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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
|X| Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required] For the fiscal year ended December
31, 1995; or
| | Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] For the transition period from
______ to ______
Commission File Number 1-10315
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HEALTHSOUTH Corporation
(Exact Name of Registrant as Specified in its Charter)
Delaware 63-0860407
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(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
Two Perimeter Park South
Birmingham, Alabama 35243
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(Address of Principal Executive (Zip Code)
Offices)
Registrant's Telephone Number, Including Area Code: (205) 967-7116
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Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
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Common Stock, par value New York Stock Exchange
$.01 per share
9.5% Senior Subordinated New York Stock Exchange
Notes due 2001
5% Convertible Subordinated New York Stock Exchange
Debentures due 2001
Securities Registered Pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all Reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such Reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No | ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. | |
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant as of March 15, 1996:
Common Stock, par value $.01 per share -- $5,339,826,576
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at March 15, 1996
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Common Stock, par value
$.01 per share 152,483,607 shares
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into this Annual Report on Form 10-K.
PART I
Item 1. Business.
General
HEALTHSOUTH Corporation ("HEALTHSOUTH" or the "Company) is the nation's
largest provider of outpatient and rehabilitative healthcare services. The
Company provides these services through its national network of outpatient and
inpatient rehabilitation facilities, outpatient surgery centers, medical centers
and other healthcare facilities. The Company believes that it provides patients,
physicians and payors with high-quality healthcare services at significantly
lower costs than traditional inpatient hospitals. Additionally, the Company's
national network, reputation for quality and focus on outcomes has enabled it to
secure contracts with national and regional managed care payors. At January 31,
1996, the Company had over 700 patient care locations in 42 states and the
District of Columbia.
In its outpatient and inpatient rehabilitation facilities, the Company
provides interdisciplinary programs for the rehabilitation of patients
experiencing disability due to a wide variety of physical conditions, such as
stroke, head injury, orthopaedic problems, neuromuscular disease and
sports-related injuries. The Company's rehabilitation services include physical
therapy, sports medicine, work hardening, neurorehabilitation, occupational
therapy, respiratory therapy, speech-language pathology and rehabilitation
nursing. Independent studies have shown that rehabilitation services like those
provided by the Company can save money for payors and employers.
The Company operates the largest network of free-standing outpatient
surgery centers in the United States. The Company's outpatient surgery centers
provide the facilities and medical support staff necessary for physicians to
perform non-emergency surgical procedures. While outpatient surgery is widely
recognized as generally less expensive than surgery performed in a hospital, the
Company believes that outpatient surgery performed at a free-standing outpatient
surgery center is generally less expensive than hospital-based outpatient
surgery. Approximately 80% of the Company's surgery center facilities are
located in markets served by its rehabilitative service facilities, enabling the
Company to pursue opportunities for cross-referrals.
Over the last two years, the Company has completed several significant
acquisitions in the rehabilitation business and has expanded into the surgery
center business. The Company believes that these acquisitions complement its
historical operations and enhance its market position. The Company further
believes that its expansion into the outpatient surgery business provides it
with a platform for future growth. The Company is continually evaluating
potential acquisitions in the outpatient and rehabilitative healthcare services
industry.
The Company was organized as a Delaware corporation in February 1984.
The Company's principal executive offices are located at Two Perimeter Park
South, Birmingham, Alabama 35243, and its telephone number is (205) 967-7116.
Company Strategy
The Company's principal objective is to be the provider of choice for
patients, physicians and payors alike for outpatient and rehabilitative
healthcare services throughout the United States. The Company's growth strategy
is based upon four primary elements: (i) the implementation of the Company's
integrated service model in appropriate markets, (ii) successful marketing to
managed care organizations and other payors, (iii) the provision of
high-quality, cost-effective healthcare services, and (iv) the expansion of its
national network.
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o Integrated Service Model. The Company seeks, where appropriate, to
provide an integrated system of healthcare services, including
outpatient rehabilitation services, inpatient rehabilitation services,
ambulatory surgery services and outpatient diagnostic services. The
Company believes that its integrated system offers payors the
convenience of dealing with a single provider for multiple services.
Additionally, it believes that its facilities can provide extensive
referral opportunities. For example, the Company estimates that
approximately one-third of its outpatient rehabilitation patients have
had outpatient surgery, virtually all inpatient rehabilitation patients
will require some form of outpatient rehabilitation, and virtually all
inpatient rehabilitation patients have had some type of diagnostic
procedure. The Company has implemented its Integrated Service Model in
certain of its markets, and intends to expand the model into other
appropriate markets.
o Marketing to Managed Care Organizations and Other Payors. Since the
late 1980s, the Company has focused on the development of contractual
relationships with managed care organizations, major insurance
companies, large regional and national employer groups and provider
alliances and networks. The Company's documented outcomes and
experience with several hundred thousand patients in delivering quality
healthcare services at reasonable prices has enhanced its
attractiveness to such entities and has given the Company a competitive
advantage over smaller and regional competitors. These relationships
have increased patient flow to the Company's facilities and contributed
to the Company's same-store growth.
o Cost-Effective Services. The Company's goal is to provide high-quality
healthcare services in cost-effective settings. To that end, the
Company has developed standardized clinical protocols for the treatment
of its patients. This results in "best practices" techniques being
utilized at all of the Company's facilities, allowing the consistent
achievement of demonstrable, cost-effective clinical outcomes. The
Company's reputation for its clinical programs is enhanced through its
relationships with major universities throughout the nation, and its
support of clinical research in its facilities. Further, independent
studies estimate that, for every dollar spent on rehabilitation, $11 to
$35 is saved. Finally, surgical procedures typically are less expensive
in outpatient surgery centers than in hospital settings. The Company
believes that outpatient and rehabilitative healthcare services will
assume increasing importance in the healthcare environment as payors
continue to seek to reduce overall costs by shifting patients to more
cost-effective treatment settings.
o Expansion of National Network. As the largest provider of outpatient
and rehabilitative healthcare services in the United States, the
Company is able to realize economies of scale and compete successfully
for national contracts with large payors and employers while retaining
the flexibility to respond to particular needs of local markets. The
national network affords the Company the opportunity to offer large
national and regional employers and payors the convenience of dealing
with a single provider, to utilize greater buying power through
centralized purchasing, to achieve more efficient costs of capital and
labor and to more effectively recruit and retain clinicians. The
Company believes that its recent and pending acquisitions in the
outpatient surgery and diagnostic imaging fields will further enhance
its national presence by broadening the scope of its existing services
and providing new opportunities for growth. These national benefits are
realized without sacrificing local market responsiveness. The Company's
objective is to provide those outpatient and rehabilitative healthcare
services needed within each local market by tailoring its services and
facilities to that market's needs, thus bringing the benefits of
nationally recognized expertise and quality into the local setting.
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Recent Acquisitions
In 1995 and early 1996, the Company consummated a series of significant
acquisitions. During 1995, the Company consummated pooling-of-interests mergers
with Surgical Health Corporation ("SHC"; 37 outpatient surgery centers in 11
states) and Sutter Surgery Centers, Inc. ("SSCI"; 12 outpatient surgery centers
in three states), as well as stock purchase acquisitions of the rehabilitation
hospitals division of NovaCare, Inc. ("NovaCare"; 11 inpatient rehabilitation
facilities, 12 other healthcare facilities and two Certificates of Need in eight
states) and Caremark Orthopedic Services Inc. ("Caremark"; 120 outpatient
rehabilitation facilities in 13 states). In addition, the Company entered into
agreements to acquire Surgical Care Affiliates, Inc. ("SCA"; 67 outpatient
surgery centers in 24 states) and Advantage Health Corporation ("Advantage
Health"; approximately 150 inpatient and outpatient rehabilitation facilities in
11 states) in pooling-of-interests transactions, which transactions were
consummated in January 1996 and March 1996 respectively. Information on the
Company's facilities included herein includes all of the acquired facilities
other than the Advantage Health facilities. The NovaCare, Caremark and Advantage
Health transactions have further enhanced the Company's position as the nation's
largest provider of inpatient and outpatient rehabilitative services, while the
SHC, SSCI and SCA transactions have made the Company the largest provider of
outpatient surgery services in the nation. The Company believes that the
geographic dispersion of the more than 850 locations (giving effect to the
Advantage Health acquisition) now operated by the Company makes it more
attractive to managed care networks, major insurance companies, regional and
national employers and regional provider alliances and enhances the Company's
ability to implement its Integrated Service Model in additional markets. See
Item 7, "Management's Discussion and Analysis of Financial Conditions and
Results of Operations".
Industry Background
In 1991 (the most recent year for which data are available),
approximately 4,000,000 people in the United States received rehabilitative
healthcare services. "Rehabilitative healthcare services" refers to the range of
skilled services provided to individuals in order to minimize physical and
cognitive impairments, maximize functional ability and restore lost functional
capacity. The focus of rehabilitative healthcare is to ameliorate physical and
cognitive impairments resulting from illness or injury, and to restore or
improve functional ability so that individuals can return to work and lead
independent and fulfilling lives. Typically, rehabilitative healthcare services
are provided by a variety of healthcare professionals including physiatrists,
rehabilitation nurses, physical therapists, occupational therapists,
speech-language pathologists, respiratory therapists, recreation therapists,
social workers, psychologists, rehabilitation counselors and others. Over 80% of
those receiving rehabilitative healthcare services return to their homes, work,
schools or active retirement.
Demand for rehabilitative healthcare services continues to be driven by
advances in medical technologies, an aging population and the recognition on the
part of the payor community (insurers, self-insured companies, managed care
organizations and federal, state and local governments) that appropriately
administered rehabilitative services can improve quality of life as well as
lower overall healthcare costs. Studies conducted by insurance companies
demonstrate the ability of rehabilitation to significantly reduce the cost of
future care. Estimates of the savings range from $11 to $30 per dollar spent on
rehabilitation. Further, reimbursement changes have encouraged the rapid
discharge of patients from acute-care hospitals while they remain in need of
rehabilitative healthcare services.
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Patient Care Services
The Company began its operations in 1984 with a focus on providing
comprehensive orthopaedic and musculoskeletal rehabilitation services on an
outpatient basis. Over the succeeding 12 years, the Company has consistently
sought and implemented opportunities to expand its services through acquisitions
and de novo development activities that complement its historic focus on
orthopaedic, sports medicine and occupational medicine services and that provide
independent platforms for growth. The Company's acquisitions and internal growth
have enabled it to become the largest provider of rehabilitative healthcare
services, both inpatient and outpatient, in the United States. In addition, the
Company has added outpatient surgery services, diagnostic imaging services and
other outpatient services which provide natural enhancements to its
rehabilitative healthcare locations and facilitate the implementation of its
Integrated Service Model. The Company believes that these additional businesses
also provide opportunities for growth in other areas not directly related to the
rehabilitative business, and the Company intends to pursue further expansion in
those businesses.
Rehabilitative Services: General
When a patient is referred to one of the Company's rehabilitation
facilities, he undergoes an initial evaluation and assessment process that
results in the development of a rehabilitation care plan designed specifically
for that patient. Depending upon the patient's disability, this evaluation
process may involve the services of a single discipline, such as physical
therapy for a knee injury, or of multiple disciplines, as in the case of a
complicated stroke patient. HEALTHSOUTH has developed numerous rehabilitation
programs, which include stroke, head injury, spinal cord injury, neuromuscular
and work injury, that combine certain services to address the needs of patients
with similar disabilities. In this way, all of the facilities' patients,
regardless of the severity and complexity of their disabilities, can receive the
level and intensity of those services necessary for them to be restored to as
productive, active and independent a lifestyle as possible.
Outpatient Rehabilitation Services
The Company operates the largest group of affiliated proprietary
outpatient rehabilitation facilities in the United States. The Company's
outpatient rehabilitation centers offer a comprehensive range of rehabilitative
healthcare services, including physical therapy and occupational therapy, that
are tailored to the individual patient's needs, focusing predominantly on
orthopaedic injuries, sports injuries, work injuries, hand and upper extremity
injuries, back injuries, and various neurological neuromuscular conditions. As
of January 31, 1996, the Company provided outpatient rehabilitative healthcare
services through approximately 500 outpatient locations, including freestanding
outpatient centers and their satellites and outpatient satellites of inpatient
facilities.
The continuing emphasis on containing the increases in healthcare
costs, as evidenced by Medicare's prospective payment system, the growth in
managed care and the various alternative healthcare reform proposals, results in
the early discharge of patients from acute-care facilities. As a result, many
hospital patients do not receive the intensity of services that may be necessary
for them to achieve a full recovery from their diseases, disorders or traumatic
conditions. The Company's outpatient rehabilitation services play a significant
role in the continuum of care because they provide hospital-level services, in
terms of intensity, quality and frequency, in a more cost- efficient setting.
Patients treated at the Company's outpatient centers will undergo
varying courses of therapy depending upon their needs. Some patients may only
require a few hours of therapy per week for a few weeks, while others may spend
up to five hours per day in therapy for six months or more, depending on the
nature, severity and complexity of their injuries.
In general, the Company initially establishes an outpatient center in a
given market, either by acquiring an existing private therapy practice or
through de novo development, and institutes its clinical protocols and programs
in response to the community's general need for services. The Company will then
establish satellite clinics that are
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dependent upon the main facility for management and administrative services.
These satellite clinics generally provide a specific evaluative or specialty
service/program, such as hand therapy or foot and ankle therapy, in response to
specific market demands. The Company's outpatient rehabilitation facilities
range in size from 1,200 square feet for specialty clinics to 20,000 square feet
for large, full-service facilities. Currently, the typical outpatient facility
configuration ranges in size from 2,000 to 5,000 square feet and costs less than
$500,000 to build and equip.
Patient utilization of the Company's outpatient rehabilitation
facilities cannot be measured in the conventional manner applied to acute-care
hospitals, nursing homes and other healthcare providers which have a fixed
number of licensed beds and serve patients on a 24-hour basis. Utilization
patterns in outpatient rehabilitation facilities will be affected by the market
to be served, the types of injuries treated, the patient mix and the number of
available therapists, among other factors. Moreover, because of variations in
size, location, hours of operation, referring physician base and services
provided and other differences among each of the Company's outpatient
facilities, it is not possible to accurately assess patient utilization against
a norm.
Inpatient Services
Inpatient Rehabilitation Facilities. At January 31, 1996, the Company
operated 77 inpatient rehabilitation facilities with 4,618 beds, representing
the largest group of affiliated proprietary inpatient rehabilitation facilities
in the United States. The Company's inpatient rehabilitation facilities provide
high-quality comprehensive services to patients who require intensive
institutional rehabilitation care.
Inpatient rehabilitation patients are typically those who are
experiencing significant physical disabilities due to various conditions, such
as head injury, spinal cord injury, stroke, certain orthopaedic problems and
neuromuscular disease. The Company's inpatient rehabilitation facilities provide
the medical, nursing, therapy and ancillary services required to comply with
local, state and federal regulations as well as accreditation standards of the
Joint Commission on Accreditation of Healthcare Organizations (the "JCAHO") and
the Commission on Accreditation of Rehabilitation Facilities ("CARF").
All of the Company's inpatient rehabilitation facilities utilize an
interdisciplinary team approach to the rehabilitation process and involve the
patient and family, as well as the payor, in the determination of the goals for
the patient. Internal case managers monitor each patient's progress and provide
documentation of patient status, achievement of goals, functional outcomes and
efficiency.
The Company acquires or develops inpatient rehabilitation facilities in
those communities where it believes there is a demonstrated need for
comprehensive inpatient rehabilitation services. Depending upon the specific
market opportunity, these facilities may be licensed as rehabilitation hospitals
or skilled nursing facilities. The Company believes that it can provide
high-quality rehabilitation services in either type of facility, but prefers to
utilize the rehabilitation hospital form.
In certain markets where it does not provide free-standing outpatient
facilities, the Company's rehabilitation hospitals may provide outpatient
rehabilitation services as a complement to their inpatient services. Typically,
this opportunity arises when patients complete their inpatient course of
treatment but remain in need of additional therapy that can be accomplished on
an outpatient basis. Depending upon the demand for outpatient services and
physical space constraints, the rehabilitation hospital may establish the
services either within its building or in a satellite location. In either case,
the clinical protocols and programs developed for use in the free-standing
outpatient centers will be utilized by these facilities.
The Company's Nashville, Tennessee (Vanderbilt University), Memphis,
Tennessee (Methodist Hospitals), Dothan, Alabama (Southeast Alabama Medical
Center) and Charleston, South Carolina (North Trident Regional Medical Center)
hospital facilities have been developed in conjunction with local tertiary-care
facilities. This
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strategy of developing effective referral and service networks prior to opening
results in improved operating efficiencies for the new facilities. The Company
is utilizing this same concept in rehabilitation hospitals under development
with the University of Missouri and the University of Virginia.
Medical Centers. The Company operates five medical centers with 912
licensed beds in four distinct markets. These facilities provide general and
specialty medical and surgical healthcare services, emphasizing orthopaedics,
sports medicine and rehabilitation.
The Company acquired its five medical centers as outgrowths of its
rehabilitative healthcare services. Often, patients require medical and surgical
interventions prior to the initiation of their rehabilitative care. In each of
the markets in which the Company has acquired a medical center, the Company had
well-established relationships with the medical communities serving each
facility. In addition, each of the facilities enjoyed well-established
reputations in orthopaedics and/or sports medicine prior to their acquisition by
the Company. Following the acquisition of each of its medical centers, the
Company has provided the resources to improve upon the physical plant and expand
services through the introduction of new technology. The Company has also
developed additional relationships between these facilities and certain
university facilities, including the University of Miami, Auburn University and
the University of Alabama at Birmingham. Through these relationships, the influx
of celebrity athletes and personalities and the acquisition of new technology,
all five medical centers have improved their operating efficiencies and enhanced
census.
Each of the five medical center facilities is licensed as an acute-care
hospital, is accredited by the JCAHO and participates in the Medicare
prospective payment system. See this Item, "Business -- Regulation".
Inpatient Facility Utilization. In measuring patient utilization of the
Company's inpatient facilities, various factors must be considered. Due to
market demand, demographics, start-up status, renovation, patient mix and other
factors, the Company may not treat all licensed beds in a particular facility as
available beds, which sometimes results in a material variance between licensed
beds and beds actually available for utilization at any specific time. The
Company is in a position to increase the number of available beds at such
facilities as market conditions dictate. During the year ended December 31,
1995, the Company's inpatient facilities achieved an overall utilization, based
on patient days and available beds, of 70.5%.
Surgery Centers
As a result of the acquisitions of SHC, SSCI and SCA in 1995 and early
1996, the Company became the largest operator of outpatient surgery centers in
the United States. It currently operates 123 free-standing surgery centers,
including five mobile lithotripsy units, in 30 states, and has an additional ten
free-standing surgery centers under development. Approximately 80% of these
facilities are located in markets served by the Company outpatient and
rehabilitative service facilities, enabling the Company to pursue opportunities
for cross-referrals between surgery and rehabilitative facilities as well as to
centralize administrative functions. The Company's surgery centers provide the
facilities and medical support staff necessary for physicians to perform
non-emergency surgical procedures. Its typical surgery center is a free-standing
facility with three to six fully equipped operating and procedure rooms and
ancillary areas for reception, preparation, recovery and administration. Each of
the Company's surgery centers is available for use only by licensed physicians,
oral surgeons and podiatrists, and the centers do not perform surgery on an
emergency basis.
Outpatient surgery centers, unlike hospitals, have not historically
provided overnight accommodations, food services or other ancillary services.
Over the past several years, states have increasingly permitted the use of
extended-stay recovery facilities by outpatient surgery centers. As a result,
many outpatient surgery centers are adding extended recovery care capabilities
where permitted. Fifty-two of the Company's surgery centers currently provide
for extended recovery stays. The Company's ability to develop such recovery care
facilities is dependent upon state regulatory environments in the particular
states where its centers are located.
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The Company's outpatient surgery centers implement quality control
procedures to evaluate the level of care provided the centers. Each center has a
medical advisory committee of three to ten physicians which reviews the
professional credentials of physicians applying for medical staff privileges at
the center.
Other Patient Care Services
In certain of its markets, the Company provides other patient care
services, including home healthcare, diagnostic services, physician services and
contract management of hospital-based rehabilitative healthcare services. The
Company evaluates market opportunities on a case-by-case basis in determining
whether to provide additional services of these types, which may be
complementary to facility-based services provided by the Company or stand-alone
businesses.
Marketing of Facilities and Services
The Company markets its facilities, and their services and programs, on
local, regional and national levels. Local and regional marketing activities are
typically coordinated by facility-based marketing personnel, whereas large-scale
regional and national efforts are coordinated by corporate-based personnel.
In general, the Company develops a marketing plan for each facility
based on a variety of factors, including population characteristics, physician
characteristics and incidence of disability statistics, in order to identify
specific service opportunities. Facility-oriented marketing programs are focused
on increasing the volume of patient referrals to the specific facility and
involve the development of ongoing relationships with area schools, businesses
and industries as well as physicians, health maintenance organizations and
preferred provider organizations.
The Company's larger-scale marketing activities are focused more
broadly on efforts to generate patient referrals to multiple facilities and the
creation of new business opportunities. Such activities include the development
and maintenance of contractual relationships or national pricing agreements with
large third-party payors, such as CIGNA, Metrahealth or other national insurance
companies, with national HMO/PPO companies, such as
Healthcare-COMPARE/AFFORDABLE, Hospital Network of America and Multiplan, with
national case management companies, such as INTRACORP and Crawford & Co., and
with national employers, such as Wal-Mart, Georgia-Pacific Corporation, Dillard
Department Stores, Goodyear Tire & Rubber and Winn-Dixie. In addition, since
many of the facilities acquired by the Company during the past two years had
very limited contractual relationships with payors, managed care providers,
employers and others, the Company is expanding its existing payor relationships
to include these facilities.
The Company carries out broader programs designed to further enhance
its public image. Among these is the HEALTHSOUTH Sports Medicine Council, headed
by Bo Jackson, which is dedicated to developing educational programs focused on
athletics for use in high schools. The Company has ongoing relationships with
the Ladies Professional Golf Association, the Southeastern Conference and more
than 400 universities, colleges and high schools to provide sports medicine
coverage of events and rehabilitative healthcare services for injured athletes.
In addition, the Company has established relationships with or provided
treatment services for athletes from some 35 to 40 major professional sports
teams, as well as providing sports medicine services for Olympic and amateur
athletes.
The Company is a national sponsor of the United Cerebral Palsy
Association and the National Arthritis Foundation and supports many other
charitable organizations on national and local levels. Through these endeavors,
the Company provides its employees with opportunities to support their
communities.
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Sources of Revenues
Private pay revenue sources represent the majority of the Company's
revenues. The following table sets forth the percentages of the Company's
revenues from various sources for the periods indicated:
Year Ended Year Ended
Source December 31, 1994 December 31, 1995
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Medicare ................................. 41.0% 40.0%
Commercial (1) ........................... 34.1 34.8
Workers' Compensation..................... 10.9 10.3
All Other Payors (2)...................... 14.0 14.9
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100.0% 100.0%
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(1) Includes commercial insurance, HMOs, PPOs and other managed care plans.
(2) Medicaid is included in this category, but is insignificant in amount.
The above table does not reflect the facilities acquired from ReLife,
Inc. ("ReLife") in 1994, the SHC facilities and the SSCI facilities for
periods or portions thereof prior to the effective date of the
acquisitions. Comparable information for the ReLife, SHC and SSCI
facilities is not available and is not reflected in either year in the
table.
See this Item "Business -- Regulation -- Medicare Participation and
Reimbursement" for a description of the reimbursement regulations applicable to
the Company's facilities.
