SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
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[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
HEALTHSOUTH CORPORATION
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(Name of Registrant as Specified In Its Charter)
HEALTHSOUTH CORPORATION
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HEALTHSOUTH CORPORATION
ONE HEALTHSOUTH PARKWAY
BIRMINGHAM, ALABAMA 35243
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
Our 2001 annual meeting of stockholders will be held at One HealthSouth
Parkway, Birmingham, Alabama on Thursday, May 17, 2001, beginning at 2:00 p.m.,
Central Daylight Time. The meeting is being held for the following purposes:
(1) To elect nine Directors to serve until our next annual meeting of
stockholders and until their successors shall have been duly elected
and qualified; and
(2) To act on any other matter that may properly come before the annual
meeting or any adjournment(s) or postponement(s) of the annual
meeting.
All stockholders of record who own shares of HEALTHSOUTH common stock at
the close of business on March 30, 2001 are entitled to receive notice of and
to vote at the annual meeting.
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WHETHER OR NOT YOU INTEND TO ATTEND THE ANNUAL MEETING, PLEASE MARK, DATE,
SIGN AND PROMPTLY RETURN THE ACCOMPANYING FORM OF PROXY, USING THE ENCLOSED
PREPAID ENVELOPE. IF YOU ATTEND THE ANNUAL MEETING IN PERSON, YOU MAY REVOKE
YOUR PROXY AND VOTE IN PERSON. ATTENDANCE AT THE MEETING DOES NOT OF ITSELF
REVOKE YOUR PROXY.
- --------------------------------------------------------------------------------
BRANDON O. HALE
Secretary
April 17, 2001
HEALTHSOUTH CORPORATION
PROXY STATEMENT
INTRODUCTION
This proxy statement and the accompanying form of proxy are being sent to
our stockholders in connection with our solicitation of proxies for use at the
2001 annual meeting of our stockholders or at any adjournment(s) or
postponement(s) of the annual meeting. The annual meeting will be held on
May 17, 2001, beginning at 2:00 p.m., Central Daylight Time, at our principal
executive offices, located at One HealthSouth Parkway, Birmingham, Alabama. We
encourage all of our stockholders to vote at the annual meeting, and we hope
that the information contained in this document will help you decide how you
wish to vote at the annual meeting. These proxy solicitation materials are
being sent to our stockholders on or about April 17, 2001.
THE ANNUAL MEETING
Purpose of the Annual Meeting
The purpose of the annual meeting is to elect a Board of Directors to
serve until our 2002 annual meeting of stockholders and until their successors
are duly elected and qualified to act.
Voting at the Annual Meeting; Proxies
To vote at the annual meeting, you may attend the annual meeting and vote
your shares of HEALTHSOUTH common stock in person, or you may appoint a person
to act as your proxy who will vote your shares at the annual meeting in
accordance with your instructions. If you wish to appoint a proxy who will vote
your shares of HEALTHSOUTH common stock on your behalf at the annual meeting,
you should complete, date, sign and return the form of proxy accompanying this
document by using the enclosed prepaid envelope. If you properly complete, date
and sign your proxy and it is received by Mellon Investor Services, L.L.C.
before, or by us at, the annual meeting, your shares of HEALTHSOUTH common
stock will be voted in accordance with the voting instructions you completed on
the proxy, unless you have validly revoked the proxy. If you properly date and
sign and return a proxy, but you fail to complete the voting instructions, your
shares of HEALTHSOUTH common stock will be voted FOR the election of each
nominee named under the section of this document captioned "Election of
Directors".
We do not currently anticipate any other matters being presented for
action at the annual meeting. If any other matters are properly presented for
action, the person(s) named on your proxy will vote your shares of HEALTHSOUTH
common stock on these other matters in their discretion and best judgment,
under the discretionary authority you have granted to them in your proxy.
You may revoke your proxy at any time prior to its exercise at the annual
meeting by:
o writing to us notifying us that you wish to revoke your proxy;
o properly completing, dating, signing and returning to us another proxy
which is granted and dated after any other proxy previously granted by
you; or
o attending the annual meeting and voting in person.
Notices of revocation should be addressed to us as follows:
HEALTHSOUTH Corporation
One HealthSouth Parkway
Birmingham, Alabama 35243
Attention: Brandon O. Hale, Secretary
Notices of revocation of your proxy must be received by us at the address
above as originals sent by U.S. mail or overnight courier. You may not revoke
your proxy by any other means.
If you grant a proxy, you are not prevented from attending the annual
meeting and voting in person. However, your attendance at the annual meeting
will not by itself revoke a proxy that you have previously granted; you must
vote in person at the annual meeting to revoke your proxy. If you have
instructed your broker, nominee, custodian or other fiduciary to vote your
shares of HEALTHSOUTH common stock, you must contact that fiduciary and follow
its directions on how to change your vote.
Quorum; Voting Rights
Our Board of Directors has determined that those stockholders who are
recorded in our record books as owning shares of HEALTHSOUTH common stock as of
the close of business on March 30, 2001, are entitled to receive notice of and
to vote at the annual meeting. As of the record date, there were 389,487,541
shares of HEALTHSOUTH common stock issued and outstanding.
Before any business may be transacted at the annual meeting, a quorum must
be present. A quorum will be attained if a majority of the shares of
HEALTHSOUTH common stock which are entitled to vote at the annual meeting are
present in person or represented by proxy at the annual meeting.
Each share of common stock is entitled to one vote on any matter to
properly come before the annual meeting.
There are no dissenters' rights of appraisal in connection with any
stockholder vote to be taken at the annual meeting.
Proxy Solicitation
This proxy solicitation is being made by our Board of Directors. To assist
us in soliciting proxies, we have retained Mellon Investor Services, L.L.C., a
proxy soliciting firm, and we have agreed to pay Mellon Investor Services,
L.L.C. a fee of $12,000, and all reasonable out-of-pocket expenses incurred by
it in connection with the provision of its services. In addition, our
Directors, officers and other employees, not specifically employed for this
purpose, may also solicit proxies by personal interview, mail, telephone or
facsimile. They will not receive additional compensation for their efforts. We
will bear the entire cost of this proxy solicitation. We will request banks,
brokers, nominees, custodians and other fiduciaries, who hold shares of
HEALTHSOUTH common stock in street name, to forward these proxy solicitation
materials to the beneficial owners of those shares and we will reimburse them
the reasonable out-of-pocket expenses they incur in doing so.
Effect of "Abstentions" and "Broker Non-Votes"
We intend to count "abstentions" and "broker non-votes" only for the
purpose of determining if a quorum is present at the annual meeting; they will
not be counted as votes cast on any other proposal which requires the vote of
our stockholders. An "abstention" will occur at the annual meeting if your
shares of HEALTHSOUTH common stock are deemed to be present at the annual
meeting, either because you attend the annual meeting or because you have
properly completed and returned a proxy, but you do not vote on any proposal or
other matter which is required to be voted on by our stockholders at the annual
meeting. A "broker non-vote" will occur if your shares of HEALTHSOUTH common
stock are held by a broker or nominee and your shares are deemed to be present
at the annual meeting but you have not instructed your broker or nominee how to
vote your shares. Brokerage firms which hold shares in street name may not vote
a client's shares with respect to any "non-discretionary" item if the client
has not furnished voting instructions to the brokerage firm. You should consult
your broker if you have any questions about this.
Abstentions and broker non-votes will have no effect in connection with
the election of Directors because the Directors are elected by a majority of
the shares of HEALTHSOUTH common stock present or represented and entitled to
be voted at the annual meeting. No other matters are expected to be voted on at
the annual meeting.
2
ELECTION OF DIRECTORS
GENERAL
Our bylaws permit our Board of Directors to determine the number of our
Directors. Our Board of Directors proposes that each of the nine nominees
listed below be elected at the annual meeting as members of our Board of
Directors, to serve until the annual meeting of our stockholders in 2002 or
until such nominee's successor is duly elected and qualified. The affirmative
vote of a majority of the shares of HEALTHSOUTH common stock present or
represented and entitled to vote at the annual meeting is required for the
election of each nominee. Unless otherwise instructed on the proxy, the persons
designated as proxies will vote the shares represented by them FOR the election
of the nominees listed below. If a nominee becomes unable or unwilling to
accept the nomination or election, the persons designated as proxies will be
entitled to vote for any other person designated as a substitute nominee by our
Board of Directors.
NOMINEES FOR DIRECTOR
Information relating to each of the nominees proposed by our Board of
Directors for election as one of our Directors is set out below. We have no
reason to believe that any of the following nominees will be unable to serve.
PRINCIPAL OCCUPATION
AND ALL POSITIONS A DIRECTOR
NAME AGE WITH HEALTHSOUTH SINCE
- -------------------------- ----- ----------------------------------------- -----------
Richard M. Scrushy 48 Chairman of the Board 1984
and Chief Executive Officer
and Director
Phillip C. Watkins, M.D. 59 Physician, Birmingham, Alabama, 1984
and Director
George H. Strong 74 Private Investor, Locust, New Jersey, 1984
and Director
C. Sage Givens 44 General Partner, 1985
Acacia Venture Partners
and Director
Charles W. Newhall III 56 Partner, New Enterprise 1985
Associates Limited Partnerships,
and Director
John S. Chamberlin 72 Private Investor, 1993
Princeton, New Jersey,
and Director
Joel C. Gordon 71 Private Investor, 1996
Consultant to the Company
and Director
Larry D. Striplin, Jr. 71 Chairman and Chief Executive Officer, 1999
Nelson-Brantley Glass Contractors, Inc.,
and Director
William T. Owens 42 Executive Vice President 2001
and Chief Financial Officer
and Director
Richard M. Scrushy, one of our management founders, has served as Chairman
of the Board and Chief Executive Officer of HEALTHSOUTH since 1984, and also
served as President of HEALTHSOUTH from 1984 until March 1995. From 1979 to
1984, Mr. Scrushy was with Lifemark
3
Corporation, a publicly owned healthcare corporation, serving in various
operational and management positions. Mr. Scrushy was until February 2001 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
AmeriSource, Inc., a large drug wholesaler.
C. Sage Givens is a founder and managing general partner of Acacia Venture
Partners, a private venture capital fund. From 1983 to June 30, 1995, Ms.
Givens was a general partner of First Century Partners, also a private venture
capital fund. Ms. Givens managed the fund's healthcare investments. Ms. Givens
also serves on the boards of directors of 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.
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 WNS, Inc. He is a
member of the Board of Trustees of the Medical Center at Princeton and is a
trustee of the Woodrow Wilson National Fellowship Foundation.
Joel C. Gordon served as Chairman of the Board of Directors of Surgical
Care Affiliates, Inc. from its founding in 1982 until January 17, 1996, when we
acquired SCA. Mr. Gordon also served as Chief Executive Officer of SCA from
1987 until January 17, 1996. Mr. Gordon is a private investor 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 Circle "S" Industries, Inc. for more than five years. Mr. Striplin
is a member of the boards of directors of Kulicke & Suffa Industries, Inc., a
publicly traded manufacturer of electronic equipment and The Banc Corporation.
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 in June 1992, 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, and in March 2001
he was named a Director. 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.
MANAGEMENT MATTERS
There are no arrangements or understandings known to us between any of our
Directors, nominees for Director or executive officers and any other person
pursuant to which any of those persons was elected as a Director or an
executive officer, except the Employment Agreement between us and Richard M.
Scrushy described elsewhere in this Proxy Statement (see "Executive
Compensation and Other Information -- Compensation Committee Report on
Executive Compensation -- Chief Executive
4
Officer Compensation") 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. None of our Directors or executive officers is a party to any
material proceedings adverse to us or any of our subsidiaries or has a material
interest adverse to us or any of our subsidiaries. The Board of Directors held
a total of seven meetings during 2000.
We have Employment Agreements with some of our executive officers in
addition to Mr. Scrushy. See "Executive Compensation and Other Information --
Compensation Committee Report on Executive Compensation -- Other Executive
Employment Agreements". Except for such Employment Agreements and except for
the broad-based retirement plans described under "Executive Compensation and
Other Information -- Retirement Investment Plan" and "Executive Compensation
and Other Information -- Employee Stock Benefit Plan" and the Executive
Deferred Compensation Plan described under "Executive Compensation and Other
Information -- Deferred Compensation Plan", there are no compensatory plans or
arrangements with respect to any such executive officer which result or will
result from the resignation or retirement of such executive officer or any
other termination of such executive officer's employment with HEALTHSOUTH and
its subsidiaries or from a change in control of or from a change in such
executive officer's responsibilities following a change in control of
HEALTHSOUTH.
Until March 2000, the Board of Directors had two standing committees: the
Audit and Compensation Committee, which was responsible for reviewing all
reports from our auditors, monitoring internal controls and reviewing our
compensation program, as well as administering our stock option plans, and the
Corporate Compliance Committee, which was responsible for establishing and
reviewing our Corporate Compliance Program and otherwise ensuring that we
conduct our operations in compliance with federal, state and local laws and
regulations. In March 2000, the Board of Directors reorganized its committee
structure, reconstituting the Audit Committee and the Compensation Committee as
separate committees. At that time, the Board appointed C. Sage Givens, Larry D.
Striplin, Jr. and George H. Strong, Chairman, as the Audit Committee, which is
responsible for reviewing all reports from our auditors and monitoring internal
controls; John S. Chamberlin, Jan L. Jones and Larry D. Striplin, Jr.,
Chairman, as the Compensation Committee, which is responsible for reviewing our
compensation programs and administering our stock option plans; and Charles W.
Newhall III, Philip C. Watkins, M.D., and Joel C. Gordon, Chairman, as the
Corporate Compliance Committee. All members of these three committees are
outside directors. In February 2001, Ms. Jones resigned from the Board, and
Dr. Watkins was appointed to the Compensation Committee in her place.
The Audit and Compensation Committee met once and acted once by unanimous
written consent during 2000 prior to the committee reorganization described
above. Thereafter, the Audit Committee met twice and the Compensation Committee
acted once by unanimous written consent and otherwise conducted its business
during regular Board meetings in 2000. The Corporate Compliance Committee met
once and otherwise conducted its business during regular Board meetings in
2000.
In March 2001, the Board of Directors appointed a Nominating Committee to
propose and recommend to the Board of Directors potential candidates for the
Board. The Nominating Committee consists of C. Sage Givens, Charles W. Newhall
III, and George H. Strong. All members of the Nominating Committee are outside
directors.
There are no other standing audit, nominating or compensation committees
of the Board of Directors.
BOARD COMPENSATION
Directors who are not also employed by HEALTHSOUTH are paid Directors'
fees of $10,000 per year, plus $3,000 for each meeting of the Board of
Directors and $1,000 for each Committee meeting attended. In addition,
Directors are reimbursed for all out-of-pocket expenses incurred in connection
with their duties as Directors. Our Directors, including employee Directors,
have been granted non-qualified stock options to purchase shares of HEALTHSOUTH
common stock. Under our existing stock option plans, each non-employee Director
is granted an option covering 25,000 shares of common stock on the first
business day in January of each year. See "Executive Compensation and Other
Information -- Stock Option Plans".
5
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, 2000,
through December 31, 2000, 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
5,000 shares of common stock at $5.1875 per share on February 28, 2000. This
transaction was subsequently reported on Form 5.
