SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999; OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 1-10315
HEALTHSOUTH CORPORATION
-------------------------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 63-0860407
- ------------------------------------- ----------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
ONE HEALTHSOUTH PARKWAY
BIRMINGHAM, ALABAMA 35243
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(Address of Principal Executive (Zip Code)
Offices)
Registrant's Telephone Number, Including Area Code: (205) 967-7116
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
- ------------------------------------ ------------------------
COMMON STOCK, PAR VALUE NEW YORK STOCK EXCHANGE
$.01 PER SHARE
9.5% SENIOR SUBORDINATED NEW YORK STOCK EXCHANGE
NOTES DUE 2001
Securities Registered Pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all Reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such Reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 24, 2000:
Common Stock, par value $.01 per share -- $2,317,587,426
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at March 24, 2000
- --------------------------------- ------------------------------
COMMON STOCK, PAR VALUE
$.01 PER SHARE 385,939,143 SHARES
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference
into this Annual Report on Form 10-K.
PART I
ITEM 1. BUSINESS.
GENERAL
HEALTHSOUTH Corporation is the nation's largest provider of outpatient
surgery and rehabilitative healthcare services. We provide these services
through our national network of inpatient and outpatient healthcare facilities,
including inpatient and outpatient rehabilitation facilities, outpatient surgery
centers, diagnostic centers, occupational medicine centers, medical centers and
other healthcare facilities. We believe that we provide patients, physicians and
payors with high-quality healthcare services at significantly lower costs than
traditional inpatient hospitals. Additionally, our national network, reputation
for quality and focus on outcomes have enabled us to secure contracts with
national and regional managed care payors. At December 31, 1999, HEALTHSOUTH
operated nearly 2,000 locations in 50 states, Puerto Rico, the United Kingdom
and Australia.
Our healthcare services are provided through inpatient healthcare
facilities and facilities providing other clinical services (including inpatient
rehabilitation facilities and specialty medical centers, as well as associated
physician practices and other services) and outpatient healthcare facilities
(including outpatient rehabilitation centers, outpatient surgery centers,
outpatient diagnostic centers and occupational medicine centers). In our
outpatient and inpatient rehabilitation facilities, we provide interdisciplinary
programs for the rehabilitation of patients experiencing disability due to a
wide variety of physical conditions, such as stroke, head injury, orthopaedic
problems, neuromuscular disease and sports-related injuries. Our rehabilitation
services include physical therapy, sports medicine, work hardening,
neurorehabilitation, occupational therapy, respiratory therapy, speech-language
pathology and rehabilitation nursing. Independent studies have shown that
rehabilitation services like those we provide can save money for payors and
employers.
A patient referred to a HEALTHSOUTH rehabilitation facility undergoes an
initial evaluation and assessment process that results in the development of a
rehabilitation care plan designed specifically for that patient. Depending upon
the patient's disability, this evaluation process may involve the services of a
single discipline, such as physical therapy for a knee injury, or of multiple
disciplines, as in the case of a complicated stroke patient. We have developed
numerous rehabilitation programs, which include stroke, head injury, spinal cord
injury, neuromuscular and work injury, that combine certain services to address
the needs of patients with similar disabilities. In this way, all of our
patients, regardless of the severity and complexity of their disabilities, can
receive the level and intensity of services necessary to restore them to as
productive, active and independent a lifestyle as possible.
In addition to our rehabilitation facilities, we operate the largest
network of freestanding outpatient surgery centers in the United States. Our
outpatient surgery centers provide the facilities and medical support staff
necessary for physicians to perform non-emergency surgical procedures.
Outpatient surgery is widely recognized as generally less expensive than surgery
performed in a hospital, and we believe that outpatient surgery performed at a
freestanding outpatient surgery center is generally less expensive than
hospital-based outpatient surgery. Over 80% of our surgery center facilities are
located in markets served by our rehabilitation facilities, enabling us to
pursue opportunities for cross-referrals.
HEALTHSOUTH is also the largest operator of outpatient diagnostic centers
and one of the largest operators of occupational medicine centers in the United
States. Most of our diagnostic centers and occupational medicine centers operate
in markets where we also provide rehabilitative healthcare and outpatient
surgery services. We believe that our ability to offer a comprehensive range of
healthcare services in a particular geographic market makes HEALTHSOUTH more
attractive to both patients and payors in such market. We focus on marketing our
services in an integrated system to patients and payors in such geographic
markets.
Since 1993, we have completed several significant acquisitions in both
inpatient and outpatient rehabilitation services and have expanded into the
outpatient surgery center, diagnostic and occupational medicine businesses. We
believe that these acquisitions complement our historical operations and enhance
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our market position. We further believe that our expansion into the outpatient
surgery, diagnostic and occupational medicine businesses provides us with
additional platforms for future growth. We are continually evaluating potential
acquisitions that complement our existing operations.
HEALTHSOUTH was organized as a Delaware corporation in February 1984. Our
principal executive offices are located at One HealthSouth Parkway, Birmingham,
Alabama 35243, and our telephone number is (205) 967-7116.
COMPANY STRATEGY
HEALTHSOUTH's principal objective is to be the provider of choice
throughout the United States for patients, physicians and payors alike for the
healthcare services that it provides. Our growth strategy has historically been
based upon four primary elements: (i) the implementation of our integrated
service model in appropriate markets, (ii) successful marketing to managed care
organizations and other payors, (iii) the provision of high-quality,
cost-effective healthcare services, and (iv) the expansion of our national
network.
o Integrated Service Model. HEALTHSOUTH seeks, where appropriate, to provide
an integrated system of healthcare services, including outpatient
rehabilitation services, inpatient rehabilitation and other clinical
services, outpatient surgery services and outpatient diagnostic services.
We believe that our integrated system offers payors the convenience of
dealing with a single provider for multiple services. Additionally, we
believe that our facilities can provide extensive cross-referral
opportunities. For example, we estimate that approximately one-third of our
outpatient rehabilitation patients have had outpatient surgery, virtually
all inpatient rehabilitation patients will require some form of outpatient
rehabilitation, and virtually all inpatient rehabilitation patients have
had some type of diagnostic procedure. We have implemented our Integrated
Service Model in approximately 150 of our markets, and intend as our
long-term goal to expand the model into the 300 leading markets in the
United States.
o Marketing to Managed Care Organizations and Other Payors. Since the late
1980s, HEALTHSOUTH has focused on the development of contractual
relationships with managed care organizations, major insurance companies,
large regional and national employer groups and provider alliances and
networks. Our documented outcomes and experience with several hundred
thousand patients in delivering quality healthcare services at reasonable
prices has enhanced our attractiveness to such entities and has given us a
competitive advantage over smaller and regional competitors. These
relationships have increased patient flow to HEALTHSOUTH's facilities and
contributed to our same-store growth. These relationships also expose us to
pressure from payors to limit pricing for our services, and we endeavor to
manage and monitor such relationships in an effort to ensure both
competitive pricing and patient volumes for its facilities.
o Cost-Effective Services. HEALTHSOUTH's goal is to provide high-quality
healthcare services in cost-effective settings. To that end, we have
developed standardized clinical protocols for the treatment of our
patients. This results in "best practices" techniques being utilized at all
HEALTHSOUTH facilities, allowing the consistent achievement of
demonstrable, cost-effective clinical outcomes. The reputation of our
clinical programs is enhanced through our relationships with major
universities throughout the nation, and our support of clinical research in
our facilities. Further, independent studies estimate that, for every
dollar spent on rehabilitation, $11 to $35 is saved. Finally, surgical
procedures typically are less expensive in outpatient surgery centers than
in hospital settings. We believe that outpatient and rehabilitative
healthcare services will assume increasing importance in the healthcare
environment as payors continue to seek to reduce overall costs by shifting
patients to more cost-effective treatment settings.
o Expansion of National Network. As one of the largest providers of
healthcare services in the United States, HEALTHSOUTH is able to realize
economies of scale and compete successfully for national contracts with
large payors and employers while retaining the flexibility to respond to
particular needs of local markets. We believe that our national network
lets us offer large national and regional employers and payors the
convenience of dealing with a single provider, utilize greater buying power
through centralized purchasing, achieve more efficient costs of capital and
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labor and more effectively recruit and retain clinicians. These national
benefits are realized without sacrificing local market responsiveness. Our
objective is to provide those outpatient and rehabilitative healthcare
services needed within each local market by tailoring our services and
facilities to that market's needs, thus bringing the benefits of nationally
recognized expertise and quality into the local setting.
These strategies have enabled us to make HEALTHSOUTH the only provider of
healthcare services to operate in all 50 states and to expand our operations
overseas. Building on that base, we further intend to leverage the franchise and
brand identity we have created through strategic alliances and, where
appropriate, equity participation with leading e-commerce and Internet-based
companies offering services that we expect will benefit us, both by creating
greater efficiencies and cost savings for our operations and by expanding the
range of services we offer and public awareness of our company. We believe that
our 2,000-facility network, our volume of daily interactions with patients
across the country and our relationships with leading physicians and
institutions offer these companies immediate scale and exposure of a type not
available through other healthcare providers, and we will seek to leverage those
assets through business affiliations which we expect will both benefit our
operations and increase stockholder value through strategic investment
activities.
RISK FACTORS
HEALTHSOUTH's business, operations and financial condition are subject to
various risks. Some of these risks are described below, and readers of this
Annual Report on Form 10-K should take such risks into account in evaluating
HEALTHSOUTH or any investment decision involving HEALTHSOUTH. This section does
not describe all risks applicable to our company, our industry or our business,
and it is intended only as a summary of certain material factors. More detailed
information concerning the factors described below is contained in other
sections of this Annual Report on Form 10-K.
HEALTHSOUTH Depends Upon Reimbursement by Third-Party Payors. Substantially
all of our revenues are derived from private and governmental third-party
payors. In 1999, approximately 33.0% of our revenues were derived from Medicare
and approximately 67.0% from commercial insurers, managed care plans, workers'
compensation payors and other private pay revenue sources. There are increasing
pressures from many payors to control healthcare costs and to reduce or limit
increases in reimbursement rates for medical services. There can be no
assurances that payments from government or private payors will remain at levels
comparable to present levels. In attempts to limit the federal budget deficit,
there have been, and we expect that there will continue to be, a number of
proposals to limit Medicare reimbursement for various services. We cannot now
predict whether any of these pending proposals will be adopted or what effect
the adoption of such proposals would have on HEALTHSOUTH.
HEALTHSOUTH's Operations Are Subject To Extensive Regulation. HEALTHSOUTH
is subject to various other types of regulation by federal and state
governments, including licensure and certification laws, Certificate of Need
laws and laws relating to financial relationships among providers of healthcare
services, Medicare fraud and abuse and physician self-referral.
The operation of our facilities and the provision of healthcare services
are subject to federal, state and local licensure and certification laws. These
facilities and services are subject to periodic inspection by governmental and
other authorities to assure compliance with the various standards established
for continued licensure under state law, certification under the Medicare and
Medicaid programs and participation in other government programs. Additionally,
in many states, Certificates of Need or other similar approvals are required for
expansion of our operations. We could be adversely affected if we cannot obtain
such approvals, by changes in the standards applicable to approvals and by
possible delays and expenses associated with obtaining approvals. Our failure to
obtain, retain or renew any required regulatory approvals, licenses or
certificates could prevent us from being reimbursed for our services or from
offering some of our services, or could adversely affect our results of
operations.
Our business is subject to extensive federal and state regulation with
respect to financial relationships among healthcare providers, physician
self-referral arrangements and other fraud and abuse issues. Penalties for
violation of federal and state laws and regulations include exclusion from
participation in the Medicare
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and Medicaid programs, asset forfeiture, civil penalties and criminal penalties,
any of which could have a material adverse effect on our business, results of
operations or financial condition. The Office of Inspector General of the
Department of Health and Human Services, the Department of Justice and other
federal agencies interpret healthcare fraud and abuse provisions liberally and
enforce them aggressively.
Healthcare Reform Legislation May Affect HEALTHSOUTH's Business. In recent
years, many legislative proposals have been introduced or proposed in Congress
and in some state legislatures that would effect major changes in the healthcare
system, either nationally or at the state level. Among the proposals which are
currently being, or which recently have been, considered are cost controls on
hospitals, insurance market reforms to increase the availability of group health
insurance to small businesses, requirements that all businesses offer health
insurance coverage to their employees and the creation of a single government
health insurance plan that would cover all citizens. The costs of certain
proposals would be funded in significant part by reductions in payment by
governmental programs, including Medicare and Medicaid, to healthcare providers.
There continue to be federal and state proposals that would, and actions that
do, impose more limitations on government and private payments to healthcare
providers such as HEALTHSOUTH and proposals to increase copayments and
deductibles from patients. At the federal level, both Congress and the current
Administration have continued to propose healthcare budgets that substantially
reduce payments under the Medicare and Medicaid programs. In addition, many
states are considering the enactment of initiatives designed to reduce their
Medicaid expenditures, to provide universal coverage or additional levels of
care and/or to impose additional taxes on healthcare providers to help finance
or expand the states' Medicaid systems. There can be no assurance as to the
ultimate content, timing or effect of any healthcare reform legislation, nor is
it possible at this time to estimate the impact of potential legislation on
HEALTHSOUTH. That impact may be material.
HEALTHSOUTH Faces National, Regional and Local Competition. HEALTHSOUTH
operates in a highly competitive industry. Although HEALTHSOUTH is the largest
provider of its range of inpatient and outpatient healthcare services on a
nationwide basis, in any particular market it may encounter competition from
local or national entities with longer operating histories or other superior
competitive advantages. There can be no assurance that such competition, or
other competition which we may encounter in the future, will not adversely
affect our results of operations.
HEALTHSOUTH Is Subject To Material Litigation. HEALTHSOUTH is, and may in
the future be, subject to litigation which, if determined adversely to us, could
have a material adverse affect on our business or financial condition. In
addition, some of the companies and businesses we have acquired have been
subject to such litigation. While we attempt to conduct our operations in such a
way as to reduce the risk that adverse results in litigation could have a
material adverse affect on us, there can be no assurance that pending or future
litigation, whether or not described in this Annual Report on Form 10-K, will
not have such a material adverse affect. See Item 3, "Legal Proceedings".
HEALTHSOUTH's Stock Price May Be Volatile. Healthcare stocks in general,
including HEALTHSOUTH's common stock, are subject to frequent changes in stock
price and trading volume, some of which may be large. These changes may be
influenced by the market's perceptions of the healthcare sector in general, of
other companies believed to be similar to HEALTHSOUTH, or of our results of
operations and future prospects. In addition, these perceptions may be greatly
affected not only by information we provide but also by opinions and reports
created by investment analysts and other third parties which do not necessarily
reflect information provided by us. Adverse movement in HEALTHSOUTH's stock
price, particularly as a result of factors over which we have no control, may
adversely affect our access to capital and the ability to consummate
acquisitions using our stock.
GROWTH THROUGH ACQUISITIONS AND RELATED DIVESTITURES
Beginning in 1994, HEALTHSOUTH has consummated a series of significant
acquisitions. The following paragraphs describe several major acquisitions
consummated during the period covered by the consolidated financial statements
contained in this Annual Report on Form 10-K, as well as related divestitures
and facility closings and consolidations in connection with our strategic plan.
During 1997, we acquired Health Images, Inc. ("Health Images"; 55
diagnostic imaging centers in 13 states and the United Kingdom), ASC Network
Corporation ("ASC"; 29 surgery centers in eight states), Horizon/CMS Healthcare
Corporation ("Horizon/CMS"; 30 inpatient rehabilitation facilities and
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approximately 275 outpatient rehabilitation centers in 24 states) and National
Imaging Affiliates, Inc. ("NIA"; eight diagnostic imaging centers in six
states). On December 31, 1997, we sold the long-term care assets of Horizon/CMS,
consisting of 139 long-term care facilities, 12 specialty hospitals, 35
institutional pharmacy locations and over 1,000 rehabilitation therapy contracts
with long-term care facilities, to Integrated Health Services, Inc. ("IHS").
During 1998, we acquired National Surgery Centers, Inc. ("NSC"; 40 surgery
centers in 14 states), as well as over 30 surgery centers (including centers
under management arrangements) from Columbia/HCA Healthcare Corporation
("Columbia/HCA"). During 1999, we acquired approximately 160 outpatient
rehabilitation centers from Mariner Post-Acute Network, Inc. ("Mariner"). These
transactions, along with our other significant acquisitions since 1993, have
further enhanced our position as the nation's largest provider of inpatient and
outpatient rehabilitative services, outpatient surgery services and diagnostic
imaging services and our position as one of the largest providers of
occupational medicine services. We believe that the geographic dispersion of the
nearly 2,000 locations we now operate makes HEALTHSOUTH more attractive to
managed care networks, major insurance companies, regional and national
employers and regional provider alliances and enhances our ability to implement
our Integrated Service Model in additional markets.
In the course of our major acquisitions, we have from time to time acquired
ancillary businesses, such as healthcare staffing and home health services,
which are not part of our strategic lines of business, and have also acquired
facilities which may be duplicative of existing facilities or which do not meet
our operating and performance standards. Accordingly, we have from time to time
determined to sell, close or consolidate certain acquired facilities and
businesses in order to focus our resources on those facilities and businesses
which are most consistent with our strategic plan and core operations. Our most
significant divestiture was the divestiture of the long-term care assets of
Horizon/CMS to IHS in 1997, described above. In addition, in the third quarter
of 1998, we adopted a plan to close substantially all of our home health
operations, which had been obtained as minor components of larger strategic
acquisitions, and in the fourth quarter of 1998 we adopted a plan to close,
consolidate or hold for sale certain other non-strategic businesses and
duplicative facilities, as well as facilities which we had determined could not
be brought up to our operating and performance standards without undue
expenditure of resources.
See Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for additional information concerning our
acquisitions, divestitures and plans with respect to facility closings and
consolidations.
INDUSTRY BACKGROUND
In 1996, there were an estimated 3,500,000 inpatient hospital discharges in
the United States involving impairments requiring rehabilitative healthcare
services. "Rehabilitative healthcare services" refers to the range of skilled
services provided to individuals in order to minimize physical and cognitive
impairments, maximize functional ability and restore lost functional capacity.
The focus of rehabilitative healthcare is to ameliorate physical and cognitive
impairments resulting from illness or injury, and to restore or improve
functional ability so that individuals can return to work and lead independent
and fulfilling lives. Typically, rehabilitative healthcare services are provided
by a variety of healthcare professionals including physiatrists, rehabilitation
nurses, physical therapists, occupational therapists, speech-language
pathologists, respiratory therapists, recreation therapists, social workers,
psychologists, rehabilitation counselors and others. Over 80% of those receiving
rehabilitative healthcare services return to their homes, work, schools or
active retirement.
Demand for rehabilitative healthcare services continues to be driven by
advances in medical technologies, an aging population and the recognition on the
part of the payor community (insurers, self-insured companies, managed care
organizations and federal, state and local governments) that appropriately
administered rehabilitative services can improve quality of life as well as
lower overall healthcare costs. Studies conducted by insurance companies
demonstrate the ability of rehabilitation to significantly reduce the cost of
future care. Estimates of the savings range from $11 to $35 per dollar spent on
rehabilitation. Further, reimbursement changes have encouraged the rapid
discharge of patients from acute-care hospitals while they remain in need of
rehabilitative healthcare services.
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We also believe that there is a growing trend toward the provision of other
healthcare services on an outpatient basis, fueled by advances in technology,
demands for cost-effective care and concerns for patient comfort and
convenience. An industry study indicates that there was a 75% increase in the
number of treatments in all ambulatory settings from 1986 to 1996, with over 70%
of the total number of surgeries in the United States currently being performed
on an outpatient basis. We believe that these trends will continue to foster
demand for the delivery of healthcare services on an outpatient basis.
PATIENT CARE SERVICES
HEALTHSOUTH began its operations in 1984 with a focus on providing
comprehensive orthopaedic and musculoskeletal rehabilitation services on an
outpatient basis. Over the succeeding 16 years, we have consistently sought and
implemented opportunities to expand our services through acquisitions and
start-up development activities that complement our historic focus on
orthopaedic, sports medicine and occupational health services and that provide
independent platforms for growth. Our acquisitions and internal growth have
enabled HEALTHSOUTH to become one of the largest providers of healthcare
services in the United States. The following sections discuss the range of
services we offer in our inpatient and other clinical services and outpatient
services business segments. See Note 14 of "Notes to Consolidated Financial
Statements" for financial information concerning these segments.
Inpatient and Other Clinical Services
HEALTHSOUTH's inpatient and other clinical services business segment
includes the operations of its inpatient rehabilitation facilities and medical
centers, as well as the operations of certain physician practices and other
clinical services which are managerially aligned with our inpatient services.
INPATIENT REHABILITATION FACILITIES. At December 31, 1999, HEALTHSOUTH
operated 118 inpatient rehabilitation facilities with 7,702 licensed beds in the
continental United States, representing the largest group of affiliated
proprietary inpatient rehabilitation facilities in the nation, as well as a
71-bed rehabilitation hospital in Australia and a 17-bed rehabilitation facility
in Puerto Rico. Our inpatient rehabilitation facilities provide high-quality
comprehensive services to patients who require intensive institutional
rehabilitation care.
Inpatient rehabilitation patients are typically those who are experiencing
significant physical disabilities due to various conditions, such as head
injury, spinal cord injury, stroke, certain orthopaedic problems and
neuromuscular disease. Our inpatient rehabilitation facilities provide the
medical, nursing, therapy and ancillary services required to comply with local,
state and federal regulations as well as accreditation standards of the Joint
Commission on Accreditation of Healthcare Organizations (the "JCAHO") and the
Commission on Accreditation of Rehabilitation Facilities ("CARF").
All HEALTHSOUTH inpatient rehabilitation facilities utilize an
interdisciplinary team approach to the rehabilitation process and involve the
patient and family, as well as the payor, in the determination of the goals for
the patient. Internal case managers monitor each patient's progress and provide
documentation of patient status, achievement of goals, functional outcomes and
efficiency.
In certain markets, our rehabilitation hospitals may provide outpatient
rehabilitation services as a complement to their inpatient services. Typically,
this opportunity arises when patients complete their inpatient course of
treatment but remain in need of additional therapy that can be accomplished on
an outpatient basis. Depending upon the demand for outpatient services and
physical space constraints, the rehabilitation hospital may establish the
services either within its building or in a satellite location. In either case,
the clinical protocols and programs developed for use in our freestanding
outpatient centers are utilized by these facilities.
A number of our rehabilitation hospitals were developed in conjunction with
local tertiary-care facilities, including major teaching hospitals such as those
at Vanderbilt University, the University of Missouri and the University of
Virginia. This strategy of developing effective referral and service networks
prior to opening results in improved operating efficiencies for the new
facilities and provides a more coordinated continuum
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of care for the constituencies served by the tertiary-care facilities. In
addition to those facilities so developed by HEALTHSOUTH, we have entered into
or are pursuing similar affiliations with a number of our rehabilitation
hospitals which were obtained through our major acquisitions.
MEDICAL CENTERS. At December 31, 1999, HEALTHSOUTH operated five medical
centers with 1,125 licensed beds in four distinct markets, including one
facility managed under contract. These facilities provide general and specialty
medical and surgical healthcare services, emphasizing orthopaedics, sports
medicine and rehabilitation.
We acquired our medical centers as outgrowths of our rehabilitative
healthcare services. Often, patients require medical and surgical interventions
prior to the initiation of their rehabilitative care. In each of the markets in
which we have acquired a medical center, we had well-established relationships
with the medical communities serving each facility. Following the acquisition of
each of our medical centers, we have provided the resources to improve upon the
physical plant and expand services through the introduction of new technology.
We have also developed additional relationships between these facilities and
certain university facilities, including the University of Miami, Auburn
University and the University of Alabama at Birmingham. Through these
relationships, the influx of celebrity athletes and personalities and the
acquisition of new technology, all of our medical centers have improved their
operating efficiencies and enhanced census.
Each of our medical center facilities is licensed as an acute-care
hospital, is accredited by the JCAHO and participates in the Medicare
prospective payment system. See this Item, "Business -- Regulation".
INPATIENT FACILITY UTILIZATION. In measuring patient utilization of our
inpatient facilities, various factors must be considered. Due to market demand,
demographics, start-up status, renovation, patient mix and other factors, we may
not treat all licensed beds in a particular facility as available beds, which
sometimes results in a material variance between licensed beds and beds actually
available for utilization at any specific time. We are generally in a position
to increase the number of available beds at such facilities as market conditions
dictate. During the year ended December 31, 1999, our inpatient facilities
achieved an overall utilization, based on patient days and available beds, of
78.08%.
Outpatient Services
HEALTHSOUTH's outpatient services business segment includes our outpatient
rehabilitation facilities, our outpatient surgery centers, our outpatient
diagnostic centers and our occupational medicine centers. Since September 1999,
these outpatient services have been managed by local market managers, who are
responsible for all outpatient services in particular local markets, and
regional market leaders, who are responsible for overseeing the market managers
in particular regions.
OUTPATIENT REHABILITATION SERVICES. HEALTHSOUTH operates the largest group
of affiliated proprietary outpatient rehabilitation facilities in the United
States. Our outpatient rehabilitation centers offer a comprehensive range of
rehabilitative healthcare services, including physical therapy and occupational
therapy, that are tailored to the individual patient's needs, focusing
predominantly on orthopaedic injuries, sports injuries, work injuries, hand and
upper extremity injuries, back injuries, and various neurological/neuromuscular
conditions. As of December 31, 1999, we provided outpatient rehabilitative
healthcare services through approximately 1,379 outpatient locations, including
freestanding outpatient centers and their satellites, outpatient satellites of
inpatient facilities and outpatient facilities managed under contract.
Continuing emphasis on containing increases in healthcare costs, as
evidenced by Medicare's prospective payment system, the growth in managed care
and the various alternative healthcare reform proposals, has resulted in earlier
discharge of patients from acute-care facilities. As a result, many hospital
patients do not receive the intensity of services that may be necessary for them
to achieve a full recovery from their diseases, disorders or traumatic
conditions. HEALTHSOUTH's outpatient rehabilitation services play a significant
role in the continuum of care because they provide hospital-level services, in
terms of intensity, quality and frequency, in a more cost-efficient setting.
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Patients treated at HEALTHSOUTH outpatient centers will undergo varying
courses of therapy depending upon their individual needs. Some patients may only
require a few hours of therapy per week for a few weeks, while others may spend
up to five hours per day in therapy for six months or more, depending on the
nature, severity and complexity of their injuries.
In general, we initially establish an outpatient center in a given market,
either by acquiring an existing private therapy practice or through start-up
development, and institute our clinical protocols and programs in response to
the community's general need for services. We will then establish satellite
clinics that are dependent upon the main facility for management and
administrative services. These satellite clinics generally provide a specific
evaluative or specialty service/program, such as hand therapy or foot and ankle
therapy, in response to specific market demands.
Patient utilization of our outpatient rehabilitation facilities cannot be
measured in the conventional manner applied to acute-care hospitals, nursing
homes and other healthcare providers which have a fixed number of licensed beds
and serve patients on a 24-hour basis. Utilization patterns in outpatient
rehabilitation facilities will be affected by the market to be served, the types
of injuries treated, the patient mix and the number of available therapists,
among other factors. Moreover, because of variations in size, location, hours of
operation, referring physician base and services provided and other differences
among each of our outpatient facilities, it is not possible to accurately assess
patient utilization against a norm.
SURGERY CENTERS. HEALTHSOUTH is currently the largest operator of
outpatient surgery centers in the United States. At December 31, 1999, we
operated 230 freestanding surgery centers in 42 states. Over 80% of these
facilities are located in markets served by our rehabilitation facilities,
enabling us to pursue opportunities for cross-referrals between surgery and
rehabilitation facilities as well as to centralize administrative functions.
HEALTHSOUTH surgery centers provide the facilities and medical support staff
necessary for physicians to perform non-emergency surgical procedures. Our
typical surgery center is a freestanding facility with three to six fully
equipped operating and procedure rooms and ancillary areas for reception,
preparation, recovery and administration. Each HEALTHSOUTH surgery center is
available for use only by licensed physicians, oral surgeons and podiatrists,
and the centers do not perform surgery on an emergency basis.
Outpatient surgery centers, unlike hospitals, have not historically
provided overnight accommodations, food services or other ancillary services.
Over the past several years, states have increasingly permitted the use of
extended-stay recovery facilities by outpatient surgery centers. As a result,
many outpatient surgery centers are adding extended recovery care capabilities
where permitted. Most HEALTHSOUTH surgery centers currently provide for extended
recovery stays. Our ability to develop such recovery care facilities is
dependent upon state regulatory environments in the particular states where its
centers are located.
HEALTHSOUTH outpatient surgery centers implement quality control procedures
to evaluate the level of care provided at the centers. Each center has a medical
advisory committee of three to ten physicians which reviews the professional
credentials of physicians applying for medical staff privileges at the center.
DIAGNOSTIC CENTERS. At December 31, 1999, HEALTHSOUTH operated 129
diagnostic centers in 27 states and the United Kingdom. These centers provide
outpatient diagnostic imaging services, including magnetic resonance imaging
("MRI"), computerized tomography ("CT") services, X-ray services, ultrasound
services, mammography services, nuclear medicine services and fluoroscopy. Not
all services are provided at all sites; however, most HEALTHSOUTH diagnostic
centers are multi-modality centers offering multiple types of service.
HEALTHSOUTH diagnostic centers provide outpatient diagnostic procedures
performed by experienced radiological technicians. After the diagnostic
procedure is completed, the images are reviewed by radiologists who have
contracted with us. Those radiologists prepare a report of the test and their
findings, which are then delivered to the referring physician. Our diagnostic
centers are open at hours appropriate for the local medical community.
Because many patients at our rehabilitative healthcare and outpatient
surgery facilities require diagnostic procedures of the type performed at our
diagnostic centers, we believe that our diagnostic operations are a natural
complement to our other services and enhance our ability to market those
services to patients and payors.
8
OCCUPATIONAL MEDICINE SERVICES. At December 31, 1999, HEALTHSOUTH operated
124 occupational medicine centers in 29 states. These centers provide
cost-effective, outpatient primary medical care and rehabilitation services to
individuals for the treatment of work-related medical problems.
HEALTHSOUTH occupational medicine centers market their services to large
and small employers, workers' compensation and health insurers and managed care
organizations. The services provided at our occupational medicine centers
include outpatient primary medical care for work-related injuries and illnesses,
work-related physical examinations, physical therapy services and workers'
compensation medical services, as well as other services primarily aimed at
work-related injuries or illnesses. Medical services at the centers are provided
by licensed physicians who are employed by or under contract with HEALTHSOUTH or
affiliated medical practices. These centers also employ nurses, therapists and
other licensed professional staff as necessary for the services provided. We
believe that occupational medicine primary care services are a strategic
component of our business, and that the physicians in our occupational medicine
centers can, in many cases, serve as "gatekeepers" providing access to the other
services we offer.
Other Patient Care Services
In some markets, HEALTHSOUTH provides other patient care services,
including physician services and contract management of hospital-based
rehabilitative healthcare services. We evaluate market opportunities on a
case-by-case basis in determining whether to provide additional services of
these types, which may be complementary to facility-based services we provide or
stand-alone businesses. These services are included within our business segment
with which they are most closely aligned in the particular local market.
MARKETING OF FACILITIES AND SERVICES
We market our facilities, and their services and programs, on local,
regional and national levels. Local and regional marketing activities are
typically coordinated by local or area-based marketing personnel, whereas
large-scale regional and national efforts are coordinated by corporate-based
personnel. In Integrated Service Model markets, area marketing activities are
coordinated by an ISM Advisory Committee reflecting our range of services in
each market.
In general, we develop a marketing plan for each facility based on a
variety of factors, including population characteristics, physician
characteristics and incidence of disability statistics, in order to identify
specific service opportunities. Facility-oriented marketing programs are focused
on increasing the volume of patient referrals to the specific facility and
involve the development of ongoing relationships with area schools, businesses
and industries as well as physicians, health maintenance organizations and
preferred provider organizations.
HEALTHSOUTH's larger-scale marketing activities are focused more broadly on
efforts to generate patient referrals to multiple facilities and the creation of
new business opportunities. These activities include the development and
maintenance of contractual relationships or national pricing agreements with
large third-party payors, such as CIGNA, United Healthcare or other national
insurance companies, with national HMO/PPO companies, such as First Health and
Multiplan, with national case management companies, such as INTRACORP and
Crawford & Co., and with national employers, such as Wal-Mart, Georgia-Pacific
Corporation, Federated Department Stores, Goodyear Tire & Rubber and Winn-Dixie.
We also carry out broader programs designed to further enhance our name
recognition and association with amateur and professional athletics. Among these
is the HEALTHSOUTH Sports Medicine Council, headed by Bo Jackson and involving
other well-known professional and amateur athletes and sports medicine
specialists, which is dedicated to developing educational programs focused on
athletics for use in high schools. We have ongoing relationships with the
Professional Golfers Association, the Senior Professional Golfers Association,
the Ladies Professional Golf Association, the Southeastern Conference, the
Southwestern Athletic Conference, the U.S. Decathlon Team, USA Hockey, USA
Wrestling, USA Volleyball and more than 125 universities and colleges and
approximately 2,000 high schools to provide sports medicine coverage of events
and rehabilitative healthcare services for injured athletes. In addition, we
have established relationships with or provided treatment services for
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athletes from some 40-50 professional sports teams, as well as providing sports
medicine services for Olympic and amateur athletes. In 1996, HEALTHSOUTH and the
United States Olympic Committee established the Richard M. Scrushy/HEALTHSOUTH
Sports Medicine and Sport Science Center at the USOC's Colorado Springs campus.
HEALTHSOUTH maintains a Web site at www.healthsouth.com, which provides
information on the company, health information, links to our Securities and
Exchange Commission filings and press releases, a facility locator and links to
other relevant information. In addition, we have entered into an Alliance
Agreement with Healtheon/WebMD Corporation, one of the largest providers of
healthcare information on the World Wide Web. Under the Alliance Agreement,
HEALTHSOUTH and Healtheon/WebMD are partners in a co-branded Web channel called
"WebMD Sports & Fitness with HEALTHSOUTH", located at
http://my.webmd.com/sports. This Web channel provides consumers with news,
information and discussions on sports and fitness related topics and includes
links to a HEALTHSOUTH facility finder and to a dedicated HEALTHSOUTH channel
located at http://my.webmd.com/partners/healthsouth. We believe that these
activities enhance consumer and physician awareness of our services and
locations, as well as providing a valuable resource for health information
related to the services that we provide. HEALTHSOUTH expects to continue to
develop relationships with leading Internet-related companies in the healthcare
arena.
HEALTHSOUTH is a national sponsor of the United Cerebral Palsy Association
and the National Arthritis Foundation and supports many other charitable
organizations on national and local levels. Through these endeavors, HEALTHSOUTH
and its employees are able to support charitable organizations and activities
within their communities.