Competition
The Company competes in the geographic markets in which its facilities
are located. In addition, the Company's rehabilitation facilities compete on a
regional and national basis with other providers of specialized services such as
sports medicine and work hardening, and specific concentrations such as head
injury rehabilitation and orthopaedic surgery. The competition faced in each of
these markets is similar, with variations arising from the number of healthcare
providers in the given metropolitan area. The primary competitive factors in the
rehabilitation services business are quality of services, projected patient
outcomes, charges for services, responsiveness to the needs of the patients,
community and physicians, and ability to tailor programs and services to meet
specific needs of the patients. Competitors and potential competitors include
hospitals, private practice therapists, rehabilitation agencies and others. Some
of these competitors may have greater patient referral support and financial and
personnel resources in particular markets than the Company. Management believes
that the Company competes successfully within the marketplace based upon its
reputation for quality, competitive prices, positive rehabilitation outcomes,
innovative programs, clean and bright facilities and responsiveness to needs.
The Company's medical centers are located in four urban areas of the
country, all with well established healthcare services provided by a number of
proprietary, not-for-profit, and municipal hospital facilities. The Company's
facilities compete directly with these local hospitals as well as various
nationally recognized centers of excellence in orthopaedics, sports medicine and
other specialties. Because the Company's facilities enjoy a national and
international reputation for orthopaedic surgery and sports medicine, the
Company believes that its medical centers' level of service and continuum of
care enable them to compete successfully, both locally and nationally.
The Company's surgery centers compete primarily with hospitals and
other operators of freestanding surgery centers in attracting physicians and
patients, and in developing new centers and in acquiring existing centers. The
primary competitive factors in the outpatient surgery business are convenience,
cost, quality of service,
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physician loyalty and reputation. Hospitals have many competitive advantages in
attracting physicians and patients, including established standing in a
community, historical physician loyalty and convenience for physicians making
rounds or performing inpatient surgery in the hospital. However, the Company
believes that its national market system and its historical presence in certain
of the markets where its surgery centers are located will enhance the Company's
ability to operate these facilities successfully.
The Company potentially faces competition any time it initiates a
Certificate of Need ("CON") project or seeks to acquire an existing facility or
CON. See this Item, "Business -- Regulation". This competition may arise either
from competing companies, national or regional, or from local hospitals which
file competing applications or oppose the proposed CON project. The necessity
for these approvals serves as a barrier to entry and has the potential to limit
competition by creating a franchise to provide services to a given area. To date
the Company has been successful in obtaining each of the CONs or similar
approvals which it has sought, although there can be no assurance that it will
achieve similar success in the future.
Regulation
The healthcare industry is subject to regulation by federal, state and
local governments. The various levels of regulatory activity affect the
Company's business activities by controlling its growth, requiring licensure or
certification of its facilities, regulating the use of its properties and
controlling the reimbursement to the Company for services provided.
Licensure, Certification and Certificate of Need Regulations
Capital expenditures for the construction of new facilities, the
addition of beds or the acquisition of existing facilities may be reviewable by
state regulators under a statutory scheme which is sometimes referred to as a
CON program. States with CON programs place limits on the construction and
acquisition of healthcare facilities and the expansion of existing facilities
and services. In such states, approvals are required for capital expenditures
exceeding certain amounts which involve inpatient rehabilitation facilities or
services. Outpatient rehabilitation facilities and services do not require such
approvals in a majority of states.
State CON statutes generally provide that, prior to the addition of new
beds, the construction of new facilities or the introduction of new services, a
state health planning designated agency (a "SHPDA") must determine that a need
exists for those beds, facilities or services. The CON process is intended to
promote comprehensive healthcare planning, assist in providing high quality
healthcare at the lowest possible cost and avoid unnecessary duplication by
ensuring that only those healthcare facilities that are needed will be built.
Typically, the provider of services submits an application to the
appropriate SHPDA with information concerning the area and population to be
served, the anticipated demand for the facility or service to be provided, the
amount of capital expenditure, the estimated annual operating costs, the
relationship of the proposed facility or service to the overall state health
plan and the cost per patient day for the type of care contemplated. Whether the
CON is granted is based upon a finding of need by the SHPDA in accordance with
criteria set forth in CON statutes and state and regional health facilities
plans. If the proposed facility or service is found to be necessary and the
applicant to be the appropriate provider, the SHPDA will issue a CON containing
a maximum amount of expenditure and a specific time period for the holder of the
CON to implement the approved project.
Licensure and certification are separate, but related, regulatory
activities. The former is usually a state or local requirement and the latter is
a federal requirement. In almost all instances, licensure and certification will
follow specific standards and requirements that are set forth in readily
available public documents. Compliance with the requirements is monitored by
annual on-site inspections by representatives of various government agencies.
All of the Company's inpatient rehabilitation facilities and medical centers and
substantially all of the Company's surgery centers are currently required to be
licensed, but only the outpatient rehabilitation facilities located in
- 10 -
Alabama, Arizona, Connecticut, Maryland, Massachusetts and New Hampshire
currently must satisfy such a licensing requirement.
Medicare Participation and Reimbursement
In order to participate in the Medicare program and receive Medicare
reimbursement, each facility must comply with the applicable regulations of the
United States Department of Health and Human Services relating to, among other
things, the type of facility, its equipment, its personnel and its standards of
medical care, as well as compliance with all state and local laws and
regulations. All of the Company's inpatient facilities, except for the St. Louis
head injury center, participate in the Medicare program. Approximately 165 of
the Company's outpatient rehabilitation facilities currently participate in, or
are awaiting the assignment of a provider number to participate in, the Medicare
program. All of the Company's surgery centers are certified (or awaiting
certification) under the Medicare program. Its Medicare-certified facilities,
inpatient and outpatient, undergo annual on-site Medicare certification surveys
in order to maintain their certification status. Failure to comply with the
program's conditions of participation may result in loss of program
reimbursement or other governmental sanctions. All such facilities have been
deemed to be in satisfactory compliance on all applicable surveys. The Company
has developed its operational systems to assure compliance with the various
standards and requirements of the Medicare program and has established ongoing
quality assurance activities to monitor compliance. The Company believes that
all of such facilities currently meet all applicable Medicare requirements.
As a result of the Social Security Act Amendments of 1983, Congress
adopted a prospective payment system ("PPS") to cover the routine and ancillary
operating costs of most Medicare inpatient hospital services. Under this system,
the Secretary of Health and Human Services has established fixed payment amounts
per discharge based on diagnosis-related groups ("DRGs"). With limited
exceptions, a hospital's payment for Medicare inpatients is limited to the DRG
rate, regardless of the number of services provided to the patient or the length
of the patient's hospital stay. Under PPS, a hospital may retain the difference,
if any, between its DRG rate and its operating costs incurred in furnishing
inpatient services, and is at risk for any operating costs that exceed its DRG
rate. The Company's medical center facilities are generally subject to PPS with
respect to Medicare inpatient services.
The PPS program has been beneficial for the rehabilitation segment of
the healthcare industry because of the economic pressure on acute-care hospitals
to discharge patients as soon as possible. The result has been increased demand
for rehabilitation services for those patients discharged early from acute-care
hospitals. Outpatient rehabilitation services and free-standing inpatient
rehabilitation facilities are currently exempt from PPS, and inpatient
rehabilitation units within acute-care hospitals are eligible to obtain an
exemption from PPS upon satisfaction of certain federal criteria.
Currently, five of the Company's outpatient centers are
Medicare-certified Comprehensive Outpatient Rehabilitation Facilities ("CORFs")
and 143 are Medicare-certified rehabilitation agencies. CORFs have been
designated cost-reimbursed Medicare providers since 1982. Under the regulations,
CORFs are reimbursed reasonable costs (subject to certain limits) for services
provided to Medicare beneficiaries. Outpatient rehabilitation facilities
certified by Medicare as rehabilitation agencies are reimbursed on the basis of
the lower of reasonable costs for services provided to Medicare beneficiaries or
charges for such services. Outpatient rehabilitation facilities which are
physician-directed clinics, as well as outpatient surgery centers, are
reimbursed by Medicare on a fee screen basis; that is, they receive a fixed fee,
which is determined by the geographical area in which the facility is located,
for each procedure performed. The Company's outpatient rehabilitation facilities
submit monthly bills to their fiscal intermediaries for services provided to
Medicare beneficiaries, and the Company files annual cost reports with the
intermediaries for each such facility. Adjustments are then made if costs have
exceeded payments from the fiscal intermediary or vice versa.
The Company's inpatient facilities (other than the medical center
facilities) either are not currently covered by PPS or are exempt from PPS, and
are also cost-reimbursed, receiving the lower of reasonable costs or charges.
- 11 -
Typically, the fiscal intermediary pays a set rate based on the prior year's
costs for each facility. As with outpatient facilities subject to cost-based
reimbursement, annual cost reports are filed with the Company's fiscal
intermediary and payment adjustments are made, if necessary.
Congress has directed the United States Department of Health and Human
Services to develop regulations, which could subject inpatient rehabilitation
hospitals to PPS in place of the current "reasonable cost within limits" system
of reimbursement. In addition, informal proposals have been made for a
prospective payment system for Medicare outpatient care. Other proposals for a
prospective payment system for rehabilitation hospitals are also being
considered by the federal government. Therefore, the Company cannot predict at
this time the effect that any such changes may have on its operations.
Regulations relating to prospective payment or other aspects of reimbursement
may be developed in the future which could adversely affect reimbursement for
services provided by the Company.
Over the past several years an increasing number of healthcare
providers have been accused of violating the federal False Claims Act. That Act
prohibits the knowing presentation of a false claim to the United States
government. Because the Company performs thousands of similar procedures a year
for which it is reimbursed by Medicare and there is a relatively long statute of
limitations, a billing error could result in significant civil penalties. The
Company does not believe that it is or has been in violation of the False Claims
Act.
Relationships with Physicians and Other Providers
Various state and federal laws regulate relationships among providers
of healthcare services, including employment or service contracts and investment
relationships. These restrictions include a federal criminal law prohibiting (i)
the offer, payment, solicitation or receipt of remuneration by individuals or
entities, to induce referrals of patients for services reimbursed under the
Medicare or Medicaid programs or (ii) the leasing, purchasing, ordering,
arranging for or recommending the lease, purchase or order of any item, good,
facility or service covered by such programs (the "Fraud and Abuse Law"). In
addition to federal criminal sanctions, violators of the Fraud and Abuse Law may
be subject to significant civil sanctions, including fines and/or exclusion from
the Medicare and/or Medicaid programs.
In 1991, the Office of the Inspector General ("OIG") of the United
States Department of Health and Human Services promulgated regulations
describing compensation arrangements which are not viewed as illegal
remuneration under the Fraud and Abuse Law (the "Safe Harbor Rules"). The Safe
Harbor Rules create certain standards ("Safe Harbors") for identified types of
compensation arrangements which, if fully complied with, assure participants in
the particular arrangement that the OIG will not treat such participation as a
criminal offense under the Fraud and Abuse Law or as the basis for an exclusion
from the Medicare and Medicaid programs or an imposition of civil sanctions. The
OIG closely scrutinizes health care joint ventures involving physicians and
other referral sources. In 1989, the OIG published a Fraud Alert that outlined
questionable features of "suspect" joint ventures.
In 1992, regulations were published in the Federal Register
implementing the OIG sanction and civil money penalty provisions established in
the Fraud and Abuse Law. The regulations (the "Exclusion Regulations") provide
that the OIG may exclude a Medicare provider from participation in the Medicare
Program for a five-year period upon a finding that the Fraud and Abuse Law has
been violated. The regulations expressly incorporate a test adopted by three
federal circuit courts providing that if one purpose of remuneration that is
offered, paid, solicited or received is to induce referrals, then the statute is
violated. The regulations also provide that after the OIG establishes a factual
basis for excluding a provider from the program, the burden of proof shifts to
the provider to prove that the Fraud and Abuse Law has not been violated.
The Company operates five of its rehabilitation hospitals and almost
all of its outpatient rehabilitation facilities as limited partnerships. Three
of the rehabilitation hospital partnerships involve physician investors, and two
of the rehabilitation hospital partnerships involve other institutional
healthcare providers. Seven of the
- 12 -
outpatient partnerships currently have a total of 21 physician limited partners,
some of whom refer patients to the partnerships. Those partnerships which are
providers of services under the Medicare program, and their limited partners,
are subject to the Fraud and Abuse Law. A number of the relationships
established by the Company with physicians and other healthcare providers do not
fit within any of the Safe Harbors. The Safe Harbor Rules do not expand the
scope of activities that the Fraud and Abuse Law prohibits, nor do they provide
that failure to fall within a Safe Harbor constitutes a violation of the Fraud
and Abuse Law; however, the OIG has informally indicated that failure to fall
within a Safe Harbor may subject an arrangement to increased scrutiny.
Most of the Company's surgery centers are owned by limited
partnerships, which include as limited partners physicians who perform surgical
procedures at such centers. Subsequent to the promulgation of the Safe Harbor
Rules in 1991, the Department of Health and Human Services issued for public
comment additional proposed Safe Harbors, one of which specifically addresses
surgeon ownership interests in ambulatory surgery centers (the "Proposed ASC
Safe Harbor"). As proposed, the Proposed ASC Safe Harbor would protect payments
to be made to surgeons as a return on investment interest in a surgery center
if, among other conditions, all the investors are surgeons who are in a position
to refer patients directly to the center and perform surgery on such referred
patients. Since a subsidiary of the Company is an investor in each limited
partnership which owns a surgery center, the Company's arrangements with
physician investors do not fit within the Proposed ASC Safe Harbor as currently
proposed. The Company is unable at this time to predict whether the Proposed ASC
Safe Harbor will become final, and if so, whether the language and requirements
will remain as currently proposed, or whether changes will be made prior to
becoming final. There can be no assurance that the Company will ever meet the
criteria under the Proposed ASC Safe Harbor as proposed or as it may be adopted
in final form. The Company believes, however, that its arrangements with
physicians with respect to its surgery center facilities should not fall within
the activities prohibited by the Fraud and Abuse Law.
While several federal court decisions have aggressively applied the
restrictions of the Fraud and Abuse Law, they provide little guidance as to the
application of the Fraud and Abuse Law to the Company's limited partnerships.
The Company believes that it is in compliance with the current requirements of
applicable federal and state law, but no assurances can be given that a federal
or state agency charged with enforcement of the Fraud and Abuse Law and similar
laws might not assert a contrary position or that new federal or state laws, or
new interpretations of existing laws, might not adversely affect relationships
established by the Company with physicians or other healthcare providers or
result in the imposition of penalties on the Company or certain of its
facilities. Even the assertion of a violation could have a material adverse
effect upon the Company.
The so-called "Stark II" provisions of the Omnibus Budget
Reconciliation Act of 1993 amend the federal Medicare statute to prohibit the
making by a physician of referrals for "designated health services" (including
physical therapy and occupational therapy) to an entity in which the physician
has an investment interest or other financial relationship, subject to certain
exceptions. Such prohibition took effect on January 1, 1995 and applies to all
of the Company's outpatient rehabilitation facility partnerships with physician
limited partners. In addition, a number of states have passed or are considering
statutes which prohibit or limit physician referrals of patients to facilities
in which they have an investment interest. In response to these regulatory
activities, the Company has restructured most of its rehabilitation facility
partnerships which involve physician investors, in order to eliminate physician
ownership interests not permitted by applicable law. The Company intends to take
such actions as may be required to cause the remaining partnerships to be in
compliance with applicable laws and regulations, including, if necessary, the
prohibition of physician partners from referring patients. The Company believes
that this restructuring has not adversely affected and will not adversely affect
the operations of its facilities.
Ambulatory surgery is not identified as a "designated health service",
and the Company does not believe that ambulatory surgery is subject to the
restrictions set forth in Stark II. However, lithotripsy facilities operated by
the Company frequently operate on hospital campuses, and it is possible to
conclude that such services are "inpatient and outpatient hospital services" --
a category of proscribed services within the meaning of Stark II. Similarly,
physicians frequently perform endoscopic procedures in the procedure rooms of
the Company's surgery centers, and it is also possible to construe these
services to be "designated health services". While the Company
- 13 -
does not believe that Stark II was intended to apply to such services, if that
were determined to be the case, the Company intends to take steps necessary to
cause the operation of its facilities to comply with the law.
The Company cannot predict whether other regulatory or statutory
provisions will be enacted by federal or state authorities which would prohibit
or otherwise regulate relationships which the Company has established or may
establish with other healthcare providers or the possibility of materially
adverse effects on its business or revenues arising from such future actions.
Management of the Company believes, however, that the Company will be able to
adjust its operations so as to be in compliance with any regulatory or statutory
provision as may be applicable. See this Item, "Business -- Patient Care
Services" and "Business -- Sources of Revenues".
Insurance
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 as of December 31, 1995, the Company had adequate reserves to
cover losses on asserted and unasserted claims.
Employees
As of January 31, 1996, the Company employed 26,427 persons, of whom
17,016 were full-time employees and 9,411 were part-time employees. Of the above
employees, 417 were employed at the Company's headquarters in Birmingham,
Alabama. Except for approximately 100 employees at one rehabilitation hospital
(about 20% of that facility's workforce), none of the Company's employees are
represented by a labor union. The Company is not aware of any current activities
to organize its employees at other facilities. Management of the Company
considers the relationship between the Company and its employees to be good.
Item 2. Properties.
The Company's executive offices currently occupy approximately 120,000
square feet of leased space in Birmingham, Alabama. In August 1995, the Company
announced plans to construct new executive offices on property acquired by it
earlier in the year. The expanded executive offices are expected to be fully
available by December 1996. All of the Company's outpatient operations are
carried out in leased facilities, except for its outpatient rehabilitation
facilities located in Birmingham and Montgomery, Alabama, Orlando and Panama
City, Florida, Bedford, New Hampshire and one of its facilities in Baltimore,
Maryland. The Company owns 33 of its inpatient rehabilitation facilities and
leases or operates under management contracts 44 of its inpatient rehabilitation
facilities. The Company also owns 27 of its surgery centers and leases the
remainder. The Company constructed its rehabilitation hospitals in Florence and
Columbia, South Carolina, Kingsport and Nashville, Tennessee, Concord, New
Hampshire, and Dothan, Alabama on property leased under long-term ground leases.
The property on which the Company's Memphis, Tennessee rehabilitation hospital
is located is owned in partnership by the Company and Methodist Hospitals of
Memphis. The Company owns its four medical center facilities in Birmingham,
Alabama, Richmond, Virginia and Miami, Florida and leases its medical center
facility in Dallas, Texas. The Company currently owns, and from time to time may
acquire, certain other improved and unimproved real properties in connection
with its business. See Notes 4 and 6 of "Notes to Consolidated Financial
Statements" for information with respect to the properties owned by the Company
and certain indebtedness related thereto.
- 14 -
In management's opinion, the Company's physical properties are adequate
for the Company's needs for the foreseeable future, and are consistent with its
expansion plans described elsewhere in this Annual Report on Form 10-K.
The following table sets forth a listing of the Company's patient care
services locations at January 31, 1996:
Outpatient Inpatient
Rehabilitation Rehabilitation Medical Surgery Diagnostic Other
State Market Centers(1) Facilities (Beds)(2) Centers (Beds)(2) Centers Centers Services
- ----- ------ ---------- -------------------- ----------------- ------- ------- --------
Alabama Auburn 1
Birmingham 6 6(225) 1(219) 1 3
Dothan 1(34) 1
Florence 2 1
Gadsden 1 1 2
Huntsville 3 1(50)
Mobile 2 1
Montgomery 1 1(80)
Muscle Shoals 1
Opelika 1
Tuscaloosa 1 1
Valley 1
Alaska Anchorage 1
Arizona Mesa 3
Phoenix 7 1(60) 1
Prescott 2
Scottsdale 3 1(43)
Tucson 2 1(80) 1
Arkansas Fort Smith 1(80) 1
Little Rock 1 1
Van Buren 1
California Anaheim 1
Bakersfield 1 1(60) 1
Canoga Park 1
Carmichael 1
Cerritos 1
Elk Grove 1
Folsom 1
Foster City 1
Fresno 2
Huntington 2 1
Inglewood 1
Marina Del Rey 1 2
Murrieta 1
Newport Beach 1 1
Oakland 1 1
Oceanside 1
Palo Alto 1
Rancho Cordova 1
Redding 1
Redlands 1
Riverside 1
Sacramento 2 2
San Carlos 1
San Diego 12 3
San Francisco 2 1 1
- 15 -
Outpatient Inpatient
Rehabilitation Rehabilitation Medical Surgery Diagnostic Other
State Market Centers(1) Facilities (Beds)(2) Centers (Beds)(2) Centers Centers Services
- ----- ------ ---------- -------------------- ----------------- ------- ------- --------
San Jose 1
San Leandro 1
San Luis Obispo 1
Santa Monica 1
Santa Rosa 2 1
Torrance 2
Vacaville 1
Van Nuys 2
Whittier 1
Woodland Hills 1
Colorado Colorado Springs 8 1 1
Denver 3 1 2
Englewood 2
Fort Collins 2 1
Longmont 1
Pueblo 1
Vail 1
Wheat Ridge 4
Connecticut Fairfield 1
Delaware Newark 4
District of
Columbia Washington 1 1
Florida Boca Raton 2 2
Coral Gables 2
Fort Lauderdale 1 1(108) 1
Fort Myers 1 1
Fort Pierce 1
Fort Walton Beach 1
Jacksonville 2
Lake Worth 1
Largo 1(40)
Lecanto 1
Melbourne 3 1(80) 1
Merritt Island 3
Miami 2 2(165) 2(397) 1 1 1
Naples 1
Ocala 2
Ocoee 2 1
Orlando 6 3
Palm Bay 2
Panama City 3
Port St. Lucie 3 1
St. Petersburg 1
Sarasota 2 1(60) 2
Tallahassee 2 1(70)
Tampa 4 1
Tarpon Springs 1
Vero Beach 1 1(70) 1
West Palm Beach 2 1
Georgia Atlanta 6 1(14) 3 1
Columbus 1
Gainesville 1
- 16 -
Outpatient Inpatient
Rehabilitation Rehabilitation Medical Surgery Diagnostic Other
State Market Centers(1) Facilities (Beds)(2) Centers (Beds)(2) Centers Centers Services
- ----- ------ ---------- -------------------- ----------------- ------- ------- --------
Macon 1 2(75)
Hawaii Honolulu 1
Kahului 1
Kihei 1
Lahaina 1
Idaho Boise 1(3)
Illinois Barrington 2
Carol Stream 2
Chicago 27 2
Elgin 2
Gurnee 2
Joliet 2
Lake Zurich 2
Naperville 2
Rockford 3
Woodstock 2
Indiana Evansville 1(80) 1
Fort Wayne 4
Indianapolis 1 1
Jeffersonville 1
La Porte 1
Muncie 3
New Albany 1
South Bend 1
Warsaw 1
Iowa Des Moines 3
Kansas Kansas City 2
Great Bend 1
Kentucky Edgewood 1(40)
Lexington 1
Louisville 2 1
Louisiana Baton Rouge 1 1(43)
Metaire 1
New Orleans 1
Shreveport 1
Maine Bangor 2
Maryland Annapolis 2
Baltimore 8 4
Chevy Chase 1 1
Hagerstown 1
Rockville 1 1 1
Salisbury 1 1(44)
Severna Park 1
Wheaton 1
Massachusetts Abington 1
Springfield 1
- 17 -
Outpatient Inpatient
Rehabilitation Rehabilitation Medical Surgery Diagnostic Other
State Market Centers(1) Facilities (Beds)(2) Centers (Beds)(2) Centers Centers Services
- ----- ------ ---------- -------------------- ----------------- ------- ------- --------
Michigan Marquette 1
Monroe 1
Mississippi Jackson 1
Pascagoula 1
Meridian 1
Missouri Blue Springs 1
Brentwood 1
Bridgeton 1
Cape Girardeau 3
Chesterfield 1
Columbia 2
Kansas City 2 2(21) 1
Lake Ozark 1
Springfield 3
St. Joseph 1
St. Louis 16 1(26) 4 2
Nebraska Omaha 2
Nevada Las Vegas 3
New Hampshire Bedford 3
Concord 1(100)
Dover 2
Manchester 1
Somersworth 1
New Jersey Atlantic City 1
Bridgewater 1 1
Brunswick 1 1(15)
Edison 2
Emerson 2
Haddonfield 1
Linden 2
Madison 1
Monahawkin 1
Mt. Laurel 1
Newton 1
North Bergen 1
Paramus 2
Roseland 1
Sparta 1
Succasunna 1
Tinton Falls 1
Toms River 1 1(155)
New Mexico Albuquerque 3 1(60) 1
New York Albany 1
Great Neck 2
Huntington 1
Liverpool 1
Monsey 2
New York 2
Orangeburg 1
Pulaski 1
- 18 -
Outpatient Inpatient
Rehabilitation Rehabilitation Medical Surgery Diagnostic Other
State Market Centers(1) Facilities (Beds)(2) Centers (Beds)(2) Centers Centers Services
- ----- ------ ---------- -------------------- ----------------- ------- ------- --------
Syracuse 1
North Carolina Asheville 1
Chapel Hill 1
Charlotte 1 1
Concord 1
Durham 1
Greensboro 1
Kinston 1(17)
Marion 1
Monroe 1
Raleigh 2 1
Shelby 1
Statesville 1
Wilmington 1
Wilson 1
Ohio Ashtabula 1
Centerville 2
Cincinnati 1
Columbus 5
Cuyahoga Falls 1
Dayton 2
Dublin 1
Fairlawn 1
Independence 1
Lorain 5
Oregon 2
Toledo 2
Westerville 1
Oklahoma Ada 2
Oklahoma City 4 1(111) 2 1
Tulsa 2 1
Weatherford 1
Pennsylvania Altoona 2 1(66)
Camp Hill 1
Erie 1 2(207)
Harrisburg 3
Lancaster 1
Mechanicsburg 2 2(201)
Mt. Pleasant 1
Paoli 1
Pittsburgh 6 1(89)
Pleasant Gap 4 1(88)
Scranton 1
Springfield 1
York 3 1(88)
South Carolina Charleston 1 1(36) 1
Columbia 3 1(89)
Florence 1 1(88)
Greenville 1
Goose Creek 1
Lancaster 2(54)
- 19 -
Outpatient Inpatient
Rehabilitation Rehabilitation Medical Surgery Diagnostic Other
State Market Centers(1) Facilities (Beds)(2) Centers (Beds)(2) Centers Centers Services
- ----- ------ ---------- -------------------- ----------------- ------- ------- --------
Tennessee Chattanooga 2 1(80) 2
Clarksville 1
Kingsport 1(50)
Knoxville 2 1
Dyersburg 1
Collierville 1
Union City 1
Martin 1(40)
Memphis 4 1(80) 1
Nashville 2 1(80) 1 1
Texas Allen 1
Amarillo 1
Arlington 2 1(60) 1
Austin 7 1(80) 1
Beaumont 1
Dallas 9 3(173) 1(96) 1 1 1
El Paso 1 1
Fort Worth 5 1(60) 1 1
Houston 11 2(186) 4 1 1
Midland 1(60)
San Antonio 2 3(127) 2 5
Stafford 1
Texarkana 1 1(60)
Victoria 1
Waco 2
Wylie 1 1
Utah Salt Lake City 1
Sandy 1 1(86)
Virginia Alexandria 1
Arlington 1
Falls Church 1
Norfolk 1
Richmond 2 3(84) 1(200) 1 1
Roanoke 1
Virginia Beach 3
Warrenton 1
Washington Seattle 20 1
Tacoma 3
West Virginia Beckley 1
Huntington 1(40)
Morgantown 1(80)
Parkersburg 1(40)
Princeton 1(40)
Wisconsin Eau Claire 1
Green Bay 1
Oshkosh 1
Wausau 1
Wauwatosa 1
______________________
<FN>
(1) Includes freestanding outpatient centers and their satellites and
outpatient satellites of inpatient rehabilitation facilities.