6
EXECUTIVE COMPENSATION AND OTHER INFORMATION
EXECUTIVE COMPENSATION -- GENERAL
The following table sets forth compensation paid or awarded to our Chief
Executive Officer, as well as each of our other four most highly compensated
executive officers and two former executive officers for whom disclosure would
have been required had they been serving as executive officers at December 31,
2000, for all services rendered to HEALTHSOUTH and its subsidiaries in 1998,
1999 and 2000.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------------- ---------------------------------
BONUS/ANNUAL STOCK RESTRICTED ALL
INCENTIVE OPTION STOCK OTHER COM-
NAME AND CURRENT POSITION YEAR SALARY AWARD AWARDS AWARDS PENSATION(1)
- ------------------------------------- ------ ------------- -------------- ----------- --------------------- ------------------
Richard M. Scrushy 1998 $2,777,829 -- 1,500,000 -- $ 72,352
Chairman of the Board 1999 1,634,031 -- 1,050,000 $ 1,293,750 (3) 54,145
and Chief Executive Officer(2) 2000 3,654,849 -- 800,000 -- 55,475
James P. Bennett 1998 $ 670,000 -- 300,000 -- $ 10,092
Formerly President and Chief 1999 589,058 -- 275,000 $ 1,293,750 (3) 4,350
Operating Officer 2000 627,716 -- 120,000 -- 3,137
William T. Owens 1998 $ 311,539 -- 62,500 -- $ 7,378
Executive Vice President -- 1999 272,944 -- 55,000 $ 970,313 (3) 2,643
and Chief Financial Officer 2000 386,510 -- 75,000 -- 1,908
P. Daryl Brown 1998 $ 386,212 -- 75,000 -- $ 10,981
Formerly President -- Ambulatory 1999 336,920 -- 125,000 $ 970,313 (3) 205,001 (4)
Services -- East 2000 372,730 -- 60,000 -- 3,845
Robert E. Thomson 1998 $ 327,928 -- 150,000 -- $ 11,341
President -- Inpatient Operations 1999 402,987 -- 125,000 $ 970,313 (3) 4,994
2000 396,162 -- 60,000 -- 2,849
Thomas W. Carman 1998 $ 337,500 -- 65,000 -- $ 8,924
Executive Vice President -- 1999 295,167 -- 65,000 $ 970,313 (3) 3,012
Corporate Development 2000 326,300 $50,000 20,000 -- 2,270
Patrick A. Foster 1998 $ 248,770 -- 120,000 -- $ 10,679
President -- Ambulatory Services -- 1999 275,977 -- 125,000 $ 970,313 (3) 3,298
West 2000 356,043 -- 60,000 -- 2,434
- ----------
(1) For the year ending December 31, 2000, this category includes (a) matching
contributions under the HEALTHSOUTH Retirement Investment Plan of $1,020
for Mr. Scrushy, $1,575 for Mr. Bennett, $0 for Mr. Owens, $1,276 for
Mr. Brown, $738 for Mr. Thomson, $1,050 for Mr. Carman and $1,260 for
Mr. Foster; (b) awards under our Employee Stock Benefit Plan of $416 for
Mr. Scrushy, $416 for Mr. Bennett, $416 for Mr. Owens, $416 for Mr. Brown,
$416 for Mr. Thomson, $416 for Mr. Carman and $416 for Mr. Foster; and (c)
split-dollar life insurance premiums paid of $54,039 with respect to
Mr. Scrushy, $1,146 with respect to Mr. Bennett, $1,492 with respect to
Mr. Owens, $2,153 with respect to Mr. Brown, $1,695 with respect to
Mr. Thomson, $804 with respect to Mr. Carman, and $758 with respect to
Mr. Foster. See "Executive Compensation and Other Information --
Retirement Investment Plan" and "Executive Compensation and Other
Information -- Employee Stock Benefit Plan".
(2) Salary amounts for Mr. Scrushy include monthly incentive compensation
amounts payable upon achievement of certain budget targets. Effective
November 1, 1998, Mr. Scrushy voluntarily suspended receipt of his base
salary and monthly incentive compensation through March 31, 1999, and
voluntarily took reduced compensation through January 2, 2000. See
"Executive Compensation and Other Information -- Compensation Committee
Report on Executive Compensation -- Chief Executive Officer Compensation".
(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, 2000 was $1,631,250 for the awards to each
of Messrs. Scrushy and Bennett (100,000 shares each) and $1,223,438 for
the awards to each of Messrs. Owens, Brown, Thomson, Carman and Foster
(75,000 shares each). The awards vest five years from the date of grant,
except as otherwise provided in our 1998 Restricted Stock Plan. See
"Executive Compensation and Other Information -- 1998 Restricted Stock
Plan"
(4) Includes $200,000 withdrawn by Mr. Brown in 1999 from his deferred
compensation account. See "Executive Compensation and Other Information --
Deferred Compensation Plan".
7
STOCK OPTION GRANTS IN 2000
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 800,000 23.8% $ 4.875 2/28/10 $2,328,000
James P. Bennett 120,000 3.6% 4.875 7/17/05 349,200
William T. Owens 75,000 2.2% 4.875 2/28/10 218,250
P. Daryl Brown 60,000 1.8% 4.875 2/28/10 174,600
Robert E. Thomson 60,000 1.8% 4.875 2/28/10 174,600
Thomas W. Carman 20,000 0.6% 4.875 2/28/10 58,200
Patrick A. Foster 60,000 1.8% 4.875 2/28/10 174,600
- ----------
(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 71%;
(ii) the risk-free rate of return is assumed to be 5.11%; (iii) dividend
yield is assumed to be 0; and (iv) the time of exercise is assumed to be
4.5 years from the date of grant.
STOCK OPTION EXERCISES IN 2000 AND OPTION VALUES AT DECEMBER 31, 2000
VALUE OF UNEXERCISED
NUMBER NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
OF SHARES AT DECEMBER 31, 2000(1) AT DECEMBER 31, 2000(2)
ACQUIRED ------------------------------- --------------------------------
ON VALUE
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------- ----------- ------------- ------------- --------------- --------------- --------------
Richard M. Scrushy ......... -- -- 14,522,524 -- $121,200,649 --
James P. Bennett ........... 515,000 $4,254,550 1,490,000 -- 4,531,562 --
William T. Owens ........... -- -- 512,500 -- 2,128,125 --
P. Daryl Brown ............. -- -- 1,100,000 -- 7,505,200 --
Robert E. Thomson .......... -- -- 755,000 -- 3,135,937 --
Thomas W. Carman ........... -- -- 850,000 -- 6,174,962 --
Patrick A. Foster .......... -- -- 513,800 -- 2,930,787 --
- ----------
(1) Does not reflect any options granted and/or exercised after December 31,
2000. The net effect of any such grants and exercises is reflected in the
table appearing under "Principal Stockholders".
(2) Represents the difference between market price of HEALTHSOUTH common stock
and the respective exercise prices of the options at December 31, 2000.
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.
STOCKHOLDER RETURN COMPARISON
Set forth below is a line graph comparing the total returns of HEALTHSOUTH
common stock, the Standard & Poor's 500 (S&P 500) Index, the Morgan Stanley
Health Care Provider Index (RXH), an equal-dollar weighted index of 15
companies involved in the business of hospital management and medical/nursing
services, including HEALTHSOUTH, and a peer group index ("Rehab Index")
compiled by HEALTHSOUTH, consisting of Tenet Healthcare Corporation and NAHC,
Inc. (formerly NovaCare, Inc.), publicly traded healthcare companies whose
businesses have historically been similar in some respects to ours.(1) As
permitted by Securities and Exchange Commission rules, we established the Rehab
Index as a self-constructed peer group index, originally consisting of three
somewhat comparable companies. However,
8
over time, one of the original companies ceased to be publicly traded and one
of the remaining companies disposed of substantially all of its assets and
effectively ceased to conduct operations. Accordingly, we are discontinuing the
use of the Rehab Index in future years, and expect to rely on the RXH index for
comparison for the foreseeable future. The graph assumes $100 invested on
December 31, 1995, in HEALTHSOUTH common stock and each of the indices. The
Rehab Index has been weighted for market capitalization, and we assume
reinvestment of dividends for purposes of the graph.
[GRAPHIC OMITTED]
December 31 HEALTHSOUTH S&P 500 RXH Rehab Index
- ----------- ----------- ------- --- -----------
1995 100 100 100 100
1996 132.62 120.26 113.37 115.19
1997 190.55 157.56 141.80 169.85
1998 106.01 199.57 99.69 121.79
1999 36.91 238.54 62.35 111.66
2000 112.02 214.36 117.27 213.30
(1) In previous Proxy Statements of HEALTHSOUTH, the Rehab Index included
Continental Medical Systems, Inc. ("CMS"). In May 1995, CMS was acquired
by Horizon/CMS Healthcare Corporation, which was the surviving corporation
in the merger. Because CMS was not publicly traded during all of 1995 or
thereafter, data relating to CMS have been deleted from the Rehab Index
for all periods.
STOCK OPTION PLANS
Set forth below is information concerning our various stock option plans
at December 31, 2000. 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 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, 2000,
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.
9
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, 2000,
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 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, 2000 and the price or range of prices at which shares may be
purchased if the options are exercised.
MAXIMUM NUMBER
OF SHARES OF NUMBER OF
HEALTHSOUTH ADDITIONAL SHARES OF
COMMON STOCK HEALTHSOUTH
SUBJECT TO COMMON STOCK
PURCHASE UNDER THE RESERVED FOR USE
NAME OF PLAN 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 2,500
1995 Stock Option Plan 24,720,467 (1) 4,051,532
1997 Stock Option Plan 5,000,000 99,396
NUMBER OF SHARES OF
HEALTHSOUTH PRICE OR RANGE OF DATE THE PLAN TERMINATED OR WILL
COMMON STOCK PRICES AT WHICH TERMINATE UNLESS OTHERWISE DETERMINED
SUBJECT TO PURCHASE IF SHARES MAY BE BY OUR BOARD OF DIRECTORS OR IF ALL OF
ALL OPTIONS PURCHASED SUBJECT THE SHARES OF HEALTHSOUTH
OUTSTANDING ON TO OPTIONS COMMON STOCK RESERVED FOR ISSUANCE
DECEMBER 31, 2000 OUTSTANDING ON UNDER THE PLAN HAVE BEEN PURCHASED DUE
NAME OF PLAN ARE EXERCISED DECEMBER 31, 2000 TO OPTIONS BEING EXERCISED
- ------------------------ ------------------------ --------------------- ---------------------------------------
1989 Stock Option Plan 51,572 $ 2.52 -- $8.375 October 25, 1999
1990 Stock Option Plan 280,004 $3.7825 -- $8.375 October 15, 2000
1991 Stock Option Plan 3,452,502 $3.7825 -- $16.25 June 19, 2001
1992 Stock Option Plan 3,938,400 $3.7825 -- $23.625 June 16, 2002
1993 Stock Option Plan 3,094,025 $ 3.375 -- $23.625 April 19, 2003
1995 Stock Option Plan 17,782,745 $ 4.875 -- $28.0625 June 5, 2005
1997 Stock Option Plan 3,658,554 $ 4.875 -- $28.0625 April 30, 2007
- ----------
(1) At December 31, 2000; 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
10
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, 2000, options granted under this plan to purchase 1,528,633 shares
of HEALTHSOUTH common stock remained outstanding at exercise prices ranging
from $3.375 to $28.00 per share, and 76,000 shares remain available for the
grant of options under this plan. All of these options remain valid and in full
force and must be held and exercised in accordance with the terms of the plan.
All of these options must be exercised within ten years after they were
granted, although they may be exercised at any time during this ten-year
period. All of these options terminate automatically within three months after
termination of association with us, unless such termination is by reason of
death. In addition, the options may not be transferred, except pursuant to the
terms of a valid will or applicable laws of descent and distribution, and in
the event additional shares of HEALTHSOUTH common stock are issued the options
are protected from dilution.
1999 Exchange Stock Option Plan
In 1999, we adopted our 1999 Exchange Stock Option Plan (the "Exchange
Plan") under which NQSOs could be granted, covering a maximum of 2,750,000
shares of common stock. The Exchange Plan was approved by our stockholders on
May 20, 1999. The Exchange Plan was adopted after a protracted period of
depression in the price of HEALTHSOUTH common stock and provided that
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 1,461,378 shares remained
outstanding at December 31, 2000. Options granted under the Exchange Plan are
nontransferable except by will or pursuant to the laws of descent and
distribution (except for certain permitted transfers to family members or
charities), are protected against dilution and expire within three months of
termination of employment, unless such termination is by reason of death.
11
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, 2000, there were outstanding under
these assumed plans options to purchase 711,321 shares of HEALTHSOUTH common
stock at exercise prices ranging from $5.28 to $36.9718 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 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 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. Awards covering
200,000 of such shares lapsed without vesting in 2000, and an award covering
100,000 shares vested upon the retirement of the recipient.
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" in Appendix A.
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.
12
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" in Appendix A.
Richard M. Scrushy, Chairman of the Board and Chief Executive Officer,
William T. Owens, Executive Vice President and Chief Financial Officer, and
Brandon O. Hale, Senior Vice President -- Administration and Secretary of the
Company, serve as Trustees of the ESOP, which is administered by HEALTHSOUTH.
STOCK PURCHASE PLAN
In order to further encourage employees to obtain equity ownership in
HEALTHSOUTH, 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% 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 Compensation Committee
of the Board of
13
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
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.
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
then-serving 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
The loans made to Messrs. Bennett and Martin were repaid in full in 2000.
The loan made to Mr. McVay and one-third of the loan made to Mr. Foster were
repaid in the first quarter of 2001.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
General
The establishment and review of HEALTHSOUTH's compensation plans have been
delegated since March 2000 to the Compensation Committee of HEALTHSOUTH's Board
of Directors, which assumed responsibility for the compensation-related duties
of the former Audit and Compensation Committee at that time. In March 2000,
John S. Chamberlin, Jan L. Jones and Larry D. Striplin, Jr., who serves as
Chairman, were appointed to the Committee. Ms. Jones resigned from the Board of
Directors in February 2001, and Phillip C. Watkins, M.D. was appointed to the
Committee in her place. The Committee is charged by the Board of Directors with
establishing a compensation plan which will enable HEALTHSOUTH to compete
effectively for the services of qualified offices and key employees, to give
those employees appropriate incentive to pursue the maximization of long-term
stockholder value, and to recognize those employees' success in achieving both
qualitative and quantitative goals for the benefit of HEALTHSOUTH. The
Committee makes recommendations to the full Board of Directors as to
appropriate levels of compensation for specific individuals, as well as
compensation and benefit programs for the company as a whole.
14
The following sections discuss the Committee's general philosophy and
policies concerning compensation for executive officers of HEALTHSOUTH, as well
as providing information concerning the specific implementation of such
policies.
Compensation Philosophy and Policies for Executive Officers
As its first principle, the Committee believes that HEALTHSOUTH executives
should be rewarded based upon their success in meeting the company's
operational goals, improving its earnings, maintaining its leadership role in
the healthcare services field, and generating returns for its stockholders, and
the Committee strives to establish levels of compensation that take such
factors into account and provide appropriate recognition for past achievement
and incentive for future success. The Committee recognizes that the demand for
executives with expertise and experience in the healthcare services field is
intense. In order to attract and retain qualified persons, the Committee
believes that HEALTHSOUTH must offer current compensation at levels consistent
with those of other publicly traded healthcare companies. In addition, the
Committee believes that it is in the best interests of HEALTHSOUTH's
stockholders to offer its executives meaningful equity participation in
HEALTHSOUTH, in order that those executives' interests will be aligned with
those of the company's stockholders. The Committee feels that the historic mix
of cash compensation and equity participation has proven to be effective in
stimulating HEALTHSOUTH's executives to meet both long-term and short-term
goals and has been a major factor in limiting turnover among senior executives.
HEALTHSOUTH's compensation program has three distinct elements: base
salary; incentive compensation, including both cash incentive compensation and
equity-based compensation; and retirement compensation. These elements are
discussed below.
Base Salary: While the demand for experienced managers in the healthcare
industry continues to grow, HEALTHSOUTH has been very successful in attracting
and retaining key executives, many of whom have been with the company since its
early days. HEALTHSOUTH believes that its compensation package has been
instrumental in such success. The Committee endeavors to establish base salary
levels for those key executives which are consistent with those provided for
similarly situated executives of other publicly traded healthcare companies,
taking into account each executive's areas and level of responsibility and
historical performance. In establishing such levels, the Committee considers
compensation for executives of other publicly traded providers of healthcare
services, as well as other publicly traded companies of similar size and with a
similar growth rate. Compensation decisions are not targeted to specific levels
in the range of compensation paid by those other companies, nor does
HEALTHSOUTH maintain a record of where its compensation stands with respect to
those companies. However, the Committee and the Board of Directors take such
levels of compensation into account in determining appropriate levels of
compensation for HEALTHSOUTH's executives.