SOURCES OF REVENUES
Most of our revenues come from non-governmental revenue sources. The
following table sets forth the percentages of our revenues from various sources
for the periods indicated:
YEAR ENDED YEAR ENDED
SOURCE DECEMBER 31, 1998 DECEMBER 31, 1999
- ---------------------------------------- ------------------- ------------------
Medicare ...................... 35.9% 33.0%
Commercial (1) ................ 37.0 40.3
Workers' Compensation ......... 10.8 11.5
All Other Payors (2) .......... 16.3 15.2
----- -----
100.0% 100.0%
===== =====
- ------------------
(1) Includes commercial insurance, HMOs, PPOs and other managed care plans.
(2) Medicaid is included in this category, but is insignificant in amount.
The above table does not reflect the NSC facilities for periods or portions
thereof prior to the effective date of the NSC acquisition. Comparable
information for those facilities is not available.
See this Item, "Business -- Regulation -- Medicare Participation and
Reimbursement" for a description of certain of the reimbursement regulations
applicable to our facilities.
COMPETITION
HEALTHSOUTH's rehabilitation facilities compete on a local, regional and
national basis with other providers of specialized services such as sports
medicine and work hardening, and specific concentrations such as head injury
rehabilitation and orthopaedic surgery. The competition faced in each of these
markets is similar, with variations arising from the number of healthcare
providers in the given metropolitan area. The primary competitive factors in the
rehabilitation components of our inpatient and outpatient business segments are
quality of services, projected patient outcomes, charges for services,
responsiveness to the needs of the patients, community and physicians, and
ability to tailor programs and services to meet specific needs of the patients.
Competitors and potential competitors include hospitals,
10
private practice therapists, rehabilitation agencies and others. Some of these
competitors may have greater patient referral support and financial and
personnel resources in particular markets than we do. We believe that we compete
successfully within the marketplace based upon our reputation for quality,
competitive prices, positive rehabilitation outcomes, innovative programs, clean
and bright facilities and responsiveness to needs.
HEALTHSOUTH's surgery centers compete primarily with hospitals and other
operators of freestanding surgery centers in attracting physicians and patients
and in developing new centers and in acquiring existing centers. The primary
competitive factors in the outpatient surgery business are convenience, cost,
quality of service, physician loyalty and reputation. Hospitals have many
competitive advantages in attracting physicians and patients, including
established standing in a community, historical physician loyalty and
convenience for physicians making rounds or performing inpatient surgery in the
hospital. However, we believe that our national market system and our historical
presence in many of the markets where our surgery centers are located enhance
our ability to operate these facilities successfully.
HEALTHSOUTH's diagnostic centers compete with local hospitals, other
multi-center imaging companies, local independent diagnostic centers and imaging
centers owned by local physician groups. We believe that the principal
competitive factors in the diagnostic services business are price, quality of
service, ability to establish and maintain relationships with managed care
payors and referring physicians, reputation of interpreting physicians, facility
location and convenience of scheduling. We believe that our diagnostic
facilities compete successfully within their respective markets, taking into
account these factors.
HEALTHSOUTH's medical centers are located in four urban areas of the
country, all with well established healthcare services provided by a number of
proprietary, not-for-profit, and municipal hospital facilities. Our facilities
compete directly with these local hospitals as well as various nationally
recognized centers of excellence in orthopaedics, sports medicine and other
specialties. Because our facilities enjoy a national and international
reputation for orthopaedic surgery and sports medicine, we believe that our
medical centers' level of service and continuum of care enable them to compete
successfully, both locally and nationally.
We potentially face competition any time we initiate a Certificate of Need
project or seek to acquire an existing facility or Certificate of Need. See this
Item, "Business -- Regulation". This competition may arise either from competing
national or regional companies or from local hospitals or other providers which
file competing applications or oppose the proposed Certificate of Need project.
The necessity for these approvals serves as a barrier to entry and has the
potential to limit competition by creating a franchise to provide services to a
given area. We have generally been successful in obtaining Certificates of Need
or similar approvals when required, although there can be no assurance that we
will achieve similar success in the future.
REGULATION
The healthcare industry is subject to regulation by federal, state and
local governments. The various levels of regulatory activity affect our business
activities by controlling our growth, requiring licensure or certification of
our facilities, regulating the use of its properties and controlling the
reimbursement to HEALTHSOUTH for services provided.
Licensure, Certification and Certificate of Need Regulations
Capital expenditures for the construction of new facilities, the addition
of beds or the acquisition of existing facilities may be reviewable by state
regulators under a statutory scheme which is sometimes referred to as a
Certificate of Need program. States with Certificate of Need programs place
limits on the construction and acquisition of healthcare facilities and the
expansion of existing facilities and services. In such states, approvals are
required for capital expenditures exceeding certain amounts which involve
inpatient rehabilitation facilities or services or outpatient surgery centers.
Most states do not require such approvals for outpatient rehabilitation,
occupational health and diagnostic facilities and services.
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State Certificate of Need statutes generally provide that, prior to the
addition of new beds, the construction of new facilities or the introduction of
new services, a state health planning designated agency must determine that a
need exists for those beds, facilities or services. The Certificate of Need
process is intended to promote comprehensive healthcare planning, assist in
providing high quality healthcare at the lowest possible cost and avoid
unnecessary duplication by ensuring that only those healthcare facilities that
are needed will be built.
Typically, the provider of services submits an application to the
appropriate agency with information concerning the area and population to be
served, the anticipated demand for the facility or service to be provided, the
amount of capital expenditure, the estimated annual operating costs, the
relationship of the proposed facility or service to the overall state health
plan and the cost per patient day for the type of care contemplated. Whether the
Certificate of Need is granted is based upon a finding of need by the agency in
accordance with criteria set forth in Certificate of Need statutes and state and
regional health facilities plans. If the proposed facility or service is found
to be necessary and the applicant to be the appropriate provider, the agency
will issue a Certificate of Need containing a maximum amount of expenditure and
a specific time period for the holder of the Certificate of Need to implement
the approved project.
Licensure and certification are separate, but related, regulatory
activities. Licensure is usually a state or local requirement, and certification
is a federal requirement. In almost all instances, licensure and certification
will follow specific standards and requirements that are set forth in readily
available public documents. Compliance with the requirements is monitored by
annual on-site inspections by representatives of various government agencies.
All of our inpatient rehabilitation facilities and medical centers and
substantially all of our surgery centers are currently required to be licensed,
but only the outpatient rehabilitation facilities located in Alabama, Arizona,
Kentucky, Maryland, Massachusetts, New Hampshire, New Mexico and Rhode Island
currently must satisfy such a licensing requirement. Most states do not require
diagnostic and occupational medicine facilities to be licensed.
Medicare Participation and Reimbursement
In order to participate in the Medicare program and receive Medicare
reimbursement, each facility must comply with the applicable regulations of the
United States Department of Health and Human Services relating to, among other
things, the type of facility, its equipment, its personnel and its standards of
medical care, as well as compliance with all state and local laws and
regulations. All HEALTHSOUTH inpatient facilities, except for our St. Louis head
injury center, participate in the Medicare program. Approximately 1,093 of our
outpatient rehabilitation facilities currently participate in, or are awaiting
the assignment of a provider number to participate in, the Medicare program. All
of our surgery centers are certified (or awaiting certification) under the
Medicare program. Diagnostic and occupational health facilities are not
certified by the Medicare program. Our Medicare-certified facilities, inpatient
and outpatient, undergo annual on-site Medicare certification surveys in order
to maintain their certification status. Failure to comply with the program's
conditions of participation may result in loss of program reimbursement or other
governmental sanctions. We have developed our operational systems to attempt to
assure compliance with the various standards and requirements of the Medicare
program and have established ongoing quality assurance activities to monitor
compliance.
As a result of the Social Security Act Amendments of 1983, Congress adopted
a prospective payment system ("PPS") to cover the routine and ancillary
operating costs of most Medicare inpatient hospital services. Under this system,
the Secretary of Health and Human Services has established fixed payment amounts
per discharge based on diagnosis-related groups ("DRGs"). With limited
exceptions, reimbursement received by a hospital for Medicare inpatients is
limited to the DRG rate, regardless of the number of services provided to the
patient or the length of the patient's hospital stay. Under acute-care PPS, a
hospital may retain the difference, if any, between its DRG rate and its
operating costs incurred in furnishing inpatient services, and is at risk for
any operating costs that exceed its DRG rate. Our medical center facilities are
generally subject to acute-care PPS with respect to Medicare inpatient services.
The acute-care PPS program has been beneficial for the rehabilitation
segment of the healthcare industry because of the economic pressure on
acute-care hospitals to discharge patients as soon as possible. The result has
been increased demand for rehabilitation services for those patients discharged
12
early from acute-care hospitals. Freestanding inpatient rehabilitation
facilities are currently exempt from PPS, and inpatient rehabilitation units
within acute-care hospitals are eligible to obtain an exemption from PPS upon
satisfaction of certain federal criteria. As discussed below, freestanding
inpatient rehabilitation facilities and hospital-based inpatient rehabilitation
units are to be placed under a PPS currently required to be phased in beginning
October 1, 2000.
Currently, 17 of our outpatient centers are Medicare-certified
Comprehensive Outpatient Rehabilitation Facilities ("CORFs") and 924 are
Medicare-certified rehabilitation agencies or satellites. Additionally, we have
certification applications pending for three CORF sites and 149 rehabilitation
agency sites (including satellites.) Through December 31, 1998, CORFs were
reimbursed reasonable costs (subject to certain limits) for services provided to
Medicare beneficiaries, and outpatient rehabilitation facilities certified by
Medicare as rehabilitation agencies were reimbursed on the basis of the lower of
reasonable costs for services provided to Medicare beneficiaries or charges for
such services. Outpatient rehabilitation facilities which are physician-directed
clinics, as well as outpatient surgery centers, are reimbursed by Medicare on a
fee screen basis; that is, they receive a fixed fee, which is determined by the
geographical area in which the facility is located, for each procedure
performed. From January 1, 1999, CORFs and rehabilitation agencies are
reimbursed on a fee screen basis as well. Our outpatient rehabilitation
facilities submit monthly bills to their fiscal intermediaries for services
provided to Medicare beneficiaries, and we file annual cost reports with the
intermediaries for each such facility.
Our inpatient facilities (other than the medical center facilities) either
are not currently covered by PPS or are currently exempt from PPS, and are
currently cost-reimbursed, receiving the lower of reasonable costs or charges.
Typically, the fiscal intermediary pays a set rate based on the prior year's
costs for each facility. As with outpatient facilities subject to cost-based
reimbursement, annual cost reports are filed with our fiscal intermediary and
payment adjustments are made, if necessary.
As part of the Balanced Budget Act of 1997, Congress directed the United
States Department of Health and Human Services to develop regulations that would
subject inpatient rehabilitation hospitals to a PPS. The Act requires the
prospective payment rates to be phased in beginning October 1, 2000, and to be
fully implemented by October 1, 2002. The Act requires that the rates must equal
98% of the amount of payments that would have been made if the PPS had not been
adopted. Since the proposed regulations implementing inpatient rehabilitation
PPS have not been released, we cannot predict at this time the effect that this
new system may have on our future operations. In addition, the Act requires the
establishment of a PPS for hospital outpatient department services, effective
for services furnished beginning in 1999. Regulations implementing that
requirement have not been issued in final form.
In June 1998, the Health Care Financing Administration issued proposed
rules setting forth new payment classifications which would significantly change
Medicare reimbursement for outpatient surgery centers. However, these proposed
rules have not been promulgated in final form, and we cannot currently predict
when final rules, if any, will be adopted or the content or effect on our
operations of those rules.
Over the past several years an increasing number of healthcare providers
have been accused of violating the federal False Claims Act. That Act prohibits
the knowing presentation of a false claim to the United States government.
Because HEALTHSOUTH performs thousands of similar procedures a year for which it
is reimbursed by Medicare and there is a relatively long statute of limitations,
a billing error or cost reporting error could result in significant civil or
criminal penalties.
Relationships with Physicians and Other Providers
Various state and federal laws regulate relationships among providers of
healthcare services, including employment or service contracts and investment
relationships. These restrictions include a federal criminal law prohibiting (a)
the offer, payment, solicitation or receipt of remuneration by individuals or
entities to induce referrals of patients for services reimbursed under the
Medicare or Medicaid programs or (b) the leasing, purchasing, ordering,
arranging for or recommending the lease, purchase or order of any item, good,
facility or service covered by such programs (the "Fraud and Abuse Law"). In
addition to federal criminal sanctions, violators of the Fraud and Abuse Law may
be subject to significant civil sanctions, including fines and/or exclusion from
the Medicare and/or Medicaid programs.
13
In 1991, the Office of the Inspector General ("OIG") of the United States
Department of Health and Human Services issued regulations describing
compensation arrangements which are not viewed as illegal remuneration under the
Fraud and Abuse Law (the "1991 Safe Harbor Rules"). The 1991 Safe Harbor Rules
create certain standards ("Safe Harbors") for identified types of compensation
arrangements which, if fully complied with, assure participants in the
particular arrangement that the OIG will not treat that participation as a
criminal offense under the Fraud and Abuse Law or as the basis for an exclusion
from the Medicare and Medicaid programs or an imposition of civil sanctions.
In 1992, regulations were published in the Federal Register implementing
the OIG sanction and civil money penalty provisions established in the Fraud and
Abuse Law. The regulations provide that the OIG may exclude a Medicare provider
from participation in the Medicare Program for a five-year period upon a finding
that the Fraud and Abuse Law has been violated. The regulations expressly
incorporate a test adopted by three federal circuit courts providing that if one
purpose of remuneration that is offered, paid, solicited or received is to
induce referrals, then the statute is violated. The regulations also provide
that after the OIG establishes a factual basis for excluding a provider from the
program, the burden of proof shifts to the provider to prove that it has not
violated the Fraud and Abuse Law.
The OIG closely scrutinizes healthcare joint ventures involving physicians
and other referral sources. In 1989, the OIG published a Fraud Alert that
outlined questionable features of "suspect" joint ventures, and has continued to
rely on such Fraud Alert in later pronouncements. We currently operate 23 of our
rehabilitation hospitals and many of our outpatient rehabilitation facilities as
limited partnerships or limited liability companies (collectively,
"partnerships") with third-party investors. Six of the rehabilitation hospital
partnerships involve physician investors and 17 of the rehabilitation hospital
partnerships involve other institutional healthcare providers. Eight of the
outpatient partnerships currently have a total of 21 physician limited partners,
some of whom refer patients to the partnerships. Those partnerships which are
providers of services under the Medicare program, and their limited partners,
are subject to the Fraud and Abuse Law. A number of the relationships we have
established with physicians and other healthcare providers do not fit within any
of the Safe Harbors. The 1991 Safe Harbor Rules do not expand the scope of
activities that the Fraud and Abuse Law prohibits, nor do they provide that
failure to fall within a Safe Harbor constitutes a violation of the Fraud and
Abuse Law; however, the OIG has indicated that failure to fall within a Safe
Harbor may subject an arrangement to increased scrutiny.
Most of our surgery centers are owned by partnerships, which include as
partners physicians who perform surgical or other procedures at such centers. On
November 19, 1999, the Department of Health and Human Services promulgated rules
setting forth additional Safe Harbors under the Fraud and Abuse Law (the "1999
Safe Harbors"). Included in the 1999 Safe Harbors is a Safe Harbor which would
protect payments to investors in ambulatory surgery centers who are surgeons who
refer patients directly to the center and perform surgery themselves on referred
patients as an extension of their practices (the "ASC Safe Harbor"). Under the
ASC Safe Harbor, ownership in a freestanding ambulatory surgery center will be
protected if a number of conditions are satisfied. Included in those conditions
is a requirement that each investor be either (a) a surgeon who derived at least
one-third of his medical practice income for the previous fiscal year or
twelve-month period from performing procedures on the list of Medicare-covered
procedures for ambulatory surgery centers or (b) not in a position to make or
influence referrals to the center, nor provide items or services to the center,
nor an employee of the center or of any investor. In addition, if all physician
investors are not members of a single specialty, at least one-third of the
Medicare-eligible ambulatory surgery procedures performed by each physician
investor for the previous fiscal year or previous twelve-month period must be
performed at the center in which the investment is made. Since a subsidiary of
HEALTHSOUTH is an investor in each partnership which owns a surgery center and
provides management and other services to the surgery center, our arrangements
with physician investors do not fit within the specific terms of the ASC Safe
Harbor. In addition, because we do not control the medical practices of our
physician investors or control where they perform surgical procedures, it is
possible that the quantitative tests described above will not be met, or that
other conditions of the ASC Safe Harbor will not be met. Accordingly, while the
ASC Safe Harbor is helpful in establishing the principle that a physician
investor's interest in a surgery center partnership should be considered as an
extension of the physician's practice and not as a prohibited financial
14
relationship, there can be no assurance that such ownership interests will not
be challenged under the Fraud and Abuse Law. We believe, however, that our
arrangements with physicians with respect to surgery center facilities should
not fall within the activities prohibited by the Fraud and Abuse Law.
Some of our diagnostic centers are owned or operated by partnerships which
include radiologists as partners. While such ownership interests are not
directly covered by the Safe Harbor Rules, we do not believe that such
arrangements violate the Fraud and Abuse Law because radiologists are typically
not in a position to make or induce referrals to diagnostic centers. In
addition, our mobile lithotripsy operations are conducted by partnerships in
which urologists are limited partners. Because such urologists are in a position
to, and do, perform lithotripsy procedures utilizing our lithotripsy equipment,
we believe that the same analysis underlying the ASC Safe Harbor should apply to
ownership interests in lithotripsy equipment held by urologists. In addition, we
believe that the nature of lithotripsy services (i.e., lithotripsy is only
prescribed and utilized when a condition for which lithotripsy is the treatment
of choice has been diagnosed) makes the risk of overutilization unlikely. There
can be no assurance, however, that the Fraud and Abuse Law will not be
interpreted in a manner contrary to our beliefs with respect to diagnostic and
lithotripsy services.
While several federal court decisions have aggressively applied the
restrictions of the Fraud and Abuse Law, they provide little guidance as to the
application of the Fraud and Abuse Law to our partnerships. We believe that our
operations are in compliance with the current requirements of applicable federal
and state law, but no assurances can be given that a federal or state agency
charged with enforcement of the Fraud and Abuse Law and similar laws might not
assert a contrary position or that new federal or state laws, or new
interpretations of existing laws, might not adversely affect relationships we
have established with physicians or other healthcare providers or result in the
imposition of penalties on HEALTHSOUTH or particular HEALTHSOUTH facilities.
Even the assertion of a violation could have a material adverse effect upon our
business, results of operations or financial condition.
The so-called "Stark II" provisions of the Omnibus Budget Reconciliation
Act of 1993 amend the federal Medicare statute to prohibit the making by a
physician of referrals for "designated health services" including physical
therapy, occupational therapy, radiology services or radiation therapy, to an
entity in which the physician has an investment interest or other financial
relationship, subject to certain exceptions. Such prohibition took effect on
January 1, 1995 and applies to all of our partnerships with physician partners.
On January 9, 1998, the Department of Health and Human Services published
proposed regulations (the "Proposed Stark Regulations") under the Stark II
statute and solicited comments thereon. The Proposed Stark Regulations would
implement, amplify and clarify the Stark II statute. Final regulations are not
expected to be promulgated until later in 2000. In addition, a number of states
have passed or are considering statutes which prohibit or limit physician
referrals of patients to facilities in which they have an investment interest.
In response to these regulatory activities, we have restructured most of our
partnerships which involve physician investors to the extent required by
applicable law, in order to eliminate physician ownership interests not
permitted by applicable law. We intend to take such actions as may be required
to cause the remaining partnerships to be in compliance with applicable laws and
regulations, including, if necessary, the prohibition of physician partners from
referring patients. We believe that this restructuring has not adversely
affected and will not adversely affect the operations of our facilities.
Ambulatory surgery is not identified as a "designated health service" under
Stark II, and we do not believe the statute is intended to cover ambulatory
surgery services. The Proposed Stark Regulations would expressly clarify that
the provision of designated health services in an ambulatory surgery center
would be excepted from the referral prohibition of Stark II if payment for such
designated health services is included in the ambulatory surgery center payment
rate.
Our lithotripsy units frequently operate on hospital campuses, and it is
possible to conclude that such services are "inpatient and outpatient hospital
services" -- a category of designated health services under Stark II. The
legislative history of the Stark II statute indicates that the statute was not
intended to cover the provision of lithotripsy services by physician-owned
lithotripsy providers under contract with a hospital. In the commentary to the
Proposed Stark Regulations, the Department of Health and Human
15
Services specifically solicited comments as to whether lithotripsy services
should be excluded from the definition of "inpatient and outpatient hospital
services". In the event that lithotripsy services are not so excluded, we
believe that the operations of our lithotripsy partnerships either comply with,
or can be restructured to comply with, certain other exceptions to the Stark II
referral prohibitions, and we intend to take such steps as may be required to
cause those partnerships to be in compliance with Stark II if the final
regulations so require. In addition, physicians frequently perform endoscopic
procedures in the procedure rooms of our surgery centers, and it is possible to
construe such services to be "designated health services". While we do not
believe that Stark II was intended to apply to such services, if that were
determined to be the case, we intend to take steps necessary to cause the
operations of our facilities to comply with the law.
The Health Insurance Portability and Accountability Act of 1996
In an effort to combat healthcare fraud, Congress included several
anti-fraud measures in the Health Insurance Portability and Accountability Act
of 1996 ("HIPAA"). HIPAA, among other things, amends existing crimes and
criminal penalties for Medicare fraud and enacts new federal healthcare fraud
crimes. HIPAA also expands the Fraud and Abuse Law to apply to all federal
healthcare programs, defined to include any plan or program that provides health
benefits through insurance that is funded by the federal government. Under
HIPAA, the Secretary of the Department of Health and Human Services (the
"Secretary") may exclude from the Medicare program any individual who has a
direct or indirect ownership or control interest in a healthcare entity that has
been convicted of a healthcare fraud crime or that has been excluded from the
Medicare program. HIPAA directs the Secretary to establish a program to collect
information on healthcare fraud and abuse to encourage individuals to report
information concerning fraud and abuse against the Medicare program and provides
for payment of a portion of amounts collected to such individuals. HIPAA
mandates the establishment of a Fraud and Abuse Program, among other programs,
to control fraud and abuse with respect to health plans and to conduct
investigations, audits, evaluations, and inspections relating to the delivery of
and payment for healthcare in the United States.
HIPAA prohibits any person or entity from knowingly and willfully
committing a federal healthcare offense relating to a "health care benefit
program". Under HIPAA, a "health care benefit program" broadly includes any
private plan or contract affecting interstate commerce under which any medical
benefit, item, or service is provided to any individual. Among the "federal
health care offenses" prohibited by HIPAA are healthcare fraud and making false
statements relative to healthcare matters. Any person or entity that knowingly
and willfully defrauds or attempts to defraud a healthcare benefit program or
obtains by means of false or fraudulent pretenses, representations or promises,
any of the money or property of any healthcare benefit program in connection
with the delivery of healthcare services is subject to a fine and/or
imprisonment. In addition, HIPAA provides that any person or entity that
knowingly and willfully falsifies, conceals or covers up a material fact or
makes any materially false or fraudulent statements in connection with the
delivery of or payment of healthcare services by a healthcare benefit plan is
subject to a fine and/or imprisonment.
HIPAA further expands the list of acts which are subject to civil monetary
penalties under federal law and increases the amount of civil penalties which
may be imposed. HIPAA provides for civil fines for individuals who retain an
ownership or control interest in a Medicare or Medicaid participating entity
after such individuals have been excluded from participating in the Medicare or
Medicaid program. HIPAA further provides for civil fines for individuals who
offer inducements to Medicare or Medicaid eligible patients if the individuals
know or should know that their offers will influence the patients to order or
receive items or services from a particular provider, practitioner or supplier.
We cannot predict whether other regulatory or statutory provisions will be
enacted by federal or state authorities which would prohibit or otherwise
regulate relationships which we have established or may establish with other
healthcare providers or the possibility of materially adverse effects on its
business or revenues arising from such future actions. We believe, however, that
we will be able to adjust our operations so as to be in compliance with any
regulatory or statutory provision that may be applicable. See this Item,
"Business -- Patient Care Services" and "Business -- Sources of Revenues".
16
INSURANCE
Beginning December 1, 1993, we became self-insured for professional
liability and comprehensive general liability. We purchased coverage for all
claims incurred prior to December 1, 1993. In addition, we purchased underlying
insurance which would cover all claims once established limits have been
exceeded. It is the opinion of management that as of December 31, 1999, we had
adequate reserves to cover losses on asserted and unasserted claims.
In connection with the Horizon/CMS acquisition, HEALTHSOUTH assumed
responsibility for handling Horizon/CMS's open professional and general
liability claims. We have entered into an agreement with an insurance carrier to
assume responsibility for the majority of open claims. Under this agreement, a
"risk transfer" converted Horizon/CMS's self-insured claims to insured
liabilities consistent with the terms of the underlying insurance policy.
EMPLOYEES
As of December 31, 1999, we employed approximately 51,260 persons, of whom
32,378 were full-time employees and 18,882 were part-time or per diem employees.
Of the above employees, 1,140 (including 370 part-time or per diem employees)
were employed at our headquarters in Birmingham, Alabama. Except for
approximately 80 employees at one rehabilitation hospital (about 14.9% of that
facility's workforce), none of our employees are represented by a labor union.
We are not aware of any current activities to organize our employees at other
facilities. Management considers the relationship between HEALTHSOUTH and its
employees to be good.
ITEM 2. PROPERTIES.
HEALTHSOUTH's executive offices occupy a headquarters building of
approximately 200,000 square feet in Birmingham, Alabama. The headquarters
building was constructed on a 73-acre parcel of land owned by HEALTHSOUTH
pursuant to a tax retention operating lease structured through NationsBanc
Leasing Corporation. Substantially all of our outpatient rehabilitation and
occupational medicine operations are carried out in leased facilities. We own 31
of our inpatient rehabilitation facilities and lease or operate under management
contracts the remainder of our inpatient rehabilitation facilities. We also own
62 of our surgery centers and 31 of our diagnostic centers and lease or operate
under management arrangements the remainder. We constructed our rehabilitation
hospitals in Florence and Columbia, South Carolina, Kingsport and Nashville,
Tennessee, Concord, New Hampshire, Dothan, Alabama, Columbia, Missouri, and
Charlottesville, Virginia on property leased under long-term ground leases. The
property on which our Memphis, Tennessee rehabilitation hospital is located is
owned in partnership by HEALTHSOUTH and Methodist Hospitals of Memphis. We own
four of our medical center facilities and manage one under contract. We
currently own, and from time to time may acquire, certain other improved and
unimproved real properties in connection with our business. See Notes 5 and 7 of
"Notes to Consolidated Financial Statements" for information with respect to the
properties we own and certain related indebtedness.
In management's opinion, our physical properties are adequate for our needs
for the foreseeable future, and are consistent with our expansion plans
described elsewhere in this Annual Report on Form 10-K.
17
The following table sets forth a listing of our primary domestic patient
care services locations (including both facilities owned or leased by
HEALTHSOUTH and facilities under management agreements or similar arrangements)
at December 31, 1999:
INPATIENT
REHABILITATION OCCUPATIONAL OUTPATIENT
FACILITIES MEDICAL MEDICINE REHABILITATION SURGERY DIAGNOSTIC
STATE (BEDS)(1) CENTERS (BEDS)(1) CENTERS CENTERS(2) CENTERS CENTERS
- ------------------------------ --------------- ------------------- -------------- ---------------- --------- -----------
Alabama ...................... 8 (404) 2 (538) 32 7 5
Alaska ....................... 4 7 1 1
Arizona ...................... 4 (243) 8 29 2 2
Arkansas ..................... 6 (301) 3 22 2
California ................... 1 (60) 27 62 55 3
Colorado ..................... 1 (64) 1 36 5 6
Connecticut .................. 2 32 6
Delaware ..................... 6 1
District of Columbia ......... 1 1
Florida ...................... 10 (661) 1 (281) 6 120 18 6
Georgia ...................... 1 (50) 4 37 4 11
Hawaii ....................... 10 2
Idaho ........................ 3 1
Illinois ..................... 1 59 8 8
Indiana ...................... 3 (200) 2 13 5 1
Iowa ......................... 1 6 2
Kansas ....................... 3 (224) 16
Kentucky ..................... 2 (80) 2 7 6
Louisiana .................... 2 (267) 4 9 2 3
Maine ........................ 2 (125) 1 10
Maryland ..................... 2 (117) 32 5 6
Massachusetts ................ 9 (839) 1 46 1 2
Michigan ..................... 1 (30) 3 13 1
Minnesota .................... 17 2
Mississippi .................. 13 3
Missouri ..................... 2 (160) 1 70 8 2
Montana ...................... 4 1
Nebraska ..................... 1 5
Nevada ....................... 2 (130) 20 3
New Hampshire ................ 3 (98) 8
New Jersey ................... 1 (155) 2 71 3 3
New Mexico ................... 1 (61) 6 1 1
New York ..................... 1 (29) 1 51 1 3
North Carolina ............... 44 10 1
North Dakota ................. 3
Ohio ......................... 1 (31) 3 40 8 1
Oklahoma ..................... 3 (153) 1 19 5 2
Oregon ....................... 30 2
Pennsylvania ................. 13 (1,081) 3 72 6 12
Rhode Island ................. 2 2
South Carolina ............... 4 (238) 15 2 5
South Dakota ................. 4 1
Tennessee .................... 7 (395) 40 7 4
Texas ........................ 18 (1,113) 1 (106) 12 121 20 26
Utah ......................... 1 (89) 2 10 2 2
Vermont ...................... 1 1
Virginia ..................... 2 (90) 1 (200) 6 32 1 5
Washington ................... 17 63 4 1
West Virginia ................ 4 (214) 3 1
Wisconsin .................... 8 4
Wyoming ...................... 2
- ------------------
(1) "Beds" refers to the number of beds for which a license or certificate of
need has been granted, which may vary materially from beds available for
use.
(2) Includes freestanding outpatient centers and their satellites, outpatient
satellites of inpatient rehabilitation facilities and outpatient facilities
managed under contract.
In addition, at December 31, 1999, we operated six diagnostic centers in
the United Kingdom, one 71-bed rehabilitation hospital in Australia and one
17-bed inpatient rehabilitation facility in Puerto Rico, as well as numerous
locations in various states providing other services.
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of its business, HEALTHSOUTH may be subject, from
time to time, to claims and legal actions by patients and others. We do not
believe that any such pending actions, if adversely decided, would have a
material adverse effect on our financial condition. See Item 1, "Business --
Insurance" and Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a description of our insurance coverage
arrangements.
From time to time, we appeal decisions of various rate-making authorities
with respect to Medicare rates established for HEALTHSOUTH facilities. These
appeals are initiated in the ordinary course of business. Management believes
that adequate reserves have been established for possible adverse decisions on
any pending appeals and that the outcomes of currently pending appeals, either
individually or in the aggregate, will have no material adverse effect on
HEALTHSOUTH's operations.
SECURITIES LITIGATION
HEALTHSOUTH was served with various lawsuits filed beginning September 30,
1998 purporting to be class actions under the federal and Alabama securities
laws. Such lawsuits were filed following a decline in our stock price at the end
of the quarter of 1998. Seven such suits were filed in the United States
District Court for the Northern District of Alabama. In January 1999, those
suits were ordered to be consolidated under the case style In re HEALTHSOUTH
Corporation Securities Litigation, Master File No. CV98-O-2634-S. On April 12,
1999, the plaintiffs filed a consolidated amended complaint against HEALTHSOUTH
and certain of our current and former officers and directors alleging that,
during the period April 24, 1997 through September 30, 1998, the defendants
misrepresented or failed to disclose certain material facts concerning our
business and financial condition and the impact of the Balanced Budget Act of
1997 on our operations in order to artificially inflate the price of our common
stock and issued or sold shares of such stock during the purported class period,
all allegedly in violation of Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 thereunder. Certain of the named plaintiffs in the
consolidated amended complaint also claim to represent separate subclasses
consisting of former stockholders of Horizon/CMS and NSC who received shares of
HEALTHSOUTH common stock in connection with our acquisition of those entities
and assert additional claims under Section 11 of the Securities Act of 1933 with
respect to the registration of securities issued in those acquisitions.
Another suit, Peter J. Petrunya v. HEALTHSOUTH Corporation, et al., Civil
Action No. 98-05931, was filed in the Circuit Court for Jefferson County,
Alabama, alleging that during the period July 16, 1996 through September 30,
1998 the defendants misrepresented or failed to disclose certain material facts
concerning our business and financial condition, allegedly in violation of
Sections 8-6-17 and 8-6-19 of the Alabama Securities Act. The Petrunya complaint
was voluntarily dismissed by the plaintiff without prejudice in January 1999.
Additionally, a suit styled Dennis Family Trust v. Richard M. Scrushy, et al.,
Civil Action No. 98-06592, has been filed in the Circuit Court for Jefferson
County, Alabama, purportedly as a derivative action on behalf of HEALTHSOUTH.
That suit largely replicates the allegations originally set forth in the
individual complaints filed in the federal actions described in the preceding
paragraph and alleges that the current directors of HEALTHSOUTH, certain former
directors and certain officers of HEALTHSOUTH breached their fiduciary duties to
HEALTHSOUTH and engaged in other allegedly tortious conduct. The plaintiff in
that case has forborne pursuing its claim thus far pending further developments
in the federal action, and the defendants have not yet been required to file a
responsive pleading in the case.
We filed a motion to dismiss the consolidated amended complaint in the
federal action in late June 1999. The parties have filed various briefs related
to this motion. We cannot predict when the court will
19
hear arguments or rule on our motion. We believe that all claims asserted in the
above suits are without merit, and expect to vigorously defend against such
claims. Because such suits remain at an early stage, we cannot currently predict
the outcome of any such suits or the magnitude of any potential loss if our
defense is unsuccessful.
CERTAIN HORIZON/CMS LITIGATION
On October 29, 1997, we acquired Horizon/CMS through the merger of a wholly
owned subsidiary of HEALTHSOUTH into Horizon/CMS. Horizon/CMS is currently a
party, or is subject, to certain material litigation matters and disputes, which
are described below, as well as various other litigation matters and disputes
arising in the ordinary course of its business.
Michigan Attorney General Litigation Regarding Long-Term Care Facility In
Michigan
Horizon/CMS learned in September 1996 that the Attorney General of the
State of Michigan was investigating one of its skilled nursing facilities. The
facility, in Howell, Michigan, was owned and operated by Horizon/CMS from
February 1994 until December 31, 1997. As widely reported in the press, the
Attorney General seized a number of patient, financial and accounting records
that were located at this facility. By order of a circuit judge in the county in
which the facility is located, the Attorney General was ordered to return
patient records to the facility for copying. Horizon/CMS advised the Michigan
Attorney General that it was willing to cooperate fully in the investigation.
The facility in question was sold by Horizon/CMS to IHS on December 31, 1997.
