SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
HEALTHSOUTH Corporation
________________________________________________
(Name of Registrant as Specified In Its Charter)
________________________________________________
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check appropriate box):
[x] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1),
or 14a-6(j)(2).
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)and 0-11.
(1) Title of each class of securities to which transaction applies:
_______________________________________________________________________
(2) Aggregate number of securities to which transaction applies:
_______________________________________________________________________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: *1
_______________________________________________________________________
(4) Proposed maximum aggregate value of transaction:
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*1 Set forth the amount on which the filing fee is calculated and state
how it was determined.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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HEALTHSOUTH CORPORATION
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
April 1, 1996
The Annual Meeting of Stockholders of HEALTHSOUTH Corporation (the "Company")
will be held at Two Perimeter Park South, Birmingham, Alabama, on Thursday, May
2, 1996, at 2:00 p.m., C.D.T., for the following purposes:
1. To elect fourteen Directors to serve until the next Annual Meeting of
Stockholders and until their successors are duly elected and qualified.
2. To transact such other business as may properly come before the Annual
Meeting or any adjournment thereof.
Stockholders of record at the close of business on March 26, 1996, are
entitled to notice of, and to vote at, the Annual Meeting or any adjournment
thereof.
If you cannot attend the Annual Meeting in person, please date and execute
the accompanying Proxy and return it promptly to the Company. If you attend the
Annual Meeting, you may revoke your Proxy and vote in person if you desire to do
so, but attendance at the Annual Meeting does not of itself serve to revoke your
Proxy.
ANTHONY J. TANNER
Secretary
HEALTHSOUTH CORPORATION
PROXY STATEMENT
INTRODUCTION
This Proxy Statement is furnished to the holders of Common Stock, par value
$.01 per share, of HEALTHSOUTH Corporation (the "Company") in connection with
the solicitation of Proxies by and on behalf of the Board of Directors of the
Company for use at the Annual Meeting of Stockholders to be held on May 2, 1996
or any adjournment thereof. A form of Proxy for use at the Annual Meeting is
also enclosed. Any such Proxy may be revoked by a stockholder at any time before
it is exercised by either giving written notice of such revocation to the
Secretary of the Company or submitting a later-dated Proxy to the Company prior
to the Annual Meeting. A stockholder attending the Annual Meeting may revoke his
Proxy and vote in person if he desires to do so, but attendance at the Annual
Meeting will not of itself revoke the Proxy.
The Company's principal executive offices are located at Two Perimeter Park
South, Birmingham, Alabama 35243. The Company's telephone number is (205)
967-7116.
Proxy materials will be mailed to stockholders by the Management of the
Company on or about April 1, 1996. The Company has retained Chemical Bank to
solicit proxies on its behalf and will pay Chemical Bank a fee of $6,000 for
those services. The Company will reimburse Chemical Bank for out-of-pocket
expenses incurred in connection with such solicitation. Additional solicitation
may be made by mail, telephone or telegram by the officers or regular employees
of the Company, who will receive no additional compensation therefor.
Arrangements will also be made with brokerage houses, custodians, nominees and
fiduciaries for the forwarding of proxy materials to the beneficial owners of
Common Stock held of record by such persons, and the Company will reimburse such
brokerage houses, custodians, nominees and fiduciaries for reasonable
out-of-pocket expenses incurred by them in connection therewith. The entire
expense of solicitation, including the cost of preparing, assembling and mailing
the proxy materials, will be borne by the Company.
The purpose of the Annual Meeting of Stockholders is to elect a Board of
Directors to serve until the next Annual Meeting of Stockholders. The Company is
not aware at this time of any other matters that will come before the Annual
Meeting. If any other matters properly come before the Annual Meeting, it is the
intention of the persons designated as proxies to vote in accordance with their
judgment on such matters. Shares represented by executed and unrevoked Proxies
will be voted in accordance with instructions contained therein or, in the
absence of such instructions, in accordance with the recommendations of the
Board of Directors. Abstentions and broker non-votes will not be counted for
purposes of determining whether any given proposal has been approved by the
stockholders of the Company. Accordingly, abstentions and broker non-votes will
not affect the vote to be taken on the election of Directors, which requires for
approval the affirmative vote of a majority of the shares of Common Stock
present or represented and entitled to vote at the Annual Meeting.