(2) "Beds" refers to the number of beds for which a license or certificate
of need has been granted, which may vary materially from beds available
for use.
(3) Under construction.
</FN>
- 20 -
Item 3. Legal Proceedings.
In the ordinary course of its business, the Company may be subject,
from time to time, to claims and legal actions by patients and others. The
Company does not believe that any such pending actions, if adversely decided,
would have a material adverse effect on its financial condition. See Item 1,
"Business -- Insurance" and Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a description of the
Company's insurance coverage arrangements.
From time to time, the Company appeals decisions of various rate-making
authorities with respect to Medicare rates established for the Company's
facilities. These appeals are initiated in the ordinary course of business.
Management believes that adequate reserves have been established for possible
adverse decisions on any pending appeals and that the outcomes of currently
pending appeals, either individually or in the aggregate, will have no material
adverse effect on the Company's operations.
Item 4. Submission of Matters to a Vote of Security Holders.
On January 17, 1996, a Special Meeting of Stockholders of the Company
was held, at which the following actions were taken:
1. The shares of Common Stock represented at the Special Meeting were
voted in favor of the merger with SCA as follows:
NUMBER
VOTING FOR AGAINST ABSTAIN
------ --- ------- -------
69,296,381 68,987,300 138,189 170,892
2. The shares of Common Stock represented at the Special Meeting were
voted for the approval of an Amendment to the Restated Certificate of
Incorporation of the Company to increase the authorized shares of Common Stock
to 250,000,000 shares as follows:
NUMBER
VOTING FOR AGAINST ABSTAIN
------ --- ------- -------
71,658,079 70,713,604 750,958 193,517
- 21 -
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock is listed for trading on the New York Stock
Exchange (Symbol: HRC). The following table sets forth for the fiscal periods
indicated the high and low reported sale prices for the Company's Common Stock
as reported on the NYSE Composite Transactions Tape. All prices shown have been
adjusted for a two-for-one stock split effected in the form of a 100% stock
dividend paid on April 17, 1995.
Reported
Sale Price
High Low
1994
First Quarter................................................................ $ 16.13 $ 11.69
Second Quarter............................................................... 17.32 12.63
Third Quarter................................................................ 19.69 12.88
Fourth Quarter............................................................... 19.32 16.13
1995
First Quarter................................................................ $ 20.44 $ 18.06
Second Quarter............................................................... 21.63 16.32
Third Quarter................................................................ 25.75 17.25
Fourth Quarter............................................................... 32.38 22.50
-------------------------
The closing price for the Common Stock on the New York Stock Exchange
on March 21, 1996, was $36-5/8.
There were approximately 4,413 holders of record of the Common Stock as
of March 21, 1996, excluding those shares held by depository companies for
certain beneficial owners.
The Company has never paid cash dividends on its Common Stock and does
not anticipate the payment of cash dividends in the foreseeable future. The
Company currently anticipates that any future earnings will be retained to
finance the Company's operations.
- 22 -
Item 6. Selected Financial Data.
Set forth below is a summary of selected consolidated financial data
for the Company for the years indicated. All amounts have been restated to
reflect the effects of the 1994 ReLife acquisition and the 1995 SHC and SSCI
acquisitions, each of which was accounted for as a pooling of interests.
Year Ended December 31,
----------------------------------------------------------------------------------
1991 1992 1993 1994 1995
----------- ---------- ------------ ----------- ---------
(in thousands, except per share data)
Income Statement Data:
Revenues $ 277,655 $ 503,657 $ 678,425 $ 1,274,365 $ 1,556,687
Operating expenses:
Operating units 200,350 373,984 486,546 930,845 1,087,554
Corporate general and administrative 10,901 17,354 26,593 48,606 42,514
Provision for doubtful accounts 6,092 13,431 17,947 27,646 31,637
Depreciation and amortization 15,115 30,019 47,827 89,305 121,195
Interest expense 10,507 12,667 19,107 66,874 91,693
Interest income (5,835) (5,434) (4,352) (4,566) (5,879)
Merger and acquisition related expenses (1) ---- ---- 333 6,520 34,159
Loss on impairment of assets (2) ---- ---- ---- 10,500 11,192
Loss on abandonment of computer project (2) ---- ---- ---- 4,500 ----
NME Selected Hospitals Acquisition
related expense (2) ---- ---- 49,742 ---- ----
Terminated merger expense ---- 3,665 ---- ---- ----
Gain on sale of partnership interest ---- ---- (1,400) ---- ----
------------- ------------- ------------- ------------- -------------
237,130 445,686 642,343 1,180,230 1,414,065
Income before income taxes and
minority interests 40,525 57,971 36,082 94,135 142,622
Provision for income taxes 13,582 18,842 12,062 34,778 48,091
------------- ------------- ------------ ------------- -------------
Income before minority interests 26,943 39,129 24,020 59,357 94,531
Minority interests 1,272 4,430 6,684 8,864 15,582
-------------- -------------- ------------- -------------- --------------
Net income $ 25,671 $ 34,699 $ 17,336 $ 50,493 $ 78,949
============= ============= ============ ============= =============
Weighted average common and common
equivalent shares outstanding (3) 57,390 75,988 79,484 86,461 94,246
============= ============= ============ ============= =============
Net income per common and common
equivalent share(3) $ 0.45 $ 0.46 $ 0.22 $ 0.58 $ 0.84
============= ============= ============ ============= =============
Net income per common share--
assuming full dilution(3)(4) $ 0.43 $ N/A $ N/A $ 0.58 $ 0.82
============= ============= ============ ============= =============
December 31,
1991 1992 1993 1994 1995
---------- ------------- ------------ ----------- ---------
Balance Sheet Data:
Cash and marketable securities $ 126,508 $ 113,268 $ 94,084 $ 90,066 $ 108,973
Working capital 184,729 210,217 216,670 236,877 327,474
Total assets 503,797 818,089 1,487,772 1,778,939 2,460,129
Long-term debt(5) 171,275 343,477 906,972 1,052,064 1,281,287
Stockholders' equity 302,176 402,369 431,811 504,223 927,710
___________________
<FN>
(1) Expenses related to SHC's Ballas Merger in 1993, the ReLife and Heritage
Acquisitions in 1994 and the SHC, SSCI and NovaCare Rehabilitation
Hospitals Acquisition in 1995.
(2) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Notes to Consolidated Financial Statements".
(3) Adjusted to reflect a three-for-two stock split effected in the form of a
50% stock dividend paid on December 31, 1991 and a two-for-one stock split
effected in the form of a 100% stock dividend paid on April 17, 1995.
(4) Fully-diluted earnings per share in 1991 reflects shares reserved for
issuance upon exercise of dilutive stock options and shares reserved for
issuance upon conversion of HEALTHSOUTH's 7 3/4% Convertible Subordinated
Debentures due 2014, all of which were converted into Common Stock prior
to June 3, 1991. Fully-diluted earnings per share in 1994 and 1995 reflect
shares reserved for issuance upon conversion of HEALTHSOUTH's 5%
Convertible Subordinated Debentures due 2001.
(5) Includes current portion of long-term debt.
</FN>
- 23 -
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
The following discussion is intended to facilitate the understanding
and assessment of significant changes and trends related to the results of
operations and financial condition of the Company, including certain factors
related to recent acquisitions by the Company, the timing and nature of which
have significantly affected the Company's results of operations. This discussion
and analysis should be read in conjunction with the Company's consolidated
financial statements and notes thereto included elsewhere in this Annual Report
on Form 10-K.
The Company completed the following acquisitions over the last two
years:
o On December 31, 1993, HEALTHSOUTH acquired substantially all
of the assets of the rehabilitation services division of
National Medical Enterprises, Inc. (the "NME Selected
Hospitals Acquisition"). The purchase price was approximately
$315,000,000, plus net working capital. The Company acquired
28 inpatient rehabilitation facilities, with an aggregate of
2,296 licensed beds, and 45 outpatient rehabilitation centers.
o On December 29, 1994, HEALTHSOUTH acquired ReLife, Inc. (the
"ReLife Acquisition"). A total of 11,025,290 shares of
HEALTHSOUTH Common Stock were issued in the transaction,
representing a value of $180,000,000 at the time of the
acquisition. At that time, ReLife operated 31 inpatient
facilities with an aggregate of 1,102 licensed beds, including
nine free-standing rehabilitation hospitals, nine acute
rehabilitation units, five sub-acute rehabilitation units,
seven transitional living units and one residential facility,
and also provided outpatient rehabilitation services at 12
centers.
o Effective April 1, 1995, HEALTHSOUTH purchased the operations
of the rehabilitation hospital division of NovaCare, Inc. (the
"NovaCare Rehabilitation Hospitals Acquisition"). The purchase
price was approximately $235,000,000. The NovaCare
Rehabilitation Hospitals consisted of 11 rehabilitation
hospitals in seven states, 12 other facilities and two
Certificates of Need.
o On June 13, 1995, HEALTHSOUTH acquired Surgical Health
Corporation (the "SHC Acquisition"). A total of 8,531,480
shares of HEALTHSOUTH Common Stock were issued in the
transaction, representing a value of $155,000,000 at the time
of the acquisition. The Company also purchased SHC's
$75,000,000 aggregate principal amount of 11.5% Senior
Subordinated Notes due 2004 for an aggregate consideration of
approximately $86,000,000. At that time, SHC operated a
network of 36 free-standing surgery centers in 11 states, and
five mobile lithotripsy units.
o On October 26, 1995, HEALTHSOUTH acquired Sutter Surgery
Centers, Inc. (the "SSCI Acquisition"). A total of 1,776,001
shares of HEALTHSOUTH Common Stock were issued in the
transaction, representing a value of $44,444,000 at the time
of the acquisition. At that time, SSCI operated a network of
12 freestanding surgery centers in three states, with an
aggregate of 54 operating and procedure rooms.
o On December 1, 1995, HEALTHSOUTH acquired Caremark Orthopedic
Services Inc. (the "Caremark Acquisition"). The purchase price
was approximately $127,500,000. At that time Caremark owned
and operated approximately 120 outpatient rehabilitation
centers in thirteen states.
- 24 -
The NME Selected Hospitals Acquisition, the NovaCare Rehabilitation
Hospitals Acquisition and the Caremark Acquisition each were accounted for under
the purchase method of accounting and, accordingly, such operations are included
in the Company's consolidated financial information from their respective dates
of acquisition. The ReLife Acquisition, the SHC Acquisition and the SSCI
Acquisition were each 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. ReLife, SHC and SSCI did not separately track such
revenues. The results of operations of SHC in turn reflect SHC's 1994
acquisition of Heritage Surgical Corporation (the "Heritage Acquisition"), which
also was accounted for as a pooling of interests.
As described below under " -- Liquidity and Capital Resources", in the
fourth quarter of 1995, the Company entered into agreements to acquire Surgical
Care Affiliates, Inc. and Advantage Health Corporation through mergers. These
transactions were consummated during the first quarter of 1996, and are not
reflected in the following discussion.
The Company determines 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. The Company utilizes independent
appraisers and relies on its 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 purchased facilities and other intangible assets, the
Company determines on a quarterly basis whether an impairment event has occurred
by considering factors such as the market value of the asset, a significant
adverse change in legal factors or in the business climate, adverse action by
regulators, 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, an impairment loss is
calculated based on the excess of the carrying value of the asset over the
asset's fair value.
Governmental, commercial and private payors have increasingly
recognized the need to contain their costs for healthcare services. These
payors, accordingly, are turning to closer monitoring of services, prior
authorization requirements, utilization review and increased utilization of
outpatient services. During the periods discussed below, the Company has
experienced an increased effort by these payors to contain costs through
negotiated discount pricing. The Company views these efforts as an opportunity
to demonstrate the effectiveness of its clinical programs and its ability to
provide its rehabilitative healthcare services efficiently. The Company has
entered into a number of contracts with payors to provide services and has
realized an increased volume of patients as a result.
The Company's 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. Management determines allowances for doubtful accounts
and contractual adjustments based on historical experience and the terms of
payor contracts. Net accounts receivable include only those amounts estimated by
management to be collectible. The Company, in many cases, operates 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.
- 25 -
Results of Operations of the Company
Twelve-Month Periods Ended December 31, 1993 and 1994
The Company operated 238 outpatient rehabilitation locations at
December 31, 1994, compared to 171 outpatient rehabilitation locations at
December 31, 1993. In addition, the Company operated 66 inpatient facilities, 47
surgery centers and five medical centers at December 31, 1994, compared to 39
inpatient facilities, 39 surgery centers and four medical centers at December
31, 1993.
The Company's operations generated revenues of $1,274,365,000 in 1994,
an increase of $595,940,000, or 87.8%, as compared to 1993 revenues. Same store
revenues for the twelve months ended December 31, 1994 were $784,884,000, an
increase of $106,459,000, or 15.7%, as compared to the same period in 1993. New
store revenues for 1994 were $489,481,000. New store revenues primarily reflect
the 28 inpatient rehabilitation facilities and 45 associated outpatient
rehabilitation locations associated with the NME Selected Hospitals Acquisition.
The increase in revenues is primarily attributable to the addition of these
operations and increases in patient volume. Revenues generated from patients
under Medicare and Medicaid plans respectively accounted for 41.0% and 3.2% of
revenues for 1994, compared to 30.6% and 1.0% of revenues for 1993. The increase
in Medicare revenues is primarily attributable to the NME Selected Hospitals
Acquisition, since the acquired facilities had a greater proportion of Medicare
patients than the Company's historical experience in its existing facilities.
Revenues from any other single third-party payor were not significant in
relation to the Company's revenues. During 1994, same store outpatient visits,
inpatient days and surgery center cases increased 21.8%, 23.0% and 5.0%,
respectively. Revenue per outpatient visit, inpatient day and surgery case for
the same store operations increased (decreased) by (7.8)%, (8.4)% and 0.9%,
respectively.
Operating expenses, at the operating unit level, were $930,845,000, or
73.0% of revenues, for 1994, compared to 71.7% of revenues for 1993. Same store
operating expenses for 1994 were $588,048,000, or 74.9% of related revenues. New
store operating expenses were $342,797,000, or 70.0% of related revenues.
Corporate general and administrative expenses increased from $26,593,000 in 1993
to $48,606,000 in 1994. As a percentage of revenues, corporate general and
administrative expense decreased from 3.9% in 1993 to 3.8% in 1994. Total
operating expenses were $979,451,000, or 76.9% of revenues, for 1994, compared
to $513,139,000, or 75.6% of revenues, for 1993. The provision for doubtful
accounts was $27,646,000, or 2.2% of revenues, for 1994, compared to
$17,947,000, or 2.6% of revenues, for 1993.
Depreciation and amortization expense was $89,305,000 for 1994,
compared to $47,827,000 for 1993. The increase represents the investment in
additional assets by the Company. Interest expense increased to $66,874,000 in
1994, compared to $19,107,000 for 1993, primarily because of the increased
borrowings during the year under the Company's revolving line of credit, the
issuance of $250,000,000 principal amount of 9.5% Senior Subordinated Notes due
2001 and the issuance of $115,000,000 principal amount of 5% Convertible
Subordinated Debentures due 2001. For 1994, interest income was $4,566,000,
compared to $4,352,000 for 1993.
As a result of the NME Selected Hospitals Acquisition, the Company
recognized an expense of approximately $49,742,000 during the year ended
December 31, 1993. By recognizing this expense, the Company accrued
approximately $3,000,000 for costs related to certain employee separations and
relocations. In addition, the Company provided approximately $39,000,000 for the
write-down of certain assets to net realizable value as the result of planned
facility consolidations, and approximately $7,700,000 for the write-off of
certain capitalized development projects. The consolidations are applicable in
selected markets where the Company's services overlap with those of the acquired
facilities. The costs of development projects in certain target markets that
were previously capitalized were written off due to the acquisition of NME
facilities in or near those markets. For further discussion, see Note 10 of
"Notes to Consolidated Financial Statements".
During 1994 and 1995, the Company completed the implementation of the
plan of consolidation related to the NME Selected Hospitals Acquisition. The
accrual for costs related to employee separations was increased
- 26 -
by $338,000 due to a change in estimate. This adjustment was charged to
operations in 1994. The total accrual was then reduced by approximately $758,000
and $2,580,000 in actual employee separation costs during 1994 and 1995,
respectively. In addition, assets with a net book value of $17,911,000 and
$21,089,000 were written off against the $39,000,000 provided for in the plan
during 1994 and 1995, respectively. Finally, the Company wrote off all of the
$7,700,000 in capitalized development projects provided for in the plan during
1994.
Merger and acquisition related expenses in 1994 of $6,520,000 represent
costs incurred or accrued in connection with completing the ReLife Acquisition
($2,949,000) and the Heritage Acquisition ($3,571,000). For further discussion,
see Note 2 of "Notes to Consolidated Financial Statements".
During 1994, the Company recognized a $10,500,000 loss on impairment of
assets. This amount relates to the termination of a ReLife management contract
and a permanently damaged ReLife facility. The Company determined not to attempt
to reopen such damaged facility because, under its existing licensure, the
facility was not consistent with the Company's plans. Also during 1994, the
Company recognized a $4,500,000 loss on abandonment of a ReLife computer
project. For further discussion, see Note 15 of "Notes to Consolidated Financial
Statements".
Income before minority interests and income taxes for 1994 was
$94,135,000, compared to $36,082,000 for 1993. Minority interests reduced income
before income taxes by $8,864,000 in 1994, compared to $6,684,000 in 1993. The
provision for income taxes for 1994 was $34,778,000, compared to $12,062,000 for
1993, resulting in effective tax rates of 40.8% for 1994 and 41.0% for 1993. Net
income for 1994 was $50,493,000.
Twelve-Month Periods Ended December 31, 1994 and 1995
The Company operated 473 outpatient rehabilitation locations at
December 31, 1995, compared to 238 outpatient rehabilitation locations at
December 31, 1994. In addition, the Company operated 77 inpatient facilities, 56
surgery centers and five medical centers at December 31, 1995, compared to 66
inpatient facilities, 47 surgery centers and five medical centers at December
31, 1994.
The Company's operations generated revenues of $1,556,687,000 in 1995,
an increase of $282,322,000, or 22.2%, as compared to 1994 revenues. Same store
revenues for the twelve months ended December 31, 1995 were $1,410,278,000, an
increase of $135,913,000, or 10.7%, as compared to the same period in 1994. New
store revenues for 1995 were $146,409,000. New store revenues reflect (1) the 11
rehabilitation hospitals and 12 other facilities associated with the Novacare
Rehabilitation Hospitals Acquisition, (2) the 120 outpatient rehabilitation
centers associated with the Caremark Acquisition, (3) the acquisition of one
surgery center and one outpatient diagnostic imaging operation, and (4) the
acquisition of outpatient rehabilitation operations in 31 new markets. See Note
10 of "Notes to Consolidated Financial Statements". The increase in revenues is
primarily attributable to the addition of these operations and increases in
patient volume. Revenues generated from patients under Medicare and Medicaid
plans respectively accounted for 40.0% and 2.5% of total revenues for 1995,
compared to 41.0% and 3.2% of total revenues for 1994. Revenues from any other
single third-party payor were not significant in relation to the Company's total
revenues. During 1995, same store outpatient visits, inpatient days and surgery
center cases increased 24.6%, 11.0% and 12.0%, respectively. Revenue per
outpatient visit, inpatient day and surgery case for same store operations
increased (decreased) by (0.8%), 1.4% and (0.2%), respectively. These decreases
were offset by increased volume from managed care and national accounts and by
control of expenses.
