-year period on a straight line basis.
All of the 1993 and 1992 acquisitions described above were accounted
for as purchases and, accordingly, the results of operations of the acquired
businesses are included in the accompanying consolidated financial statements
from their respective dates of acquisition.
11. Income Taxes
HEALTHSOUTH and its subsidiaries file a consolidated federal income tax
return. The limited partnerships file separate income tax returns. HEALTHSOUTH's
allocable portion of each partnership's income or loss is included in the
taxable income of the Company. The remaining income or loss of each partnership
is allocated to the limited partners.
F-18
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1994 - Continued
Effective January 1, 1993, the Company changed its method of accounting
for income taxes to the liability method required by Financial Accounting
Standards Board (FASB) Statement No. 109, "Accounting for Income Taxes". The
cumulative effect of adopting Statement No. 109 was not material. Previously,
the Company had used the liability method as prescribed by FASB Statement No.
96.
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of December 31, 1993 are as
follows:
Current Noncurrent Total
(In thousands)
Deferred tax liabilities: .......................
Depreciation and amortization.................. $ -- $32,787 $32,787
Other.......................................... 340 255 595
Total deferred tax liabilities................... 340 33,042 33,382
Deferred tax assets: ............................
NME Selected Hospitals Acquisition related
expense........................................ -- 19,399 19,399
Other.......................................... 3,549 2,790 6,339
Total deferred tax assets........................ 3,549 22,189 25,738
Net deferred tax (assets) liabilities............ $(3,209) $10,853 $7,644
Significant components of the Company's deferred tax liabilities and
assets as of December 31, 1994 are as follows:
Current Noncurrent Total
(In thousands)
Deferred tax liabilities: .......................
Depreciation and amortization.................. $ -- $26,343 $26,343
Other.......................................... -- 385 385
Total deferred tax liabilities................... -- 26,728 26,728
Deferred tax assets: ............................
NME Selected Hospitals Acquisition related
expense........................................ -- 15,241 15,241
Other.......................................... 2,643 2,892 5,535
Total deferred tax assets........................ 2,643 18,133 20,776
Net deferred tax (assets) liabilities............ $ (2,643) $8,595 $ 5,952
The current portion of the Company's deferred tax assets is included
with prepaid expenses and other current assets on the accompanying balance
sheet.
F-19
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1994 - Continued
The provision for income taxes was as follows:
Year ended December 31
1992 1993 1994
(In thousands)
Currently payable: ........
Federal.................... $12,556 $15,616 $31,363
State...................... 1,772 2,101 4,634
-------- --------- --------
14,328 17,717 35,997
Deferred expense (benefit):
Federal.................... 4,041 (5,213) (1,414)
State...................... 495 (574) (278)
------- --------- --------
4,536 (5,787) (1,692)
------- --------- --------
Total provision............ $18,864 $11,930 $34,305
========= ========= ========
The components of the provision for deferred income taxes for the year
ended December 31, 1992 are as follows:
(In thousands)
Depreciation and
amortization................. $ 5,599
Bad debts.................... (1,119)
Other........................ 56
$ 4,536
The difference between the provision for income taxes and the amount
computed by applying the statutory federal income tax rate to income before
taxes was as follows:
Year ended December 31
1992 1993 1994
(In thousands)
Federal taxes at statutory rates.............. $19,733 $12,100 $31,734
Add (deduct):
State income taxes, net of federal tax
benefit..................................... 1,665 792 2,734
Tax-exempt interest income................... (1,076) (454) (276)
Other........................................ (1,458) (508) 113
------- ------ -----
$18,864 $11,930 $34,305
======== ======== ======
12. Commitments and Contingencies
At December 31, 1994, anticipated capital expenditures for the next
twelve months approximate $130,000,000. This amount includes expenditures for
the construction and equipping of additions to existing facilities, the
construction of two inpatient rehabilitation facilities for which regulatory
approval is being obtained and the acquisition or development of comprehensive
outpatient rehabilitation facilities.
Beginning December 1, 1993, the Company became self-insured for
professional liability and comprehensive general liability. The Company
purchased coverage for all claims incurred prior to December 1, 1993. In
addition, the Company purchased underlying insurance which would cover all
claims once established limits have been exceeded. It is the opinion of
management that at December 31, 1994 the Company has adequate reserves to cover
losses on asserted and unasserted claims.
F-20
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1994 - Continued
Operating leases
Operating leases generally consist of short-term lease agreements for
buildings where facilities are located. These leases generally have 5-year
terms, with one or more renewal options, with terms to be negotiated at the time
of renewal. Total rental expense for all operating leases was $17,777,000,
$29,373,000 and $66,056,000 for the years ended December 31, 1992, 1993 and
1994, respectively.
The following is a schedule of future minimum lease payments under all
operating leases having initial or remaining non-cancelable lease terms in
excess of one year:
Year ending December 31 (In thousands)
1995................................... $57,659
1996................................... 53,836
1997................................... 49,752
1998................................... 45,663
1999................................... 40,438
After 1999............................. 129,327
Total minimum payments required........ $376,675
13. Employee Benefit Plans
The Company has a 401(k) savings plan which matches 15% of the first 4%
of earnings that an employee contributes. All contributions are in the form of
cash. All employees who have completed one year of service with a minimum of
1,000 hours worked are eligible to participate in the plan. Company
contributions are gradually vested over a seven-year service period.
Contributions to the plan by the Company were approximately $521,000, $490,000
and $1,094,000 in 1992, 1993 and 1994, respectively.
In 1991, the Company established an Employee Stock Ownership Plan
(ESOP) for the purpose of providing substantially all employees of the Company
the opportunity to save for their retirement and acquire a proprietary interest
in the Company. The ESOP currently owns approximately 830,000 shares of the
Company's Common Stock, which were purchased with funds borrowed from the
Company, $10,000,000 in 1991 (the 1991 ESOP Loan) and $10,000,000 in 1992 (the
1992 ESOP Loan). At December 31, 1994, the combined ESOP Loans had a balance of
$17,477,000. The 1991 ESOP Loan, which bears an interest rate of 10%, is payable
in annual installments covering interest and principal over a ten-year period
beginning in 1992. The 1992 ESOP Loan, which bears an interest rate of 8.5%, is
payable in annual installments covering interest and principal over a ten-year
period beginning in 1993. Company contributions to the ESOP began in 1992 and
shall at least equal the amount required to make all ESOP Loan amortization
payments for each plan year. The Company recognizes compensation expense based
on the shares allocated method. The total compensation expense related to the
ESOP recognized by the Company was $1,701,000, $3,198,000 and $3,673,000 in
1992, 1993 and 1994, respectively. Interest incurred on the ESOP Loans was
approximately $964,000, $1,743,000 and $1,608,000 in 1992, 1993 and 1994,
respectively. Approximately 213,000 shares owned by the ESOP have been allocated
to participants at December 31, 1994.
During 1993 the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 93-6, "Employers Accounting for Employee
Stock Ownership Plans." Among other provisions, SOP 93-6 requires that
compensation expense relating to employee stock ownership plans be measured
based on the fair market value of the shares when allocated to the employees.
The provisions of SOP 93-6 apply only to leveraged ESOPs formed after December
31, 1992, or shares newly acquired
F-21
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1994 - Continued
by an existing leveraged ESOP after December 31, 1992. Because all shares owned
by the Company's ESOP were acquired prior to December 31, 1992, the Company's
accounting policies for the shares currently owned by the ESOP are not affected
by SOP 93-6.
14. Terminated Merger
On January 2, 1992, the Company and Continental Medical Systems, Inc.
("CMS") jointly announced an agreement to combine their business operations as
provided in an Agreement and Plan of Reorganization (the Plan). On May 6, 1992,
the Company and CMS jointly announced the termination of the Plan. Accordingly,
all costs and expenses incurred in connection with the Plan were charged to
operations in 1992 and reported as terminated merger expense in the accompanying
statements of income.
15. Sale of Assets and Partnership Interest
During the second quarter of 1994, the Company consummated the sale of
selected properties to Capstone Capital Corporation ("Capstone"), a real estate
investment trust. These properties include six ancillary hospital facilities,
three outpatient rehabilitation facilities, and one research facility. The net
proceeds to the Company as a result of this transaction were approximately
$49,025,000. The net book value of the properties was approximately $41,335,000.
Because the Company is leasing back substantially all of the properties from
Capstone, payments which aggregate $5.7 million annually, the resulting gain on
sale of approximately $7,690,000 has been recorded on the accompanying
consolidated balance sheet as deferred revenue and will be amortized into income
over the initial lease terms of the properties. The Company is accounting for
each of the new leases as an operating lease with an initial lease term of 15
years. The Company and certain Company officers own approximately 3.9% of the
outstanding common stock of Capstone.
In May 1993, the Company sold its 51% partnership interest in Coastal
Lithotripsy Associates, L.P. and the Associated Management Services contract for
net proceeds of approximately $3,163,000. The Company recognized a gain of
$1,400,000 from this sale.
16. Impairment of Long-Term Assets
During 1994, certain events have occurred impairing the value of
specific long-term assets of ReLife (see Note 2). A hospital in Missouri with a
distinct part unit which ReLife was managing was purchased in 1994 by an acute
care provider which terminated the contract with ReLife. Remaining goodwill of
$1,700,000 and costs allocated to the management contract of $1,300,000 were
written off as there is no value remaining for the terminated contract.
A ReLife facility in central Florida incurred tornado damage and has
not been operating since September 1993. During 1994, management of ReLife has
determined that it is probable that this facility will not reopen. Start-up
costs of $1,600,000 were written off. This facility is leased under an operating
lease as described in Note 12 through the year 2001. An impairment accrual has
been established based on the projected undiscounted net cash flows related to
this non-operating facility for the remainder of the lease term. The accrual
totals $5,900,000 and consists of $4,700,000 in lease payments and $1,200,000 in
fixed costs and operating expenses, including property taxes, maintenance,
security and other related costs. The current portion of the accrual
approximates $600,000 and is included with accrued interest payable and other
liabilities in the accompanying December 31, 1994 balance sheet. The remaining
long-term portion of the accrual is included with other long-term liabilities in
the accompanying December 31, 1994 balance sheet.
F-22
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1994 - Continued
During 1994, ReLife entered into a contract for a new information
system. During the period ended September 30, 1994, ReLife's expenditures
related to this contract totalled approximately $4,363,000. The system was not
operational during this period, thus those expenditures are considered
non-recurring. The Company will retain certain equipment with an approximate
cost of $750,000, which was included in the expenditures noted above. The
remainder of the expenditures, $3,613,000, is included in loss on abandonment of
the computer project. The Company has also established a reserve of
approximately $887,000 for settlement of the contract. The contract contains a
provision for cancellation by ReLife, without cause, upon at least 180 days'
prior written notice. The application of this termination provision could result
in a settlement of up to $6,500,000. The Company is currently in negotiations to
settle the contract and believes that it is probable that the settlement will be
for an amount approximately equal to the reserve established.
The above amounts are shown as operating expenses in the consolidated
statement of income.
17. Subsequent Events
Effective June 13, 1995, the Company merged with Surgical Health
Corporation in a transaction accounted for as a pooling of interests (see Note
2).
Effective April 1, 1995, the Company completed the acquisition of the
rehabilitation hospitals division of NovaCare, Inc. ("NovaCare"), consisting of
11 rehabilitation hospitals, 12 other facilities and certificates of need to
build two other facilities. The total purchase price for the NovaCare facilities
was approximately $235,000,000.
Effective April 17, 1995, the Company declared a two-for-one stock
split paid in the form of a 100% stock dividend. Accordingly, all share and per
share information have been restated to give effect to this transaction for all
periods presented.
Subsequent to December 31, 1994, the Company received a fully
underwritten commitment to amend and restate the 1994 Credit Agreement (see Note
7) which will increase the size of the facility to $1 billion.