As to all matters that may come before the Annual Meeting, each stockholder
will be entitled to one vote for each share of Common Stock of the Company held
by him at the close of business on March 26, 1996. The holders of a majority of
the shares of Common Stock of the Company present in person or by proxy and
entitled to vote will constitute a quorum at the Annual Meeting. Abstentions and
broker non-votes will be counted for purposes of determining the presence of a
quorum. At March 26, 1996, the record date for the Annual Meeting, there were
144,255,488 shares of Common Stock outstanding.
Dissenters' Rights of Appraisal
There are no dissenters' rights of appraisal in connection with any vote of
stockholders to be taken at the 1996 Annual Meeting of Stockholders.
1
Proposals by Stockholders
Any proposals by stockholders of the Company intended to be presented at the
1997 Annual Meeting of Stockholders must be received by the Company for
inclusion in the Company's Proxy Statement and form of Proxy by December 3,
1996.
ELECTION OF DIRECTORS
Nominees for Director
At the Annual Meeting, fourteen Directors are to be elected. The Bylaws of
the Company permit the Board of Directors to determine the number of Directors
of the Company. Unless other instructions are specified, the enclosed Proxy will
be voted in favor of the persons named below to serve until the next Annual
Meeting of Stockholders and until their successors shall have been duly elected
and qualified. The affirmative vote of a majority of the shares of Common Stock
present or represented and entitled to vote at the Annual Meeting is required
for the election of each Director. In the event any of the nominees shall be
unable to serve as a Director, it is the intention of the persons designated as
proxies to vote for substitutes selected by the Board of Directors. The Board of
Directors of the Company has no reason to believe that any of the nominees named
below will be unable to serve if elected.
The following table sets forth certain information concerning the twelve
nominees for Director of the Company:
Principal Occupation A Director
Name ................... Age and All Positions With the Company Since
Richard M. Scrushy...... 43 Chairman of the Board and Chief Executive Officer and
Director 1984
Phillip C. Watkins,
M.D..................... 54 Physician, Birmingham, Alabama, and Director 1984
George H. Strong........ 69 Private Investor, Locust, New Jersey, and Director 1984
C. Sage Givens.......... 39 General Partner, Acacia Venture Partners, and
Director 1985
Charles W. Newhall III . 51 Partner, New Enterprise Associates Limited
Partnerships, and Director 1985
Aaron Beam, Jr.......... 52 Executive Vice President and Chief Financial Officer
and Director 1993
James P. Bennett........ 38 President and Chief Operating Officer and Director 1993
Larry R. House.......... 52 Chairman of the Board, President and Chief Executive
Officer, MedPartners/Mullikin, Inc., and Director 1993
Anthony J. Tanner....... 47 Executive Vice President -- Administration and
Secretary and Director 1993
John S. Chamberlin...... 67 Private Investor, Princeton, New Jersey, and Director 1993
Richard F. Celeste...... 58 Managing Partner, Celeste and Sabaty, Ltd. and
Director 1991
P. Daryl Brown.......... 41 President -- HEALTHSOUTH Outpatient Centers and
Director 1995
Joel C. Gordon.......... 67 Private Investor, Nashville, Tennessee, Consultant to
the Company and Director 1996
Raymond J. Dunn, III ... 53 Private Investor, Woburn, Massachusetts, Consultant
to the Company and Director 1996
2
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.
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.
3
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 VicePresident -- 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 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 Surgical Care
Affiliates, Inc. ("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
Corporation ("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 ViceChairman 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.
Directors hold office until the next Annual Meeting of Stockholders of the
Company and until their successors are elected and qualified. Officers are
elected annually by the Board of Directors and serve at the discretion of the
Board of Directors.
Management Matters
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 such person was elected as a Director or
an executive officer, except the Employment Agreement between the Company and
Richard M. Scrushy described under "Executive Compensation and Other Information
- -- Audit and Compensation Committee Report on Executive Compensation -- Chief
Executive Officer Compensation" in this Proxy Statement and except that Mr.
Gordon and Mr.
4
Dunn were initially named to the Board of Directors under the terms of the
merger agreements pursuant to which the Company acquired SCA and Advantage
Health, respectively. There are no family relationships between any Directors,
nominees for Director or executive officers of the Company. The Board of
Directors of the Corporation held a total of 11 meetings and acted by unanimous
written consent four times during 1995.