Operating expenses, at the operating unit level, were $1,087,554,000,
or 69.9% of revenues, for 1995, compared to 73.0% of revenues for 1994. Same
store operating expenses for 1995 were $983,709,000, or 69.8% of related
revenues. New store operating expenses were $103,845,000, or 70.9% of related
revenues. Corporate general and administrative expenses decreased from
$48,606,000 in 1994 to $42,514,000 in 1995. As a percentage of revenues,
corporate general and administrative expenses decreased from 3.8% in 1994 to
2.7% in 1995. Total operating expenses were $1,130,068,000, or 72.6% of
revenues, for 1995, compared to $979,451,000, or 76.9%
- 27 -
of revenues, for 1994. The provision for doubtful accounts was $31,637,000, or
2.0% of revenues, for 1995, compared to $27,646,000, or 2.2% of revenues, for
1994.
Depreciation and amortization expense was $121,195,000 for 1995,
compared to $89,305,000 for 1994. The increase resulted from the investment in
additional assets by the Company. Interest expense increased to $91,693,000 in
1995, compared to $66,874,000 for 1994, primarily because of the increased
average borrowings during 1995 under the Company's revolving line of credit. For
1995, interest income was $5,879,000 compared to $4,566,000 for 1994.
As a result of the NovaCare and SHC acquisitions, the Company
recognized $29,194,000 in merger and acquisition related expenses during the
second quarter of 1995. Fees related to legal, accounting and financial advisory
services accounted for $3,400,000 of the expense. Costs and expenses related to
the purchase of the SHC Notes (see "--Liquidity and Capital Resources" and Note
7 of "Notes to Consolidated Financial Statements") totaled $14,606,000. Accruals
for employee separations were approximately $1,188,000. In addition, the Company
provided approximately $10,000,000 for the write-down of certain assets to net
realizable value as the result of a planned facility consolidation. The
consolidation is applicable in a market where the Company's existing services
overlap with those of an acquired facility. The planned employee separations and
facility consolidation were completed by the end of 1995.
In the fourth quarter of 1995, the Company incurred direct costs and
expenses of $4,965,000 in connection with the SSCI Acquisition. These expenses
consist primarily of fees related to legal, accounting and financial advisory
services and are included in merger and acquisition related expenses for the
year ended December 31, 1995.
Also during 1995, the Company recognized an $11,192,000 loss on
impairment of assets. The impaired assets relate to six SHC facilities in which
the projected undiscounted cash flows did not support the book value of the
long-lived assets of such facilities. See Note 15 of "Notes to Consolidated
Financial Statements".
Income before minority interests and income taxes for 1995 was
$142,622,000, compared to $94,135,000 for 1994. Minority interests reduced
income before income taxes by $15,582,000, compared to $8,864,000 for 1994. The
provision for income taxes for 1995 was $48,091,000, compared to $34,778,000 for
1994, resulting in effective tax rates of 37.9% for 1995 and 40.8% for 1994. Net
income for 1995 was $78,949,000.
Liquidity and Capital Resources
At December 31, 1995, the Company had working capital of $327,474,000,
including cash and marketable securities of $108,973,000. Working capital at
December 31, 1994 was $236,877,000, including cash and marketable securities of
$90,066,000. For 1995, cash provided by operations was $217,282,000, compared to
$151,826,000 for 1994. The Company used $705,557,000 for investing activities
during 1995, compared to $272,479,000 for 1994. Additions to property, plant and
equipment and acquisitions accounted for $145,820,000 and $463,105,000,
respectively, during 1995. Those same investing activities accounted for
$161,728,000 and $89,266,000, respectively, in 1994. Financing activities
provided $515,238,000 and $108,975,000 during 1995 and 1994, respectively. Net
borrowing proceeds (borrowings less principal reductions) for 1995 and 1994 were
$193,812,000 and $105,890,000, respectively.
Net accounts receivable were $336,818,000 at December 31, 1995,
compared to $246,983,000 at December 31, 1994. The number of days of average
revenues in average receivables was 65.7 at December 31, 1995, compared to 61.8
at December 31, 1994. The increase is primarily attributable to approximately
$68,300,000 in net accounts receivable obtained through acquisitions during
1995, since the days' revenues in net accounts receivable of the acquired
facilities was generally greater than the Company's historical experience in its
existing facilities.
- 28 -
The Company has a $1,000,000,000 revolving line of credit with
NationsBank, N.A. (Carolinas) and 28 other participating banks. Interest is paid
based on LIBOR plus a predetermined margin, a base rate or competitively bid
rates from the participating banks. This credit facility has a maturity date of
October 1, 2000. The Company provided a negative pledge on all assets and
granted the banks a first priority security interest in all shares of stock of
its subsidiaries and rights and interests in its controlled partnerships. The
effective interest rate on the average outstanding balance under the revolving
line of credit was 7.01% for the twelve months ended December 31, 1995, compared
to the average prime rate of 8.83% during the same period. At December 31, 1995,
the Company had drawn $790,000,000 under its revolving line of credit. The
Company is currently seeking an amendment to the credit facility which would
extend the maturity date to April 1, 2001 and release the first priority
security interest in all shares of stock of its subsidiaries and rights and
interests in its controlled partnerships.
On June 20, 1995, the Company purchased $67,500,000 of the $75,000,000
outstanding principal amount of 11.5% Senior Subordinated Notes due 2004 of SHC
for 115% of the face value of the Notes. In July 1995, the remaining $7,500,000
balance was purchased on the open market. See Note 7 of "Notes to Consolidated
Financial Statements".
The Company intends to pursue the acquisition or development of
additional healthcare operations, including comprehensive outpatient
rehabilitation facilities, inpatient rehabilitation facilities, ambulatory
surgery centers and companies engaged in the provision of rehabilitation-related
services, and to expand certain of its existing facilities. While it is not
possible to estimate precisely the amounts which will actually be expended in
the foregoing areas, the Company anticipates that over the next twelve months,
it will spend approximately $30,000,000 on maintenance and expansion of its
existing facilities and approximately $150,000,000 on development of the
Integrated Service Model. See Item 1, "Business -- Company Strategy".
On October 9, 1995, the Company entered into a Plan and Agreement of
Merger with Surgical Care Affiliates, Inc. ("SCA"), pursuant to which the
Company agreed to acquire SCA through a stock-for-stock merger to be accounted
for as a pooling of interests. SCA operates 67 surgery centers (with an
additional 10 under development or construction) in 24 states. Under the terms
of the Plan and Agreement of Merger, the Company issued 1.1726 shares of its
Common Stock for each share of SCA's common stock. The transaction was
consummated on January 17, 1996. See Note 16 of "Notes to Consolidated Financial
Statements".
On December 16, 1995, the Company entered into an Agreement and Plan of
Merger with Advantage Health Corporation ("Advantage Health"), pursuant to which
the Company agreed to acquire Advantage Health through a stock-for-stock merger
to be accounted for as a pooling of interests. Advantage Health operates a
network of approximately 150 sites of service, including four freestanding
rehabilitation hospitals, one freestanding multi-use hospital, one nursing home,
68 outpatient rehabilitation facilities, 14 inpatient managed rehabilitation
units, 24 rehabilitation services management contracts and six managed sub-acute
rehabilitation units. Under the terms of the Agreement and Plan of Merger, the
Company issued 1.3768 shares of its Common Stock for each share of Advantage
Health's common stock. The transaction was consummated on March 14, 1996. See
Note 16 of "Notes to Consolidated Financial Statements".
Although the Company is continually considering and evaluating
acquisitions and opportunities for future growth, the Company has not entered
into any agreements with respect to material future acquisitions. The Company
believes that existing cash, cash flow from operations, and borrowings under the
revolving line of credit will be sufficient to satisfy the Company's estimated
cash requirements for the next twelve months, and for the reasonably foreseeable
future.
Inflation in recent years has not had a significant effect of the
Company's business, and is not expected to adversely affect the Company in the
future unless it increases significantly.
Statements contained in this Annual Report on Form 10-K which are not
historical facts are forward-looking statements. In addition, the Company,
through its senior management, from time to time makes forward-looking
- 29 -
public statements concerning its expected future operations and performance and
other developments. Such forward-looking statements are necessarily estimates
reflecting the Company's best judgment based upon current information and
involve a number of risks and uncertainties, and there can be no assurance that
other factors will not affect the accuracy of such forward-looking statements.
While it is impossible to identify all such factors, factors which could cause
actual results to differ materially from those estimated by the Company include,
but are not limited to, changes in the regulation of the healthcare industry at
either or both of the federal and state levels, changes in reimbursement for the
Company's services by governmental or private payors, competitive pressures in
the healthcare industry and the Company's response thereto, the Company's
ability to obtain and retain favorable arrangements with third-party payors,
unanticipated delays in the Company's implementation of its Integrated Service
Model, general conditions in the economy and capital markets, and other factors
which may be identified from time to time in the Company's Securities and
Exchange Commission filings and other public announcements.
- 30 -
Item 8. Financial Statements and Supplementary Data.
Consolidated financial statements of the Company meeting the
requirements of Regulation S-X are filed on the succeeding pages of this Item 8
of this Annual Report on Form 10-K, as listed below:
Page
----
Report of Independent Auditors 33
Consolidated Balance Sheets as of December 31, 1994 and 1995 34
Consolidated Statements of Income for the Years Ended
December 31, 1993, 1994 and 1995 36
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1993, 1994 and 1995 37
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1993, 1994 and 1995 38
Notes to Consolidated Financial Statements 40
Other financial statements and schedules required under Regulation S-X
are listed in Item 14(a)2, and filed under Item 14(d), of this Annual Report on
Form 10-K.
Quarterly Results (Unaudited)
Set forth below is certain summary information with respect to the
Company's operations for the last eight fiscal quarters. All amounts have been
restated to reflect the effects of the 1994 ReLife acquisition and the 1995
acquisitions of SHC and SSCI which were accounted for as poolings of interests.
All per share amounts have been adjusted to reflect a two-for-one stock split
effected in the form of a 100% stock dividend paid on April 17, 1995.
1994
-----------------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands, except per share data)
Revenues $ 291,554 $ 311,759 $ 327,312 $ 343,740
Net income 13,198 16,451 16,220 4,624
Net income per common and
common equivalent share 0.16 0.18 0.19 0.05
Net income per common share --
assuming full dilution N/A N/A N/A 0.05
- 31 -
1995
-----------------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands, except per share data)
Revenues $ 347,421 $ 389,974 $ 402,162 $ 417,130
Net income (loss) 20,237 (1,888) 27,601 32,999
Net income (loss) per common and
common equivalent share 0.23 (0.02) 0.30 0.33
Net income (loss) per common share --
assuming full dilution 0.23 (0.02) 0.29 0.32
- 32 -
Report of Ernst & Young, Independent Auditors
The Board of Directors
HEALTHSOUTH Corporation
We have audited the accompanying consolidated balance sheets of HEALTHSOUTH
Rehabilitation Corporation and Subsidiaries as of December 31, 1994 and 1995,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
HEALTHSOUTH Rehabilitation Corporation and Subsidiaries at December 31, 1994 and
1995, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Birmingham, Alabama
February 14, 1995
- 33 -
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Balance Sheets
December 31
---------------------------------------------
1994 1995
---------------------------------------------
(In thousands)
Assets
Current assets:
Cash and cash equivalents (Note 3) $ 73,438 $ 104,896
Other marketable securities (Note 3) 16,628 4,077
Accounts receivable, net of allowances for doubtful
accounts and contractual adjustments of $147,436,000
in 1994 and $212,972,000 in 1995 246,983 336,818
Inventories 27,398 33,504
Prepaid expenses and other current assets 69,092 70,888
Deferred income taxes (Note 11) 3,073 13,257
---------------------------------------------
Total current assets 436,612 563,440
Other assets:
Loans to officers 1,240 1,525
Other (Note 4) 41,834 60,437
---------------------------------------------
43,074 61,962
Property, plant and equipment, net (Note 5) 872,795 1,100,212
Intangible assets, net (Note 6) 426,458 734,515
---------------------------------------------
Total assets $ 1,778,939 $ 2,460,129
=============================================
- 34 -
December 31
---------------------------------------------
1994 1995
---------------------------------------------
(In thousands)
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 88,413 $ 90,427
Salaries and wages payable 34,848 59,540
Accrued interest payable and other liabilities 57,351 58,086
Current portion of long-term debt (Note 7) 19,123 27,913
---------------------------------------------
Total current liabilities 199,735 235,966
Long-term debt (Note 7) 1,032,941 1,253,374
Deferred income taxes (Note 11) 9,104 15,436
Other long-term liabilities (Note 15) 9,451 5,375
Deferred revenue (Note 14) 7,526 1,525
Minority interests-limited partnerships (Note 9) 15,959 20,743
Commitments and contingent liabilities (Note 12)
Stockholders' equity:
Preferred Stock, $.10 par value-1,500,000 shares
authorized; issued and outstanding-none - -
Common Stock, $.01 par value-150,000,000 shares
authorized; issued-78,858,000 in 1994 and
97,359,000 in 1995 789 974
Additional paid-in capital 388,269 740,763
Retained earnings 138,205 208,653
Treasury stock, at cost (91,000 shares) (323) (323)
Receivable from Employee Stock Ownership
Plan (17,477) (15,886)
Notes receivable from stockholders (5,240) (6,471)
---------------------------------------------
Total stockholders' equity 504,223 927,710
---------------------------------------------
Total liabilities and stockholders' equity $ 1,778,939 $ 2,460,129
=============================================
See accompanying notes.
- 35 -
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Statements of Income
Year ended December 31
-------------------------------------------------------------------
1993 1994 1995
-------------------------------------------------------------------
(In thousands, except for per share amounts)
Revenues $ 678,425 $ 1,274,365 $ 1,556,687
Operating expenses:
Operating units 486,546 930,845 1,087,554
Corporate general and administrative 26,593 48,606 42,514
Provision for doubtful accounts 17,947 27,646 31,637
Depreciation and amortization 47,827 89,305 121,195
Interest expense 19,107 66,874 91,693
Interest income (4,352) (4,566) (5,879)
Merger and acquisition related
expenses (Notes 2 and 10) 333 6,520 34,159
Loss on impairment of assets (Note 15) - 10,500 11,192
Loss on abandonment of computer
project (Note 15) - 4,500 -
NME Selected Hospitals Acquisition
related expense (Note 10) 49,742 - -
Gain on sale of partnership interest (1,400) - -
-------------------------------------------------------------------
642,343 1,180,230 1,414,065
-------------------------------------------------------------------
Income before income taxes and
minority interests 36,082 94,135 142,622
Provision for income taxes
(Note 11) 12,062 34,778 48,091
-------------------------------------------------------------------
24,020 59,357 94,531
Minority interests 6,684 8,864 15,582
-------------------------------------------------------------------
Net income $ 17,336 $ 50,493 $ 78,949
===================================================================
Weighted average common and common
equivalent shares outstanding 79,484 86,461 94,246
===================================================================
- 36 -
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Statements of Income
Net income per common and common
equivalent share $ 0.22 $ 0.58 $ 0.84
===================================================================
Net income per common share-assuming
full dilution $ N/A $ 0.58 $ 0.82
===================================================================
See accompanying notes.
- 37 -
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
Notes
Additional Receivable Total
Common Common Paid-In Retained Treasury Receivable from Stockholders'
Shares Stock (Note 2) Capital Earnings Stock from ESOP Stockholders Equity
-----------------------------------------------------------------------------------------------
(In thousands)
Balance at December 31, 1992 $75,155 $ 752.3 $349,932.6 $ 77,305.7 $ (60.0) $ (19,642.0) $ (5,919.7) $402,368.9
Proceeds from exercise of
options (Note 8) 462 4.6 1,732.9 - - - - 1,737.5
Proceeds from issuance of
common shares 1,074 10.7 13,987.9 - - - - 13,998.6
Income tax benefits related
to incentive stock options
(Note 8) - - 584.7 - - - - 584.7
Reduction in Receivable from
Employee Stock Ownership Plan - - - - - 710.1 - 710.1
Payments received on stockholders'
notes receivable - - - - - - 429.7 429.7
Purchase of limited partnership
units - - - (5,091.7) - - - (5,091.7)
Purchases of treasury stock (20) - - - (263.0) - - (263.0)
Net income - - - 17,336.0 - - - 17,336.0
------------------------------------------------------------------------------------------------
Balance at December 31, 1993 76,671 767.6 366,238.1 89,550.0 (323.0) (18,931.9) (5,490.0) 431,810.8
Proceeds from issuance of common
shares at $27.17 per share 38 0.4 532.6 - - - - 533.0
Proceeds from exercise of options
(Note 8) 2,080 20.8 15,349.4 - - - - 15,370.2
Income tax benefits related to
incentive stock options (Note 8) - - 6,469.6 - - - - 6,469.6
Common shares exchanged in the
exercise of options (22) (0.2) (321.2) - - - - (321.4)
Reduction in receivable from
Employee Stock Ownership Plan - - - - - 1,455.0 - 1,455.0
Payments received on stockholders'
notes receivable - - - - - - 250.0 250.0
Purchase of limited partnership
units - - - (1,838.0) - - - (1,838.0)
Net income - - - 50,493.4 - - - 50,493.4
------------------------------------------------------------------------------------------------
Balance at December 31, 1994 78,767 788.6 388,268.5 138,205.4 (323.0) (17,476.9) (5,240.0) 504,222.6
Adjustment for ReLife Merger
(Note 2) 2,732 27.3 7,113.7 (3,734.0) - - - 3,407.0
Proceeds from issuance of common
shares 14,950 149.5 330,229.2 - - - - 330,378.7
Proceeds from exercise of options
(Note 8) 819 8.2 8,498.8 - - - - 8,507.0
Income tax benefits related to
incentive stock options (Note 8) - - 6,653.3 - - - - 6,653.3
Reduction in receivable from
Employee Stock Ownership Plan - - - - - 1,590.9 - 1,590.9
Increase in stockholders' notes
receivable - - - - - - (1,231.0) (1,231.0)
Purchase of limited partnership
units - - - (4,767.3) - - - (4,767.3)
Net income - - - 78,949.1 - - - 78,949.1
================================================================================================
Balance at December 31, 1995 $ 97,268 $ 973.6 $740,763.5 $208,653.2 $ (323.0) $(15,886.0) $(6,471.0) $927,710.3
================================================================================================
See accompanying notes.
- 38 -
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31
------------------------------------------------------
1993 1994 1995
------------------------------------------------------
(In thousands)
Operating activities
Net income $ 17,336 $ 50,493 $ 78,949
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 47,827 89,305 121,195
Provision for doubtful accounts 17,947 27,646 31,637
Provision for losses on impairment of assets - 10,500 11,192
Provision for losses on abandonment of
computer project - 4,500 -
Merger and acquisition related expenses - - 34,159
NME Selected Hospitals Acquisition related
expense 49,742 - -
Income applicable to minority interests of
limited partnerships 6,684 8,864 15,582
Provision (benefit) for deferred income taxes (5,718) (1,770) 938
Provision for deferred revenue (49) (164) (1,990)
Gain on sale of property, plant and equipment - (623) -
Gain on sale of partnership interests (1,400) - -
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable (31,493) (78,400) (52,661)
Inventories, prepaid expenses and other
current assets (18,373) (21,285) 3,153
Accounts payable and accrued expenses (6,903) 62,760 (24,872)
------------------------------------------------------
Net cash provided by operating activities 75,600 151,826 217,282
Investing activities
Purchases of property, plant and equipment (131,929) (161,728) (145,820)
Proceeds from sale of property, plant and equipment - 68,330 14,541
Additions to intangible assets, net of effects of
acquisitions (39,333) (59,311) (114,381)
Assets obtained through acquisitions, net of
liabilities assumed (460,080) (89,266) (463,105)
Changes in other assets (5,303) (23,038) (6,963)
Proceeds received on sale of other marketable
securities 20,554 1,660 21,097
Investments in other marketable securities (6,000) (9,126) (10,926)
------------------------------------------------------
Net cash used in investing activities (622,091) (272,479) (705,557)
- 39 -
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Year ended December 31
------------------------------------------------------
1993 1994 1995
------------------------------------------------------
(In thousands)
Financing activities
Proceeds from borrowings $ 557,657 $ 1,045,471 $ 610,700
Principal payments on long-term debt and leases (33,086) (939,581) (416,888)
Proceeds from exercise of options 1,736 13,895 8,508
Proceeds from issuance of common stock 13,999 350 330,379
Purchase of treasury stock (263) - -
Reduction in Receivable from Employee Stock
Ownership Plan 710 1,455 1,591
Payments received on (loans made to) stockholders 429 250 (1,231)
Proceeds from investment by minority interests 6,476 2,268 1,103
Purchase of limited partnership interests (3,784) (1,090) (7,548)
Payment of cash distributions to limited partners (7,519) (14,043) (11,376)
------------------------------------------------------
Net cash provided by financing activities 536,355 108,975 515,238
------------------------------------------------------
(Decrease) increase in cash and cash equivalents (10,136) (11,678) 26,963
Cash and cash equivalents at beginning of year
(Note 2) 95,252 85,116 77,933
------------------------------------------------------
Cash and cash equivalents at end of year $ 85,116 $ 73,438 $ 104,896
======================================================
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 16,856 $ 53,374 $ 90,636
Income taxes 22,216 29,315 49,581
Non-cash investing activities:
The Company assumed liabilities of $88,566,000, $24,659,000 and $51,741,000
during the years ended December 31, 1993, 1994 and 1995, respectively, in
conjunction with its acquisitions. During the years ended December 31, 1993 and
1994, the Company issued 138,000 and 38,000 common shares, respectively, with a
market value of $954,000 and $533,000, respectively, as consideration for
acquisitions.
Non-cash financing activities:
During 1995 the Company had a two-for-one stock split on its common stock, which
was effected in the form of a one hundred percent stock dividend.
The Company received a tax benefit from the disqualifying disposition of
incentive stock options of $585,000, $6,470,000 and $6,653,000 for the years
ended December 31, 1993, 1994 and 1995, respectively.
During the year ended December 31, 1994, 11,000 common shares were exchanged in
the exercise of options. The shares exchanged had a market value on the date of
exchange of $321,000.
See accompanying notes.
- 40 -
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1995
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.
Principles of Consolidation
The consolidated financial statements include the accounts of HEALTHSOUTH
Corporation ("HEALTHSOUTH") and its wholly-owned subsidiaries, as well as its
limited partnerships (see Note 9). All significant intercompany accounts and
transactions have been eliminated in consolidation.
HEALTHSOUTH Corporation is engaged in the business of providing comprehensive
rehabilitative, clinical and surgical healthcare services on an inpatient and
outpatient basis.
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 equity securities and debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, if material, reported as a separate
component of stockholders' equity, net of tax. The adjusted cost of the specific
security sold method is used to compute gain or loss on the sale of securities.
Interest and dividends on securities classified as available-for-sale are
included in investment income. Marketable equity securities and debt securities
of the Company have maturities of less than one year.
- 41 -
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Accounts Receivable and Third-Party Reimbursement Activities
Receivables from patients, insurance companies and third-party contractual
insured accounts (Medicare and Medicaid) are based on payment agreements which
generally result in the Company collecting an amount different from the
established rates. Final determination of the settlement is subject to review by
appropriate authorities. Adequate allowances are provided for doubtful accounts
and contractual adjustments. Uncollectible accounts are written off against the
allowance for doubtful accounts after adequate collection efforts are made. Net
accounts receivable include only those amounts estimated by management to be
collectible.
The concentration of net accounts receivable from third-party contractual payors
and others, as a percentage of total net accounts receivable, was as follows:
December 31
--------------------------------------------
1994 1995
--------------------------------------------
Medicare 36% 24%
Medicaid 6 5
Other 58 71
============================================
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.