On February 19, 1998, the State of Michigan filed a criminal complaint
against Horizon/CMS, four former employees of the facility and one former
Horizon/CMS regional manager, alleging various violations in 1995 and 1996 of
certain statutes relating to patient care, patient medical records and the
making of false statements with respect to the condition or operations of the
facility (State of Michigan v. Horizon/CMS Healthcare Corp., et al., Case No.
98-630-FY, State of Michigan District Court 54B). The maximum fines chargeable
against Horizon/CMS under the counts alleged in the complaint (exclusive of
charges against the individual defendants, some of which charges may result in
indemnification obligations for Horizon/CMS) aggregate $69,000. Horizon/CMS
denies the allegations made in the complaint and expects to vigorously defend
against the charges. The litigation continued at the pretrial hearing phase for
over a year, including numerous adjournments, and Horizon/CMS is still awaiting
a decision by the court as to which, if any, charges may be brought to trial.
Because of the preliminary status of this litigation, it is not possible to
predict at this time the outcome or effect of this litigation or the length of
time it will take to resolve this litigation.
Lawsuit by Former Shareholders of Communi-Care, Inc. and Pro Rehab, Inc.
On May 28, 1997, Continental Medical Systems, Inc. ("CMS"), a Horizon/CMS
subsidiary acquired in 1995, was served with a lawsuit styled Kenneth Hubbard
and Lynn Hubbard v. Rocco Ortenzio, Robert A. Ortenzio and Continental Medical
Systems, Inc., No. 3:97 CV294MCK, filed in the United States District Court for
the Western District of North Carolina, Charlotte Division, by the former
shareholders of Communi-Care, Inc. and Pro Rehab, Inc. seeking damages arising
out of certain "earnout" provisions of the definitive purchase agreements under
which CMS purchased the outstanding stock of Communi-Care, Inc. and Pro Rehab,
Inc. from such shareholders. The plaintiffs allege that the manner in which CMS
and the other defendants operated the companies after their acquisition breached
its fiduciary duties to the plaintiffs, constituted fraud, gross negligence and
bad faith and a breach of their employment agreements with the companies. As a
result of such alleged conduct, the plaintiffs assert that they are entitled to
damages in an amount in excess of $27,000,000 from CMS and the other defendants.
Some of the plaintiffs' claims were dismissed by order of the court in September
1999. Horizon/CMS believes, based upon its evaluation of the legal and factual
matters relating to the plaintiffs' assertions, that it has valid defenses to
the plaintiffs' remaining claims and, as a result, intends to vigorously contest
such claims. Horizon/CMS has also filed various counterclaims against the
plaintiffs. Because this litigation remains at a procedurally early stage,
HEALTHSOUTH cannot now predict the outcome or effect of such litigation or the
length of time it will take to resolve such litigation.
20
EEOC Litigation
In March 1997, the Equal Employment Opportunity Commission filed a
complaint against Horizon/CMS alleging that Horizon/CMS had engaged in unlawful
employment practices in respect of Horizon/CMS's employment policies related to
pregnancies. Specifically, the EEOC asserted that
Horizon/CMS's alleged refusal to provide pregnant employees with light-duty
assignments to accommodate their temporary disabilities caused by pregnancy
violated Sections 701(k) and 703(a) of Title VII, 42 U.S.C. (section)(section)
2000e-(k) and 2000e-2(a). In this lawsuit, the EEOC sought, among other things,
to permanently enjoin Horizon/CMS's employment practices in this regard. The
trial court ruled in favor of Horizon/CMS on all counts, and the EEOC has
appealed that decision to the United States Tenth Circuit Court of Appeals. That
appeal remains pending.
Heritage Western Hills Litigation
Since July 1996, Horizon/CMS has been a defendant in a lawsuit styled Lexa
A. Auld, Administratrix of Martha Hary, Deceased v. Horizon/CMS Healthcare
Corporation and Charles T. Maxvill, D.O., No. 48-165121, 48th Judicial District
Court, Tarrant County, Texas. The case involved injuries allegedly suffered by a
resident of the Heritage Western Hills nursing facility in Fort Worth, Texas.
Horizon/CMS tendered the claim to its insurance carrier, which accepted coverage
with a reservation of rights and provided a defense through the carrier's
selected counsel in Dallas, Texas. The case went to trial on October 29, 1997,
and on November 7, 1997, the jury rendered a verdict in favor of the plaintiff
in the amount of $2,370,000 in compensatory damages and $90,000,000 in punitive
damages. Counsel has advised Horizon/CMS that, under applicable Texas law, the
punitive damages award is, at worst, limited to four times the amount of the
compensatory damages (the "Punitive Damages Cap"), and thus that the maximum
amount of an enforceable judgment in favor of the plaintiff is approximately
$12,000,000. Counsel has also advised Horizon/CMS that there are, potentially,
other and further caps on both the amount of compensatory damages available to
the plaintiff and the amount of punitive damages. Horizon/CMS filed the required
motions with the court to impose the Punitive Damages Cap. On February 20, 1998,
the court reduced the jury's verdict and entered a judgment in the amount of
approximately $11,237,000. Horizon/CMS also vigorously disputes the efficacy of
the jury's verdict and has appealed the judgment. The judgment was left
unchanged by the intermediate appellate court and is now being appealed to the
Texas Supreme Court.
Horizon/CMS's insurance carrier continues to defend the matter subject to a
reservation of rights. Horizon/CMS, based upon an evaluation by its then-current
internal counsel, after reviewing the findings contained in the jury verdict,
the insurance policy at issue and the carrier's handling of the case, believes
that the entirety of any judgment ultimately entered is covered by and payable
from that insurance policy, less Horizon/CMS's self-insured retention of
$250,000. On November 19, 1997, the insurance carrier sent Horizon/CMS a letter
indicating its belief that various policy exclusions might apply and requesting
additional information which might affect its coverage determination. Following
negotiations with the insurance carrier over these coverage issues, Horizon/CMS
filed a declaratory judgment action in the United States District Court for the
District of New Mexico seeking a declaration that the insurance carrier was
required to cover the punitive damages component of the judgment in this case
and in similar cases, up to policy limits. That litigation was subsequently
resolved to the satisfaction of all parties. Thus, while it is not possible at
this time to predict the outcome of the appeal of this judgment, Horizon/CMS
expects all liability, less its self-insured retention of $250,000, to be
covered by insurance. See Item 1, "Business -- Insurance".
HEALTH IMAGES/FONAR LITIGATION
On February 2, 1998, Fonar Corporation filed an action against HEALTHSOUTH
in the United States District Court for the Eastern District of New York styled
Fonar Corporation v. HEALTHSOUTH, Inc., Civil Action No. 98-CV-679 (LDW)(ARL).
In the complaint, Fonar alleges that HEALTHSOUTH infringed United States Patent
Number 4,871,966 (the "'966 patent") which pertains to the operation of the
Multi-Angle Oblique ("MAO") feature in MRI machines. The MAO feature enables the
MRI machine to scan multiple differing angles in a single MAO scan. Fonar seeks
damages
21
in an unspecified amount, along with enhanced damages for alleged willful
infringement. Fonar's allegations of infringement and willful infringement are
based largely on the actions of Health Images prior to its acquisition by
HEALTHSOUTH on March 3, 1997. Health Images, and subsequently HEALTHSOUTH, are
alleged to have infringed the '966 patent through the manufacture and use of MRI
equipment that contains the MAO feature.
HEALTHSOUTH has answered Fonar's complaint denying the allegations of
infringement. At this time, the litigation is in the discovery phase, and we
cannot predict the outcome or effect of this litigation or the length of time it
will take to resolve this litigation. The court has set the matter for a final
pretrial conference on September 15, 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
HEALTHSOUTH common stock is listed for trading on the New York Stock
Exchange under the symbol "HRC". The following table sets forth for the fiscal
periods indicated the high and low reported sale prices for HEALTHSOUTH common
stock as reported on the NYSE Composite Transactions Tape.
REPORTED
SALE PRICE
-------------------------
HIGH LOW
----------- -----------
1998
- ----------------
First Quarter .................... $ 30.44 $ 21.69
Second Quarter ................... 30.81 25.75
Third Quarter .................... 30.12 8.88
Fourth Quarter ................... 15.88 7.69
1999
- ----------------
First Quarter .................... $ 17.75 $ 10.38
Second Quarter ................... 16.00 8.94
Third Quarter .................... 15.38 4.56
Fourth Quarter ................... 6.38 4.69
The closing price per share for HEALTHSOUTH common stock on the New York
Stock Exchange on March 24, 2000, was $6.1875.
There were approximately 6,852 holders of record of HEALTHSOUTH common
stock as of March 24, 2000.
We have never paid cash dividends on our common stock (although certain of
the companies we have acquired in pooling-of-interests transactions had paid
dividends prior to such acquisitions), and we do not anticipate paying cash
dividends in the foreseeable future. We currently anticipate that any future
earnings will be retained to finance our operations.
RECENT SALES OF UNREGISTERED SECURITIES
There were no unregistered sales of equity securities by HEALTHSOUTH in
1999.
23
ITEM 6. SELECTED FINANCIAL DATA.
Set forth below is a summary of selected consolidated financial data for
HEALTHSOUTH for the years indicated. All amounts have been restated to reflect
the effects of the 1995 acquisitions of Surgical Health Corporation ("SHC") and
Sutter Surgery Centers, Inc. ("SSCI"), the 1996 acquisitions of Surgical Care
Affiliates, Inc. ("SCA") and Advantage Health Corporation, the 1997 Health
Images acquisition and the 1998 NSC acquisition, each of which was accounted for
as a pooling of interests.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1995 1996 1997 1998 1999
------------- ------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Revenues ................................ $2,173,012 $2,648,188 $3,123,176 $4,006,074 $4,072,107
Operating unit expenses ................. 1,478,208 1,718,108 1,952,189 2,491,914 2,688,849
Corporate general and administrative
expenses .............................. 67,789 82,953 87,512 112,800 149,285
Provision for doubtful accounts ......... 43,471 61,311 74,743 112,202 342,708
Depreciation and amortization ........... 164,482 212,967 257,136 344,591 374,248
Merger and acquisition related
expenses (1) .......................... 19,553 41,515 15,875 25,630 --
Impairment and restructuring charges
(2) ................................... 53,549 37,390 -- 483,455 121,037
Loss on sale of assets (2) .............. -- -- -- 31,232 --
Interest expense ........................ 109,656 101,367 112,529 148,163 176,652
Interest income ......................... (8,287) (6,749) (6,004) (11,286) (10,587)
---------- ---------- ---------- ---------- ----------
1,928,421 2,248,862 2,493,980 3,738,701 3,842,192
---------- ---------- ---------- ---------- ----------
Income from continuing operations
before income taxes, minority
interests and extraordinary item ...... 244,591 399,326 629,196 267,373 229,915
Provision for income taxes .............. 88,142 148,545 213,668 143,347 66,929
---------- ---------- ---------- ---------- ----------
156,449 250,781 415,528 124,026 162,986
Minority interests ...................... 45,135 54,003 72,469 77,468 86,469
---------- ---------- ---------- ---------- ----------
Income from continuing operations
before extraordinary item ............. 111,314 196,778 343,059 46,558 76,517
Income from discontinued operations ..... (1,162) -- -- -- --
Extraordinary item ...................... (9,056) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income .............................. $ 101,096 $ 196,778 $ 343,059 $ 46,558 $ 76,517
========== ========== ========== ========== ==========
Weighted average common shares
outstanding (3) ....................... 298,462 336,603 366,768 421,462 408,195
========== ========== ========== ========== ==========
Net income per common share: (3)
Continuing operations ................... $ 0.37 $ 0.58 $ 0.94 $ 0.11 $ 0.19
Discontinued operations ................. -- -- -- -- --
Extraordinary item ...................... (0.03) -- -- -- --
---------- ---------- ---------- ---------- ----------
$ 0.34 $ 0.58 $ 0.94 $ 0.11 $ 0.19
========== ========== ========== ========== ==========
Weighted average common shares
outstanding -- assuming dilution
(3)(4) ................................ 329,000 365,715 386,211 432,275 414,570
========== ========== ========== ========== ==========
Net income per common share --
assuming dilution: (3)(4) .............
Continuing operations ................... $ 0.35 $ 0.55 $ 0.89 $ 0.11 $ 0.18
Discontinued operations ................. -- -- -- -- --
Extraordinary item ...................... (0.03) -- -- -- --
---------- ---------- ---------- ---------- ----------
$ 0.32 $ 0.55 $ 0.89 $ 0.11 $ 0.18
========== ========== ========== ========== ==========
24
DECEMBER 31,
------------------------------------------------------------------------
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and marketable securities ......... $ 182,636 $ 205,166 $ 185,018 $ 142,513 $ 132,882
Working capital ........................ 428,746 624,497 612,917 945,927 852,711
Total assets ........................... 3,190,095 3,671,958 5,566,324 6,762,897 6,832,334
Long-term debt (5) ..................... 1,477,092 1,570,597 1,614,961 2,830,926 3,114,648
Stockholders' equity ................... 1,317,878 1,686,770 3,290,623 3,423,004 3,206,362
- ----------
(1) Expenses related to the SHC, SSCI and NovaCare Rehabilitation Hospitals
acquisitions in 1995, the SCA, Advantage Health, Professional Sports Care
Management, Inc. and ReadiCare, Inc. acquisitions in 1996, the Health
Images acquisition in 1997 and the NSC acquisition in 1998.
(2) See "Notes to Consolidated Financial Statements".
(3) Adjusted to reflect a two-for-one stock split effected in the form of a 100%
stock dividend paid on April 17, 1995 and a two-for-one stock split effected
in the form of a 100% stock dividend paid on March 17, 1997.
(4) Diluted earnings per share in 1995, 1996 and 1997 reflect shares reserved
for issuance upon conversion of HEALTHSOUTH's 5% Convertible Subordinated
Debentures due 2001. Substantially all of those Debentures were converted
into shares of HEALTHSOUTH common stock in 1997.
(5) Includes current portion of long-term debt.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The following discussion is intended to facilitate the understanding and
assessment of significant changes and trends related to the consolidated results
of operations and financial condition of HEALTHSOUTH, including various factors
related to acquisitions we have made during the periods indicated, the timing
and nature of which have significantly affected our consolidated results of
operations. This discussion and analysis should be read in conjunction with our
consolidated financial statements and notes thereto included elsewhere in this
Annual Report on Form 10-K.
We completed the following major acquisitions over the last three years
(common share amounts have been adjusted to reflect a stock split effected in
the form of a 100% stock dividend paid on March 17, 1997):
o On March 3, 1997, we acquired Health Images, Inc. (the "Health Images
Acquisition"). A total of 10,343,470 shares of HEALTHSOUTH common stock
were issued in the transaction, representing a value of approximately
$208,162,000 at the time of the acquisition. At that time, Health Images
operated 49 freestanding diagnostic centers in 13 states and six in the
United Kingdom.
o On September 30, 1997, we acquired ASC Network Corporation (the "ASC
Acquisition"). We paid approximately $130,827,000 in cash for all of the
issued and outstanding capital stock of ASC and assumed approximately
$61,000,000 in debt. At that time, ASC operated 29 outpatient surgery
centers in eight states.
o On October 23, 1997, we acquired National Imaging Affiliates, Inc. (the
"NIA Acquisition"). A total of 984,189 shares of HEALTHSOUTH common stock
were issued in the transaction, representing a value of approximately
$20,706,000 at the time of the acquisition. At that time, NIA operated
eight diagnostic imaging centers in six states.
o On October 29, 1997, we acquired Horizon/CMS Healthcare Corporation (the
"Horizon/CMS Acquisition"). A total of 45,261,000 shares of HEALTHSOUTH
common stock were issued in the transaction, representing a value of
approximately $975,824,000 at the time of the acquisition, and we assumed
approximately $740,000,000 in debt. At that time, Horizon/CMS operated 30
inpatient rehabilitation facilities and approximately 275 outpatient
rehabilitation centers, among other strategic businesses, as well as
certain long-term care businesses. On December 31, 1997, we sold the
long-term care assets of Horizon/CMS, including 139 long-term care
facilities, 12 specialty hospitals, 35 institutional pharmacy locations
and over 1,000 rehabilitation therapy contracts with long-term care
facilities, to Integrated Health Services, Inc. ("IHS"). IHS paid
approximately $1,130,000,000 in cash (net of certain adjustments) and
assumed approximately $94,000,000 in debt in the transaction.
o On July 1, 1998, we acquired Columbia/HCA Healthcare Corporation's
interest in (or entered into interim management arrangements with respect
to) 34 outpatient surgery centers located in 13 states (the "Columbia/HCA
Acquisition"). The cash purchase price was approximately $550,402,000.
o On July 22, 1998, we acquired National Surgery Centers, Inc. (the "NSC
Acquisition"). A total of 20,426,261 shares of HEALTHSOUTH common stock
were issued in connection with the transaction, representing a value of
approximately $574,489,000. At that time, NSC operated 40 outpatient
surgery centers in 14 states.
o On June 29, 1999, we acquired from Mariner Post-Acute Network, Inc.
("Mariner") substantially all of the assets of Mariner's American
Rehability Services division (the "Rehability Acquisition"), which
operated approximately 160 outpatient rehabilitation centers in 18 states.
The net cash purchase price was approximately $54,521,000.
26
Each of the ASC Acquisition, the Horizon/CMS Acquisition, the NIA
Acquisition, the Columbia/HCA Acquisition and the Rehability Acquisition was
accounted for under the purchase method of accounting and, accordingly, the
acquired operations are included in our consolidated financial statements from
their respective dates of acquisition. Each of the Health Images Acquisition and
the NSC Acquisition was accounted for as a pooling of interests and, with the
exception of data set forth relating to revenues derived from Medicare and
Medicaid, all amounts shown in the following discussion have been restated to
reflect such acquisitions. Health Images and NSC did not separately track such
revenues (see Note 2 of "Notes to Consolidated Financial Statements" for further
discussion).
We determine the amortization period of the cost in excess of net asset
value of purchased facilities based on an evaluation of the facts and
circumstances of each individual purchase transaction. The evaluation includes
an analysis of historic and projected financial performance, an evaluation of
the estimated useful life of the buildings and fixed assets acquired, the
indefinite useful life of certificates of need and licenses acquired, the
competition within local markets, lease terms where applicable, and the legal
terms of partnerships where applicable. We utilize independent appraisers and
rely on our own management expertise in evaluating each of the factors noted
above. With respect to the carrying value of the excess of cost over net asset
value of individual purchased facilities and other intangible assets, we
determine on a quarterly basis whether an impairment event has occurred by
considering factors such as the market value of the asset, a significant adverse
change in legal factors or in the business climate, adverse action by
regulators, a history of operating losses or cash flow losses, or a projection
of continuing losses associated with an operating entity. The carrying value of
excess cost over net asset value of purchased facilities and other intangible
assets will be evaluated if the facts and circumstances suggest that it has been
impaired. If this evaluation indicates that the value of the asset will not be
recoverable, as determined based on the undiscounted cash flows of the entity
acquired over the remaining amortization period, our carrying value of the asset
will be reduced by the estimated shortfall of cash flows to the estimated fair
market value.
In 1998, we adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and
Related Information". SFAS 131 requires an enterprise to report operating
segments based upon the way its operations are managed. This approach defines
operating segments along the lines used by management to assess performance and
make operating and resource allocation decisions. Based on our management and
reporting structure, segment information has been presented for inpatient and
other clinical services and outpatient services.
The inpatient and other clinical services segment includes the operations
of our inpatient rehabilitation facilities and medical centers, as well as the
operations of certain physician practices and other clinical services which are
managerially aligned with our inpatient services. We have aggregated the
financial results of our outpatient rehabilitation facilities, outpatient
surgery centers and outpatient diagnostic centers into the outpatient services
segment. These three types of facilities have common economic characteristics,
provide similar services, serve a similar class of customers, cross-utilize
administrative services and operate in a similar regulatory environment. In
addition, our Integrated Service Model strategy combines these services in a
seamless environment for the delivery of patient care on an episodic basis.
See Note 14 of "Notes to Consolidated Financial Statements" for financial
data for each of our operating segments.
Our revenues include net patient service revenues and other operating
revenues. Net patient service revenues are reported at estimated net realizable
amounts from patients, insurance companies, third-party payors (primarily
Medicare and Medicaid) and others for services rendered. Revenues from
third-party payors also include estimated retroactive adjustments under
reimbursement agreements which are subject to final review and settlement by
appropriate authorities. We determine allowances for doubtful accounts based on
the specific agings and payor classifications at each facility, and contractual
adjustments based on historical experience and the terms of payor contracts. Net
accounts receivable include only those amounts we estimate to be collectible.
Substantially all of our revenues are derived from private and governmental
third-party payors. Our reimbursement from governmental third-party payors is
based upon cost reports and other
27
reimbursement mechanisms which require the application and interpretation of
complex regulations and policies, and such reimbursement is subject to various
levels of review and adjustment by fiscal intermediaries and others, which may
affect the final determination of reimbursement. In addition, there are
increasing pressures from many payor sources to control healthcare costs and to
reduce or limit increases in reimbursement rates for medical services. There can
be no assurance that payments under governmental and third-party payor programs
will remain at levels comparable to present levels. In addition, there have
been, and we expect that there will continue to be, a number of proposals to
limit Medicare reimbursement for certain services. We cannot now predict whether
any of these proposals will be adopted or, if adopted and implemented, what
effect such proposals would have on us. Changes in reimbursement policies or
rates by private or governmental payors could have an adverse effect on our
future results of operations.
In many cases, we operate more than one site within a market. In such
markets, there is customarily an outpatient center or inpatient facility with
associated satellite outpatient locations. For purposes of the following
discussion and analysis, same store operations are measured on locations within
markets in which similar operations existed at the end of the period and include
the operations of additional locations opened within the same market. New store
operations are measured on locations within new markets. We may, from time to
time, close or consolidate similar locations in multi-site markets to obtain
efficiencies and respond to changes in demand.
RESULTS OF OPERATIONS
Twelve-Month Periods Ended December 31, 1997 and 1998
Our operations generated revenues of $4,006,074,000 in 1998, an increase of
$882,898,000, or 28.3%, as compared to 1997 revenues. Same store revenues for
the twelve months ended December 31, 1998 were $3,755,413,000, an increase of
$632,237,000, or 20.2%, as compared to the same period in 1997. New store
revenues for 1998 were $250,661,000. Same store revenues reflect the first full
year of operations of the Horizon/CMS facilities and the ASC facilities acquired
in October 1997. New store revenues reflect primarily the addition of facilities
from the Columbia/HCA Acquisition and our single facility acquisitions through
internal development (see Note 9 of "Notes to Consolidated Financial
Statements"). The increase in revenues is primarily attributable to the addition
of these operations and increases in patient volume. Revenues generated from
patients under the Medicare and Medicaid programs respectively accounted for
35.9% and 2.7% of total revenues for 1998, compared to 36.9% and 2.3% of total
revenues for 1997. Revenues from any other single third-party payor were not
significant in relation to our total revenues. During 1998, same store inpatient
days, outpatient visits, surgical cases and diagnostic cases increased 32.5%,
27.7%, 20.8% and 18.0%, respectively. Revenue per inpatient day, outpatient
visit, surgical case and diagnostic case for same store operations decreased by
(5.8)%, (0.2)%, (2.8)% and (0.3)%, respectively.
Operating expenses, at the operating unit level, were $2,491,914,000, or
62.2% of revenues, for 1998, compared to 62.5% of revenues for 1997. Included in
operating expenses, at the operating unit level, for the year ended December 31,
1998, is a non-recurring expense item of approximately $27,768,000 related to
our plan to dispose of or otherwise discontinue substantially all of our home
health operations, as described below. Excluding the non-recurring expense,
operating expenses, at the operating unit level, were $2,464,146,000, or 61.5%
of revenues, for the year ended December 31, 1998. The decrease in operating
expenses as a percentage of revenues is primarily attributable to the increase
in same store revenues noted above. Same store operating expenses for 1998,
excluding the non-recurring expense item noted above, were $2,296,802,000, or
61.2% of related revenues. New store operating expenses were $167,344,000, or
66.8% of related revenues. Corporate general and administrative expenses
increased from $87,512,000 in 1997 to $112,800,000 in 1998. As a percentage of
revenues, corporate general and administrative expenses remained constant at
2.8% in 1997 and 1998. Total operating expenses were $2,604,714,000, or 65.0% of
revenues, for 1998, compared to $2,039,701,000, or 65.3% of revenues, for 1997.
The provision for doubtful accounts was $112,202,000, or 2.8% of revenues, for
1998, compared to $74,743,000, or 2.4% of revenues, for 1997. Included in the
provision for doubtful accounts for the year
28
ended December 31, 1998, is a non-recurring expense item of approximately
$19,228,000 related to our plan to dispose of or otherwise discontinue
substantially all of our home health operations, as described below. Excluding
the non-recurring item, the provision for doubtful accounts was $92,974,000, or
2.3% of revenues for 1998.
Depreciation and amortization expense was $344,591,000 for 1998, compared
to $257,136,000 for 1997. The increase resulted from our investment in
additional assets. Interest expense increased to $148,163,000 in 1998, compared
to $112,529,000 for 1997, primarily because of the increased amount outstanding
under our credit facilities (see "Liquidity and Capital Resources"). For 1998,
interest income was $11,286,000, compared to $6,004,000 for 1997. The increase
in interest income resulted primarily from an increase in the average amount
outstanding in interest-bearing investments.
Merger expenses in 1998 of $25,630,000 represent costs incurred or accrued
in connection with completing the NSC Acquisition. For further discussion, see
Note 2 of "Notes to Consolidated Financial Statements".
During the third quarter of 1998, we adopted a plan to dispose of or
otherwise discontinue substantially all of our home health operations. The
decision to adopt the plan was prompted in large part by the negative impact of
the 1997 Balanced Budget Act (the "BBA"), which placed reimbursement limits on
home health businesses. The limits were announced in March 1998 and we
thereafter began to see the adverse affect on home health margins. The negative
trends that occurred as a result of the reduction in reimbursement brought about
by the BBA caused us to re-evaluate our view of the home health product line.
The plan was approved by the Board of Directors on September 16, 1998 and all
home health operations covered by the plan were closed by December 31, 1998.
We recorded impairment and restructuring charges of approximately
$72,000,000 related to the home health plan. For a more detailed discussion of
this charge, see Note 13 of "Notes to Consolidated Financial Statements". In
addition, we determined that approximately $27,768,000 in notes receivable and
approximately $19,228,000 in accounts receivable would not be collectible as a
result of the closing of our home health operations. These non-recurring amounts
were recognized in operating unit expenses and the provision for doubtful
accounts, respectively. The total non-recurring charges and expenses included in
the results of operations for the year ended December 31, 1998 related to the
home health plan was approximately $118,996,000.
During the fourth quarter of 1998, we adopted a plan to dispose of or
otherwise substantially discontinue the operations of certain facilities that
did not fit with our Integrated Service Model strategy (see Item 1, "Business --
Company Strategy"), underperforming facilities and facilities not located in
target markets. The Board of Directors approved the plan on December 10, 1998
and as of March 24, 2000, 95% of the identified facilities had been closed. The
remaining 5% are predominantly facilities in which the consent of unaffiliated
partners is required prior to closing. We recorded impairment and restructuring
charges of approximately $404,000,000 related to the fourth quarter
restructuring plan. For a more detailed discussion of this charge, see Note 13
of "Notes to Consolidated Financial Statements".
For 1998, the facilities that were included in the third and fourth quarter
restructuring charges described above recorded revenues of $211,300,000, a
pre-tax loss of $14,100,000, and negative cash flows from operations of
approximately $10,000,000. We do not expect elimination of these revenues, costs
and negative cash flows to have a material impact on future results of
operations.
At December 31, 1998, we had a remaining liability for restructuring
charges of approximately $67,000,000. The majority of this liability,
approximately $49,000,000, represented lease abandonment costs. The timing of
these lease abandonment costs is reflected in the schedule of future minimum
lease payments under all operating leases included in Note 11 of "Notes to
Consolidated Financial Statements". We had incurred $17,000,000 of these lease
abandonment costs through December 31, 1999. Of the remaining $18,000,000
restructuring liability, we had paid out $10,000,000 through December 31, 1999
and the remainder is expected to be paid out ratably over the 12 months ending
December 31, 2000.
In addition, we recorded an impairment charge of approximately $8,000,000
related to a rehabilitation hospital we had previously closed and recorded a
$31,232,000 loss on the sale of our physical therapy staffing business.
29
Total non-recurring charges and expenses included in the results of
operations for the year ended December 31, 1998 were approximately $587,000,000.
For further discussion, see Notes 2, 9 and 13 of "Notes to Consolidated
Financial Statements".
Income before minority interests and income taxes for 1998 was
$267,373,000, compared to $629,196,000 for 1997. Minority interests reduced
income before income taxes by $77,468,000 in 1998, compared to $72,469,000 for
1997. The provision for income taxes for 1998 was $143,347,000, compared to
$213,668,000 for 1997. Excluding the tax effects of the impairment and
restructuring charges, the merger costs, and the loss on sale of assets, the
effective tax rate for 1998 was 39.0%, compared to 38.4% for 1997 (see Note 10
of "Notes to Consolidated Financial Statements" for further discussion). Net
income for 1998 was $46,558,000.
Twelve-Month Periods Ended December 31, 1998 and 1999
Our operations generated revenues of $4,072,107,000 in 1999, an increase of
$66,033,000, or 1.6%, as compared to 1998 revenues. Same store revenues for the
twelve months ended December 31, 1999 were $4,023,696,000, an increase of
$97,792,000, or 2.4%, as compared to the same period in 1998, excluding
discontinued home health operations. New store revenues for 1999 were
$48,411,000. The increase in revenues is primarily attributable to the addition
of new operations and increases in patient volume. Revenues generated from
patients under the Medicare and Medicaid programs respectively accounted for
33.0% and 2.2% of total revenues for 1999, compared to 35.9% and 2.7% of total
revenues for 1998. Revenues from any other single third-party payor were not
significant in relation to our total revenues. During 1999, same store inpatient
days, outpatient visits, surgical cases and diagnostic cases increased 6.9%,
10.1%, 13.0% and 10.8%, respectively. Revenue per inpatient day, outpatient
visit, surgical case and diagnostic case for same store operations decreased by
(7.0)%, (1.3)%, (5.1)% and (7.2)%, respectively.
Operating expenses, at the operating unit level, were $2,688,849,000, or
66.0% of revenues, for 1999, compared to 62.2% of revenues for 1998. Included in
operating expenses, at the operating unit level, for the year ended December 31,
1999, is a non-recurring expense item of approximately $40,183,000 which related
primarily to our plan to write off obsolete equipment. Excluding the
non-recurring expense, operating expenses at the operating unit level were
$2,648,666,000, or 65.0% of revenues, for the year ended December 31, 1999. The
increase in operating expenses as a percentage of revenues is primarily
attributable to the decline in same store revenues per inpatient day, outpatient
visit, surgical case and diagnostic case. Same store operating expenses for
1999, excluding the non-recurring expense item noted above, were $2,614,953,000,
or 65.0% of related revenues. New store operating expenses were $33,713,000, or
69.6% of related revenues. Corporate general and administrative expenses
increased from $112,800,000 in 1998 to $149,285,000 in 1999. Included in
corporate general and administrative expenses, for the year ended December 31,
1999, is a non-recurring expense item of approximately $29,798,000. This expense
item included write-offs of investments and notes of $14,603,000, expenses
related to year 2000 remediation of $13,429,000 and expenses related to the
proposed spin-off of our inpatient operations of $1,766,000. Excluding the
non-recurring expense, as a percentage of revenues, corporate general and
administrative expenses increased from 2.8% in 1998 to 2.9% in 1999. Total
operating expenses were $2,838,134,000, or 69.7% of revenues, for 1999, compared
to $2,604,714,000, or 65.0% of revenues, for 1998. The provision for doubtful
accounts was $342,708,000, or 8.4% of revenues, for 1999, compared to
$112,202,000, or 2.8% of revenues, for 1998. Included in the provision for
doubtful accounts is $117,752,000 in expense recognized in the third quarter of
1999 and $139,835,000 in expense recognized in the fourth quarter of 1999. The
third quarter provision includes the charge-off of accounts receivable of
facilities included in the impairment and restructuring charges recognized in
1998. These accounts receivable were determined to be uncollectible by local and
regional operations management personnel who assumed collection responsibilities
in the third quarter of 1999 in connection with the restructuring of our
outpatient regional business offices, which had previously been responsible for
collection activities. The fourth quarter charge reflects management's decision
to adopt a more conservative approach in estimating the allowance for doubtful
accounts. The revision in estimating the allowance for doubtful accounts is due
to management's assessment of the current healthcare payor environment. This
approach focuses more heavily upon the specific agings and payor classifications
at each facility, as opposed to determining an estimate based primarily on
historical write-off rates.
30
Depreciation and amortization expense was $374,248,000 for 1999, compared
to $344,591,000 for 1998. The increase resulted from our investment in
additional assets. Interest expense increased to $176,652,000 in 1999, compared
to $148,163,000 for 1998, primarily because of the increased amount outstanding
under our credit facilities (see "Liquidity and Capital Resources"). For 1999,
interest income was $10,587,000, compared to $11,286,000 for 1998.
During the fourth quarter of 1999, we recorded a non-recurring expense item
of $121,037,000 related to the impairment of long-term assets. The charge was
based on a facility-by-facility review of each facility's financial performance
which determined if there were trends that would indicate that the facility's
ability to recover its investment in long-lived assets had been impaired. For
further discussion, see Note 13 of "Notes to Consolidated Financial Statements".
Total unusual and non-recurring charges and expenses included in the
results of operations for the year ended December 31, 1999 were approximately
$448,605,000.
Income before minority interests and income taxes for 1999 was
$229,915,000, compared to $267,373,000 for 1998. Minority interests reduced
income before income taxes by $86,469,000 in 1999, compared to $77,468,000 for
1998. The provision for income taxes for 1999 was $66,929,000, compared to
$143,347,000 for 1998. Excluding the tax effects of the impairment and
restructuring charges in both periods and the merger costs and the loss on sale
of assets in 1998, the effective tax rate for 1999 was 39.5%, compared to 39.0%
for 1998 (see Note 10 of "Notes to Consolidated Financial Statements" for
further discussion). Net income for 1999 was $76,517,000.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, we had working capital of $852,711,000, including
cash and marketable securities of $132,882,000. Working capital at December 31,
1998 was $945,927,000, including cash and marketable securities of $142,513,000.
For 1999, cash provided by operations was $704,511,000, compared to $636,132,000
for 1998. For 1999, investing activities used $614,859,000, compared to using
$1,781,459,000 for 1998. The change is primarily due to a decrease in facility
acquisitions. Additions to property, plant and equipment and acquisitions
accounted for $474,115,000 and $104,304,000, respectively, during 1999. Those
same investing activities accounted for $714,212,000 and $729,440,000,
respectively, in 1998. Financing activities used $99,079,000 and provided
$1,121,162,000 during 1999 and 1998, respectively. The change is primarily due
to reduced borrowings as a result of decreased acquisition activity. Net
borrowing proceeds for 1999 and 1998 were $285,379,000 and $1,177,311,000,
respectively.