There are no employment contracts between the Company and any executive
officer named in the Summary Compensation Table under "Executive Compensation
and Other Information -- Executive Compensation -- General", other than the
Employment Agreement with Richard M. Scrushy described under "Executive
Compensation and Other Information -- Audit and Compensation Committee Report on
Executive Compensation -- Chief Executive Officer Compensation" in this Proxy
Statement. Except for such Employment Agreement and except for the broad-based
retirement plans of the Company described under "Executive Compensation and
Other Information -- Retirement Investment Plan" and "Executive Compensation and
Other Information -- Employee Stock Benefit Plan", there are no compensatory
plans or arrangements with respect to any such executive officer which result or
will result from the resignation, retirement or any other termination of such
executive officer's employment with the Company and its subsidiaries or from a
change in control of the Company or from a change in such executive officer's
responsibilities following a change in control of the Company.
The Audit and Compensation Committee of the Board is responsible for
reviewing all reports from the Company's auditors, monitoring internal controls
and reviewing the Company's compensation program, as well as administering the
Company's stock option plans. On June6, 1995, C. Sage Givens, George H. Strong
and Phillip C. Watkins, all of whom are outside Directors, were appointed to
serve on this committee for a period of one year or until their successors are
appointed. They continue to serve in such capacity. This committee held two
meetings and acted three times by unanimous written consent during 1995.
The Company has no other standing audit, nominating or compensation
committees of the Board of Directors.
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 SEC 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 December31, 1995, all
of its officers, Directors and greater-than-10% beneficial owners complied with
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.
5
EXECUTIVE COMPENSATION AND OTHER INFORMATION
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
------------------- ----------------------
Stock Long-Term All
Bonus/Annual Option Incentive Other Com-
Name and Principal Position Year Salary Incentive 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 "Executive
Compensation and Other Information -- Retirement Investment Plan" and
"Executive Compensation and Other Information -- 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
"Certain Transactions".
</FN>
6
Stock Option Grants in 1995
Individual Grants
% of Total
Options
Number of Granted to Exercise Grant Date
Options Employees in Price Expiration Present
Name Granted Fiscal Year Per Share Date 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 "Principal Stockholders".
(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>
7
Stockholder Return Comparison (1)
Set forth below is a line graph comparing the total returns of the Company's
Common Stock, the Standard & Poor's 500 (S&P 500) Index and a peer group index
("Rehab Index") compiled by the Company, consisting of Tenet Healthcare
Corporation and NovaCare, Inc., publicly-traded healthcare companies whose
businesses are similar in some respects to that of the Company. The graph
assumes $100 invested on December 31, 1990, in HEALTHSOUTH Common Stock and each
of the indices. The Rehab Index has been weighted for market capitalization, and
the Company assumes reinvestment of dividends for purposes of the graph.
#############################################################################
IMAGE OMITTED
December 31 HEALTHSOUTH S&P 500 Rehab Index
- ----------- ----------- ------- -----------
1990 100 100 100
1991 211 131 111
1992 158 141 115
1993 152 155 106
1994 219 156 108
1995 350 215 108
#############################################################################
_____________
(1) In previous proxy statements of the Company, the Rehab Index included
Continental Medical Systems, Inc. ("CMS"). In February 1995, CMS was
acquired by Horizon Healthcare Corp., which was the surviving corporation
in the merger. Because CMS was not publicly traded during all of 1995,
data relating to CMS have been deleted from the Rehab Index for all
periods.
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.
8
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 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
9
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 1995 acquisitions of Surgical Health Corporation
("SHC") and Sutter Surgery Centers, Inc. ("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.
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.
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.
10
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.
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 "Executive Compensation and Other Information -- Stock Option
Plans" above.
Audit and Compensation Committee Report on Executive Compensation
General
The Board of Directors of the Company has an Audit and Compensation Committee
(the "Committee"), consisting of Ms. Givens, Mr. Strong and Dr. Watkins. The
Committee is charged by the Board of Directors with establishing a compensation
plan which will enable the Company to compete effectively for the services of
qualified officers and key employees, to give such employees appropriate
incentive to pursue the maximization of long-term stockholder value, and to
recognize such employees' success in achieving both qualitative and quantitative
goals for the benefit of the Company. The Committee makes recommendations to the
full Board of Directors as to appropriate levels of compensation for specific
individuals, as well as compensation and benefit programs for the Company as a
whole.