F-23
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Balance Sheets
(In Thousands)
December 31, September 30,
1994 1995
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................ $ 68,735 $ 86,952
Other marketable securities .......................................... 16,628 6,217
Accounts receivable .................................................. 242,659 298,178
Inventories, prepaid expenses, and other current assets ............. 97,180 102,906
TOTAL CURRENT ASSETS .............................................. 425,202 494,253
OTHER ASSETS ........................................................... 43,074 58,127
DEFERRED INCOME TAXES .................................................. 0 7,559
PROPERTY, PLANT AND EQUIPMENT--NET ..................................... 857,372 1,049,375
INTANGIBLE ASSETS--NET ................................................. 410,688 541,366
TOTAL ASSETS ...................................................... $1,736,336 $ 2,150,680
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ..................................................... $ 87,153 $ 83,246
Salaries and wages payable ........................................... 34,102 44,668
Accrued interest payable and other liabilities ....................... 55,922 49,462
Current portion of long-term debt .................................... 16,698 17,720
TOTAL CURRENT LIABILITIES ......................................... 193,875 195,096
LONG-TERM DEBT ......................................................... 1,017,696 1,386,450
DEFERRED INCOME TAXES .................................................. 8,595 0
OTHER LONG-TERM LIABILITIES ............................................ 8,398 5,470
DEFERRED REVENUE ....................................................... 7,526 7,137
MINORITY INTERESTS--LIMITED PARTNERSHIPS ............................... 10,326 8,980
STOCKHOLDERS' EQUITY:
Preferred Stock, $.10 par value--1,500,000 shares authorized; issued
and outstanding--none ............................................... 0 0
Common Stock, $.01 par value--150,000,000 shares authorized;
95,391,000 and 76,991,000 shares issued at September 30, 1995 and
December 31, 1994, respectively ..................................... 770 954
Additional paid-in capital ........................................... 369,186 719,296
Retained earnings .................................................... 137,764 178,929
Common Stock subscriptions receivable ................................ 0 (335,423)
Treasury stock ....................................................... (323) (323)
Receivable from Employee Stock Ownership Plan ........................ (17,477) (15,886)
TOTAL STOCKHOLDERS' EQUITY ........................................ 489,920 547,547
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................ $1,736,336 $ 2,150,680
See accompanying notes.
F-24
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Statements of Income
(UNAUDITED--In Thousands, Except for Per Share Data)
Nine Months Ended
September 30,
1994 1995
Revenues ....................................................... $ 902,268 $1,109,689
Operating expenses:
Operating units .............................................. 670,607 788,593
Corporate general and administrative ......................... 29,831 28,463
Provision for doubtful accounts ................................ 16,691 20,520
Depreciation and amortization .................................. 59,142 86,767
Interest expense ............................................... 45,632 68,697
Interest income ................................................ (3,256) (4,529)
Merger costs ................................................... 3,571 29,194
Loss on impairment of assets ................................... 0 11,192
822,218 1,028,897
Income before income taxes and minority interests............... 80,050 80,792
Provision for income taxes ..................................... 30,418 27,525
Income before minority interests ............................... 49,632 53,267
Minority interests ............................................. (4,276) (8,357)
Net income ..................................................... $ 45,356 $ 44,910
Weighted average common and common equivalent shares
outstanding .................................................... 84,509 87,773
Net income per common and common equivalent share .............. $ 0.54 $ 0.51
Net income per common share -- assuming full dilution ......... N/A $ 0.51
See accompanying notes.
F-25
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(UNAUDITED--In Thousands)
Nine Months Ended
September 30,
1994 1995
OPERATING ACTIVITIES
Net income .................................................................. $ 45,356 $ 44,910
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ............................................. 59,142 86,767
Provision for doubtful accounts ........................................... 16,691 20,520
Income applicable to minority interests of limited partnerships .......... 4,276 8,357
Loss on impairment of assets .............................................. 0 11,192
Merger costs .............................................................. 3,571 29,194
Provision (benefit) for deferred income taxes.............................. 20,617 (15,347)
Provision for deferred revenue ............................................ (34) (389)
Changes in operating assets and liabilities, net of effects of cquisitions:
Accounts receivable ....................................................... (62,050) (26,796)
Inventories, prepaid expenses and other current assets .................... (964) 4,422
Accounts payable and accrued expenses ..................................... 20,876 (35,517)
NET CASH PROVIDED BY OPERATING ACTIVITIES ................................ 107,481 127,313
INVESTING ACTIVITIES
Purchases of property, plant and equipment .................................. (113,386) (98,658)
Proceeds from sale of property, plant and equipment ......................... 58,265 14,786
Additions to intangible assets, net of effects of acquisitions ............. (35,289) (53,898)
Assets obtained through acquisitions, net of liabilities assumed ........... (58,910) (304,499)
Changes in other assets ..................................................... (22,388) (4,070)
Proceeds received on sale of other marketable securities .................... 520 21,057
Investments in other marketable securities .................................. (1,000) (13,026)
NET CASH USED IN INVESTING ACTIVITIES .................................. (172,188) (438,308)
F-26
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(UNAUDITED--In Thousands)
Nine Months Ended
September 30,
1994 1995
FINANCING ACTIVITIES
Proceeds from borrowings ......................... 550,921 722,264
Principal payments on long-term debt and leases .. (505,760) (396,601)
Proceeds from exercise of options ................ 12,537 7,731
Proceeds from issuance of common stock .......... 9 0
Reduction in receivable from Employee Stock
Ownership Plan ................................... 1,455 1,591
Proceeds from investment by minority interests .. 1,546 0
Purchase of limited partnership interests ....... (1,512) 0
Payment of cash distributions to limited partners (8,425) (10,268)
NET CASH PROVIDED FROM
FINANCING ACTIVITIES .......................... 50,771 324,717
INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS ..................... (13,936) 13,722
Cash and cash equivalents at beginning of period 81,031 73,230
CASH AND CASH EQUIVALENTS
AT END OF PERIOD .............................. $ 67,095 $ 86,952
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION ............................
Cash paid during the year for:
Interest ....................................... $ 28,220 $ 60,238
Income taxes ................................... 26,917 44,355
Non-cash financing activities:
During 1995, the Company declared a two-for-one stock split on its
Common Stock, which was effected in the form of a 100% stock dividend.
The Company consummated the issuance of 14,950,000 shares of its Common
Stock effective September 27, 1995. The net proceeds of $335,423,000 were not
received until after the balance sheet date (see Note 12).
See accompanying notes.
F-27
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Nine Months Ended September 30, 1994 and 1995
NOTE 1--The accompanying consolidated financial statements include the
accounts of HEALTHSOUTH Corporation (the "Company") and its subsidiaries. This
information should be read in conjunction with the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994, as amended. It is
management's opinion that the accompanying consolidated financial statements
reflect all adjustments (which are normal recurring adjustments, except as
otherwise indicated) necessary for a fair presentation of the results for the
interim period and the comparable period presented.
NOTE 2--During 1994, the Company entered into a $550,000,000 revolving
line of credit with NationsBank, N.A. (Carolinas) ("NationsBank") and other
participating banks (the "1994 Credit Agreement"). On April 11, 1995, the
Company amended and restated the 1994 Credit Agreement with NationsBank to
increase the size of the credit facility to $1,000,000,000. At September 30,
1995, the Company had drawn $935,000,000 under the restated 1994 Credit
Agreement.
On March 24, 1994, the Company issued $250,000,000 principal amount of
9.5% Senior Subordinated Notes due 2001 (the "Notes"). Interest is payable on
April 1 and October 1. The Notes are senior subordinated obligations of the
Company and, as such, are subordinated to all existing and future senior
indebtedness of the Company. Also on March 24, 1994, the Company issued
$100,000,000 principal amount of 5% Convertible Subordinated Debentures due 2001
(the "Convertible Debentures"). An additional $15,000,000 principal amount of
Convertible Debentures was issued in April 1994 to cover underwriters'
overallotments. Interest is payable on April 1 and October 1. The Convertible
Debentures are convertible into Common Stock of the Company at the option of the
holder at a conversion price of $18.81 per share, subject to adjustment in
certain events. The net proceeds from the issuance of the Notes and Convertible
Debentures were used by the Company to pay down indebtedness outstanding under
its other existing credit facilities.
At December 31, 1994 and September 30, 1995, long-term debt consisted
of the following:
December 31, September 30,
1994 1995
(in thousands)
Advances under the $1,000,000,000
1994 Credit Agreement ......................... $ 510,000 $ 935,000
9.5% Senior Subordinated Notes due 2001 ....... 250,000 250,000
5% Convertible Subordinated Debentures due 2001 115,000 115,000
Other long-term debt ........................... 159,394 104,170
---------- ----------
1,034,394 1,404,170
Less amounts due within one year ............... 16,698 17,720
---------- ----------
$ 1,017,696 $ 1,386,450
========== ==========
NOTE 3--Effective December 29, 1994, the Company merged with ReLife,
Inc. ("ReLife") in a transaction that was accounted for as a pooling of
interests. Accordingly, the Company's historical financial statements for all
periods prior to the effective date of the merger have been restated to include
the results of ReLife. Prior to the merger, ReLife reported on a fiscal year
ending on September 30. The restated financial statements for all periods prior
to and including December 31, 1994 are based on a combination of the Company's
results for its December 31 fiscal year and ReLife's results for its September
30 fiscal year. Beginning January 1, 1995, all facilities acquired in the ReLife
merger adopted a December 31 fiscal year end; accordingly, all consolidated
financial statements for periods after December 31, 1994 are based on a
consolidation of all of the Company's subsidiaries on a December 31 year end.
ReLife's historical results of operations for the three months ended December
31, 1994 are not included in the Company's consolidated statements of income or
cash flows. An adjustment has been made to stockholders' equity as of January 1,
1995 to adjust for the effect of excluding ReLife's results of operations for
the three months ended December 31, 1994. The following is a summary of ReLife's
results of operations and cash flows for the three months ended December 31,
1994 (in thousands):
F-28
HEALTHSOUTH Corporation and Subsidiaries -
Notes to Consolidated Financial Statements (Unaudited)
Nine Months Ended September 30, 1994 and 1995 - (Continued)
Statement of Income Data:
Revenues ........................................ $ 38,174
Operating expenses:
Operating units ............................... 31,797
Corporate general and administrative .......... 2,395
Provision for doubtful accounts ................... 541
Depreciation and amortization ..................... 1,385
Interest expense .................................. 858
Interest Income ................................... (91)
HEALTHSOUTH merger expense ........................ 3,050
Loss on disposal of fixed assets .................. 1,000
Loss on abandonment of computer project .......... 973
----------
41,908
----------
Income before income taxes and minority
interests ....................................... (3,734)
Provision for income taxes ........................ --
----------
(3,734)
----------
Minority interests ................................ --
----------
Net income ........................................ $ (3,734)
==========
Statement of Cash Flow Data:
Net cash provided by operating activities ......... $ 38,077
Net cash used by investing activities ............. (9,632)
Net cash used in financing activities ............. (23,950)
-----------
Net increase in cash .............................. $ 4,495
===========
NOTE 4--Effective June 13, 1995, the Company merged with Surgical
Health Corporation ("SHC") and in connection therewith issued 8,531,480 shares
of its Common Stock for all of SHC's outstanding common and preferred stock. SHC
operated a network of 41 freestanding surgery centers (including four mobile
lithotripters) in eleven states, with an aggregate of 156 operating and
procedure rooms.
The merger was accounted for as a pooling of interests and,
accordingly, the Company's financial statements have been restated to include
the results of SHC for all periods presented. Costs and expenses of $29,194,000
incurred by the Company in connection with the merger have been recorded in
operations during the quarter ending June 30, 1995 and reported as Merger Costs
in the accompanying consolidated statements of income (see Note 8).
There were no material transactions between the Company and SHC prior
to the merger. The effects of conforming the accounting policies of the two
companies are not material.
NOTE 5--Effective April 1, 1995, the Company completed the acquisition
of the rehabilitation hospitals division of NovaCare, Inc. ("NovaCare"),
consisting of 11 rehabilitation hospitals, 12 other facilities, and certificates
of need to build two other facilities. The total purchase price for the NovaCare
facilities was approximately $235,000,000. The cost in excess of net asset value
was approximately $173,000,000. Of this excess, approximately $129,000,000 has
been allocated to leasehold value and the remaining $44,000,000 to goodwill.
During the first nine months of 1995, the Company acquired 44
outpatient facilities and one outpatient surgery center. The total purchase
price of the acquired facilities was approximately $75,619,000. The Company also
entered into non-compete agreements totaling approximately $8,172,000 in connec-
F-29
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Nine Months Ended September 30, 1994 and 1995 - (Continued)
tion with these transactions. The cost in excess of the acquired facilities' net
asset value was approximately $55,716,000. The results of operations (not
material individually or in the aggregate) of these acquisitions are included in
the consolidated financial statements from their respective acquisition dates.
NOTE 6--During the first nine months of 1995, the Company granted
incentive and nonqualified stock options to certain Directors, employees and
others for 2,904,000 shares of Common Stock at exercise prices ranging from
$17.00 to $19.25 per share.
NOTE 7--Effective April 17, 1995, the Company declared a two-for-one
stock split paid in the form of a 100% stock dividend. Accordingly, all share
and per share information have been restated to give effect to this transaction
for all periods presented.
NOTE 8--As a result of the NovaCare and SHC acquisitions, the Company
recognized $29,194,000 in merger costs during 1995. Fees related to legal,
accounting and financial advisory services accounted for $3,400,000 of the
expense. Costs and expenses related to the SHC Bond Tender Offer (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources") totaled $14,606,000. Accruals for
employee separations were approximately $1,188,000. In addition, the Company has
provided approximately $10,000,000 for the write-down of certain assets to net
realizable value as the result of a planned facility consolidation. The
consolidation is applicable in a market where the Company's existing services
overlap with those of an acquired facility.