- 42 -
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Property, Plant and Equipment (continued)
Interest cost incurred during the construction of a facility is capitalized. The
Company incurred interest of $21,771,000, $69,268,000 and $93,634,000, of which
$2,664,000, $2,394,000 and $1,941,000 was capitalized, during 1993, 1994 and
1995, respectively.
Depreciation and amortization is computed using the straight-line method over
the estimated useful lives of the assets or the term of the lease, as
appropriate. The estimated useful life of buildings is 30-40 years and the
general range of useful lives for leasehold improvements, furniture, fixtures
and equipment is 10-15 years.
Intangible Assets
Cost in excess of net asset value of purchased facilities is amortized over 20
to 40 years using the straight-line method. Organization and start-up costs
incurred prior to opening a new facility and partnership formation costs are
deferred and amortized on a straight-line basis over a period of 36 months.
Organization, partnership formation and start-up costs for a project that is
subsequently abandoned are charged to operations in that period. Debt issue
costs are amortized over the term of the debt. Noncompete agreements are
amortized using the straight-line method over the term of the agreements.
Minority Interests
The equity of minority investors in limited partnerships of the Company is
reported on the balance sheet as minority interests. Minority interests reported
in the income statement reflect the respective interests in the income or loss
of the limited partnerships attributable to the minority investors, the effect
of which is removed from the results of operations of the Company.
Revenues
Revenues include net patient service revenues and other operating revenues. Net
patient service revenues are reported at the estimated net realizable amounts
from patients, third-party payors and others for services rendered, including
estimated retroactive adjustments under reimbursement agreements with
third-party payors.
- 43 -
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Income per Common and Common Equivalent Share
Income per common and common equivalent share is computed based on the weighted
average number of common shares and common equivalent shares outstanding during
the periods, as adjusted for the two-for-one stock split declared in April 1995.
Common equivalent shares include dilutive employees' stock options, less the
number of treasury shares assumed to be purchased from the proceeds using the
average market price of the Company's common stock. Fully diluted earnings per
share (based on 100,359,000 shares in 1995) assumes conversion of the 5%
Convertible Subordinated Debentures due 2001 (see Note 7). The conversion of the
debentures was antidilutive in 1994.
Impairment of Assets
In accordance with FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of, 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
amounts of those assets.
With respect to the carrying value of the excess of cost over net asset value of
purchased facilities and other intangible assets, the Company determines on a
quarterly basis whether an impairment event has occurred by considering factors
such as: the market value of the asset; a significant adverse change in legal
factors or in the business climate; adverse action by a regulator; a history of
operating or cash flow 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, an impairment loss is calculated based on the excess of the
carrying amount of the asset over the asset's fair value.
- 44 -
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Stock Option Plan
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because the alternative fair value
accounting provided for under FASB Statement No. 123 "Accounting for Stock-Based
Compensation," requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
2. Mergers
Effective December 29, 1994, the Company merged with ReLife, Inc. ("ReLife") and
in connection therewith issued 11,025,290 shares of its common stock for all of
ReLife's outstanding common stock. Prior to the merger, ReLife provided a system
of rehabilitation services and operated 31 inpatient facilities with an
aggregate of approximately 1,100 licensed beds, including nine free-standing
rehabilitation hospitals, nine acute rehabilitation units, five sub-acute
rehabilitation units, seven transitional living units and one residential
facility and provided outpatient rehabilitation services at twelve outpatient
centers. Costs and expenses of $2,949,000, primarily legal, accounting and
financial advisory fees, incurred by HEALTHSOUTH in connection with the ReLife
merger have been recorded in operations in 1994 and reported as merger expenses
in the accompanying consolidated statements of income.
Effective June 13, 1995, the Company merged with Surgical Health Corporation
("SHC") and in connection therewith issued 8,531,480 shares of its common stock
for all of SHC's common and preferred stock. Prior to the merger, SHC operated a
network of 41 freestanding surgery centers (including four mobile lithotripters)
in eleven states, with an aggregate of 156 operating and procedure rooms. Costs
and expenses of approximately $19,194,000 incurred by the Company in connection
with the SHC merger have been recorded in operations during 1995 and reported as
merger expenses in the accompanying consolidated statements of income. Fees
related to legal, accounting and financial advisory services accounted for
$3,400,000 of the expense. Costs and expense related to the retirement of the
SHC Notes (see Note 7) totaled $14,606,000. Costs related to employee
separations were approximately $1,188,000.
- 45 -
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Mergers (continued)
SHC merged with Ballas Outpatient Management, Inc. and Midwest Anesthesia, Inc.
on February 11, 1993 in a transaction accounted for as a pooling of interests.
SHC recorded merger costs of $333,000 in connection with this transaction in
1993. SHC merged with Heritage Surgical Corporation on January 18, 1994 in a
transaction accounted for as a pooling of interests. SHC recorded merger costs
of $3,571,000 in connection with this transaction in 1994. SHC's historical
financial statements for the periods prior to the two mergers described above
have been restated to include the results of the acquired companies for all
periods presented.
Effective October 26, 1995, the Company merged with Sutter Surgery Centers, Inc.
("SSCI") and in connection therewith issued 1,776,001 shares of its common stock
in exchange for all of SSCI's outstanding common stock. Prior to the merger,
SSCI operated a network of 12 freestanding surgery centers in three states, with
an aggregate of 54 operating and procedure rooms. Costs and expenses of
approximately $4,965,000, primarily legal, accounting and financial advisory
fees, incurred by the Company in connection with the SSCI merger have been
recorded in operations and reported as merger expenses in the accompanying
consolidated statements of income.
The mergers of the Company with ReLife, SHC and SSCI were accounted for as
poolings of interests and, accordingly, the Company's consolidated financial
statements have been restated to include the results of the acquired companies
for all periods presented.
Combined and separate results of the Company and its 1995 mergers, SHC and SSCI,
are as follows (in thousands):
HEALTHSOUTH SHC SSCI Combined
----------------- ---------------- ----------------- -----------------
Year ended December 31, 1993
Revenues $ 575,346 $ 80,983 $ 22,096 $ 678,425
Net income 13,592 3,605 139 17,336
Year ended December 31, 1994
Revenues 1,127,441 108,749 38,175 1,274,365
Net income (loss) 53,225 (3,264) 532 50,493
Year ended December 31, 1995
Revenues 1,475,884 50,935 29,868 1,556,687
Net income 76,819 1,090 1,040 78,949
- 46 -
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Mergers (continued)
There were no material transactions between the Company, ReLife, SHC and SSCI
prior to the mergers. The effects of conforming the accounting policies of the
combined companies are not material.
Prior to its merger with the Company, ReLife reported on a fiscal year ending on
September 30. The restated financial statements for all periods prior to and
including December 31, 1994 are based on a combination of the Company's results
for its December 31 fiscal year and ReLife's results for its September 30 fiscal
year. Beginning January 1, 1995, all facilities acquired in the ReLife merger
adopted a December 31 fiscal year end; accordingly, all consolidated financial
statements for periods after December 31, 1994 are based on a consolidation of
all of the Company's subsidiaries on a December 31 year end. ReLife's historical
results of operations for the three months ended December 31, 1994 are not
included in the Company's consolidated statements of income or cash flows. An
adjustment has been made to stockholders' equity as of January 1, 1995 to adjust
for the effect of excluding ReLife's results of operations for the three months
ended December 31, 1994. The following is a summary of ReLife's results of
operations and cash flows for the three months ended December 31, 1994 (in
thousands):
Statement of Income Data:
Revenues $ 38,174
Operating expenses:
Operating units 31,797
Corporate general and administrative 2,395
Provision for doubtful accounts 541
Depreciation and amortization 1,385
Interest expense 858
Interest income (91)
HEALTHSOUTH merger expense 3,050
Loss on disposal of fixed assets 1,000
Loss on abandonment of computer project 973
---------------------
41,908
---------------------
Loss before income taxes and minority interests (3,734)
- 47 -
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Provision for income taxes -
---------------------
(3,734)
Minority interests -
---------------------
Net loss $ (3,734)
=====================
- 48 -
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Mergers (continued)
Statement of Cash Flow Data:
Net cash provided by operating activities $ 38,077
Net cash used in investing activities (9,632)
Net cash used in financing activities (23,950)
---------------------
Net increase in cash $ 4,495
=====================
During the three months ended December 31, 1994, ReLife received $7,141,000 in
proceeds from the exercise of stock options.
3. Cash, Cash Equivalents and Other Marketable Securities
Cash, cash equivalents and other marketable securities consisted of the
following:
December 31
--------------------- ---------------------
1994 1995
--------------------- ---------------------
(In thousands)
Cash $ 64,338 $ 95,601
Municipal put bonds 2,100 2,095
Tax advantaged auction preferred stocks 7,000 7,200
--------------------- ---------------------
Total cash and cash equivalents 73,438 104,896
United States Treasury notes 1,004 -
Certificates of deposit 2,135 1,962
Municipal put bonds 3,975 615
Municipal put bond mutual funds 8,514 500
Collateralized mortgage obligations 1,000 1,000
--------------------- ---------------------
Total other marketable securities 16,628 4,077
--------------------- ---------------------
Total cash, cash equivalents and other
marketable securities (approximates market value) $ 90,066 $ 108,973
===================== =====================
For purposes of the consolidated balance sheets and statements of cash flows,
marketable securities purchased with an original maturity of ninety days or less
are considered cash equivalents.
- 49 -
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Other Assets
Other assets consisted of the following:
December 31
--------------------------------------
1994 1995
--------------------- ----------------
(In thousands)
Notes and accounts receivable $ 15,104 $ 24,628
Investment in Caretenders Health Corp. 7,370 7,417
Prepaid long-term lease - 8,888
Investments in other unconsolidated
subsidiaries 6,007 4,031
Real estate investments 10,022 11,586
Trusteed funds - 1,879
Other 3,331 2,008
=================== ==================
$ 41,834 $ 60,437
=================== ==================
The Company has a 19% ownership interest in Caretenders Health Corp.
("Caretenders"). Accordingly, the Company's investment is being accounted for
using the equity method of accounting. The investment was initially valued at
$7,250,000. The Company's equity in earnings of Caretenders for the years ended
December 31, 1993, 1994 and 1995 was not material to the Company's results of
operations.
It was not practicable to estimate the fair value of the Company's various
investments in other unconsolidated subsidiaries (involved in operations similar
to those of the Company) because of the lack of a quoted market price and the
inability to estimate fair value without incurring excessive costs. The carrying
amount at December 31, 1995 represents the original cost of the investments,
which management believes is not impaired.
- 50 -
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
December 31
-------------------------------------------
1994 1995
--------------------- ---------------------
(In thousands)
Land $ 55,511 $ 58,933
Buildings 497,433 679,988
Leasehold improvements 47,427 66,948
Furniture, fixtures and equipment 347,419 472,904
Construction in progress 45,709 24,513
--------------------- ---------------------
993,499 1,303,286
Less accumulated depreciation and amortization 120,704 203,074
--------------------- ---------------------
$ 872,795 $ 1,100,212
===================== =====================
6. Intangible Assets
Intangible assets consisted of the following:
December 31
-------------------------------------------
1994 1995
--------------------- ---------------------
(In thousands)
Organizational, partnership formation and
start-up costs $ 94,620 $ 151,578
Debt issue costs 18,848 34,029
Noncompete agreements 35,253 69,400
Cost in excess of net asset value of purchased
facilities 340,365 583,473
--------------------- ---------------------
489,086 838,480
Less accumulated amortization 62,628 103,965
--------------------- ---------------------
$ 426,458 $ 734,515
===================== =====================
- 51 -
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Long-Term Debt
Long-term debt consisted of the following:
December 31
------------------------------------------
1994 1995
------------------------------------------
(In thousands)
Notes and bonds payable:
Advances under a $550,000,000 credit
agreement with banks $ 510,000 $ -
Advances under a $1,000,000,000 credit
agreement with banks - 790,000
11.5% Senior Subordinated Notes due 2004 75,000 -
9.5% Senior Subordinated Notes due 2001 250,000 250,000
5.0% Convertible Subordinated Debentures
due 2001 115,000 115,000
Notes payable to banks and various other
notes payable, at interest rates from 5.5%
to 9.0% 51,830 69,789
Hospital revenue bonds payable 24,763 32,337
Noncompete agreements payable with
payments due at ranging intervals through
December 2004 17,610 24,161
Other 7,861 -
--------------------- ---------------------
1,052,064 1,281,287
Less amounts due within one year 19,123 27,913
--------------------- ---------------------
$ 1,032,941 $ 1,253,374
===================== =====================
The fair value of total long-term debt approximates book value at December 31,
1994 and 1995. 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.
- 52 -
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Long-Term Debt (continued)
During 1994, the Company entered into a Credit Agreement with NationsBank, N.A.
("NationsBank") and other participating banks (the "1994 Credit Agreement")
which consisted of a $550,000,000 revolving facility and term loan. On April 11,
1995, the Company amended and restated the 1994 Credit Agreement with
NationsBank to increase the size of the revolving credit facility to
$1,000,000,000. Interest 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 1994 revolving credit
facility ranging from 0.1875% to 0.375%, depending on certain defined ratios.
The principal amount is payable in full on October 1, 2000. The Company provided
a negative pledge of all its assets and has granted a first priority security
interest in and lien on all shares of stock of its subsidiaries and rights and
interests in its partnerships. At December 31, 1995, the effective interest rate
associated with the 1994 Credit Agreement was approximately 6.56%.
On March 24, 1994, the Company issued $250,000,000 principal amount of 9.5%
Senior Subordinated Notes due 2001 (the Notes). Interest is payable on April 1
and October 1. The Notes are senior subordinated obligations of the Company and
as such will be subordinated to all existing and future senior indebtedness of
the Company, and also will be effectively subordinated to all existing and
future liabilities of the Company's subsidiaries and partnerships. The Notes
rank senior to all subordinated indebtedness of the Company, including the 5%
Convertible Subordinated Debentures due 2001 described below. The Notes mature
on April 1, 2001.
Also on March 24, 1994, the Company issued $100,000,000 principal amount of 5%
Convertible Subordinated Debentures due 2001 (the Convertible Debentures). An
additional $15,000,000 principal amount of Convertible Debentures was issued in
April 1994 to cover underwriters' over allotments. Interest is payable on April
1 and October 1. The Convertible Debentures are convertible into Common Stock of
the Company at the option of the holder at a conversion price of $18.8125 per
share, subject to adjustment in the occurrence of certain events.
The net proceeds from the issuance of the Notes and Convertible Debentures were
used by the Company to pay down indebtedness outstanding under its other
existing credit facilities.
- 53 -
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Long-Term Debt (continued)
In June 1994, SHC (see Note 2) issued $75 million of 11.5% Senior Subordinated
Notes due July 15, 2004 (the "SHC Notes"). The proceeds of the SHC Notes were
used by SHC to pay down indebtedness outstanding under its other existing credit
facilities. During 1995, the Company purchased $67,500,000 of the $75,000,000
outstanding principal amount of the SHC Notes for 115% of the face value of the
Notes and the remaining $7,500,000 balance was purchased on the open market,
using proceeds from the Company's other long-term credit facilities. The loss on
retirement of the SHC Notes totaled approximately $14,606,000. The loss consists
of the premium, write-off of unamortized bond issue costs and other fees and is
included in merger expenses in the accompanying consolidated statement of income
(see Note 2).
Principal maturities of long-term debt are as follows:
Year ending December 31 (In thousands)
- ------------------------ ---------------------
1996 $ 27,913
1997 24,186
1998 18,360
1999 12,158
2000 800,077
After 2000 398,593
=====================
$ 1,281,287
=====================
8. Stock Options
The Company has various stockholder-approved stock option plans which provide
for the grant of options to Directors, officers and other key employees to
purchase common stock at 100% of the fair market value as of the date of grant.
The Board of Directors administers the stock option plans. Options may be
granted as incentive stock options or as non-qualified stock options. Incentive
stock options vest 25% annually, commencing upon completion of one year of
employment subsequent to the date of grant. Non-qualified stock options
generally are not subject to any vesting provisions. The options expire at dates
ranging from five to ten years from the date of grant.
- 54 -
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Stock Options (continued)
The following table summarizes activity in the stock option plans:
1993 1994 1995
---------------- ----------------- -----------------
Options outstanding January 1: $ 11,450,885 $ 14,900,895 $ 13,383,945
Granted 3,944,252 1,253,194 3,296,816
Exercised 374,602 1,977,562 1,149,808
Canceled 119,640 792,582 304,393
---------------- ----------------- -----------------
Options outstanding at December 31 $ 14,900,895 $ 13,383,945 $ 15,226,560
================ ================= =================
Option price range for options
granted during the period $6.75 - $8.44 $13.94 - $18.25 $16.75 - $30.75
Option price range for options
exercised during the period $1.50 - $9.59 $1.50 - $8.44 $1.52 - $17.24
Options exercisable at December 31 10,665,880 10,948,440 12,783,364
Options available for grant at
December 31 689,013 1,103,134 2,681,064
9. Limited Partnerships
HEALTHSOUTH operates a number of rehabilitation and surgery centers as limited
partnerships in which HEALTHSOUTH serves as the general partner. These limited
partnerships are included in the consolidated financial statements (as more
fully described in Note 1 under "Minority Interests"). The limited partners
share in the profit or loss of the partnerships based on their respective
ownership percentage (ranging from 1% to 50% at December 31, 1995) during their
ownership period.
Beginning in 1992, due to federal and state regulatory requirements, the Company
began the process of buying back selected partnership interests of its physician
limited partners. The buyback prices for the interests were in general based on
a predetermined multiple of projected cash flows of the partnerships. The excess
of the buyback price over the book value of the limited partners' capital
amounts was charged to the Company's retained earnings.
- 55 -
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Acquisitions
Effective April 1, 1995, the Company acquired the rehabilitation hospitals
division of NovaCare, Inc. ("NovaCare"), consisting of 11 rehabilitation
hospitals, 12 other facilities, and certificates of need to build two other
facilities. The total purchase price for the NovaCare facilities was
approximately $235,000,000 in cash. The cost in excess of net asset value was
approximately $173,000,000. Of this excess, approximately $129,000,000 was
allocated to leasehold value and the remaining $44,000,000 to cost in excess of
net asset value of purchased facilities. As part of the acquisition, the Company
acquired approximately $4,790,000 in deferred tax assets. The Company also
provided approximately $10,000,000 for the write-down of certain assets to net
realizable value as the result of a planned facility consolidation. The
consolidation is applicable in a market where the Company's existing services
overlap with those of an acquired facility. The planned employee separations and
facility consolidation were completed by the end of 1995.
The pro forma effect of this acquisition on 1994 and 1995 operations and net
income per common and common equivalent share is reflected in the pro forma
summary in Note 16.
Effective December 1, 1995, the Company acquired Caremark Orthopedic Services
Inc. ("Caremark"). Caremark owns and operates approximately 120 outpatient
rehabilitation centers in 13 states. The total purchase price was approximately
$127,500,000 in cash.
Also at various dates during 1995, the Company acquired 70 separate outpatient
rehabilitation operations located throughout the United States, one outpatient
surgery center and one outpatient diagnostic imaging operation. The combined
purchase prices of these 72 acquisitions was approximately $102,281,000. The
form of consideration comprising the combined purchase prices was approximately
$85,745,000 in cash and $16,536,000 in notes payable.
In connection with these transactions, the Company entered into non-compete
agreements with former owners totaling $16,222,000. In general these non-compete
agreements are payable in monthly or quarterly installments over periods ranging
from five to ten years.
The fair value of the total net assets relating to the 1995 acquisitions
described above, excluding the NovaCare acquisition, was approximately
$58,452,000. The total cost of these acquisitions exceeded the fair value of the
net assets acquired by approximately
- 56 -
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Acquisitions (continued)
$171,329,000. The Company evaluated each acquisition independently to determine
the appropriate amortization period for the cost in excess of net asset value of
purchased facilities. Each evaluation included an analysis of historic and
projected financial performance, evaluation of the estimated useful 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. Based on
these evaluations, the Company determined that the cost in excess of net asset
value of purchased facilities relating to the 1995 acquisitions should be
amortized over periods ranging from 25 to 40 years on a straight-line basis.
No other identifiable intangible assets were recorded in the acquisitions
described above.
All of the 1995 acquisitions described above were accounted for as purchases
and, accordingly, the results of operations of the acquired businesses are
included in the accompanying consolidated financial statements from their
respective dates of acquisition. With the exception of NovaCare, none of the
above acquisitions were material individually or in the aggregate.
At various dates during 1994, the Company acquired 53 separate outpatient
operations located throughout the United States. The combined purchase price of
these acquired outpatient operations was approximately $53,947,000. The Company
also acquired a specialty medical center in Dallas, Texas, a contract therapist
provider and a diagnostic imaging company. The combined purchase price of these
three operations was approximately $25,861,000. The form of consideration
constituting the total purchase prices of $79,808,000 was approximately
$68,359,000 in cash, $10,916,000 in notes payable and approximately 38,000
shares of common stock valued at $533,000.
In connection with these transactions, the Company entered into non-compete
agreements with former owners totaling $10,814,000. In general, these
non-compete agreements are payable in monthly or quarterly installments over
periods ranging from five to ten years.
The fair value of the total net assets relating to the 1994 acquisitions
described above was approximately $11,087,000. The total cost for 1994
acquisitions exceeded the fair value of the net assets acquired by approximately
$68,721,000. Based on the evaluation of
- 57 -
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Acquisitions (continued)
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 1994 acquisitions should be amortized over periods ranging from 25 to 40
years on a straight-line basis. No other identifiable assets were recorded in
the acquisitions described above.
All of the 1994 acquisitions described above were accounted for as purchases
and, accordingly, the results of operations of the acquired businesses (not
material individually or in the aggregate) are included in the accompanying
consolidated financial statements from their respective dates of acquisition.
Effective December 31, 1993, the Company completed an acquisition from National
Medical Enterprises, Inc. (NME) of 28 inpatient rehabilitation facilities and 45
outpatient rehabilitation centers, which constituted substantially all of NME's
rehabilitation services division (the NME Selected Hospitals Acquisition). The
purchase price was approximately $296,661,000 cash, plus net working capital of
$64,503,000, subject to certain adjustments, the assumption of approximately
$16,313,000 of current liabilities and the assumption of approximately
$17,111,000 in long-term debt.
As a result of the NME Selected Hospitals Acquisition, HEALTHSOUTH recognized an
expense of approximately $49,742,000 during the year ended December 31, 1993.
This expense represents management's estimate of the cost to consolidate
operations of thirteen existing HEALTHSOUTH facilities (three inpatient
facilities and ten outpatient facilities) into the operations of certain
facilities acquired from NME. This plan was formulated by HEALTHSOUTH's
management in order to more efficiently provide services in markets where
multiple locations now exist as a result of the acquisition. The plan of
consolidation calls for the affected operations to be merged into the operations
of the acquired facilities over a period of 12 to 24 months from the date of the
NME Selected Hospitals Acquisition. Due to the single-use nature of these
properties, the consolidation plan does not provide for the sale of these
facilities.
The total expense of $49,742,000 consists of several components. First,
approximately $39,000,000 relates to the writedown of the assets of the affected
HEALTHSOUTH facilities to their estimated net realizable value. Of this
$39,000,000, approximately
- 58 -
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Acquisitions (continued)
$31,500,000 relates to the assets of the three inpatient facilities and
approximately $7,500,000 relates to the assets of the ten outpatient facilities.