11
Compensation Philosophy and Policies for Executive Officers
As its first principle, the Committee believes that executives of the Company
should be rewarded based upon their success in meeting the Company's operational
goals, improving its earnings, maintaining its leadership role in the outpatient
and rehabilitative healthcare services fields, and generating returns for its
stockholders, and the Committee strives to establish levels of compensation that
take such factors into account and provide appropriate recognition for past
achievement and incentive for future success. The Committee recognizes that the
demand for executives with expertise and experience in the outpatient and
rehabilitative healthcare services fields is intense. In order to attract and
retain qualified persons, the Committee believes that the Company must offer
current compensation at levels consistent with those of other publicly-traded
healthcare companies. In addition, the Committee believes that it is in the best
interests of the Company's stockholders to offer its executives meaningful
equity participation in the Company, in order that those executives' interests
will be aligned with those of the Company's stockholders. The Committee feels
that the historic mix of cash compensation and equity participation has proven
to be effective in stimulating the Company's executives to meet both long-term
and short-term goals and has been a major factor in limiting turnover among
senior executives.
The Company's compensation program has three distinct elements: base salary;
incentive compensation, including both cash incentive compensation and
equity-based compensation; and retirement compensation. These elements are
discussed below.
Base Salary: While the demand for experienced managers in the healthcare
industry continues to grow, the Company has been very successful in attracting
and retaining key executives, many of whom have been with the Company since its
early days. The Company believes that its compensation package is instrumental
in such success. The Committee endeavors to establish base salary levels for
those key executives which are consistent with those provided for similarly
situated executives of other publicly-traded healthcare companies, taking into
account each executive's areas and level of responsibility, historical
performance and tenure with the Company. In establishing such levels, the
Company considers compensation for executives of other publicly-traded providers
of healthcare services, such as Columbia/HCA, Horizon/CMS Healthcare and Tenet
Healthcare Corporation, as well as other publicly-traded companies of similar
size and with a similar growth rate. Compensation decisions are not targeted to
specific levels in the range of compensation paid by such companies, nor does
the Company maintain a record of where its compensation stands with respect to
such other companies. However, the Committee and the Board of Directors take
such levels of compensation into account in determining appropriate levels of
compensation for the Company's executives.
Incentive Compensation: In addition to base salary, the Committee recommends
to the Board of Directors cash incentive compensation for executives of the
Company, based upon each such executive's success in meeting qualitative and
quantitative performance goals on an annual basis. The total incentive bonus
pool available for the Company's executives is capped at the lesser of (a) the
amount by which the Company's annual net income exceeds the budgeted annual net
income established by the Board of Directors and (b) 10% of the Company's annual
net income. No bonuses are payable unless annual net income exceeds budgeted net
income. Individual incentive bonuses within such bonus pool are not determined
in a formulary manner, but are determined on a basis that takes into account
each executive's success in achieving standards of performance, which may or may
not be quantitative, established by the Board of Directors and such executive's
superiors. Bonus determinations are made on a case-by-case basis, taking into
account appropriate quantitative and qualitative factors, and there is no fixed
relationship between any particular performance factor and the amount of a given
executive's bonus. Historically, incentive compensation has been a major
component of the Company's executive compensation, and the Committee believes
that placing executives at risk for such a component has been effective in
motivating such executives to achieve such goals.
In 1994, the Committee engaged William M. Mercer, Inc. as a consultant to
perform a study of the Company's executive compensation programs. The Mercer
report concluded that the Company's compensation mix was significantly more
highly-leveraged, at risk and performance-focused than other companies selected
by Mercer for comparison, with 41% of the Company's cash compensation for
executive officers being at-risk, performance-based compensation, compared to
29% for the other companies reviewed by Mercer.
12
In addition to cash incentive compensation, as a growth company, the Company
has always utilized equity-based compensation, in the form of stock options, as
a tool to encourage its executives to work to meet its operational goals and
maximize long-term stockholder value. Because the value of stock options granted
to an executive is directly related to the Company's success in enhancing its
market value over time, the Committee feels that its stock option programs have
been very effective in aligning the interests of management and stockholders.
The Committee determines stock option grants under the Company's various
stock option plans, all of which are described above under "Executive
Compensation and Other Information -- Stock Option Plans". Specific grants are
determined taking into account an executive's current responsibilities and
historical performance, as well as the executive's perceived contribution to the
Company's results of operations. Options are also used to give incentive to
newly-promoted officers at the time that they are asked to assume greater
responsibilities, and, in some cases, to executives who have joined the Company
through acquisitions and have assumed significant leadership roles within the
Company. In evaluating option grants, the Board of Directors considers prior
grants and shares currently held, as well as the recipient's success in meeting
operational goals and the recipient's level of responsibility. However, no fixed
formula is utilized to determine particular grants. The Committee believes that
the opportunity to acquire a significant equity interest in the Company has been
a strong motivation for the Company's executives to pursue the long-term
interests of the Company and its stockholders, and has promoted longevity and
retention of key executives. Information relating to stock options granted to
the five most highly-compensated executive officers of the Company is set forth
elsewhere in this Proxy Statement.