During the second quarter of 1995, the Company recognized an
$11,192,000 loss on impairment of assets. The impaired assets relate to six SHC
facilities in which the projected undiscounted cash flows did not support the
book value of the long-lived assets of such facilities.
NOTE 9--On August 24, 1995, the Company signed an agreement to merge
with Sutter Surgery Centers, Inc. ("Sutter") in a transaction to be accounted
for as a pooling of interests. Sutter operates 12 surgery centers located in
three states. Under the terms of the agreement, all shares of common stock of
Sutter were to be exchanged for shares of the Company's Common Stock pursuant to
an exchange ratio that, at the time of the agreement, was projected to yield an
aggregate value of approximately $38,000,000 to Sutter stockholders. The
transaction was completed in the fourth quarter of 1995.
NOTE 10--On October 9, 1995, the Company signed an agreement to acquire
Surgical Care Affiliates, Inc. ("SCA") in a transaction to be accounted for as a
pooling of interests. SCA operates 67 surgery centers (with an additional 10
under development or construction) in 24 states. Under the terms of the
agreement, all shares of common stock of SCA will be exchanged for shares of the
Company's Common Stock pursuant to an exchange ratio that will yield an
aggregate value of approximately $1,200,000,000 to SCA stockholders. The
transaction is subject to certain regulatory and governmental reviews, and to
approval by the stockholders of both companies. The transaction is expected to
be completed in early 1996.
NOTE 11--On October 16, 1995, the Company entered into a definitive
agreement to purchase Caremark Orthopedic Services Inc., consisting of
approximately 120 outpatient rehabilitation centers in 13 states. The purchase
price will be approximately $127,500,000 in cash. The transaction is currently
expected to be completed by year-end 1995.
NOTE 12--The Company filed a Registration Statement on Form S-3 with
the Securities and Exchange Commission in connection with a public offering
which became effective on September 27, 1995. The Company consummated the issue
of Common Stock for 14,950,000 shares on October 3, 1995. Net proceeds of the
stock issue, after deducting underwriting discounts, commissions and offering
costs were approximately $335,423,000, of which $319,000,000 was used to reduce
outstanding indebtedness under the Company's existing credit facilities. The net
proceeds of the issuance and sale of the 14,950,000 shares are included in the
accompanying September 30, 1995 balance sheet as Common Stock and additional
paid-in capital, with the Common Stock subscription receivable as a
corresponding reduction in Stockholders' Equity.
F-30
ANNEX A
PLAN AND AGREEMENT OF MERGER
PLAN AND AGREEMENT OF MERGER (the "Plan of Merger"), made and entered
into as of the 9th day of October, 1995, by and among HEALTHSOUTH Corporation, a
Delaware corporation ("HEALTHSOUTH"), CATS ACQUISITION CORPORATION, a Delaware
corporation (the "Subsidiary"), and SURGICAL CARE AFFILIATES, INC., a Delaware
corporation ("SCA") (the Subsidiary and SCA 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 SCA have approved the merger of the Subsidiary with and into SCA
(the "Merger"), upon the terms and conditions set forth in this Plan of Merger,
whereby all shares of Common Stock, par value $.25 per share, of SCA (the "SCA
Common Stock"), not owned directly or indirectly by SCA, will be converted into
the right to receive the Merger Consideration (as hereinafter defined);
WHEREAS, each of HEALTHSOUTH, the Subsidiary and SCA 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; 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 SCA at the Effective Time
(as defined in Section 1.3). Following the Effective Time, the separate
corporate existence of the Subsidiary shall cease and SCA shall continue as the
surviving corporation (the "Surviving Corporation") under the name "SCA, Inc."
and shall succeed to and assume all the rights and obligations of the Subsidiary
and SCA 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)), at the offices of Haskell Slaughter Young & Johnston,
Professional Association, 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 SCA 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 SCA 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 SCA Common Stock that
is owned by SCA or by any subsidiary of SCA 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 SCA Shares. Subject to Section 2.2(d), each issued
and outstanding share of SCA Common Stock (other than shares to be canceled in
accordance with Section 2.1(b)) (collectively, the "Exchanging SCA Shares")
shall be converted into the right to receive 1.22 (the "Exchange Ratio") shares
of HEALTHSOUTH Common Stock, as may be adjusted as provided below (the "Merger
Consideration"); provided, however, that if the Base Period Trading Price (as
defined below) shall be greater than $28.00, then the Exchange Ratio shall be
equal to the quotient obtained by dividing $34.16 by the Base Period Trading
Price, computed to four decimal places, and the Merger Consideration shall be
adjusted accordingly; and provided further, however, that if the Base Period
Trading Price shall be less than $22.00, then the Exchange Ratio shall be equal
to the quotient obtained by dividing $26.84 by the Base Period Trading Price,
computed to four decimal places, and the Merger Consideration shall be adjusted
accordingly; provided further, however, that the Exchange Ratio shall in no
event (other than an adjustment pursuant to Section 2.1(e) or Section 8.7) be
greater than the quotient obtained by dividing $26.84 by $20.00, computed to
four decimal places. For purposes of this Plan of Merger, the term "Base Period
Trading Price" shall mean the average 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 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 New York Stock Exchange trading day
immediately preceding the Closing Date (such period being herein called the
"Base Period"). As of the Effective Time, all such Exchanging SCA 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 SCA 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 and Warrants. At the Effective Time, all rights with
respect to SCA Common Stock pursuant to any SCA stock options or SCA warrants
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 SCA stock option or SCA warrant, in
accordance with the terms of any stock option plan under which it was issued and
any stock option agreement or warrant agreement, as the case may be, by which it
is evidenced. It is intended that the foregoing provisions shall be undertaken
in a manner that will not constitute a "modification" as defined in Section 425
of the Code, as to any stock option which is an "incentive stock option". Each
SCA stock option or warrant so assumed shall be exercisable for that number of
shares of HEALTHSOUTH Common Stock equal to the number of SCA shares subject
thereto multiplied by the Exchange Ratio, and shall have an exercise price per
share equal to the SCA exercise price divided by the Exchange Ratio. All options
issued pursuant to SCA's Incentive Stock Plan of 1986 and 1990 Non-Qualified
Stock Option Plan for Non-Employee Directors, as amended, shall be fully vested
at the Effective Time to the extent permitted under such Plans.
A-2
(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 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, reclassification, merger, consolidation,
reorganization or similar transaction) then (i) the amounts $28.00, $22.00 and
$20.00 referred to in Section 2.1(c) and the amount $20.00 referred to in
Section 8.1(f), 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 during or
after the Base Period and prior to the Effective Time, then the number of shares
of HEALTHSOUTH Common Stock to be issued upon conversion of a share of SCA
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
provides that HEALTHSOUTH shall deposit with the Exchange Agent as of the
Effective Time, for the benefit of the holders of Exchanging SCA 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 SCA Common Stock.
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, the Surviving Corporation shall cause the Exchange Agent shall
mail to each holder of record of a certificate or certificates which immediately
prior to the Effective Time represented outstanding shares of SCA 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 SCA and
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 SCA Common
Stock which is not registered in the transfer records of SCA, a certificate
representing the proper number of shares of HEALTHSOUTH Common Stock may be
issued to a person other than the person in whose name the Certificate so
surrendered is registered, if such Certificate shall be properly endorsed or
otherwise be in proper form for transfer and the person requesting such payment
shall pay any transfer or other taxes required by reason of the issuance of
shares of HEALTHSOUTH Common Stock to a person other than the registered holder
of such Certificate or establish to the satisfaction of HEALTHSOUTH that such
tax has been paid or is not applicable. 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 SCA 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 SCA
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.
A-3
(c) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions with respect to HEALTHSOUTH Common Stock with a record date
after the Effective Time of the Merger shall be paid to the holder of any
unsurrendered Certificate with respect to the shares of HEALTHSOUTH Common Stock
represented thereby and no cash payment in lieu of fractional shares shall be
paid to any such holder pursuant to Section 2.2(e) until 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 SCA 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 SCA 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 SCA 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 Base Period Trading Price.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund
which remains undistributed to the holders of the Certificates for six months
after the Effective Time shall be delivered to HEALTHSOUTH, upon demand, and any
holders of the Certificates who have not theretofore complied with this Section
2 shall thereafter look only to HEALTHSOUTH for payment of HEALTHSOUTH Common
Stock, any cash in lieu of fractional shares of HEALTHSOUTH Common Stock and any
dividends or distributions with respect to HEALTHSOUTH Common Stock.
(g) No Liability. None of HEALTHSOUTH, the Subsidiary, SCA 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.
A-4
2.3 Certificate of Incorporation of Surviving Corporation. The
Certificate of Incorporation of SCA shall be amended and restated, effective at
the Effective Time, in a manner satisfactory to HEALTHSOUTH. The Certificate of
Incorporation of SCA, 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 SCA 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 SCA
shall be taken up on the books of the Surviving Corporation at the amounts at
which they respectively shall be carried on the books of said corporations
immediately prior to the Effective Time, except as otherwise set forth in the
Plan of Merger and subject to such adjustments, or elimination of intercompany
items, as may be appropriate in giving effect to the Merger in accordance with
generally accepted accounting principles.
2.7 Corporate Acts of the Subsidiary. All corporate acts, plans,
policies, approvals and authorizations of the Subsidiary, its sole stockholder,
its Board of Directors, committees elected or appointed by the Board of
Directors, and all officers and agents, valid immediately prior to the Effective
Time, shall be those of the Surviving Corporation and shall be as effective and
binding thereon as they were with respect to the Subsidiary. 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 SCA.
SCA hereby represents and warrants to HEALTHSOUTH and the Subsidiary as
follows:
3.1 Organization, Existence and Good Standing. SCA is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware. SCA has all necessary corporate power to own its properties
and assets and to carry on its business as presently conducted. SCA 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 SCA within such
time owned, directly or indirectly, any shares of HEALTHSOUTH Common Stock or
Subsidiary Common Stock.
3.2 SCA Capital Stock. SCA's authorized capital consists of 100,000,000
shares of SCA Common Stock, par value $.25 per share, of which 38,993,892 shares
were issued and outstanding, as of September 30, 1995, and 472,400 of which
shares are issued and held as treasury shares. All of the issued and outstanding
shares of SCA 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 SCA to HEALTHSOUTH simultaneously with the execution and delivery
hereof (the "Disclosure Schedule") or otherwise disclosed in the SCA Quarterly
Report on Form 10-Q for the three months ended June 30, 1995 (the "SCA June
10-Q") (as hereinafter defined), there are no options, warrants, or similar
rights granted by SCA or any other agreements to which SCA is a party providing
for the issuance or sale by it of any additional securities which would remain
in effect after the Effective Time, other than those reflected in the SCA June
10-Q. There is no liability for dividends declared or accumulated but unpaid
with respect to any of the shares of SCA Common Stock. SCA has not made any
distributions to any holders of SCA Common Stock or participated in or effected
any issuance, exchange or retirement of shares of SCA Common Stock, or otherwise
changed the equity interests of holders of SCA Common Stock, in contemplation of
effecting the Merger within the two years immediately preceding the date of this
Plan of Merger. Any
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shares of SCA Common Stock that SCA 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", as such term is defined in
Accounting Principles Board Opinion No. 16, as amended ("Business
Combinations").
3.3 Subsidiaries and Affiliated Partnerships. (a) Attached to the
Disclosure Schedule as Exhibit 3.3 is a list of all subsidiaries of SCA
(individually, a "SCA Subsidiary", and collectively, the "SCA Subsidiaries") and
their states of incorporation. Except as set forth on Exhibit 3.3, SCA does not
own stock in and does not control, directly or indirectly, any other
corporation, association or business organization other than the SCA 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 SCA, a SCA Subsidiary or another SCA
Partnership (individually, a "SCA Partnership" and collectively, the "SCA
Partnerships"), and all limited liability companies in which SCA, a SCA
Subsidiary or a SCA Partnership is a member (individually, a "SCA LLC" and
collectively, the "SCA LLCs") (the SCA Partnerships and the SCA LLCs being
collectively called the "SCA Other Entities"), and their states of organization.
Except as set forth on Exhibit 3.3, neither SCA nor any SCA 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 SCA Subsidiaries and
SCA Other Entities. (a) Each SCA Subsidiary is a corporation duly organized,
validly existing and in good standing under the laws of its respective state of
incorporation. Each SCA Subsidiary has all necessary corporate power to own its
properties and assets and to carry on its business as presently conducted.