Net accounts receivable were $898,529,000 at December 31, 1999, compared to
$897,901,000 at December 31, 1998. The number of days of average quarterly
revenues in ending receivables was 82.6 at December 31, 1999, compared to 79.4
at December 31, 1998. See Note 1 of "Notes to Consolidated Financial Statements"
for the concentration of net accounts receivable from patients, third-party
payors, insurance companies and others at December 31, 1999 and 1998.
We have a $1,750,000,000 revolving credit facility with Bank of America,
N.A. ("Bank of America") and other participating banks (the "1998 Credit
Agreement"). The 1998 Credit Agreement replaced a previous $1,250,000,000
revolving credit agreement, also with Bank of America. Interest on the 1998
Credit Agreement is paid based on LIBOR plus a predetermined margin, a base
rate, or competitively bid rates from the participating banks. We are required
to pay a fee based on the unused portion of the revolving credit facility
ranging from 0.09% to 0.25%, depending on certain defined credit ratings. The
principal amount is payable in full on June 22, 2003. We have provided a
negative pledge on all assets under the 1998 Credit Agreement. The effective
interest rate on the average outstanding balance under the 1998 Credit Agreement
was 5.81% for the twelve months ended December 31, 1999, compared to the average
prime rate of 8.00% during the same period. At December 31, 1999, we had drawn
$1,625,000,000 under the 1998 Credit Agreement. For further discussion, see Note
7 of "Notes to Consolidated Financial Statements".
We also have a Short Term Credit Agreement with Bank of America (the
"Short Term Credit Agreement"), providing for a $250,000,000 short term
revolving credit facility. The terms of the Short Term Credit Agreement are
substantially consistent with those of the 1998 Credit Agreement. Interest
31
on the Short Term Credit Agreement is paid based on LIBOR plus a predetermined
margin or a base rate. We are required to pay a fee on the unused portion of the
credit facility ranging from 0.30% to 0.50%, depending on certain defined
ratios. The principal amount is payable in full on December 12, 2000, with an
earlier repayment required in the event that we consummate any public offering
or private placement of debt securities. At December 31, 1999, we had not drawn
down any amounts under the Short Term Credit Agreement.
On March 20, 1998, we issued $500,000,000 in 3.25% Convertible Subordinated
Debentures due 2003 in a private placement. An additional $67,750,000 principal
amount of the 3.25% Convertible Debentures was issued on March 31, 1998 to cover
underwriters' overallotments. Interest is payable on April 1 and October 1. The
3.25% Convertible Debentures are convertible into HEALTHSOUTH common stock at
the option of the holder at a conversion price of $36.625 per share. The
conversion price is subject to adjustment upon the occurrence of (a) a
subdivision, combination or reclassification of outstanding shares of our common
stock, (b) the payment of a stock dividend or stock distribution on any shares
of our capital stock, (c) the issuance of rights or warrants to all holders of
our common stock entitling them to purchase shares of our common stock at less
than the current market price, or (d) the payment of certain other distributions
with respect to our common stock. In addition, we may, from time to time, lower
the conversion price for periods of not less than 20 days, in our discretion. We
used net proceeds from the issuance of the 3.25% Convertible Debentures to pay
down indebtedness outstanding under our then-existing credit facilities.
On June 22, 1998, we issued $250,000,000 in 6.875% Senior Notes due 2005
and $250,000,000 in 7.0% Senior Notes due 2008 (collectively, the "Senior
Notes"). Interest is payable on June 15 and December 15. The Senior Notes are
unsecured, unsubordinated obligations of HEALTHSOUTH. We used the net proceeds
from the issuance of the Senior Notes to pay down indebtedness outstanding under
our then-existing credit facilities.
On February 8, 1999, we announced a plan to repurchase up to 70,000,000
shares of our common stock over the next 36 months through open market
purchases, block trades or privately negotiated transactions. As of December 31,
1999, we had repurchased approximately 36,300,637 shares.
In June 1999, we announced that our Board of Directors had given
preliminary approval to the exploration and development of a plan to divide our
inpatient and outpatient businesses into separate public companies through the
tax-free spin-off of our inpatient operations. On September 9, 1999, we
announced that our Board had indefinitely tabled the spin-off proposal due to a
variety of factors, including the anticipated timeframe to complete the
spin-off, developments in the healthcare capital markets and favorable
developments in the likely structure of the prospective payment system for
inpatient rehabilitation services, among others. We are not currently pursuing
any activities with respect to the spin-off proposal.
We intend to pursue the acquisition or development of additional healthcare
operations, including outpatient rehabilitation facilities, inpatient
rehabilitation facilities, ambulatory surgery centers, outpatient diagnostic
centers and companies engaged in the provision of other complementary services,
and to expand certain of our existing facilities. While it is not possible to
estimate precisely the amounts which will actually be expended in the foregoing
areas, we anticipate that over the next twelve months, we will spend
approximately $200,000,000 to $250,000,000 on maintenance and expansion of our
existing facilities and approximately $200,000,000 to $250,000,000 on
development activities and Internet and e-commerce initiatives, and on continued
development of the Integrated Service Model. See Item 1, "Business -- Company
Strategy".
Although we are continually considering and evaluating acquisitions and
opportunities for future growth, we have not entered into any agreements with
respect to material future acquisitions. We believe that existing cash, cash
flow from operations and borrowings under existing credit facilities will be
sufficient to satisfy our estimated cash requirements for the next twelve
months, and for the reasonably foreseeable future.
Inflation in recent years has not had a significant effect on our business,
and is not expected to adversely affect us in the future unless it increases
significantly.
32
EXPOSURES TO MARKET RISK
We are exposed to market risk related to changes in interest rates. The
impact on earnings and value of market risk-sensitive financial instruments
(principally marketable security investments and long-term debt, as well as the
interest rate swaps described below) is subject to change as a result of
movements in market rates and prices. We use sensitivity analysis models to
evaluate these impacts. We do not hold or issue derivative instruments for
trading purposes and are not a party to any instruments with leverage features.
Our investment in marketable securities was $3,482,000 at December 31,
1999, compared to $3,686,000 at December 31, 1998. The investment represents
less than 1% of total assets at December 31, 1999 and 1998. These securities are
generally short-term, highly-liquid instruments and, accordingly, their fair
value approximates cost. Earnings on investments in marketable securities are
not significant to our results of operations, and therefore any changes in
interest rates would have a minimal impact on future pre-tax earnings.
As described below, a significant portion of our long-term indebtedness is
subject to variable rates of interest, generally equal to LIBOR plus a
predetermined percentage. In October 1999, we entered into three short-term
interest rate swap arrangements intended to hedge our exposure to rising
interest rates resulting from the capital markets' perception of risks
associated with year 2000 issues. Each of these arrangements has a notional
amount of $250,000,000 and matures six months from the date of the original
transaction. The notional amounts are used to measure interest to be paid or
received and do not represent an amount of exposure to credit loss. In each of
these arrangements, we pay the counterparty a fixed rate of interest on the
notional amount, and the counterparty pays us a variable rate of interest equal
to the 90-day LIBOR rate. The variable rate paid to us by the counterparty is
reset once during the term of the swap. Thus, these interest rate swaps have the
effect of fixing the interest rates on an aggregate of $750,000,000 of our
variable-rate debt through their maturity dates. The arrangements mature at
various dates in April 2000. We would be exposed to credit losses if the
counterparties did not perform their obligations under the swap arrangements;
however, the counterparties are major commercial banks whom we believe to be
creditworthy, and we expect them to fully satisfy their obligations. At December
31, 1999, the weighted average interest rate we were obligated to pay under
these interest rate swaps was 6.044%, and the weighted average interest rate we
received was 6.207%.
With respect to our interest-bearing liabilities, approximately
$1,625,000,000 in long-term debt at December 31, 1999 is subject to variable
rates of interest before giving effect to the interest rate swaps above, while
the remaining balance in long-term debt of $1,489,648,000 is subject to fixed
rates of interest. This compares to $1,325,000,000 in long-term debt subject to
variable rates of interest and $1,505,926,000 in long-term debt subject to fixed
rates of interest at December 31, 1998 (see Note 7 of "Notes to Consolidated
Financial Statements" for further description). The fair value of our total
long-term debt, based on discounted cash flow analyses, approximates its
carrying value at December 31, 1999 except for the 3.25% Convertible Debentures,
6.875% Senior Notes and 7.0% Senior Notes. The fair value of the 3.25%
Convertible Debentures at December 31, 1999 was approximately $443,000,000. The
fair value of the 6.875% Senior Notes due 2005 was approximately $216,600,000 at
December 31, 1999. The fair value of the 7% Senior Notes due 2008 was
approximately $207,250,000 at December 31, 1999. Based on a hypothetical 1%
increase in interest rates, the potential losses in future pre-tax earnings
would be approximately $16,250,000. The impact of such a change on the carrying
value of long-term debt would not be significant. These amounts are determined
considering the impact of the hypothetical interest rates on our borrowing cost
and long-term debt balances. These analyses do not consider the effects, if any,
of the potential changes in the overall level of economic activity that could
exist in such an environment. Further, in the event of a change of significant
magnitude, management would expect to take actions intended to further mitigate
its exposure to such change.
Foreign operations, and the related market risks associated with foreign
currency, are currently insignificant to our results of operations and financial
position.
33
COMPUTER TECHNOLOGIES AND YEAR 2000 COMPLIANCE
In prior years, we discussed the nature and progress of our plans to become
year 2000 ready. In late 1999, we completed our remediation and testing of
systems. As a result of those planning and implementation efforts, we
experienced no significant disruptions in mission-critical information
technology and non-information technology systems and believe those systems
responded to the year 2000 date change. We expensed approximately $14,282,000
during 1999 in connection with remediating our systems and invested
approximately $22,000,000 in new hardware. We are not aware of any material
problems resulting from year 2000 issues, either with our internal systems or
the products and services of third parties. We will continue to monitor our
mission-critical computer applications and those of our suppliers and vendors
throughout the year 2000 to ensure that any latent year 2000 matters that may
arise are addressed promptly.
FORWARD-LOOKING STATEMENTS
Statements contained in this Annual Report on Form 10-K which are not
historical facts are forward-looking statements. Without limiting the generality
of the preceding statement, all statements in this Annual Report on Form 10-K
concerning or relating to estimated and projected earnings, margins, costs,
expenditures, cash flows, growth rates and financial results are forward-looking
statements. In addition, HEALTHSOUTH, through its senior management, from time
to time makes forward-looking public statements concerning its expected future
operations and performance and other developments. Such forward-looking
statements are necessarily estimates reflecting our best judgment based upon
current information, involve a number of risks and uncertainties and are made
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. There can be no assurance that other factors will not affect
the accuracy of such forward-looking statements or that our actual results will
not differ materially from the results anticipated in such forward-looking
statements. While it is impossible to identify all such factors, factors which
could cause actual results to differ materially from those estimated by us
include, but are not limited to, changes in the regulation of the healthcare
industry at either or both of the federal and state levels, changes or delays in
reimbursement for our services by governmental or private payors, competitive
pressures in the healthcare industry and our response thereto, our ability to
obtain and retain favorable arrangements with third-party payors, unanticipated
delays in the implementation of our Integrated Service Model, general conditions
in the economy and capital markets, and other factors which may be identified
from time to time in our Securities and Exchange Commission filings and other
public announcements.
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated financial statements of HEALTHSOUTH meeting the requirements
of Regulation S-X are filed on the following pages of this Item 8 of this Annual
Report on Form 10-K, as listed below:
PAGE
-----
Report of Independent Auditors ........................................ 36
Consolidated Balance Sheets as of December 31, 1998 and 1999 .......... 37
Consolidated Statements of Income for the Years Ended December 31,
1997, 1998 and 1999 .................................................. 38
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1998 and 1999 ..................................... 39
Consolidated Statements of Cash Flows for the Years Ended December
31, 1997, 1998 and 1999 .............................................. 40
Notes to Consolidated Financial Statements ............................ 42
Other financial statements and schedules required under Regulation S-X are
listed in Item 14(a)2, and filed under Item 14(d), of this Annual Report on Form
10-K.
QUARTERLY RESULTS (UNAUDITED)
Set forth below is summary information with respect to HEALTHSOUTH's
operations for the last eight fiscal quarters. All amounts have been restated to
reflect the 1998 acquisition of NSC, which was accounted for as a pooling of
interests.
1998
---------------------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------------- --------------- ----------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues ..................................... $ 938,779 $ 979,064 $1,047,422 $1,040,809
Net income (loss) ............................ 113,132 121,600 5,670 (193,844)
Net income (loss) per common share ........... 0.27 0.29 0.01 (0.46)
Net income (loss) per common share -- assuming
dilution .................................... 0.26 0.28 0.01 (0.46)
1999
---------------------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------------- --------------- ----------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues ..................................... $1,030,547 $1,047,632 $ 993,341 $1,000,587
Net income (loss) ............................ 109,905 114,005 (4,330) (143,063)
Net income (loss) per common share ........... 0.26 0.28 (0.01) (0.37)
Net income (loss) per common share -- assuming
dilution .................................... 0.26 0.27 (0.01) (0.37)
35
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
HEALTHSOUTH Corporation
We have audited the accompanying consolidated balance sheets of HEALTHSOUTH
Corporation and Subsidiaries as of December 31, 1998 and 1999, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1999. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
HEALTHSOUTH Corporation and Subsidiaries at December 31, 1998 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
ERNST & YOUNG LLP
Birmingham, Alabama
March 19, 2000
36
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------------
1998 1999
------------- -------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents (Note 3) ......................................... $ 138,827 $ 129,400
Other marketable securities (Note 3) ....................................... 3,686 3,482
Accounts receivable, net of allowances for doubtful accounts of
$143,689,000 in 1998 and $303,614,000 in 1999 ............................ 897,901 898,529
Inventories ................................................................ 77,840 85,551
Prepaid expenses and other current assets .................................. 169,899 114,496
Income tax refund receivable ............................................... 58,832 39,438
---------- ----------
Total current assets ........................................................ 1,346,985 1,270,896
Other assets:
Loans to officers .......................................................... 3,263 3,842
Assets held for sale (Note 13) ............................................. 32,966 29,473
Deferred income taxes (Note 10) ............................................ -- 47,550
Other (Note 4) ............................................................. 164,280 149,099
---------- ----------
200,509 229,964
Property, plant and equipment, net (Note 5) ................................ 2,255,493 2,502,967
Intangible assets, net (Note 6) ............................................ 2,959,910 2,828,507
---------- ----------
Total assets ................................................................ $6,762,897 $6,832,334
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................... $ 76,099 $ 76,549
Salaries and wages payable ................................................. 111,243 93,046
Accrued interest payable and other liabilities ............................. 126,110 102,604
Deferred income taxes (Note 10) ............................................ 37,612 108,168
Current portion of long-term debt (Note 7) ................................. 49,994 37,818
---------- ----------
Total current liabilities ................................................... 401,058 418,185
Long-term debt (Note 7) ..................................................... 2,780,932 3,076,830
Deferred income taxes (Note 10) ............................................. 28,856 --
Deferred revenue and other long-term liabilities ............................ 1,829 4,573
Minority interests-limited partnerships (Note 1) ............................ 127,218 126,384
Commitments and contingencies (Note 11)
Stockholders' equity (Notes 8 and 12):
Preferred stock, $.10 par value -- 1,500,000 shares authorized; issued and
outstanding -- none ...................................................... -- --
Common stock, $.01 par value -- 600,000,000 shares authorized; issued --
423,178,000 in 1998 and 423,982,000 in 1999 .............................. 4,232 4,240
Additional paid-in capital ................................................. 2,577,647 2,584,572
Retained earnings .......................................................... 878,228 948,385
Treasury stock, at cost (2,042,000 shares in 1998 and 38,342,000 shares in
1999) .................................................................... (21,813) (278,504)
Receivable from Employee Stock Ownership Plan .............................. (10,169) (7,898)
Notes receivable from stockholders, officers and management employees ...... (5,121) (44,433)
---------- ----------
Total stockholders' equity .................................................. 3,423,004 3,206,362
---------- ----------
Total liabilities and stockholders' equity .................................. $6,762,897 $6,832,334
========== ==========
See accompanying notes.
37
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1998 1999
------------- ------------- -------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
Revenues .............................................. $3,123,176 $4,006,074 $4,072,107
Operating unit expenses ............................... 1,952,189 2,491,914 2,688,849
Corporate general and administrative expenses ......... 87,512 112,800 149,285
Provision for doubtful accounts ....................... 74,743 112,202 342,708
Depreciation and amortization ......................... 257,136 344,591 374,248
Merger and acquisition related expenses (Notes 2
and 9) ............................................... 15,875 25,630 --
Loss on sale of assets (Note 9) ....................... -- 31,232 --
Impairment and restructuring charges (Note 13) ........ -- 483,455 121,037
Interest expense ...................................... 112,529 148,163 176,652
Interest income ....................................... (6,004) (11,286) (10,587)
---------- ---------- ----------
2,493,980 3,738,701 3,842,192
---------- ---------- ----------
Income before income taxes and minority interests ..... 629,196 267,373 229,915
Provision for income taxes (Note 10) .................. 213,668 143,347 66,929
---------- ---------- ----------
415,528 124,026 162,986
Minority interests .................................... 72,469 77,468 86,469
---------- ---------- ----------
Net income ............................................ $ 343,059 $ 46,558 $ 76,517
========== ========== ==========
Weighted average common shares outstanding ............ 366,768 421,462 408,195
========== ========== ==========
Net income per common share ........................... $ 0.94 $ 0.11 $ 0.19
========== ========== ==========
Weighted average common shares outstanding --
assuming dilution .................................... 386,211 432,275 414,570
========== ========== ==========
Net income per common share -- assuming dilution ...... $ 0.89 $ 0.11 $ 0.18
========== ========== ==========
See accompanying notes.
38
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
COMMON STOCK
-------------------- ADDITIONAL
PAID-IN
SHARES AMOUNT CAPITAL
--------- ---------- --------------
(IN THOUSANDS)
Balance at December 31, 1996 ......................................... 339,587 $ 3,396 $ 1,210,314
Common shares issued in connection with acquisitions (Note 9) ........ 46,412 464 999,587
Value of options exchanged in connection with the Horizon/CMS
acquisition (Note 9) ................................................ -- -- 23,191
Common shares issued upon conversion of convertible debt ............. 12,324 123 114,390
Proceeds from exercise of options (Note 8) ........................... 10,525 105 60,221
Income tax benefits related to incentive stock options (Note 8) ...... -- -- 67,090
Reduction in receivable from ESOP .................................... -- -- --
Payments received on stockholders' notes receivable .................. -- -- --
Purchase of limited partnership units ................................ -- -- --
Purchase of treasury stock ........................................... -- -- --
Net income ........................................................... -- -- --
Translation adjustment ............................................... -- -- --
Stock dividend ....................................................... 6,689 67 (67)
------- ------- -----------
Balance at December 31, 1997 ......................................... 415,537 4,155 2,474,726
Proceeds from exercise of options (Note 8) ........................... 6,885 69 60,135
Common shares issued in connection with acquisitions (Note 9) ........ 699 7 19,390
Common shares issued in connection with lease buyout ................. 57 1 1,592
Income tax benefits related to incentive stock options (Note 8) ...... -- -- 21,804
Purchase of treasury shares .......................................... -- -- --
Reduction in receivable from ESOP .................................... -- -- --
Payments received on stockholders' notes receivable .................. -- -- --
Purchase of limited partnership units ................................ -- -- --
Net income ........................................................... -- -- --
Translation adjustment ............................................... -- -- --
------- ------- -----------
Balance at December 31, 1998 ......................................... 423,178 4,232 2,577,647
Proceeds from exercise of options (Note 8) ........................... 804 8 4,363
Restricted stock grants issued ....................................... -- -- 2,562
Reduction in receivable from ESOP .................................... -- -- --
Loans made to stockholders ........................................... -- -- --
Payments received on stockholders' notes receivable .................. -- -- --
Purchase of limited partnership units ................................ -- -- --
Purchase of treasury stock ........................................... -- -- --
Net income ........................................................... -- -- --
Translation adjustment ............................................... -- -- --
------- ------- -----------
Balance at December 31, 1999 ......................................... 423,982 $ 4,240 $ 2,584,572
======= ======= ===========
TREASURY STOCK
RETAINED ------------------------ RECEIVABLE
EARNINGS SHARES AMOUNT FROM ESOP
------------ -------- --------------- --------------
(IN THOUSANDS)
Balance at December 31, 1996 ......................................... $ 492,954 182 $ (323) $ (14,148)
Common shares issued in connection with acquisitions (Note 9) ........ -- -- -- --
Value of options exchanged in connection with the Horizon/CMS
acquisition (Note 9) ................................................ -- -- -- --
Common shares issued upon conversion of convertible debt ............. -- -- -- --
Proceeds from exercise of options (Note 8) ........................... -- -- -- --
Income tax benefits related to incentive stock options (Note 8) ...... -- -- -- --
Reduction in receivable from ESOP .................................... -- -- -- 1,901
Payments received on stockholders' notes receivable .................. -- -- -- --
Purchase of limited partnership units ................................ (2,465) -- -- --
Purchase of treasury stock ........................................... -- 370 (3,600) --
Net income ........................................................... 343,059 -- -- --
Translation adjustment ............................................... (220) -- -- --
Stock dividend ....................................................... -- -- -- --
--------- --- ----------- ----------
Balance at December 31, 1997 ......................................... 833,328 552 (3,923) (12,247)
Proceeds from exercise of options (Note 8) ........................... -- -- -- --
Common shares issued in connection with acquisitions (Note 9) ........ -- -- -- --
Common shares issued in connection with lease buyout ................. -- -- -- --
Income tax benefits related to incentive stock options (Note 8) ...... -- -- -- --
Purchase of treasury shares .......................................... -- 1,490 (17,890) --
Reduction in receivable from ESOP .................................... -- -- -- 2,078
Payments received on stockholders' notes receivable .................. -- -- -- --
Purchase of limited partnership units ................................ (1,634) -- -- --
Net income ........................................................... 46,558 -- -- --
Translation adjustment ............................................... (24) -- -- --
--------- ----- ----------- ----------
Balance at December 31, 1998 ......................................... 878,228 2,042 (21,813) (10,169)
Proceeds from exercise of options (Note 8) ........................... -- -- -- --
Restricted stock grants issued ....................................... -- -- -- --
Reduction in receivable from ESOP .................................... -- -- -- 2,271
Loans made to stockholders ........................................... -- -- -- --
Payments received on stockholders' notes receivable .................. -- -- -- --
Purchase of limited partnership units ................................ (5,998) -- -- --
Purchase of treasury stock ........................................... -- 36,300 (256,691) --
Net income ........................................................... 76,517 -- -- --
Translation adjustment ............................................... (362) -- -- -
--------- ------ ----------- ----------
Balance at December 31, 1999 ......................................... $ 948,385 38,342 $ (278,504) $ (7,898)
========= ====== =========== ==========
NOTES
RECEIVABLE TOTAL
FROM STOCKHOLDERS'
STOCKHOLDERS EQUITY
-------------- --------------
(IN THOUSANDS)
Balance at December 31, 1996 ......................................... $ (5,423) $ 1,686,770
Common shares issued in connection with acquisitions (Note 9) ........ -- 1,000,051
Value of options exchanged in connection with the Horizon/CMS
acquisition (Note 9) ................................................ -- 23,191
Common shares issued upon conversion of convertible debt ............. -- 114,513
Proceeds from exercise of options (Note 8) ........................... -- 60,326
Income tax benefits related to incentive stock options (Note 8) ...... -- 67,090
Reduction in receivable from ESOP .................................... -- 1,901
Payments received on stockholders' notes receivable .................. 7 7
Purchase of limited partnership units ................................ -- (2,465)
Purchase of treasury stock ........................................... -- (3,600)
Net income ........................................................... -- 343,059
Translation adjustment ............................................... -- (220)
Stock dividend ....................................................... -- --
---------- -----------
Balance at December 31, 1997 ......................................... (5,416) 3,290,623
Proceeds from exercise of options (Note 8) ........................... -- 60,204
Common shares issued in connection with acquisitions (Note 9) ........ -- 19,397
Common shares issued in connection with lease buyout ................. -- 1,593
Income tax benefits related to incentive stock options (Note 8) ...... -- 21,804
Purchase of treasury shares .......................................... -- (17,890)
Reduction in receivable from ESOP .................................... -- 2,078
Payments received on stockholders' notes receivable .................. 295 295
Purchase of limited partnership units ................................ -- (1,634)
Net income ........................................................... -- 46,558
Translation adjustment ............................................... -- (24)
---------- -----------
Balance at December 31, 1998 ......................................... (5,121) 3,423,004
Proceeds from exercise of options (Note 8) ........................... -- 4,371
Restricted stock grants issued ....................................... -- 2,562
Reduction in receivable from ESOP .................................... -- 2,271
Loans made to stockholders ........................................... (39,334) (39,334)
Payments received on stockholders' notes receivable .................. 22 22
Purchase of limited partnership units ................................ -- (5,998)
Purchase of treasury stock ........................................... -- (256,691)
Net income ........................................................... -- 76,517
Translation adjustment ............................................... -- (362)
---------- -----------
Balance at December 31, 1999 ......................................... $ (44,433) $ 3,206,362
========== ===========
See accompanying notes.
39
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1998 1999
--------------- --------------- -------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income ......................................................... $ 343,059 $ 46,558 $ 76,517
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ..................................... 257,136 344,591 374,248
Provision for doubtful accounts ................................... 74,743 112,202 342,708
Issuance of restricted stock grants ............................... -- -- 2,562
Impairment and restructuring charges .............................. -- 483,455 121,037
Merger and acquisition related expenses ........................... 15,875 25,630 --
Loss on sale of assets ............................................ -- 31,232 --
Income applicable to minority interests of limited
partnerships ..................................................... 72,469 77,468 86,469
Provision (benefit) for deferred income taxes ..................... 15,237 (43,410) (5,850)
Provision for deferred revenue .................................... (406) -- --
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable .............................................. (200,778) (250,468) (332,977)
Inventories, prepaid expenses and other current assets ........... 21,803 (132,280) 67,428
Accounts payable and accrued expenses ............................ (152,201) (58,846) (27,631)
------------ ------------ ----------
Net cash provided by operating activities .......................... 446,937 636,132 704,511
INVESTING ACTIVITIES
Purchases of property, plant and equipment ......................... (349,861) (714,212) (474,115)
Proceeds from sale of non-strategic assets ......................... 1,136,571 34,100 5,693
Additions to intangible assets, net of effects of acquisitions ..... (61,887) (48,415) (33,140)
Assets obtained through acquisitions, net of liabilities
assumed ........................................................... (309,548) (729,440) (104,304)
Payments on purchase accounting accruals ........................... -- (292,949) (22,063)
Changes in other assets ............................................ (108,245) (48,883) 12,866
Proceeds received on sale of other marketable securities ........... 41,087 18,340 1,300
Investments in other marketable securities ......................... (1,339) -- (1,096)
------------ ------------ ----------
Net cash provided by (used in) investing activities ................ 346,778 (1,781,459) (614,859)
FINANCING ACTIVITIES
Proceeds from borrowings ........................................... 1,763,317 3,486,474 756,000
Principal payments on long-term debt ............................... (2,537,620) (2,309,163) (470,621)
Proceeds from exercise of options .................................. 60,326 60,204 4,371
Proceeds from issuance of common stock ............................. 70 -- --
Purchase of treasury stock ......................................... -- (17,890) (256,691)
Reduction in receivable from ESOP .................................. 1,901 2,078 2,271
Decrease (increase) in loans to stockholders ....................... 7 295 (39,312)
Proceeds from investment by minority interests ..................... 4,096 4,471 11,582
Purchase of limited partnership units .............................. (2,685) (1,658) (6,360)
Payment of cash distributions to limited partners .................. (79,927) (103,649) (100,319)
------------ ------------ ----------
Net cash (used in) provided by financing activities ................ (790,515) 1,121,162 (99,079)
------------ ------------ ----------
Increase (decrease) in cash and cash equivalents ................... 3,200 (24,165) (9,427)
Cash and cash equivalents at beginning of year ..................... 159,792 162,992 138,827
------------ ------------ ----------
Cash and cash equivalents at end of year ........................... $ 162,992 $ 138,827 $ 129,400
============ ============ ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest .......................................................... $ 113,241 $ 143,606 $ 159,496
Income taxes ...................................................... 140,715 315,028 88,575
40
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
Non-cash investing activities:
The Company assumed liabilities of $1,163,913,000, $107,091,000 and
$9,529,000 during the years ended December 31, 1997, 1998 and 1999,
respectively, in connection with its acquisitions.
During the year ended December 31, 1997, the Company issued 46,412,000 common
shares with a market value of $1,000,051,000 as consideration for
acquisitions accounted for as purchases.
During the year ended December 31, 1998, the Company issued 699,000 common
shares with a market value of $19,397,000 as consideration for acquisitions
accounted for as purchases.
Non-cash financing activities:
During 1997, the Company effected a two-for-one stock split of its common
stock which was effected in the form of a 100% stock dividend.
The Company received a tax benefit from the disqualifying disposition of
incentive stock options of $67,090,000 and $21,804,000 for the years ended
December 31, 1997 and 1998, respectively.
During 1997, the holders of the Company's $115,000,000 in aggregate principal
amount of 5% Convertible Subordinated Debentures due 2001 surrendered the
Debentures for conversion into approximately 12,324,000 shares of the
Company's Common Stock.
See accompanying notes.
41
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by HEALTHSOUTH Corporation and
its subsidiaries ("the Company") are presented as an integral part of the
consolidated financial statements.
NATURE OF OPERATIONS
HEALTHSOUTH is engaged in the business of providing healthcare services
through two business segments: inpatient and other clinical services and
outpatient services. Inpatient and other clinical services consist of services
provided through inpatient rehabilitation facilities, specialty medical centers
and certain physician practices and other clinical services. Outpatient services
consist of services provided through outpatient rehabilitation facilities,
outpatient surgery centers and outpatient diagnostic centers.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of HEALTHSOUTH
Corporation ("HEALTHSOUTH") and its wholly-owned subsidiaries, as well as its
majority ownership or controlling interest in limited partnerships and limited
liability companies. All significant intercompany accounts and transactions have
been eliminated in consolidation.
HEALTHSOUTH operates a number of its facilities as general and limited
partnerships ("partnerships") or limited liability companies ("LLCs") in which
HEALTHSOUTH serves as the general partner or managing member, as applicable.
HEALTHSOUTH's policy is to consolidate the financial position and results of
operations of these partnerships and LLCs in cases where HEALTHSOUTH owns the
majority interest or in which it has otherwise a controlling interest (see also
"Minority Interests" below in Note 1). Investments in partnerships, LLCs and
other entities that represent less than a majority interest or otherwise
represent a non-controlling interest are accounted for under the equity method
or cost method, as appropriate (see also "Minority Interests" below in Note 1
and Note 4).
OPERATING SEGMENTS
The Company has adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and
Related Information". SFAS 131 requires the utilization of a "management
approach" to define and report the financial results of operating segments. The
management approach defines operating segments along the lines used by
management to assess performance and make operating and resource allocation
decisions. The Company has aggregated the financial results of its outpatient
rehabilitation facilities, outpatient surgery centers and outpatient diagnostic
centers into the outpatient services segment. These three types of facilities
have common economic characteristics, provide similar services, serve a similar
class of customers, cross-utilize administrative services and operate in a
similar regulatory environment. In addition, the Company's integrated service
model strategy combines these services in a seamless environment for the
delivery of patient care on an episodic basis.
The adoption of SFAS 131 did not affect results of operations or financial
position, but did require the disclosure of segment information (see Note 14).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the accompanying consolidated
financial statements and notes. Actual results could differ from those
estimates.
42
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
MARKETABLE SECURITIES
Marketable securities and debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, if material, reported as a separate
component of stockholders' equity, net of tax. The cost of the specific security
sold method is used to compute gain or loss on the sale of securities. Interest
and dividends on securities classified as available-for-sale are included in
interest income. Marketable securities and debt securities held by the Company
have maturities of less than one year.
ACCOUNTS RECEIVABLE AND THIRD-PARTY REIMBURSEMENT ACTIVITIES
Receivables from patients, insurance companies and third-party contractual
insured accounts (Medicare and Medicaid) are based on payment agreements which
generally result in the Company's collecting an amount different from the
established rates. Net third-party settlement receivables included in accounts
receivable were $9,277,000 and $49,631,000 at December 31, 1998 and 1999,
respectively. Final determination of the settlement is subject to review by
appropriate authorities. The differences between original estimates made by the
Company and subsequent revisions (including final settlement) were not material
to the operations of the Company. Adequate allowances are provided for doubtful
accounts and contractual adjustments. Uncollectible accounts are written off
against the allowance for doubtful accounts after adequate collection efforts
are made. Net accounts receivable include only those amounts estimated by
management to be collectible.
The concentration of net accounts receivable from third-party contractual
payors and others, as a percentage of total net accounts receivable, was as
follows:
DECEMBER 31,
-------------------
1998 1999
-------- --------
Medicare ................. 21% 26%
Medicaid ................. 4 5
Other .................... 75 69
-- --
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.
Interest cost incurred during the construction of a facility is
capitalized. The Company incurred interest costs of $115,020,000, $148,793,000
and $178,836,000, of which $2,491,000, $630,000 and $2,184,000 was capitalized,
during 1997, 1998 and 1999, respectively.
Depreciation and amortization is computed using the straight-line method
over the estimated useful lives of the assets or the term of the lease, as
appropriate. The estimated useful life of buildings is 30-40 years and the
general range of useful lives for leasehold improvements, furniture, fixtures
and equipment is 10-15 years.
43
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
INTANGIBLE ASSETS
Cost in excess of net asset value of purchased facilities is amortized over
20 to 40 years using the straight-line method, with the majority of such cost
being amortized over 40 years. Organization and partnership formation costs are
deferred and amortized on a straight-line basis over a period of 36 months.
Organization, partnership formation and start-up costs for a project that is
subsequently abandoned are charged to operations in that period. Debt issue
costs are amortized over the term of the debt. Noncompete agreements are
amortized using the straight-line method over the term of the agreements.
Effective July 1, 1997, the Company began expensing amounts reflecting the
costs of implementing its clinical and administrative programs and protocols at
acquired facilities in the period in which such costs are incurred. Previously,
the Company had capitalized such costs and amortized them over 36 months. Such
costs at June 30, 1997 aggregated $64,643,000, net of accumulated amortization.
These capitalized costs will be amortized in accordance with the Company's
policy in effect through June 30, 1997 and will be fully amortized by June 2000.
Through June 30, 1997, the Company had assigned value to and capitalized
organization and partnership formation costs which had been incurred by the
Company or obtained by the Company in acquisitions accounted for as purchases.