The $39,000,000 is broken down into the following asset categories (net of any
related accumulated depreciation or amortization):
Inpatient Outpatient
Facilities Facilities Total
--------------------- --------------------- ----------------
(In thousands)
Land $ 2,898 $ - $ 2,898
Buildings 16,168 - 16,168
Equipment 4,326 2,920 7,246
Intangible assets 6,111 3,455 9,566
Other assets 1,997 1,125 3,122
===================== ===================== ================
$ 31,500 $ 7,500 $ 39,000
===================== ===================== ================
During the year ended December 31, 1994, management discontinued operations in
two of the inpatient facilities and three of the outpatient facilities affected
by the plan and merged them into the operations of the acquired facilities.
Accordingly, assets with a net book value of approximately $17,911,000 were
written off in 1994 against the reserves established at December 31, 1993.
Operations at the remaining inpatient facility and the remaining seven
outpatient facilities identified in the plan were discontinued during 1995 and
charged against the remaining reserve.
Second, $7,700,000 relates to the write-off of certain capitalized development
projects. These projects relate to the planned facilities that, if completed,
would be in direct competition with certain of the acquired NME facilities.
These development projects were written off in 1994 against the reserves
established at December 31, 1993.
Finally, approximately $3,000,000 was accrued for costs of employee separations,
relocations and other direct costs related to the planned consolidation of the
affected operations. During the second quarter of 1994, management revised its
estimate of the cost of the employee separations and relocations. The revised
estimate calls for approximately 150 employees to be affected by separations and
approximately 400 to be affected by relocations. Separation benefits under the
revised plan range from one month's to one year's compensation and totals
approximately $2,188,000. Relocation benefits are estimated to be $2,000 per
employee and total $800,000. An additional
- 59 -
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Acquisitions (continued)
$350,000 has been provided for additional direct administrative costs associated
with the implementation of the plan, including outplacement services, travel and
legal fees. Accordingly, the total revised estimated cost of employee
separations and relocations is $3,338,000. The difference between the initial
estimate and the revised estimate was treated as a change in accounting estimate
and charged to operations in the second quarter of 1994.
The total costs relating to terminations and relocations incurred by the Company
and charged against the reserve were $758,000 and $2,580,000 for the years ended
December 31, 1994 and 1995, respectively. This cost is the only cash expense
included in the acquisition related expense.
Also at various dates during 1993, the Company acquired 27 separate outpatient
rehabilitation operations located throughout the United States. The total
consideration paid for these acquired outpatient rehabilitation operations was
approximately $23,943,000, consisting of $21,634,000 in cash and $2,309,000 in
notes payable. The fair value of the net assets acquired was approximately
$5,196,000. The total cost of the 1993 outpatient rehabilitation acquisitions
exceeded the fair value of the net assets acquired by approximately $18,747,000.
The Company also acquired thirteen outpatient surgery center operations during
1993. The total consideration paid for these acquired outpatient surgery center
operations was approximately $51,392,000, consisting of $44,799,000 in cash,
$5,639,000 in notes payable and common stock value at $954,000. The total cost
of the 1993 outpatient surgery acquisitions exceeded the fair value of the net
assets acquired by approximately $11,710,000. Based on the evaluation of each
acquisition, utilizing the criteria described above, the Company determined that
the cost in excess of net asset value of purchased facilities relating to the
1993 acquisitions should be amortized over a 40 year period on a straight line
basis. No other identifiable intangible assets were recorded in the acquisitions
described above.
Also during 1993, the Company acquired 100% of the stock of Rebound, Inc.
("Rebound") for net consideration of approximately $14,000,000 in cash. Rebound
operated 293 beds in thirteen facilities. The purchase price exceeded the fair
value of the net assets acquired by approximately $11,200,000, which was
allocated to excess of cost over net asset value of purchased facilities.
- 60 -
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Acquisitions (continued)
All of the 1993 acquisitions described above were accounted for as purchases
and, accordingly, the results of operations of the acquired businesses are
included in the accompanying consolidated financial statements from their
respective dates of acquisition.
11. Income Taxes
HEALTHSOUTH and its subsidiaries file a consolidated federal income tax return.
The limited partnerships file separate income tax returns. HEALTHSOUTH's
allocable portion of each partnership's income or loss is included in the
taxable income of the Company. The remaining income or loss of each partnership
is allocated to the limited partners.
The Company utilizes the liability method of accounting for income taxes, as
required by Financial Accounting Standards Board (FASB) Statement No. 109,
"Accounting for Income Taxes".
At December 31, 1995, the Company has net operating loss carryforwards of
approximately $41,736,000 for income tax purposes expiring through the year
2010. Those carryforwards resulted from the Company's acquisitions of Diagnostic
Health Corporation, ReLife, NovaCare, and SHC (Notes 2 and 10).
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax liabilities and assets as of December 31, 1994 are as
follows:
Current Noncurrent Total
------------------------------------------
(In thousands)
Deferred tax assets:
NME Selected Hospitals Acquisition
related expense $ - $ 15,241 $ 15,241
Allowance for bad debts 18,440 - 18,440
Amortization - 5,550 5,550
Other 2,019 3,444 5,463
------------------------------------------
Total deferred tax assets 20,459 24,235 44,694
- 61 -
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Income Taxes (continued)
Current Noncurrent Total
------------------- ------------------- -------------------
(In thousands)
Deferred tax liabilities:
Depreciation $ - $ 19,276 $ 19,276
Non-accrual experience method 12,353 - 12,353
Contracts 3,849 - 3,849
Capitalized costs - 10,487 10,487
Other 1,184 3,576 4,760
------------------- ------------------- -------------------
Total deferred tax liabilities 17,386 33,339 50,725
------------------- ------------------- -------------------
Net deferred tax assets (liabilities) $ 3,073 $ (9,104) $ (6,031)
=================== =================== ===================
Significant components of the Company's deferred tax liabilities and assets as
of December 31, 1995 are as follows:
Current Noncurrent Total
--------------------- --------------------- ---------------------
(In thousands)
Deferred tax assets:
Accruals $ 6,988 $ - $ 6,988
Acquired net operating loss - 16,277 16,277
Allowance for bad debts 25,614 - 25,614
Other 1,584 5,549 7,133
--------------------- --------------------- ---------------------
Total deferred tax assets 34,186 21,826 56,012
Deferred tax liabilities:
Depreciation $ - $ 22,518 $ 22,518
Non-accrual experience method 14,559 - 14,559
Contracts 3,849 - 3,849
Capitalized costs - 12,916 12,916
Other 2,521 1,828 4,349
--------------------- --------------------- ---------------------
Total deferred tax liabilities 20,929 37,262 58,191
` --------------------- --------------------- ---------------------
Net deferred tax assets (liabilities) $ 13,257 $ (15,436) $ (2,179)
===================== ===================== =====================
- 62 -
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Income Taxes (continued)
The provision for income taxes was as follows:
Year ended December 31
-----------------------------------------------------------------
1993 1994 1995
-----------------------------------------------------------------
(In thousands)
Currently payable:
Federal $ 15,660 $ 31,789 $ 42,317
State 2,120 4,759 4,836
-----------------------------------------------------------------
17,780 36,548 47,153
Deferred expense (benefit):
Federal (5,162) (1,475) 842
State (556) (295) 96
-----------------------------------------------------------------
(5,718) (1,770) 938
-----------------------------------------------------------------
Total provision $ 12,062 $ 34,778 $ 48,091
=================================================================
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
-----------------------------------------------------------------
1993 1994 1995
-----------------------------------------------------------------
(In thousands)
Federal taxes at statutory rates $ 12,629 $ 32,947 $ 49,918
Add (deduct):
State income taxes, net of federal
tax benefit 822 2,798 3,206
Tax-exempt interest income (454) (276) (198)
Other (935) (691) (4,835)
-----------------------------------------------------------------
$ 12,062 $ 34,778 $ 48,091
=================================================================
12. Commitments and Contingencies
At December 31, 1995, anticipated capital expenditures for the next twelve
months are $180,000,000. This amount includes expenditures for maintenance and
expansion of the Company's existing facilities as well as development and
integration of the Company's services in selected metropolitan markets.
- 63 -
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Commitments and Contingencies (continued)
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,
1995 the Company has adequate reserves to cover losses on asserted and
unasserted claims.
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 $30,118,000, $67,001,000 and
$89,288,000 for the years ended December 31, 1993, 1994 and 1995, respectively.
The following is a schedule of future minimum lease payments under all operating
leases having initial or remaining non-cancelable lease terms in excess of one
year:
Year ending December 31 (In thousands)
- ------------------------ ---------------------
1996 $ 89,016
1997 82,249
1998 75,881
1999 66,271
2000 53,812
After 2000 248,924
=====================
Total minimum payments required $ 616,153
=====================
13. Employee Benefit Plans
The Company has a 401(k) savings plan which matches 15% of the first 4% of
earnings that an employee contributes. All contributions are in the form of
cash. All employees who have completed one year of service with a minimum of
1,000 hours worked are eligible to participate in the plan. Company
contributions are gradually vested over a seven-year service period.
Contributions to the plan by the Company were approximately $490,000, $1,094,000
and $1,196,000 in 1993, 1994 and 1995, respectively.
- 64 -
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Employee Benefit Plans (continued)
In 1991, the Company established an Employee Stock Ownership Plan ("ESOP") for
the purpose of providing substantially all employees of the Company the
opportunity to save for their retirement and acquire a proprietary interest in
the Company. The ESOP currently owns approximately 830,000 shares of the
Company's common stock, which were purchased with funds borrowed from the
Company, $10,000,000 in 1991 (the "1991 ESOP Loan") and $10,000,000 in 1992 (the
"1992 ESOP Loan"). At December 31, 1995, the combined ESOP Loans had a balance
of $15,886,000. The 1991 ESOP Loan, which bears an interest rate of 10%, is
payable in annual installments covering interest and principal over a ten-year
period beginning in 1992. The 1992 ESOP Loan, which bears an interest rate of
8.5%, is payable in annual installments covering interest and principal over a
ten-year period beginning in 1993. Company contributions to the ESOP began in
1992 and shall at least equal the amount required to make all ESOP loan
amortization payments for each plan year. The Company recognizes compensation
expense based on the shares allocated method. The total compensation expense
related to the ESOP recognized by the Company was $3,198,000, $3,673,000 and
$3,524,000 in 1993, 1994 and 1995, respectively. Interest incurred on the ESOP
Loans was approximately $1,743,000, $1,608,000 and $1,460,000 in 1993, 1994 and
1995, respectively. Approximately 229,000 shares owned by the ESOP have been
allocated to participants at December 31, 1995.
During 1993, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 93-6, "Employers Accounting for Employee Stock
Ownership Plans". Among other provisions, SOP 93-6 requires that compensation
expense relating to employee stock ownership plans be measured based on the fair
market value of the shares when allocated to the employees. The provisions of
SOP 93-6 apply only to leveraged ESOPs formed after December 31, 1992, or shares
newly acquired by an existing leveraged ESOP after December 31, 1992. Because
all shares owned by the Company's ESOP were acquired prior to December 31, 1992,
the Company's accounting policies for the shares currently owned by the ESOP are
not affected by SOP 93-6.
14. Sale of Assets
During the second quarter of 1994, the Company consummated the sale of selected
properties to Capstone Capital Corporation ("Capstone"), a real estate
investment trust. These properties include six ancillary hospital facilities,
three outpatient rehabilitation facilities, two outpatient surgery centers, one
uncompleted medical office building and
- 65 -
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Sale of Assets (continued)
one research facility. The net proceeds to the Company as a result of this
transaction were approximately $58,425,000. The net book value of the properties
was approximately $50,735,000. Because the Company is leasing back substantially
all of the properties from Capstone, payments which aggregate $6.9 million
annually, the resulting gain on sale of approximately $7,690,000 has been
recorded on the accompanying consolidated balance sheet as deferred revenue and
will be amortized into income over the initial lease terms of the properties.
The Company is accounting for each of the new leases as an operating lease with
an initial lease term of 5 years. During 1995, the Company sold another
inpatient rehabilitation hospital property to Capstone under terms similar to
those described above. Aggregate annual lease payments for this property totaled
$1.7 million. The resulting loss of approximately $4,010,000 has been netted
against the deferred gain described above and will be amortized to expense over
the initial lease term. The Company and certain Company officers own
approximately 4.5% of the outstanding common stock of Capstone at December 31,
1995.
15. Impairment of Long-Term Assets
During 1994, certain events occurred which impaired the value of specific
long-term assets of ReLife (see Note 2). A hospital in Missouri with a distinct
part unit which ReLife was managing was purchased in 1994 by an acute care
provider which terminated the contract with ReLife. Remaining goodwill of
$1,700,000 and costs allocated to the management contract of $1,300,000 were
written off as there is no value remaining for the terminated contract.
A ReLife facility in central Florida incurred tornado damage and has not been
operating since September 1993. During 1994, management of ReLife determined
that it is probable that this facility will not reopen. Start-up costs of
$1,600,000 were written off. This facility is leased under an operating lease as
described in Note 12 through the year 2001. An impairment accrual has been
established based on the projected undiscounted net cash flows related to this
non-operating facility for the remainder of the lease term. The accrual totals
$5,900,000 and consists of $4,700,000 in lease payments and $1,200,000 in fixed
costs and operating expenses, including property taxes, maintenance, security
and other related costs.
- 66 -
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. Impairment of Long-Term Assets (continued)
During 1994, ReLife entered into a contract for a new information system.
Payments under the contract and related costs were capitalized during the year.
After the agreement to merge with HEALTHSOUTH was entered into (see Note 2), the
computer project was abandoned resulting in a write-off of capitalized cost of
$4,500,000.
During the second quarter of 1995, the Company recognized an $11,192,000 loss on
impairment of assets which relates to six SHC (see Note 2) facilities in which
the undiscounted cash flows did not support the book value of the long-lived
assets of such facilities. The assets were written down to fair value as
determined from an independent appraisal of such properties.
The above amounts are shown recorded in operations in the consolidated statement
of income.
16. Subsequent Events - Unaudited
On January 17, 1996, the Company consummated the acquisition of Surgical Care
Affiliates, Inc. ("SCA") in a transaction accounted for as a pooling of
interests. In the transaction, SCA stockholders received an aggregate of
45,928,339 shares of the Company's common stock. SCA operates 67 surgery centers
in 24 states.
On March 14, 1996, the Company consummated the acquisition of Advantage Health
Corporation ("Advantage Health") in a transaction accounted for as a pooling of
interests. In the transaction, Advantage Health stockholders and optionholders
received an aggregate of 9,101,989 shares of the Company's common stock.
Advantage Health operates a network of 136 sites of service, including four
freestanding rehabilitation hospitals, one freestanding multi-use hospital, one
nursing home, 68 outpatient rehabilitation facilities, 14 inpatient managed
rehabilitation units, 24 rehabilitation services management contracts and six
managed sub-acute rehabilitation units.
The effects of conforming the accounting policies of the Company, SCA and
Advantage Health are not expected to be material.
The following table summarizes the unaudited consolidated pro forma results of
operations, assuming the SCA and Advantage Health acquisitions described above
had
- 67 -
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16. Subsequent Events - Unaudited (continued)
occurred at the beginning of each of the following periods. This pro forma
summary does not necessarily reflect the results of operations as they would
have been had the Company and the acquired entities constituted a single entity
during such periods. The 1994 and 1995 amounts also reflect the pro forma
effects of the NovaCare acquisition (see Note 10).
Year ended December 31
---------------------------------------------------
1993 1994 1995
--------------- ----------------- -----------------
(In thousands, except per share amounts)
Revenues $ 979,206 $1,799,805 $2,042,948
Net income 60,474 87,607 91,959
Net income per common share--assuming
full dilution 0.45 0.61 0.62
- 68 -
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
The Company has not changed independent accountants within the
24 months prior to December 31, 1995.
- 69 -
PART III
Item 10. Directors and Executive Officers.
Directors
The following table sets forth certain information with respect to the
Company's Directors.
Principal Occupation
and All Positions A Director
Name Age With the Company Since
---- --- ---------------- -----
Richard M. Scrushy 43 Chairman of the Board 1984
and Chief Executive Officer
and Director
James P. Bennett 38 President and Chief Operating Officer 1993
and Director
Phillip C. Watkins, M.D. 54 Physician, Birmingham, Alabama, 1984
and Director
George H. Strong 69 Private Investor, Locust, New Jersey, 1984
and Director
C. Sage Givens 39 General Partner, 1985
Acacia Venture Partners
and Director
Charles W. Newhall III 51 Partner, New Enterprise 1985
Associates Limited Partnerships,
and Director
Aaron Beam, Jr. 52 Executive Vice President and 1993
Chief Financial Officer
and Director
Larry R. House 52 Chairman of the Board, President 1993
and Chief Executive Officer,
MedPartners/Mullikin, Inc.,
and Director
Anthony J. Tanner 47 Executive Vice President-- 1993
Administration and Secretary
and Director
P. Daryl Brown 41 President - HEALTHSOUTH 1995
Outpatient Centers and Director
- 70 -
Principal Occupation
and All Positions A Director
Name Age With the Company Since
---- --- ---------------- -----
John S. Chamberlin 67 Private Investor, 1993
Princeton, New Jersey,
and Director
Richard F. Celeste 58 Managing Partner, 1991
Celeste and Sabaty, Ltd.
and Director
Joel C. Gordon 67 Private Investor, 1996
Nashville, Tennessee,
Consultant to the Company
and Director
Raymond J. Dunn III 53 Private Investor, 1996
Woburn, Massachusetts,
Consultant to the Company
and Director
Richard M. Scrushy, one of the Company's management founders, has
served as Chairman of the Board and Chief Executive Officer of the Company since
1984, and also served as President of the Company from 1984 until March 1995.
From 1979 to 1984, Mr. Scrushy was with Lifemark Corporation, a publicly-owned
healthcare corporation, serving in various operational and management positions.
Mr. Scrushy is also a director of MedPartners/Mullikin, Inc., a publicly-traded
physician practice management company, and Chairman of the Board of Capstone
Capital, Inc., a publicly-traded real estate investment trust. He also serves on
the boards of directors of several privately-held healthcare corporations.
Phillip C. Watkins, M.D., FACC, is and has been in private practice for
more than five years with Cardiovascular Associates, P.C. 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 Core Funds,
a public mutual fund group, Integrated Health Services, Inc., a publicly-traded
healthcare corporation, and AmeriSource, Inc., a large drug wholesaler.
C. Sage Givens is a general partner of Acacia Venture Partners, a
private venture capital fund capitalized at $66,000,000. From 1983 to June 30,
1995, Ms. Givens was a general partner of First Century Partners, a private
venture capital fund capitalized to $100,000,000. Ms. Givens managed the fund's
healthcare investments. Ms. Givens serves on the boards of directors of PhyCor,
Inc., a publicly-traded healthcare corporation, and several privately-held
healthcare companies.
Charles W. Newhall III is a general partner and founder of New
Enterprise Associates Limited Partnerships, Baltimore, Maryland, where he has
been engaged in the venture capital business since 1978. Mr. Newhall is also a
director of Integrated Health Services, Inc., MedPartners/Mullikin, Inc. and
Opta Food Ingredients, Inc., all of which are publicly-traded corporations.
- 71 -
Aaron Beam, Jr., C.P.A., a management founder, serves as Executive Vice
President and Chief Financial Officer of the Company and was elected a Director
in February 1993. From 1980 to 1984, Mr. Beam was employed by Lifemark
Corporation in several financial and operational management positions for the
Shared Services Division, including division controller. Mr. Beam is a director
of Ramsey Healthcare, Inc., a publicly-traded healthcare corporation.
James P. Bennett joined the Company in May 1991 as Director of
Inpatient Operations, was promoted to Group Vice President -- Inpatient
Rehabilitation Operations in September 1991, again to President and Chief
Operating Officer -- HEALTHSOUTH Rehabilitation Hospitals in June 1992, to
President -- HEALTHSOUTH Inpatient Operations in February 1993, and to President
and Chief Operating Officer of the Company in March 1995. Mr. Bennett was
elected a Director in February 1993. From August 1987 to May 1991, Mr. Bennett
was employed by Russ Pharmaceuticals, Inc., Birmingham, Alabama, as Vice
President -- Operations, Chief Financial Officer, Secretary and director. Mr.
Bennett served as certified public accountant on the audit staff of the
Birmingham, Alabama office of Ernst & Whinney (now Ernst & Young LLP) from
October 1980 to August 1987.
Larry R. House is Chairman of the Board, President and Chief Executive
Officer of MedPartners/Mullikin, Inc. a publicly-traded physician practice
management firm, a position he assumed as his principal occupation in August
1993. Mr. House was elected a Director of the Company in February 1993. At the
same time he became President -- HEALTHSOUTH International, Inc. and New
Business Ventures, a position which he held until August 31, 1994, when he
terminated his employment with the Company to concentrate on his duties at
MedPartners/Mullikin. Mr. House joined the Company in September 1985 as Director
of Marketing, subsequently served as Senior Vice President and Chief Operating
Officer of the Company, and in June 1992 became President and Chief Operating
Officer -- HEALTHSOUTH Medical Centers. Prior to joining the Company, Mr. House
was president and chief executive officer of a provider of clinical contract
management services for more than ten years.
Anthony J. Tanner, Sc.D., a management founder, serves as Executive
Vice President -- Administration and Secretary of the Company and was elected a
Director in February 1993. From 1980 to 1984, Mr. Tanner was with Lifemark
Corporation in the Shared Services Division as director, clinical and
professional programs (1982-1984) and director, quality assurance and education
(1980-1982), where he was responsible for the development of clinical programs
and marketing programs.
P. Daryl Brown joined the Company in April 1986 and served until June
1992 as Group Vice President -- Outpatient Operations. He became President --
HEALTHSOUTH Outpatient Centers in June 1992, and was elected as a Director in
March 1995. From 1977 to 1986, Mr. Brown served with the American Red Cross,
Alabama Region, in several positions, including Chief Operating Officer,
Administrative Director for Financing and Administration and Controller.
John S. Chamberlin retired in 1988 as president and chief operating
officer of Avon Products, Inc., a position he had held since 1985. From 1976
until 1985, he served as chairman and chief executive officer of Lenox,
Incorporated, after 22 years in various assignments for General Electric. From
1990 to 1991, he served as chairman and chief executive officer of New Jersey
Publishing Co. Mr. Chamberlin is chairman of the board of Life Fitness Company
and WNS, Inc., and is a director of The Scotts Company. He is a member of the
Board of Trustees of the Medical Center at Princeton and the Board of Overseers
of Parsons School of Design and is a trustee of the Woodrow Wilson National
Fellowship Foundation.
Richard F. Celeste originally joined the Board of Directors in 1991,
took a leave of absence from the Board of Directors in August 1993 to head the
Democratic National Committee's healthcare reform campaign, and rejoined the
Board in May 1994. He is Managing Partner of Celeste and Sabaty, Ltd., a
business advisory firm located in Columbus, Ohio, which assists United States
companies to build strategic business alliances in Europe, Africa, South Asia
and the Pacific Rim. He served as Governor of Ohio from 1983 to 1991, during
which time he chaired the National Governors' Association Committee on Science
and Technology, and directed the United States Peace Corps from 1979 to 1981. He
is a member of the Advisory Council of the Carnegie Commission on Science,
Technology
- 72 -
and Government, and chairs Carnegie's Task Force on Science, Technology and the
States. He is a director of Navistar International, Inc. and Republic Engineered
Steels, Inc., both of which are publicly-traded companies.
Joel C. Gordon served as Chairman of the Board of Directors of SCA from
its founding in 1982 until January 17, 1996, when SCA was acquired by the
Company. Mr. Gordon also served as Chief Executive Officer of SCA from 1987
until January 17, 1996. Mr. Gordon serves on the boards of directors of Genesco,
Inc., an apparel manufacturer, HealthWise of America, Inc., an owner and
operator of health maintenance organizations, and SunTrust Bank of Nashville,
N.A.