Incentive Compensation: In addition to base salary, the Committee
recommends to the Board of Directors cash incentive compensation for
HEALTHSOUTH's executives, based upon each executive's success in meeting
qualitative and quantitative performance goals on an annual basis. The total
incentive bonus pool available for the company's executives and management
personnel is capped at the lesser of (a) the amount by which the company's
annual net income exceeds the budgeted annual net income established by the
Board of Directors and (b) 10% of the company's annual net income. No bonuses
are payable unless annual net income exceeds budgeted net income. Individual
incentive bonuses within such bonus pool are not determined in a formulary
manner, but are determined on a basis that takes into account each executive's
success in achieving standards of performance, which may or may not be
quantitative, established by the Board of Directors and an executive's
superiors. Bonus determinations are made on a case-by-case basis, taking into
account appropriate quantitative and qualitative factors, and there is no fixed
relationship between any particular performance factor and the amount of a
given executive's bonus. Historically, incentive compensation has been a major
component of HEALTHSOUTH's executive compensation, and the Committee believes
that placing executives at risk for such a component has been effective in
motivating such executives to achieve such goals.
In addition to cash incentive compensation, as a growth-oriented company,
HEALTHSOUTH has always utilized equity-based compensation, in the form of stock
options, as a tool to encourage its executives to work to meet its operational
goals and maximize long-term stockholder value. Because the
15
value of stock options granted to an executive is directly related to
HEALTHSOUTH's success in enhancing its market value over time, the Committee
feels that its stock option programs have been very effective in aligning the
interests of management and stockholders.
The Committee determines stock option grants under HEALTHSOUTH's various
stock option plans, all of which are described above under "Executive
Compensation and Other Information -- Stock Option Plans". Specific grants are
determined taking into account an executive's current responsibilities and
historical performance, as well as the executive's perceived contribution to
HEALTHSOUTH's results of operations. Options are also used to give incentive to
newly-promoted officers at the time that they are asked to assume greater
responsibilities, and, in some cases, to executives who have joined the company
through acquisitions and have assumed significant leadership roles within the
company. In evaluating option grants, the Board of Directors considers prior
grants and shares currently held, as well as the recipient's success in meeting
operational goals and the recipient's level of responsibility. However, no
fixed formula is utilized to determine particular grants. The Committee
believes that the opportunity to acquire a significant equity interest in
HEALTHSOUTH has been a strong motivation for the company's executives to pursue
the long-term interests of HEALTHSOUTH and its stockholders, and has promoted
longevity and retention of key executives. Information relating to stock
options granted to HEALTHSOUTH's five most highly-compensated executive
officers is set forth elsewhere in this Proxy Statement.
Retirement Compensation: As described under "Executive Compensation and
Other Information -- Retirement Investment Plan", in 1991 HEALTHSOUTH adopted a
401(k) retirement plan in order to give all full-time employees an opportunity
to provide for their retirement on a tax-advantaged basis. In order to further
tie employees' interests to the long-term market value of the company,
HEALTHSOUTH adopted an Employee Stock Benefit Plan (the "ESOP") in 1991, which
gives all full-time employees an opportunity to invest a portion of their
retirement funds in HEALTHSOUTH common stock on a tax-advantaged basis. The
Committee believes that the ESOP provides additional incentive to executives to
maximize stockholder value over the long term. See "Executive Compensation and
Other Information -- Employee Stock Benefit Plan". Additionally, in 1997,
HEALTHSOUTH adopted a Deferred Compensation Plan, which gives senior management
employees the opportunity to elect to defer receipt of a portion of their
salary and bonus in exchange for a variable rate of interest on the amounts so
deferred. See "Executive Compensation and Other Information -- Deferred
Compensation Plan".
Chief Executive Officer Compensation
HEALTHSOUTH has an Employment Agreement, dated April 1, 1998, with Richard
M. Scrushy, pursuant to which Mr. Scrushy, a management founder of the company,
is employed as Chairman of the Board and Chief Executive Officer for a
five-year term initially expiring on April 1, 2003. This term is automatically
extended for an additional year on each April 1 unless the Agreement is
terminated as provided therein. In addition, HEALTHSOUTH has agreed to use its
best efforts to cause Mr. Scrushy to be elected as a Director of the company
during the term of the Agreement. The Agreement provides for Mr. Scrushy to
receive an annual base salary of at least $1,200,000, as well as an "Annual
Target Bonus" equal to at least $2,400,000, based upon the Company's success in
meeting certain monthly and annual performance standards determined by the
Compensation Committee of the Board of Directors. Mr. Scrushy's base salary for
2001 has been set at $1,500,000. The Annual Target Bonus is earned at the rate
of $200,000 per month if the monthly performance standards are met, provided
that if any monthly performance standards are not met but the annual
performance standards are met, Mr. Scrushy will be entitled to any payments
which were withheld as a result of failure to meet the monthly performance
standards. The Agreement further provides that Mr. Scrushy is eligible for
participation in all other management bonus or incentive plans and stock
option, stock purchase or equity-based incentive compensation plans in which
other senior executives of the company are eligible to participate. Under the
Agreement, Mr. Scrushy is entitled to receive long-term disability insurance
coverage, a non-qualified retirement plan providing for annual retirement
benefits equal to 60% of his base compensation, use of a company-owned
automobile, certain personal security services, and various other retirement,
insurance and fringe benefits, as well as to generally participate in all
employee benefit programs maintained by the company.
16
The Agreement may be terminated by Mr. Scrushy for "Good Reason" (as
defined), by HEALTHSOUTH for "Cause" (as defined), upon Mr. Scrushy's
"Disability" (as defined) or death, or by either party at any time subject to
the consequences of such termination as described in the Agreement. If the
Agreement is terminated by Mr. Scrushy for Good Reason, HEALTHSOUTH is required
to pay him a lump-sum severance payment equal to the discounted value of the
sum of his then-current base salary and Annual Target Bonus over the remaining
term of the Agreement and to continue certain employee and fringe benefits for
the remaining term of the Agreement. If the Agreement is terminated by Mr.
Scrushy otherwise than for Good Reason, HEALTHSOUTH is required to pay him a
lump-sum severance amount equal to the discounted value of two times the sum of
his then-current base salary and Annual Target Bonus. If the Agreement is
terminated by HEALTHSOUTH for Cause, Mr. Scrushy is not entitled to any
severance or continuation of benefits. If the Agreement is terminated by reason
of Mr. Scrushy's Disability, HEALTHSOUTH is required to continue the payment of
his then-current base salary and Annual Target Bonus for three years as if all
relevant performance standards had been met, and if the Agreement is terminated
by Mr. Scrushy's death, HEALTHSOUTH is required to pay his representatives or
estate a lump-sum payment equal to 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,
HEALTHSOUTH is 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 HEALTHSOUTH to indemnify Mr. Scrushy against certain
"parachute payment" excise taxes which may be imposed upon payments under the
Agreement. The Agreement restricts Mr. Scrushy from engaging in certain
activities competitive with HEALTHSOUTH's business during, and for 24 months
after termination of, his employment with the company, unless such termination
occurs after a Change in Control.
The Committee reports to the Board of Directors on compensation
arrangements with Mr. Scrushy, and recommends to the Board of Directors the
level of incentive compensation, both cash and equity-based, which is
appropriate for Mr. Scrushy with respect to each fiscal year of the Company. In
making such recommendation, the Committee takes into account HEALTHSOUTH's
performance in the marketplace, its success in meeting strategic goals and its
success in meeting monthly and annual budgets established by the Board of
Directors. Again, ultimate compensation decisions are not made in a formulary
manner, but in a manner which takes into account HEALTHSOUTH's competitive
position, its position in the financial markets, and the significant
contributions made by Mr. Scrushy to the success of the company. In making its
decisions with respect to Mr. Scrushy's compensation, the Committee believes
that it is appropriate to recognize that, as a management founder of the
company, Mr. Scrushy has played an instrumental role in establishing
HEALTHSOUTH as the industry leader in outpatient and rehabilitative healthcare
services and that, under his leadership, HEALTHSOUTH has continued to show
strong performance in asset growth and quality, net revenues and income.
In the period since December 31, 1993, HEALTHSOUTH, under Mr. Scrushy's
leadership, has grown from the fourth-largest provider of rehabilitative
healthcare services to the largest provider, and since 1995 has established
itself as the nation's largest provider of outpatient surgery services and
outpatient diagnostic services. During that same period, the company has
expanded its operations to 50 states, the United Kingdom, Australia, Canada and
Puerto Rico and has been named to the S&P 500. The Committee believes that Mr.
Scrushy's leadership has been essential to HEALTHSOUTH's success and growth. In
view of these accomplishments, the Committee believes that it is important to
ensure that, if Mr. Scrushy is successful in leading HEALTHSOUTH to achieve the
goals set by the Board of Directors, his compensation will be at a level
commensurate with that of chief executive officers of similarly-performing
public companies and that he will continue to have the opportunity to obtain a
significant equity interest in the company.
In evaluating Mr. Scrushy's performance in 2000 and recommending Mr.
Scrushy's compensation for 2001, the Committee took note of the significant
improvement in HEALTHSOUTH's stock price after a period of significant
depression in late 1998 and 1999. The Committee noted that, under Mr. Scrushy's
leadership, HEALTHSOUTH's stock price had increased 203% from December 31, 1999
through December 31, 2000, the fourth-best performance of all S&P 500 companies
for 2000. The Committee further noted that Mr. Scrushy had voluntarily chosen
to forgo receipt of his entire base salary and
17
Annual Target Bonus from November 1, 1998 through March 31, 1999 and continued
to receive, at his election, a substantially reduced portion of his annual base
salary and Annual Target Bonus through the remainder of 1999. In addition, the
Committee considered the increased responsibility taken on by Mr. Scrushy after
the departure of HEALTHSOUTH's President and Chief Operating Officer in
July 2000. In light of all these factors and Mr. Scrushy's continued
leadership, the Committee believes that Mr. Scrushy's compensation for 2000 and
2001 is appropriate.
Other Executive Employment Agreements
HEALTHSOUTH also has Employment Agreements, dated April 1, 1998, with
Thomas W. Carman, Executive Vice President -- Corporate Development, Robert E.
Thomson, President -- Inpatient Operations, and Patrick A. Foster, President --
Ambulatory Services -- West, pursuant to which each of these persons is
employed in these capacities for a three-year term initially expiring on April
1, 2001. Such terms are automatically extended for an additional year on each
April 1 unless the Agreements are terminated in accordance with their terms.
The Agreements currently provide for the payment of an annual base salary of at
least $360,000 to Mr. Carman, $450,000 to Mr. Thomson and $450,000 to Mr.
Foster. The Agreements further provide that each such officer is eligible for
participation in all management bonus or incentive plans and stock option,
stock purchase or equity-based incentive compensation plans in which other
senior executives of HEALTHSOUTH are eligible to participate, and provide for
certain specified fringe benefits.
If the Agreements are terminated by HEALTHSOUTH other than for Cause (as
defined), Disability (as defined) or death, HEALTHSOUTH is required to continue
the officers' base salary in effect for a period of one year after termination,
as severance compensation. In addition, in the event of a voluntary termination
of employment by the officer within six months after a Change in Control (as
defined), HEALTHSOUTH is also required to continue the officer's salary for the
same period. The Agreements restrict the officers from engaging in certain
activities competitive with HEALTHSOUTH's business during their employment with
the company and for any period during which the officer is receiving severance
compensation, unless such termination occurs after a Change in Control.
Section 162(m) of the Internal Revenue Code
The Omnibus Budget Reconciliation Act of 1993 contains a provision under
which a publicly traded corporation is sometimes precluded from taking a
federal income tax deduction for compensation in excess of $1,000,000 that is
paid to the chief executive officer and the four other most highly-compensated
executives of the corporation during a corporation's tax year. Compensation in
excess of $1,000,000 continues to be deductible if that compensation is
"performance based" within the meaning of that term under Section 162(m) of the
Internal Revenue Code. Certain transition rules apply with respect to stock
option plans which were approved prior to December 20, 1993, pursuant to Rule
16b-3(b) under the Exchange Act.
HEALTHSOUTH believes that its employee stock option plans meet the
requirements of Section 162(m) as performance-based plans. The Committee and
the Board of Directors have made a decision not to amend HEALTHSOUTH's cash
compensation programs to meet all requirements of Section 162(m) because such a
decision would not be in the best interests of the company's stockholders. The
Committee believes that, in establishing bonus and incentive awards, certain
subjective factors must be taken into account in particular cases, based upon
the experienced judgment of the Committee members as well as on factors which
may be objectively quantified. The preservation of tax deductibility of all
compensation is an important consideration. However, the Committee believes
that it is important that HEALTHSOUTH retain the flexibility to reward superior
effort and accomplishment even where all cash compensation may not be fully
deductible. The Committee will continue to review the requirements for
deductibility under Section 162(m) and will take such requirements into account
in the future as it deems appropriate and in the best interests of
HEALTHSOUTH's stockholders. Approximately $2,654,849 of Mr. Scrushy's
compensation paid with respect to 2000 will not be deductible; however,
HEALTHSOUTH believes that all other compensation paid to executive officers
will be fully deductible.
18
Conclusion
The Committee believes that the levels and mix of compensation provided to
HEALTHSOUTH's executives during 2000 were appropriate and were instrumental in
the achievement of the company's goals for 2000. It is the intent of the
Committee to ensure that the Company's compensation programs continue to
motivate its executives and reward them for being responsive to the long-term
interests of HEALTHSOUTH and its stockholders.
The foregoing report is submitted by the following Directors of
HEALTHSOUTH, constituting all of the members of the Compensation Committee of
the Board of Directors for the year ending December 31, 2000 who continue to
serve on the Board of Directors at the date of this Proxy Statement:
John S. Chamberlin
Larry D. Striplin, Jr., Chairman(1)
- ----------
(1) Jan L. Jones, a member of the Compensation Committee in 2000, no longer
served on the Board at the date of this Proxy Statement.
AUDIT INFORMATION
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
Our Board of Directors has engaged Ernst &Young LLP to audit our
consolidated financial statements for the fiscal year ended December 31, 2000.
We expect that Ernst & Young LLP will serve in that capacity for the 2001
fiscal year as well. We expect that representatives of Ernst & Young LLP will
be present at the annual meeting to make a statement if they desire to do so
and to respond to appropriate questions.
AUDIT FEES
The aggregate fees billed to us for the fiscal year ended December 31,
2000 by Ernst & Young LLP for the fiscal year ended December 31, 2000 or
related to its audit for such fiscal year were as follows:
Audit Fees ....................... $1,026,649
All Other Fees
Audit-Related Fees ............ $2,583,854
Non-Audit-Related Fees ........ 66,107
----------
Total of All Other Fees ... $2,649,961
AUDIT COMMITTEE REPORT
The Audit Committee of the Board of Directors, consisting of C. Sage
Givens, Larry D. Striplin, Jr. and George H. Strong, Chairman, is responsible
for overseeing HEALTHSOUTH's financial reporting process on behalf of the Board
of Directors. HEALTHSOUTH's management has the primary responsibility for the
financial statements and the reporting process, including the systems of
internal control. In fulfilling its oversight responsibilities, the Committee
reviewed the audited financial statements contained in HEALTHSOUTH's Annual
Report on Form 10-K for the Fiscal Year Ended December 31, 2000 with
management, including a discussion of the quality, not just the acceptability,
of the accounting principles, the reasonableness of significant judgments, and
the clarity of disclosures in the financial statements.
All members of the Audit Committee are "independent" under the standards
established by the New York Stock Exchange. A copy of the Audit Committee
charter is included as Appendix B to this Proxy Statement.