(b) Each SCA Partnership that is a limited partnership is validly
formed, each SCA Partnership that is a general partnership has been duly
organized, and each SCA Partnership is in good standing under the laws of its
respective state of organization. Each SCA Partnership has all necessary power
to own its property and assets and to carry on its business as presently
conducted.
(c) Each SCA LLC is a limited liability company validly formed and in
good standing under the laws of its respective state of organization. Each SCA
LLC has all necessary power to own its property and assets to carry on its
business as presently conducted.
3.5 Foreign Qualifications. SCA, each SCA Subsidiary and each SCA 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 would not have a material adverse effect
on SCA.
3.6 Power and Authority. Subject to the satisfaction of the conditions
precedent set forth herein, SCA has the corporate power to execute, deliver and
perform the Plan of Merger and all agreements and other documents executed and
delivered or to be executed and delivered by it pursuant to the 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 the Plan of
Merger and such related documents. Except as set forth on Exhibit 3.6, the
execution and delivery of the 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 SCA or any
provisions of, or result in the acceleration of any obligation under, any
material mortgage, lien, lease, agreement, instrument, order, arbitration award,
judgment or decree, to which SCA or any SCA Subsidiary or SCA Partnership 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 SCA. The execution and delivery of this Agreement has been approved by
the Board of Directors of SCA. This Agreement has been duly executed and
delivered by SCA and, assuming this Agreement constitutes a valid and binding
obligation of HEALTHSOUTH and the Subsidiary, as the case may be, constitutes a
valid and binding obligation of SCA, enforceable against SCA in accordance with
its terms.
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3.7 SCA Public Information. SCA 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 "SCA Documents") since January 1, 1994, which
are all the documents (other than preliminary material) that it was required to
file with the SEC since such date. As of their respective dates, the SCA
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 SCA Documents complied in all
material respects with the applicable requirements of the Securities Act of
1933, as amended, and the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated under such statutes. The financial statements
contained in the SCA 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 SCA
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 SCA at said dates and the consolidated results of operations and
cash flows of SCA for the periods then ended. The consolidated balance sheet of
SCA at June 30, 1995 included in the SCA Documents is herein sometimes referred
to as the "SCA Balance Sheet".
3.8 [Intentionally omitted.]
3.9 Legal Proceedings. Except as disclosed in the SCA June 10-Q or on
Exhibit 3.9 to the Disclosure Schedule, there is no material litigation,
governmental investigation or other proceeding pending or, so far as is known to
SCA, threatened against or relating to SCA, its properties or business, or the
transaction contemplated by the Plan of Merger and, so far as is known to SCA,
no basis for any such action exists. 3.10 Contracts, etc. (a) All material
contracts, leases, agreements and arrangements to which SCA or any of the SCA
Subsidiaries or SCA Partnerships is a party are legally valid and binding in
accordance with their terms and in full force and effect. All parties to such
contracts, leases, agreements and arrangements have complied with the provisions
of such contracts, leases, agreements and arrangements, and, to the knowledge of
SCA, 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
hereunder, except, in each case, where the invalidity of the lease, contract,
agreement or arrangement or the default or breach thereunder or thereof would
not, individually or in the aggregate, have a material adverse effect on SCA.
(b) Except as set forth on Exhibit 3.10 to the Disclosure Schedule, no
contract or agreement to which SCA or any SCA Subsidiary or SCA Partnership is a
party will, by its terms, terminate as a result of the transactions contemplated
hereby or require any consent from any obligor thereto in order to remain in
full force and effect immediately after the Effective Time, except for contracts
or agreements which, if terminated, would not have a material adverse effect on
SCA.
(c) Except as set forth on Exhibit 3.10 to the Disclosure Schedule,
none of SCA, any SCA Subsidiary or any SCA Partnership has granted any right of
first refusal or similar right in favor of any third party with respect to any
material portion of its properties or assets or entered into any non-competition
agreement or similar agreement restricting its ability to engage in any business
in any location.
3.11 Subsequent Events. Except as set forth on Exhibit 3.11 to the
Disclosure Schedule or disclosed in the SCA June 10-Q, SCA has not, since the
date of the SCA June 10-Q:
(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 SCA Balance
Sheet or (ii) liabilities incurred since the date of the SCA June 10-Q in the
ordinary course of business, which discharge or satisfaction would have a
material adverse effect on SCA.
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(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 SCA, except as may have been required due to income
or operations of SCA since the date of the SCA June 10-Q.
(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 SCA.
(e) Sold or transferred any of the assets material to the consolidated
business of SCA, cancelled 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 SCA
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 SCA or warrants granted to third
parties, all of which are disclosed on Exhibit 3.2 to the Disclosure Schedule or
in the SCA Documents.
3.12 Accounts Receivable. (a) Since the date of the SCA June 10-Q, SCA
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. SCA
(including the SCA Subsidiaries and SCA Partnerships) 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 SCA.
(b) Without limiting the generality of the foregoing, SCA and each SCA
Subsidiary or SCA Partnership 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 SCA.
3.13 Tax Returns. SCA 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 SCA. SCA has
made all payments shown as due on such returns. SCA has not been notified that
any tax returns of SCA are currently under audit by the Internal Revenue Service
or any state or local tax agency. No agreements have been made by SCA for the
extension of time or the waiver of the statute of limitations for the assessment
or payment of any federal, state or local taxes.
3.14 Commissions and Fees. Except for fees payable to Bear, Stearns &
Co. Inc. ("Bear, Stearns"), 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 SCA or its stockholders, officers or
Directors, or any of them.
3.15 Employee Benefit Plans; Employment Matters. (a) Except as
described in the SCA Documents or set forth on Exhibit 3.15(a) to the Disclosure
Schedule, SCA 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
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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 SCA
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. SCA 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 SCA Documents or set forth on Exhibit
3.15(b) to the Disclosure Schedule, SCA 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 $100,000, or (iii) agreement or plan,
including any stock option plan, stock appreciation rights plan, restricted
stock plan or stock purchase plan, any of the benefits of which will be
increased, or the vesting the benefits of which will be accelerated, by the
occurrence of any of the transactions contemplated by this Plan of Merger or the
value of any of the benefits of which will be calculated on the basis of any of
the transactions contemplated by this Plan of Merger.
3.16 Compliance with Laws in General. Except as set forth on Exhibit
3.16 to the Disclosure Schedule or disclosed in the SCA Documents, SCA 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 SCA which, if it were determined
that a violation had occurred, would have a material adverse effect on SCA.
3.17 Licenses, Accreditation and Regulatory Approvals. SCA and the SCA
Subsidiaries and SCA 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 SCA, the SCA
Subsidiaries and the SCA Other Entities in the aggregate. All such Licenses are
in full force and effect, and SCA is in compliance in all material respects with
all conditions and requirements of the Licenses and with all rules and
regulations relating thereto. SCA, the SCA Subsidiaries and the SCA 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 for such noncompliance as does not
have a material adverse effect on SCA, the SCA Subsidiaries and the SCA Other
Entities in the aggregate. SCA, the SCA Subsidiaries and the SCA Other Entities
have timely filed all requisite claims and other reports required to be filed in
connection with the Medicare, Medicaid and other governmental health programs
due on or before the date hereof, all of which were, when filed, complete and
correct in all material respects. There are no current claims, actions or
appeals pending, and neither SCA nor the SCA Subsidiaries, nor the SCA Other
Entities have filed any claims or reports which should 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 could have a material adverse effect on SCA, the SCA Subsidiaries
and the SCA Other Entities in the aggregate. The amounts established as
provisions for adjustments by Medicare, Medicaid and other third-party payors on
the financial statements set forth in the SCA June 10-Q are sufficient to pay
any amounts for which SCA may be liable. To the best knowledge of SCA, neither
SCA nor the SCA Subsidiaries nor the SCA Other
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Entities nor their respective employees have committed a violation of the
Medicare and Medicaid fraud and abuse provisions of the Social Security Act.
Except as disclosed in the SCA Documents, any and all past litigation concerning
such licenses, certificates of need and regulatory approvals, and all claims and
causes of action raised therein, has been finally adjudicated. No such license,
certificate of need or regulatory approval has been revoked, conditioned (except
as may be customary) or restricted, and, except as disclosed in the SCA
Documents, no action (equitable, legal or administrative), arbitration or other
process is pending, or to the best knowledge of SCA, threatened, which in any
way challenges the validly of, or seeks to revoke, condition or restrict any
such license, certificate of need, or regulatory approval. Subject to compliance
with applicable securities laws, the Hart Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"), and state or local statutes, rules or
regulations requiring notice, approval, or other action upon the occurrence of a
change in control of SCA or any of the SCA Subsidiaries, the consummation of the
Merger will not violate any law or regulation to which SCA is subject which, if
violated, would have a material adverse effect on SCA.
3.18 Retirement or Re-Acquisition of HEALTHSOUTH Common Stock. SCA is not
a party to any agreement the effect of which would be to require HEALTHSOUTH
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.
3.19 Disposition of Assets of Surviving Corporation. SCA is not a party
to any plan to dispose of a significant part of the assets of the Surviving
Corporation within two years after the Closing Date, other than dispositions in
the ordinary course of business of the Surviving Corporation and dispositions
intended to eliminate duplicate facilities or excess capacity.
3.20 Vote Required. The affirmative vote of the holders of a majority
of the outstanding shares of the SCA Common Stock entitled to vote thereon is
the only vote of the holders of any class or series of SCA capital stock
necessary to approve this Plan of Merger, the Merger and the transactions
contemplated hereby.
3.21 Opinion of Financial Advisor. SCA has received the oral opinion of
Bear, Stearns to the effect that, as of the date of this Agreement, the Merger
Consideration is fair to the holders of SCA Shares from a financial point of
view, a written copy of which opinion will be delivered by SCA to HEALTHSOUTH
prior to the date on which the definitive proxy materials for the Proxy
Statement (as defined in Section 7.4(a)) are filed with the SEC.
3.22 No Untrue Representations. No representation or warranty by SCA in
this Plan of Merger, and no Exhibit or certificate issued by SCA and furnished
or to be furnished to HEALTHSOUTH pursuant hereto, or in connection with the
transactions contemplated hereby, contains or will contain any untrue statement
of a material fact in response to the disclosure requested, or omits or will
omit to state a material fact necessary to make the statements or facts
contained therein in response to the disclosure requested not misleading in
light of all of the circumstances then prevailing.
Section 4. Representations and Warranties of the Subsidiary and HEALTHSOUTH.
The Subsidiary and HEALTHSOUTH, jointly and severally, hereby represent
and warrant to SCA as follows:
4.1 Organization, Existence and Capital Stock. The Subsidiary is a
corporation duly organized and validly existing and is in good standing under
the laws of the State of Delaware. The Subsidiary's authorized capital consists
of 1,000 shares of Common Stock, par value $.01 per share, all of which shares
are issued and registered in the name of HEALTHSOUTH. The Subsidiary has not,
within the two years immediately preceding the date of this Plan of Merger,
owned, directly or indirectly, any shares of SCA Common Stock.
4.2 Power and Authority. The Subsidiary has corporate power to execute,
deliver and perform the Plan of Merger and all agreements and other documents
executed and delivered, or to be executed and delivered, by it pursuant to the
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
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otherwise, to authorize the execution and delivery of the Plan of Merger and
such related documents. The execution and delivery of the Plan of Merger does
not and, subject to the receipt of required stockholder and regulatory approvals
and any other required third-party consents or approvals, the consummation of
the Merger contemplated hereby will not, violate any provisions of the
Certificate of Incorporation or Bylaws of the Subsidiary, or any agreement,
instrument, order, judgment or decree to which the Subsidiary is a party or by
which it is bound, violate any restrictions of any kind to which the Subsidiary
is subject, or result in the creation of any lien, charge or encumbrance upon
any of the property or assets of the Subsidiary.
4.3 Commissions and Fees. Except for fees owed to Smith Barney Inc.
("Smith Barney"), there are no claims for brokerage commissions, investment
bankers' fees or finder's fees in connection with the transaction contemplated
by the Plan of Merger resulting from any action taken by the Subsidiary or any
of its officers, Directors or agents.
4.4 No Subsidiaries. The Subsidiary does not own stock in, and does not
control directly or indirectly, any other corporation, association or business
organization. The Subsidiary is not a party to any joint venture or partnership.
4.5 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.
4.6 No Contracts or Liabilities. Other than the obligations created
under the 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 SCA 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 SCA Common Stock.