In connection with the Company's use of stock options as a significant
component of compensation, the Mercer study referred to above indicated that
most companies in Mercer's long-term incentive survey utilized two long-term
incentive plans, while the Company used stock options as its only long-term
incentive plan. The Mercer study noted that the Company's use of stock options
was very consistent with the practices of high-growth companies that wished to
increase the ownership stake of executives in the company and to conserve cash
by using stock rather than cash in long-term plans.
Retirement Compensation: As described under "Executive Compensation and Other
Information -- Retirement Investment Plan", in 1991 the Company adopted a 401(k)
retirement plan in order to give all full-time employees an opportunity to
provide for their retirement on a tax-advantaged basis. In order to further tie
employees' interests to the long-term market value of the Company, the Company
adopted an Employee Stock Benefit Plan (the "ESOP") in 1991, which gives all
full-time employees an opportunity to invest a portion of their retirement funds
in Common Stock of the Company on a tax-advantaged basis. See "Executive
Compensation and Other Information -- Employee Stock Benefit Plan". While these
plans provide benefits to all full-time employees, the Committee believes that
the ESOP provides additional incentive to executives to maximize stockholder
value over the long term.
Chief Executive Officer Compensation
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 "Certain
Transactions". Such additional bonus was based on the Committee's assessment of
Mr. Scrushy's con
13
tribution to the establishment of the Company as the industry leader in
outpatient surgery 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 were to 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 the Agreement at any time upon 180 days'
notice, in which case he will receive one year's base salary as severance pay.
The Committee reports to the Board of Directors on compensation arrangements
with Mr. Scrushy, and recommends to the Board of Directors the level of
incentive compensation, both cash and equity-based, which is appropriate for Mr.
Scrushy with respect to each fiscal year of the Company. In making such
recommendation, the Committee takes into account the Company's performance in
the marketplace, its success in meeting strategic goals and its success in
meeting monthly and annual budgets established by the Board of Directors. Again,
ultimate compensation decisions are not made in a formulary manner, but in a
manner which takes into account the Company's competitive position, its position
in the financial markets, and the significant contributions made by Mr. Scrushy
to the success of the Company. In making its decisions with respect to Mr.
Scrushy's compensation, the Committee believes that it is appropriate to
recognize that, as a management founder of the Company, Mr. Scrushy has played
an instrumental role in establishing the Company as the industry leader in
outpatient and rehabilitative healthcare services and that, under his
leadership, the Company has significantly enhanced stockholder value over a
period of years and continues to grow in assets, net revenues, net income and
market value.
Mr. Scrushy's stewardship of the Company has led it to 38 consecutive
profitable quarters (excluding the effect of one-time charges in the second
quarter of 1995) since the second quarter of 1986, with steadily increasing
earnings per share. The Company's assets increased by 38.3% from December 31,
1994, to December 31, 1995; its net revenues and income (excluding the effect of
one-time charges in 1994 and 1995) rose 22.2% and 68.6%, respectively, in the
same period; and its stock price increased by 59.8% over the same period. This
represents an increase of $3,406,921,000, or 227.9%, in market capitalization
over the period. Further, in the period since December 31, 1993, the Company,
under Mr. Scrushy's leadership, has grown from the fourth-largest provider of
rehabilitative healthcare services to the largest provider, and during 1995 and
1996 established itself as the largest provider of outpatient surgery services
through a series of strategic acquisitions. During that same period, the Company
has become the second-largest publicly-traded healthcare provider (by market
capitalization) in the nation and has expanded its operations to 44 states. The
Committee believes that Mr. Scrushy's leadership has been essential to the
Company's success and growth. In view of these accomplishments, the Committee
believes that it is important to ensure that, if Mr. Scrushy is successful in
leading the Company to achieve the goals set by the Board of Directors, his
compensation will be at a level commensurate with that of chief executive
officers of similarly-situated public companies and that he will continue to
have the opportunity to obtain a significant equity interest in the Company.