The Committee reviewed with the independent auditors, who are responsible
for expressing an opinion on the conformity of those audited financial
statements with generally accepted accounting principles, their judgments as to
the quality, not just the acceptability, of HEALTHSOUTH's accounting
19
principles and such other matters as are required to be discussed with the
Committee under generally accepted auditing standards. In addition, the
Committee has discussed with the independent auditors the auditors'
independence from management and HEALTHSOUTH, including the matters in the
written disclosures required by the Independence Standards Board, and
considered the compatibility of non-audit services with the auditors'
independence. The Committee believes that the non-audit services are compatible
with such independence.
The Committee discussed with HEALTHSOUTH's internal and independent
auditors the overall scope and plans of their respective audits. The Committee
meets with the internal and independent auditors, with and without management
present, to discuss the results of their examinations, their evaluations of
HEALTHSOUTH's internal controls, and the overall quality of HEALTHSOUTH's
financial reporting.
In reliance upon the reviews and discussions referred to above, the
Committee has recommended to the Board of Directors (and the Board has
approved) that the audited financial statements be included in HEALTHSOUTH's
Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2000 for
filing with the Securities and Exchange Commission. Those audited financial
statements are also included in Appendix A to this Proxy Statement.
The forgoing report is submitted by the following Directors of
HEALTHSOUTH, constituting all the members of the Audit Committee of the Board
of Directors for the year ended December 31, 2000:
C. Sage Givens
Larry D. Striplin, Jr.
George H. Strong, Chairman
20
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of HEALTHSOUTH common stock as of March 30, 2001, (a) by each person
who is known by us to own beneficially more than 5% of our common stock, (b) by
each of our Directors, (c) by our five most highly compensated executive
officers, (d) by two former executive officers who would have been among our
five most highly compensated executive officers had they held such positions at
December 31, 2000 and (e) 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 ................................................... 20,704,955(2) 5.11%
John S. Chamberlin ................................................... 382,000(3) *
C. Sage Givens ....................................................... 445,100(4) *
Charles W. Newhall III ............................................... 805,846(5) *
George H. Strong ..................................................... 540,665(6) *
Phillip C. Watkins, M.D. ............................................. 694,154(7) *
William T. Owens ..................................................... 887,500(8) *
Joel C. Gordon ....................................................... 1,961,868(9) *
Robert E. Thomson .................................................... 1,176,637(10) *
Larry D. Striplin, Jr. ............................................... 125,000(11) *
Thomas W. Carman ..................................................... 1,075,000(12) *
Patrick A. Foster .................................................... 802,837(13) *
James P. Bennett ..................................................... 1,570,500(14) *
P. Daryl Brown ....................................................... 1,574,873(15) *
FMR Corp.
82 Devonshire Street
Boston, Massachusetts 02109 ......................................... 37,727,785(16) 9.69%
All Executive Officers and Directors as a Group (17 persons) ......... 31,486,089(17) 7.63%
- ----------
(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 children, 31,000
shares held by a charitable foundation of which Mr. Scrushy is an officer
and director and 15,522,524 shares subject to currently exercisable stock
options.
(3) Includes 250,000 shares subject to currently exercisable stock options.
(4) Includes 2,100 shares owned by Ms. Givens's spouse and 410,000 shares
subject to currently exercisable stock options.
(5) Includes 460 shares owned by members of Mr. Newhall's immediate family, and
685,000 shares subject to currently exercisable stock options. Mr. Newhall
disclaims beneficial ownership of the shares owned by his family members,
except to the extent of his pecuniary interest therein.
(6) Includes 220,665 shares owned by trusts of which Mr. Strong is a trustee
and claims shared voting and investment power and 300,000 shares subject to
currently exercisable stock options.
(7) Includes 547,500 shares subject to currently exercisable stock options.
(8) Includes 812,500 shares subject to currently exercisable stock options.
(9) Includes 127,396 shares owned by Mr. Gordon's spouse and 484,520 shares
subject to currently exercisable stock options.
(10) Includes 855,000 shares subject to currently exercisable stock options.
(11) Includes 60,000 shares subject to currently exercisable stock options.
(12) Includes 900,000 shares subject to currently exercisable stock options.
(13) Includes 613,800 shares subject to currently exercisable stock options.
(14) Includes 1,490,000 shares subject to currently exercisable stock options.
(15) Includes 1,100,000 shares subject to currently exercisable stock options.
21
(16) 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 936,510 shares and sole power to dispose of all of the shares.
(17) Includes 23,119,857 shares subject to currently exercisable stock options
held by executive officers and Directors.
- ----------
* Less than 1%
CERTAIN TRANSACTIONS
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 purchased $74,587,873 in goods, supplies
and related services through MedCenterDirect.com on terms we believe to be no
less favorable than those we could have obtained from an unrelated vendor.
During 2001, we expect to enter into a definitive long-term 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,
2000, a loan in the principal amount of $476,000 was outstanding to William T.
Owens, Executive Vice President and Chief Financial Officer and a Director of
the Corporation. This loan bears interest at the rate of 1-1/4% per annum below
the prime rate of AmSouth Bank of Alabama, Birmingham, Alabama, and is payable
on demand. See "Executive Compensation and Other Information -- 1999 Executive
Equity Loan Plan" for information concerning loans to executive officers to
purchase HEALTHSOUTH common stock.
GENERAL INFORMATION
STOCKHOLDER PROPOSALS FOR 2002 ANNUAL MEETING
Any proposals that our stockholders wish to have included in our proxy
statement and form of proxy for the 2001 annual meeting of stockholders must be
received by us no later than the close of business on December 18, 2001. You
may also submit a proposal without having it included in our proxy statement
and form of proxy, but we need not submit such a proposal for consideration at
the annual meeting if it is considered untimely. Under the applicable rules of
the Securities and Exchange Commission, a proposal will be considered untimely
unless you have given us notice of your intent to submit it for consideration
no later than the close of business on February 28, 2002. Any proposals should
be sent to:
HEALTHSOUTH Corporation
One HealthSouth Parkway
Birmingham, Alabama 35243
Attention: Brandon O. Hale, Secretary
FINANCIAL STATEMENTS
Our audited consolidated financial statements for the fiscal year ended
December 31, 2000, and other selected information, including our management's
discussion and analysis of our financial condition and results of operations,
are included in Appendix A to this proxy statement.
22
ANNUAL REPORT ON FORM 10-K
A copy of our annual report on Form 10-K for the year ended December 31,
2000 may be obtained without charge by writing to our Secretary at the address
below:
HEALTHSOUTH Corporation
One HealthSouth Parkway
Birmingham, Alabama 35243
Attention: Brandon O. Hale, Secretary
All requests submitted by beneficial owners of HEALTHSOUTH common stock
must include a good faith representation by the requesting stockholder
confirming that, as of March 30, 2001, he is a beneficial owner of shares of
HEALTHSOUTH common stock.
Please complete, sign and return the enclosed proxy promptly.
By Order of the Board of Directors:
BRANDON O. HALE
Secretary
April 17, 2001
23
APPENDIX A
NOTE: This Appendix A, together with the foregoing Proxy Statement,
contains the information required to be provided in our annual report to
security holders pursuant to the Rules and Regulations of the Securities and
Exchange Commission. Our 2000 Annual Report to Stockholders, which provides
additional information concerning HEALTHSOUTH and its performance in 2000, is
also included in this mailing.
TABLE OF CONTENTS
PAGE
NUMBER
-------
Business ............................................................................. A-2
Selected Financial Data .............................................................. A-2
Quarterly Results .................................................................... A-3
Directors and Executive Officers ..................................................... A-4
Management's Discussion and Analysis of Financial Condition and Results of Operations A-6
Audited Consolidated Financial Statements of HEALTHSOUTH Corporation and
Subsidiaries
Report of Independent Auditors ...................................................... A-14
Consolidated Balance Sheets ......................................................... A-15
Consolidated Statements of Income ................................................... A-16
Consolidated Statements of Stockholders' Equity ..................................... A-17
Consolidated Statements of Cash Flows ............................................... A-18
Notes to Consolidated Financial Statements .......................................... A-20
Market for HEALTHSOUTH's Common Equity and Related Stockholder Matters ............... A-43
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . A-43
A-1
BUSINESS
HEALTHSOUTH Corporation is the nation's largest provider of outpatient
surgery, outpatient diagnostic and rehabilitative healthcare services. We
provide these services through our national network of outpatient and inpatient
rehabilitation facilities, outpatient surgery centers, diagnostic centers,
occupational medicine centers, medical centers and other healthcare facilities.
We believe that we provide patients, physicians and payors with high-quality
healthcare services at significantly lower costs than traditional inpatient
hospitals. Additionally, our national network, reputation for quality and focus
on outcomes have enabled us to secure contracts with national and regional
managed care payors. At December 31, 2000, we had over 2,000 patient care
locations in 50 states, Puerto Rico, the United Kingdom, Canada and Australia.
SELECTED FINANCIAL DATA
Set forth below is a summary of selected consolidated financial data for
HEALTHSOUTH for the years indicated. All amounts have been restated to reflect
the effects of the 1996 acquisitions of Surgical Care Affiliates, Inc. ("SCA")
and Advantage Health Corporation, the 1997 acquisition of Health Images, Inc.
and the 1998 acquisition of National Surgery Centers, Inc. ("NSC"), each of
which was accounted for as a pooling of interests.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1996 1997 1998 1999 2000
------------- ------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Revenues ................................ $2,648,188 $3,123,176 $4,006,074 $4,072,107 $4,195,115
Operating unit expenses ................. 1,718,108 1,952,189 2,491,914 2,688,849 2,816,363
Corporate general and
administrative expenses ............... 82,953 87,512 112,800 149,285 148,023
Provision for doubtful accounts ......... 61,311 74,743 112,202 342,708 98,037
Depreciation and amortization ........... 212,967 257,136 344,591 374,248 360,847
Merger and acquisition related
expenses (1) .......................... 41,515 15,875 25,630 -- --
Impairment and restructuring
charges (2) ........................... 37,390 -- 483,455 121,037 --
Loss on sale of assets (2) .............. -- -- 31,232 -- --
Interest expense ........................ 101,367 112,529 148,163 176,652 221,595
Interest income ......................... (6,749) (6,004) (11,286) (10,587) (9,104)
---------- ---------- ---------- ---------- ----------
2,248,862 2,493,980 3,738,701 3,842,192 3,635,761
---------- ---------- ---------- ---------- ----------
Income before income taxes and
minority interests .................... 399,326 629,196 267,373 229,915 559,354
Provision for income taxes .............. 148,545 213,668 143,347 66,929 181,808
---------- ---------- ---------- ---------- ----------
250,781 415,528 124,026 162,986 377,546
Minority interests ...................... 54,003 72,469 77,468 86,469 99,081
---------- ---------- ---------- ---------- ----------
Net income ............................ $ 196,778 $ 343,059 $ 46,558 $ 76,517 $ 278,465
========== ========== ========== ========== ==========
Weighted average common shares
outstanding (3) ......................... 336,603 366,768 421,462 408,195 385,666
========== ========== ========== ========== ==========
Net income per common share (3) .......... $ 0.58 $ 0.94 $ 0.11 $ 0.19 $ 0.72
========== ========== ========== ========== ==========
Weighted average common shares
outstanding -- assuming dilution
(3)(4) .................................. 365,715 386,211 432,275 414,570 391,016
========== ========== ========== ========== ==========
Net income per common share --
assuming dilution (3)(4) ................ $ 0.55 $ 0.89 $ 0.11 $ 0.18 $ 0.71
========== ========== ========== ========== ==========
A-2
DECEMBER 31,
------------------------------------------------------------------------
1996 1997 1998 1999 2000
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and marketable securities ......... $ 205,166 $ 185,018 $ 142,513 $ 132,882 $ 180,407
Working capital ........................ 624,497 612,917 945,927 852,711 1,048,204
Total assets ........................... 3,671,958 5,566,324 6,788,209 6,890,484 7,380,440
Long-term debt (5) ..................... 1,570,597 1,614,961 2,830,926 3,114,648 3,211,829
Stockholders' equity ................... 1,686,770 3,290,623 3,423,004 3,206,362 3,526,454
- ----------
(1) Expenses related to 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 March 17, 1997.
(4) Diluted earnings per share in 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.
QUARTERLY RESULTS (UNAUDITED)
QUARTERLY RESULTS (UNAUDITED)
Set forth below is summary information with respect to HEALTHSOUTH's
operations for the last eight fiscal quarters.
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)
2000
---------------------------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------------- --------------- --------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues ............................ $ 1,021,335 $ 1,036,322 $ 1,060,457 $ 1,077,001
Net income .......................... 65,326 65,213 71,037 76,889
Net income per common share ......... 0.17 0.17 0.18 0.20
Net income per common share --
assuming dilution .................. 0.17 0.17 0.18 0.19
A-3
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to our
executive officers:
ALL POSITIONS AN OFFICER
NAME AGE WITH HEALTHSOUTH SINCE
- ---------------------------- ----- ------------------------------------------------------- -----------
Richard M. Scrushy ......... 48 Chairman of the Board and Chief Executive Officer and 1984
Director
Thomas W. Carman ........... 49 Executive Vice President -- Corporate Development 1985
William T. Owens ........... 42 Executive Vice President and Chief Financial Officer 1986
and Director
William W. Horton .......... 41 Executive Vice President and Corporate Counsel and 1994
Assistant Secretary
Robert E. Thomson .......... 53 President -- Inpatient Operations 1987
Patrick A. Foster .......... 54 President -- Ambulatory Services -- West 1994
Larry D. Taylor ............ 42 President -- Ambulatory Services -- East 1991
Brandon O. Hale ............ 51 Senior Vice President -- Administration and Secretary 1987
Weston L. Smith ............ 40 Senior Vice President -- Finance and Controller 1987
Malcolm E. McVay ........... 39 Senior Vice President -- Finance and Treasurer 1999
Biographical information for Messrs. Scrushy and Owens is set forth in the
Proxy Statement to which this Appendix A is attached under "Election of
Directors".
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 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 and Executive Vice President and Corporate Counsel in March 2001. 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.
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.
Larry D. Taylor joined HEALTHSOUTH in May 1987 as an outpatient
rehabilitation facility administrator. He was subsequently named Area Manager
in July 1989, Regional Vice President -- Outpatient Operations in October 1991,
Group Vice President -- Outpatient Operations in July 1992, Senior Vice
President -- Outpatient Operations in February 1994, and Senior Vice President
- -- Ambulatory Services -- East in September 1999. In July 2000, he became
President -- Ambulatory Services -- East.
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.
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Weston L. Smith, C.P.A., joined HEALTHSOUTH in February 1987 as Director
of Reimbursement and subsequently served as Assistant Vice President -- Finance
- -- Reimbursement, Vice President -- Finance -- Reimbursement, Group Vice
President -- Finance -- Reimbursement and Senior Vice President -- Finance --
Reimbursement. In March 2000, he was named Senior Vice President -- Finance and
Controller. Prior to joining HEALTHSOUTH, Mr. Smith served as a certified
public accountant on the audit staff of the Birmingham, Alabama office of Ernst
& Whinney (now Ernst & Young LLP) from 1982 to 1987.
Malcolm E. McVay joined HEALTHSOUTH in September 1999 as Vice President --
Finance, and was named Senior Vice President -- Finance and Treasurer in
February 2000. From October 1998 until September 1999, he served as Senior Vice
President of Investor Relations at CaremarkRx, Inc., and from 1996 until
October 1998, he served as Chief Financial Officer, Secretary and Treasurer of
Capstone Capital Corporation, a healthcare real estate investment trust. Prior
to 1996, he worked for ten years in commercial banking, most recently as a
Senior Vice President of SouthTrust Bank.
See "Election of Directors" in the Proxy Statement to which this Appendix
A is attached for identification of the Directors of the Company.
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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:
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.
Each of 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. 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. 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.
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information" 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
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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, outpatient
services -- East and outpatient services -- West.