Raymond J. Dunn, III served as Chief Executive Officer of Advantage
Health from 1986 until March 14, 1996, when Advantage Health was acquired by the
Company. In addition, he served as Chairman of its Board of Directors from 1990
to March 14, 1996 and as its President from 1994 to March 14, 1996. From 1987 to
1990, he served as Vice Chairman of the Board of Advantage Health. From 1979 to
1986, Mr. Dunn was Chief Executive Officer of a former subsidiary of Advantage
Health responsible for management of Advantage Health's operations. From 1970 to
1978, he was Administrator of New England Rehabilitation Hospital, Inc.
Executive Officers
The following table sets forth certain information with respect to the
Company's executive officers.
All Positions An Officer
Name Age With the Company Since
---- --- ---------------- -----
Richard M. Scrushy 43 Chairman of the Board 1984
and Chief Executive Officer and
Director
James P. Bennett 38 President and Chief Operating Officer 1991
and Director
Aaron Beam, Jr. 52 Executive Vice President and Chief 1984
Financial Officer and Director
Anthony J. Tanner 47 Executive Vice President-- Administration 1984
and Secretary and Director
Thomas W. Carman 44 Executive Vice President-- 1985
Corporate Development
P. Daryl Brown 41 President-- HEALTHSOUTH 1986
Outpatient Centers and Director
Robert E. Thomson 48 President-- HEALTHSOUTH 1987
Inpatient Operations
Tarpley B. Jones 38 President-- HEALTHSOUTH 1996
Surgery Centers
Russell H. Maddox 55 President-- HEALTHSOUTH 1995
Imaging Centers
- 73 -
William T. Owens 37 Senior Vice President-- 1986
Finance and Controller
Michael D. Martin 35 Senior Vice President-- 1989
Finance and Treasurer
William W. Horton 36 Group Vice President-- 1994
Legal Services and
Assistant Secretary
Biographical information for Messrs. Scrushy, Bennett, Beam, Tanner and
Brown is set forth above under this Item, "Directors and Executive Officers --
Directors".
Thomas W. Carman joined the Company 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.
Robert E. Thomson joined the Company 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 --
HEALTHSOUTH Inpatient Operations in February 1996.
Tarpley B. Jones served as Senior Vice President and Chief Financial
Officer of SCA from January 1, 1992 until January 17, 1996. Prior to joining
SCA, he served as Treasurer, Senior Vice President and Chief Financial Officer,
and then Executive Vice President and Chief Financial Officer, of Comdata
Holdings Corporation and Comdata Network. Inc.
Russell H. Maddox became President -- HEALTHSOUTH Imaging Centers in
January 1996. He served as President -- HEALTHSOUTH Surgery & Imaging Centers
from June 1995 through January 1996. From January 1992 until May 1995, Mr.
Maddox served as Chairman of the Board, President and Chief Executive Officer of
Diagnostic Health Corporation, an outpatient diagnostic imaging company which
became a wholly-owned subsidiary of the Company in 1996. Mr. Maddox was founder
and President of Russ Pharmaceuticals, Inc., located in Birmingham, Alabama. In
March 1989 Russ Pharmaceuticals was acquired by Ethyl Corporation of Richmond,
Virginia.
William T. Owens, C.P.A., joined the Company 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 and
became Senior Vice President -- Finance and Controller in February 1994. Prior
to joining the Company, 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.
Michael D. Martin joined the Company in October 1989 as Vice President
and Treasurer, and was named Senior Vice President -- Finance and Treasurer in
February 1994. From 1983 through September 1989, Mr. Martin specialized in
healthcare lending with AmSouth Bank N.A., Birmingham, Alabama, where he was a
Vice President immediately prior to joining the Company.
William W. Horton joined the Company in July 1994 as Group Vice
President -- Legal Services. From August 1986 through June 1994, Mr. Horton
practiced corporate, securities and healthcare law with the Birmingham,
Alabama-based firm of Haskell Slaughter Young & Johnston, Professional
Association, where he served as Chairman of the Healthcare Practice Group.
- 74 -
General
Directors of the Company hold office until the next Annual Meeting of
Stockholders of the Company and until their successors are elected and
qualified. Executive officers of the Company are elected annually by, and serve
at the discretion of the Board of Directors. There are no arrangements or
understandings known to the Company between any of the Directors, nominees for
Director or executive officers of the Company and any other person pursuant to
which any of such persons was elected as a Director or an executive officer,
except the Employment Agreement between the Company and Richard M. Scrushy (see
Item 11, "Executive Compensation -- Chief Executive Officer Employment
Agreement") and except that the Company agreed to appoint Mr. Gordon and Mr.
Dunn to the Board of Directors in connection with the SCA and Advantage Health
mergers. There are no family relationships between any Directors, nominees for
Director or executive officers of the Company.
Compliance With Section 16(a) of the
Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and Directors, and persons who beneficially own more than 10%
of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the New York Stock Exchange. Officers, Directors and beneficial owners of
more than 10% of the Company's Common Stock are required by Securities and
Exchange Commission regulations to furnish the Company with copies of all
Section 16(a) forms that they file. Based solely on review of the copies of such
forms furnished to the Company, or written representations that no reports on
Form 5 were required, the Company believes that for the period from January 1,
1995, through December 31, 1995, all of its officers, Directors and
greater-than-10% beneficial owners complied with all Section 16(a) filing
requirements applicable to them, except as set forth below.
Larry R. House, a Director of the Company, failed to timely report a
total of 17 sales of the Company's Common Stock between February 10, 1993 and
March 23, 1995. In addition, two acquisitions of Common Stock pursuant to the
exercise of stock options on October 13, 1994 were not timely reported. All such
transactions were reported on Mr. House's Form 5 filed in February 1996.
- 75 -
Item 11. Executive Compensation.
Executive Compensation -- General
The following table sets forth compensation paid or awarded to the
Chief Executive Officer and each of the other four most highly compensated
executive officers of the Company (the "Named Executive Officers") for all
services rendered to the Company and its subsidiaries in 1993, 1994 and 1995.
Summary Compensation Table
Annual Compensation Long-Term Compensation
------------------- ----------------------
Bonus/Annual Stock Long-Term All
Incentive Option Incentive Other Com-
Name and Principal Position Year Salary Award Awards Payouts pensation (1)
- --------------------------- ---- ------ ----- ------ ------- -------------
Richard M. Scrushy 1993 $ 820,768 $1,900,000 271,000 -- $ 10,796
Chairman of the Board 1994 1,207,228 2,000,000 -- -- 12,991
and Chief Executive Officer 1995 1,737,526 5,000,000 1,000,000 650,108 (2)
James P. Bennett 1993 $ 250,514 130,000 40,000 -- $ 6,640
President and Chief 1994 357,740 250,000 -- -- 10,760
Operating Officer 1995 371,558 600,000 150,000 -- 7,835
Michael D. Martin 1993 $ 113,049 100,000 30,000 -- $ 7,635
Senior Vice President 1994 189,013 250,000 -- -- 7,311
and Treasurer 1995 165,626 500,000 85,000 -- 7,919
P. Daryl Brown 1993 $ 182,707 160,000 20,000 -- $ 7,701
President-- HEALTHSOUTH 1994 272,573 200,000 -- -- 10,226
Outpatient Centers 1995 263,462 300,000 130,000 -- 8,580
Aaron Beam, Jr. 1993 $ 252,039 100,000 25,000 -- $ 9,342
Executive Vice President 1994 298,223 175,000 -- -- 11,272
and Chief Financial Officer 1995 247,903 300,000 100,000 -- 8,695
- --------------------
<FN>
(1) Includes car allowances of $500 per month for Mr. Scrushy and $350 per
month for the other named officers. Also includes (a) matching
contributions under the Company's Retirement Investment Plan for 1993,
1994 and 1995, respectively, of: $393, $318 and $292 to Mr. Scrushy;
$380, $355 and $900 to Mr. Beam; $453, $625 and $900 to Mr. Bennett;
$325, $526 and $900 to Mr. Martin; and $473, $274 and $900 to Mr.
Brown; (b) awards under the Company's Employee Stock Benefit Plan for
1993, 1994 and 1995, respectively, of $3,123, $4,910 and $1,626 to Mr.
Scrushy; $3,123, $4,910 and $1,626 to Mr. Beam; $1,102, $4,910 and
$1,626 to Mr. Bennett; $3,057, $1,345 and $1,626 to Mr. Martin; and
$2,846, $4,910 and $1,626 to Mr. Brown; and (c) split-dollar life
insurance premiums paid in 1993 and 1994 of $1,280, $1,723 and $2,190
with respect to Mr. Scrushy; $1,639, $1,807 and $1,969 with respect to
Mr. Beam; $885, $1,025 and $1,109 with respect to Mr. Bennett; $53,
$1,240 and $1,193 with respect to Mr. Martin; and $182, $842 and $1,854
with respect to Mr. Brown. See this Item, "Executive Compensation --
Retirement Investment Plan" and "Executive Compensation -- Employee
Stock Benefit Plan".
(2) In addition to the amounts described in the preceding footnote,
includes the conveyance of real property valued at $640,000 to Mr.
Scrushy. See Item 13, "Certain Relationships and Related Transactions".
</FN>
- 76 -
Stock Option Grants in 1995
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 1,000,000 32.6% $16.75 6/6/2005 $ 11,070,000
James P. Bennett 50,000 19.375 3/10/2005 675,500
100,000 4.9% 16.75 6/6/2005 1,107,000
Michael D. Martin 60,000 16.75 6/6/2005 664,200
25,000 2.8% 30.75 12/14/2005 451,750
P. Daryl Brown 30,000 19.375 3/10/2005 405,300
100,000 4.2% 16.75 6/6/2005 1,107,000
Aaron Beam, Jr. 100,000 3.3% 16.75 6/6/2005 1,107,000
- --------------
<FN>
(1) Based on the Black-Scholes option pricing model adapted for use in
valuating 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 48 at March 10, 1995, 45 at June 6, 1995
and 36 at December 14, 1995; (ii) the risk-free rate of return is
assumed to be 7.17% at March 10, 1995, 6.25% at June 6, 1995 and 5.76%
at December 14, 1995; (iii) dividend yield is assumed to be 0; and (iv)
the time of exercise is assumed to be the expiration date of the
option.
</FN>
Stock Option Exercises in 1995 and Option Values at December 31, 1995
Number Value of Unexercised
of Shares Number of Unexercised Options In-the-Money Options
Acquired at December 31, 1995 at December 31, 1995
on Value --------------------------- ------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- ----------- ------------- ----------- -------------
Richard M. Scrushy...... -0- $ -0- 6,686,262 -0- $136,449,400 $ -0-
James P. Bennett........ 10,000 111,850 360,000 15,000 6,252,600 323,400
Michael D. Martin....... 30,000 395,550 63,000 71,250 822,336 991,163
P. Daryl Brown.......... -0- -0- 441,000 15,000 8,332,353 323,400
Aaron Beam, Jr..........123,100 1,556,845 176,250 -0- 2,881,450 -0-
- --------------------
<FN>
(1) Does not reflect any options granted and/or exercised after December 31,
1995. The net effect of any such grants and exercises is reflected in the
table appearing under Item 12, "Security Ownership of Certain Beneficial
Owners and Management".
(2) Represents the difference between market price of the Company's Common
Stock and the respective exercise prices of the options at December 31,
1995. 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.
</FN>
- 77 -
Stock Option Plans
Set forth below is information concerning the various stock option
plans of the Company at December 31, 1995.
1984 Incentive Stock Option Plan
The Company had a 1984 Incentive Stock Option Plan (the "ISO Plan"),
intended to qualify under Section 422(b) of the Internal Revenue Code of 1986,
as amended (the "Code"), covering an aggregate of 2,400,000 shares of Common
Stock. The ISO Plan expired on February 28, 1994, in accordance with its terms.
As of December 31, 1995, there were outstanding under the ISO Plan options to
purchase 21,353 shares of the Company's Common Stock at prices ranging from
$2.71 to $7.57 per share. All such options remain in full force and effect in
accordance with their terms and the ISO Plan. Under the ISO Plan, which was
administered by the Board of Directors, key employees could be granted options
to purchase shares of Common Stock at 100% of fair market value on the date of
grant (or 110% of fair market value in the case of a 10% stockholder/grantee).
The outstanding options granted under the ISO Plan must be exercised within ten
years from the date of grant, are cumulatively exercisable with respect to 25%
of the shares covered thereby after the expiration of each of the first through
the fourth years following the date of grant, are nontransferable except by will
or pursuant to the laws of descent and distribution, are protected against
dilution and expire within three months after termination of employment, unless
such termination is by reason of death.
1988 Non-Qualified Stock Option Plan
The Company also has a 1988 Non-Qualified Stock Option Plan (the "NQSO
Plan") covering a maximum of 2,400,000 shares of Common Stock. As of December
31, 1995, there were outstanding under the NQSO Plan options to purchase 167,180
shares of the Company's Common Stock at prices ranging from $5.04 to $16.75 per
share. An additional 3,650 shares were reserved for grants under the NQSO
Plan.The NQSO Plan, which is administered by the Board of Directors (except with
respect to options granted to Directors, as to which it is administered by an
Independent Stock Option Committee), provides that Directors, executive officers
and other key employees may be granted options to purchase shares of Common
Stock at 100% of fair market value on the date of grant. The NQSO Plan
terminates on the earliest of (a) February 28, 1998, (b) such time as all shares
of Common Stock reserved for issuance under the NQSO Plan have been acquired
through the exercise of options granted thereunder or (c) such earlier time as
the Board of Directors of the Company may determine. Options granted pursuant to
the NQSO Plan have a ten-year term are exercisable at any time during such
period, are nontransferable except by will or pursuant to the laws of descent
and distribution, are protected against dilution and expire within three months
of termination of association with the Company as a Director or termination of
employment, unless such termination is by reason of death.
1989, 1990, 1991, 1992, 1993 and 1995 Stock Option Plans
The Company also has a 1989 Stock Option Plan (the "1989 Plan"), a 1990
Stock Option Plan (the "1990 Plan"), a 1991 Stock Option Plan (the "1991 Plan"),
a 1992 Stock Option Plan (the "1992 Plan"), a 1993 Stock Option Plan (the "1993
Plan") and a 1995 Stock Option Plan (the "1995 Plan"), under each of which
incentive stock options ("ISOs") and non-qualified stock options ("NQSOs") may
be granted. The 1989, 1990, 1991, 1992, 1993 and 1995 Plans cover a maximum of
1,200 shares, 1,800 shares, 5,600,000 shares, 2,800,000 shares, 2,800,000 shares
and 3,500,000 (to be increased by 0.9% of the outstanding Common Stock of the
Company on each January 1, beginning January 1, 1996) shares, respectively, of
the Company's Common Stock. As of December 31, 1995, there were outstanding
options to purchase an aggregate of 13,458,221 shares of the Company's Common
Stock under such Plans at exercise prices ranging from $5.04 to $30.75 per
share. An additional 1,236,004 shares were reserved for grants under such Plans.
Each of the 1989, 1990, 1991, 1992, 1993 and 1995 Plans is administered in the
same manner as the NQSO Plan and provides that Directors, executive officers and
other key employees may
- 78 -
be granted options to purchase shares of Common Stock at 100% of fair market
value on the date of grant. The 1989, 1990, 1991, 1992, 1993 and 1995 Plans
terminate on the earliest of (a) October 25, 1999, October 15, 2000, June 19,
2001, June 16, 2002, April 19, 2003 and June 5, 2005, respectively, (b) such
time as all shares of Common Stock reserved for issuance under the respective
Plan have been acquired through the exercise of options granted thereunder, or
(c) such earlier times as the Board of Directors of the Company may determine.
Options granted under these Plans which are designated as ISOs contain vesting
provisions similar to those contained in options granted under the ISO Plan and
have a ten-year term. NQSOs granted under these Plans have a ten-year term.
Options granted under these Plans are nontransferable except by will or pursuant
to the laws of descent and distribution, are protected against dilution and will
expire within three months of termination of association with the Company as a
Director or termination of employment, unless such termination is by reason of
death.
1993 Consultants' Stock Option Plan
The Company also has a 1993 Consultants' Stock Option Plan (the "1993
Consultants' Plan"), under which NQSOs may be granted, covering a maximum of
1,500,000 shares of Common Stock. As of December 31, 1995, there were
outstanding under the 1993 Consultants' Plan options to purchase 905,000 shares
of Common Stock at prices ranging from $6.75 to $30.75 per share. The 1993
Consultants' Plan, which is administered in the same manner as the NQSO Plan,
provides that certain non-employee consultants who provide significant services
to the Company may be granted options to purchase shares of Common Stock at such
prices as are determined by the Board of Directors or the appropriate committee.
The 1993 Consultants' Plan terminates on the earliest of (a) February 25, 2003,
(b) such time as all shares of Common Stock reserved for issuance under the 1993
Consultants' Plan have been acquired through the exercise of options granted
thereunder, or (c) such earlier time as the Board of Directors of the Company
may determine. Options granted under the 1993 Consultants' Plan have a ten-year
term. Options granted under the 1993 Consultants' Plan are nontransferable
except by will or pursuant to the laws of descent and distribution, are
protected against dilution and expire within three months of termination of
association with the Company as a consultant, unless such termination is by
reason of death.
Other Stock Option Plans
In connection with the acquisitions of SHC and SSCI, the Company
assumed certain 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 of the Company in accordance
with the exchange ratios applicable to such mergers. At December 31, 1995, there
were outstanding under the SHC and SSCI plans options to purchase 674,806 shares
of the Company's Common Stock at exercise prices ranging from $1.52 to $17.24
per share. No additional options are being granted under any such assumed plans.
Executive Loans
In order to enhance equity ownership by senior management, in 1989 the
Company adopted a program of making loans to officers holding the position of
Group Vice President and above to facilitate the exercise of stock options held
by such persons. Each loan bears interest at the prime rate announced from time
to time by AmSouth Bank of Alabama, Birmingham, Alabama and is secured by a
first lien on the shares of Common Stock acquired with the proceeds of the loan.
Each loan has a ten-year term, and the Company's lien on the shares of Common
Stock is released as the indebtedness is repaid at the rate of one share per the
weighted average option exercise price repaid. The only loan currently
outstanding under such program is a loan made on May 7, 1992 to P. Daryl Brown,
President -- HEALTHSOUTH Outpatient Centers, which had an original principal
balance of $213,613 and of which $190,000 remained outstanding at December 31,
1995.
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Retirement Investment Plan
Effective January 1, 1990, the Company adopted the HEALTHSOUTH
Retirement Investment Plan (the "401(k) Plan"), a retirement plan intended to
qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended.
The 401(k) Plan is open to all full-time and part-time employees of the Company
who are over the age of 21, have one full year of service with the Company 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 20% of
their annual compensation (subject to nondiscrimination rules under the Internal
Revenue 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. The Company will match a minimum of 10% 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".
Aaron Beam, Jr., Executive Vice President and Chief Financial Officer
of the Company, and Anthony J. Tanner, Executive Vice President --
Administration and Secretary of the Company, serve as Trustees of the 401(k)
Plan, which is administered by the Company.
Employee Stock Benefit Plan
Effective January 1, 1991, the Company 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 Internal Revenue Code of 1986, as amended. The ESOP is open to
all full-time and part-time employees of the Company who are over the age of 21,
have one full year of service with the Company 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
aforementioned conditions.
The ESOP was established with a $10,000,000 loan from the Company, the
proceeds of which were used to purchase 413,793 shares of the Company's Common
Stock. In 1992, an additional $10,000,000 loan was made to the ESOP, which was
used to purchase an additional 416,666 shares of Common Stock. Under the ESOP, a
Company Common Stock account (a "company stock account") is established and
maintained for each eligible employee who participates in the ESOP. In each plan
year, such account is credited with such employee's allocable share of the
Common Stock held by the ESOP and allocated with respect to such 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.
Under the ESOP, eligible employees who participate in the ESOP and who
have attained age 55 and have completed 10 years of participation in the ESOP
may elect to diversify the assets in their company stock account by directing
the plan administrator to transfer to the 401(k) Plan a portion of their company
stock account to be invested, as the eligible employee directs, in one or more
of the investment options available under the 401(k) Plan.
See Note 12 of "Notes to Consolidated Financial Statements".
Richard M. Scrushy, Chairman of the Board and Chief Executive Officer
of the Company, Aaron Beam, Jr., Executive Vice President and Chief Financial
Officer of the Company, and Anthony J. Tanner, Executive Vice President --
Administration and Secretary of the Company, serve as Trustees of the ESOP,
which is administered by the Company.
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Stock Purchase Plan
In order to further encourage employees to obtain equity ownership in
the Company, the Company's Board of Directors adopted an Employee Stock Purchase
Plan (the "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 the Company's 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, the Company will provide a
10% matching contribution to be applied to purchases under the Stock Purchase
Plan. The Company also pays 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 the Company.
Board Compensation
Directors who are not also employed by the Company are paid Directors'
fees of $10,000 per annum, 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. The Directors of the Company, including Mr. Scrushy, have
been granted non-qualified stock options to purchase shares of the Company's
Common Stock. See this Item, "Executive Compensation -- Stock Option Plans"
above.
Chief Executive Officer Employment Agreement
The Company is a party to an Employment Agreement 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 of the Company for
a five-year term which ends December 31, 2000. Such term is automatically
extended for an additional year on December 31 of each year. In addition, the
Company 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. Under the Agreement,
Mr. Scrushy received a base salary of $900,000, excluding incentive compensation
of up to $900,000, in 1995 and is to receive the same base salary in 1996 and
each year thereafter, with incentive compensation of up to $2,400,000, subject
to annual review by the Board of Directors, and is entitled to participate in
any bonus plan approved by the Board of Directors for the Company's management.
The incentive compensation is earned at $200,000 per month in 1996, contingent
upon the Company's success in meeting certain monthly budgeted earnings per
share targets. Mr. Scrushy earned the entire $900,000 incentive component of his
compensation in 1995, as all such targets were met. In addition, Mr. Scrushy was
awarded $5,000,000 under the management bonus plan, and was conveyed real estate
having an appraised value of $640,000 by the Company. See Item 13, "Certain
Relationships and Related Transactions". Such additional bonus was based on the
Committee's assessment of Mr. Scrushy's contribution to the establishment of the
Company as the industry leader in outpatient and rehabilitative healthcare
services, including his role in the negotiation and consummation of the
Company's 1995 acquisitions of Surgical Health Corporation, the rehabilitation
hospitals division of NovaCare, Inc., Sutter Surgery Centers, Inc. and Caremark
Orthopedic Services Inc. and the 1996 acquisitions of Surgical Care Affiliates,
Inc. and Advantage Health Corporation, as well as the Company's success in
achieving annual budgeted net income targets. Mr. Scrushy is also provided with
a car allowance in the amount of $500 per month and disability insurance through
a Company-wide plan or otherwise. Under the Agreement, Mr. Scrushy's employment
may be terminated for cause or if he should become disabled. Termination of Mr.
Scrushy's employment under the Agreement will result in certain severance pay
arrangements. In the event that the Company shall be acquired, merged or
reorganized in such a manner as to result in a change of control of the Company,
Mr. Scrushy has the right to terminate his employment under the Agreement, in
which case he will receive a lump sum payment equal to three years' annual base
salary (including the gross incentive portion thereof) under the Agreement. Mr.
Scrushy has agreed not to compete with the Company during any period to which
any such severance pay relates. Mr. Scrushy may terminate
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the Agreement at any time upon 180 days' notice, in which case he will receive
one year's base salary as severance pay.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 15, 1996, (a) by each person
who is known by the Company to own beneficially more than 5% of the Company's
Common Stock, (b) by each of the Company's Directors and (c) by the Company's
five most highly compensated executive officers and all executive officers and
Directors as a group.