Section 162(m) of the Internal Revenue Code
The Omnibus Budget Reconciliation Act of 1993 contains a provision under
which a publicly-traded corporation is sometimes precluded from taking a federal
income tax deduction for compensation in excess of $1,000,000 that is paid to
the chief executive officer and the four other most highly-compensated
executives of the corporation during a corporation's tax year. Compensation in
excess of $1,000,000
14
continues to be deductible if that compensation is "performance based" within
the meaning of that term under Section 162(m) of the Internal Revenue Code.
Certain transition rules apply with respect to stock option plans which were
approved prior to December 20, 1993, pursuant to Rule 16b-3(b) under the
Exchange Act.
The Company believes that its employee stock option plans meet the
requirements of Section 162(m) as performance-based plans. The Committee and the
Board of Directors have currently made a decision not to amend the Company's
cash compensation programs to meet all requirements of Section 162(m) because
such a decision would not be in the best interests of the Company's
stockholders. The Committee believes that, in establishing bonus and incentive
awards, certain subjective factors must be taken into account in particular
cases, based upon the experienced judgment of the Committee members as well as
on factors which may be objectively quantified. The preservation of tax
deductibility of all compensation is an important consideration. However, the
Committee believes that it is important that the Company retain the flexibility
to reward superior effort and accomplishment even where all cash compensation
may not be fully deductible. The Committee will continue to review the
requirements for deductibility under Section 162(m) and will take such
requirements into account in the future as it deems appropriate and in the best
interests of the Company's stockholders. Approximately $3,386,000 of Mr.
Scrushy's compensation paid with respect to 1995 will not be deductible;
however, the Company believes that all other compensation paid to executive
officers will be fully deductible.
Conclusion
The Committee believes that the levels and mix of compensation provided to
the Company's executives during 1995 were appropriate and were instrumental in
the achievement of the Company's goals for 1995. It is the intent of the
Committee to ensure that the Company's compensation programs continue to
motivate its executives and reward them for being responsive to the long-term
interests of the Company and its stockholders.
The foregoing report is submitted by the following Directors of the Company,
constituting all of the members of the Audit and Compensation Committee of the
Board of Directors:
C. Sage Givens
George H. Strong
Phillip C. Watkins, Chairman
15
PRINCIPAL STOCKHOLDERS
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
(20 persons) ................................... 16,249,806(15) 9.87%
<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 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.
16
(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>
CERTAIN 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 managment company, for management services
rendered to certain physician practices owned by the Company. Richard M.
Scrushy, Chairman of the Board and Chief 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,
17
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 interest 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, 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 "Executive Compensation and Other Information -- 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 Decem-
18
ber 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 VicePresident 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.
RELATIONSHIP WITH
INDEPENDENT PUBLIC ACCOUNTANTS
Ernst & Young LLP, Birmingham, Alabama, has been engaged by the Board of
Directors of the Company as independent public accountants for the Company and
its subsidiaries for the fiscal year 1996 and it is expected that such firm will
serve in that capacity for the 1996 fiscal year. Management expects that a
representative of Ernst & Young LLP will be present at the Annual Meeting to
make a statement if he or she desires to do so and to be available to answer
appropriate questions posed by stockholders.
FINANCIAL STATEMENTS
The Company's audited financial statements for the fiscal year ended December
31, 1995, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other selected information are
included in Appendix A to this Proxy Statement.
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors of the Company
does not know of any business which will be presented for consideration at the
Annual Meeting other than that specified herein and in the Notice of Annual
Meeting of Stockholders, but if other matters are presented, it is the intention
of the persons designated as proxies to vote in accordance with their judgment
on such matters.
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1995, INCLUDING THE FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES THERETO, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, WILL BE
FURNISHED WITHOUT CHARGE TO ANY STOCKHOLDER OF THE COMPANY WHOSE PROXY IS
SOLICITED BY THE FOREGOING PROXY STATEMENT, UPON THE WRITTEN REQUEST OF ANY SUCH
PERSON ADDRESSED TO ANTHONY J. TANNER, SECRETARY, HEALTHSOUTH CORPORATION, TWO
PERIMETER PARK SOUTH, BIRMINGHAM, ALABAMA 35243. SUCH A REQUEST FROM A
BENEFICIAL OWNER OF THE COMPANY'S COMMON STOCK MUST CONTAIN A GOOD-FAITH
REPRESENTATION BY SUCH PERSON THAT, AS OF MARCH 26, 1996, HE WAS A BENEFICIAL
OWNER OF THE COMPANY'S COMMON STOCK.