The inpatient and other clinical services segment primarily 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. The
outpatient services segments primarily include the operations of our outpatient
rehabilitation facilities, outpatient surgery centers and outpatient diagnostic
centers and follow the geographic management reporting structure we use for our
outpatient services operations.
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 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, 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.
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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 (expenses excluding corporate general and
administrative expenses, provision for doubtful accounts, depreciation and
amortization and interest expense) were $2,688,849,000, or 66.0% of revenues,
for 1999, compared to 62.2% of revenues for 1998. Included in operating
expenses 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. During the fourth quarter of 1999, we reviewed equipment
that had originally been acquired through various company mergers and
acquisitions. During the acquisitions it was our intention to either continue
using the equipment or transfer it to other locations where it could be
utilized. During the fourth quarter of 1999, an obsolescence charge was taken
based on our determination that certain equipment was obsolete due to changes
in available technologies. Excluding the non-recurring expense, operating
expenses 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. As part of
our evaluation of the proposed spin-off in 1999, we determined that certain
notes and investments totaling $14,603,000 should be written off. The year 2000
remediation expenditures were incurred during 1999 while testing for year 2000
compliance. 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 reflected
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 was due to management's assessment of the healthcare payor
environment. This approach focused 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. Due to a deterioration of the
payor environment, our days sales outstanding at the end of the second quarter
of 1999 had grown to 94.5 days. Our subsequent reviews uncovered tremendous
volumes of denied or pended claims. Further commitment to collecting these
older receivables would have diluted our effectiveness in collecting current,
ongoing accounts.
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 completed our budgets for the 2000
fiscal year. The existence
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of locations budgeting operating losses before interest, taxes, depreciation
and amortization initiated our need for a detail oriented impairment review.
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. The
evaluation indicated that the value of the asset would not be recoverable, as
determined based on the undiscounted cash flows of the entity over the
remaining amortization period, and the impairment loss was calculated based on
the excess of the carrying amount of the asset over the asset's fair value. 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.
Twelve-Month Periods Ended December 31, 1999 and 2000
Our operations generated revenues of $4,195,115,000 in 2000, an increase
of $123,008,000, or 3.0%, as compared to 1999 revenues. Same store revenues for
the twelve months ended December 31, 2000 were $4,121,055,000, an increase of
$48,948,000, or 1.2%, as compared to the same period in 1999. New store
revenues for 2000 were $74,060,000. The increase in revenues is primarily
attributable to increases in patient volume. Revenues generated from patients
under the Medicare and Medicaid programs respectively accounted for 29.0% and
2.6% of total revenues for 2000, compared to 33.0% and 2.2% of total revenues
for 1999. Revenues from any other single third-party payor were not significant
in relation to our total revenues. During 2000, same store inpatient days,
outpatient visits, surgical cases and diagnostic cases increased 4.6%, 3.5%,
1.8% and 6.2%, respectively. Revenue per inpatient day, outpatient visit,
surgical case and diagnostic case for same store operations (decreased)
increased by (2.3)%, 0.4%, 1.8% and (10.2)%, respectively.
Operating unit expenses (expenses excluding corporate general and
administrative expenses, provision for doubtful accounts, depreciation and
amortization and interest expense) were $2,816,363,000, or 67.1% of revenues,
for 2000, compared to 66.0% of revenues for 1999. Same store operating expenses
for 2000 were $2,762,795,000, or 67.0% of related revenues. New store operating
expenses were $53,568,000, or 72.3% of related revenues. Corporate general and
administrative expenses decreased from $149,285,000 in 1999 to $148,023,000 in
2000. As described above, 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. Excluding the non-recurring expense, as a
percentage of revenues, corporate general and administrative expenses increased
from 2.9% in 1999 to 3.5% in 2000. Total operating expenses were
$2,964,386,000, or 70.7% of revenues, for 2000, compared to $2,838,134,000, or
69.7% of revenues, for 1999. The provision for doubtful accounts was
$98,037,000, or 2.3% of revenues, for 2000, compared to $342,708,000, or 8.4%
of revenues, for 1999. Included in the 1999 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.
Depreciation and amortization expense was $360,847,000 for 2000, compared
to $374,248,000 for 1999. The decrease was primarily attributable to the full
amortization of certain intangible assets. Interest expense increased to
$221,595,000 in 2000, compared to $176,652,000 for 1999, primarily attributable
to increases in effective interest rates (see "Liquidity and Capital
Resources"). For 2000, interest income was $9,104,000, compared to $10,587,000
for 1999.
Income before minority interests and income taxes for 2000 was
$559,354,000, compared to
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$229,915,000 for 1999. Minority interests reduced income before income taxes by
$99,081,000 in 2000, compared to $86,469,000 for 1999. The provision for income
taxes for 2000 was $181,808,000, compared to $66,929,000 for 1999. Excluding
the tax effects of the impairment and restructuring charges in 1999, the
effective tax rate for 1999 and 2000 was 39.5% (see Note 10 of "Notes to
Consolidated Financial Statements" for further discussion). Net income for 2000
was $278,465,000.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, we had working capital of $1,048,204,000, including
cash and marketable securities of $180,407,000. Working capital at December 31,
1999 was $852,711,000, including cash and marketable securities of
$132,882,000. For 2000, cash provided by operations was $796,764,000, compared
to $704,511,000 for 1999. For 2000, investing activities used $757,304,000,
compared to using $614,859,000 for 1999. The change is primarily due to
increased purchases of property, plant and equipment. Additions to property,
plant and equipment and acquisitions accounted for $583,639,000 and
$74,137,000, respectively, during 2000. Those same investing activities
accounted for $474,115,000 and $104,304,000, respectively, in 1999. Financing
activities provided $11,457,000 and used $99,079,000 during 2000 and 1999,
respectively. The change is primarily due to significantly higher purchases of
treasury stock in 1999. Net borrowing proceeds for 2000 and 1999 were
$89,007,000 and $285,379,000, respectively.
Net accounts receivable were $946,965,000 at December 31, 2000, compared
to $891,829,000 at December 31, 1999. The number of days of average quarterly
revenues in ending receivables was 80.9 at December 31, 2000, compared to 82.0
at December 31, 1999. 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, 2000 and
1999.
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"). 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 6.92% for the twelve months ended
December 31, 2000, compared to the average prime rate of 9.21% during the same
period. At December 31, 2000, we had drawn $1,655,000,000 under the 1998 Credit
Agreement. For further discussion, see Note 7 of "Notes to Consolidated
Financial Statements".
We also had 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
were substantially consistent with those of the 1998 Credit Agreement. Interest
on the Short Term Credit Agreement was paid based on LIBOR plus a predetermined
margin or a base rate. We were 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. On October 31, 2000, we terminated the Short Term Credit Agreement and
replaced it with a new $400,000,000 Credit Agreement (the "2000 Credit
Agreement") with UBS AG and other participating banks. Interest on the 2000
Credit Agreement is paid based on LIBOR plus a predetermined margin or base
rate. We are required to pay a fee on the unused portion of the credit facility
ranging from 0.25% to 0.50%, depending on certain defined ratios. The principal
amount is payable in full in eight quarterly installments ending on June 22,
2003. At December 31, 2000, we had no drawings outstanding under the 2000
Credit Agreement.
On March 24, 1994, we issued $250,000,000 principal amount of 9.5% Senior
Subordinated Notes due 2001 (the "9.5% Notes"). We redeemed the 9.5% Notes at
par on October 30, 2000.
On March 20, 1998, we issued $500,000,000 in 3.25% Convertible
Subordinated Debentures due 2003. 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
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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 September 25, 2000, we issued $350,000,000 in 10-3/4% Senior
Subordinated Notes due 2008 (the "10-3/4% Notes"). Interest is payable on April
1 and October 1. The 10-3/4% Notes are senior subordinated obligations of
HEALTHSOUTH and, as such, are subordinated to all our existing and future
senior indebtedness, and also are effectively subordinated to all existing and
future liabilities of our subsidiaries and partnerships. The net proceeds from
the issuance of the 10-3/4% Notes were used to redeem the 9.5% Notes and to pay
down indebtedness outstanding under our then-existing credit facilities. The
10-3/4% Notes mature on October 1, 2008.
On February 1, 2001, we issued $375,000,000 in 8-1/2% Senior Notes due
2008 (the "8-1/2% Notes"). Interest is payable on February 1 and August 1. The
8-1/2% Notes are unsecured, unsubordinated obligations of HEALTHSOUTH. The net
proceeds from the issuance of the 8-1/2% Notes were used to pay down
indebtedness outstanding under our credit facilities. The 8-1/2% Notes mature
on February 1, 2008.
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 $100,000,000 to $150,000,000 on maintenance
and expansion of our existing facilities and approximately $200,000,000 to
$250,000,000 on development activities and on continued development of the
Integrated Service Model.
Although we are continually considering and evaluating acquisitions and
opportunities for future growth, we have not entered into any agreements with
respect to material future acquisitions. We believe that existing cash, cash
flow from operations and borrowings under existing credit facilities will be
sufficient to satisfy our estimated cash requirements for the next twelve
months, and for the reasonably foreseeable future.
Inflation in recent years has not had a significant effect on our
business, and is not expected to adversely affect us in the future unless it
increases significantly.
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 $90,000 at December 31, 2000,
compared to $3,482,000 at December 31, 1999. The investment represents less
than 1% of total assets at December 31, 2000 and
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1999. 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 2000, we entered into three short-term
interest rate swap arrangements intended to hedge our exposure to rising
interest rates in the capital markets. Two of these arrangements have a
notional amount of $240,000,000 and one has a notional amount of $175,000,000.
These mature six months and twelve months, respectively, 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 on the six-month maturities and the twelve-month maturity are
reset once and three times, respectively, during the term of the swaps. Thus,
these interest rate swaps have the effect of fixing the interest rates on an
aggregate of $655,000,000 of our variable-rate debt through their maturity
dates. The arrangements mature at various dates in April 2001 and November
2001. 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, 2000,
the weighted average interest rate we were obligated to pay under these
interest rate swaps was 6.70%, and the weighted average interest rate we
received was 6.76%.
With respect to our interest-bearing liabilities, approximately
$1,655,000,000 in long-term debt at December 31, 2000 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 $1,556,829,000 is subject to fixed
rates of interest. This compares to $1,625,000,000 in long-term debt subject to
variable rates of interest and $1,489,648,000 in long-term debt subject to
fixed rates of interest at December 31, 1999 (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, 2000 except for the 3.25% Convertible
Debentures, 6.875% Senior Notes, 7.0% Senior Notes and 10-3/4% Senior Notes.
The fair value of the 3.25% Convertible Debentures at December 31, 2000 was
approximately $503,765,000. The fair value of the 6.875% Senior Notes due 2005
was approximately $252,025,000 at December 31, 2000. The fair value of the 7%
Senior Notes due 2008 was approximately $225,125,000 at December 31, 2000. The
fair value of the 10-3/4% Senior Notes due 2008 was approximately $366,625,000
at December 31, 2000. Based on a hypothetical 1% increase in interest rates,
the potential losses in future pre-tax earnings would be approximately
$16,550,000. 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.
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 our expected future operations and performance and other
developments. Such forward-looking statements are necessarily estimates
reflecting our best judgment based upon
A-12
current information, involve a number of risks and uncertainties and are made
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. There can be no assurance that other factors will not
affect the accuracy of such forward-looking statements or that our actual
results will not differ materially from the results anticipated in such
forward-looking statements. While it is impossible to identify all such
factors, factors which could cause actual results to differ materially from
those estimated by us include, but are not limited to, changes in the
regulation of the healthcare industry at either or both of the federal and
state levels, changes or delays in reimbursement for our services by
governmental or private payors, competitive pressures in the healthcare
industry and our response thereto, our ability to obtain and retain favorable
arrangements with third-party payors, unanticipated delays in the
implementation of our Integrated Service Model, general conditions in the
economy and capital markets, and other factors which may be identified from
time to time in our Securities and Exchange Commission filings and other public
announcements.
A-13
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, 1999 and 2000, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of HEALTHSOUTH
Corporation and Subsidiaries at December 31, 1999 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
Birmingham, Alabama
March 6, 2001
A-14
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------------
1999 2000
------------- -------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents (Note 3) ......................................... $ 129,400 $ 180,317
Other marketable securities (Note 3) ....................................... 3,482 90
Accounts receivable, net of allowances for doubtful accounts of
$303,614,000 in 1999 and $230,430,000 in 2000............................. 891,829 946,965
Inventories ................................................................ 85,551 92,943
Prepaid expenses and other current assets .................................. 170,836 210,803
Income tax refund receivable ............................................... 39,438 --
---------- ----------
Total current assets ........................................................ 1,320,536 1,431,118
Other assets:
Loans to officers .......................................................... 3,842 6,242
Assets held for sale (Note 13) ............................................. 29,473 26,759
Deferred income taxes (Note 10) ............................................ 47,550 --
Other (Note 4) ............................................................. 157,609 197,897
---------- ----------
238,474 230,898
Property, plant and equipment, net (Note 5) ................................. 2,502,967 2,871,763
Intangible assets, net (Note 6) ............................................. 2,828,507 2,846,661
---------- ----------
Total assets ................................................................ $6,890,484 $7,380,440
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................... $ 76,549 $ 78,762
Salaries and wages payable ................................................. 93,046 87,730
Accrued interest payable and other liabilities ............................. 152,244 168,970
Deferred income taxes (Note 10) ............................................ 108,168 4,227
Current portion of long-term debt (Note 7) ................................. 37,818 43,225
---------- ----------
Total current liabilities ................................................... 467,825 382,914
Long-term debt (Note 7) ..................................................... 3,076,830 3,168,604
Deferred income taxes (Note 10) ............................................. - 160,365
Deferred revenue and other long-term liabilities ............................ 4,573 4,126
Minority interests-limited partnerships (Note 1) ............................ 134,894 137,977
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 --
423,982,000 in 1999 and 426,031,000 in 2000 .............................. 4,240 4,260
Additional paid-in capital ................................................. 2,584,572 2,610,442
Accumulated other comprehensive (loss) income .............................. (1,443) 7,074
Retained earnings .......................................................... 949,828 1,224,950
Treasury stock, at cost (38,342,000 shares in 1999 and 38,742,000 shares
in 2000) ................................................................. (278,504) (280,524)
Receivable from Employee Stock Ownership Plan .............................. (7,898) (5,415)
Notes receivable from stockholders, officers and management
employees ................................................................ (44,433) (34,333)
---------- ----------
Total stockholders' equity .................................................. 3,206,362 3,526,454
---------- ----------
Total liabilities and stockholders' equity .................................. $6,890,484 $7,380,440
========== ==========
See accompanying notes.
A-15
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1999 2000
------------- ------------- -------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
Revenues .................................................. $4,006,074 $4,072,107 $4,195,115
Operating unit expenses ................................... 2,491,914 2,688,849 2,816,363
Corporate general and administrative expenses ............. 112,800 149,285 148,023
Provision for doubtful accounts ........................... 112,202 342,708 98,037
Depreciation and amortization ............................. 344,591 374,248 360,847
Merger and acquisition related expenses (Notes 2
and 9) ................................................... 25,630 -- --
Loss on sale of assets (Note 9) ........................... 31,232 -- --
Impairment and restructuring charges (Note 13) ............ 483,455 121,037 --
Interest expense .......................................... 148,163 176,652 221,595
Interest income ........................................... (11,286) (10,587) (9,104)
---------- ---------- ----------
3,738,701 3,842,192 3,635,761
---------- ---------- ----------
Income before income taxes and minority interests ......... 267,373 229,915 559,354
Provision for income taxes (Note 10) ...................... 143,347 66,929 181,808
---------- ---------- ----------
124,026 162,986 377,546
Minority interests ........................................ 77,468 86,469 99,081
---------- ---------- ----------
Net income ................................................ $ 46,558 $ 76,517 $ 278,465
========== ========== ==========
Weighted average common shares outstanding ................ 421,462 408,195 385,666
========== ========== ==========
Net income per common share ............................... $ 0.11 $ 0.19 $ 0.72
========== ========== ==========
Weighted average common shares outstanding -
assuming dilution ........................................ 432,275 414,570 391,016
========== ========== ==========
Net income per common share - assuming dilution ........... $ 0.11 $ 0.18 $ 0.71
========== ========== ==========
See accompanying notes.