5.2 Power and Authority. HEALTHSOUTH has corporate power to execute,
deliver and perform the Plan of Merger and all agreements and other documents
executed and delivered, or to be executed and delivered, by it pursuant to the
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 the Plan of Merger and such related documents. The execution and delivery of
the Plan of Merger does not and, subject to the receipt of required stockholder
and regulatory approvals and any other required third-party consents or
approvals, the consummation of the Merger contemplated hereby will not, violate
any provisions of 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 which HEALTHSOUTH is subject. The execution and
delivery of this Agreement has been approved by the Board of Directors of
HEALTHSOUTH. This Agreement has been duly executed and delivered by HEALTHSOUTH
and the Subsidiary and, assuming this Agreement constitutes a valid and binding
obligation of SCA, constitutes a valid and binding obligation of HEALTHSOUTH and
the Subsidiary, enforceable against HEALTHSOUTH and the Subsidiary in accordance
with its terms.
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5.3 HEALTHSOUTH Common Stock. Subject to stockholder approval of an
increase in the authorized number of shares of HEALTHSOUTH Common Stock, on the
Closing Date, HEALTHSOUTH will have a sufficient number of authorized but
unissued and/or treasury shares of its Common Stock available for issuance to
the holders of SCA Shares in accordance with the provisions of the Plan of
Merger. The HEALTHSOUTH Common Stock to be issued pursuant to the Plan of Merger
will, when so delivered, be (i) duly and validly issued, fully paid and
nonassessable, (ii) issued pursuant to an effective registration statement under
the Securities Act of 1933, as amended, and (iii) authorized for listing on the
New York Stock Exchange, Inc. (the "Exchange") upon official notice of issuance.
5.4 Capitalization. HEALTHSOUTH's authorized capital stock consists of
1,500,000 shares of Preferred Stock, par value $.10 per share, of which no
shares are issued and outstanding, and no shares are held in treasury, and
150,000,000 shares of Common Stock, par value $.01 per share, of which
93,466,441 shares are issued and outstanding, and 182,000 shares are held in
treasury. All of the issued and outstanding shares of HEALTHSOUTH Common Stock
have been duly and validly issued and are fully paid and non-assessable. Except
as disclosed in the HEALTHSOUTH Registration Statement on Form S-3 (Registration
No. 33-62475), declared effective by the SEC on September 27, 1995 (the
"HEALTHSOUTH September S-3"), 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. There is no liability for dividends declared or
accumulated but unpaid 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, all of the issued and outstanding shares of Subsidiary Common Stock,
which are validly issued and outstanding, fully paid and nonassessable, free and
clear of all liens and encumbrances. HEALTHSOUTH has the corporate power to
endorse and surrender such Subsidiary Shares for cancellation pursuant to the
Plan of Merger. HEALTHSOUTH has taken all such actions as may be required in its
capacity as the sole stockholder of the Subsidiary to approve the Merger.
5.6 HEALTHSOUTH Documents. HEALTHSOUTH has heretofore furnished SCA
with a true and complete copy of each report, schedule, registration statement
and definitive proxy statement filed by it with the SEC (as any such documents
have since the time of their original filing been amended, the "HEALTHSOUTH
Documents") since January 1, 1994, which are all the documents (other than
preliminary material) that it was required to file with the SEC since such date.
As of their respective dates, the HEALTHSOUTH Documents did not contain any
untrue statements of material facts or omit to state material facts required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. As of their respective
dates, the HEALTHSOUTH Documents complied in all material respects with the
applicable requirements of the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated under such statutes. The financial statements contained in the
HEALTHSOUTH Documents, together with the notes thereto, have been prepared in
accordance with generally accepted accounting principles consistently followed
throughout the periods indicated (except as may be indicated in the notes
thereto, or, in the case of the unaudited financial statements, as permitted by
Form 10-Q), reflect all known liabilities of HEALTHSOUTH required to be stated
therein, including all known contingent liabilities as of the end of each period
reflected therein, and present fairly the financial condition of HEALTHSOUTH at
said dates and the consolidated results of operations and cash flows of
HEALTHSOUTH for the periods then ended.
5.7 Investment Intent. HEALTHSOUTH is acquiring the shares of SCA
Common Stock hereunder for its own account and not with a view to the
distribution or sale thereof, and HEALTHSOUTH
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has no understanding, agreement or arrangement to sell, distribute, partition or
otherwise transfer or assign all or any part of the shares of SCA Common Stock
to any other person, firm or corporation.
5.8 Commissions and Fees. Except for fees owed to Smith Barney, there
are no claims for brokerage commissions, investment bankers' fees or finder's
fees in connection with the transactions contemplated by the Plan of Merger
resulting from any action taken by HEALTHSOUTH or any of its officers, Directors
or agents.
5.9 Legal Proceedings. Except as disclosed in the HEALTHSOUTH September
S-3, 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 the Plan of Merger and, so far as is known to HEALTHSOUTH, no
basis for any such action exists.
5.10 No Violations. Subject to compliance with applicable securities
laws and the HSR Act, the consummation of the Merger will not violate any law or
restriction to which HEALTHSOUTH is subject.
5.11 Contracts, etc. (a) All material contracts, leases, agreements and
arrangements to which HEALTHSOUTH or any of its subsidiaries or affiliated
partnerships is a party are legally valid and binding in accordance with their
terms and in full force and effect. All parties to such contracts, leases,
agreements and arrangements have complied with the provisions of such contracts,
leases, agreements and arrangements, and, to the knowledge of HEALTHSOUTH, 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
hereunder, except, in each case, where the invalidity of the lease, contract,
agreement or arrangement or the default or breach thereunder or thereof would
not, individually or in the aggregate, have a material adverse effect on
HEALTHSOUTH.
(b) No contract or agreement to which HEALTHSOUTH or any of its
subsidiaries or affiliated partnerships is a party will, by its terms, terminate
as a result of the transactions contemplated hereby or require any consent from
any obligor thereto in order to remain in full force and effect immediately
after the Effective Time, except for contracts or agreements which, if
terminated, would not have a material adverse effect on HEALTHSOUTH.
5.12 Subsequent Events. Except as disclosed in the HEALTHSOUTH
September S-3, HEALTHSOUTH has not, since June 30, 1995:
(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 June 30, 1995
Balance Sheet contained in the HEALTHSOUTH September S-3 or (ii) liabilities
incurred since the effective date of the HEALTHSOUTH September S-3 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 June 30, 1995.
(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, cancelled 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.
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(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.
5.13 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.
5.14 Accounts Receivable. (a) Since June 30, 1995, HEALTHSOUTH has not
changed any material principle or practice with respect to the recordation of
accounts receivable or the calculation of reserves therefor, or any material
collection, discount or write-off policy or procedure. HEALTHSOUTH (including
its subsidiaries and affiliated partnerships) is in compliance with the terms
and conditions of all third-party payor arrangements relating to its accounts
receivable, except to the extent that such noncompliance would not have a
material adverse effect on HEALTHSOUTH.
(b) Without limiting the generality of the foregoing, HEALTHSOUTH and
each of its subsidiaries and affiliated partnerships is in compliance with all
Medicare and Medicaid provider agreements to which it is a party, except to the
extent that such noncompliance would not have a material adverse effect on
HEALTHSOUTH.
5.15 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.
5.16 Vote Required. An amendment to HEALTHSOUTH's Restated Certificate
of Incorporation is required to increase the authorized number of shares of
HEALTHSOUTH Common Stock to enable HEALTHSOUTH to have an adequate number of
authorized shares to consummate the transactions contemplated hereby. The
affirmative vote of the holders of a majority of the outstanding shares of
HEALTHSOUTH Common Stock entitled to vote thereon is the only vote of the
holders in each class or series of HEALTHSOUTH capital stock necessary to
approve such amendment, this Plan of Merger, the Merger and the transactions
contemplated by this Plan of Merger.
5.17 Opinion of Financial Advisor. HEALTHSOUTH has received the oral
opinion of Smith Barney to the effect that, as of the date of this Agreement,
the Merger Consideration is fair to HEALTHSOUTH from a financial point of view,
a written copy of which opinion will be delivered by HEALTHSOUTH to SCA prior to
the date on which the definitive proxy materials for the Proxy Statement (as
defined in Section 7.4(a)) are filed with the SEC.
5.18 Tax Returns. HEALTHSOUTH 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
HEALTHSOUTH. HEALTHSOUTH has made all payments shown as due on such returns.
HEALTHSOUTH has not been notified that any tax returns of HEALTHSOUTH are
currently under audit by the Internal Revenue Service or any state or local tax
agency. No agreements have been made by HEALTHSOUTH for the extension of time or
the waiver of the statute of limitations for the assessment or payment of any
federal, state or local taxes.
5.19 Employee Benefit Plans; Employment Matters. (a) Except as
disclosed in the HEALTHSOUTH September S-3, HEALTHSOUTH has neither established
nor maintains nor is obligated to make contributions to or under or otherwise
participate in (a) any bonus or other type of incentive compensation plan,
program, agreement, policy, commitment, contract or arrangement (whether or not
set forth in a written document), (b) any pension, profit-sharing, retirement or
other plan, program or
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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
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 HEALTHSOUTH 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. Except as disclosed in the HEALTHSOUTH
September S-3, HEALTHSOUTH has not previously made, is not currently making, and
is not obligated in any way to make, any contributions to any multi-employer
plan within the meaning of the Multi-Employer Pension Plan Amendments Act of
1980.
(b) Except as disclosed in the HEALTHSOUTH September S-3, HEALTHSOUTH
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 $100,000, or
(iii) agreement or plan, including any stock option plan, stock appreciation
rights plan, restricted stock plan or stock purchase plan, any of the benefits
of which will be increased, or the vesting the benefits of which will be
accelerated, by the occurrence of any of the transactions contemplated by this
Plan of Merger or the value of any of the benefits of which will be calculated
on the basis of any of the transactions contemplated by this Plan of Merger.
5.20 Compliance with Laws in General. Except as disclosed in the
HEALTHSOUTH September S-3, 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 with respect to any alleged violation which, if it
were determined that a violation occurred, would have a material adverse effect
on HEALTHSOUTH.
5.21 Licenses, Accreditation and Regulatory Approvals. HEALTHSOUTH and
its subsidiaries and affiliated partnerships 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 and
its subsidiaries and affiliated partnerships in the aggregate. All such Licenses
are in full force and effect, and HEALTHSOUTH is in compliance in all material
respects with all conditions and requirements of the Licenses and with all rules
and regulations relating thereto. HEALTHSOUTH and its subsidiaries and
affiliated partnerships 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 for such
noncompliance as does not have a material adverse effect on HEALTHSOUTH and its
subsidiaries in the aggregate. HEALTHSOUTH and its subsidiaries and affiliated
partnerships have timely filed all requisite cost reports, claims and other
reports required to be filed in connection with the Medicare, Medicaid and other
governmental health programs due on or before the date hereof, all of which
were, when filed, complete and correct in all material respects. There are no
current claims, actions or appeals pending, and neither HEALTHSOUTH nor its
subsidiaries nor its affiliated partnerships have filed any claims or reports
which should 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 cost reports or claims, or
any disallowances in connection with any audit of such cost reports, which could
have a material adverse effect on HEALTHSOUTH and its subsidiaries and
affiliated partnerships in
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the aggregate. The amounts established as provisions for adjustments by
Medicare, Medicaid and other third-party payors on the financial statements set
forth in the HEALTHSOUTH September S-3 are sufficient to pay any amounts for
which HEALTHSOUTH may be liable. To the best knowledge of HEALTHSOUTH, neither
HEALTHSOUTH nor its subsidiaries and affiliated partnerships nor their
respective employees have committed a violation of the Medicare and Medicaid
fraud and abuse provisions of the Social Security Act. Except as disclosed in
the HEALTHSOUTH September S-3, any and all past litigation concerning such
licenses, certificates of need and regulatory approvals, and all claims and
causes of action raised therein, has been finally adjudicated. No such license,
certificate of need or regulatory approval has been revoked, conditioned (except
as may be customary) or restricted, and, except as disclosed in the HEALTHSOUTH
September S-3, no action (equitable, legal or administrative), arbitration or
other process is pending, or to the best knowledge of HEALTHSOUTH, threatened,
which in any way challenges the validly of, or seeks to revoke, condition or
restrict any such license, certificate of need, or regulatory approval. Subject
to compliance with applicable securities laws, the HSR Act and other or local
rules or regulations requiring notice, approval, or other action upon the
occurrence of a change in control of SCA or any of the SCA subsidiaries or SCA
Other Entities, the consummation of the Merger will not violate any law or
restriction to which HEALTHSOUTH is subject.
5.22 No Untrue Representation. No representation or warranty by
HEALTHSOUTH in this Plan of Merger, and no Exhibit or certificate issued by
HEALTHSOUTH and furnished or to be furnished to SCA pursuant hereto, or in
connection with the transactions contemplated hereby, contains or will contain
any untrue statement of a material fact in response to the disclosure requested,
or omits or will omit to state a material fact necessary to make the statement
or facts contained therein in response to the disclosure requested not
misleading in light of all of the circumstances then prevailing.