Effective July 1, 1997, the Company no longer assigned value to organization and
partnership formation costs obtained in acquisitions accounted for as purchases
except to the extent that objective evidence exists that such costs will provide
future economic benefits to the Company after the acquisition. Such organization
and partnership formation costs at June 30, 1997 which were obtained by the
Company in purchase transactions aggregated $8,380,000, net of accumulated
amortization. Such costs at June 30, 1997 will be amortized in accordance with
the Company's policy in effect through June 30, 1997 and will be fully amortized
by June 2000.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5 requires that the costs of start-up activities be
expensed as incurred. The SOP broadly defines start-up activities as those
one-time activities related to opening a new facility, introducing a new product
or service, conducting business in a new territory, conducting business with a
new class of customer, initiating a new process in an existing facility, or
beginning some new operation. Start-up activities also include organizational
costs. SOP 98-5 is effective for years beginning after December 15, 1998. In
1997, the Company began expensing as incurred all costs related to start-up
activities. Therefore, the adoption of SOP 98-5 did not have a material effect
on the Company's financial statements.
MINORITY INTERESTS
The equity of minority investors in partnerships and LLCs of the Company is
reported on the consolidated balance sheets as minority interests. Minority
interests reported in the consolidated income statements reflect the respective
interests in the income or loss of the limited partnerships or limited liability
companies attributable to the minority investors (ranging from 1% to 50% at
December 31, 1999), the effect of which is removed from the results of
operations of the Company.
REVENUES
Revenues include net patient service revenues and other operating revenues.
Other operating revenues include cafeteria revenue, gift shop revenue, rental
income, trainer/contract revenue, management and administrative fee revenue
(related to non-consolidated subsidiaries and affiliates) and transcriptionist
fees which are insignificant to total revenues. Net patient service revenues are
reported at the estimated net realizable amounts from patients, third-party
payors and others for services rendered, including estimated retroactive
adjustments under reimbursement agreements with third-party payors.
44
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1998 1999
-------------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Numerator:
Net income ...................................................... $ 343,059 $ 46,558 $ 76,517
---------- --------- ---------
Numerator for basic earnings per share -- income available
to common stockholders ......................................... 343,059 46,558 76,517
Effect of dilutive securities:
Elimination of interest and amortization on 5%
Convertible Subordinated Debentures due 2001, less the
related effect of the provision for income taxes .............. 968 -- --
---------- --------- ---------
Numerator for diluted earnings per share--income available to
common stockholders after assumed conversion ................... $ 344,027 $ 46,558 $ 76,517
========== ========= =========
Denominator:
Denominator for basic earnings per share -- weighted-average
shares ......................................................... 366,768 421,462 408,195
Effect of dilutive securities:
Net effect of dilutive stock options ........................... 16,374 10,813 5,525
Restricted shares issued ....................................... -- -- 850
Assumed conversion of 5% Convertible Subordinated
Debentures due 2001 ........................................... 3,057 -- --
Assumed conversion of other dilutive convertible debt .......... 12 -- --
---------- --------- ---------
Dilutive potential common shares ................................ 19,443 10,813 6,375
---------- --------- ---------
Denominator of diluted earnings per share -- adjusted
weighted-average shares and assumed conversions ................ 386,211 432,275 414,570
========== ========= =========
Basic earnings per share ......................................... $ 0.94 $ 0.11 $ 0.19
========== ========= =========
Diluted earnings per share ....................................... $ 0.89 $ 0.11 $ 0.18
========== ========= =========
IMPAIRMENT OF ASSETS
The Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those assets. In such cases, the
impaired assets are written down to fair value. Fair value is determined based
on the individual facts and circumstances of the impairment event, and the
available information related to it. Such information might include quoted
market prices, prices for comparable assets, estimated future cash flows
discounted at a rate commensurate with the risks involved, and independent
appraisals. For purposes of analyzing impairment, assets are generally grouped
at the individual operational facility level, which is the lowest level for
which there are identifiable cash flows. If the group of assets being tested was
acquired by the Company as part of a purchase business combination, any goodwill
that arose as part of the transaction is included as part of the asset grouping.
With respect to the carrying value of goodwill and other intangible assets,
the Company determines on a quarterly basis whether an impairment event has
occurred by considering factors such as the market
45
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
value of the asset, a significant adverse change in legal factors or in the
business climate, adverse action by regulators, a history of operating losses or
cash flow losses, or a projection of continuing losses associated with an
operating entity. The carrying value of goodwill and other intangible assets
will be evaluated if the facts and circumstances suggest that it has been
impaired. If this evaluation indicates that the value of the asset will not be
recoverable, as determined based on the undiscounted cash flows of the entity
over the remaining amortization period, an impairment loss is calculated based
on the excess of the carrying amount of the asset over the asset's fair value
(see Note 13).
SELF-INSURANCE
The Company is self-insured for professional liability and comprehensive
general liability. Liabilities for asserted and unasserted claims are accrued
based upon specific claims and incidents and the claims history of the Company.
The reserves for estimated liabilities for asserted and unasserted claims, which
are not material in relation to the Company's consolidated financial position at
December 31, 1998 and 1999, are included with accrued interest payable and other
liabilities in the accompanying consolidated balance sheets.
RECLASSIFICATIONS
Certain amounts in 1997 and 1998 financial statements have been
reclassified to conform with the 1999 presentation. Such reclassifications had
no effect on previously reported consolidated financial position and
consolidated net income.
FOREIGN CURRENCY TRANSLATION
The Company translates the assets and liabilities of its foreign
subsidiaries stated in local functional currencies to U.S. dollars at the rates
of exchange in effect at the end of the period. Revenues and expenses are
translated using rates of exchange in effect during the period. Gains and losses
from currency translation are included in stockholders' equity. Currency
transaction gains or losses are recognized in current operations and have not
been significant to the Company's operating results in any period.
2. MERGERS
Effective March 3, 1997, a wholly-owned subsidiary of the Company merged
with Health Images, Inc. ("Health Images"), and in connection therewith the
Company issued 10,343,470 shares of its common stock in exchange for all of
Health Images' outstanding common stock. Prior to the merger, Health Images
operated 49 freestanding diagnostic imaging centers in 13 states and six in the
United Kingdom. Costs and expenses of approximately $15,875,000, primarily
legal, accounting and financial advisory fees, incurred by the Company in
connection with the Health Images merger have been recorded in operations during
1997 and reported as merger expenses in the accompanying consolidated statements
of income.
Effective July 22, 1998, a wholly-owned subsidiary of the Company merged
with National Surgery Centers, Inc. ("NSC"), and in connection therewith the
Company issued 20,426,261 shares of its common stock in exchange for all of
NSC's outstanding common stock. Prior to the merger, NSC operated 40 outpatient
surgery centers in 14 states. Costs and expenses of approximately $25,630,000,
primarily legal, accounting and financial advisory fees, incurred by the Company
in connection with the NSC merger have been recorded in operations during 1998
and reported as merger expenses in the accompanying consolidated statements of
income.
46
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. MERGERS - (CONTINUED)
The mergers of the Company with Health Images and NSC were accounted for as
poolings of interests and, accordingly, the Company's consolidated financial
statements have been restated to include the results of the acquired companies
for all periods presented. There were no material transactions between the
Company, Health Images and NSC prior to the mergers. The effects of conforming
the accounting policies of the combined companies are not material.
3. CASH, CASH EQUIVALENTS AND OTHER MARKETABLE SECURITIES
Cash, cash equivalents and other marketable securities consisted of the
following:
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
(IN THOUSANDS)
Cash ........................................ $131,709 $117,912
Cash equivalents ............................ 7,118 11,488
-------- --------
Total cash and cash equivalents ............ 138,827 129,400
Certificates of deposit ..................... 1,256 2,352
Municipal put bonds ......................... 1,430 130
Collateralized mortgage obligations ......... 1,000 1,000
-------- --------
Total other marketable securities .......... 3,686 3,482
-------- --------
Total cash, cash equivalents and other
marketable securities (approximates
market value) .............................. $142,513 $132,882
======== ========
For purposes of the consolidated balance sheets and statements of cash
flows, marketable securities purchased with an original maturity of ninety days
or less are considered cash equivalents.
4. OTHER ASSETS
Other assets consisted of the following:
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
(IN THOUSANDS)
Notes receivable ........................... $ 54,871 $ 48,717
Prepaid long-term lease .................... 7,829 7,084
Investments accounted for on equity method . 16,548 13,320
Investments accounted for at cost .......... 52,004 44,093
Real estate investments .................... 2,820 2,820
Trusteed funds ............................. 4,218 8,255
Deferred loss on leases .................... 22,658 21,263
Other ...................................... 3,332 3,547
--------- ---------
$ 164,280 $ 149,099
========= =========
The Company has various investments, with ownership percentages ranging
from 24% to 49%, which are accounted for using the equity method of accounting.
The Company's equity in earnings of these investments was not material to the
Company's consolidated results of operations for the years ended 1997, 1998 and
1999. At December 31, 1999, the investment balance on the Company's books was
not materially different than the underlying equity in net assets of the
unconsolidated entities.
47
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. OTHER ASSETS - (CONTINUED)
Investments accounted for at cost consist of investments in companies
involved in operations similar to those of the Company. For those investments
with a quoted market price, the Company's investment balance is not materially
different than the quoted market price. For all other investments in this
category, it was not practicable to estimate the fair value because of the lack
of a quoted market price and the inability to estimate the fair value without
incurring excessive costs. The carrying amount at December 31, 1999 represents
the original cost of the investments, which management believes is not impaired.
During 1998, the Company sold four inpatient rehabilitation hospital
facilities. Because the Company is leasing back all of the properties, the
resulting loss on sale of approximately $19,500,000 has been recorded on the
accompanying consolidated balance sheet in other assets as deferred loss on
leases and will be amortized into expense over the initial lease term of 15
years in accordance with SFAS 98. Aggregate annual lease payments for these
properties total $6,000,000. During 1995, the Company sold another inpatient
rehabilitation hospital property under terms similar to those described above.
Aggregate annual lease payments for this property total $1,700,000. The
resulting loss of approximately $4,000,000 is being amortized to expense over
the initial lease term of 15 years.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
DECEMBER 31,
-----------------------------
1998 1999
------------- -------------
(IN THOUSANDS)
Land ...................................... $ 123,076 $ 126,074
Buildings ................................. 1,114,852 1,233,809
Leasehold improvements .................... 348,205 380,852
Furniture, fixtures and equipment ......... 1,266,185 1,553,159
Construction-in-progress .................. 29,212 28,931
---------- ----------
2,881,530 3,322,825
Less accumulated depreciation and
amortization ............................. 626,037 819,858
---------- ----------
$2,255,493 $2,502,967
========== ==========
48
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
6. INTANGIBLE ASSETS
Intangible assets consisted of the following:
DECEMBER 31,
-------------------------------
1998 1999
-------------- --------------
(IN THOUSANDS)
Organizational, partnership formation
and start-up costs (see Note 1) ......... $ 200,160 $ 117,622
Debt issue costs ......................... 56,068 51,284
Noncompete agreements .................... 130,776 122,545
Cost in excess of net asset value of
purchased facilities .................... 2,919,187 2,920,980
----------- -----------
3,306,191 3,212,431
Less accumulated amortization ............ 346,281 383,924
----------- -----------
$ 2,959,910 $ 2,828,507
=========== ===========
7. LONG-TERM DEBT
Long-term debt consisted of the following:
DECEMBER 31,
-----------------------------
1998 1999
------------- -------------
(IN THOUSANDS)
Notes and bonds payable:
Advances under a $1,750,000,000
credit agreement with banks .................... $1,325,000 $1,625,000
9.5% Senior Subordinated Notes due
2001 ........................................... 250,000 250,000
3.25% Convertible Subordinated
Debentures due 2003 ............................ 567,750 567,750
6.875% Senior Notes due 2005 .................... 250,000 250,000
7.0% Senior Notes due 2008 ...................... 250,000 250,000
Notes payable to banks and various
other notes payable, at interest rates
from 5.5% to 14.9% ............................. 113,755 117,421
Hospital revenue bonds payable .................. 13,712 15,130
Noncompete agreements payable with
payments due at intervals ranging
through December 2004 ........................... 60,709 39,347
---------- ----------
2,830,926 3,114,648
Less amounts due within one year ................. 49,994 37,818
---------- ----------
$2,780,932 $3,076,830
========== ==========
The fair value of the total long-term debt approximates book value at
December 31, 1999, except for the 3.25% Convertible Subordinated Debentures due
2003, the 6.875% Senior Notes due 2005 and the 7.0% Senior Notes due 2008. The
fair value of the 3.25% Convertible Subordinated Debentures due 2003 was
approximately $443,000,000 at December 31, 1999. The fair value of the 6.875%
Senior Notes due 2005 was approximately $216,600,000 at December 31, 1999. The
fair value of the 7% Senior Notes due 2008 was approximately $207,250,000 at
December 31, 1999. The fair values of the Company's long-term
49
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. LONG-TERM DEBT - (CONTINUED)
debt are estimated using discounted cash flow analysis, based on the Company's
current incremental borrowing rates for similar types of borrowing arrangements.
The Company has a $1,750,000,000 revolving credit facility with Bank of
America, N.A. ("Bank of America") and other participating banks (the "1998
Credit Agreement"). The 1998 Credit Agreement replaced a previous $1,250,000,000
revolving credit agreement, also with Bank of America. Interest on the 1998
Credit Agreement is paid based on LIBOR plus a predetermined margin, a base
rate, or competitively bid rates from the participating banks. The Company is
required to pay a fee on the unused portion of the revolving credit facility
ranging from 0.09% to 0.25%, depending on certain defined credit ratings. The
principal amount is payable in full on June 22, 2003. The Company has provided a
negative pledge on all assets under the 1998 Credit Agreement. At December 31,
1999, the effective interest rate associated with the 1998 Credit Agreement was
approximately 6.6%.
The Company also has a Short Term Credit Agreement with Bank of America (as
amended, the "Short Term Credit Agreement"), providing for a $250,000,000 short
term revolving credit facility. The terms of the Short Term Credit Agreement are
substantially consistent with those of the 1998 Credit Agreement. Interest on
the Short Term Credit Agreement is paid based on LIBOR plus a predetermined
margin or a base rate. The Company is required to pay a fee on the unused
portion of the credit facility ranging from 0.30% to 0.50%, depending on certain
defined credit ratings. The principal amount is payable in full on December 12,
2000, with an earlier repayment required in the event that the Company
consummates any public offering or private placement of debt securities. At
December 31, 1999, the Company had not drawn any amounts under the Short Term
Credit Agreement.
On March 24, 1994, the Company issued $250,000,000 principal amount of 9.5%
Senior Subordinated Notes due 2001 (the "Notes"). Interest is payable on April 1
and October 1. The Notes are senior subordinated obligations of the Company and
as such are subordinated to all existing and future senior indebtedness of the
Company, and also are effectively subordinated to all existing and future
liabilities of the Company's subsidiaries and partnerships. The Notes mature on
April 1, 2001.
On March 20, 1998, the Company issued $500,000,000 in 3.25% Convertible
Subordinated Debentures due 2003 (the "3.25% Convertible Debentures") in a
private placement. An additional $67,750,000 principal amount of the 3.25%
Convertible Debentures was issued on March 31, 1998 to cover underwriters'
overallotments. Interest is payable on April 1 and October 1. The 3.25%
Convertible Debentures are convertible into Common Stock of the Company at the
option of the holder at a conversion price of $36.625 per share. The conversion
price is subject to adjustment upon the occurrence of (a) a subdivision,
combination or reclassification of outstanding shares of Common Stock, (b) the
payment of a stock dividend or stock distribution on any share of the Company's
capital stock, (c) the issuance of rights or warrants to all holders of Common
Stock entitling them to purchase shares of Common Stock at less than the current
market price, or (d) the payment of certain other distributions with respect to
the Company's Common Stock. In addition, the Company may, from time to time,
lower the conversion price for periods of not less than 20 days, in its
discretion. The net proceeds from the issuance of the 3.25% Convertible
Debentures were used by the Company to pay down indebtedness outstanding under
its then-existing credit facilities.
On June 22, 1998, the Company issued $250,000,000 in 6.875% Senior Notes
due 2005 and $250,000,000 in 7.0% Senior Notes due 2008 (collectively, the
"Senior Notes"). Interest is payable on June 15 and December 15 of each year,
commencing on December 15, 1998. The Senior Notes are unsecured, unsubordinated
obligations of the Company. The net proceeds from the issuance of the Senior
Notes were used by the Company to pay down indebtedness outstanding under its
then-existing credit facilities.
In October 1999, the Company entered into three six-month interest rate
swap arrangements with notional amounts of $250,000,000 each. The swaps expire
on various dates in April 2000. These
50
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. LONG-TERM DEBT - (CONTINUED)
arrangements have the effect of converting a portion of the Company's variable
rate debt to a fixed rate. The arrangements did not have a material effect on
the Company's operations.
Principal maturities of long-term debt are as follows:
YEAR ENDING DECEMBER 31, (IN THOUSANDS)
- ------------------------------ ---------------
2000 ....................... $ 37,818
2001 ....................... 295,549
2002 ....................... 19,138
2003 ....................... 2,205,240
2004 ....................... 10,407
After 2004 ................. 546,496
----------
$3,114,648
==========
8. STOCK OPTIONS
The Company has various stockholder-approved stock option plans which
provide for the grant of options to directors, officers and other key employees
to purchase Common Stock at 100% of the fair market value as of the date of
grant. The Audit and Compensation Committee of the Board of Directors
administers the stock option plans. Options may be granted as incentive stock
options or as non-qualified stock options. Incentive stock options vest 25%
annually, commencing upon completion of one year of employment subsequent to the
date of grant. Certain of the non-qualified stock options are not subject to any
vesting provisions, while others vest on the same schedule as the incentive
stock options. The options expire ten years from the date of grant.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 is effective for fiscal years beginning
after December 15, 1995 and allows for the option of continuing to account for
stock-based compensation under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations, or selecting the fair value method of expense recognition as
described in SFAS 123. The Company has elected to follow APB 25 in accounting
for its employee stock options. The Company follows SFAS 123 in accounting for
its non-employee stock options. The total compensation expense associated with
non-employee stock options granted in 1997, 1998 and 1999 was not material.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of SFAS 123. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1997,
1998 and 1999, respectively: risk-free interest rates of 6.12%, 6.10% and 6.21%;
dividend yield of 0%; volatility factors of the expected market price of the
Company's common stock of .37, .76 and .77; and a weighted-average expected life
of the options of 6.2 years, 5.5 years and 5.0 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
51
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. STOCK OPTIONS - (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1998 1999
-------------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Pro forma net income ......... $ 301,467 $ 31,009 $ 47,149
Pro forma earnings per share:
Basic ....................... 0.82 0.07 0.12
Diluted ..................... 0.78 0.07 0.12
The 1997 pro forma net income reflects the third year of vesting of the
1995 awards, the second year of vesting the 1996 awards and the first year of
vesting of the 1997 awards. Not until 1998 is the full effect of recognizing
compensation expense for stock options representative of the possible effects on
pro forma net income for future years.
A summary of the Company's stock option activity and related information
for the years ended December 31 follows:
1997 1998 1999
------------------------- ------------------------ -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE
(000) PRICE (000) PRICE (000) PRICE
------------ ---------- ----------- ---------- ----------- ---------
Options outstanding January 1 .............. 34,736 $ 7 34,771 $ 12 34,437 $ 12
Granted ................................... 11,286 22 6,020 12 6,589 11
Exercised ................................. (10,075) 7 (5,035) 12 (772) 5
Canceled .................................. (1,176) 19 (1,319) 21 (4,226) 20
------- ---- ------ ---- ------ ----
Options outstanding at December 31 ......... 34,771 $ 12 34,437 $ 12 36,028 $ 11
Options exercisable at December 31 ......... 28,703 $ 11 29,156 $ 11 31,689 $ 11
Weighted average fair value of options
granted during the year ................... $ 10.59 $ 7.50 $ 7.14
The following table summarizes information about stock options outstanding
at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
DECEMBER 31, REMAINING EXERCISE DECEMBER 31, EXERCISE
1999 LIFE PRICE 1999 PRICE
---------------- ----------- ---------- --------------- -----------
(IN THOUSANDS) (YEARS) (IN THOUSANDS)
Under $10.00 ............. 21,591 4.99 $ 6.49 19,746 $ 6.26
$10.00 - $23.63 .......... 14,198 7.32 16.78 11,733 17.71
$23.63 and above ......... 239 7.69 28.65 210 28.83
9. ACQUISITIONS
The Company evaluates each of its acquisitions independently to determine
the appropriate amortization period for the cost in excess of net asset value of
purchased facilities. Each evaluation includes an analysis of historic and
projected financial performance, evaluation of the estimated useful lives of
buildings and fixed assets acquired, the indefinite lives of certificates of
need and licenses acquired, the competition within local markets, lease terms
where applicable, and the legal term of partnerships where applicable.
52
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. ACQUISITIONS - (CONTINUED)
1997 ACQUISITIONS
Effective October 29, 1997, the Company acquired Horizon/CMS Healthcare
Corporation ("Horizon/CMS") in a stock-for-stock merger in which the
stockholders of Horizon/CMS received 0.84338 of a share of the Company's common
stock per share of Horizon/CMS common stock. At the time of the acquisition,
Horizon/CMS operated 30 inpatient rehabilitation hospitals and approximately 275
outpatient rehabilitation centers, among other strategic businesses, as well as
certain long-term care businesses. In the transaction, the Company issued
approximately 45,261,000 shares of its common stock, valued at $975,824,000,
exchanged options to acquire 3,313,000 shares of common stock, valued at
$23,191,000, and assumed approximately $740,000,000 in long-term debt.
Effective December 31, 1997, the Company sold certain non-strategic assets
of Horizon/CMS to Integrated Health Services, Inc. ("IHS"). Under the terms of
the sale, the Company sold 139 long-term care facilities, 12 specialty
hospitals, 35 institutional pharmacy locations and over 1,000 rehabilitation
therapy contracts with long-term care facilities. The transaction was valued at
approximately $1,224,000,000, including the payment by IHS of approximately
$1,130,000,000 in cash (net of certain adjustments) and the assumption by IHS of
approximately $94,000,000 in debt.
In accordance with Emerging Issues Task Force Issue 87-11, "Allocation of
Purchase Price to Assets to be Sold" ("EITF 87-11"), the results of operations
of the non-strategic assets sold to IHS from the acquisition date to December
31, 1997, including a net loss of $7,376,000, have been excluded from the
Company's results of operations in the accompanying financial statements. The
gain on the disposition of the assets sold to IHS, totaling $10,996,000, has
been accounted for as an adjustment to the original Horizon/CMS purchase price
allocation.
The Company also planned to sell the physician and allied health
professional placement service business it acquired in the Horizon/CMS
acquisition (the "Physician Placement Services Subsidiary"). This sale was
completed during the fourth quarter of 1998. Accordingly, a portion of the
Horizon/CMS purchase price was allocated to the Physician Placement Services
Subsidiary and this amount was classified as assets held for sale in the
accompanying December 31, 1997 consolidated balance sheet. The allocated amount
of $60,400,000 represented the net assets of the Physician Placement Services
Subsidiary, plus anticipated cash flows from (a) operations of the Physician
Placement Services Subsidiary during the holding period and (b) proceeds from
the sale of the Physician Placement Services Subsidiary. The actual net proceeds
realized by the Company upon the sale of the Physician Placement Services
Subsidiary was approximately $34,100,000. The difference between the original
amount allocated and the net proceeds realized by the Company has been accounted
for in 1998 as an adjustment to the Horizon/CMS purchase price allocation. The
results of operations of the Physician Placement Services Subsidiary from the
Horizon/CMS acquisition date to December 31, 1998, including a net loss of
$10,065,000, have been excluded from the Company's results of operations in the
accompanying financial statement in accordance with EITF 87-11.
In connection with the sale of the Physician Placement Services Subsidiary,
the Company also sold its physical therapy staffing business, which had been
acquired by the Company as part of a larger strategic acquisition in 1994. The
loss on the sale of the physical therapy staffing business was $31,232,000 and
was recorded by the Company in the fourth quarter of 1998.
Effective September 30, 1997, the Company acquired ASC Network Corporation
("ASC") in a cash-for-stock merger. At the time of the acquisition, ASC operated
29 outpatient surgery centers in eight states. The total purchase price for ASC
was approximately $130,827,000 in cash, plus the assumption of approximately
$61,000,000 in long-term debt.
Effective October 23, 1997, the Company acquired National Imaging
Affiliates, Inc. ("NIA") in a stock-for-stock merger. At the time of the
acquisition, NIA operated eight diagnostic imaging centers in six states and a
radiology management services business. In conjunction with the transaction, NIA
spun
53
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. ACQUISITIONS - (CONTINUED)
off its radiology management services business, which continues to be owned by
the former NIA stockholders. In the transaction, the Company issued
approximately 984,000 shares of its common stock, valued at $20,706,000, in
exchange for all of the outstanding shares of NIA.
At various dates and in separate transactions throughout 1997, the Company
acquired 135 outpatient rehabilitation facilities, ten outpatient surgery
centers and eight diagnostic imaging facilities located throughout the United
States. The Company also acquired an inpatient rehabilitation hospital located
in Australia. The total purchase price of the acquired operations was
approximately $179,749,000. The form of consideration constituting the total
purchase price was $173,519,000 in cash, $2,674,000 in notes payable and the
issuance of approximately 167,000 shares of the Company's common stock, valued
at $3,521,000.
In connection with these transactions, the Company entered into noncompete
agreements with former owners totaling $29,275,000. In general, these noncompete
agreements are payable in monthly or quarterly installments over periods ranging
from five to ten years.
As of December 31, 1997, the Company had estimated the fair value of the
total net assets relating to the 1997 acquisitions described above to be
approximately $237,369,000. During 1998, the Company made certain adjustments to
reduce the fair value of the Horizon/CMS net assets acquired by approximately
$136,065,000. These adjustments relate primarily to the valuation of accounts
and notes receivable acquired, the valuation of fixed assets acquired, final
working capital settlements with IHS and the payment of pre-acquisition
liabilities in excess of amounts accrued in the original purchase price
allocation. After considering the effects of the adjustments recorded in 1998,
the total cost of the 1997 acquisitions exceeded the fair value of the net
assets acquired by approximately $1,228,993,000. Based on the evaluation of each
acquisition utilizing the criteria described above, the Company determined that
the cost in excess of net asset value of purchased facilities relating to the
1997 acquisitions should be amortized over a period of 25 to 40 years on a
straight-line basis.
All of the 1997 acquisitions described above were accounted for as
purchases and, accordingly, the results of operations of the acquired businesses
are included in the accompanying consolidated financial statements from their
respective dates of acquisition. With the exception of the operations acquired
in the Horizon/CMS acquisition (for which pro forma data have been disclosed
above), the results of operations of the acquired businesses were not material
individually or in the aggregate to the Company's consolidated results of
operations and financial position.
1998 ACQUISITIONS
Effective July 1, 1998, the Company acquired Columbia/HCA Healthcare
Corporation's interests in 33 ambulatory surgery centers (subject to certain
outstanding consents and approvals with respect to three of the centers, as to
which the parties entered into management agreements) in a transaction accounted
for as a purchase. Effective July 31, 1998, the Company entered into certain
other arrangements to acquire substantially all of the economic benefit of
Columbia/HCA's interests in one additional ambulatory surgery center. The
purchase price was approximately $550,402,000 in cash.
At various dates and in separate transactions throughout 1998, the Company
acquired 112 outpatient rehabilitation facilities, four outpatient surgery
centers, one inpatient rehabilitation hospital and 27 diagnostic imaging
centers. The acquired operations are located throughout the United States. The
total purchase price of the acquired operations was approximately $216,305,000.
The form of consideration constituting the total purchase price was
approximately $179,038,000 in cash and $17,870,000 in notes payable and the
issuance of approximately 699,000 shares of the Company's common stock, valued
at $19,397,000.
54
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. ACQUISITIONS - (CONTINUED)
In connection with these transactions, the Company entered into noncompete
agreements with former owners totaling $25,926,000. In general, these noncompete
agreements are payable in monthly or quarterly installments over periods ranging
from five to ten years.
The fair value of the total net assets relating to the 1998 acquisitions
described above was approximately $15,570,000. The total cost of the 1998
acquisitions exceeded the fair value of the net assets acquired by approximately
$751,137,000. Based on the evaluation of each acquisition utilizing the criteria
described above, the Company determined that the cost in excess of net asset
value of purchased facilities relating to the 1998 acquisitions should be
amortized over periods ranging from 25 to 40 years on a straight-line basis. No
other identifiable intangible assets were recorded in the acquisitions described
above.
All of the 1998 acquisitions described above were accounted for as
purchases and, accordingly, the results of operations of the acquired businesses
(not material individually or in the aggregate) are included in the accompanying
consolidated financial statements from their respective dates of acquisition.
1999 ACQUISITIONS
Effective June 29, 1999, the Company acquired from Mariner Post-Acute
Network, Inc. ("Mariner") substantially all of the assets of Mariner's American
Rehability Services division in a transaction accounted for as a purchase. At
the time of the acquisition, Mariner operated approximately 160 outpatient
rehabilitation centers in 18 states. The purchase price was approximately
$54,521,000 in cash.
At various dates and in separate transactions throughout 1999, the Company
acquired ten outpatient rehabilitation facilities, eight outpatient surgery
centers, two inpatient rehabilitation hospitals and four diagnostic imaging
centers. The acquired operations are located throughout the United States. The
total purchase price of the acquired operations was approximately $49,844,000.
The form of consideration constituting the total purchase price was
approximately $49,684,000 in cash and $160,000 in notes payable.
In connection with these transactions, the Company entered into noncompete
agreements with former owners totaling $2,996,000. In general, these noncompete
agreements are payable in monthly or quarterly installments over periods ranging
from five to ten years.
The fair value of the total net assets relating to the 1999 acquisitions
described above was approximately $23,245,000. The total cost of the 1999
acquisitions exceeded the fair value of the net assets acquired by approximately
$81,120,000. Based on the evaluation of each acquisition utilizing the criteria
described above, the Company determined that the cost in excess of net asset
value of purchased facilities relating to the 1999 acquisitions should be
amortized over periods ranging from 20 to 40 years on a straight-line basis. No
other identifiable intangible assets were recorded in the acquisitions described
above. At December 31, 1999, the purchase price allocation associated with the
1999 acquisitions is preliminary in nature. During 2000 the Company will make
adjustments, if necessary, to the purchase price allocation based on revisions
to the fair value of the assets acquired.
All of the 1999 acquisitions described above were accounted for as
purchases and, accordingly, the results of operations of the acquired businesses
(not material individually or in the aggregate) are included in the accompanying
consolidated financial statements from their respective dates of acquisition.
10. INCOME TAXES
HEALTHSOUTH and its subsidiaries file a consolidated federal income tax
return. The partnerships and LLCs file separate income tax returns.
HEALTHSOUTH's allocable portion of each partnership's income or loss is included
in the taxable income of the Company. The remaining income or loss of each
partnership and LLC is allocated to the other partners.
55
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. INCOME TAXES - (CONTINUED)
The Company utilizes the liability method of accounting for income taxes,
as required by Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes". Deferred income taxes reflect the net effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1998 are as follows:
CURRENT NONCURRENT TOTAL
-------------- ------------ ------------
(IN THOUSANDS)
Deferred tax assets:
Net operating loss .................... $ -- $ 3,504 $ 3,504
Accruals .............................. 19,482 -- 19,482
Other ................................. -- 6,470 136,470
--------- ---------- ----------
Total deferred tax assets .............. 19,482 139,974 159,456
Deferred tax liabilities:
Depreciation and amortization ......... -- (90,753) (90,753)
Bad debts ............................. (53,642) -- (53,642)
Capitalized costs ..................... -- (78,077) (78,077)
Other ................................. (3,452) -- (3,452)
--------- ---------- ----------
Total deferred tax liabilities ......... (57,094) (168,830) (225,924)
--------- ---------- ----------
Net deferred tax liabilities ........... $ (37,612) $ (28,856) $ (66,468)
========= ========== ==========
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1999 are as follows:
CURRENT NONCURRENT TOTAL
-------------- ------------ ------------
(IN THOUSANDS)
Deferred tax assets:
Net operating loss .................... $ -- $ 2,811 $ 2,811
Impairment and restructuring charges .. -- 126,008 126,008
---------- --------- ----------
Total deferred tax assets .............. -- 128,819 128,819
Deferred tax liabilities:
Depreciation and amortization ......... -- (46,017) (46,017)
Bad debts ............................. (91,830) -- (91,830)
Capitalized costs ..................... -- (35,252) (35,252)
Accruals .............................. (7,584) -- (7,584)
Other ................................. (8,754) -- (8,754)
---------- --------- ----------
Total deferred tax liabilities ......... (108,168) (81,269) (189,437)
---------- --------- ----------
Net deferred tax liabilities ........... $ (108,168) $ 47,550 $ (60,618)
========== ========= ==========
At December 31, 1999, the Company has net operating loss carryforwards of
approximately $7,322,000 for income tax purposes expiring through the year 2015.
Those carryforwards resulted from the Company's acquisitions of Rebound, Inc.,
Horizon/CMS Healthcare Corporation, ASC Network Corporation, The Company Doctor
and National Imaging Affiliates.
56
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. INCOME TAXES - (CONTINUED)
The provision for income taxes was as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ------------- -----------
(IN THOUSANDS)
Currently payable:
Federal ......... $171,029 $ 162,433 $ 61,156
State ........... 27,402 24,324 11,623
-------- --------- --------
198,431 186,757 72,779
Deferred expense:
Federal ......... 13,186 (37,756) (4,916)
State ........... 2,051 (5,654) (934)
-------- --------- --------
15,237 (43,410) (5,850)
-------- --------- --------
$213,668 $ 143,347 $ 66,929
======== ========= ========
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,
--------------------------------------------
1997 1998 1999
------------- ------------- ------------
(IN THOUSANDS)
Federal taxes at statutory rates ......... $ 220,219 $ 93,581 $ 80,470
Add (deduct):
State income taxes, net of federal tax
benefit ............................... 19,144 12,136 6,948
Minority interests ...................... (25,364) (27,114) (30,264)
Nondeductible goodwill .................. -- 7,630 9,304
Disposal/impairment charges ............. 1,576 57,873 6,128
Other ................................... (1,907) (759) (5,657)
--------- --------- ---------
$ 213,668 $ 143,347 $ 66,929
========= ========= =========
11. COMMITMENTS AND CONTINGENCIES
The Company is a party to legal proceedings incidental to its business. In
the opinion of management, any ultimate liability with respect to these actions
will not materially affect the consolidated financial position or results of
operations of the Company.
Beginning December 1, 1993, the Company became self-insured for
professional liability and comprehensive general liability. The Company
purchased coverage for all claims incurred prior to December 1, 1993. In
addition, the Company purchased underlying insurance which would cover all
claims once established limits have been exceeded. It is the opinion of
management that at December 31, 1999 the Company has adequate reserves to cover
losses on asserted and unasserted claims.