A-16
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
COMMON STOCK
-------------------- ADDITIONAL
PAID-IN
SHARES AMOUNT CAPITAL
--------- ---------- --------------
(IN THOUSANDS)
Balance at December 31, 1997 ........................................ 415,537 $ 4,155 $ 2,474,726
Comprehensive income:
Net income ......................................................... -- -- --
Translation adjustment ............................................. -- -- --
Comprehensive income
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
Reduction in receivable from ESOP ................................... -- -- --
Payments received on stockholders' notes receivable ................. -- -- --
Repurchase limited partnership units ................................ -- -- --
Purchase of treasury stock .......................................... -- -- --
------- ------- -----------
Balance at December 31, 1998 ........................................ 423,178 4,232 2,577,647
Comprehensive income:
Net income ......................................................... -- -- --
Translation adjustment ............................................. -- -- --
Comprehensive income ................................................
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 ................. -- -- --
Repurchase limited partnership units ................................ -- -- --
Purchase of treasury stock .......................................... -- -- --
------- ------- -----------
Balance at December 31, 1999 ........................................ 423,982 4,240 2,584,572
Comprehensive income:
Net income ......................................................... -- -- --
Translation adjustment ............................................. -- -- --
Unrealized gain on available for sale securities (net $7,526 tax
expense) ........................................................... -- -- --
Comprehensive income ................................................
Proceeds from exercise of options (Note 8) .......................... 2,049 20 14,768
Income tax benefits related to incentive stock options (Note 8)...... -- -- 4,155
Restricted stock grants issued ...................................... -- -- 2,002
Reduction in receivable from ESOP ................................... -- -- --
Payments received on stockholders' notes receivable ................. -- -- --
Repurchase limited partnership units ................................ -- -- --
Variable stock option appreciation .................................. -- -- 4,945
Purchase of treasury stock .......................................... -- -- --
------- ------- -----------
Balance at December 31, 2000 ........................................ 426,031 $ 4,260 $ 2,610,442
======= ======= ===========
ACCUMULATED
OTHER TREASURY STOCK
COMPREHENSIVE RETAINED ------------------------
INCOME (LOSS) EARNINGS SHARES AMOUNT
--------------- --------------- -------- ---------------
(IN THOUSANDS)
Balance at December 31, 1997 ........................................ $ (1,057) $ 834,385 552 $ (3,923)
Comprehensive income:
Net income ......................................................... -- 46,558 -- --
Translation adjustment ............................................. (24) -- -- --
Comprehensive income
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)...... -- -- -- --
Reduction in receivable from ESOP ................................... -- -- -- --
Payments received on stockholders' notes receivable ................. -- -- -- --
Repurchase limited partnership units ................................ -- (1,634) -- --
Purchase of treasury stock .......................................... -- -- 1,490 (17,890)
--------- ----------- ----- -----------
Balance at December 31, 1998 ........................................ (1,081) 879,309 2,042 (21,813)
Comprehensive income:
Net income ......................................................... -- 76,517 -- --
Translation adjustment ............................................. (362) -- -- --
Comprehensive income ................................................
Proceeds from exercise of options (Note 8) .......................... -- -- -- --
Restricted stock grants issued ...................................... -- -- -- --
Reduction in receivable from ESOP ................................... -- -- -- --
Loans made to stockholders .......................................... -- -- -- --
Payments received on stockholders' notes receivable ................. -- -- -- --
Repurchase limited partnership units ................................ -- (5,998) -- --
Purchase of treasury stock .......................................... -- -- 36,300 (256,691)
--------- ----------- ------ -----------
Balance at December 31, 1999 ........................................ (1,443) 949,828 38,342 (278,504)
Comprehensive income:
Net income ......................................................... -- 278,465 -- --
Translation adjustment ............................................. (3,560) -- -- --
Unrealized gain on available for sale securities (net $7,526 tax
expense) ........................................................... 12,077 -- -- --
Comprehensive income ................................................
Proceeds from exercise of options (Note 8) .......................... -- -- -- --
Income tax benefits related to incentive stock options (Note 8)...... -- -- -- --
Restricted stock grants issued ...................................... -- -- -- --
Reduction in receivable from ESOP ................................... -- -- -- --
Payments received on stockholders' notes receivable ................. -- -- -- --
Repurchase limited partnership units ................................ -- (3,343) -- --
Variable stock option appreciation .................................. -- -- -- --
Purchase of treasury stock .......................................... -- -- 400 (2,020)
--------- ----------- ------ -----------
Balance at December 31, 2000 ........................................ $ 7,074 $ 1,224,950 38,742 $ (280,524)
========= =========== ====== ===========
TOTAL
RECEIVABLE NOTES STOCKHOLDERS'
FROM ESOP RECEIVABLE EQUITY
-------------- -------------- --------------
(IN THOUSANDS)
Balance at December 31, 1997 ........................................ $ (12,247) $ (5,416) $ 3,290,623
Comprehensive income:
Net income ......................................................... -- -- 46,558
Translation adjustment ............................................. -- -- (24)
-----------
Comprehensive income 46,534
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
Reduction in receivable from ESOP ................................... 2,078 -- 2,078
Payments received on stockholders' notes receivable ................. -- 295 295
Repurchase limited partnership units ................................ -- -- (1,634)
Purchase of treasury stock .......................................... -- -- (17,890)
---------- ---------- -----------
Balance at December 31, 1998 ........................................ (10,169) (5,121) 3,423,004
Comprehensive income:
Net income ......................................................... -- -- 76,517
Translation adjustment ............................................. -- -- (362)
-----------
Comprehensive income ................................................ 76,155
Proceeds from exercise of options (Note 8) .......................... -- -- 4,371
Restricted stock grants issued ...................................... -- -- 2,562
Reduction in receivable from ESOP ................................... 2,271 -- 2,271
Loans made to stockholders .......................................... -- (39,334) (39,334)
Payments received on stockholders' notes receivable ................. -- 22 22
Repurchase limited partnership units ................................ -- -- (5,998)
Purchase of treasury stock .......................................... -- -- (256,691)
---------- ---------- -----------
Balance at December 31, 1999 ........................................ (7,898) (44,433) 3,206,362
Comprehensive income:
Net income ......................................................... -- -- 278,465
Translation adjustment ............................................. -- -- (3,560)
Unrealized gain on available for sale securities (net $7,526 tax
expense) ........................................................... -- -- 12,077
-----------
Comprehensive income ................................................ 286,982
Proceeds from exercise of options (Note 8) .......................... -- -- 14,788
Income tax benefits related to incentive stock options (Note 8)...... -- -- 4,155
Restricted stock grants issued ...................................... -- -- 2,002
Reduction in receivable from ESOP ................................... 2,483 -- 2,483
Payments received on stockholders' notes receivable ................. -- 10,100 10,100
Repurchase limited partnership units ................................ -- -- (3,343)
Variable stock option appreciation .................................. -- -- 4,945
Purchase of treasury stock .......................................... -- -- (2,020)
---------- ---------- -----------
Balance at December 31, 2000 ........................................ $ (5,415) $ (34,333) $ 3,526,454
========== ========== ===========
See accompanying notes.
A-17
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1998 1999 2000
--------------- ------------- ---------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income ........................................................ $ 46,558 $ 76,517 $ 278,465
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .................................... 344,591 374,248 360,847
Provision for doubtful accounts .................................. 112,202 342,708 98,037
Issuance of restricted stock grants .............................. -- 2,562 2,002
Variable stock option appreciation ............................... -- -- 4,945
Impairment and restructuring charges ............................. 483,455 121,037 --
Merger and acquisition related expenses .......................... 25,630 -- --
Loss on sale of assets ........................................... 31,232 -- --
Income applicable to minority interests of limited
partnerships .................................................... 77,468 86,469 99,081
(Benefit) provision for deferred income taxes .................... (43,410) (5,850) 96,448
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable ............................................. (250,468) (332,977) (150,283)
Inventories, prepaid expenses and other current assets .......... (132,280) 67,428 (7,877)
Accounts payable and accrued expenses ........................... (58,846) (27,631) 15,099
------------ ---------- ------------
Net cash provided by operating activities ......................... 636,132 704,511 796,764
INVESTING ACTIVITIES
Purchases of property, plant and equipment ........................ (714,212) (474,115) (583,639)
Proceeds from sale of non-strategic assets ........................ 34,100 5,693 2,713
Additions to intangible assets, net of effects of acquisitions..... (48,415) (33,140) (83,291)
Assets obtained through acquisitions, net of liabilities
assumed .......................................................... (729,440) (104,304) (74,137)
Payments on purchase accounting accruals .......................... (292,949) (22,063) --
Changes in other assets ........................................... (48,883) 12,866 (22,342)
Proceeds received on sale of other marketable securities .......... 18,340 1,300 3,392
Investments in other marketable securities ........................ -- (1,096) --
------------ ---------- ------------
Net cash used in investing activities ............................. (1,781,459) (614,859) (757,304)
FINANCING ACTIVITIES
Proceeds from borrowings .......................................... $ 3,486,474 $ 756,000 $ 1,585,000
Principal payments on long-term debt .............................. (2,309,163) (470,621) (1,495,993)
Proceeds from exercise of options ................................. 60,204 4,371 14,788
Purchase of treasury stock ........................................ (17,890) (256,691) (2,020)
Reduction in receivable from ESOP ................................. 2,078 2,271 2,483
Decrease (increase) in loans from stockholders .................... 295 (39,312) 10,100
Proceeds from investment by minority interests .................... 4,471 11,582 12,901
Purchase of limited partnership units ............................. (1,634) (5,998) (21,116)
Payment of cash distributions to limited partners ................. (103,649) (100,319) (91,126)
Foreign currency translation adjustment ........................... (24) (362) (3,560)
------------ ---------- ------------
Net cash provided by (used in) financing activities ............... 1,121,162 (99,079) 11,457
------------ ---------- ------------
(Decrease ) increase in cash and cash equivalents ................. (24,165) (9,427) 50,917
Cash and cash equivalents at beginning of year .................... 162,992 138,827 129,400
------------ ---------- ------------
Cash and cash equivalents at end of year .......................... $ 138,827 $ 129,400 $ 180,317
============ ========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest ......................................................... $ 143,606 $ 159,496 $ 232,776
Income taxes ..................................................... 315,028 88,575 9,153
A-18
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS- (CONTINUED )
Non-cash investing activities:
The Company assumed liabilities of $107,091,000, $9,529,000 and $9,178,000
during the years ended December 31, 1998, 1999 and 2000, respectively, in
connection with its acquisitions.
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.
See accompanying notes.
A-19
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
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 three operating divisions: Inpatient and other clinical services and
Outpatient services -- East and Outpatient services -- West. Inpatient and
other clinical services consist primarily of services provided through
inpatient rehabilitation facilities, specialty medical centers and certain
physician practices and other clinical services. Outpatient services consist
primarily of services provided through outpatient rehabilitation facilities,
outpatient surgery centers and outpatient diagnostic centers. Management
operates the outpatient services in two geographic segments, East and West.
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 or a subsidiary 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 otherwise has 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
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information" 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 operates in three
segments: Inpatient and other clinical services, Outpatient services -- East
and Outpatient services -- West.
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.
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
A-20
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
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 (primarily 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 $42,606,000 and $69,480,000 at December
31, 1999 and 2000, respectively. Final determination of the settlement is
subject to review by appropriate authorities. It is at least reasonably
possible that the recorded estimates will change by material amounts in the
near term. The differences between original estimates made by the Company and
subsequent revisions (including final settlement) were not material to the
Company's operating results. 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 includes 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,
-------------------
1999 2000
-------- --------
Medicare ................. 26% 27%
Medicaid ................. 5 5
Other .................... 69 68
--- ---
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 $148,793,000, $178,836,000
and $223,321,000 of which $630,000, $2,184,000 and $1,726,000 was capitalized
during 1998, 1999 and 2000, 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 3-15 years.
INTANGIBLE ASSETS
Costs in excess of the net asset value of purchased facilities are
amortized over 20 to 40 years using the straight-line method, with the majority
of such costs 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. 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.
A-21
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
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 were amortized in accordance with the Company's policy
in effect through June 30, 1997 and were 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 were amortized in
accordance with the Company's policy in effect through June 30, 1997 and were
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. 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, 2000), the effect of which is removed from the results of
operations of the Company.
REVENUES
Revenues include net patient service revenues and other operating
revenues. Other operating revenues include cafeteria revenue, gift shop
revenue, rental income, trainer/contract revenue, management and administrative
fee revenue (related to non-consolidated subsidiaries and affiliates) and
transcriptionist fees which are insignificant to total revenues. Net patient
service revenues are reported at the estimated net realizable amounts from
patients, third-party payors and others for services rendered, including
estimated retroactive adjustments under reimbursement agreements with
third-party payors.
A-22
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,
--------------------------------------------
1998 1999 2000
------------- ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Numerator:
Net income ................................................. $ 46,558 $ 76,517 $ 278,465
--------- --------- ---------
Numerator for basic earnings per share-income available to
common stockholders ...................................... $ 46,558 $ 76,517 $ 278,465
========= ========= =========
Denominator:
Denominator for basic earnings per share -- weighted-average
shares ................................................... 421,462 408,195 385,666
Effect of dilutive securities:
Net effect of dilutive stock options ..................... 10,813 5,525 4,600
Restricted shares issued ................................. -- 850 750
--------- --------- ---------
Dilutive potential common shares ........................... 10,813 6,375 5,350
--------- --------- ---------
Denominator of diluted earnings per share - adjusted
weighted-average shares and assumed conversions .......... 432,275 414,570 391,016
========= ========= =========
Basic earnings per share .................................... $ 0.11 $ 0.19 $ 0.72
========= ========= =========
Diluted earnings per share .................................. $ 0.11 $ 0.18 $ 0.71
========= ========= =========
IMPAIRMENT OF ASSETS
The Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those assets. In such cases, the
impaired assets are written down to fair value. Fair value is determined based
on the individual facts and circumstances of the impairment event, and the
available information related to it. Such information might include quoted
market prices, prices for comparable assets, estimated future cash flows
discounted at a rate commensurate with the risks involved and independent
appraisals. For purposes of analyzing impairment, assets are generally grouped
at the individual operational facility level, which is the lowest level for
which there are identifiable cash flows. If the group of assets being tested
was acquired by the Company as part of a purchase business combination, any
goodwill that arose as part of the transaction is included as part of the asset
grouping.
With respect to the carrying value of goodwill and other intangible
assets, the Company determines on a quarterly basis whether an impairment event
has occurred by considering factors such as the market value of the asset, a
significant adverse change in legal factors or in the business climate, adverse
action 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
A-23
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
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, 1999 and 2000, are included
with accrued interest payable and other liabilities in the accompanying
consolidated balance sheets.
RECLASSIFICATIONS
Certain amounts in 1998 and 1999 financial statements have been
reclassified to conform with the 2000 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 as operating
unit expenses and have not been significant to the Company's operating results
in any period.
2. MERGERS
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.
The merger of the Company with NSC was accounted for as a pooling of
interests. There were no material transactions between the Company and NSC
prior to the merger. The effects of conforming the accounting policies of the
combined companies are not material.