Section 6. Access to Information and Documents.
6.1 Access to Information. Between the date hereof and the Closing
Date, each of SCA 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 information
with respect to the affairs of such party as the other party may from time to
time reasonably request. Each party will disclose and make available to the
other party and its representatives all books, contracts, accounts, personnel
records, letters of intent, papers, records, communications with regulatory
authorities and other documents relating to the business and operations of such
party. In addition, SCA shall make available to HEALTHSOUTH all such banking,
investment and financial information as shall be necessary to allow for the
efficient integration of SCA's banking, investment and financial arrangements
with those of HEALTHSOUTH at the Effective Time.
6.2 Return of Records. If the transactions contemplated hereby are not
consummated and this Plan of Merger terminates, each party agrees to promptly
return all documents, contracts, records or properties of the other party and
all copies thereof furnished pursuant to this Section 6 or otherwise. All
information disclosed by any party or any affiliate or representative of any
party shall be deemed to be "Confidential Information" under the terms of the
Confidentiality Agreement dated October 5, 1995, between SCA and HEALTHSOUTH
(the "Confidentiality Agreement").
6.3 Effect of Access. (a) Nothing contained in this Section 6 shall be
deemed to create any duty or responsibility on the part of either party to
investigate or evaluate the value, validity or enforceability of any contract,
lease or other asset included in the assets of the other party.
(b) With respect to matters as to which any party has made express
representations or warranties herein, the parties shall be entitled to rely upon
such express representations and warranties irrespective of any investigations
made by such parties, except to the extent that such investigations result in
actual knowledge of the inaccuracy or falsehood of particular representations
and warranties.
Section 7. Covenants.
7.1 Preservation of Business. SCA will use its reasonable best efforts
to preserve the business organization of SCA intact, to keep available to
HEALTHSOUTH and the Surviving Corporation the
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services of the present employees of SCA, and to preserve for HEALTHSOUTH and
the Surviving Corporation the goodwill of the suppliers, customers and others
having business relations with SCA.
7.2 Material Transactions. Prior to the Effective Time, SCA will not
(other than as required pursuant to the terms of the 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 and transactions
described on Exhibit 7.2 to the Disclosure Schedule which do not vary materially
from the terms set forth on such Exhibit 7.2), 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 SCA,
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 SCA except as
provided herein.
(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 SCA, except upon exercise of currently outstanding
stock options or warrants (other than options or warrants to purchase up to
400,000 shares of SCA Common Stock issued in the ordinary course of SCA's
business consistent with its past practices).
(e) Make any 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 SCA's usual past
practice, or make any payment or contributions or incur any obligation pursuant
to or in respect of any other plan or contract or arrangement providing for
bonuses, executive incentive compensation, pensions, deferred compensation,
retirement payments, profit-sharing or the like, establish or enter into any
such plan, contract or arrangement, 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 3.11(a) to
3.11(h), inclusive.
7.3 Meetings of Stockholders. (a) Each of HEALTHSOUTH and SCA will take
all steps necessary in accordance with their respective Certificates of
Incorporation and Bylaws to call, give notice of, convene and hold meetings of
their respective stockholders (the "Special Meetings") 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 (including any necessary increase in the number of
authorized shares of HEALTHSOUTH Common Stock required for the consummation of
the transactions contemplated hereby). Unless this Plan of Merger shall have
been validly terminated as provided herein, the Boards of Directors of
HEALTHSOUTH and SCA (subject, in the case of SCA, to the provisions of Section
8.1(d) hereof) will (i) recommend to their respective 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 their respective reasonable, good faith efforts to
obtain the approval by their respective stockholders of this Plan of Merger and
the transactions contemplated hereby.
(b) Nothing contained herein shall affect the right of HEALTHSOUTH, the
Subsidiary and SCA to take action by written consent in lieu of meeting to the
extent permitted by applicable law and their respective Certificates of
Incorporation and Bylaws.
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7.4 Registration Statement. (a) HEALTHSOUTH shall prepare and file with
the Securities and Exchange Commission and any other applicable regulatory
bodies, as soon as reasonably practicable, a Registration Statement on Form S-4
with respect to the shares of HEALTHSOUTH Common Stock to be issued in the
Merger (the "Registration Statement"), and will otherwise proceed promptly to
satisfy the requirements of the Securities Act of 1933, including Rule 145
thereunder. Such Registration Statement shall contain a joint proxy statement of
HEALTHSOUTH and SCA containing the information required by the Securities
Exchange Act of 1934 (the "Proxy Statement"). 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 amend or supplement the
Registration Statement to the extent necessary in order to make the statements
therein not misleading or to correct any misstatements which have become false
or misleading. HEALTHSOUTH shall use its reasonable, good faith efforts to have
the Proxy Statement approved by the SEC under the provisions of the Securities
Exchange Act of 1934. HEALTHSOUTH shall provide SCA with copies of all filings
made pursuant to this Section 7.4 and shall consult with SCA on responses to any
comments made by the Staff of the SEC with respect thereto.
(b) The information specifically designated as being supplied by SCA
for inclusion in the Registration Statement shall not, at the time the
Registration Statement is declared effective, at the time the Proxy Statement is
first mailed to holders of SCA Common Stock and holders of HEALTHSOUTH Common
Stock, at the time of the Special Meetings and at the Effective Time, 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 SCA 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 SCA Common Stock and holders of HEALTHSOUTH Common Stock, at the
time of the Special Meetings and at the Effective Time, 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 SCA, or
its officers or directors, should be discovered by SCA which should be set forth
in an amendment to the Registration Statement or a supplement to the Proxy
Statement, SCA shall promptly inform HEALTHSOUTH. All documents, if any, that
SCA is responsible for filing with the SEC in connection with the transactions
contemplated herein will comply as to form and substance in all material
respects with the applicable requirements of the Securities Act and the rules
and regulations thereunder and the Exchange Act and the rules and regulations
thereunder.
(c) The information specifically designated as being supplied by
HEALTHSOUTH for inclusion in the Registration Statement shall not, at the time
the Registration Statement is declared effective, at the time the Proxy
Statement is first mailed to holders of SCA Common Stock and holders of
HEALTHSOUTH Common Stock, at the time of the Special Meetings and at the
Effective Time, 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 SCA Common Stock in connection with the SCA Stockholders'
Meeting and to the HEALTHSOUTH stockholders in connection with the HEALTHSOUTH
Stockholders' Meeting shall not, at the date the Proxy Statement (or any
amendment thereof or supplement thereto) is first mailed to holders of SCA
Common Stock and holders of HEALTHSOUTH Common Stock, at the time of the Special
Meetings or at the Effective Time, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading. If at any time prior to
the Effective Time any event or circumstance relating to HEALTHSOUTH or its
officers or directors, should be discovered by HEALTHSOUTH which should be set
forth in an amendment to the Registration Statement or a supplement to the Proxy
Statement, HEALTHSOUTH shall promptly inform SCA 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 require
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ments of the Securities Act and the rules and regulations thereunder and the
Exchange Act and the rules and regulations thereunder.
(d) Prior to the Closing Date, HEALTHSOUTH shall use its reasonable,
good faith efforts to cause the shares of HEALTHSOUTH Common Stock to be issued
pursuant to the Merger to be registered or qualified under all applicable
securities or Blue Sky laws of each of the states and territories of the United
States, and to take any other actions which may be necessary to enable the
Common Stock to be issued pursuant to the Merger to be distributed in each such
jurisdiction.
(e) Prior to the Closing Date, HEALTHSOUTH shall file an additional
listing application (the "Listing Application") with the Exchange relating to
the shares of HEALTHSOUTH Common Stock to be issued in connection with the
Merger, and shall use its reasonable, good faith efforts to cause such shares of
HEALTHSOUTH Common Stock to be approved for listing on the Exchange, upon
official notice of issuance, prior to the Closing Date.
(f) SCA shall furnish all information to HEALTHSOUTH with respect to
SCA and the SCA Subsidiaries and SCA Partnerships 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. SCA shall take all reasonable
steps necessary to 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 SCA's Board
of Directors or otherwise.
7.6 HSR Act Compliance. HEALTHSOUTH and SCA 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
SCA 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 SCA will consult with each
other before issuing any press release or otherwise making any public statement
with respect to the transactions contemplated by this Plan of Merger, and shall
not issue any such press release or make any such public statement prior to such
consultation except as may be required by applicable law or requirements of the
Exchange. The parties shall issue a joint press release, mutually acceptable to
HEALTHSOUTH and SCA, promptly upon execution and delivery of this Plan of
Merger.
7.8 Resignation of SCA Directors. On or prior to the Closing Date, SCA
shall deliver to HEALTHSOUTH evidence satisfactory to HEALTHSOUTH of the
resignation of the Directors of SCA, 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 delivered by the notifying party
under this Plan of Merger, promptly after the occurrence of the same. If the
effect of such change or addition would, individually or in the aggregate with
the effect of changes or additions previously disclosed pursuant to this Section
7.9, constitute a material adverse effect on the notifying party, the
non-notifying party may, within ten days after receipt of such notice, elect to
terminate this Plan of Merger. If the non-notifying party does not give written
notice of such termination within such 10-day period, the non-notifying party
shall be deemed to have consented to such change or addition and shall not be
entitled to terminate this Plan of Merger by reason thereof.
7.10 No Solicitations. SCA may, directly or indirectly, furnish
information and access, in response to unsolicited requests therefor, to the
same extent permitted by Section 6.1, to any corporation, partnership, person or
other entity or group, pursuant to appropriate confidentiality agreements, and
may participate in discussions and negotiate with such corporation, partnership,
person or other entity or group concerning any proposal to acquire SCA upon a
merger, purchase of assets, purchase of or tender
A-19
offer for shares of SCA Common Stock or similar transaction (an "Acquisition
Transaction"), if the Board of Directors of SCA 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. Except as set forth above, SCA shall not,
and will direct each officer, director, employee, representative and agent of
SCA not to, directly or indirectly, encourage, solicit, participate in or
initiate discussions or negotiations with or provide any information to any
corporation, partnership, person or other entity or group (other than
HEALTHSOUTH or an affiliate or associate or agent of HEALTHSOUTH) concerning any
merger, sale of assets, sale of or tender offer for shares of SCA Common Stock
or similar transactions involving SCA. SCA shall promptly notify HEALTHSOUTH if
it shall, on or after the date hereof, 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.
7.11 Other Actions. Subject to the provisions of Section 7.10 hereof,
none of SCA, 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 SCA 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 SCA 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 SCA 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 by such parties' independent accountants.
7.13 Pooling and Tax-Free Reorganization Treatment. Neither HEALTHSOUTH
nor SCA 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 Internal Revenue Code of 1986, as amended.
7.14 Affiliate and Pooling Agreements. HEALTHSOUTH and SCA will each
use their respective reasonable, good faith efforts to cause each of their
respective Directors and executive officers and each of their respective
"affiliates" (within the meaning of Rule 145 under the Securities Act of 1933,
as amended) to execute and deliver to HEALTHSOUTH as soon as practicable an
agreement in the form attached hereto as Exhibit 7.14 relating to the
disposition of shares of SCA 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 SCA shall together, or pursuant
to an allocation of responsibility agreed to between them, (i) cooperate with
one another in determining whether any filings required to be made or consents
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 SCA 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 the Plan of Merger and to consummate the transactions
contemplated hereby, subject to the votes of
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its 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 its
subsidiaries or affiliates in connection with this Plan of Merger and the
transactions contemplated hereby Each of HEALTHSOUTH and SCA 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 SCA Stock Options and Warrants. (a) As soon as reasonably
practicable after the Effective Time of the Merger, HEALTHSOUTH shall deliver to
the holders of SCA stock options and warrants appropriate notices setting forth
such holders' rights pursuant to any stock option plans under which such SCA
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
Sections 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 SCA 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 SCA 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 SCA
stock options and shall use its best efforts to maintain the effectiveness of a
registration statement or registration statements covering such options (and
maintain the current status of the prospectus or prospectuses contained therein)
for so long as such SCA 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 and vesting with respect to the SCA
stock options awarded under any plan, program, or arrangement of SCA 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 20
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 SCA. For purposes of this Section 7.17, the
term "publication" shall have the meaning provided in SEC Accounting Series
Release No. 135.
7.18 SCA Employees. HEALTHSOUTH shall retain all employees of SCA 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.
7.19 HEALTHSOUTH Board of Directors. Immediately following the
Effective Time, HEALTHSOUTH shall cause Joel C. Gordon to be appointed to the
Board of Directors of HEALTHSOUTH.