Please SIGN and RETURN the enclosed Proxy promptly.
By Order of the Board of Directors:
ANTHONY J. TANNER
Secretary
April 1, 1996
19
APPENDIX A
NOTE: This Appendix A, together with the foregoing Proxy Statement, contains
the information required to be provided in the Company's annual report to
security holders pursuant to the Rules and Regulations of the Securities and
Exchange Commission. The Company's 1995 Annual Report to Stockholders, which
provides additional information concerning the Company and its performance in
1995, will be separately mailed to stockholders.
TABLE OF CONTENTS
Page
Number
Business............................................................................ A-2
Selected Financial Data............................................................. A-2
Quarterly Results (Unaudited)....................................................... A-2
Executive Officers.................................................................. A-4
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... A-7
Audited Consolidated Financial Statements of HEALTHSOUTH Corporation and
Subsidiaries .......................................................................
Report of Independent Auditors..................................................... A-12
Consolidated Balance Sheets........................................................ A-13
Consolidated Statements of Income.................................................. A-14
Consolidated Statements of Stockholders' Equity.................................... A-15
Consolidated Statements of Cash Flows.............................................. A-16
Notes to Consolidated Financial Statements......................................... A-18
Market for the Company's Common Equity and Related Stockholders Matters ............ A-36
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure......................................................................... A-36
A-1
BUSINESS
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 March 15,
1996, the Company had over 850 patient care locations in 44 states and the
District of Columbia.
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 acquisition of ReLife, Inc. ("ReLife") and the acquisitions
of Surgical Health Corporation ("SHC") and Sutter Surgery Centers, Inc.
("SSCI"), 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
======= ======= ======= ========= =========
A-2
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>
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, each of which was accounted for as a pooling 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
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
A-3
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 and Chief Executive
Officer and Director 1984
James P. Bennett .. 38 President and Chief Operating Officer and
Director 1991
Aaron Beam, Jr. ... 52 Executive Vice President and Chief
Financial Officer and Director 1984
Anthony J. Tanner . 47 Executive Vice President -- Administration
and Secretary and Director 1984
Thomas W. Carman .. 44 Executive Vice President -- Corporate
Development 1985
P. Daryl Brown..... 41 President -- HEALTHSOUTH Outpatient
Centers and Director 1986
Robert E. Thomson . 48 President -- HEALTHSOUTH Inpatient
Operations 1987
Tarpley B. Jones .. 38 President -- HEALTHSOUTH Surgery Centers 1996
Russell H. Maddox . 55 President -- HEALTHSOUTH Imaging Centers 1995
William T. Owens .. 37 Senior Vice President -- Finance and
Controller 1986
Michael D. Martin . 35 Senior Vice President -- Finance and
Treasurer 1989
William W. Horton . 36 Group Vice President -- Legal Services and
Assistant Secretary 1994
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.
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.
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
A-4
Healthcare, Inc., a publicly-traded healthcare corporation. 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.
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 Preseident -- 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.
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, SouthCarolina inpatient rehabilitation facility, and subsequently
served as Regional Vice Preseident -- Inpatient Operations, Vice Preseident --
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 Preseident and Chief Financial Officer
of SCA from January 1, 1992 until January 17, 1996. Prior to joining SCA, he
served as Treasurer, Senior Vice Preseident and Chief Financial Officer, and
then Executive Vice Preseident 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.
See "Election of Directors" in the Proxy Statement to which this Appendix A
is attached for information concerning the Directors of the Company.
A-5
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.
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
A-6
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.
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.
A-7
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 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".
A-8
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% 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 Consol-
A-9
idated 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.
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".
A-10
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, pursuant to which the Company plans to utilize its services in
particular markets to provide an integrated continuum of coordinated care.
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 Proxy Statement (including this Appendix A)
which are not historical facts are forward-looking statements. In addition, the
Company, through its senior management, from time to time makes forward-looking
public statements concerning its expected future operations and performance and
other developments. Such forward-looking statements are necessarily estimates
reflecting 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.
A-11
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. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 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.
ERNST & YOUNG LLP
Birmingham, Alabama
February 14, 1995
A-12
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
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.
A-13
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
===================================================================
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.
A-14
HEALTHSOUTH Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
Notes Additional
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.
A-15
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)
A-16
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.
A-17
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.
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%
============================================
A-18
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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.
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.
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.
A-19
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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.
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.