Percentage
Name and Number of Shares of
Address of Owner Beneficially Owned (1) Common Stock
---------------- ---------------------- ------------
Richard M. Scrushy 7,738,329 (2) 4.84%
John S. Chamberlin 105,000 (3) *
C. Sage Givens 191,050 (4) *
Charles W. Newhall III 315,938 (5) *
George H. Strong 264,166 (6) *
Phillip C. Watkins, M.D. 322,765 (7) *
Aaron Beam, Jr. 228,060 (8) *
James P. Bennett 475,000 (3) *
Larry R. House 288,906 (9) *
Anthony J. Tanner 646,904 (10) *
Richard F. Celeste 80,000 (3) *
P. Daryl Brown 520,000 (11) *
Joel C. Gordon 1,947,236 (12) 1.28%
Raymond J. Dunn, III 1,619,749 (13) 1.06%
Michael D. Martin 114,004 (14) *
FMR Corp. 9,967,400 (15) 6.54%
82 Devonshire Street
Boston, Massachusetts 02109
All Executive Officers and Directors as a Group 16,249,806 (16) 9.87%
(20 persons)
- -------------------------
<FN>
(1) The persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by
them, except as otherwise indicated.
(2) Includes 7,436,262 shares subject to currently exercisable stock options.
(3) All of the shares are subject to currently exercisable stock options.
(4) Includes 1,050 shares owned by Ms. Givens's spouse and 190,000 shares
subject to currently exercisable stock options.
(5) Includes 230 shares owned by members of Mr. Newhall's immediate family,
10,780 shares owned by partnerships of which Mr. Newhall is a general
partner and 305,000 shares subject to currently exercisable
- 82 -
stock options. Mr. Newhall disclaims beneficial ownership of the shares
owned by the partnerships except to the extent of his pecuniary interest
therein.
(6) Includes 54,054 shares owned by a trust of which Mr. Strong is a trustee
and claims shared voting and investment power and 138,165 shares subject
to currently exercisable stock options.
(7) Includes 225,000 shares subject to currently exercisable stock options.
(8) Includes 206,250 shares subject to currently exercisable stock options.
(9) Includes 173,734 shares subject to currently exercisable stock options.
(10) Includes 36,000 shares held in trust by Mr. Tanner for his children and
610,000 shares subject to currently exercisable stock options.
(11) Includes 491,000 shares subject to currently exercisable stock options.
(12) Includes 204,670 shares owned by his spouse, 235,350 shares owned by
trusts of which he is a trustee and 167,260 shares subject to currently
exercisable stock options.
(13) Includes 31,666 shares owned by a charitable foundation of which Mr. Dunn
is a trustee.
(14) Includes 113,000 shares subject to currently exercisable stock options.
(15) Shares held by various investment funds for which affiliates of FMR Corp.
act as investment advisor. FMR Corp. or its affiliates claim sole power
to vote 21,100 of the shares and sole power to dispose of all of the
shares.
(16) Includes 12,094,715 shares subject to currently exercisable stock options
held by executive fficers and Directors.
* Less than 1%
</FN>
Item 13. Certain Relationships and Related Transactions.
During 1995, the Company paid $11,587,000 for the purchase of new NCR
computer equipment from GG Enterprises, a value-added reseller of computer
equipment which is owned by Grace Scrushy, the mother of Richard M. Scrushy,
Chairman of the Board and Chief Executive Officer of the Company, and Gerald P.
Scrushy, Senior Vice President -- Physical Resources of the Company. Such
purchases were made in the ordinary course of the Company's business. The price
paid for this equipment was more favorable to the Company than that which could
have been obtained from an independent third party seller.
During 1995, the Company paid 229,000 to Caretenders Health Corp., a
provider of home healthcare services and related services, for services provided
by Caretenders to the Company. The Company beneficially owns approximately 30%
of the issued and outstanding shares of common stock of Caretenders. Such
purchases were made in the ordinary course of the Company's business. The
Company believes that the price paid for the services provided by Caretenders
was no less favorable to the Company than that which could have been obtained
from an independent third-party provider.
During 1995, the Company paid $63,000 to MedPartners/Mullikin, Inc., a
publicly-traded physician practice management company, for management services
rendered to certain physician practices owned by the Company. Richard M.
Scrushy, Chairman of the Board and Chief
- 83 -
Executive Officer of the Company, and Larry R. House, a Director of the Company,
are directors of MedPartners/Mullikin, Inc. Mr. House also serves as Chairman of
the Board, President and Chief Executive Officer of MedPartners/Mullikin, Inc.,
a position which has been his principal occupation since August 1993. At March
1, 1996, Mr. Scrushy beneficially owns approximately 1.63%, Mr. House
beneficially owns approximately 3.93%, and the Company owns approximately 2.20%
of the issued and outstanding Common Stock of MedPartners/Mullikin, Inc. The
Company believes that the price paid for such services was no less favorable to
the Company than that which could have been obtained from an independent
third-party provider.
In June 1994, the Company sold selected properties, including six
ancillary hospital facilities, three outpatient rehabilitation facilities, two
outpatient surgery centers, one uncompleted medical office building and one
research facility to Capstone Capital Corporation ("Capstone"), a
publicly-traded real estate investment trust. The net proceeds of the Company as
a result of the transaction were approximately $58,425,000. The net book value
of the properties was approximately $50,735,000. The Company leases back
substantially all these properties from Capstone and guarantees the associated
operating leases, payments under which aggregate approximately $6,900,000
annually. In addition, in 1995, Capstone acquired ownership of the Company's
Erie, Pennsylvania inpatient rehabilitation facility, which had been leased by
the Company from an unrelated lessor. The Company's annual lease payment under
that lease is $1,700,000. Richard M. Scrushy, Chairman of the Board and Chief
Executive Officer of the Company, and Michael D. Martin, Senior Vice President
- -- Finance and Treasurer of the Company, were among the founders of Capstone and
serve on its Board of Directors. At March 1, 1996, Mr. Scrushy owned
approximately 2.9% of the issued and outstanding capital stock of Capstone, and
Mr. Martin owned approximately 0.8% of the issued and outstanding capital stock
of Capstone. In addition, the Company owned approximately 0.8% of the issued and
outstanding capital stock of Capstone at March 1, 1996. The Company believes
that all transactions involving Capstone were effected on terms no less
favorable than those which could have been obtained in transactions with
independent third parties.
Effective June 13, 1995, the Company acquired SHC through the merger of
a wholly-owned subsidiary of the Company with and into SHC. The transaction was
subject to approval of the stockholders of both the Company and SHC, and the
Company received an opinion from Smith Barney Inc. as to the fairness to the
Company, from a financial point of view, of the exchange ratio pursuant to which
capital stock of SHC was exchanged for Common Stock of the Company. Richard M.
Scrushy, Chairman of the Board and Chief Executive Officer of the Company, and
Charles W. Newhall III, a Director of the Company, also served on the Board of
Directors of SHC. In connection with such transaction, Mr. Scrushy received
123,421 shares of HEALTHSOUTH Common Stock in the merger, and entities of which
Mr. Newhall is a general partner received 1,058,901 shares of HEALTHSOUTH Common
Stock in the merger. Mr. Newhall shared voting and investment power with respect
to such shares and disclaimed beneficial ownership of such shares. In addition,
C. Sage Givens and Larry R. House, both Directors of the Company, were also
direct or indirect stockholders of SHC and received, respectively, 215,404 and
114,370 shares of HEALTHSOUTH Common Stock in connection with the merger.
In July 1994, the Company acquired in excess of 80% of the issued and
outstanding capital stock of Diagnostic Health Corporation ("DHC"), a
privately-held company which operated diagnostic imaging facilities. After the
July 1994 transaction, the minority interests in DHC were owned by approximately
49 stockholders, including the following Directors and executive officers of the
Company: Richard M. Scrushy, Chairman of the Board and Chief Executive Officer
of the Company, James P. Bennett, President and Chief Operating Officer of the
Company, Aaron Beam, Jr., Executive Vice President and Chief Financial Officer
of the Company, Thomas W. Carman, Executive Vice President -- Corporate
Development of the Company, Russell H. Maddox, President -- HEALTHSOUTH Imaging
Centers of the Company, P. Daryl Brown, President -- HEALTHSOUTH Outpatient
Centers of the Company, Michael D. Martin, Senior Vice President and Treasurer
of the Company, and Larry R. House, a Director of the Company. In October 1995,
the Company purchased the remaining minority interests in DHC for a cash
purchase price of $4.00 per share and cashed out all options to acquire DHC
stock at a cash price equal to $4.00 per share less the option exercise price.
The Company received an opinion from Smith Barney Inc. as to the fairness to the
Company, from a financial point of view, of the consideration payable to DHC
stockholders and option holders. In connection with such transactions, Mr.
Scrushy received a cash payment of $3,229,164,
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Mr. Maddox received a cash payment of $3,412,886, Mr. Martin received a cash
payment of $223,750, and Mr. House received a cash payment of $2,452,500. The
other individuals named above received cash payments of less than $60,000
apiece.
In 1992, the Company acquired 19.55 acres of vacant land in Vestavia
Hills, Alabama for potential development as a corporate headquarters building.
The Company subsequently determined that, for various reasons, such land was not
suited for the type of development that the Company wished to pursue.
Accordingly, in 1995, the Board of Directors of the Company determined to convey
the property to Richard M. Scrushy, Chairman of the Board and Chief Executive
Officer of the Company, as additional compensation. An independent appraisal
valued the property at $640,000, and such amount was treated as additional
compensation to Mr. Scrushy.
In order to enhance equity ownership by senior management, the Company
has adopted a program of making loans to officers holding the position of Group
Vice President and above to facilitate the exercise of stock options held by
such persons. See Item 11, "Executive Compensation -- Executive Loans".
At various times, the Company has made loans to executive officers to
assist them in meeting financial obligations at certain times when they were
requested by the Company to refrain from selling Common Stock in the open
market. At January 1, 1995, loans in the following original principal amounts
were outstanding: $460,000 to Larry R. House, a Director and a former executive
officer, and $140,000 to William T. Owens, Senior Vice President and Controller.
Outstanding principal balances at December 31, 1995 were $414,000 for Mr. House
and $126,000 for Mr. Owens. In addition, during 1995, the Company made an
additional loan of $350,000 to Mr. Owens and $500,000 to Aaron Beam, Jr.,
Executive Vice President and Chief Financial Officer of the Company, which loans
were outstanding in full at December 31, 1995. Such loans bear interest at the
rate of 1-1/4% per annum below the prime rate of AmSouth Bank of Alabama,
Birmingham, Alabama, and are payable on demand.
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PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements, Financial Statement Schedules and Exhibits.
1. Financial Statements.
The consolidated financial statements of the Company and its
subsidiaries filed as a part of this Annual Report on Form 10-K are listed in
Item 8 of this Annual Report on Form 10-K, which listing is hereby incorporated
herein by reference.
2. Financial Statement Schedules.
The financial statement schedules required by Regulation S-X are filed
under Item 14(d) of this Annual Report on Form 10-K, as listed below:
Schedules Supporting the Financial Statements
Schedule II Valuation and Qualifying Accounts 90
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission have been
omitted because they are not required under the related instructions or are
inapplicable, or because the information has been provided in the Consolidated
Financial Statements or the Notes thereto.
3. Exhibits.
The Exhibits filed as a part of this Annual Report are listed in Item
14(c) of this Annual Report on Form 10-K, which listing is hereby incorporated
herein by reference.
(b) Reports on Form 8-K.
During the last quarter of the period covered by this Annual Report on
Form 10-K, the Company filed the following Current Reports on Form 8-K:
(1) Current Report on Form 8-K filed October 19, 1995 providing
information under Items 5 and 7 relating to the acquisition of
SHC, and including the following unaudited pro forma financial
statements of HEALTHSOUTH Corporation:
(a) Pro forma consolidated Balance Sheet at March 31, 1995
and pro forma consolidated statements of income for
the three-month periods ended March 31, 1995 and March
31, 1994;
(b) Pro forma consolidated statements of income for the
twelve-month periods ended December 31, 1994, 1993 and
1992; and
(c) Notes to consolidated financial statements.
(2) Current Report on Form 8-K filed October 20, 1995, as amended on
November 9, 1995 providing information under Items 5 and 7
relating to the acquisition of SCA.
(3) Current Report on Form 8-K dated October 30, 1995 providing
information under Items 5 and 7 relating to the acquisition of
Caremark Orthopedic Services, Inc.
(4) Current Report on Form 8-K dated November 13, 1995 providing
information under Items 2 and 7 relating to the acquisition of
SSCI, incorporating by reference from HEALTHSOUTH Corporation's
Registration Statement on Form S-4 filed September 28, 1995
(Registration No. 33-63055) the audited consolidated financial
statements of SSCI as at December 31, 1994, and for the period
then ended.
(5) Current Report on Form 8-K dated December 20, 1995 providing
information under Item 5 relating to the acquisition of Sutter
Surgery Centers, Inc.
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(c) Exhibits.
The Exhibits required by Regulation S-K are set forth in the following
list and are filed either by incorporation by reference from previous filings
with the Securities and Exchange Commission or by attachment to this Annual
Report on Form 10-K as so indicated in such list.
(2)-1 Amended and Restated Plan and Agreement of Merger, dated as of
September 18, 1994, among HEALTHSOUTH Rehabilitation
Corporation, RRS Acquisitions Company, Inc. and ReLife, Inc.,
filed as Exhibit (2)-1 to the Company's Registration Statement
on Form S-4 (Registration No. 33-55929), is hereby
incorporated by reference.
(2)-2 Amended and Restated Plan and Agreement of Merger, dated as of
January 22, 1995, among HEALTHSOUTH Corporation, ASC Atlanta
Acquisition Company, Inc. and Surgical Health Corporation,
filed as Exhibit (2)-4 to the Company's Annual Report on Form
10-K for the Fiscal Year Ended December 31, 1994, is hereby
incorporated by reference.
(2)-3 Stock Purchase Agreement, dated February 3, 1995, among
HEALTHSOUTH Corporation, NovaCare, Inc. and NC Resources,
Inc., filed as Exhibit (2)-3 to the Company's Annual Report on
Form 10-K for the Fiscal Year Ended December 31, 1994, is
hereby incorporated by reference.
(2)-4 Plan and Agreement of Merger, dated August 23, 1995, among
HEALTHSOUTH Corporation, SSCI Acquisition Corporation and
Sutter Surgery Centers, Inc., filed as Exhibit (2) to the
Company's Registration Statement on Form S-4 (Registration No.
33-63-55) is hereby incorporated by reference.
(2)-5 Amendment to Plan and Agreement of Merger among HEALTHSOUTH
Corporation, SSCI Acquisition Corporation and Sutter Surgery
Center, Inc.
(2)-6 Amended and Restated Plan and Agreement of Merger, dated as of
October 9, 1995, among HEALTHSOUTH Corporation, SCA
Acquisition Corporation and Surgical Care Affiliates, Inc.,
filed as Exhibit (2)-1 to Amendment No. 1 to the Company's
Registration Statement on Form S-4 (Registration No.
33-64935), is hereby incorporated by reference.
(2)-7 Agreement and Plan of Merger, dated December 16, 1995, between
HEALTHSOUTH Corporation, Aladdin Acquisition Corporation and
Advantage Health Corporation, filed as Exhibit (2)-1 to the
Company's Registration Statement on Form S-4 (Registration No.
333-825), is hereby incorporated by reference.
(3)-1 Restated Certificate of Incorporation of HEALTHSOUTH
Corporation, as filed in the Office of the Secretary of State
of the State of Delaware on January 17, 1996, filed as Exhibit
(3) to the Company's Current Report on Form 8-K filed
onJanuary 29, 1996, is hereby incorporated by reference.
- 87 -
(3)-2 Bylaws of HEALTHSOUTH Rehabilitation Corporation, filed as
Exhibit (3)-2 to the Company's Annual Report on Form 10-K for
the Fiscal Year Ended December 31, 1991, are hereby
incorporated herein by reference.
(4)-1 Indenture, dated March 24, 1994, between HEALTHSOUTH
Rehabilitation Corporation and NationsBank of Georgia,
National Association, relating to the Company's 9.5% Senior
Subordinated Notes due 2001, filed as Exhibit (4)-1 to the
Company's Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1994, is hereby incorporated by reference.
(4)-2 Indenture, dated March 24, 1994, between HEALTHSOUTH
Rehabilitation Corporation and PNC Bank of Kentucky, Inc.,
relating to the Company's 5% Convertible Subordinated
Debentures due 2001, filed as Exhibit (4)-2 to the Company's
Annual Report on Form 10-K for the Fiscal Year Ended December
31, 1994, is hereby incorporated by reference.
(4)-3 Form of Incentive Stock Option Agreement for 1995 Stock Option
Plan.
(10)-1 1984 Incentive Stock Option Plan, as amended, filed as Exhibit
(10)-1 to the Company's Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 1987, is hereby incorporated
herein by reference.
(10)-2 1988 Non-Qualified Stock Option Plan, filed as Exhibit 4(a) to
the Company's Registration Statement on Form S-8 (Registration
No. 33-23642), is hereby incorporated herein by reference.
(10)-3 1989 Stock Option Plan, filed as Exhibit (10)-6 to the
Company's Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1989, is hereby incorporated by reference.
(10)-4 1990 Stock Option Plan, filed as Exhibit (10)-13 to the
Company's Annual Report on Form 10-K for the Fiscal Year ended
December 31, 1990, is hereby incorporated by reference.
(10)-5 Forms of Stock Option Agreements utilized under 1984 Incentive
Stock Option Plan, 1988 Non- Qualified Stock Option Plan, 1989
Stock Option Plan and 1990 Stock Option Plan, filed as Exhibit
(10)-14 to the Company's Annual Report on Form 10-K for the
Fiscal Year ended December 31, 1990, are hereby incorporated
herein by reference.
(10)-6 1991 Stock Option Plan, as amended, filed as Exhibit (10)-15
to the Company's Annual Report on Form 10-K for the Fiscal
Year ended December 31, 1991, is hereby incorporated herein by
reference.
(10)-7 Forms of Stock Option Agreements utilized under 1991 Stock
Option Plan, filed as Exhibit (10)-16 to the Company's Annual
Report on Form 10-K for the Fiscal Year Ended December 31,
1991, are hereby incorporated by reference.
(10)-8 1992 Stock Option Plan, filed as Exhibit (10)-8 to the
Company's Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1992, is hereby incorporated by reference.
(10)-9 Forms of Stock Option Agreements utilized under 1992 Stock
Option Plan, filed as Exhibit (10)-9 to the Company's Annual
Report on Form 10-K for the Fiscal Year Ended December 31,
1992, are hereby incorporated by reference .
(10)-10 1993 Stock Option Plan, filed as Exhibit (10)-10 to the
Company's Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1993, is hereby incorporated by reference.
- 88 -
(10)-11 Forms of Stock Option Agreements utilized under 1993 Stock
Option Plan, filed as Exhibit (10)-11 to the Company's Annual
Report on Form 10-K for the Fiscal Year Ended December 31,
1993, are hereby incorporated by reference.
(10)-12 1993 Consultants Stock Option Plan, filed as Exhibit 4(a) to
the Company's Registration Statement on Form S-8 (Commission
File No. 33-64316), is hereby incorporated by reference.
(10)-13 Form of Stock Option Agreement utilized under the 1993
Consultants Stock Option Plan, filed as Exhibit 4(b) to the
Company's Registration Statement on Form S-8 (Commission File
No. 33-64316), is hereby incorporated by reference.
(10)-14 1995 Stock Option Plan.
(10)-15 Form of Stock Option Agreement utilized under the 1995 Stock
Option Plan.
(10)-16 Employment Agreement, dated July 23, 1986, between HEALTHSOUTH
Rehabilitation Corporation and Richard M. Scrushy, as amended.
To be filed by amendment.
(10)-17 Second Amended and Restated Credit Agreement, dated as of
April 11, 1995, between HEALTHSOUTH Corporation and
NationsBank of North Carolina, National Association.
(10)-18 Form of Indemnity Agreement entered into between HEALTHSOUTH
Rehabilitation Corporation and each of its Directors, filed as
Exhibit (10)-13 to the Company's Annual Report on Form 10-K
for the Fiscal Year Ended December 31, 1991, is hereby
incorporated by reference.
(11) HEALTHSOUTH Corporation and Subsidiaries, Computation of
Income Per Share.
(21) Subsidiaries of HEALTHSOUTH Corporation.
(23) Consent of Ernst & Young LLP.
(d) Financial Statement Schedules.
Schedule II: Valuation and Qualifying Accounts
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SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at Additions Charged Additions Charged
Beginning of to Costs and to Other Accounts - Deductions - Balance at
Description Period Expenses Describe Describe End of Period
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Year ended December 31,
1993:
Allowance for doubtful
accounts and con- 298,309 (1)
tractual adjustments $ 50,753 $ 17,947 $ 51,516 (2) $ 295,178 (3) $ 123,347
============== ============== ============== ============== ==============
Year ended December 31,
1994:
Allowance for doubtful
accounts and con- 662,230 (1)
tractual adjustments $ 123,347 $ 27,646 $ 6,547 (2) $ 672,334 (3) $ 147,436
============== ============== ============== ============== ==============
Year ended December 31,
1995:
Allowance for doubtful
accounts and con- 860,363 (1)
tractual adjustments $ 147,436 $ 31,637 $ 28,609 (2) $ 855,073 (3) $ 212,972
============== ============== ============== ============== ==============
- -------------------------
<FN>
(1) Provisions for contractual adjustments which are netted against gross
revenues.
(2) Allowances of acquisitions in years 1993, 1994 and 1995, respectively.
(3) Write-offs of uncollectible patient accounts receivable and third party
contractual adjustments, net of third party retroactive settlements.
</FN>
90
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HEALTHSOUTH Corporation
By /s/RICHARD M. SCRUSHY
---------------------------------------------
Richard M. Scrushy,
Chairman of the Board, President
and Chief Executive Officer
Date: March 27, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
/s/RICHARD M. SCRUSHY Chairman of the Board March 27, 1996
- --------------------------------------
Richard M. Scrushy and Chief Executive Officer
and Director
/s/AARON BEAM, JR. Executive Vice President and March 27, 1996
- --------------------------------------
Aaron Beam, Jr. Chief Financial Officer
and Director
/s/WILLIAM T. OWENS Senior Vice President-Finance and March 27, 1996
- --------------------------------------
William T. Owens Controller (Principal Accounting
Officer)
/s/C. SAGE GIVENS Director March 27, 1996
- --------------------------------------
C. Sage Givens
/s/CHARLES W. NEWHALL III Director March 27, 1996
- --------------------------------------
Charles W. Newhall III
/s/GEORGE H. STRONG Director March 27, 1996
- --------------------------------------
George H. Strong
/s/PHILLIP C. WATKINS Director March 27, 1996
- --------------------------------------
Phillip C. Watkins
/s/JOHN S. CHAMBERLIN Director March 27, 1996
- --------------------------------------
John S. Chamberlin
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/s/LARRY R. HOUSE Director March 27, 1996
- --------------------------------------
Larry R. House
/s/ANTHONY J. TANNER Director March 27, 1996
- --------------------------------------
Anthony J. Tanner
/s/JAMES P. BENNETT Director March 27, 1996
- --------------------------------------
James P. Bennett
/s/RICHARD F. CELESTE Director March 27, 1996
- --------------------------------------
Richard F. Celeste
/s/P. DARYL BROWN Director March 27, 1996
- --------------------------------------
P. Daryl Brown
/s/JOEL C. GORDON Director March 27, 1996
- --------------------------------------
Joel C. Gordon
/s/RAYMOND J. DUNN, III Director March 27, 1996
- --------------------------------------
Raymond J. Dunn
- 92 -