In connection with the Horizon/CMS acquisition, the Company assumed
Horizon/CMS's open professional and general liability claims. The Company has
entered into an agreement with an insurance carrier to assume responsibility for
the majority of open claims. Under this agreement, a "risk transfer" was
conducted which converted Horizon/CMS's self-insured claims to insured
liabilities consistent with the terms of the underlying insurance policy.
Horizon/CMS is currently a party, or is subject, to certain litigation
matters and disputes. The Company itself is, in general, not a party to such
litigation. These matters include actions on
57
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
investigations initiated by the Securities and Exchange Commission, New York
Stock Exchange, various federal and state regulatory agencies, stockholders of
Horizon/CMS and other parties. Both Horizon/CMS and the Company are working to
resolve these matters and cooperating fully with the various regulatory agencies
involved. As of December 31, 1999, it was not possible for the Company to
predict the ultimate outcome or effect of these matters. In management's
opinion, the ultimate resolution of these matters will not have a material
effect on the Company's consolidated financial position.
The Company was served with certain lawsuits filed beginning September 30,
1998, which purport to be class actions under the federal and Alabama securities
laws. Such lawsuits were filed following a decline in the Company's stock price
at the end of the third quarter of 1998. Seven such suits were filed in the
United States District Court for the Northern District of Alabama. In January
1999, those suits were ordered consolidated. In April 1999, the plaintiffs filed
a consolidated amended complaint against the Company and certain of its officers
and directors alleging that, during the period April 24, 1997 through September
30, 1998, the defendants misrepresented or failed to disclose certain material
facts concerning the Company's business and financial condition in order to
artificially inflate the price of the Company's Common Stock and issued or sold
shares of such stock during the purported class period, all allegedly in
violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder. Certain of the named plaintiffs in the consolidated amended
complaint also purport to represent separate subclasses consisting of former
stockholders of corporations acquired by the Company in 1997 and 1998 who
received shares of the Company's Common Stock in connection with such
acquisitions and who assert additional claims under Section 11 of the Securities
Act of 1933.
Additionally, another suit has been filed in the Circuit Court of Jefferson
County, Alabama, purportedly as a derivative action on behalf of the Company.
This suit largely replicates the allegations of the federal actions described in
the preceding paragraph and alleges that the current directors of the Company,
certain former directors and certain officers of the Company breached their
fiduciary duties to the Company and engaged in other allegedly tortious conduct.
The plaintiff in that case has forborne pursuing its claim thus far pending
further progress in the federal actions, and the Company has not yet been
required to file a responsive pleading in the case. Another non-derivative state
court action was voluntarily dismissed by the plaintiff, without prejudice.
The Company filed its motion to discuss the consolidated amended complaint
in the federal action in late June 1999. The Company cannot predict when the
court will hear arguments or rule on this motion. The Company believes that all
claims asserted in the above suits are without merit, and expects to vigorously
defend against such claims. Because such suits remain at an early stage, the
Company cannot predict the outcome of any such suits or the magnitude of any
potential loss if the Company's defense is unsuccessful.
At December 31, 1999, committed capital expenditures for the next twelve
months are $33,822,000.
Operating leases generally consist of short-term lease agreements for
buildings where facilities are located. These leases generally have 5-year
terms, with one or more renewal options, with terms to be negotiated at the time
of renewal. Total rental expense for all operating leases was $167,749,000,
$238,937,000 and $233,895,000 for the years ended December 31, 1997, 1998 and
1999, respectively.
The Company has entered into a tax retention operating lease for certain of
its facilities. The Company is required to renegotiate the lease or purchase or
obtain a purchaser for the facilities at its termination in December 2000. The
minimum sales price guarantee is approximately $120,000,000.
58
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
The following is a schedule of future minimum lease payments under all
operating leases having initial or remaining non-cancelable lease terms in
excess of one year:
YEAR ENDING DECEMBER 31, (IN THOUSANDS)
- --------------------------------------------------- ---------------
2000 ..................................... $ 203,432
2001 ..................................... 169,129
2002 ..................................... 133,593
2003 ..................................... 103,166
2004 ..................................... 77,301
After 2004 ............................... 381,789
-----------
Total minimum payments required .......... $ 1,068,410
===========
12. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) savings plan which matches 15% of the first 4% of
earnings that an employee contributes. All contributions are in the form of
cash. All employees who have completed one year of service with a minimum of
1,000 hours worked are eligible to participate in the plan. Company
contributions are gradually vested over a seven-year service period.
Contributions to the plan by the Company were approximately $2,628,000,
$4,121,000 and $4,608,000 in 1997, 1998 and 1999, respectively.
In 1991, the Company established an Employee Stock Ownership Plan ("ESOP")
for the purpose of providing substantially all employees of the Company the
opportunity to save for their retirement and acquire a proprietary interest in
the Company. The ESOP currently owns approximately 3,320,000 shares of the
Company's common stock, which were purchased with funds borrowed from the
Company, $10,000,000 in 1991 (the "1991 ESOP Loan") and $10,000,000 in 1992 (the
"1992 ESOP Loan"). At December 31, 1999, the combined ESOP Loans had a balance
of $7,898,000. The 1991 ESOP Loan, which bears an interest rate of 10%, is
payable in annual installments covering interest and principal over a ten-year
period beginning in 1992. The 1992 ESOP Loan, which bears an interest rate of
8.5%, is payable in annual installments covering interest and principal over a
ten-year period beginning in 1993. Company contributions to the ESOP began in
1992 and shall at least equal the amount required to make all ESOP loan
amortization payments for each plan year. The Company recognizes compensation
expense based on the shares allocated method. Compensation expense related to
the ESOP recognized by the Company was $3,249,000, $3,195,000 and $3,197,000 in
1997, 1998 and 1999, respectively. Interest incurred on the ESOP Loans was
approximately $1,121,000, $927,000 and $715,000 in 1997, 1998 and 1999,
respectively. Approximately 2,149,000 shares owned by the ESOP have been
allocated to participants at December 31, 1999.
During 1993, the American Institute of Certified Public Accountants issued
Statement of Position 93-6, "Employers Accounting for Employee Stock Ownership
Plans" ("SOP 93-6"). Among other provisions, SOP 93-6 requires that compensation
expense relating to employee stock ownership plans be measured based on the fair
market value of the shares when allocated to the employees. The provisions of
SOP 93-6 apply only to leveraged ESOPs formed after December 31, 1992, or shares
newly acquired by an existing leveraged ESOP after December 31, 1992. Because
all shares owned by the Company's ESOP were acquired prior to December 31, 1992,
the Company's accounting policies for the shares currently owned by the ESOP are
not affected by SOP 93-6.
13. IMPAIRMENT AND RESTRUCTURING CHARGES
During the third quarter of 1998, the Company recorded impairment and
restructuring charges of approximately $72,000,000 related to the Company's
decision to dispose of or otherwise discontinue substantially all of its home
health operations. The decision was prompted in large part by the negative
59
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
13. IMPAIRMENT AND RESTRUCTURING CHARGES - (CONTINUED)
impact of the 1997 Balanced Budget Act, which placed reimbursement limits on
home health businesses. The limits were announced in March 1998, and the Company
began to see the adverse affect on home health margins. Based on this
unfavorable trend, management prepared a plan to exit the home health operations
described above. The plan was approved by the Board of Directors on September
16, 1998. Revenues and losses before income taxes and minority interests for the
home health operations were $71,163,000 and $(4,261,000), respectively. The home
health operations have been included in the inpatient and other clinical
services segment. The home health operations covered by the plan included
approximately 35 locations, all of which were closed by December 31, 1998.
The $72,000,000 third quarter charge consists of the following components:
(i) A $62,748,000 impairment charge was recorded to reduce the carrying amount
of selected long-lived assets to estimated fair value. All of the assets
written down, including fixed assets of $8,363,000 and intangible assets of
$54,385,000, were associated with the discontinued home health operations
and are detailed further in the table below.
(ii) A $4,908,000 charge was recorded to write down other assets, primarily
inventories and prepaid expenses, which were negatively impacted by the
Company's decision to discontinue the home health operations.
(iii) The remaining components of the charge included $2,618,000 in lease
abandonment costs and $1,435,000 in other incremental costs, representing
primarily legal and asset disposal costs.
The Company has developed a strategic plan to provide integrated services
in major markets throughout the United States. In the fourth quarter of 1998,
the Company recorded a restructuring charge of approximately $404,000,000 as a
result of its decision to close certain facilities that did not fit with the
Company's strategic vision, underperforming facilities and facilities not
located in target markets. The Company's Board of Directors approved the
restructuring plan on December 10, 1998. A total of 167 facilities were included
in the plan, including 110 outpatient rehabilitation facilities, 7 inpatient
rehabilitation hospitals, 29 outpatient surgery centers, and 21 diagnostic
centers. Some of these facilities had multiple business units associated with
the operation. The identified facilities contributed $140,087,000 to the
Company's revenue and $(9,907,000) to the Company's income before income taxes
and minority interests during 1998. At March 24, 2000, approximately 95% of the
locations identified in the fourth quarter restructuring plan had been closed.
The $404,000,000 fourth quarter charge consists of the following
components:
(i) A $304,624,000 impairment charge was recorded to reduce the carrying amount
of selected long-lived assets to estimated fair value. All of the assets
written down, including fixed assets of $137,880,000 and intangible assets
of $166,744,000, were associated with the facilities identified in the
fourth quarter restructuring plan. These assets are detailed further in the
table below.
(ii) A $19,857,000 charge was recorded to write down other assets, primarily
inventories and prepaid expenses, which were negatively impacted by the
Company's decision to close the affected facilities.
(iii) Approximately $6,027,000 of the charge related to involuntary severance
packages paid or payable to approximately 7,900 employees. These employees
worked primarily in the Company's discontinued home health operations
described above. The terminations were communicated to the affected
employees during the fourth quarter. Approximately 7,880 of the affected
employees had left the Company as of December 31, 1998. The remaining
employees left the Company during the first half of 1999.
(iv) Approximately $49,476,000 of the charge related to lease abandonment costs
primarily for office and clinical space that was or was to be vacated as a
result of the restructuring plan.
60
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
13. IMPAIRMENT AND RESTRUCTURING CHARGES - (CONTINUED)
(v) The Company recognized $24,089,000 in estimated other incremental costs,
generally representing costs that are a direct result of the restructuring
plan and have no future economic benefit. These costs include primarily (a)
$7,818,000 in legal costs associated with closing the facilities, (b)
$7,275,000 in disposal costs, including costs associated with
de-installation of signage and equipment, moving costs, refurbishing costs
and exit cleaning costs, (c) $2,777,000 in ongoing security costs at
abandoned or closed facilities, (d) $4,591,000 storage rental costs and (e)
$1,628,000 in utility costs incurred at abandoned or closed facilities.
The restructuring activities (shown below in tabular form) primarily relate
to asset write-downs, lease abandonments and the elimination of job
responsibilities resulting in costs incurred to sever employees. Details of the
impairment and restructuring charges, separated by the amounts recorded in the
third and fourth quarter of 1998, respectively, are as follows:
ACTIVITY
------------------------
RESTRUCTURING CASH NON-CASH
DESCRIPTION CHARGE PAYMENTS IMPAIRMENTS
- ----------------------------------------- --------------- ---------- -------------
(IN THOUSANDS)
Third Quarter 1998 Charge
Property, plant and equipment:
Leasehold improvements ................ $ 820 $ -- $ 820
Furniture, fixtures and equipment ..... 7,543 -- 7,543
--------- -------- ---------
8,363 -- 8,363
Intangible assets:
Goodwill .............................. 53,485 -- 53,485
Noncompete agreements ................. 678 -- 678
Other intangible assets ............... 222 -- 222
--------- -------- ---------
54,385 -- 54,385
Lease abandonment costs ................ 2,618 2,618 --
Other assets ........................... 4,908 -- 4,908
Other incremental costs ................ 1,435 1,020 --
--------- -------- ---------
Total Third Quarter 1998 Charge ......... $ 71,709 $ 3,638 $ 67,656
========= ======== =========
Fourth Quarter 1998 Charge
Property, plant and equipment:
Land and buildings .................... $ 38,741 $ -- $ 38,741
Leasehold improvements ................ 27,187 -- 27,187
Furniture, fixtures and equipment ..... 71,952 -- 71,952
--------- -------- ---------
137,880 -- 137,880
Intangible assets:
Goodwill .............................. 154,840 -- 154,840
Noncompete agreements ................. 10,632 -- 10,632
Other intangible assets ............... 1,272 -- 1,272
--------- -------- ---------
166,744 -- 166,744
Lease abandonment costs ................ 49,476 -- --
Other assets ........................... 19,857 -- 19,857
Severance packages ..................... 6,027 4,753 --
Other incremental costs ................ 24,089 8,100 --
--------- -------- ---------
Total Fourth Quarter 1998 Charge ........ $ 404,073 $ 12,853 $ 324,481
========= ======== =========
ACTIVITY
------------------------
BALANCE AT CASH NON-CASH BALANCE AT
DESCRIPTION 12/31/98 PAYMENTS IMPAIRMENTS 12/31/99
- ----------------------------------------- ------------ ---------- ------------- -----------
(IN THOUSANDS)
Third Quarter 1998 Charge
Property, plant and equipment:
Leasehold improvements ................ $ -- $ -- $-- $ --
Furniture, fixtures and equipment ..... -- -- -- --
-------- -------- --- --------
-- -- -- --
Intangible assets:
Goodwill .............................. -- -- -- --
Noncompete agreements ................. -- -- -- --
Other intangible assets ............... -- -- -- --
-------- -------- --- --------
-- -- -- --
Lease abandonment costs ................ -- -- -- --
Other assets ........................... -- -- -- --
Other incremental costs ................ 415 415 -- --
-------- -------- --- --------
Total Third Quarter 1998 Charge ......... $ 415 $ 415 $-- $ --
======== ======== === ========
Fourth Quarter 1998 Charge
Property, plant and equipment:
Land and buildings .................... $ -- $ -- $-- $ --
Leasehold improvements ................ -- -- -- --
Furniture, fixtures and equipment ..... -- -- -- --
-------- -------- --- --------
-- -- -- --
Intangible assets:
Goodwill .............................. -- -- -- --
Noncompete agreements ................. -- -- -- --
Other intangible assets ............... -- -- -- --
-------- -------- --- --------
-- -- -- --
Lease abandonment costs ................ 49,476 17,110 -- 32,366
Other assets ........................... -- -- -- --
Severance packages ..................... 1,274 1,274 -- --
Other incremental costs ................ 15,989 8,978 -- 7,011
-------- -------- --- --------
Total Fourth Quarter 1998 Charge ........ $ 66,739 $ 27,362 $-- $ 39,377
======== ======== === ========
The remaining balances at December 31, 1998 and 1999, are included in
accrued interest payable and other liabilities in the accompanying consolidated
balance sheet.
In addition to the third and fourth quarter charges described above, the
Company recorded an impairment charge of approximately $8,000,000 in the fourth
quarter of 1998 related to a rehabilitation hospital it had closed. The
write-down was based on a recently obtained independent appraisal, which
61
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
13. IMPAIRMENT AND RESTRUCTURING CHARGES - (CONTINUED)
reflected a decline in valuation since the original closure. The hospital was
closed in 1995 as a result of duplicative services in a single market. At that
time, the hospital was written down to its then-estimated fair value and
classified as assets held for sale.
The Company abandoned certain equipment and sold certain properties and
equipment during 1999, associated with the 1998 closed facilities. The fair
value of assets remaining to be sold is approximately $27,273,000 compared to
$32,966,000 as of December 31, 1998. The Company expects to have all properties
sold by the end of 2000. The effect of suspending depreciation is immaterial.
For assets that will not be abandoned, the fair values were based on independent
appraisals or estimates of recoverability for similar closings.
Goodwill and other related intangible assets included in the third and
fourth quarter 1998 charges were allocated to the impaired assets based on the
relative fair values of those assets at their respective acquisition dates.
Lease abandonment costs were based on the lease terms remaining, which
range from one to fifteen years, net of any anticipated sublease income, where
applicable.
During the fourth quarter of 1999, in accordance with FASB Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, the Company recorded an asset impairment charge of
$121,037,000. Management evaluated the financial performance of each of its
facilities to determine if there are trends which would indicate that a
facility's ability to recover its investment in its long-lived assets had been
impaired. Based on this evaluation, the Company determined that property, plant
and equipment with a carrying value of $38,050,000 and intangibles with a
carrying value of $95,091,000 were impaired and wrote them down by $25,807,000
and $95,091,000, respectively, to their fair market value. The Company plans to
sell certain property, plant, and equipment with a carrying amount of $2,339,000
in 2000 and has estimated the sales value, net of related costs to sell, at
$2,200,000.
Accordingly, the Company recorded an impairment loss of $139,000 on these
assets, which is included in the 1999 impairment and restructuring charge. See
Note 14 for the impact of impairment losses on operating segments.
14. OPERATING SEGMENTS
The Company adopted SFAS 131 in 1998. Prior years' information has been
restated to present information for the Company's two business segments
described in Note 1.
The accounting policies of the segments are the same as those for the
Company described in Note 1, Significant Accounting Policies. Intrasegment
revenues are not significant. The Company's Chief Operating Decision Maker
evaluates the performance of its segments and allocates resources to them based
on income before minority interests and income taxes and earnings before
interest, income taxes, depreciation and amortization ("EBITDA"). In addition,
certain revenue producing functions are managed directly from the Corporate
office and are not included in operating results for management reporting.
Unallocated assets represent those assets under the direct management of
Corporate office personnel.
62
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
14. OPERATING SEGMENTS - (CONTINUED)
Operating results and other financial data are presented for the principal
operating segments as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1998 1999
------------- ------------- -------------
(IN THOUSANDS)
Revenues:
Inpatient and other clinical services ............. $1,661,254 $1,992,359 $1,878,333
Outpatient services ............................... 1,430,599 1,960,055 2,134,590
---------- ---------- ----------
3,091,853 3,952,414 4,012,923
Unallocated corporate office ...................... 31,323 53,660 59,184
---------- ---------- ----------
Consolidated revenues .............................. $3,123,176 $4,006,074 $4,072,107
========== ========== ==========
Income before income taxes and minority interests:
Inpatient and other clinical services ............. $ 363,984 $ 204,447 $ 225,471
Outpatient services ............................... 413,561 295,846 345,940
---------- ---------- ----------
777,545 500,293 571,411
Unallocated corporate office ...................... (148,349) (232,920) (341,496)
---------- ---------- ----------
Consolidated income before income taxes and minority
interests ......................................... $ 629,196 $ 267,373 $ 229,915
========== ========== ==========
Depreciation and amortization:
Inpatient and other clinical services ............. $ 79,605 $ 97,149 $ 107,957
Outpatient services ............................... 119,470 157,511 176,702
---------- ---------- ----------
199,075 254,660 284,659
Unallocated corporate office ...................... 58,061 89,931 89,589
---------- ---------- ----------
Consolidated depreciation and amortization ......... $ 257,136 $ 344,591 $ 374,248
========== ========== ==========
Interest expense:
Inpatient and other clinical services ............. $ 68,390 $ 68,602 $ 52,211
Outpatient services ............................... 3,734 2,174 781
---------- ---------- ----------
72,124 70,776 52,992
Unallocated corporate office ...................... 40,405 77,387 123,660
---------- ---------- ----------
Consolidated interest expense ...................... $ 112,529 $ 148,163 $ 176,652
========== ========== ==========
Interest income:
Inpatient and other clinical services ............. $ 1,149 $ 4,403 $ 3,397
Outpatient services ............................... 3,883 4,141 5,148
---------- ---------- ----------
5,032 8,544 8,545
Unallocated corporate office ...................... 972 2,742 2,042
---------- ---------- ----------
Consolidated interest income ....................... $ 6,004 $ 11,286 $ 10,587
========== ========== ==========
EBITDA:
Inpatient and other clinical services ............. $ 510,827 $ 331,999 $ 382,242
Outpatient services ............................... 532,885 485,186 518,275
---------- ---------- ----------
1,043,712 817,185 900,517
Unallocated corporate office ...................... (50,855) (68,344) (130,289)
---------- ---------- ----------
Consolidated EBITDA ................................ $ 992,857 $ 748,841 $ 770,228
========== ========== ==========
63
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
14. OPERATING SEGMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
--------- ----------- ----------
(IN THOUSANDS)
Merger and acquisition related expenses, loss on sale of
assets and impairment and restructuring charge:
Inpatient and other clinical services ................... $ -- $224,710 $ 37,072
Outpatient services ..................................... 15,875 303,979 83,965
------- -------- --------
15,875 528,689 121,037
Unallocated corporate office ............................ -- 11,628 --
------- -------- --------
Consolidated merger and acquisition related expenses, loss
on sale of assets and impairment and restructuring charge $15,875 $540,317 $ 121,037
======= ======== ========
Assets:
Inpatient and other clinical services ......... $2,758,851 $2,525,736
Outpatient services ........................... 3,464,540 3,263,397
---------- ----------
6,223,391 5,789,133
Unallocated corporate office .................. 539,506 1,043,201
---------- ----------
Total assets ................................... $6,762,897 $6,832,334
========== ==========
15. RELATED PARTY
In December 1999, the Company acquired 6,390,583 shares of Series A
Convertible Preferred Stock of medcenterdirect.com, inc., a development-stage
healthcare e-procurement company, in a private placement for a purchase price of
$0.3458 per share. Various persons affiliated or associated with the Company,
including various of the Company's Directors and executive officers, also
purchased shares in the private placement. Under a Stockholders Agreement, the
Company and the other holders of the Series A Convertible Preferred Stock,
substantially all of whom may be deemed to be Company affiliates or associates,
have the right to elect 50% of the directors of medcenterdirect.com. During
2000, the Company expects to enter into a definitive 10-year exclusive agreement
under which medcenterdirect.com will be the Company's exclusive e-procurement
vendor of medical products and supplies. The Company expects that the terms of
such agreement will be no less favorable than those the Company could obtain
from an unrelated vendor.
64
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
HEALTHSOUTH has not changed independent accountants within the 24 months
prior to December 31, 1999.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
DIRECTORS
The following table provides information with respect to HEALTHSOUTH's
Directors.
A
PRINCIPAL OCCUPATION AND ALL POSITIONS DIRECTOR
NAME AGE WITH HEALTHSOUTH SINCE
- ---------------------------------- ----- ------------------------------------------------------- ---------
Richard M. Scrushy ............... 47 Chairman of the Board and Chief Executive Officer 1984
and Director
James P. Bennett ................. 42 President and Chief Operating Officer and Director 1993
Phillip C. Watkins, M.D. ......... 58 Physician, Birmingham, Alabama,and Director 1984
George H. Strong ................. 73 Private Investor, Locust, New Jersey, and Director 1984
C. Sage Givens ................... 43 General Partner, Acacia Venture Partners and 1985
Director
Charles W. Newhall III ........... 55 Partner, New Enterprise Associates Limited 1985
Partnerships, and Director
P. Daryl Brown ................... 45 President -- HEALTHSOUTH Ambulatory Services 1995
-- East and Director
John S. Chamberlin ............... 71 Private Investor, Princeton, New Jersey, and Director 1993
Joel C. Gordon ................... 70 Chairman, Crofton Capital Corp. Consultant to the 1996
Company and Director
Larry D. Striplin, Jr. ........... 70 Chairman and Chief Executive Officer, 1999
Nelson-Brantley Glass Contractors, Inc., and Director
Jan L. Jones ..................... 51 Executive Director, Nevada Resort Partners, and 1999
Director
Richard M. Scrushy, one of HEALTHSOUTH's management founders, has served as
Chairman of the Board and Chief Executive Officer of HEALTHSOUTH since 1984, and
also served as President of HEALTHSOUTH from 1984 until March 1995. From 1979 to
1984, Mr. Scrushy was with Lifemark Corporation, a publicly-owned healthcare
corporation, serving in various operational and management positions. Mr.
Scrushy is also a director of CaremarkRx, Inc., a publicly-traded pharmacy
benefits management company, for which he also served as Acting Chief Executive
Officer from January 16 through March 18, 1998 and as Chairman of the Board from
January 16 through December 1, 1998.
Phillip C. Watkins, M.D., FACC, is and has been for more than five years in
the private practice of medicine in Birmingham, Alabama. A graduate of The
Medical College of Alabama, Dr. Watkins is a Diplomate of the American Board of
Internal Medicine. He is also a Fellow of the American College of Cardiology and
the Subspecialty Board of Cardiovascular Disease.
George H. Strong retired as senior vice president and chief financial
officer of Universal Health Services, Inc. in December 1984, a position he held
for more than six years. Mr. Strong is a private investor and continued to act
as a director of Universal Health Services, Inc., a publicly-traded hospital
management corporation, until 1993. Mr. Strong is also a director of Balanced
Care Corporation, a publicly-traded healthcare corporation, and AmeriSource,
Inc., a large drug wholesaler.
65
C. Sage Givens is a founder and managing general partner of Acacia Venture
Partners, a private venture capital fund. From 1983 to June 30, 1995, Ms.
Givens was a general partner of First Century Partners, also a private venture
capital fund. Ms. Givens managed the fund's healthcare investments. Ms. Givens
also serves on the boards of directors of PhyCor, Inc. a publicly-traded
healthcare corporation, and several privately-held healthcare companies.
Charles W. Newhall III is a general partner and founder of New Enterprise
Associates Limited Partnerships, Baltimore, Maryland, where he has been engaged
in the venture capital business since 1978. Mr. Newhall is also a director of
CaremarkRx, Inc.
James P. Bennett joined HEALTHSOUTH in May 1991 as Director of Inpatient
Operations, subsequently served in various senior operations positions,
including President -- HEALTHSOUTH Inpatient Operations, and was named President
and Chief Operating Officer of HEALTHSOUTH in March 1995. Mr. Bennett was
elected a Director in February 1993. From August 1987 to May 1991, Mr. Bennett
was employed by Russ Pharmaceuticals, Inc., Birmingham, Alabama, as Vice
President -- Operations, Chief Financial Officer, Secretary and director. Mr.
Bennett served as a certified public accountant on the audit staff of the
Birmingham, Alabama office of Ernst & Whinney (now Ernst & Young LLP) from
October 1980 to August 1987.
P. Daryl Brown joined HEALTHSOUTH in April 1986 and served until June 1992
as Group Vice President -- Outpatient Operations. He became President --
HEALTHSOUTH Outpatient Centers in June 1992, and was elected as a Director in
March 1995. In September 1999, he was named President -- Ambulatory Services --
East. From 1977 to 1986, Mr. Brown served with the American Red Cross, Alabama
Region, in several positions, including Chief Operating Officer, Administrative
Director for Financing and Administration and Controller.
John S. Chamberlin retired in 1988 as president and chief operating officer
of Avon Products, Inc., a position he had held since 1985. From 1976 until 1985,
he served as chairman and chief executive officer of Lenox, Incorporated, after
22 years in various assignments for General Electric. From 1990 to 1991, he
served as chairman and chief executive officer of New Jersey Publishing Co. Mr.
Chamberlin is chairman of the board of Sports Holding Company and WNS, Inc., and
is a director of Imagyn Medical Technologies, Inc. He is a member of the Board
of Trustees of the Medical Center at Princeton and is a trustee of the Woodrow
Wilson National Fellowship Foundation.
Joel C. Gordon served as Chairman of the Board of Directors of Surgical
Care Affiliates, Inc. from its founding in 1982 until January 17, 1996, when
SCA was acquired by HEALTHSOUTH. Mr. Gordon also served as Chief Executive
Officer of SCA from 1987 until January 17, 1996. Mr. Gordon is Chairman of
Crofton Capital Corp., a private venture capital firm, and serves on the boards
of directors of Genesco, Inc., an apparel manufacturer, and SunTrust Bank of
Nashville, N.A.
Larry D. Striplin, Jr. has been the Chairman and Chief Executive Officer
of Nelson-Brantley Glass Contractors, Inc. and Chairman and Chief Executive
Officer of Clearview Properties, Inc. since December 1995. Until December 1995,
Mr. Striplin had been Chairman of the Board and Chief Executive Officer of
Circle "S" Industries, Inc., a privately owned bonding wire manufacturer.
Mr. Striplin is a member of the boards of directors of Kulicke & Suffa
Industries, Inc., a publicly traded manufacturer of electronic equipment, The
Banc Corporation and Vesta Insurance Group, Inc.
Jan L. Jones became Executive Director of Nevada Resort Partners, which
provides public relations and communication services for the Nevada gaming
industry, in 1999, following two terms as Mayor of the City of Las Vegas, Nevada
from 1991 through 1999. Previously, Ms. Jones was president of Fletcher Jones
Management Group, which oversaw marketing and administrative functions for 11
car dealerships in the western United States. Ms. Jones is also a director of
Community Bank of Nevada and served from 1995 until 1997 as a director of Bank
of America.
66
EXECUTIVE OFFICERS
The following table provides information with respect to HEALTHSOUTH's
executive officers.
AN
ALL POSITIONS OFFICER
NAME AGE WITH HEALTHSOUTH SINCE
- ---------------------------- ----- ------------------------------------------------------- --------
Richard M. Scrushy ......... 47 Chairman of the Board and Chief Executive Officer 1984
and Director
James P. Bennett ........... 42 President and Chief Operating Officer and Director 1991
Michael D. Martin .......... 39 Executive Vice President -- Investments 1989
Thomas W. Carman ........... 48 Executive Vice President -- Corporate Development 1985
William T. Owens ........... 41 Executive Vice President and Chief Financial Officer 1986
P. Daryl Brown ............. 45 President -- Ambulatory Services -- East and Director 1986
Robert E. Thomson .......... 52 President -- Inpatient Operations 1987
Patrick A. Foster .......... 53 President -- Ambulatory Services -- West 1994
William W. Horton .......... 40 Senior Vice President and Corporate Counsel and 1994
Assistant Secretary
Brandon O. Hale ............ 50 Senior Vice President -- Administration and Secretary 1987
Weston L. Smith ............ 39 Senior Vice President -- Finance and Controller 1987
Malcolm E. McVay ........... 38 Senior Vice President -- Finance and Treasurer 1999
Biographical information for Messrs. Scrushy, Bennett and Brown is set
forth above under this Item, "Directors and Executive Officers -- Directors".
Michael D. Martin joined HEALTHSOUTH in October 1989 as Vice President and
Treasurer, and was named Senior Vice President -- Finance and Treasurer in
February 1994 and Executive Vice President -- Finance and Treasurer in May 1996.
In October 1997, he was additionally named Chief Financial Officer of
HEALTHSOUTH. In February 2000, Mr. Martin was named Executive Vice President -
Investments. He also served as a Director from March 1998 through February 2000.
From 1983 through September 1989, Mr. Martin specialized in healthcare lending
with AmSouth Bank N.A., Birmingham, Alabama, where he was a Vice President
immediately prior to joining HEALTHSOUTH. Mr. Martin is a director of
CaremarkRx, Inc.
Thomas W. Carman joined HEALTHSOUTH in 1985 as Regional Director --
Corporate Development, and now serves as Executive Vice President -- Corporate
Development. From 1983 to 1985, Mr. Carman was director of development for
Medical Care International. From 1981 to 1983, Mr. Carman was assistant
administrator at the Children's Hospital of Birmingham, Alabama.
William T. Owens, C.P.A., joined HEALTHSOUTH in March 1986 as Controller
and was appointed Vice President and Controller in December 1986. He was
appointed Group Vice President -- Finance and Controller, June 1992 and Senior
Vice President -- Finance and Controller in February 1994 and Group Senior Vice
President -- Finance and Controller in March 1998. In February 2000, he was
named Executive Vice President and Chief Financial Officer. Prior to joining
HEALTHSOUTH, Mr. Owens served as a certified public accountant on the audit
staff of the Birmingham, Alabama office of Ernst & Whinney (now Ernst & Young
LLP) from 1981 to 1986.
Robert E. Thomson joined HEALTHSOUTH in August 1985 as administrator of its
Florence, South Carolina inpatient rehabilitation facility, and subsequently
served as Regional Vice President -- Inpatient Operations, Vice President --
Inpatient Operations, Group Vice President -- Inpatient Operations, and Senior
Vice President -- Inpatient Operations. Mr. Thomson was named President --
Inpatient Operations in February 1996.
Patrick A. Foster joined HEALTHSOUTH in February 1994 as Director of
Operations and subsequently served as Group Vice President -- Inpatient
Operations and Senior Vice President -- Inpatient Operations. He was named
President -- HEALTHSOUTH Surgery Centers in October 1997 and President --
Ambulatory Services --West in September 1999. From August 1992 until February
1994, he served as Senior Vice President of the Rehabilitation/Medical Division
of The Mediplex Group.
67
William W. Horton joined HEALTHSOUTH in July 1994 as Group Vice President
- -- Legal Services and was named Senior Vice President and Corporate Counsel in
May 1996. From August 1986 through June 1994, Mr. Horton practiced corporate,
securities and healthcare law with the Birmingham, Alabama-based firm now known
as Haskell Slaughter & Young, L.L.C., where he served as Chairman of the
Healthcare Practice Group.
Brandon O. Hale joined HEALTHSOUTH in July 1986 as Director of Human
Resources and subsequently served as Vice President - Human Resources and Group
Vice President - Human Resources. In December 1999, Mr. Hale was named Senior
Vice President - Administration and Secretary of HEALTHSOUTH, and he also serves
as HEALTHSOUTH's Corporate Compliance Officer.
Weston L. Smith, C.P.A., joined HEALTHSOUTH in February 1987 as Director of
Reimbursement and subsequently served as Assistant Vice President - Finance -
Reimbursement, Vice President - Finance - Reimbursement, Group Vice President -
Finance - Reimbursement and Senior Vice President - Finance - Reimbursement. In
March 2000, he was named Senior Vice President - Finance and Controller. Prior
to joining HEALTHSOUTH, Mr. Smith served as a certified public accountant on the
audit staff of the Birmingham, Alabama office of Ernst & Whinney (now Ernst &
Young LLP) from 1982 to 1987.
Malcolm E. McVay joined HEALTHSOUTH in September 1999 as Vice President -
Finance, and was named Senior Vice President - Finance and Treasurer in February
2000. From October 1998 until September 1999, he served as Senior Vice President
of Investor Relations at CaremarkRx, Inc., and from 1996 until October 1998, he
served as Chief Financial Officer, Secretary and Treasurer of Capstone Capital
Corporation, a healthcare real estate investment trust. Prior to 1996, he worked
for ten years in commercial banking, most recently as a Senior Vice President of
SouthTrust Bank.