A-20
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1995-(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
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):
A-21
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1995-(continued)
Statement of Income Data:
Revenues $ 38,174
Operating expenses:
Operating units 31,797
Corporate general and administrative 2,395
Provision for doubtful accounts 541
Depreciation and amortization 1,385
Interest expense 858
Interest income (91)
HEALTHSOUTH merger expense 3,050
Loss on disposal of fixed assets 1,000
Loss on abandonment of computer project 973
---------------------
41,908
---------------------
Loss before income taxes and minority interests (3,734)
Provision for income taxes -
---------------------
(3,734)
Minority interests -
---------------------
Net loss $ (3,734)
=====================
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.
A-22
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1995-(continued)
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.
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.
A-23
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1995-(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
===================== =====================
A-24
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1995-(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.
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.
A-25
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1995-(continued)
Also on March 24, 1994, the Company issued $100,000,000 principal amount of
5% Convertible Subordinated Debentures due 2001 (the Convertible Debentures). An
additional $15,000,000 principal amount of Convertible Debentures was issued in
April 1994 to cover underwriters' over allotments. Interest is payable on April
1 and October 1. The Convertible Debentures are convertible into Common Stock of
the Company at the option of the holder at a conversion price of $18.8125 per
share, subject to adjustment in the occurrence of certain events.
The net proceeds from the issuance of the Notes and Convertible Debentures
were used by the Company to pay down indebtedness outstanding under its other
existing credit facilities.
In June 1994, 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.
A-26
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1995-(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.
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.
A-27
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1995-(continued)
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 $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 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 Ac-
A-28
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1995-(continued)
quisition). 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 $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 $350,000
has been provided for
A-29
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1995-(continued)
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. 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).
A-30
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1995-(continued)
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
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)
===================== ===================== =====================
A-31
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1995-(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.
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.
A-32
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1995-(continued)
The following is a schedule of future minimum lease payments under all
operating leases having initial or remaining non-cancelable lease terms in
excess of one year:
Year ending December 31 (In thousands)
- ------------------------ ---------------------
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.
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.
A-33
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1995-(continued)
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 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.
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.
A-34
HEALTHSOUTH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1995-(continued)
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 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
A-35
MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDERS 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 26, 1996, was $35 3/4 .
There were approximately 3,413 holders of record of the Common Stock as of
March 26, 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.
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.
A-36
PROXY
HEALTHSOUTH CORPORATION
ANNUAL MEETING OF STOCKHOLDERS -- MAY 2, 1996
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS
The undersigned hereby appoints RICHARD M. SCRUSHY and AARON BEAM, JR. or
_______________________, and each of them, with several powers of substitution,
proxies to vote the shares of Common Stock, par value $.01 per share, of
HEALTHSOUTH Corporation which the undersigned could vote if personally present
at the Annual Meeting of Stockholders of HEALTHSOUTH Corporation to be held at
Two Perimeter Park South, Birmingham, Alabama 35243, on Thursday, May 2, 1996,
at 2:00 p.m., C.D.T., and any adjournment thereof:
1. Election of Directors
| ] FOR all nominees listed below (except
as marked to the contrary below)
| ] WITHHOLD AUTHORITY to vote
for all nominees listed below
INSTRUCTION: To withhold authority to vote for any individual nominee,
mark a line through the nominee's name in the list below.
Richard M. Scrushy C. Sage Givens Anthony J. Tanner
Phillip C. Watkins Richard F. Celeste Larry R. House
George H. Strong Charles W. Newhall III James P. Bennett
John S. Chamberlin Aaron Beam, Jr. P. Daryl Brown
Joel C. Gordon Raymond J. Dunn, III
(Continued and to be signed on other side)
(Continued from other side)
2. In their discretion, to act upon any matters incidental to the foregoing
and such other business as may properly come before the Annual Meeting or any
adjournment thereof.
This Proxy, when properly executed, will be voted in the manner directed
herein by the undersigned stockholder. If no direction is made, this Proxy will
be voted FOR Item 1 above. Any stockholder who wishes to withhold the
discretionary authority referred to in Item 2 above should mark a line through
the entire Item.
DATED _______________, 1996
Signature(s)
(Please sign exactly and as fully as your name appears on your stock
certificate. If shares are held jointly, each stockholder should sign.)
PLEASE MARK, SIGN, DATE AND RETURN PROMPTLY, USING THE ENCLOSED
ENVELOPE. NO POSTAGE IS REQUIRED.