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 SCA Common
Stock and the holders of HEALTHSOUTH Common Stock:
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(a) by mutual written consent of HEALTHSOUTH and SCA;
(b) by either HEALTHSOUTH or SCA:
(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 SCA
Common Stock or the holders of HEALTHSOUTH Common Stock shall not have been
obtained;
(ii) if the Merger shall not have been consummated on or before March
31, 1996, 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 breaching party of such
breach (a "Material Breach") (provided that the terminating party is not then in
Material Breach of any representation, warranty, covenant or other agreement
contained in this Plan of Merger); or
(v) if either HEALTHSOUTH or SCA gives notice of termination pursuant
to Section 7.9;
(c) By either HEALTHSOUTH or SCA 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 SCA) is not capable of being
satisfied prior to the end of the period referred to in Section 8.1(b)(ii);
(d) By SCA, if SCA'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 SCA 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;
(e) By either HEALTHSOUTH or SCA, if the condition set forth in Section
9.1(g)(i) is not satisfied by October 31, 1995; or
(f) Subject to the provisions of Section 8.7 below, by SCA, if the Base
Period Trading Price shall be less than $20.00.
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 SCA Shares or holders of HEALTHSOUTH Common
Stock; provided, however, that after any such approval, there
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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 SCA, action by its Board of Directors or the duly authorized
designee of the Board of Directors.
8.6 Expenses; Break-up Fees. (a) All costs and expenses incurred in
connection with this Plan of Merger and the transactions contemplated hereby
shall be paid by the party incurring such expense, except that expenses (other
than legal, accounting and investment banking costs, which shall be paid by the
party incurring such expenses) incurred in connection with preparing, filing,
printing and mailing the Proxy Statement and the Registration Statement shall be
shared equally by SCA and HEALTHSOUTH.
(b) (i) If this Plan of Merger is terminated by SCA pursuant to Section
8.1(d), and within one year after the effective date of such termination SCA 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, SCA
shall pay to HEALTHSOUTH a break-up fee of 3.25% of the aggregate Merger
Consideration (determined as it would have been calculated on the effective date
of termination of this Plan of Merger, substituting the effective date of such
termination for the Closing Date in calculating the Base Period Trading Price)
in immediately available funds, which fee represents the parties' best estimates
of the out-of-pocket costs incurred by HEALTHSOUTH and the value of management
time, overhead, opportunity costs and other unallocated costs of HEALTHSOUTH
incurred by or on behalf of HEALTHSOUTH in connection with this Plan of Merger.
SCA shall not enter into any agreement with respect to any Third Party
Acquisition Event which does not, as a condition precedent to the consummation
of such Third Party Acquisition Event, require such break-up fee to be paid to
HEALTHSOUTH upon such consummation.
(ii) As used herein, the term "Third Party Acquisition Event" shall
mean either of the following:
(A) SCA shall consummate any Acquisition Transaction (as defined in
Section 7.10); or
(B) any Person (other than a party hereto or its affiliates) shall have
acquired beneficial ownership (as such term is defined in Rule 13d-3 under the
Exchange Act) or the right to acquire beneficial ownership of, or a new group
has been formed which beneficially owns or has the right to acquire beneficial
ownership of, 30% or more of the outstanding SCA Common Stock.
(C) SCA 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 SCA, and SCA
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
SCA therefor, SCA shall pay HEALTHSOUTH reasonable costs and expenses (including
rea
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sonable attorneys' fees) in connection with such suit, together with interest
computed on any amounts determined to be due pursuant to this Section (computed
from the date upon which such amounts were due and payable pursuant to this
Section) and such costs (computed from the date incurred) at the prime rate of
interest announced from time to time by NationsBank, N.A. (Carolinas). The
obligations of SCA under this Section 8.6 shall survive any termination of this
Plan of Merger.
8.7 Certain Rights of HEALTHSOUTH. If SCA proposes to terminate this
Plan of Merger pursuant to Section 8.1(f) hereof, SCA shall first notify
HEALTHSOUTH in writing of its intent to so terminate this Plan of Merger.
HEALTHSOUTH shall then have not less than 48 hours (the exact deadline to be set
by SCA) from the time of receipt of written notice by SCA to submit a final and
best offer (a "Final Offer") for a change in the Merger Consideration. If such
Final Offer is accepted by SCA (as determined by SCA' Board of Directors after
consulting with its legal counsel and financial advisers), SCA, the Subsidiary
and HEALTHSOUTH shall amend this Plan of Merger to reflect such Final Offer and
shall make any appropriate amendments to the Registration Statement and the
Proxy Statement. 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 SCA):
(a) None of HEALTHSOUTH, the Subsidiary or SCA 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 SCA, the SCA Subsidiaries and the SCA Partnerships, taken as a
whole.
(b) No statute, rule or regulation shall have been enacted by the
government (or any governmental agency) of the United States or any state,
municipality or other political subdivision thereof that makes the consummation
of the Merger and any other transaction contemplated hereby illegal.
(c) Any waiting period (and any extension thereof) applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated.
(d) The Registration Statement shall have been declared effective and
no stop order with respect to the Registration Statement shall be in effect.
(e) The holders of HEALTHSOUTH Common Stock and the holders of SCA
Shares 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 and shall
have been issued pursuant to an effective registration statement (which is
subject to no stop order).
(g) The Merger shall qualify for "pooling of interests" accounting
treatment, and HEALTHSOUTH and SCA shall each have received letters to that
effect from Ernst & Young, LLP, independent accountants for HEALTHSOUTH, dated
(i) not later than October 31, 1995, (ii) the date of the mailing of the Proxy
Statement and (iii) 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 SCA 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 SCA Subsidiaries and the SCA Other
Entities are parties, which consents, approvals and
A-24
authorizations are required of such third parties by such documents, in form and
substance acceptable to HEALTHSOUTH, except where the failure to obtain such
consent, approval or authorization would not have a material effect on the
business of the Surviving Corporation.
9.2 Conditions to Obligations of HEALTHSOUTH and the Subsidiary. The
obligations of HEALTHSOUTH and the Subsidiary to consummate the Merger and the
other transactions contemplated hereby shall be subject to the satisfaction, at
or prior to the Closing Date, of the following conditions (any of which may be
waived by HEALTHSOUTH and the Subsidiary):
(a) Each of the agreements of SCA 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 SCA 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 SCA set forth in Section
3.11(a) shall be true and correct as of the date of this Plan of Merger and as
of the Closing Date. The representations and warranties of SCA 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 SCA
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 SCA, 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 & Johnston, Professional Association, to the effect that the merger will
constitute a reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended, which opinion may be based upon reasonable
representations of fact provided by officers of HEALTHSOUTH, SCA and the
Subsidiary.
(d) HEALTHSOUTH shall have received an opinion from Waller Lansden
Dortch & Davis substantially to the effect set forth in Exhibit 9.2(d) hereto.
(e) The Proxies dated of even date herewith executed by those persons
identified on Exhibit 9.1(e) in favor of HEALTHSOUTH shall be and remain in full
force and effect.
9.3 Conditions to Obligations of SCA. The obligations of SCA 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 SCA):
(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 5.12(i) 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
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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). SCA 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 SCA may reasonably request as to the fulfillment of the foregoing
conditions.
(c) SCA shall have received an opinion from Skadden, Arps, Slate,
Meagher & Flom to the effect that the Merger will constitute a reorganization
with the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended, which opinion may be based upon reasonable representations of fact
provided by officers of HEALTHSOUTH, SCA and the Subsidiary.
(d) SCA shall have received an opinion from Haskell Slaughter Young &
Johnston, Professional Association, 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
Two Perimeter Park South
Birmingham, Alabama 35243
Attention: Michael D. Martin
Facsimile: (205) 969-4719
with a copy to:
William W. Horton, Esq.
HEALTHSOUTH Corporation
Two Perimeter Park South
Birmingham, Alabama 35243
Facsimile: (205) 969-4732
and
J. Brooke Johnston, Jr., Esq.
Haskell Slaughter Young & Johnston,
Professional Association
1200 AmSouth/Harbert Plaza
1901 Sixth Avenue North
Birmingham, Alabama 35203
Facsimile: (205) 324-1133
If to SCA:
Surgical Care Affiliates, Inc.
102 Woodmont Boulevard
Suite 610
Nashville, Tennessee 37205
Attention: Tarpley B. Jones
Facsimile: (615) 298-5641
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with a copy to:
Skadden, Arps, Slate, Meagher & Flom
919 Third Avenue
New York, New York 10022
Attention: Alan C. Myers, Esq.
Facsimile: (212) 735-3609
and
Waller Lansden Dortch & Davis
Nashville City Center
511 Union Street
Suite 2100
Nashville, Tennessee 37219-1760
Attention: J. Reginald Hill, Esq.
Facsimile: (615) 244-6804
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) SCA 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 SCA 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 SCA or any of its
subsidiaries, whether pertaining to any matter existing or occurring at or prior
to, or at or after, the Effective Time ("Indemnified Liabilities") and (ii) all
Indemnified Liabilities based in whole or in part on, or arising in whole or in
part out of, or pertaining to this Plan of Merger, the Merger or any other
transactions contemplated hereby or thereby, in each case to the full extent a
corporation is permitted under the DGCL to indemnify its own directors, officers
and employees, as the case may be (and HEALTHSOUTH and the Surviving
Corporation, as the case may be, will pay expenses in advance of the final
disposition of any such action or proceeding to each Indemnified Party to the
full extent permitted by law upon receipt of any undertaking contemplated by
Section 145(e) of the DGCL). Without limiting the foregoing, in the event any
such claim, 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 SCA (or them and
HEALTHSOUTH and the Surviving Corporation after the Effective Time), (ii) SCA
(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) SCA (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 SCA, 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 SCA,
HEALTHSOUTH or the Surviving Corporation (but the failure so to notify an
Indemnifying Party shall nor 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 SCA (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
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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) For a period of three years after the Effective Time, HEALTHSOUTH
shall cause to be maintained in effect the current policies of directors' and
officers' liability insurance maintained by SCA (provided that HEALTHSOUTH may
substitute therefor policies of at least the same coverage and amounts
containing terms and conditions which are no less advantageous) with respect to
claims arising from facts or events which occurred at or prior to the Effective
Time, to the extent such liability insurance can be maintained at an annual cost
not greater than 150% of SCA' 1995 annual premium for its directors' and
officers' liability insurance; provided, however, that if HEALTHSOUTH in unable
to maintain or obtain the insurance called for by this Section 10.4(b) at such
annual cost, HEALTHSOUTH shall obtain as much comparable insurance as is
available at such annual cost.
(c) The provisions of this Section 10.4 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party and his or her
heirs and representatives.
10.5 Governing Law. This Plan of Merger shall be interpreted, construed
and enforced in accordance with the laws of the State of Delaware, applied
without giving effect to any conflicts-of-law principles.
10.6 "Including". The word "including", when following any general
statement, term or matter, shall not be construed to limit such statement, term
or matter to the specific terms or matters as provided immediately following the
word "including" or to similar items or matters, whether or not non-limiting
language (such as "without limitation", "but not limited to", or words of
similar import) is used with reference to the word "including" or the similar
items or matters, but rather shall be deemed to refer to all other items or
matters that could reasonably fall within the broadest possible scope of the
general statement, term or matter.
10.7 "Knowledge". "To the knowledge", "to the best knowledge,
information and belief", or any similar phrase shall be deemed to refer to the
knowledge of the Chairman of the Board, Chief Executive Officer or Chief
Financial Officer of a party and to include the assurance that such knowledge is
based upon a reasonable investigation, unless otherwise expressly provided.
10.8 "Material adverse change" or "material adverse effect". "Material
adverse change" or "material adverse effect" means, when used in connection with
SCA 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
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) any changes resulting from
any restructuring or other similar charges or write-offs taken by SCA with the
consent of HEALTHSOUTH; provided, however, that no such changes or write-offs
will be taken if such would adversely affect pooling-of-interests accounting
treatment for the Merger.
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
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.
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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
Agreement, the term "tax return" shall mean any return, report, information
return or other document (including any related or supporting information) with
respect to taxes.
10.12 Captions. The captions or headings in this Plan of Merger are
made for convenience and general reference only and shall not be construed to
describe, define or limit the scope or intent of the provisions of this Plan of
Merger.
10.13 Integration of Exhibits. All Exhibits attached to this Plan of
Merger are integral parts of this Plan of Merger as if fully set forth herein,
and all statements appearing therein shall be deemed disclosed for all purposes
and not only in connection with the specific representation in which they are
explicitly referenced.
10.14 Entire Agreement. This instrument, including all Exhibits
attached hereto, together with the Confidentiality Agreement, contains the
entire agreement of the parties and supersedes any and all prior or
contemporaneous agreements between the parties, written or oral, with respect to
the transactions contemplated hereby. It may not be changed or terminated
orally, but may only be changed by an agreement in writing signed by the party
or parties against whom enforcement of any waiver, change, modification,
extension, discharge or termination is sought.