GENERAL
Directors of HEALTHSOUTH hold office until the next Annual Meeting of
Stockholders of HEALTHSOUTH and until their successors are elected and
qualified. Executive officers are elected annually by, and serve at the
discretion of the Board of Directors. There are no arrangements or
understandings known to us between any of our Directors, nominees for Director
or executive officers and any other person pursuant to which any of those
persons was elected as a Director or an executive officer, except the Employment
Agreements between HEALTHSOUTH and Richard M. Scrushy, James P. Bennett, Michael
D. Martin and P. Daryl Brown (see Item 11, "Executive Compensation -- Chief
Executive Officer Employment Agreement"; " -- Other Executive Employment
Agreements"), and except that we initially agreed to appoint Mr. Gordon to the
Board of Directors in connection with the SCA merger. There are no family
relationships between any Directors or executive officers of HEALTHSOUTH.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our executive
officers and Directors, and persons who beneficially own more than 10% of a
registered class of our equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission and the New
York Stock Exchange. Executive officers, Directors and beneficial owners of more
than 10% of HEALTHSOUTH's common stock are required by Securities and Exchange
Commission regulations to furnish us with copies of all Section 16(a) forms that
they file. Based solely on review of the copies of such forms furnished to us,
or written representations that no reports on Form 5 were required, we believe
that for the period from January 1, 1999, through December 31, 1999, all of our
executive officers, Directors and greater-than-10% beneficial owners complied
with all Section 16(a) filing requirements applicable to them, except that Larry
D. Striplin, Jr., an outside Director, inadvertently failed to timely report an
open market purchase of 10,000 shares of common stock at $9.0375 per share in
April 1999. This transaction was subsequently reported on Form 5.
68
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION -- GENERAL
The following table sets forth compensation paid or awarded to our Chief
Executive Officer and each of our other four most highly compensated executive
officers (the "Named Executive Officers") for all services rendered to
HEALTHSOUTH and its subsidiaries in 1997, 1998 and 1999.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------ ---------------------------------
BONUS/ANNUAL STOCK RESTRICTED ALL
INCENTIVE OPTION STOCK OTHER
NAME AND CURRENT POSITION YEAR SALARY AWARD AWARDS AWARDS COMPENSATION(1)
- ----------------------------------- ------ -------------- -------------- ----------- --------------------- ------------------
Richard M. Scrushy 1997 $ 3,398,999 $ 10,000,000 1,300,000 -- $ 21,430
Chairman of the Board 1998 2,777,829 -- 1,500,000 -- 72,352
and Chief Executive Officer(2) 1999 1,634,031 -- 1,050,000 $ 1,293,750 (3) 54,145
James P. Bennett 1997 639,161 1,500,000 700,000 -- 10,158
President and Chief 1998 670,000 -- 300,000 -- 10,092
Operating Officer 1999 589,058 -- 275,000 1,293,750 (3) 4,350
Michael D. Martin 1997 359,672 2,000,000 450,000 -- 9,700
Executive Vice President - 1998 415,826 -- 260,000 -- 9,665
Investments 1999 362,810 -- 200,000 1,293,750 (3) 3,775
P. Daryl Brown 1997 370,673 450,000 250,000 -- 10,737
President -- Ambulatory 1998 386,212 -- 75,000 -- 10,981
Services -- East 1999 336,920 -- 125,000 970,313 (3) 205,001 (4)
Robert E. Thomson 1997 305,376 500,000 250,000 -- 11,189
President -- Inpatient Operations 1998 327,928 -- 150,000 -- 11,341
1999 402,987 -- 125,000 970,313 (3) 4,994
- ----------
(1) Includes car allowances of $500 per month for Mr. Scrushy and $350 per month
for the other Named Executive Officers in 1997, use of a company-owned
automobile by Mr. Scrushy in 1998, and car allowances of $500 per month for
Mr. Scrushy and $450 per month for the other Named Executive Officers
through September 1998. All such car allowances were discontinued in October
1998. Also includes (a) matching contributions under HEALTHSOUTH's
Retirement Investment Plan for 1997, 1998 and 1999, respectively, of: $791,
$1,450 and $745 to Mr. Scrushy; $1,425, $1,499 and $1,500 to Mr. Bennett;
$1,324, $1,395 and $1,212 to Mr. Martin; $1,319, $1,415 and $1,212 to Mr.
Brown; and $1,001, $1,070 and $736 to Mr. Thomson; (b) awards under
HEALTHSOUTH's Employee Stock Benefit Plan for 1997, 1998 and 1999,
respectively, of $2,889, $2,882 and $1,292 to Mr. Scrushy; $2,889, $2,882
and $1,292 to Mr. Bennett; $2,889, $2,882 and $1,292 to Mr. Martin; $2,889,
$2,882 and $1,292 to Mr. Brown; and $2,889, $2,882 and $1,292 to Mr.
Thomson; and (c) split-dollar life insurance premiums paid in 1997, 1998 and
1999 of $11,750, $45,187 and $52,108 with respect to Mr. Scrushy; $1,644,
$1,661, and $1,558 with respect to Mr. Bennett; $1,287, $1,338 and $1,271
with respect to Mr. Martin; $2,329, $2,634 and $2,497 with respect to Mr.
Brown; and $3,099, $3,339 and $2,966 with respect to Mr. Thomson. See this
Item, "Executive Compensation -- Retirement Investment Plan" and "Executive
Compensation -- Employee Stock Benefit Plan".
(2) Salary amounts for Mr. Scrushy include monthly incentive compensation
amounts payable upon achievement of certain budget targets. Effective
November 1, 1998, Mr. Scrushy voluntarily suspended receipt of his base
salary and monthly incentive compensation through March 31, 1999, and
voluntarily took reduced compensation through January 2, 2000. See this
Item,"Executive Compensation -- Chief Executive Officer Employment
Agreement".
(3) The value of restricted stock awards in 1999 reflects the closing price of
HEALTHSOUTH common stock at the date of the award. The value of these awards
measured at December 31, 1999 was $537,500 for the awards to each of Messrs.
Scrushy, Bennett and Martin (100,000 shares each) and $403,125 for the
awards to Messrs. Brown and Thomson (75,000 shares each). The awards vest
five years from the date of grant, except as otherwise provided in our 1998
Restricted Stock Plan. See this Item, "Executive Compensation - 1998
Restricted Stock Plan".
(4) Includes $200,000 withdrawn by Mr. Brown in 1999 from his deferred
compensation account. See this Item, "Executive Compensation - Deferred
Compensation Plan".
69
STOCK OPTION GRANTS IN 1999
INDIVIDUAL GRANTS
---------------------------------------------------
% OF TOTAL
OPTIONS
NUMBER OF GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE EXPIRATION GRANT DATE
NAME GRANTED FISCAL YEAR PER SHARE DATE PRESENT VALUE (1)
- ---------------------------- ----------- -------------- ----------- ------------ ------------------
Richard M. Scrushy ......... 850,000 18.5% $11.00 3/14/09 7,165,500
200,000 4.4% 4.94 12/15/09 758,000
James P. Bennett ........... 200,000 4.4% 11.00 3/14/09 1,686,000
75,000 1.6% 4.94 12/15/09 284,250
Michael D. Martin .......... 150,000 3.3% 11.00 3/14/09 1,264,500
50,000 1.1% 4.94 12/15/09 189,500
P. Daryl Brown ............. 75,000 1.6% 11.00 3/14/09 632,250
50,000 1.1% 4.94 12/15/09 189,500
Robert E. Thomson .......... 75,000 1.6% 11.00 3/14/09 632,250
50,000 1.1% 4.94 12/15/09 189,500
- ----------
(1) Based on the Black-Scholes option pricing model adapted for use in valuing
executive stock options. The actual value, if any, an executive may realize
will depend upon the excess of the stock price over the exercise price on
the date the option is exercised, so that there is no assurance that the
value realized by an executive will be at or near the value estimated by the
Black-Scholes model. The estimated values under that model are based on
arbitrary assumptions as to certain variables, including the following: (i)
stock price volatility is assumed to be 77%; (ii) the risk-free rate of
return is assumed to be 6.2%; (iii) dividend yield is assumed to be 0; and
(iv) the time of exercise is assumed to be 7.4 years from the date of grant.
STOCK OPTION EXERCISES IN 1999 AND OPTION VALUES AT DECEMBER 31, 1999
NUMBER VALUE OF UNEXERCISED
OF SHARES NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED AT DECEMBER 31, 1999 (1) AT DECEMBER 31, 1999 (2)
ON VALUE ------------------------------- ---------------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------- ---------- ---------- ------------- --------------- ------------- --------------
Richard M. Scrushy ......... -- -- 13,722,524 -- $10,214,781 --
James P. Bennett ........... -- -- 1,885,000 -- 207,988 --
Michael D. Martin. ......... -- -- 1,090,000 -- 21,875 --
P. Daryl Brown ............. -- -- 1,040,000 -- 563,325 --
Robert E. Thomson .......... -- -- 695,000 -- 21,875 --
- ----------
(1) Does not reflect any options granted and/or exercised after December 31,
1999. The net effect of any such grants and exercises is reflected in the
table appearing under Item 12, "Security Ownership of Certain Beneficial
Owners and Management".
(2) Represents the difference between market price of HEALTHSOUTH common stock
and the respective exercise prices of the options at December 31, 1999. Such
amounts may not necessarily be realized. Actual values which may be
realized, if any, upon any exercise of such options will be based on the
market price of the common stock at the time of any such exercise and thus
are dependent upon future performance of the common stock.
STOCK OPTION PLANS
Set forth below is information concerning our various stock option plans at
December 31, 1999. All share numbers and exercise prices have been adjusted as
necessary to reflect previous stock splits.
1984 Incentive Stock Option Plan
In 1984 we adopted the 1984 Incentive Stock Option Plan. Under this plan,
our Board of Directors, which administered the plan, had discretion to grant to
key employees of HEALTHSOUTH options to purchase shares of HEALTHSOUTH common
stock at the fair market value attributed to shares of HEALTHSOUTH common stock
on the date the option was granted or, in the case of a key employee who was
also a beneficial holder of at least 10% of the total number of shares of
HEALTHSOUTH
70
common stock that were issued and outstanding at the time of the option grant,
at 110% of such fair market value. The total number of shares of HEALTHSOUTH
common stock covered by this plan was 4,800,000. The plan expired on February
28, 1994, in accordance with its terms. As of December 31, 1999, options granted
under this plan to purchase 15,000 shares of HEALTHSOUTH common stock remained
outstanding at an exercise price of $3.7825 per share. All of these outstanding
options remain valid and in full force and must be held and exercised in
accordance with the terms of the plan. All of the options granted must be
exercised within ten years after they were granted and options granted under the
plan terminate automatically within three months after termination of
employment, unless such termination is by reason of death. In addition, the
options may not be transferred, except pursuant to the terms of a valid will or
applicable laws of descent and distribution, and in the event additional shares
of HEALTHSOUTH common stock are issued they are protected from dilution.
1988 Non-Qualified Stock Option Plan
In 1988 we adopted the 1998 Non-Qualified Stock Option Plan. Under this
plan, the Audit and Compensation Committee of our Board of Directors, which
administered the plan, had discretion to grant to the Directors, officers and
other key employees of HEALTHSOUTH options to purchase shares of HEALTHSOUTH
common stock at the fair market value attributed to shares of HEALTHSOUTH common
stock on the date the option was granted. The total number of shares of
HEALTHSOUTH common stock covered by this plan was 4,800,000. The plan expired on
February 28, 1998, in accordance with its terms. As of December 31, 1999,
options granted under this plan to purchase 7,300 shares of HEALTHSOUTH common
stock remained outstanding at an exercise price of $16.25 per share. All of
these outstanding options remain valid and in full force and must be held and
exercised in accordance with the terms of the plan. All of the options must be
exercised within ten years after they were granted. All of the options granted
under this plan terminate automatically within three months after termination of
association as a Director or of employment, unless such termination is by reason
of death. In addition, the options may not be transferred, except pursuant to
the terms of a valid will or applicable laws of descent and distribution, and in
the event additional shares of HEALTHSOUTH common stock are issued they are
protected from dilution.
1989, 1990, 1991, 1992, 1993, 1995 and 1997 Stock Option Plans
In each of 1989, 1990, 1991, 1992, 1993, 1995 and 1997 we adopted stock
option plans to provide incentives to our Directors, officers and other key
employees. Under each of these plans, the Audit and Compensation Committee of
our Board of Directors, which administers each of the plans, has the discretion
to grant to our Directors, officers and other key employees incentive or
non-qualified options to purchase shares of HEALTHSOUTH common stock at the fair
market value attributed to shares of HEALTHSOUTH common stock on the date the
option is granted. The table below sets forth information regarding each plan,
including the total number of shares of HEALTHSOUTH common stock which may be
purchased under each of the plans, the total number of additional shares of
HEALTHSOUTH common stock which have been reserved for future use under each
plan, the total number of shares of HEALTHSOUTH common stock which may be
purchased under options which have been granted under each plan and which were
outstanding on December 31, 1999 and the price at which shares may be purchased
if the options are exercised.
71
MAXIMUM NUMBER NUMBER OF
OF SHARES OF ADDITIONAL SHARES OF
HEALTHSOUTH HEALTHSOUTH
COMMON STOCK COMMON STOCK
NAME OF SUBJECT TO PURCHASE RESERVED FOR USE
PLAN UNDER THE PLAN UNDER THE PLAN
- -------------- --------------------- ----------------------
1989 Stock
Option Plan 2,400,000 None
1990 Stock
Option Plan 3,600,000 None
1991 Stock
Option Plan 11,200,000 None
1992 Stock
Option Plan 5,600,000 None
1993 Stock
Option Plan 5,600,000 None
1995 Stock
Option Plan 21,231,156 (1) 3,636,922
1997 Stock
Option Plan 5,000,000 32,475
DATE THE PLAN
TERMINATED OR WILL
NUMBER OF TERMINATE UNLESS
SHARES OF OTHERWISE DETERMINED
HEALTHSOUTH BY OUR BOARD OF
COMMON STOCK RANGE OF PRICES DIRECTORS OR IF ALL OF THE
SUBJECT TO PURCHASE AT WHICH SHARES SHARES OF HEALTHSOUTH
IF ALL OPTIONS MAY BE PURCHASED COMMON STOCK RESERVED FOR
OUTSTANDING SUBJECT TO OPTIONS ISSUANCE UNDER THE PLAN HAVE
NAME OF ON DECEMBER 31, 1999 OUTSTANDING BEEN PURCHASED DUE TO
PLAN ARE EXERCISED ON DECEMBER 31, 1999 OPTIONS BEING EXERCISED
- -------------- ---------------------- ---------------------- -----------------------------
1989 Stock
Option Plan 205,004 $ 2.52-$8.375 October 25, 1999
1990 Stock
Option Plan 300,504 $ 3.7825-$8.375 October 15, 2000
1991 Stock
Option Plan 3,470,002 $ 3.7825-$16.25 June 19, 2001
1992 Stock
Option Plan 4,100,900 $ 3.7825-23.625 June 16, 2002
1993 Stock
Option Plan 3,237,025 $ 3.375-$23.625 April 19, 2003
1995 Stock
Option Plan 15,569,059 $ 4.9375-$28.0625 June 5, 2005
1997 Stock
Option Plan 3,771,475 $ 4.9375-$28.0625 April 30, 2007
- ----------
(1) At December 31, 1999; to be increased by 0.9% of the outstanding shares of
HEALTHSOUTH common stock as of January 1 of each calendar year thereafter
until the plan terminates.
Until options granted under each of these plans expire or terminate, they
remain valid and in full force and must be held and exercised in accordance with
the terms of the plan under which they were issued. Each option granted under
each of these plans, whether incentive or non-qualified, must be exercised
within ten years after the date it was granted and each option granted under
these plans, whether incentive or non-qualified, will terminate automatically
within three months after a Director no longer is associated with us or an
officer or key employee is no longer employed with us, except if the termination
of association or employment is by reason of death. In addition, the options may
not be transferred, except pursuant to the terms of a valid will or applicable
laws of descent and distribution (except for various permitted transfers to
family members or charities). In the event additional shares of HEALTHSOUTH
common stock are issued, each option granted under these plans is protected from
dilution.
1993 Consultants' Stock Option Plan
In 1993 we adopted the 1993 Consultants' Stock Option Plan to provide
incentives to non-employee consultants who provide significant services to us.
Under this plan, our Board of Directors, which administers the plan, has the
discretion to grant to these non-employee consultants options to purchase shares
of HEALTHSOUTH common stock at prices to be determined by our Board of Directors
or a committee of our Board of Directors to whom this discretion has been
delegated. The plan will expire on February 25, 2003 unless terminated earlier
at the discretion of our Board of Directors or as a result of all of the shares
of HEALTHSOUTH common stock reserved under this plan having been purchased by
the exercise of options granted under this plan. The total number of shares of
HEALTHSOUTH common stock covered by this plan is 3,500,000. As of December 31,
1999, options granted under this plan to purchase 1,589,633 shares of
HEALTHSOUTH common stock remained outstanding at exercise prices ranging from
$3.375 to $28.00 per share, and 125,000 shares remain available for the grant of
options under this plan. All of these options remain valid and in full force and
must be held and exercised in accordance with the terms of the plan. All of
these options must be exercised within ten years after they were granted,
although they may be exercised at any time during this ten year period. All of
these options terminate automatically within three months after termination of
association with us, unless such termination is by reason of death. In addition,
the options may not be transferred, except pursuant to the terms of a valid will
or applicable laws of descent and distribution, and in the event additional
shares of HEALTHSOUTH common stock are issued the options are protected from
dilution.
72
1999 Exchange Stock Option Plan
In 1999, we adopted our 1999 Exchange Stock Option Plan (the "Exchange
Plan") under which NQSOs could be granted, covering a maximum of 2,750,000
shares of common stock. The Exchange Plan was approved by our stockholders on
May 20, 1999. The Exchange Plan was adopted after a protracted period of
depression in the price of HEALTHSOUTH common stock, and provided that
HEALTHSOUTH employees (other than Directors and executive officers, who were
eligible to participate) who held outstanding stock options with an exercise
price equal to or greater than $16.00 could exchange such options for NQSOs
issued under the Exchange Plan. Options granted under the Exchange Plan would
have an exercise price equal to the closing price per share of our common stock
on the New York Stock Exchange Composite Transactions Tape on May 20, 1999,
would be deemed to have been granted on May 20, 1999, and would have durations
and vesting restrictions identical to those affecting the options surrendered.
Eligible options with an exercise price between $16.00 and $22.00 per share
could be surrendered in exchange for an option under the Exchange Plan covering
two shares of common stock for each three shares of common stock covered by the
surrendered options, and eligible options having an exercise price of $22.00 per
share or greater could be surrendered in exchange for an option under the
Exchange Plan covering three shares of common stock for each four shares of
common stock covered by the surrendered option. Each optionholder surrendering
options was required to retain eligible options covering 10% of the aggregate
number of shares covered by the options eligible for surrender. The Exchange
Plan expired on September 30, 1999, at which time options covering 1,716,707
shares of common stock had been issued under the Exchange Plan at an exercise
price of $13.3125 per share. Options covering 1,628,013 shares remained
outstanding at December 31, 1999. Options granted under the Exchange Plan are
nontransferable except by will or pursuant to the laws of descent and
distribution (except for certain permitted transfers to family members or
charities), are protected against dilution and expire within three months of
termination of employment, unless such termination is by reason of death.
Other Stock Option Plans
In connection with some of our major acquisitions, we assumed existing
stock option plans of the acquired companies, and outstanding options to
purchase stock of the acquired companies under such plans were converted into
options to acquire common stock in accordance with the exchange ratios
applicable to such mergers. At December 31, 1999, there were outstanding under
these assumed plans options to purchase 2,134,051 shares of HEALTHSOUTH common
stock at exercise prices ranging from $4.6392 to $40.7042 per share. No
additional options are being granted under any such assumed plans.
1998 RESTRICTED STOCK PLAN
In 1998, we adopted the 1998 Restricted Stock Plan (the "Restricted Stock
Plan"), covering a maximum of 3,000,000 shares of HEALTHSOUTH common stock. The
Restricted Stock Plan, which is administered by the Audit and Compensation
Committee of our Board of Directors, provides that executives and other key
employees of HEALTHSOUTH and its subsidiaries may be granted restricted stock
awards vesting over a period of not less than one year and no more than ten
years, as determined by the Committee. The Restricted Stock Plan terminates on
the earliest of (a) May 28, 2008, (b) the date on which awards covering all
shares of common stock reserved for issuance thereunder have been granted and
are fully vested thereunder, or (c) such earlier time as the Board of Directors
may determine. Awards under the Restricted Stock Plan are nontransferable except
by will or pursuant to the laws of descent and distribution (except for certain
permitted transfers to family members), are protected against dilution and are
forfeitable upon termination of a participant's employment to the extent not
vested. On May 17, 1999, the Audit and Compensation Committee of the Board of
Directors granted restricted stock awards covering 850,000 shares of HEALTHSOUTH
common stock to various executive officers of HEALTHSOUTH. These shares vest in
full upon the earliest to occur of (a) five years from the date of the award,
(b) a Change in Control (as defined) of HEALTHSOUTH, or (c) unless the Audit and
Compensation Committee otherwise determines, upon the recipient's termination of
employment by reason of death, disability or retirement.
73
RETIREMENT INVESTMENT PLAN
Effective January 1, 1990, we adopted the HEALTHSOUTH Retirement Investment
Plan (the "401(k) Plan"), a retirement plan intended to qualify under Section
401(k) of the Code. The 401(k) Plan is open to all full-time and part-time
employees of HEALTHSOUTH who are over the age of 21, have one full year of
service with HEALTHSOUTH and have at least 1,000 hours of service in the year in
which they enter the 401(k) Plan. Eligible employees may elect to participate in
the Plan on January 1 and July 1 in each year.
Under the 401(k) Plan, participants may elect to defer up to 15% of their
annual compensation (subject to nondiscrimination rules under the Code). The
deferred amounts may be invested among four options, at the participant's
direction: a money market fund, a bond fund, a guaranteed insurance contract or
an equity fund. HEALTHSOUTH will match a minimum of 15% of the amount deferred
by each participant, up to 4% of such participant's total compensation, with the
matched amount also directed by the participant. See Note 12 of "Notes to
Consolidated Financial Statements".
William T. Owens, Executive Vice President and Chief Financial Officer, and
Brandon O. Hale, Senior Vice President -- Administration and Secretary, serve as
Trustees of the 401(k) Plan, which is administered by HEALTHSOUTH.
EMPLOYEE STOCK BENEFIT PLAN
Effective January 1, 1991, we adopted the HEALTHSOUTH Rehabilitation
Corporation and Subsidiaries Employee Stock Benefit Plan (the "ESOP"), a
retirement plan intended to qualify under sections 401(a) and 4975(e)(7) of the
Code. The ESOP is open to all full-time and part-time employees of HEALTHSOUTH
who are over the age of 21, have one full year of service with HEALTHSOUTH and
have at least 1,000 hours of service in the year in which they begin
participation in the ESOP on the next January 1 or July 1 after the date on
which such employee satisfies the conditions mentioned above.
The ESOP was established with a $10,000,000 loan from HEALTHSOUTH, the
proceeds of which were used to purchase 1,655,172 shares of HEALTHSOUTH common
stock. In 1992, an additional $10,000,000 loan was made to the ESOP, which was
used to purchase an additional 1,666,664 shares of common stock. Under the ESOP,
a company stock account is established and maintained for each eligible employee
who participates in the ESOP. In each plan year, this account is credited with
such employee's allocable share of the common stock held by the ESOP and
allocated with respect to that plan year. Each employee's allocable share for
any given plan year is determined according to the ratio which such employee's
compensation for such plan year bears to the compensation of all eligible
participating employees for the same plan year.
Eligible employees who participate in the ESOP and who have attained age 55
and have completed 10 years of participation in the ESOP may elect to diversify
the assets in their company stock account by directing the plan administrator to
transfer to the 401(k) Plan a portion of their company stock account to be
invested, as the eligible employee directs, in one or more of the investment
options available under the 401(k) Plan. See Note 12 of "Notes to Consolidated
Financial Statements".
Richard M. Scrushy, Chairman of the Board and Chief Executive Officer,
William T. Owens, Executive Vice President and Chief Financial Officer, and
Brandon O. Hale, Senior Vice President -- Administration and Secretary, serve as
Trustees of the ESOP, which is administered by HEALTHSOUTH.
STOCK PURCHASE PLAN
In order to further encourage employees to obtain equity ownership in
HEALTHSOUTH, the Board of Directors adopted an Employee Stock Purchase Plan
effective January 1, 1994. Under the Stock Purchase Plan, participating
employees may contribute $10 to $200 per pay period toward the purchase of
HEALTHSOUTH common stock in open-market transactions. The Stock Purchase Plan is
open to regular full-time or part-time employees who have been employed for six
months and are at least 21 years old. After six months of participation in the
Stock Purchase Plan, we currently provide a 20%
74
matching contribution to be applied to purchases under the Stock Purchase Plan.
We also pay all fees and brokerage commissions associated with the purchase of
the stock. The Stock Purchase Plan is administered by a broker-dealer firm not
affiliated with HEALTHSOUTH.
DEFERRED COMPENSATION PLAN
In 1997, the Board of Directors adopted an Executive Deferred Compensation
Plan, which allows senior management personnel to elect, on an annual basis, to
defer receipt of up to 50% of their base salary and up to 100% of their annual
bonus, if any (but not less than an aggregate of $2,400 per year) for a minimum
of five years from the date such compensation would otherwise have been
received. Amounts deferred are held by HEALTHSOUTH pursuant to a "rabbi trust"
arrangement, and amounts deferred are credited with earnings at an annual rate
equal to the Moody's Average Corporate Bond Yield Index (the "Moody's Rate"), as
adjusted from time to time, or the Moody's Rate plus 2% if a participant's
employment is terminated by reason of retirement, disability or death or within
24 months of a change in control of HEALTHSOUTH. Amounts deferred may be
withdrawn upon retirement, termination of employment or death, upon a showing of
financial hardship, or voluntarily with certain penalties. The Deferred
Compensation Plan is administered by an Administrative Committee, currently
consisting of William T. Owens, Executive Vice President and Chief Financial
Officer, and Brandon O. Hale, Senior Vice President -- Administration and
Secretary.
1999 EXECUTIVE EQUITY LOAN PLAN
In order to provide its executive officers and other key employees with
additional incentive for future endeavor and to align the interests of our
management and our stockholders by providing a mechanism to enhance ownership of
HEALTHSOUTH common stock by executives and key employees, we adopted the 1999
Executive Equity Loan Plan (the "Loan Plan"), which was approved by our
stockholders on May 20, 1999. Under the Loan Plan, the Audit and Compensation
Committee of the Board of Directors may approve loans to executive and key
employees of HEALTHSOUTH to be used for purchases of HEALTHSOUTH common stock.
The maximum aggregate principal amount of loans outstanding under the Loan Plan
may not exceed $50,000,000. Loans under the Loan Plan have a maturity date of
seven years from the date of the loan, subject to acceleration and termination
as provided in the Loan Plan. The maturity date may be extended for up to one
additional year by the Audit and Compensation Committee, acting in its
discretion. The unpaid principal balance of each loan bears interest at a rate
equal to the effective interest rate on the average outstanding balance under
HEALTHSOUTH's principal credit agreement for each calendar quarter, adjustable
as of the end of each calendar quarter. Interest compounds annually. Each loan
is secured by a pledge of all the shares of HEALTHSOUTH common stock purchased
with the proceeds of the loan. The pledged shares may not be sold for one year
after the date on which they were acquired. Thereafter, one-third of the
aggregate number of shares may be sold during each of the second, third and
fourth years after the date of acquisitions, with any unsold portion carrying
forward from year to year. The proceeds from any such sale must be used to repay
a corresponding percentage of the principal amount of the loan. In addition,
HEALTHSOUTH may, but is not required to, repurchase the shares of a participant
at such participant's original acquisition cost if the participant's employment
is terminated, voluntarily or involuntarily or by reason of death or disability,
within the first three years after the acquisition date, all as more fully
described in the Loan Plan. Loans under the Loan Plan are made with full
recourse, and each participant is required to repay all principal and accrued
but unpaid interest upon the maturity of the loan, or its earlier acceleration
or termination, irrespective of whether the participant has sold the underlying
shares or whether the proceeds of such sale were sufficient to repay all
principal and interest with respect to the loan. The Loan Plan terminates on the
earlier of May 19, 2009 or such earlier time as the Board of Directors may
determine.
75
On September 10, 1999, loans aggregating $39,334,104 were made under the
Loan Plan. Included in this amount were loans in the following amounts to
executive officers:
NAME PRINCIPAL AMOUNT
- ------------------------------------ -------------------
Richard M. Scrushy .......... $ 25,218,114.87
James P. Bennett ............ 5,043,622.97
Michael D. Martin ........... 1,513,086.89
P. Daryl Brown .............. 1,008,506.87
Robert E. Thomson ........... 1,008,506.87
Patrick A. Foster ........... 1,008,506.87
Malcolm E. McVay ............ 100,850.69
William W. Horton ........... 88,914.00
BOARD COMPENSATION
Directors who are not also employed by HEALTHSOUTH are paid Directors' fees
of $10,000 per year, plus $3,000 for each meeting of the Board of Directors and
$1,000 for each Committee meeting attended. In addition, Directors are
reimbursed for all out-of-pocket expenses incurred in connection with their
duties as Directors. Our Directors, including employee Directors, have been
granted non-qualified stock options to purchase shares of HEALTHSOUTH common
stock. Under our existing stock option plans, each non-employee Director is
granted an option covering 25,000 shares of common stock on the first business
day in January of each year. See this Item, "Executive Compensation -- Stock
Option Plans" above.
CHIEF EXECUTIVE OFFICER EMPLOYMENT AGREEMENT
We have an Amended and Restated Employment Agreement, dated April 1, 1998,
with Richard M. Scrushy, under which Mr. Scrushy, a management founder, is
employed as Chairman of the Board and Chief Executive Officer for a five-year
term initially expiring on April 1, 2003. This term is automatically extended
for an additional year on each April 1 unless the Agreement is terminated as
provided therein. In addition, we have agreed to use our best efforts to cause
Mr. Scrushy to be elected as a Director during the term of the Agreement. The
Agreement provides for Mr. Scrushy to receive an annual base salary of at least
$1,200,000, as well as an "Annual Target Bonus" equal to at least $2,400,000,
based upon our success in meeting certain monthly and annual performance
standards determined by the Audit and Compensation Committee of the Board of
Directors. The Annual Target Bonus is earned at the rate of $200,000 per month
if the monthly performance standards are met, provided that if any monthly
performance standards are not met but the annual performance standards are met,
Mr. Scrushy will be entitled to any payments which were withheld as a result of
failure to meet the monthly performance standards. The Agreement further
provides that Mr. Scrushy is eligible for participation in all other management
bonus or incentive plans and stock option, stock purchase or equity-based
incentive compensation plans in which other senior executives of HEALTHSOUTH are
eligible to participate. Under the Agreement, Mr. Scrushy is entitled to receive
long-term disability insurance coverage, a non-qualified retirement plan
providing for annual retirement benefits equal to 60% of his base compensation,
use of a company-owned automobile, certain personal security services, and
various other retirement, insurance and fringe benefits, as well as to generally
participate in all employee benefit programs we maintain.
The Agreement may be terminated by Mr. Scrushy for "Good Reason" (as
defined), by the Company for "Cause" (as defined), upon Mr. Scrushy's
"Disability" (as defined) or death, or by either party at any time subject to
the consequences of such termination as described in the Agreement. If the
Agreement is terminated by Mr. Scrushy for Good Reason, we are required to pay
him a lump-sum severance payment equal to the discounted value of the sum of his
then-current base salary and Annual Target Bonus over the remaining term of the
Agreement and to continue certain employee and fringe benefits for the remaining
term of the Agreement. If the Agreement is terminated by Mr. Scrushy otherwise
than for Good Reason, we are required to pay him a lump-sum severance amount
equal to the
76
discounted value of two times the sum of his then-current base salary and Annual
Target Bonus. If the Agreement is terminated by HEALTHSOUTH for Cause, Mr.
Scrushy is not entitled to any severance or continuation of benefits. If the
Agreement is terminated by reason of Mr. Scrushy's Disability, we are required
to continue the payment of his then-current base salary and Annual Target Bonus
for three years as if all relevant performance standards had been met, and if
the Agreement is terminated by Mr. Scrushy's death, we are required to pay his
representatives or estate a lump-sum payment equal to his then-current base
salary and Annual Target Bonus. In the event of a voluntary termination by Mr.
Scrushy following a Change in Control (as defined) of HEALTHSOUTH, other than
for Cause, we are required to pay Mr. Scrushy an additional lump-sum severance
payment equal to his then-current base salary and Annual Target Bonus. The
Agreement provides for us to indemnify Mr. Scrushy against certain "parachute
payment" excise taxes which may be imposed upon payments under the Agreement.
The Agreement restricts Mr. Scrushy from engaging in certain activities
competitive with our business during, and for 24 months after termination of,
his employment with HEALTHSOUTH, unless such termination occurs after a Change
in Control.
As a result of the impact of the Balanced Budget Act of 1997 on
HEALTHSOUTH's reimbursement and the increased pressure from managed care payors,
HEALTHSOUTH reduced overhead and otherwise managed expenses. In order to lead by
example Mr. Scrushy voluntarily chose to forgo receipt of his base salary and
Annual Target Bonus after October 31, 1998. Through that date, all monthly
performance standards required to be met for payment of monthly installments of
his Annual Target Bonus had been met. Mr. Scrushy resumed receipt of a portion
of his base salary at the rate of $900,000 annually and a portion of his Annual
Target Bonus at the rate of $900,000 annually on April 1, 1999, and resumed
taking his full base salary and Annual Target Bonus effective January 1, 2000.
OTHER EXECUTIVE EMPLOYMENT AGREEMENTS
We also have Employment Agreements, dated April 1, 1998, with James P.
Bennett, President and Chief Operating Officer, Michael D. Martin, Executive
Vice President -- Investments, Thomas W. Carman, Executive Vice President --
Corporate Development, Robert E. Thomson, President -- Inpatient Operations, P.
Daryl Brown, President -- Ambulatory Services -- East, and Patrick A. Foster,
President -- Ambulatory Services -- West, under which each of these persons is
employed in these capacities for a three-year term expiring on April 1, 2001.
Such terms are automatically extended for an additional year on each April 1
unless the Agreements are terminated in accordance with their terms. In
addition, we have agreed to use our best efforts to cause Messrs. Bennett,
Martin and Brown to be elected as Directors of HEALTHSOUTH during the term of
their respective Agreements. Mr. Martin has subsequently left the Board. The
Agreements currently provide for the payment of an annual base salary of at
least $650,000 to Mr. Bennett, $400,000 to Mr. Martin, $325,000 to Mr. Carman,
$400,000 to Mr. Thomson, $370,000 to Mr. Brown, and $370,000 to Mr. Foster. The
Agreements further provide that each of these officers is eligible for
participation in all management bonus or incentive plans and stock option, stock
purchase or equity-based incentive compensation plans in which other senior
executives of HEALTHSOUTH are eligible to participate, and provide for various
specified fringe benefits, including car allowances of $500 per month.