A-24
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. CASH, CASH EQUIVALENTS AND OTHER MARKETABLE SECURITIES
Cash, cash equivalents and other marketable securities consisted of the
following:
DECEMBER 31,
-----------------------
1999 2000
----------- ---------
(IN THOUSANDS)
Cash ........................................ $117,912 $179,989
Cash equivalents ............................ 11,488 328
-------- --------
Total cash and cash equivalents ............ 129,400 180,317
Certificates of deposit ..................... 2,352 80
Municipal put bonds ......................... 130 10
Collateralized mortgage obligations ......... 1,000 --
-------- --------
Total other marketable securities .......... 3,482 90
-------- --------
Total cash, cash equivalents and other
marketable securities (approximates
market value) .............................. $132,882 $180,407
======== ========
For purposes of the consolidated balance sheets and statements of cash
flows, marketable securities with a maturity of ninety days or less when
purchased are considered cash equivalents.
4. OTHER ASSETS
Other assets consisted of the following:
DECEMBER 31,
-------------------------
1999 2000
----------- -----------
(IN THOUSANDS)
Notes receivable .................. $ 48,717 $ 52,907
Prepaid long-term lease ........... 7,084 6,555
Investments accounted for on equity
method ........................... 15,523 26,328
Other investments ................. 50,400 71,021
Real estate investments ........... 2,820 2,686
Trusteed funds .................... 8,255 11,185
Deferred loss on leases ........... 21,263 19,686
Other ............................. 3,547 7,529
--------- ---------
$ 157,609 $ 197,897
========= =========
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 1998, 1999 and
2000. At December 31, 2000, the investment balance on the Company's books was
not materially different than the underlying equity in net assets of the
unconsolidated entities.
Other investments 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 based on 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, 2000 represents the original cost of the
investments, which management believes is not impaired.
A-25
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. OTHER ASSETS - (CONTINUED)
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 28. 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,
----------------------------
1999 2000
------------- ------------
(IN THOUSANDS)
Land ...................................... $ 126,074 $ 138,277
Buildings ................................. 1,233,809 1,312,375
Leasehold improvements .................... 380,852 479,404
Furniture, fixtures and equipment ......... 1,553,159 1,821,403
Construction-in-progress .................. 28,931 83,406
---------- ----------
3,322,825 3,834,865
Less accumulated depreciation and
amortization ............................. 819,858 963,102
---------- ----------
$2,502,967 $2,871,763
========== ==========
6. INTANGIBLE ASSETS
Intangible assets consisted of the following:
DECEMBER 31,
------------------------------
1999 2000
-------------- -------------
(IN THOUSANDS)
Organizational, partnership formation
and start-up costs (see Note 1) ......... $ 117,622 $ 17,393
Debt issue costs ......................... 51,284 66,179
Noncompete agreements .................... 122,545 124,932
Cost in excess of net asset value of
purchased facilities .................... 2,920,980 3,038,560
----------- -----------
3,212,431 3,247,064
Less accumulated amortization ............ 383,924 400,403
----------- -----------
$ 2,828,507 $ 2,846,661
=========== ===========
<
A-26
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
7. LONG-TERM DEBT
Long-term debt consisted of the following:
DECEMBER 31,
-----------------------------
1999 2000
------------- -------------
(IN THOUSANDS)
Notes and bonds payable:
Advances under a $1,750,000,000
credit agreement with banks .......... $1,625,000 $1,655,000
9.5% Senior Subordinated Notes .......... 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
10-3/4% Senior Subordinated Notes
due 2008 ............................. -- 350,000
Notes payable to banks and various
other notes payable, at interest rates
from 5.5% to 14.9% .................... 117,421 104,031
Hospital revenue bonds payable .......... 15,130 11,674
Noncompete agreements payable with
payments due at intervals ranging
through December 2005 ................... 39,347 23,374
---------- ----------
3,114,648 3,211,829
Less amounts due within one year ......... 37,818 43,225
---------- ----------
$3,076,830 $3,168,604
========== ==========
The fair value of the total long-term debt approximates book value at
December 31, 2000 except for the 3.25% Convertible Subordinated Debentures due
2003, the 6.875% Senior Notes due 2005, the 7.0% Senior Notes due 2008 and the
10-3/4% Senior Subordinated Notes due 2008. The fair value of the 3.25%
Convertible Subordinated Debentures due 2003 was approximately $503,765,000 at
December 31, 2000. The fair value of the 6.875% Senior Notes due 2005 was
approximately $252,025,000 at December 31, 2000. The fair value of the 7%
Senior Notes due 2008 was approximately $225,125,000 at December 31, 2000. The
fair value of the 10-3/4% Senior Subordinated Notes due 2008 was approximately
$366,625,000 at December 31, 2000. The fair values of the Company's long-term
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, 2000, the effective interest rate associated with
the 1998 Credit Agreement was approximately 7.18%.
The Company also had a Short Term Credit Agreement with Bank of America
and other participating banks (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 were substantially
A-27
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. LONG-TERM DEBT - (CONTINUED)
consistent with those of the 1998 Credit Agreement. Interest on the Short Term
Credit Agreement was paid based on LIBOR plus a predetermined margin or a base
rate. The Company was 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. On October 31, 2000, the Company terminated the Short Term Credit
Agreement and replaced it with a new $400,000,000 Credit Agreement (the "2000
Credit Agreement") with UBS AG and other participating banks. Interest on the
2000 Credit Agreement is paid based on LIBOR plus a predetermined margin or
base rate. The Company is required to pay a fee on the unused portion of the
credit facility ranging from 0.25% to 0.50%, depending on certain defined
ratios. The principal amount is payable in full in eight quarterly installments
ending on June 22, 2003. At December 31, 2000, the Company had no drawings
outstanding under the 2000 Credit Agreement.
On March 24, 1994, the Company issued $250,000,000 principal amount of
9.5% Senior Subordinated Notes due 2001 (the "9.5% Notes"). The Company
redeemed the 9.5% Notes at par on October 30, 2000.
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 shares 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. 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.
On September 25, 2000, the Company issued $350,000,000 in 10-3/4% Senior
Subordinated Notes due 2008 (the "10-3/4% Notes"). Interest is payable on April
1 and October 1. The 10-3/4% 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 net proceeds from the issuance of the 10-3/4% Notes were used by the
Company to redeem the 9.5% Notes and to pay down indebtedness outstanding under
its then-existing credit facilities. The 10-3/4% Notes mature on October 1,
2008.
In October 2000, the Company entered into two six-month and one
twelve-month interest rate swap arrangements with notional amounts of
$240,000,000, $240,000,000 and $175,000,000 each. The swaps expire on various
dates in April 2001 and November 2001. These 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.
A-28
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. LONG-TERM DEBT - (CONTINUED)
Principal maturities of long-term debt are as follows:
YEAR ENDING DECEMBER 31, (IN THOUSANDS)
------------------------------ ---------------
2001 ............................ $ 43,225
2002 ............................ 19,569
2003 ............................ 2,236,623
2004 ............................ 11,721
2005 ............................ 260,641
After 2006 ...................... 640,050
----------
$3,211,829
==========
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 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 1998, 1999 and 2000 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 1998, 1999 and 2000, respectively: risk-free interest rates of
6.10%, 6.21% and 5.11%; dividend yield of 0%; volatility factors of the
expected market price of the Company's common stock of .76, .77 and .71; and a
weighted-average expected life of the options of 5.5 years, 5.0 years and 5.2
years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
A-29
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,
----------------------------------------
1998 1999 2000
------------ ------------ --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Pro forma net income ......... $ 31,009 $ 47,149 $ 266,684
Pro forma earnings per share:
Basic ...................... 0.07 0.12 0.69
Diluted .................... 0.07 0.12 0.69
A summary of the Company's stock option activity and related information
for the years ended December 31 follows:
1998 1999 2000
------------------------ ------------------------ -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE
(000) PRICE (000) PRICE (000) PRICE
----------- ---------- ----------- ---------- ----------- ---------
Options outstanding January 1 .............. 34,771 $ 12 34,437 $ 12 36,028 $ 11
Granted ................................... 6,020 12 6,589 11 3,615 5
Exercised ................................. (5,035) 12 (772) 5 (1,957) 8
Canceled .................................. (1,319) 21 (4,226) 20 (1,704) 15
------ ---- ------ ---- ------ ----
Options outstanding at December 31 ......... 34,437 $ 12 36,028 $ 11 35,982 $ 10
Options exercisable at December 31 ......... 29,156 $ 11 31,689 $ 11 31,429 $ 10
Weighted average fair value of options
granted during the year ................... $ 7.50 $ 7.14 $ 3.07
The following table summarizes information about stock options outstanding
at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- -----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
DECEMBER 31, REMAINING EXERCISE DECEMBER 31, EXERCISE
2000 LIFE PRICE 2000 PRICE
---------------- ----------- ---------- --------------- -----------
(IN THOUSANDS) (YEARS) (IN THOUSANDS)
Under $10.00............. 22,926 4.73 $ 6.14 19,807 $ 6.10
$10.00 - $23.63.......... 12,871 6.47 16.79 11,448 17.40
$23.63 and above......... 185 7.00 27.28 174 27.24
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.
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
A-30
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. ACQUISITIONS - (CONTINUED)
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, which
interests the Company later acquired outright. 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, $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.
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 costs
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.
The Company 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.
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.
A-31
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. ACQUISITIONS - (CONTINUED)
2000 ACQUISITIONS
At various dates and in separate transactions throughout 2000, the Company
acquired thirteen outpatient rehabilitation facilities, three outpatient
surgery centers, three inpatient rehabilitation hospitals and thirteen
diagnostic imaging centers. The acquired operations are located throughout the
United States. The total purchase price of the acquired operations was
approximately $75,365,000. The form of consideration constituting the total
purchase price was approximately $74,137,000 in cash and $1,228,000 in notes
payable.
In connection with these transactions, the Company entered into noncompete
agreements with former owners totaling $5,520,000. 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 2000 acquisitions
described above was approximately $8,174,000. The total cost of the 2000
acquisitions exceeded the fair value of the net assets acquired by
approximately $67,191,000. 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 2000
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, 2000, the purchase price
allocation associated with the 2000 acquisitions is preliminary in nature.
During 2001 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 acquisitions described above were accounted for as purchases
and, accordingly, the results of operations of the acquired businesses (not
material individually or in the aggregate) are included in the accompanying
consolidated financial statements from their respective dates of acquisition.
10. INCOME TAXES
HEALTHSOUTH and its subsidiaries file a consolidated federal income tax
return. The partnerships and LLCs file separate income tax returns.
HEALTHSOUTH's allocable portion of each partnership's income or loss is
included in the taxable income of the Company. The remaining income or loss of
each partnership and LLC is allocated to the other partners.
A-32
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, 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) assets ..... $ (108,168) $ 47,550 $ (60,618)
========== ========= ==========
Significant components of the Company's deferred tax assets and
liabilities as of December 31, 2000 are as follows:
CURRENT NONCURRENT TOTAL
------------ --------------- ---------------
(IN THOUSANDS)
Deferred tax assets:
Net operating loss ...................... $ -- $ 5,864 $ 5,864
Accruals ................................ 9,063 -- 9,063
Impairment and restructuring charges..... -- 41,932 41,932
Other ................................... -- 5,045 5,045
--------- ----------- -----------
Total deferred tax assets ................ 9,063 52,841 61,904
Deferred tax liabilities:
Depreciation and amortization ........... -- (123,901) (123,901)
Bad debts ............................... (13,290) -- (13,290)
Capitalized costs ....................... -- (81,779) (81,779)
Unrealized gain on available for sale
securities ............................ -- (7,526) (7,526)
--------- ----------- -----------
Total deferred tax liabilities ........... (13,290) (213,206) (226,496)
--------- ----------- -----------
Net deferred tax liabilities ............. $ (4,227) $ (160,365) $ (164,592)
========= =========== ===========
At December 31, 2000, the Company has net operating loss carryforwards of
approximately $15,275,000 for income tax purposes expiring through the year
2020. Those carryforwards resulted from the Company's acquisitions of Rebound,
Inc., Horizon/CMS Healthcare Corporation, ASC Network Corporation, The Company
Doctor and National Imaging Affiliates.
A-33
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,
-------------------------------------------------
1998 1999 2000
------------ ---------- -----------
(IN THOUSANDS)
Currently payable:
Federal ......... $ 162,433 $ 61,156 $ 74,243
State ........... 24,324 11,623 11,117
--------- -------- ---------
186,757 72,779 85,360
Deferred expense:
Federal ......... (37,756) (4,916) 83,886
State ........... (5,654) (934) 12,562
--------- -------- ---------
(43,410) (5,850) 96,448
--------- -------- ---------
$ 143,347 $ 66,929 $ 181,808
========= ======== =========
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,
-------------------------------------------
1998 1999 2000
------------- ------------ ------------
(IN THOUSANDS)
Federal taxes at statutory rates ......... $ 93,581 $ 80,470 $ 195,774
Add (deduct):
State income taxes, net of federal tax
benefit ............................... 12,136 6,948 15,391
Minority interests ...................... (27,114) (30,264) (34,678)
Nondeductible goodwill .................. 7,630 9,304 2,452
Disposal/impairment charges ............. 57,873 6,128 --
Other ................................... (759) (5,657) 2,869
--------- --------- ---------
$ 143,347 $ 66,929 $ 181,808
========= ========= =========
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, 2000 the Company has adequate reserves to cover
losses on asserted and unasserted claims. In the fourth quarter of 2000, the
Company formed an offshore captive insurance subsidiary to which it expects to
transition the administration of its self-insurance programs.
In connection with the Horizon/CMS acquisition in 1997, 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.
A-34
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
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 or 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, 2000, 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 or results of operations.
The Company was served with certain lawsuits filed beginning September 30,
1998, purporting to be class actions under the federal and Alabama securities
laws. These 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 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 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 and the impact of the Balanced
Budget Act of 1997 on our operations 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 Horizon/CMS Healthcare
Corporation and National Surgery Centers, Inc. 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 with respect
to the registration of securities issued in those acquisitions.
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 dismiss the consolidated amended complaint
in the federal action in late June 1999. The court denied that motion to
dismiss in December 2000. 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, 2000, committed capital expenditures for the next twelve
months are $41,281,000.
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
$238,937,000, $233,895,000 and $248,782,000 for the years ended December 31,
1998, 1999 and 2000, respectively.
The Company has entered into two tax retention operating leases for
certain of its facilities. The Company is required to renegotiate the leases or
purchase, or obtain a purchaser, for the facilities at its termination in 2003.
The minimum sales price guarantee is approximately $119,190,000.
A-35
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)
------------------------ --------------
2001 ..................................... $ 236,811
2002 ..................................... 200,890
2003 ..................................... 158,221
2004 ..................................... 123,035
2005 ..................................... 90,372
After 2006 ............................... 409,091
-----------
Total minimum payments required .......... $ 1,218,420
===========
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 $4,121,000,
$4,608,000 and $4,712,000 in 1998, 1999 and 2000, 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, 2000, the combined ESOP Loans had a
balance of $5,415,000. 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 $3,195,000, $3,197,000 and
$3,176,000 in 1998, 1999 and 2000, respectively. Interest incurred on the ESOP
Loans was approximately $927,000, $715,000 and $483,000 in 1998, 1999 and 2000,
respectively. Approximately 2,451,000 shares owned by the ESOP have been
allocated to participants at December 31, 2000.
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
impact of the 1997 Balanced Budget Act, which placed reimbursement limits on
home health businesses.
A-36
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
13. IMPAIRMENT AND RESTRUCTURING CHARGES - (CONTINUED)
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 21, 2001,
approximately 97% of the locations identified in the fourth quarter
restructuring plan had been closed.
The $404,000,000 fourth quarter charge consists of the following
components:
(i) A $304,624,000 impairment charge was recorded to reduce the carrying
amount of selected long-lived assets to estimated fair value. All of the
assets written down, including fixed assets of $137,880,000 and
intangible assets of $166,744,000, were associated with the facilities
identified in the fourth quarter restructuring plan. These assets are
detailed further in the table below.
(ii) A $19,857,000 charge was recorded to write down other assets, primarily
inventories and prepaid expenses, which were negatively impacted by the
Company's decision to close the affected facilities.