10.15 Counterparts. This Plan of Merger may be executed in several
counterparts, each of which, when so executed, shall be deemed to be an
original, and such counterparts shall, together, constitute and be one and the
same instrument.
10.16 Binding Effect. This Plan of Merger shall be binding on, and
shall inure to the benefit of, the parties hereto, and their respective
successors and assigns, and, except as provided in Section 10.4, no other person
shall acquire or have any right under or by virtue of this Plan of Merger. No
party may assign any right or obligation hereunder without the prior written
consent of the other parties.
10.17 No Rule of Construction. The parties acknowledge that this Plan
of Merger was initially prepared by HEALTHSOUTH, and that all parties have read
and negotiated the language used in this Plan of Merger. The parties agree that,
because all parties participated in negotiating and drafting this Plan of
Merger, no rule of construction shall apply to this Plan of Merger which
construes ambiguous language in favor of or against any party by reason of that
party's role in drafting this Plan of Merger.
A-29
IN WITNESS WHEREOF, HEALTHSOUTH, the Subsidiary and SCA have caused
this Plan and Agreement of Merger to be executed by their respective duly
authorized officers, and have caused their respective corporate seals to be
hereunto affixed, all as of the day and year first above written.
SURGICAL CARE AFFILIATES, INC.
By /s/ Joel C. Gordon
--------------------
Joel C. Gordon
Chairman and Chief Executive Officer
ATTEST:
/s/ Tarpley B. Jones
- --------------------
Tarpley B. Jones
Secretary
[CORPORATE SEAL]
HEALTHSOUTH Corporation
By /s/ Richard M. Scrushy
----------------------
Richard M. Scrushy
Chairman of the Board and
Chief Executive Officer
ATTEST:
/s/ Anthony J. Tanner
- ---------------------
Anthony J. Tanner
Secretary
[CORPORATE SEAL]
CATS ACQUISITION CORPORATION
By /s/ Richard M. Scrushy
----------------------
Richard M. Scrushy
President
ATTEST:
/s/ Anthony J. Tanner
- ---------------------
Anthony J. Tanner
Secretary
[CORPORATE SEAL]
A-30
Annex B
October 9, 1995
The Board of Directors
HEALTHSOUTH Corporation
Two Perimeter Park South
Birmingham, Alabama 35243
Members of the Board:
You have requested our opinion as to the fairness, from a financial
point of view, to HEALTHSOUTH Corporation ("HEALTHSOUTH") of the consideration
to be paid by HEALTHSOUTH pursuant to the terms and subject to the conditions
set forth in the Plan and Agreement of Merger, dated as of October 9, 1995 (the
"Merger Agreement"), by and among HEALTHSOUTH, SCA Acquisition Corporation, a
wholly owned subsidiary of HEALTHSOUTH ("Subsidiary"), and Surgical Care
Affiliates, Inc. ("SCA"). As more fully described in the Merger Agreement, (i)
Subsidiary will be merged with and into SCA (the "Merger") and (ii) each
outstanding share of the common stock, par value $0.25 per share, of SCA (the
"SCA Common Stock") will be converted into the right to receive 1.22 shares (the
"Exchange Ratio") of the common stock, par value $0.01 per share, of HEALTHSOUTH
(the "HEALTHSOUTH Common Stock"); provided, that (i) if 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) ending at the close of trading
on the second trading day immediately preceding the date of the stockholders'
meeting for the Merger (the "Base Period Trading Price") is greater than $28.00,
then the Exchange Ratio will be equal to the quotient obtained by dividing
$34.16 by the Base Period Trading Price and (ii) if the Base Period Trading
Price is less than $22.00, then the Exchange Ratio will be equal to the quotient
obtained by dividing $26.84 by the Base Period Trading Price; and provided
further, that in no event will the Exchange Ratio exceed the quotient obtained
by dividing $26.84 by $20.00.
In arriving at our opinion, we reviewed the Merger Agreement and held
discussions with certain senior officers, directors and other representatives
and advisors of HEALTHSOUTH and certain senior officers and other
representatives and advisors of SCA concerning the businesses, operations and
prospects of HEALTHSOUTH and SCA. We examined certain publicly available
business and financial information relating to HEALTHSOUTH and SCA as well as
certain other financial information and data for HEALTHSOUTH and SCA which were
provided to or otherwise discussed with us by the respective managements of
HEALTHSOUTH and SCA, including information relating to certain strategic
implications and operational benefits anticipated from the Merger, certain
financial forecasts of HEALTHSOUTH prepared by the management of HEALTHSOUTH and
analysts' estimates as to the future financial performance of HEALTHSOUTH and
SCA. We reviewed the financial terms of the Merger as set forth in the Merger
Agreement in relation to, among other things: current and historical market
prices and trading volumes of the HEALTHSOUTH Common Stock and SCA Common Stock;
the historical and projected earnings and other operating data of HEALTHSOUTH
and SCA; and the capitalization and financial condition of HEALTHSOUTH and SCA.
We considered, to the extent publicly available, the financial terms of similar
transactions recently effected which we considered relevant in evaluating the
Merger and analyzed certain financial, stock market and other publicly available
information relating to the businesses of other companies whose operations we
considered relevant in evaluating those of HEALTHSOUTH and SCA. We also
evaluated the potential pro forma financial impact of the Merger on HEALTHSOUTH.
In addition to the foregoing, we conducted such other analyses and examinations
and considered such other financial, economic and market criteria as we deemed
appropriate to arrive at our opinion.
B-1
In rendering our opinion, we have assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information publicly available or furnished to or otherwise reviewed
by or discussed with us. With respect to certain financial information and other
data reviewed by or discussed with us, we have been advised by the managements
of HEALTHSOUTH and SCA that such financial information and other data reflect
the best currently available estimates and judgments as to the future financial
performance of HEALTHSOUTH and SCA and the strategic implications and
operational benefits anticipated from the Merger. We also have assumed, with
your consent, that the Merger will be treated as a pooling of interests in
accordance with generally accepted accounting principles and as a tax-free
reorganization for federal income tax purposes. Our opinion, as set forth
herein, relates to the relative values of HEALTHSOUTH and SCA. We are not
expressing any opinion as to what the value of the HEALTHSOUTH Common Stock
actually will be when issued to SCA stockholders pursuant to the Merger or the
price at which the HEALTHSOUTH Common Stock will trade subsequent to the Merger.
We have not made or been provided with an independent evaluation or appraisal of
the assets or liabilities (contingent or otherwise) of HEALTHSOUTH or SCA nor
have we made any physical inspection of the properties or assets of HEALTHSOUTH
or SCA. We have not been asked to consider, and our opinion does not address,
the relative merits of the Merger as compared to any alternative business
strategies that might exist for HEALTHSOUTH or the effect of any other
transaction in which HEALTHSOUTH might engage. Our opinion is necessarily based
upon information available to us, and financial, stock market and other
conditions and circumstances existing and disclosed to us, as of the date
hereof.
Smith Barney has been engaged to render financial advisory services to
HEALTHSOUTH in connection with the Merger and will receive a fee for such
services. We also will receive a fee upon the delivery of this opinion. In the
ordinary course of our business, we and our affiliates may actively trade the
securities of HEALTHSOUTH and SCA for our own account or for the account of our
customers and, accordingly, may at any time hold a long or short position in
such securities. Smith Barney has in the past provided financial advisory and
investment banking services to HEALTHSOUTH unrelated to the Merger, and has
received compensation for the rendering of such services. In addition, we and
our affiliates (including Travelers Group Inc. and its affiliates) may maintain
relationships with HEALTHSOUTH and SCA.
Our advisory services and the opinion expressed herein are provided for
the information of the Board of Directors of HEALTHSOUTH in its evaluation of
the proposed Merger, and our opinion is not intended to be and does not
constitute a recommendation to any stockholder as to how such stockholder should
vote on the proposed Merger. Our opinion may not be published or otherwise used
or referred to, nor shall any public reference to Smith Barney be made, without
our prior written consent.
Based upon and subject to the foregoing, our experience as investment
bankers, our work as described above and other factors we deemed relevant, we
are of the opinion that, as of the date hereof, the Exchange Ratio is fair, from
a financial point of view, to HEALTHSOUTH.
Very truly yours,
SMITH BARNEY INC.
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Annex C
December , 1995
Surgical Care Affiliates, Inc.
Woodmont Centre
102 Woodmont Boulevard
Nashville, Tennessee 37205
Dear Sirs:
We understand that Surgical Care Affiliates, Inc. ("SCA") and
HEALTHSOUTH Corporation ("HEALTHSOUTH") have entered into a Plan and Agreement
of Merger dated October 9, 1995 (the "Agreement"), pursuant to which a
wholly-owned subsidiary of HEALTHSOUTH will be merged with and into SCA in a
stock-for-stock exchange (the "Merger"). Pursuant to the Agreement, at the close
of the Merger, each outstanding SCA Share (excluding shares held by SCA and any
of its subsidiaries) will be converted into the right to receive 1.22 shares
(the "Exchange Ratio") of HEALTHSOUTH Common Stock; provided, however, that if
the Base Period Trading Price (as defined below) is greater than $28.00, then
the Exchange Ratio shall be equal to the quotient obtained by dividing $34.16 by
the Base Period Trading Price; and provided further, that if the Base Period
Trading Price shall be less than $22.00, then the Exchange Ratio shall be equal
to the quotient obtained by dividing $26.84 by the Base Period Trading Price;
and provided further, that the Exchange Ratio shall in no event be greater than
1.342. SCA shall have the right to terminate the Agreement if the Base Period
Trading Price is less than $20.00. The term "Base Period Trading Price" is
defined in the Agreement as the average of the daily closing prices per share of
HEALTHSOUTH Common Stock for the 20 consecutive trading days on which such
shares are actually traded ending on the second New York Stock Exchange trading
day before the closing of the Merger. You have provided us with the joint proxy
statement/prospectus, which includes the Agreement, in substantially the form to
be sent to the shareholders of SCA (the "Proxy Statement").
You have asked us to render our opinion as to whether the Merger is
fair, from a financial point of view, to the stockholders of SCA.
In the course of our analyses for rendering this opinion, we have:
1. reviewed the Proxy Statement;
2. reviewed SCA's Annual Reports to Shareholders and Annual Reports
on Form 10-K for the fiscal years ended December 31, 1992 through
1994, and its Quarterly Reports on Form 10-Q for the periods ended
June 30 and September 30, 1996;
3. reviewed HEALTHSOUTH's Registration Statement on Form S-3 dated
September 27, 1995, its Annual Reports to Shareholders and Annual
Reports on Form 10-K for the fiscal years ended December 31, 1992
through 1994, and its Quarterly Reports on Form 10-Q for the
periods ended June 30 and September 30, 1995;
4. reviewed certain operating and financial information, including
financial projections, provided to us by the managements of SCA
and HEALTHSOUTH relating to their respective businesses and
prospects;
5. met with certain members of the senior managements of SCA and
HEALTHSOUTH to discuss their respective operations, historical
financial statements and future prospects;
C-1
6. reviewed the historical prices and trading volume of the common
shares of SCA and HEALTHSOUTH;
7. reviewed publicly available financial data and stock market
performance data of companies which we deemed generally comparable
to SCA and HEALTHSOUTH;
8. reviewed the terms of recent mergers and acquisitions of companies
which we deemed generally comparable to the Merger; and
9. conducted such other studies, analyses, inquiries and
investigations as we deemed appropriate.
In the course of our review, we have relied upon and assumed the
accuracy and completeness of the financial and other information provided to us
by SCA and HEALTHSOUTH. With respect to SCA's and HEALTHSOUTH's projected
financial results, we have assumed that they have been prepared reasonably upon
bases reflecting the best currently available estimates and judgments of the
managements of SCA and HEALTHSOUTH as to the expected future performance of SCA
and HEALTHSOUTH, respectively. We have not assumed any responsibility for the
information provided to us and we have further relied upon the assurances of the
managements of SCA and HEALTHSOUTH that they are unaware of any facts that would
make the information provided to us incomplete or misleading. In arriving at our
opinion, we have not performed or obtained any independent appraisal of the
assets of SCA and HEALTHSOUTH. Our opinion is necessarily based upon economic,
market and other conditions, and the information made available to us, as of the
date hereof.
Based on the foregoing, it is our opinion that the Merger is fair, from
a financial point of view, to the stockholders of SCA.
We have acted as financial advisor to SCA in connection with the Merger
and will receive a fee for such services, payment of a significant portion of
which is contingent upon the consummation of the Merger.
Very truly yours,
BEAR, STEARNS & CO. INC.
By:-----------------------
Managing Director
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