If the Agreements are terminated by HEALTHSOUTH other than for Cause (as
defined), Disability (as defined) or death, we are required to continue the
officers' base salary in effect for a period of two years (in the case of
Messrs. Bennett, Martin, and Brown) or one year (in each other case) after
termination, as severance compensation. In addition, in the event of a voluntary
termination of employment by the officer within six months after a Change in
Control (as defined), we are also required to continue the officer's salary for
the same period. The Agreements restrict the officers from engaging in
activities competitive with our business during their employment with
HEALTHSOUTH and for any period during which the officer is receiving severance
compensation, unless such termination occurs after a Change in Control.
With the consent of the affected officers, we discontinued payment of the
car allowances in October 1998. In addition, each of the affected officers
voluntarily agreed to a 25% reduction in base salary effective January 1, 1999.
Such officers were restored to their full base salary rates effective May 23,
1999.
77
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership of HEALTHSOUTH common stock as of March 21, 2000, (a) by each person
who is known by us to own beneficially more than 5% of HEALTHSOUTH common stock,
(b) by each of HEALTHSOUTH's Directors, (c) by HEALTHSOUTH's five most highly
compensated executive officers and (d) by all executive officers and Directors
as a group.
NAME AND NUMBER OF SHARES PERCENTAGE OF
ADDRESS OF OWNER BENEFICIALLY OWNED (1) COMMON STOCK
- -------------------------------------------------- ------------------------ --------------
Richard M. Scrushy ............................ 19,204,955 (2) 4.92%
John S. Chamberlin ............................ 357,000 (3) *
C. Sage Givens ................................ 468,000 (4) *
Charles W. Newhall III ........................ 2,114,627 (5) *
George H. Strong .............................. 515,665 (6) *
Phillip C. Watkins, M.D. ...................... 663,254 (7) *
James P. Bennett .............................. 3,057,959 (8) *
Jan L. Jones .................................. 50,000 (9) *
P. Daryl Brown ................................ 15,574,873 (10) *
Joel C. Gordon ................................ 2,207,787 (11) *
Michael D. Martin ............................. 1,408,746 (12) *
Robert E. Thomson ............................. 1,076,637 (13) *
Larry D. Striplin, Jr. ........................ 95,000 (14) *
FMR Corp. ..................................... 21,056,707 (15) 5.46%
82 Devonshire Street
Boston, Massachusetts 02109
AXA Financial, Inc. ........................... 19,327,588 (16) 5.01%
1290 Avenue of the Americas
New York, New York 10104
All Executive Officers and Directors as a Group
(20 persons) ................................ 36,240,464 (17) 8.82%
- ----------
(1) The persons named in the table have sole voting and investment power with
respect to all shares of HEALTHSOUTH common stock shown as beneficially
owned by them, except as otherwise indicated.
(2) Includes 9,000 shares held by trusts for Mr. Scrushy's minor children,
31,000 shares held by a charitable foundation of which Mr. Scrushy is an
officer and director and 14,522,524 shares subject to currently exercisable
stock options.
(3) Includes 225,000 shares subject to currently exercisable stock options.
(4) Includes 2,100 shares owned by Ms. Givens's spouse and 432,900 shares
subject to currently exercisable stock options.
(5) Includes 460 shares owned by members of Mr. Newhall's immediate family,
1,508,781 shares owned by New Enterprise Associates VIII, Limited
Partnership, and 485,000 shares subject to currently exercisable stock
options. Mr. Newhall disclaims beneficial ownership of the shares owned by
his family members and New Enterprise Associates VIII, Limited Partnership,
except to the extent of his pecuniary interest therein.
(6) Includes 170,665 shares owned by trusts of which Mr. Strong is a trustee
and claims shared voting and investment power and 325,000 shares subject to
currently exercisable stock options.
(7) Includes 515,000 shares subject to currently exercisable stock options.
(8) Includes 2,005,000 shares subject to currently exercisable stock options.
(9) Includes 25,000 shares subject to currently exercisable stock options.
(10) Includes 1,100,000 shares subject to currently exercisable stock options.
(11) Includes 368,740 shares owned by Mr. Gordon's spouse and 459,520 shares
subject to currently exercisable stock options.
(12) Includes 1,030,000 shares subject to currently exercisable stock options.
78
(13) Includes 755,000 shares subject to currently exercisable stock options.
(14) Includes 35,000 shares subject to currently exercisable stock options.
(15) Shares held by various investment funds for which affiliates of FMR Corp.
act as investment advisor. FMR Corp. or its affiliates claim sole power to
vote 1,315,125 shares and sole power to dispose of all of the shares.
(16) Shares held by various affiliates of AXA Financial, Inc. for investment
purposes or in client discretionary accounts for which such affiliates act
as investment advisor. AXA Financial, Inc. or its affiliates claim sole
power to vote 7,045,560 shares, shared power to vote 12,137,900 shares,
sole power to dispose of 19,323,163 shares and shared power to dispose of
4,425 shares.
(17) Includes 24,860,905 shares subject to currently exercisable stock options
held by executive officers and Directors.
* Less than 1%
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
We purchase computer equipment and related technology and services from a
variety of vendors. In the past, those vendors have included GG Enterprises, a
value-added reseller of NCR computer equipment which is owned by Gerald Scrushy,
the father of Richard M. Scrushy, Chairman of the Board and Chief Executive
Officer of HEALTHSOUTH, and Gerald P. Scrushy, Senior Vice President - Physical
Resources of HEALTHSOUTH. These purchases were made in the ordinary course of
our business, and we believe that the price paid for equipment and services
purchased from GG Enterprises was more favorable to us than that which could
have been obtained for the same equipment and services from an independent
third-party seller. We no longer purchase equipment from GG Enterprises.
However, we paid GG Enterprises approximately $156,000 in 1999, consisting of
reimbursement for taxes owed on equipment we had previously purchased and other
amounts relating to past services.
In November 1997, we agreed to lend up to $10,000,000 to 21st Century
Health Ventures L.L.C. ("21st Century"), an entity formed to sponsor a private
equity investment fund investing in the healthcare industry. Richard M. Scrushy,
Chairman of the Board and Chief Executive Officer of HEALTHSOUTH, and Michael D.
Martin, then Executive Vice President and Chief Financial Officer and a Director
of HEALTHSOUTH, along with another individual not then employed by HEALTHSOUTH,
were the principals of 21st Century. The purpose of the loan was to facilitate
certain investments by 21st Century prior to the establishment of its proposed
private equity fund, in which it was anticipated that HEALTHSOUTH and
third-party investors would invest. Our investment in the private equity fund
was expected to allow us to benefit from the opportunity to participate in
investments in healthcare businesses that were not part of our core businesses,
but which we believed provided opportunities for growth. Amounts outstanding
under the loan bore interest at 1% over the prime rate announced from time to
time by AmSouth Bank of Alabama and were repayable upon demand. During 1997 and
1998, 21st Century drew an aggregate of $2,841,310 under the $10,000,000
commitment, of which $1,500,000 was used to purchase 576,924 shares of Series B
Preferred Convertible Preferred Stock in Summerville Healthcare Group, Inc.
("Summerville"), a developer and operator of assisted living facilities, and the
remainder of which was used to make an investment in Pathology Partners, Inc., a
provider of management services to pathology groups. We own an aggregate of
3,361,539 shares of Series B Convertible Preferred Stock of Summerville, which
we acquired in two transactions in July and November 1997, as well as 266,667
shares of Series D Convertible Preferred Stock of Summerville which we acquired
in February 2000. In connection with the July 1997 transaction, Mr. Scrushy and
Mr. Martin were appointed to the Board of Directors of Summerville. 21st Century
repaid the principal and the interest allocated to the purchase of the
Summerville stock during 1998. In the first quarter of 1999, 21st Century
determined that, due to adverse changes in the markets for private equity funds
specializing in the healthcare industry, it was advisable to dissolve 21st
Century. In connection with the dissolution of 21st Century, 21st Century
transferred to us 675,005 shares of Series A Cumulative Preferred Stock and
1,440,010 shares of Series B Convertible Preferred Stock of Pathology Partners,
Inc, in satisfaction of the principal and interest allocable to the loan
relating to the Pathology Partners, Inc. investment. We believe that the value
of the stock so received was equal to or greater than the then-remaining
indebtedness of 21st Century to HEALTHSOUTH.
79
In December 1999, we acquired 6,390,583 shares of Series A Convertible
Preferred Stock of medcenterdirect.com, inc., a development-stage healthcare
e-procurement company, in a private placement for a purchase price of $0.3458
per share. Various persons affiliated or associated with us, including various
of our Directors and executive officers, also purchased shares in the private
placement. Under a Stockholders Agreement, we and the other holders of Series A
Convertible Preferred Stock, substantially all of whom may be deemed to be our
affiliates or associates, have the right to elect 50% of the directors of
medcenterdirect.com. During 2000, we expect to enter into a definitive 10-year
exclusive agreement under which medcenterdirect.com will be our exclusive
e-procurement vendor of medical products and supplies. We expect that the terms
of such agreement will be no less favorable than those we could obtain from an
unrelated vendor.
At times, we have made loans to executive officers to assist them in
meeting various financial obligations or for other purposes. At December 31,
1999, loans in the following principal amounts were outstanding to the following
executive officers:
NAME PRINCIPAL AMOUNT
- ---------------------------------- -----------------
James P. Bennett .......... $ 595,000
P. Daryl Brown ............ 1,370,000
William T. Owens .......... 476,000
These loans bear interest at the rate of 1-1/4% per annum below the prime
rate of AmSouth Bank of Alabama, Birmingham, Alabama, and are payable on demand.
See Item 11, "Executive Compensation -- 1999 Executive Equity Loan Plan", for
information concerning loans to executive officers to purchase HEALTHSOUTH
common stock.
80
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements, Financial Statement Schedules and Exhibits.
1. Financial Statements.
The consolidated financial statements of HEALTHSOUTH and its subsidiaries
filed as a part of this Annual Report on Form 10-K are listed in Item 8 of this
Annual Report on Form 10-K, which listing is hereby incorporated herein by
reference.
2. Financial Statement Schedules.
The financial statement schedules required by Regulation S-X are filed
under Item 14(d) of this Annual Report on Form 10-K, as listed below:
Schedules Supporting the Financial Statements
Schedule II Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission have been
omitted because they are not required under the related instructions or are
inapplicable, or because the information has been provided in the Consolidated
Financial Statements or the Notes thereto.
3. Exhibits.
The Exhibits filed as a part of this Annual Report are listed in Item 14(c)
of this Annual Report on Form 10-K, which listing is hereby incorporated herein
by reference.
(b) Reports on Form 8-K.
HEALTHSOUTH filed no Current Reports on Form 8-K during the three months
ended December 31, 1999.
(c) Exhibits.
The Exhibits required by Regulation S-K are set forth in the following list
and are filed either by incorporation by reference from previous filings with
the Securities and Exchange Commission or by attachment to this Annual Report on
Form 10-K as so indicated in such list.
(2)-1 Plan and Agreement of Merger, dated December 2, 1996, among
HEALTHSOUTH Corporation, Hammer Acquisition Corporation and Health
Images, Inc., filed as Exhibit (2)-1 to HEALTHSOUTH's Registration
Statement on Form S-4 (Registration No. 333-19439), is hereby
incorporated by reference.
(2)-2 Plan and Agreement of Merger, dated February 17, 1997, among
HEALTHSOUTH Corporation, Reid Acquisition Corporation and Horizon/CMS
Healthcare Corporation, as amended, filed as Exhibit 2 to
HEALTHSOUTH's Registration Statement on Form S-4 (Registration No.
333-36419), is hereby incorporated by reference.
(2)-3 Purchase and Sale Agreement, dated November 3, 1997, among HEALTHSOUTH
Corporation, Horizon/CMS Healthcare Corporation and Integrated Health
Services, Inc., filed as Exhibit 2.1 to HEALTHSOUTH's Current Report
on Form 8-K, dated December 31, 1997, is hereby incorporated by
reference.
(2)-4 Amendment to Purchase and Sale Agreement, dated December 31, 1997,
among HEALTHSOUTH Corporation, Horizon/CMS Healthcare Corporation and
Integrated Health Services, Inc., filed as Exhibit 2.2 to
HEALTHSOUTH's Current Report on Form 8-K, dated December 31, 1997, is
hereby incorporated by reference.
81
(2)-5 Second Amendment to Purchase and Sale Agreement, dated March 4, 1998,
among HEALTHSOUTH Corporation, Horizon/CMS Healthcare Corporation and
Integrated Health Services, Inc., filed as Exhibit (2-14) to
HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1997, is hereby incorporated by reference.
(2)-6 Plan and Agreement of Merger, dated May 5, 1998, among HEALTHSOUTH
Corporation, Field Acquisition Corporation and National Surgery
Centers, Inc., filed as Exhibit (2) to HEALTHSOUTH's Registration
Statement on Form S-4 (Registration No. 333-57087), is hereby
incorporated by reference.
(3)-1 Restated Certificate of Incorporation of HEALTHSOUTH Corporation, as
filed in the Office of the Secretary of State of the State of Delaware
on May 21, 1998, filed as Exhibit (3)-1 to HEALTHSOUTH's Current
Report on Form 8-K dated May 28, 1998, is hereby incorporated by
reference.
(3)-2 By-laws of HEALTHSOUTH Corporation, filed as Exhibit (3)-2 to
HEALTHSOUTH's Current Report on Form 8-K dated May 28, 1998, are
hereby incorporated by reference.
(4)-1 Indenture, dated March 24, 1994, between HEALTHSOUTH Rehabilitation
Corporation and NationsBank of Georgia, National Association, relating
to the Company's 9.5% Senior Subordinated Notes due 2001, filed as
Exhibit (4)-1 to HEALTHSOUTH's Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 1994, is hereby incorporated by
reference.
(4)-2 Subordinated Indenture, dated March 20, 1998, between HEALTHSOUTH
Corporation and The Bank of Nova Scotia Trust Company of New York, as
Trustee, filed as Exhibit (4)-2 to HEALTHSOUTH's Annual Report on Form
10-K for the Fiscal Year Ended December 31, 1997, is hereby
incorporated by reference.
(4)-3 Officer's Certificate pursuant to Sections 2.3 and 11.5 of the
Subordinated Indenture, dated March 20, 1998, between HEALTHSOUTH
Corporation and The Bank of Nova Scotia Trust Company of New York, as
Trustee, relating to HEALTHSOUTH's 3.25% Convertible Subordinated
Debentures due 2003, filed as Exhibit (4)-3 to HEALTHSOUTH's Annual
Report on Form 10-K for the Fiscal Year Ended December 31, 1997, is
hereby incorporated by reference.
(4)-4 Registration Rights Agreement, dated March 17, 1998, among HEALTHSOUTH
Corporation and Smith Barney Inc., Bear, Stearns & Co. Inc., Cowen &
Company, Credit Suisse First Boston Corporation, J.P. Morgan
Securities Inc., Morgan Stanley & Co. Incorporated, NationsBanc
Montgomery Securities LLC and PaineWebber Incorporated, relating to
HEALTHSOUTH's 3.25% Convertible Subordinated Debentures due 2003,
filed as Exhibit (4)-4 to the Company's Annual Report on Form 10-K for
the Fiscal Year Ended December 31, 1997, is hereby incorporated by
reference.
(4)-5 Indenture, dated June 22, 1998, between HEALTHSOUTH Corporation and
PNC Bank, National Association, as Trustee, filed as Exhibit 4.1 to
HEALTHSOUTH's Quarterly Report on Form 10-Q for the Three Months Ended
June 30, 1998, is hereby incorporated by reference.
(4)-6 Form of Officer's Certificate pursuant to Sections 2.3 and 11.5 of the
Indenture, dated June 22, 1998, between HEALTHSOUTH Corporation and
PNC Bank, National Association, as Trustee, relating to HEALTHSOUTH's
6.875% Senior Notes due 2005 and 7.0% Senior Notes due 2008, filed as
Exhibit (4)-6 to HEALTHSOUTH's Registration Statement on Form S-4
(Registration No. 333-61485), is hereby incorporated by reference.
82
(10)-1 1984 Incentive Stock Option Plan, as amended, filed as Exhibit
(10)-1 to HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal
Year Ended December 31, 1987, is hereby incorporated by reference.
(10)-2 1988 Non-Qualified Stock Option Plan, filed as Exhibit 4(a) to
HEALTHSOUTH's Registration Statement on Form S-8 (Registration No.
33-23642), is hereby incorporated by reference.
(10)-3 1989 Stock Option Plan, filed as Exhibit (10)-6 to HEALTHSOUTH's
Annual Report on Form 10-K for the Fiscal Year Ended December 31,
1989, is hereby incorporated by reference.
(10)-4 1990 Stock Option Plan, filed as Exhibit (10)-13 to HEALTHSOUTH's
Annual Report on Form 10-K for the Fiscal Year ended December 31,
1990, is hereby incorporated by reference.
(10)-5 1991 Stock Option Plan, as amended, filed as Exhibit (10)-15 to
HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year ended
December 31, 1991, is hereby incorporated by reference.
(10)-6 1992 Stock Option Plan, filed as Exhibit (10)-8 to HEALTHSOUTH's
Annual Report on Form 10-K for the Fiscal Year Ended December 31,
1992, is hereby incorporated by reference.
(10)-7 1993 Stock Option Plan, filed as Exhibit (10)-10 to HEALTHSOUTH's
Annual Report on Form 10-K for the Fiscal Year Ended December 31,
1993, is hereby incorporated by reference.
(10)-8 Amended and Restated 1993 Consultants Stock Option Plan, filed as
Exhibit 4 to HEALTHSOUTH's Registration Statement on Form S-8
(Commission File No. 333-42305), is hereby incorporated by
reference.
(10)-9 1995 Stock Option Plan, filed as Exhibit (10)-14 to HEALTHSOUTH's
Annual Report on Form 10-K for the Fiscal Year Ended December 31,
1995, is hereby incorporated by reference
(10)-10 Employment Agreement, dated April 1, 1998, between HEALTHSOUTH
Corporation and Richard M. Scrushy.
(10)-11 Credit Agreement, dated as of June 23, 1998, by and among
HEALTHSOUTH Corporation, NationsBank, National Association, J.P.
Morgan Securities, Inc., Deutsche Bank AG, ScotiaBanc, Inc. and the
Lenders party thereto from time to time, filed as Exhibit 10 to
HEALTHSOUTH's Quarterly Report on Form for the Three Months Ended
June 30, 1998, is hereby incorporated by reference.
(10)-12 Form of Indemnity Agreement entered into between HEALTHSOUTH
Rehabilitation Corporation and each of its Directors, filed as
Exhibit (10)-13 to HEALTHSOUTH's Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 1991, is hereby incorporated by
reference.
(10)-13 Surgical Health Corporation 1992 Stock Option Plan, filed as Exhibit
10(aa) to Surgical Health Corporation's Registration Statement on
Form S-4 (Commission File No. 33-70582), is hereby incorporated by
reference.
(10)-14 Surgical Health Corporation 1993 Stock Option Plan, filed as Exhibit
10(bb) to Surgical Health Corporation's Registration Statement on
Form S-4 (Commission File No. 33-70582), is hereby incorporated by
reference.
(10)-15 Surgical Health Corporation 1994 Stock Option Plan, filed as Exhibit
10(pp) to Surgical Health Corporation's Quarterly Report on Form
10-Q for the Quarter Ended September 30, 1994, is hereby
incorporated by reference.
83
(10)-16 Heritage Surgical Corporation 1992 Stock Option Plan, filed as
Exhibit 4(d) to HEALTHSOUTH's Registration Statement on Form S-8
(Commission File No. 33-60231), is hereby incorporated by reference.
(10)-17 Heritage Surgical Corporation 1993 Stock Option Plan, filed as
Exhibit 4(e) to HEALTHSOUTH's Registration Statement on Form S-8
(Commission File No. 33-60231), is hereby incorporated by reference.
(10)-18 Sutter Surgery Centers, Inc. 1993 Stock Option Plan, Non-Qualified
Stock Option Plan and Agreement (Saibeni), Non-Qualified Stock
Option Plan and Agreement (Shah), Non-Qualified Stock Option Plan
and Agreement (Akella), Non-Qualified Stock Option Plan and
Agreement (Kelly) and Non-Qualified Stock Option Plan and Agreement
(May), filed as Exhibits 4(a) -- 4(f) to HEALTHSOUTH's Registration
Statement on Form S-8 (Commission File No. 33-64615), are hereby
incorporated by reference.
(10)-19 Surgical Care Affiliates Incentive Stock Plan of 1986, filed as
Exhibit 10(g) to Surgical Care Affiliates, Inc.'s Annual Report on
Form 10-K for the Fiscal Year Ended December 31, 1993, is hereby
incorporated by reference.
(10)-20 Surgical Care Affiliates 1990 Non-Qualified Stock Option Plan for
Non-Employee Directors, filed as Exhibit 10(i) to Surgical Care
Affiliates, Inc.'s Annual Report on Form 10-K for the Fiscal Year
Ended December 31, 1990, is hereby incorporated by reference.
(10)-21 Professional Sports Care Management, Inc. 1992 Stock Option Plan, as
amended, filed as Exhibits 10.1 -- 10.3 to Professional Sports Care
Management, Inc.'s Registration Statement on Form S-1 (Commission
File No. 33-81654), is hereby incorporated by reference.
(10)-22 Professional Sports Care Management, Inc. 1994 Stock Incentive Plan,
filed as Exhibit 10.4 to Professional Sports Care Management, Inc.'s
Registration Statement on Form S-1 (Commission File No. 33-81654),
is hereby incorporated by reference.
(10)-23 Professional Sports Care Management, Inc. 1994 Directors' Stock
Option Plan, filed as Exhibit 10.5 to Professional Sports Care
Management, Inc.'s Registration Statement on Form S-1 (Commission
File No. 33-81654), is hereby incorporated by reference.
(10)-24 ReadiCare, Inc. 1991 Stock Option Plan, filed as an exhibit to
ReadiCare, Inc.'s Annual Report on Form 10-K for the Fiscal Year
Ended February 29, 1992, is hereby incorporated by reference.
(10)-25 ReadiCare, Inc. Stock Option Plan for Non-Employee Directors, as
amended, filed as an exhibit to ReadiCare, Inc's Annual Report on
Form 10-K for the Fiscal Year Ended February 29, 1992 and as an
exhibit to ReadiCare, Inc.'s Annual Report on Form 10-K for the
Fiscal Year Ended February 28, 1994, is hereby incorporated by
reference.
(10)-26 1997 Stock Option Plan, filed as Exhibit 4 to HEALTHSOUTH's
Registration Statement on Form S-8 (Registration No. 333-42307) is
hereby incorporated by reference.
(10)-27 1998 Restricted Stock Plan filed as Exhibit (10)-27 to HEALTHSOUTH's
Annual Report on Form 10-K for the Fiscal Year Ended December 31,
1998, is hereby incorporated by reference.
(10)-28 Health Images, Inc. Non-Qualified Stock Option Plan, filed as
Exhibit 10(d)(i) to Health Images, Inc.'s Annual Report on Form 10-K
for the Fiscal Year Ended December 31, 1995, is hereby incorporated
by reference.
(10)-29 Amended and Restated Employee Incentive Stock Option Plan, as
amended, of Health Images, Inc., filed as Exhibits 10(c)(i),
10(c)(ii), 10(c)(iii) and 10(c)(iv) to Health Images, Inc.'s Annual
Report on Form 10-K for the Fiscal Year Ended December 31, 1995, is
hereby incorporated by reference.
84
(10)-30 Form of Health Images, Inc. 1995 Formula Stock Option Plan, filed as
Exhibit 10(d)(iv) to Health Images, Inc.'s Annual Report on Form
10-K for the Fiscal Year Ended December 31, 1995, is hereby
incorporated by reference.
(10)-31 1996 Employee Incentive Stock Option Plan of Health Images, Inc.,
filed as Exhibit 4(v) to HEALTHSOUTH's Registration Statement on
Form S-8 (Registration No. 333-24429), is hereby incorporated by
reference.
(10)-32 Employee Stock Option Plan of Horizon/CMS Healthcare Corporation,
filed as Exhibit 10.5 to Horizon/CMS Healthcare Corporation's Annual
Report on Form 10-K for the Fiscal Year Ended May 31, 1994, is
hereby incorporated by reference.
(10)-33 First Amendment to Employee Stock Option Plan of Horizon/CMS
Healthcare Corporation, filed as Exhibit 10.6 to Horizon/CMS
Healthcare Corporation's Annual Report on Form 10-K for the Fiscal
Year Ended May 31, 1994, is hereby incorporated by reference.
(10)-34 Corrected Second Amendment to Employee Stock Option Plan of
Horizon/CMS Healthcare Corporation, filed as Exhibit 10.7 to
Horizon/CMS Healthcare Corporation's Annual Report on Form 10-K for
the Fiscal Year Ended May 31, 1994, is hereby incorporated by
reference.
(10)-35 Amendment No. 3 to Employee Stock Option Plan of Horizon/CMS
Healthcare Corporation, filed as Exhibit 10.12 to Horizon/CMS
Healthcare Corporation's Annual Report on Form 10-K for the Fiscal
Year Ended May 31, 1995, is hereby incorporated by reference.
(10)-36 Horizon Healthcare Corporation Stock Option Plan for Non-Employee
Directors, filed as Exhibit 10.6 to Horizon/CMS Healthcare
Corporation's Annual Report on Form 10-K for the Fiscal Year Ended
May 31, 1994, is hereby incorporated by reference.
(10)-37 Amendment No. 1 to Horizon Healthcare Corporation Stock Option Plan
for Non-Employee Directors, filed as Exhibit 10.14 to Horizon/CMS
Healthcare Corporation's Annual Report on Form 10-K for the Fiscal
Year Ended May 31, 1996, is hereby incorporated by reference.
(10)-38 Horizon/CMS Healthcare Corporation 1995 Incentive Plan, filed as
Exhibit 4.1 to Horizon/CMS Healthcare Corporation's Registration
Statement on Form S-8 (Registration No. 33-63199), is hereby
incorporated by reference.
(10)-39 Horizon/CMS Healthcare Corporation 1995 Non-Employee Directors'
Stock Option Plan, filed as Exhibit 4.2 to Horizon/CMS Healthcare
Corporation's Registration Statement on Form S-8 (Registration No.
33-63199), is hereby incorporated by reference.
(10)-40 First Amendment to Horizon Healthcare Corporation Employee Stock
Purchase Plan, filed as Exhibit 10.18 to Horizon/CMS Healthcare
Corporation's Annual Report on Form 10-K for the Fiscal Year Ended
May 31, 1996, is hereby incorporated by reference.
(10)-41 Continental Medical Systems, Inc. 1994 Stock Option Plan (as amended
and restated effective December 1, 1991), Amendment No. 1 to
Continental Medical Systems, Inc. 1986 Stock Option Plan and
Amendment No. 2 to Continental Medical Systems, Inc. 1986 Stock
Option Plan, filed as Exhibit 4.1 to Horizon/CMS Healthcare
Corporation's Registration Statement on Form S-8 (Registration No.
33-61697), is hereby incorporated by reference.
(10)-42 Continental Medical Systems, Inc. 1989 Non-Employee Directors' Stock
Option Plan (as amended and restated effective December 1, 1991),
filed as Exhibit 4.2 to Horizon/CMS Healthcare Corporation's
Registration Statement on Form S-8 (Registration No. 33-61697), is
hereby incorporated by reference.
85
(10)-43 Continental Medical Systems, Inc. 1992 CEO Stock Option Plan and
Amendment No. 1 to Continental Medical Systems, Inc. 1992 CEO Stock
Option Plan, filed as Exhibit 4.3 to Horizon/CMS Healthcare
Corporation's Registration Statement on Form S-8 (Registration No.
33-61697), is hereby incorporated by reference.
(10)-44 Continental Medical Systems, Inc. 1993 Nonqualified Stock Option
Plan, Amendment No. 1 to Continental Medical Systems, Inc. 1993
Nonqualified Stock Option Plan and Amendment No. 2 to Continental
Medical Systems, Inc. 1993 Nonqualified Stock Option Plan, filed as
Exhibit 4.4 to Horizon/CMS Healthcare Corporation's Registration
Statement on Form S-8 (Registration No. 33-61697), is hereby
incorporated by reference.
(10)-45 Continental Medical Systems, Inc. 1994 Stock Option Plan, filed as
Exhibit 4.5 to Horizon/CMS Healthcare Corporation's Registration
Statement on Form S-8 (Registration No. 33-61697), is hereby
incorporated by reference.
(10)-46 The Company Doctor Amended and Restated Omnibus Stock Plan of 1995,
filed as Exhibit 4.1 to HEALTHSOUTH's Registration Statement on Form
S-8 (Registration No. 333-59895), is hereby incorporated by
reference.
(10)-47 National Surgery Centers, Inc. Amended and Restated 1992 Stock
Option Plan, filed as Exhibit 4.1 to HEALTHSOUTH's Registration
Statement on Form S-8 (Registration No. 333-59887), is hereby
incorporated by reference.
(10)-48 National Surgery Centers, Inc. 1997 Non-Employee Directors Stock
Option Plan, filed as Exhibit 4.2 to HEALTHSOUTH's Registration
Statement on Form S-8 (Registration No. 333-59887), is hereby
incorporated by reference.
(10)-49 Employment Agreement, dated April 1, 1998, between HEALTHSOUTH
Corporation and James P. Bennett, filed as Exhibit (10)-49 to
HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1998, is hereby incorporated by reference.
(10)-50 Employment Agreement, dated April 1, 1998, between HEALTHSOUTH
Corporation and P. Daryl Brown, filed as Exhibit (10)-50 to
HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1998, is hereby incorporated by reference.
(10)-51 Employment Agreement, dated April 1, 1998, between HEALTHSOUTH
Corporation and Thomas W. Carman, filed as Exhibit (10)-51 to
HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1998, is hereby incorporated by reference.
(10)-52 Employment Agreement, dated April 1, 1998, between HEALTHSOUTH
Corporation and Michael D. Martin, filed as Exhibit (10)-52 to
HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1998, is hereby incorporated by reference.
(10)-53 Employment Agreement, dated April 1, 1999, between HEALTHSOUTH
Corporation and Anthony J. Tanner
(10)-54 Employment Agreement, dated April 1, 1998, between HEALTHSOUTH
Corporation and Patrick A. Foster, filed as Exhibit (10)-54 to
HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1998, is hereby incorporated by reference.
(10)-55 Employment Agreement, dated April 1, 1998, between HEALTHSOUTH
Corporation and Robert E. Thomson, filed as Exhibit (10)-55 to
HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1998, is hereby incorporated by reference.
86
(10)-56 Lease Agreement, dated December 18, 1998, between First Security
Bank, National Association, as Owner Trustee under the HEALTHSOUTH
Corporation Trust 1998-1, as Lessor, and HEALTHSOUTH Corporation, as
Lessee, filed as Exhibit (10)-56 to HEALTHSOUTH's Annual Report on
Form 10-K for the Fiscal Year Ended December 31, 1998, is hereby
incorporated by reference.
(10)-57 Participation Agreement, dated December 18, 1998, among HEALTHSOUTH
Corporation as Lessee, First Security Bank, National Association, as
Owner Trustee under the HEALTHSOUTH Corporation Trust 1998-1, the
Holders and the Lenders Party Thereto From Time to Time, Deutsche
Bank A.G. New York Branch and NationsBank, N.A., filed as Exhibit
(10)-57 to HEALTHSOUTH's Annual Report on Form 10-K for the Fiscal
Year Ended December 31, 1998, is hereby incorporated by reference
(10)-58 Short Term Credit Agreement, among HEALTHSOUTH Corporation, Bank of
America, N.A., Citicorp USA, Inc. and the Lenders Party Thereto From
Time to Time, dated December 15, 1999.
(10)-59 1999 Exchange Stock Option Plan, filed as Exhibit 3 to HEALTHSOUTH's
Registration Statement on Form S-8 (Registration No. 333-80073), is
hereby incorporated by reference.
(10)-60 1999 Executive Equity Loan Plan.
(21) Subsidiaries of HEALTHSOUTH Corporation.
(23) Consent of Ernst & Young LLP.
(27) Financial Data Schedule.
(d) Financial Statement Schedules.
Schedule II: Valuation and Qualifying Accounts
87
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------- -------------- --------------------------------------- ---------------- --------------
BALANCE AT ADDITIONS CHARGED ADDITIONS CHARGED
BEGINNING OF TO COSTS AND TO OTHER ACCOUNTS DEDUCTIONS BALANCE AT
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD
- ----------------------------------- -------------- ------------------- ------------------- ---------------- --------------
(IN THOUSANDS)
Year ended December 31, 1997:
Allowance for doubtful accounts .. $ 77,083 $ 74,743 $ 43,077(1) $ 67,331(2) $127,572
======== ======== =========== ============ ========
Year ended December 31, 1998:
Allowance for doubtful accounts .. $127,572 $112,202 $ 18,524(1) $ 114,609(2) $143,689
======== ======== =========== ============ ========
Year ended December 31, 1999:
Allowance for doubtful accounts .. $143,689 $342,708 $ 16,314(1) $ 199,097(2) $303,614
======== ======== =========== ============ ========
- ----------
(1) Allowances of acquisitions in years 1997, 1998 and 1999, respectively.
(2) Write-offs of uncollectible patient accounts receivable.
88
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HEALTHSOUTH CORPORATION
By: RICHARD M. SCRUSHY
------------------------------------
Richard M. Scrushy,
Chairman of the Board
and Chief Executive Officer
Date: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
- ------------------------- ------------------------------------- ---------------
RICHARD M. SCRUSHY Chairman of the Board March 30, 2000
- ----------------------- and Chief Executive Officer
Richard M. Scrushy and Director
WILLIAM T. OWENS Executive Vice President March 30, 2000
- ----------------------- and Chief Financial Officer
William T. Owens
WESTON L. SMITH Senior Vice President-Finance March 30, 2000
- ----------------------- and Controller (Principal Accounting
Weston L. Smith Officer)
C. SAGE GIVENS Director March 30, 2000
- -----------------------
C. Sage Givens
CHARLES W. NEWHALL III Director March 30, 2000
- -----------------------
Charles W. Newhall III
GEORGE H. STRONG Director March 30, 2000
- -----------------------
George H. Strong
PHILLIP C. WATKINS Director March 30, 2000
- -----------------------
Phillip C. Watkins
JOHN S. CHAMBERLIN Director March 30, 2000
- -----------------------
John S. Chamberlin
JAN L. JONES
- -----------------------
Jan L. Jones Director March 30, 2000
JAMES P. BENNETT Director March 30, 2000
- -----------------------
James P. Bennett
P. DARYL BROWN Director March 30, 2000
- -----------------------
P. Daryl Brown
JOEL C. GORDON Director March 30, 2000
- -----------------------
Joel C. Gordon
LARRY D. STRIPLIN, JR. Director March 30, 2000
- -----------------------
Larry D. Striplin, Jr.