(iii) Approximately $6,027,000 of the charge related to involuntary severance
packages paid or payable to approximately 7,900 employees. These
employees worked primarily in the Company's discontinued home health
operations described above. The terminations were communicated to the
affected employees during the fourth quarter. Approximately 7,880 of the
affected employees had left the Company as of December 31, 1998. The
remaining employees left the Company during the first half of 1999.
(iv) Approximately $49,476,000 of the charge related to lease abandonment
costs primarily for office and clinical space that was or was to be
vacated as a result of the restructuring plan.
A-37
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
-----------------------
NON-CASH BALANCE
RESTRUCTURING CASH IMPAIR- AT
DESCRIPTION CHARGE PAYMENTS MENTS 12/31/98
- ----------------------------- --------------- ---------- ------------ ----------
(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 -- 415
--------- -------- --------- --------
Total Third Quarter 1998
Charge ..................... $ 71,709 $ 3,638 $ 67,656 $ 415
========= ======== ========= ========
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 -- -- 49,476
Other assets ............... 19,857 -- 19,857 --
Severance packages ......... 6,027 4,753 -- 1,274
Other incremental costs .... 24,089 8,100 -- 15,989
--------- -------- --------- --------
Total Fourth Quarter 1998
Charge ..................... $ 404,073 $ 12,853 $ 324,481 $ 66,739
========= ======== ========= ========
ACTIVITY ACTIVITY
--------------------- ----------
NON-CASH BALANCE NON-CASH BALANCE
CASH IMPAIR- AT CASH IMPAIR- AT
DESCRIPTION PAYMENTS MENTS 12/31/99 PAYMENTS MENTS 12/31/00
- ----------------------------- ---------- ---------- ---------- ---------- ---------- -----------
(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 -- -- -- -- --
-------- ---- -------- -------- ---- --------
Total Third Quarter 1998
Charge ..................... $ 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 .... 17,110 -- 32,366 11,253 -- 21,113
Other assets ............... -- -- -- -- -- --
Severance packages ......... 1,274 -- -- -- -- --
Other incremental costs .... 8,978 -- 7,011 7,011 -- --
-------- ---- -------- -------- ---- --------
Total Fourth Quarter 1998
Charge ..................... $ 27,362 $ -- $ 39,377 $ 18,264 $ -- $ 21,113
======== ==== ======== ======== ==== ========
The remaining balances at December 31, 1999 and 2000, are included in
accrued interest payable and other liabilities in the accompanying consolidated
balance sheets.
In addition to the third and fourth quarter charges described above, the
Company recorded an impairment charge of approximately $8,000,000 in the fourth
quarter of 1998 related to a rehabilitation hospital it had closed. The
write-down was based on a recently obtained independent appraisal, which
A-38
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 2000, associated with the 1998 closed facilities. The fair
value of assets remaining to be sold is approximately $24,559,000 compared to
$27,273,000 as of December 31, 1999. The Company expects to have all properties
sold by the end of 2001. 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. In addition, the
Company plans to sell certain property, plant and equipment with a carrying
amount of $2,339,000 in 2001 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 accounting policies of the segments are the same as those for the
Company described in Note 1, Significant Accounting Policies. Intrasegment
revenues are not significant. The Company's Chief Operating Decision Maker
evaluates the performance of its segments and allocates resources to them based
on income before minority interests and income taxes and earnings before
interest, income taxes, depreciation and amortization ("EBITDA"). In addition,
certain revenue producing functions are managed directly from the Corporate
office and are not included in operating results for management reporting.
Unallocated assets represent those assets under the direct management of
Corporate office personnel.
A-39
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,
---------------------------------------------
1998 1999 2000
------------- ------------- -------------
(IN THOUSANDS)
Revenues:
Inpatient and other clinical services .................... $2,178,060 $2,021,546 $1,988,506
Outpatient services - East ............................... 870,994 989,451 1,062,842
Outpatient services - West ............................... 940,468 1,039,072 1,125,885
---------- ---------- ----------
3,989,522 4,050,069 4,177,233
Unallocated corporate office ............................. 16,552 22,038 17,882
---------- ---------- ----------
Consolidated revenues ..................................... $4,006,074 $4,072,107 $4,195,115
========== ========== ==========
Income before income taxes and minority interests
(excluding consolidated merger and acquisition related
expenses, loss on sale of assets and impairment and
restructuring charge):
Inpatient and other clinical services .................... $ 540,726 $ 516,233 $ 422,808
Outpatient services - East ............................... 273,268 243,531 261,251
Outpatient services - West ............................... 230,875 193,612 232,811
---------- ---------- ----------
1,044,869 953,376 916,870
Unallocated corporate office ............................. (208,456) (322,447) (357,516)
---------- ---------- ----------
Consolidated income before income taxes and minority
interests ................................................ $ 836,413 $ 630,929 $ 559,354
Consolidated merger and acquisition related expenses, loss
on sale of assets and impairment and restructuring charge. (569,040) (401,014) --
---------- ---------- ----------
Consolidated income before income taxes and minority
interests ................................................ $ 267,373 $ 229,915 $ 559,354
========== ========== ==========
Depreciation and amortization:
Inpatient and other clinical services .................... $ 124,712 $ 143,340 $ 114,926
Outpatient services - East ............................... 67,225 78,028 99,031
Outpatient services - West ............................... 73,313 78,607 86,398
---------- ---------- ----------
265,250 299,975 300,355
Unallocated corporate office ............................. 79,341 74,273 60,492
---------- ---------- ----------
Consolidated depreciation and amortization ................ $ 344,591 $ 374,248 $ 360,847
========== ========== ==========
Interest expense:
Inpatient and other clinical services .................... $ 64,427 $ 49,800 $ 63,719
Outpatient services - East ............................... 2,245 1,214 310
Outpatient services - West ............................... 5,458 3,714 4,433
---------- ---------- ----------
72,130 54,728 68,462
Unallocated corporate office ............................. 76,033 121,924 153,133
---------- ---------- ----------
Consolidated interest expense ............................. $ 148,163 $ 176,652 $ 221,595
========== ========== ==========
A-40
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
14. OPERATING SEGMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1998 1999 2000
--------------- --------------- ---------------
(IN THOUSANDS)
Interest income:
Inpatient and other clinical services .................. $ 2,612 $ 2,340 $ 1,888
Outpatient services - East ............................. 525 301 459
Outpatient services - West ............................. 420 746 711
----------- ----------- -----------
3,557 3,387 3,058
Unallocated corporate office ........................... 7,729 7,200 6,046
----------- ----------- -----------
Consolidated interest income ............................ $ 11,286 $ 10,587 $ 9,104
=========== =========== ===========
EBITDA (excluding consolidated merger and acquisition
related expenses, loss on sale of assets and impairment
and restructuring charge):
Inpatient and other clinical services .................. $ 727,253 $ 707,033 $ 599,565
Outpatient services - East ............................. 342,213 322,472 360,133
Outpatient services - West ............................. 309,226 275,187 322,931
----------- ----------- -----------
1,378,692 1,304,692 1,282,629
Unallocated corporate office ........................... (60,811) (133,450) (149,937)
----------- ----------- -----------
Consolidated EBITDA (excluding consolidated merger
and acquisition related expenses, loss on sale of assets
and impairment and restructuring charge): .............. $ 1,317,881 $ 1,171,242 $ 1,132,692
Consolidated merger and acquisition related expenses,
loss on sale of assets and impairment and restructuring
charge ................................................. (569,040) (401,014) --
----------- ----------- -----------
Consolidated EBITDA ..................................... $ 748,841 $ 770,228 $ 1,132,692
=========== =========== ===========
Assets:
Inpatient and other clinical services .................. $ 2,621,115 $ 2,774,893
Outpatient services - East ............................. 1,551,413 1,704,838
Outpatient services - West ............................. 1,790,904 1,945,070
----------- -----------
5,963,432 6,424,801
Unallocated corporate office ........................... 927,052 955,639
----------- -----------
Total assets ............................................ $ 6,890,484 $ 7,380,440
=========== ===========
A-41
HEALTHSOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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
2001, the Company expects to enter into a definitive long-term 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.
16. SUBSEQUENT EVENT
On February 1, 2001, the Company issued $375,000,000 in 8-1/2% Senior
Notes due 2008 (the "8-1/2% Notes"). The 8-1/2% Notes are unsecured,
unsubordinated obligations of the Company. The net proceeds from the issuance
of the 8-1/2% Notes were used to pay down indebtedness outstanding under the
Company's credit facilities.
A-42
MARKET FOR HEALTHSOUTH'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
HEALTHSOUTH common stock is listed for trading on the New York Stock
Exchange under the symbol "HRC". The following table sets forth for the fiscal
periods indicated the high and low reported sale prices for HEALTHSOUTH common
stock as reported on the NYSE Composite Transactions Tape.
REPORTED
SALE PRICE
------------------------
HIGH LOW
---------- -----------
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
2000
----
First Quarter ................ $ 7.31 $ 4.75
Second Quarter ............... 8.56 5.38
Third Quarter ................ 8.12 5.19
Fourth Quarter ............... 17.50 8.12
------------------
The closing price per share for HEALTHSOUTH common stock on the New York
Stock Exchange on April 4, 2001, was $12.80.
There were approximately 6,861 holders of record of HEALTHSOUTH common
stock as of March 30, 2001.
We have never paid cash dividends on its 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 anticipates 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
2000.
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, 2000.
A-43
APPENDIX B
HEALTHSOUTH AUDIT COMMITTEE CHARTER
ORGANIZATION
This charter governs the operations of the Audit Committee. The committee
shall review and reassess the charter at least annually and obtain the approval
of the Board of Directors for any revisions. The committee shall be appointed
by the Board of Directors and shall comprise at least three directors, each of
whom are independent of management and the Company. Members of the committee
shall be considered independent if they have no relationship that may interfere
with the exercise of their independence from management and the Company, as
determined by the Board of Directors in its business judgment. All committee
members shall be financially literate, and at least one member shall have
accounting or related financial management expertise.
STATEMENT OF POLICY
The Audit Committee shall provide assistance to the Board of Directors in
fulfilling its oversight responsibility to the Company's stockholders, the
investment community, and others relating to the Company's financial statements
and the financial reporting process, the systems of internal accounting and
financial controls, the internal audit function, and the annual independent
audit of the Company's financial statements. In so doing, it is the
responsibility of the committee to maintain free and open communication between
the committee, independent auditors, the internal auditors and management of
the Company. In discharging its oversight role, the committee is empowered to
investigate any matter brought to its attention with full access to all books,
records, facilities, and personnel of the Company and the power to retain
outside counsel or other experts for this purpose.
RESPONSIBILITIES AND PROCESSES
The primary responsibility of the Audit Committee is to oversee the
Company's financial reporting process on behalf of the Board and report the
results of its activities to the Board. Management is responsible for preparing
the Company's financial statements, and the independent auditors are
responsible for auditing those financial statements. The committee in carrying
out its responsibilities believes its policies and procedures should remain
flexible, in order to best react to changing conditions and circumstances. The
committee should take the appropriate actions to set the overall corporate
"tone" for quality financial reporting, sound business risk practices, and
ethical behavior.
The following shall be the principal recurring processes of the Audit
Committee in carrying out its oversight responsibilities. The processes are set
forth as a guide with the understanding that the committee may supplement them
as appropriate.
(1) The committee shall have a clear understanding with management and the
independent auditors that the independent auditors are ultimately
accountable to the Board and the Audit Committee, as representatives of
the Company?s stockholders. The committee shall have the ultimate
authority and responsibility to evaluate and, where appropriate,
recommend the replacement of the independent auditors. The committee
shall discuss with the auditors their independence from management and
the Company and the matters included in the written disclosures required
by the Independence Standards Board. Annually, the committee shall
review and recommend to the board the selection of the Company's
independent auditors.
(2) The committee shall discuss with the internal auditors and the
independent auditors the overall scope and plans for their respective
audits including the adequacy of staffing and compensation. Also, the
committee shall discuss with management, the internal auditors and the
independent auditors the adequacy and effectiveness of the accounting
and financial controls. Further, the committee shall meet separately
with the internal auditors and the independent auditors, with and
without management present, to discuss the results of their
examinations.
B-1
(3) The committee shall review the interim financial statements with
management and the independent auditors prior to the filing of the
Company's Quarterly Report on Form 10-Q. Also, the committee shall
discuss the results of the quarterly review and any other matters
required to be communicated to the committee by the independent auditors
under generally accepted auditing standards. The chair of the committee
may represent the entire committee for the purposes of this review.
(4) The committee shall review with management and the independent auditors
the financial statements to be included in the Company's Annual Report
on Form 10-K, including the independent auditors' judgment about the
quality, not just acceptability, of accounting principles, the
reasonableness of significant judgments, and the clarity of the
disclosures in the financial statements. Also, the committee shall
discuss the results of the annual audit and any other matters required
to be communicated to the committee by the independent auditors under
generally accepted auditing standards.
SCOPE OF RESPONSIBILITY
The Audit Committee is responsible for the duties set forth in this
charter but is not responsible for either the preparation of the financial
statements or the auditing of the financial statements. Management has the
responsibility for preparing the financial statements and implementing internal
controls, and the independent auditors have the responsibility for auditing the
financial statements and monitoring the effectiveness of the internal controls.
The review of the financial statements by the Audit Committee is not of the
same quality as the audit performed by the independent auditors.
B-2
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HEALTHSOUTH CORPORATION
PROXY FOR THE ANNUAL MEETING OF STOCKHOLDERS -- MAY 17, 2001
THIS PROXY IS SOLICITED BY OUR BOARD OF DIRECTORS
The undersigned hereby revoke(s) any and all proxies previously given by
the undersigned to vote or act with respect to the common stock of HEALTHSOUTH
Corporation owned by the undersigned, and appoints RICHARD M. SCRUSHY and
WILLIAM T. OWENS or __________________, and each of them, with several powers
of substitution, as proxies to vote the shares of common stock, par value $.01
per share, of HEALTHSOUTH Corporation that the undersigned would be entitled to
vote if personally present at the annual meeting of stockholders of HEALTHSOUTH
Corporation to be held at One HealthSouth Parkway, Birmingham, Alabama, on
Thursday, May 17, 2001, at 2:00 p.m., C.D.T., and at any adjournment(s) or
postponement(s) of the annual meeting.
1. ELECTION OF DIRECTORS
[ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY to vote
(Except as marked to the contrary below) for all nominees listed below
Richard M. Scrushy Joel C. Gordon Larry D. Striplin, Jr.
John S. Chamberlin Charles W. Newhall III George H. Strong
C. Sage Givens William T. Owens Phillip C. Watkins, M.D.
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, MARK A
LINE THROUGH THAT NOMINEE'S NAME IN THE LIST PROVIDED ABOVE.
2. IN THE DISCRETION OF THE PROXIES, TO ACT UPON ANY OTHER MATTER
INCIDENTAL TO THE FOREGOING OR THAT MAY PROPERLY COME BEFORE THE ANNUAL MEETING
OR ANY ADJOURNMENT(S) OR POSTPONEMENT(S) OF THE ANNUAL MEETING.
(Continued and to be signed on reverse.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Continued from other side.)
THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED ON THIS PROXY BY THE
UNDERSIGNED STOCKHOLDER(S). IF NO SPECIFICATION IS MADE, THIS PROXY WILL BE
VOTED FOR ITEM 1. IF YOU WISH TO WITHHOLD THE DISCRETIONARY AUTHORITY DESCRIBED
IN ITEM 2 ABOVE, MARK A LINE THROUGH THE ENTIRE ITEM 2.
Please mark, date, sign and promptly mail this proxy using the enclosed
envelope. No postage is required.
DATED 2001
--------------------------,
-------------------------------------
Signature of Stockholder
-------------------------------------
Signature of Stockholder
Please sign your name as it appears
on this form of proxy. If there is
more than one owner, each owner
should sign. If you are signing as an
attorney, administrator, executor,
guardian or trustee, please indicate
the capacity in which you are
signing. If executed by a corporation
or partnership, this form of proxy
must be signed by an authorized
representative.
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